Kimberly-Clark Corporation (KMB) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Kimberly-Clark Second Quarter 2023 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Christina Cheng, Vice President of Investor Relations. Ma'am, the floor is yours.

Welcome, everyone, to our second quarter 2023 earnings conference call. Before we begin, please note today's presentation will include forward-looking statements. Our results may vary materially from those expressed or implied in our forward-looking statements, and you should not place undue reliance on any forward-looking statements. Please refer to our SEC filings for a list of factors that could cause our actual results to deviate materially from our expectations. Our remarks today refer to adjusted results, which exclude certain items described in our news release. We use non-GAAP financial measures to help investors understand our ongoing business performance. Please consult our press release for a discussion of our non-GAAP financial measures and a reconciliation to comparable GAAP financial measures. We have published supplemental materials which are found in the Investor Relations section of our website. Participating in today's call are our Chairman and Chief Executive Officer, Mike Hsu; and our Chief Financial Officer, Nelson Urdaneta. Mike will start the discussion with our strategic priorities and provide an overview of our performance for the quarter. Nelson will provide a detailed discussion on our Q2 results and our outlook before we open the floor to Q&A. With that, I turn the call over to Mike.

Thank you, Christina. We delivered another solid quarter with 5% organic growth, while cycling 9% growth in the year-ago quarter. Organic sales were up across all segments with Personal Care and Consumer Tissue, each up 4% and Professional up 13%. Our growth strategy is working, and our performance in the quarter reflects strong execution by our teams around the world. We continue to make strong progress on margin recovery. Adjusted gross margin was up 380 basis points and fueled a 17% increase in adjusted operating profit and a 23% increase in adjusted earnings per share. Given the strength of our first half, we're raising our full year 2023 outlook to 3% to 5% organic growth and 10% to 14% adjusted EPS growth. Our categories remain healthy. In North America, category sales were up 8%, and we continue to see robust growth in key developed markets, including the U.K. and South Korea, which delivered double-digit and mid-single-digit increases, respectively. While category growth across D&E has been more variable, we continue to see double-digit increases in Latin America. This growth reflects the essential nature of our categories. As category leaders, we remained focused on serving all our consumers and recognize that many are facing economic challenges. With our broad portfolio offering value to premium options, we're able to meet consumers where they need us, and we are well positioned with brands like Scott and Huggies Snug & Dry to serve the value-oriented consumer. Across markets, we're strengthening our price tag offering and that means enhancing large-count packs and big box channels and making entry prices more affordable in small format channels. More importantly, we're accelerating innovation and cascading technology through our product offering to ensure we're delivering a superior value proposition to consumers. Growing market share continues to be a top priority. In the quarter, year-over-year market share performance was soft, reflecting the relatively early actions we took to mitigate inflation. In the last 6 months, price gaps have begun to normalize, and we are encouraged to see sequential improvement in market share in key cohorts, including North America, where we've seen improvement in 5 of 8 categories. Volume trends have improved, and we expect that to continue as we cycle inflationary measures and execute our strategy and commercial programs. Our enhanced commercial capabilities are enabling more real-time decision-making to drive sales, optimize brand investment and balance value and volume. Furthermore, we expect increased brand investment and improve supply fulfillment to strengthen our market share performance over the balance of the year. Our commercial programs and innovation are core to our strategy to elevate and expand our categories. We're pleased with our launches in the first half and enthusiastic about our second half plans. Here are a few highlights. Huggies debuted it's newest baby bus campaign this summer, celebrating Huggies unique curve design, which provides greater comfort and protection for babies on the move. Early results show excellent consumer engagement across our marketing channels. In China, we're raising the bar on skin health through a proprietary design that whisks away the baby's mess. Moving the mess away quickly from baby skin is key to reducing diaper rash. We believe this kind of innovation will further differentiate us from the competition and is the reason Huggies continues to expand its market leadership in China. Lastly, our Kotex Intimate She Can campaign in Latin America continues to resonate. We were recently recognized with a prestigious [Indiscernible] award for this initiative, reducing period stigma as part of menstrual education. In China, Kotex introduced overnight and overnight pad with a proprietary design that prevents leakage with instant absorb technology. Overall, around the world, we are seeing growth driven by the overnight segment. This is a great example of superior product performance, coupled with effective brand strategy and communications to drive share gains and strong brand equity. Now I'd like to briefly address the impairment charges to intangible assets we recognized this quarter. We purchased Softex Indonesia to expand our presence in one of the world's fastest-growing personal care markets. Indonesia ranked some of the top 3 markets for new births, and we expect continued economic development will create more demand for our products over time. As the second largest diaper player in Indonesia, representing over 1/4 of the market, Softex has built a strong equity with local consumers. The impairment charges we took this quarter, which Nelson will discuss shortly reflect our updated projections for the business. We have enhanced the team and taken action to improve the business processes and our go-to-market approach. Indonesia remains an exciting growth market for Kimberly-Clark, and we're committed to this business for the long term. Now as we enter the back half, we expect continued progress in our journey to restore and eventually expand our margins. We're excited about our innovation and commercial plans, and we'll invest more in our brands to improve our market share performance and growth trajectory. This is how we will elevate and expand our categories to deliver balanced and sustainable growth. Now I'll turn it over to Nelson for more details on the second quarter.

Thanks, Mike. Before I get into second quarter results, let me take a moment to discuss the divestiture of our Brazil Tissue business and the impairment of intangible assets this quarter. We closed the sale of our Brazil Tissue business in June, which enables us to focus even more on growing personal care. As a result of this transaction, we recorded a pretax gain of $74 million and $30 million of related expenses, both of which are excluded from our adjusted results this quarter. I want to thank the many K-Cers, who worked hard to complete this transaction. In addition, we conducted strategic reviews, forecasting and integration assessments as part of our business planning cycle. Based on updated financial projections, a pretax noncash impairment charge of $658 million was recorded, primarily related to intangible assets linked to the Softex acquisition. The charges reflect revised projections for certain brands. Due to modified consumer shopping behavior, post COVID-19 and inflationary pressures and increased competitive activity in the region. We are confident in the prospects of the personal care market in Indonesia, and we are committed to continue investing in this business. Let me now turn to our second quarter results. Net sales were $5.1 billion, up 1% year-over-year. Organic sales increased 5%. On a 2-year basis, organic sales growth was strong across all three segments with approximately 7% average growth for the company. Effective revenue growth management delivered favorable price realization and mix benefits, while volume trends continue to improve sequentially. Net sales in the quarter were impacted by approximately 400 basis points of currency headwinds. Turning to our segments. Personal Care, representing approximately half of the company's revenue grew 4% organically, led by mid-teens growth in feminine care and mid-single-digit growth in adult care. Infant Care delivered broad-based growth in the quarter with the majority of regions growing mid-single digits. Operating profit for the segment improved 1%. Organic growth in consumer tissue was 4%, led by a 7% growth in North America, where volumes have turned positive, up low single digits in the quarter, driven by Viva and Cottonelle. Operating profit for the segment was up 12%. Finally, our K-C Professional business posted a 13% organic growth. All geographies grew and notably, volumes turned positive in North America after six quarters of decline. Our focus on key commercial sectors, effective digital engagement and innovation in sustainability are fueling the momentum in K-C Professional. Favorable product mix and cost savings drove significant operating profit improvement in the quarter. Turning to the rest of the P&L. Second quarter adjusted gross margin increased 380 basis points to 34%. Revenue growth management, in addition to 4 savings of approximately $80 million more than offset cost inflation and currency headwinds. Cost environment remains mixed. Although energy prices have moderated in some markets, they remain elevated in others. Labor costs are structurally higher now due the cost of living adjustments and a tight job market in certain key geographies. In addition, other manufacturing costs, which cover labor, were $85 million higher this quarter, in line with our expectations. Between the lines spending on an adjusted basis was 19.8% of net sales, up 190 basis points versus a year ago, driven by continued investments behind our brands and our capabilities as well as the impact from inflation on our cost base. Adjusted operating profit for the quarter increased 17%, and operating margin improved by 190 basis points to 14.2%. Foreign currency was a 16 percentage point headwind on operating profit in the quarter, of which 5 points were due to translation of earnings from our non-U.S. operations. The balance was largely from transactional impacts. We have made good progress on our margin recovery over the last few quarters, and we remain committed to restoring them to pre-pandemic levels and expanding them over time. To achieve this, we are increasing our focus on productivity by building a long-term pipeline of opportunities that can generate significant end-to-end efficiencies. Lastly, the adjusted effective tax rate for the quarter was 20.5% compared to 22% in the year ago period. Strong overall performance, along with a lower tax rate resulted in adjusted earnings increasing by 23% to $1.65 per share. For the first half of the year, we generated $1.4 billion in cash flow from operations. Capital spending was $389 million compared to $470 million last year. Year-to-date, we returned $850 million to shareholders through dividends and share repurchases. Now let me say a few words about our outlook. With our continued momentum this quarter, we are raising our full year guidance for organic growth of 3% to 5% and adjusted EPS growth of 10% to 14%. As a reminder, our previous guidance was 2% to 4% organic growth and 6% to 10% adjusted EPS growth. The Brazil divestiture, which was not reflected in our previous outlook, is expected to impact reported sales growth by approximately 100 basis points. We continue to expect currency to impact full year top line growth by approximately 200 basis points. Based on the latest estimates for the year, we now expect input costs to be a headwind of approximately $100 million, an improvement versus the midpoint of our prior outlook of $100 million to $200 million. In addition, we continue to project approximately $200 million from higher wages and other manufacturing costs. Continued progress in gross margin recovery puts us in a great position to advance our commercial programs. We expect advertising spend to increase by approximately 100 basis points for the full year. This brings us to a projected operating profit growth in the low double-digit range and an operating margin increase of approximately 150 basis points at the midpoint of our guidance range. We remain optimistic about the future and our ability to create long-term value for our stakeholders. We are also very proud of how our teams continue to execute our exciting growth agenda across the globe. With that, we will open the floor to questions.

[Operator Instructions] Your first question is coming from Lauren Lieberman from Barclays.

Wanted to just ask a bit about divisional margins. One thing that jumped out to me in the quarter was actually that margins in Consumer Tissue decelerated sequentially. They were down sequentially and then also were up less on a year-over-year basis. So I was just curious kind of whats driving that? As you mentioned, there was some better volume performance in North America, the pricing is coming through, costs are easing. So just some conversation around Consumer Tissue margins and the path to recovery would be really helpful.

Yes. No, absolutely. So a few things. I mean we don't speak about gross margin. But just to give you a context, Lauren, year-over-year, we did have a meaningful gain in gross margins on the segment, over 200 basis points. We -- on a quarter-over-quarter, you're always going to see a few puts and takes depending on mix and elements that flow through. But net-net, I mean, we are seeing an upward trend. So I wouldn't get too hung up on the overall movement quarter-to-quarter for the segment because overall, we are seeing an upward trend and recovery on the margins.

Okay. Okay. Still -- yes, okay, fine. Can I read into that, though, when you think about reinvestment in the business in any other particular areas? I know you've talked a lot about innovation and potential for elevate and expand to apply in Tissue as well as some of that seeding these investments? Or is it really just a matter of timing and mix?

Yes, it's a few things. I mean, one, obviously, we in North America have been doing the transition to the new artwork and some of the upgrades that we're doing in Cottonelle. So part of the thing has been our transition on shelf is taking a little bit longer than what we had planned. So that's playing a little bit in the mix. But overall, I mean, that's progressing. And in terms of the elevate, we're also having initiatives in the U.K. in Andrex, where we're doing some upgrades on the product line, and that's coming through. So that's progressing on that end. But Mike, I don't know if you want to add anything else on that end?

Yes, Lauren, I mean I think when we talk about elevating that holds for all our businesses around the world. And certainly, Consumer Tissue, Personal Care, Professional, we're happy to invest in all those, and it's paying out, as Nelson just mentioned in the U.K. The organic growth was up double digits. Share continues to be strong and robust on Andrex. And part of that is because, along with some pricing we have upgraded the quality over the last couple of years. And so we feel good about that where we stand there. And really proud, if you look at year-on-year, I think our between-the-lines investment, we mentioned was up about 190 basis points over the prior year. And that reflects our commitment to the brands and our belief that we've got great commercial programming to invest behind.

Okay. Great. Because the genesis of I guess, if the question also is like one topic that we've been getting a lot of questions of late is around pricing pressure in Consumer Tissue. Some of the discussion, particularly in Europe and U.K. from retailers pushing back on pricing or looking to roll back in Consumer Tissue. And feel a lot of questions about: a, if that would be an issue for Kimberly-Clark and -- specific to Europe; and b, the risk of that dynamic materializing in the U.S. So just maybe you can add perspective there as well. I think you've said a lot in terms of reinvestment and share momentum, but any perspective on pressure to give back pricing in that category in U.S. and Europe would be helpful.

Yes. I'd say overall, Lauren, pricing initiatives, our net revenue management initiatives are on track, generally across our business, Personal Care, Professional and Consumer Tissue, we're cognizant of the same discussions and similar pressure. And we will see maybe a little bit more promotional activity than we've seen in the past, prior -- maybe in the prior 6 months. But I think thus far, it's -- we're not -- it's not showing up in the results or dramatically impacting our results. For the quarter, we had a very solid quarter across Western Europe demand was up about double digits. So our organic was up about double digits. Volume hanging in there pretty well. And so we feel good about where we are, but also recognize that, yes, it's going to be a competitive environment, and we have to be prepared for that. The great thing is, as you've heard us talk about, we've invested in enhancing our revenue growth management analytic capability. And so we feel like we'll be able to make the right investments at the right time that will be wise and not just overreact to things.

Your next question is coming from Javier Escalante from Evercore ISI.

I do like to understand a little bit better the -- I think that you call it between the line spend in the SG&A line, which you do not break out. So if you can explain to us how much is this labor inflation versus more kind of like proactively investing in enhancing the products and the capabilities. And related to that and a follow-up to Lauren's question, you just did a strategic review and essentially exited Brazil, roll-down Indonesia. What is -- if you step back, the main difference between Kimberly-Clark and Procter, is that this international tissue business, could you explain the role of the international tissue business and whether the margin profile is materially lower to the Consumer Tissue in the U.S.?

Yes. Maybe -- Do you want to start with between the lines? And Javier, just so you know, between the lines is a big bucket for us, so it includes both the advertising and as you point out, some of our general administrative costs. And so maybe Nelson comment.

Sure. So yes, Javier, so to give you a sense, I mean, of the increase that we're seeing in between the lines about half of that would be on support behind the brands, the advertising and promotional activities, and it's largely advertising because of all the products that we've been not just launching, but upgrading in some of the campaigns that are underway. The other half really relates to a couple of things. One, we've been increasing investments behind certain capabilities, and that continues, revenue growth management, our digital agenda, which includes upgrades that we're doing to some of our systems, including the migration to S/4HANA and some of the other capabilities that we're laying on a multiyear basis across the enterprise. And then last but not least, is labor inflation, which, again, hits on the overheads and some of the compensation increases that really impact us in April, starting in the second quarter. So that -- because of the timing of our merit increase.

Okay. And then maybe on the Consumer Tissue or maybe it's a portfolio question, Javier, I'd say, hey, we love all our businesses and the segments that we operate in. Certainly -- and as we talk about Elevate and Expand, we're elevating and expanding all those categories. And so we remain committed to that. That said, we are cognizant in the performance of some businesses especially in Consumer Tissue was a little bit more variable. And so I think we've been on the record in the past our Consumer Tissue in the North American -- North America is a little bit more profitable than some of our international businesses. But we have very strong profitable international business as well. And so the decision around exiting Brazil tissue, I think is specific to the conditions in Brazil. What I've said in the past around portfolio was "Hey, we're going to look to add businesses most -- with a greater focus on personal care," I would say. Internationally, where there's a lot of growth opportunity. Indonesia is one great example where while we just reduced our medium-term expectations for that business with the impairment, we still see a very long and bright future in that country for us, and we remain committed to Indonesia for long term because, at some point, it's going to be in the top three of the largest hypermarkets in the world, and it's probably around the corner for us. And so we remain excited about that. But that said, there are other markets that are more structurally challenged. And so Brazil tissue was one of those. And that was driven by we would say some policies that encourage capital investment into tissue making, and so there was a lot of capacity coming in, and we felt like the Neve business and brand would have been in better hands with Suzano than with us. And so we made that transaction. So I think our -- we're looking at -- we love all the sectors that we're in, but we're going to make decisions based on local market conditions and make sure our brands can be competitive for the long term.

So then as a follow-up, this is very interesting, but as a follow-up, shall we think that in countries where you have very large personal care businesses and some sort of ancillary tissue businesses like Brazil, for example, that you may continue divesting things like that, say, China or whatever, where you do have enough critical mass to run that business independently and do not need to have attached a low-margin tissue business?

Yes. I guess it's always possible, Javier. I wouldn't over read into it. I mean we're comfortable with our businesses, and how they're performing where they are. But that said, I think if I would probably say we're going to stay close to local market conditions and make sure -- and this is something I'll talk about internally with our management, which is businesses need to perform for us. And so while we love all our businesses, they do need to perform. And performance is part of the game for us. And so that's probably the bigger barometer for us.

Your next question is coming from Chris Carey from Wells Fargo.

Can you perhaps just frame your expectations for price mix versus volumes for the full year or specifically for the back half of the year? And perhaps just related to that, how you might be thinking about the spending to reaccelerate volumes. Mike, I heard you say promotions might tick up a little bit. I don't know if that was a comment on any specific region. But some context on how you see volumes trending from here and the types of actions that you might be taking to drive a little bit better volume performance would be helpful.

Okay. Chris, let me start and then Nelson maybe give you some more specifics around the volume versus price. But we're pleased with our volume trends. Certainly, just to refresh your memory, Chris, we moved relatively early on pricing. We moved pretty quickly. And so a lot of our pricing went in last year maybe in the front half of the year, we should start to cycle the price element of the P&L as we approach the back half. And so what we would expect to see our volume trends improve. And we are encouraged because we have seen sequential volume improvement overall in the business and then specifically by sector kind of as we've gone through the year. And so we expect to continue to see that. That said, as I said on the call, our market share is a little soft, we were up or even in just below 40% of our cohorts, our market category combinations, which is a little less than we would prefer, right? We want to be over 50%. And so what are the big drivers behind that, Chris, I'd say a couple of things. One is we were quick on pricing. And so in the parlance of one of our general managers, we're seeing competition "scrape" us a little bit. And that means kind of lagging the price to take advantage perhaps on the share momentum side. And so that's one aspect. The other aspect is we are cycling a host of one-offs and supply challenges. It is also relevant to Lauren's question, which you asked about tissue margin. There's a lot of noise in our numbers just because we're now lapping the third order effects of the Texas storm. There's still supply challenges, et cetera. But that said, there's a bunch of one-off things related to both supply and the cycling that affect the business. And then to be true, we definitely have some competitive issues that are, I would say, normal across our business, and we'd like to see a performance improve in a few markets, and that's why we want to continue to invest and we're committed to investing more behind our brands. We feel great about the innovation that we have coming generally globally, and we feel great about our commercial programs and recognize that there's better opportunities for us to beef up that our investment to support the brands. We're -- Chris, I'd say we're -- I'm not really focused on driving promotion to kind of earn back that share, maybe we would respond certainly to competitive conditions. But I'm much more focused on earning there for the long term, and that means kind of driving consumers or encouraging consumers to try our products and then having them stay there because they like the quality of our products. And so that's really our focus. Nelson, do you want to.

Yes. And then to add some flavor, Chris, on the outlook and what we've seen in terms of volume. I mean, at some perspective, I mean, we've seen continued improvement in our volume trends if you step back, Q4 last year, volumes were down 7%. Q1 of this year, volumes were down 5% Q2. The quarter we just closed, volumes were down 3%. Many of the actions that we have to take to deal with the inflation, go back to the first half of last year, the majority of them. So as we step into the third quarter of the year and the fourth quarter, we will begin lapping some of them. And what we would expect at this point. And we're projecting is the volumes to continue to improve on a sequential basis as the year progresses and the overall revenue growth management actions should decrease in terms of the impact they're having on the top line growth. We've already seen that from a sequential quarter, Q1 to Q2, that came down, and then mix, we've been doing about a point, I would expect that to be the same as we progress.

That's really helpful perspective. Just one follow-up from an input inflation perspective. Can you talk about what specifically improved relative to your prior expectations? And if you have any comments on phasing, clearly, we're getting into it seems a bit deflationary into the back half. Is that Q3 and Q4? Does that all hit in Q4? Any context on the phasing would also be helpful.

Yes. So just to give you a context, I mean, on -- we -- the latest guidance that we have on cost on input cost inflation is that it would be at around $100 million. So that's about $50 million better than what we were forecasting back in April when we last talked. Through the first half, we are at about $190 million negative, so it's an impact. So evidently, what's going to happen is we're seeing about a $90 million give or take benefit we go into the balance of the year. We will see some of that coming in, in Q3 and then the balance, obviously, in Q4. What we're seeing is versus our prior outlook, the overall fiber complex has gotten a little bit better and distribution costs have gotten a little bit better. I will, however, just highlight that on a year-over-year basis, we're still seeing bulk and the overall fiber complex inflationary for us. Even though if you take it as a whole, the latest outlooks have fiber being year-on-year down in the mid-teens, if you aggregate everything. So net-net, that's come down. Distribution is about flat now year-over-year for us. And then the only big cost bucket that's down significantly, continues to be the rest in complex, which, again, that's down overall for the quarter, 50%, so -- and we're projecting about 40% down.

Yes. I mean, Chris, the headline for me is the cost environment for us has stabilized. And that's really, really good news for us after cycling, I think 2021 and 2022 where we had record inflation for us. While it's still modestly inflationary, we can operate very well in a stable cost environment. And so we're seeing both input costs stabilize. And also the supply environment. While we still have some sporadic outages in supply it's much improved. And so we're bullish on the road ahead for us on the cost environment.

Your next question is coming from Dara Mohsenian from Morgan Stanley.

So I just wanted to return to share for a bit. I mean your comments seemed more glass have full here in terms of sequential improvement in share. But if we look specifically at U.S. scanner data, some fairly pronounced year-over-year share losses in Q2 and Consumer Tissue and diapers. So I was just hoping you could put the U.S. scanner data in context? And then second, plans to drive improved share trends going forward, it sounds like perhaps there might be a bit more promotion but not necessarily big focus. Innovation ramps up. Is that sort of the plan to drive improved share from here? Or how do you think about the share trends in the back half of the year, specifically in the U.S.

Yes, Dara, definitely, I believe the shares will improve. We feel very confident in our programming and our innovation that's coming. And year-to-date, we feel really good about what that's done in the marketplace. I would say the recent softness, as I mentioned earlier, Dara, primarily related to the relatively faster pace of our price advantages last year -- price advances last year. And so that kind of really is the primary effect. But I would also say, in North America specifically, we are facing a fairly tough comp. Just to refresh your memory, I think Personal Care. In Personal Care, we were up 14% in the year ago quarter and across both Personal Care and Tissue, market shares were a bit elevated. That was an artifact. And I think we talked about it this time a year ago, which was we're out of -- our supply was tight in the first and second quarter of 2021. And so we had the kind of restock impact and the kind of reselling impact in the year ago quarter, and we're cycling that now. So we did see our shares were higher in the year ago quarter. higher than they historically were. And I think that was related to the, I would say, coming back in the business in Q2 of 2022. But that said, we're not satisfied with our share performance, and definitely want to be up or even in over half. And so we are committed. We feel very good about our programming, especially in North America. I mentioned our baby bloods advertising and our product improvements in North America on Huggies. And so we feel good about where we are, and we're going to continue to invest in the brands and make sure that we continue to touch baseball our consumers and encourage them to try our products and return.