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

We're going to get started. Busy days. We're kicking off this morning with Kimberly-Clark. We're joined by Michael Hsu, Chairman and CEO; Nelson Urdaneta, CFO; and Chris Jakubik, VP of Investor Relations. We're going to jump right in.

So we're about a month away from the formal transition into the new work structure that you announced at your Investor Day back in March. And I was just hoping if you could maybe give some color on how that process has gone, what the structure will look like versus what's been in place historically? Like how much of the organization will have like a new remit, new reporting lines? And I believe that it was announced externally and internally concurrently. So kind of what was the response from employees as you went through that?

Okay. First of all, Lauren, thank you. Thanks for having us, and we're delighted to be here, and thanks all of you for attending. Yes, our reorganization which internally we're calling, wire for growth, I think is proceeding very, very well. Overall, I'd say, strong organization support for it, and we're already starting to see the benefits. So I think the support -- yes, it was awkward because, obviously, it's a big event, we announced concurrently internally and externally. In fact, we invited our employees to dial into the Investor Day call, of which we had about, Lauren, 5,000 to 6,000 lines dialed in. And I say lines because what happens at K-C is people gather in auditoriums and conference rooms and then they all listen together. So what happened is -- so we had the Investor Day call with about 6,000 lines and then that night, we flew back to Dallas and then we had our Asia Pacific call, which had another 5,000 to 6,000 people dial in. And then the next morning, we had about 10,000 to 12,000 on a global call. And so all, of course, with great interest around what's this reorganization about. I'd say, we do a lot of polling and I think we've already pulled 3 times on how our employees are feeling. But I'd say, overall, strong support for the strategy. They understand the environment, the context why we're doing it. I think they love the focus on the key markets. They like this breakdown, and I think it's working for them the difference between North America, the focus markets and then what we're calling, enterprise markets, which is our long tail of smaller markets, right? And so they understand kind of that differentiation. And then I think they do understand that we need and there's a good opportunity for us to bring more global scale to the local fight. And we -- I think the important thing is we've evolved from a really decentralized structure to one that, I would call -- I call balanced matrix, right, a balance between the local markets which we're always going to prioritize. We're going to really want -- I think our historic calling card, Lauren, has been local agility, local knowledge, all those things. And I think we're still going to retain that, but we want to multiply that with the global capability that Kimberly-Clark has. So I think overall that's going well. And as we pull our employees, I think, again, the vast majority of the -- I think we pull in the high 70s around supporting what we're doing in confidence so that we can execute all those things. I think the execution thus far is proceeding very well, and I'm not expecting many executional hiccups. Why do I say that? Well, we've been running, what we call, the soft cutover since April and then in July. So I think with international personal care and feminine care, I think we started cutting over back in April to that new structure, the split between International Family and Professional and North America happened in July. And so we've been running under that structure now for a few months. And I think we're getting quite comfortable with it. It's not as automated Nelson as it's going to be because reporting is still a little bit more manual, but I think we're comfortable with the overall approach from an operational standpoint. And then I'd say, where the benefits are starting to show up, things like our powerhouse supply chain work. We're really seeing the benefits of kind of the functional experts working with the local markets to accelerate our progress.

I'm excited to recast my model. I love that project. Just diving deeper into the reorganization, I do want to talk specifically about North America. I was hoping you could discuss the rationale behind bringing personal care, consumer tissue and KCP together under one roof because you sort of got the retailer dialogue aspect, there's some supply chain aspect and then lately I'm guessing back office, but I don't know how to weight those and how much is really changing and bringing them together?

Yes. Yes, definitely, I'd say, Lauren, it's about creating and leveraging scale in both supply and demand. I think maybe tertiary benefit, certainly, there's going to be some back office savings for sure. But that's not why we're doing it. I think it was funny. I was out -- Nelson and I were out in London meeting with the International Family and Professional team, which also puts together, right, consumer tissue and professional. Same time, we were meeting with them, they were all excited. They were like, oh, finally, this makes sense, right? Because it's the same supply chain. We use the same producing assets, we use same materials, same processes. But they were always, I think, in some ways, suboptimized because we ran them completely separately. So I think there's going to be plenty of scale benefits definitely in consumer tissue and professional tissue, surprised that we're also a little bit in personal care too because, obviously, there's a big wipers business and there's some synergy there. So I think in North America, having that all under one roof is going to really create some opportunity for us. So that's one part of it. And then on the demand side, I used to work in the condiments category in the Foodservice business. And that was -- and the food service channels, right, having in restaurants catch-up in restaurants was a great marketing channel. And so for us in the hotel, I wish we had Cottonelle in this hotel, and that's not. But again, we're in a lot of hotels. And I think having Cottonelle Kleenex and those type of products with end users when they're traveling away from home or experiencing other things outside of home, I think is a great trial vehicle for us. And so we think -- and we haven't run it that way and so I think there's a great opportunity for us to be more coordinated on kind of serving consumer demand better.

Okay. And what about retailer discussions? Anything on that front in terms of tissue and personal care?

No. Again, I think -- well, I think probably the biggest thing is how we manage our customer relationships. Again, I think we've talked a number of times that we've evolved quite a bit over the last decade in terms of our ability to interact with customers and how we serve customers both on the professional side and on the retail side. And so I think for me, it's more about how we mine best practices and how we serve them better.

Okay. Great. Let's keep going on supply chain. So one of the key aspects of the strategy discussed at the Investor Day was reworking of supply chain. And, again, this notion of bringing scale to where it may not have been leveraged previously, some of the opportunities you've spoken about value stream simplification, network optimization, digital automization and gross productivity savings next several years totaling $3 billion. I'd love to get some concrete examples because they are very big flashy words, but nothing to fake, but if tangible helps kind of bring it to life. And then I was also curious on why now? What is that is making these opportunities more apparent now or the organization more able to go after them than has been the case historically?

Yes. Maybe I'll ask Nelson to give you some more concrete examples because he's more strict than me. The -- maybe I'll hit the line out. First of all, I'd say, Lauren, and you should ask Nelson. I think our confidence in our ability to deliver these savings, gross productivity savings is continually increasing. And I think that's, again, brought about by this reorganization we're doing. It's really the combination of our local market expertise in kind of running these plants and running these businesses combined with, I think, the mix of great external perspective we've been bringing in. And what I've learned over the last few months and Nelson, importantly and I were up on a -- internally, we're calling it the power work stream, right? So powerhouse supply chain. But on value stream, we had an update with North America personal care. And I think what we learned part of it is we're really excellent product makers. We make great products, but however, we tend to focus a little bit too much on the SKUs, and that leads to excess complexity. And so we're great product makers, but I would say, we're not great product system builders. And so that's an opportunity area for us. And I think people like Nelson, who came in from Mondelez; Russ, who built one of the big plants at Mondelez, who leads our North American business; Tamera, who came in from 3M. We've got these different external perspectives that say, hey, there's a better way to do this, and it's more about, for us, product systems. And so I think that's kind of the benefit of the reorganization that we're seeing, but I'll let Nelson maybe comment on specifics.

Sure. Thanks, Mike. And Lauren, as concrete examples as we look at what's different, what are we doing? There are 2 factors that I'd like to highlight and 2 things that I think are important to explain why they're working together to give us the visibility into the $3 billion of gross productivity over the next 5 years. And I'd also like to highlight the fact that we stated that we would be disappointed if our gross margins by the end of the decade were not at least at 40%. And our operating profit margins were not at least in the 18% to 20% range. Now these 2 factors are first, a creation of one global supply chain organization and the second one is the adoption of integrated margin management. Let me distill them a little bit more. This past July, we stood up our global supply chain organization under Tamera Fenske's leadership. This new global team is working hand-in-hand with local teams to ensure that we're not just driving lower costs, but that we're also driving optimized structures on how we operate at our factories and our distribution centers that we are ensuring we're scaling innovation on a global basis much faster and that we're continuously driving optimized customer service levels through the 3 strategies that you've highlighted. The first one, value stream simplification. What it entails is really looking at our product platforms and simplifying them and standardizing them wherever possible. This will drive a much more -- a much better approach to how we handle raw materials. It will drive a much better way of simplifying how we handle our operational and manufacturing assets and processes, as well as driving simplification and product specifications. The second one is network optimization. And this refers to within the 4 walls of our manufacturing facilities and our distribution centers. We are optimizing and we will continue to optimize our footprint and this will in turn also drive lower costs. And then the third bit, as you mentioned, third strategy within the global supply chain is driving automation and really embracing a digital supply chain globally. We are deploying state-of-the-art software in procurement and in supply and demand planning, and we're also scaling up in an accelerated basis, robotics. The second factor is the adoption of integrated margin management. You've seen how we've migrated to reporting end-to-end in terms of how we're optimizing margins this year. Integrated margin management for us is an end-to-end approach, and it's something we're doing operationally across the enterprise to look at all levers at our disposable to expand margins and optimize them over time. It's about revenue growth management, which we've been building capabilities over the last few years. It's about looking at new ways of handling risks and risk management, proactive strategies on commodities and input costs, it's about a continuous focus on cost discipline, overheads, and then, of course, it's about having a very strong pipeline of productivity initiatives for years to come. Integrated margin management is not new to the world, but it is new to Kimberly-Clark. For us, it's a new operational rhythm that we're looking at it end-to-end. It gives us visibility. It gives us discipline across the entire value chain. It gives accountability with our operators so that we ensure we're driving lower costs, but also flow in savings to the bottom line. And then on the gross productivity front, we have a very proactive set of initiatives over the next few years that we review on a monthly basis to ensure that we're not only driving lower cost, but we have the means to invest behind our growth initiatives for years to come.

I think just one thing to add on that. I think what we get excited about having been in other places is that, we call it, global supply chain 1.0. So we're just putting this into place now. We're building that visibility and just starting to discover places where we're not leveraging our scale as much as we could. So a lot of what you're seeing right now is sort of low-hanging fruit in a way.

Yes. Because it's 1.0, Lauren, we feel like we have a lot more opportunity.

Okay. I want to keep going, but I'm going to shift to top line as I look at the clock. So at the Investor Day, you discussed the expectation that your categories will revert to growing in the 2% to 3% range with the algorithm assuming that you can outpace the categories. I think commentary also suggested for the -- this year high end, right, with -- I'm guessing, largely due to some inflationary pricing still around. So if you could just talk to your expectations for when you expect categories to revert to that kind of 2% to 3% growth? And what kind of keeps you growing above the category rate over time?

Let me provide some context, Lauren, on what are our category expectations in terms of growth for the foreseeable future, why we've laid that out? And then I'll pass it on to Mike so he can probably provide more color on what is it that we're going to do for us to be growing and leading category growth? So a few things. The targets that we've laid out, as we went out in March with our Investor Day, clearly indicate that we expect to grow in the future from a volume mix-driven organic net sales growth, and our financial targets reflect this. Prior to 2020, our categories were growing in the 2% to 3% range, and it was really led by volume and mix. Between 2020 and 2023, what happened was our categories accelerated to mid-single digits or the 6% level, give or take, on average globally, largely due to the necessary pricing actions that were required to deal with the unprecedented level of inflation that we were facing. In the near term, we are expecting the categories to revert to this 2% to 3% level. And again, being led by volume and mix. In fact, if you look at the last few quarters, that's exactly what's been happening. We've seen volume and mix accelerate sequentially quarter after quarter, and we've seen the incidents of pricing actually subside as we lap the necessary pricing actions that were taken in the 2020 to 2022 period, give or take. But I'll hand it over to Mike so he can provide some further details.

No. Again, we expect our businesses to grow faster than the category. And why do we expect that? One, we still see huge opportunity to elevate and expand our categories and markets around the world. We're going to do that through the pioneering innovation that we've talked about at our Investor Day. We're really excited about some of the technical platforms that we have in the pipeline. So that will continue to go, things like the 2 zoned liner that we just launched in the U.S. or the multilayer core that we have across Asia. So I think we're very excited about our innovation pipeline. You're going to hear more from us about being better storytellers and increasing our advertising investment. And so I think that's another area. We already have great execution around the world, and that execution is going to continue to get better. And then the last thing we're just talking about on powerhouse supply chain, that's going to help us create a virtuous cycle. We feel like that's going to give us an opportunity to expand our margins, at the same time, give us additional funds to reinvest back in the business. So we feel good about kind of the overall play. And what we're trying to do is drive a virtuous cycle of growth.

Okay. And I think keeping with revenue, we've noticed the change you just did too and how you talk about top line drivers, which is you've always discussed volume, price and mix by geography. But recently, it's been volume plus mix is the language. And we looked, you haven't used -- that was not used before 2023. So it is actually a change. It's not just my forgetfulness. So just kind of wondering what does this change in communication reflect, if there's a change in internal approach in terms of how you think about top line growth and the importance of mix?

Yes. So it's definitely significant. I'd also posit that we have a stricter VP of Investor Relations now. No, actually, I'm just kidding. Part of it is it's very intentional because as I just mentioned, our employees are listening to this call and our earnings calls as well. So we're talking to both the investor community and our employees, and we're emphasizing volume mix right now. I think if you rewind, Lauren and take maybe a past 5-year history, I'd say, we made the turn from having to go on price and recover and offset some of the input costs that were historical for us, right? And what we're calling internally an inflation super cycle that had to be offset. And that happened in 2020, 2021, that period, 2022. And so having largely kind of navigated through that, I think successfully, we knew we're going to start to see normalization of the category in terms of the category volumes that -- or growth that Nelson talked about, 2% to 3%. And so for us, what we needed to see what's core to the strategy is volume growth. And I'll remind you that before COVID hit and before the inflation super cycle hit, all of our growth was volume based, right? And so -- but I think what's shifted now and important for us as we talk about the Elevate strategy is we want to see healthy volume and we want to see healthy mix, and they're both a reflection about our execution of the strategy. And so that's kind of how we're focused on driving the business. Obviously, overall, we want a healthy mix of volume mix and price over time. But right now, I think in this period, we're really more focused on volume and mix.

Okay. So if we go a little bit deeper on how you get at the mix, right, you've discussed R&D and innovation efforts focusing more on problem areas, specifically facing consumers. So comfort, skin health, absorbency. I'd love to talk a little bit about absolute investment levels. And if you think there's a need to increase R&D spending or if the absolute spend is generally sufficient and more about spending with greater focus?

Well, on R&D, I'd say, I'm generally comfortable with our investment levels and I think those investment levels should allow us to deliver the pipeline we're talking about -- that we talked about in Investor Day. So I'm overall comfortable with that. But I think there's really 2 opportunities for us. One, I think we still have an opportunity to get much more efficient with our spending. And we have a new R&D leader coming in, Craig, and he's an experienced leader that is not only an inventor, I think he's got over 70 patents associated with his name, but he's got a history of building R&D organizations. And so -- and again, an artifact of our historical approaches, we ran R&D fairly decentralized in the markets. And so what Craig is going to help us do is kind of bring global R&D organization together as one team. There'll still be market focused, but we're going to be more coordinated and make sure that our investments in technology platforms are efficiently bowled out and that we don't have 2 markets working on the same thing. And so I think that's one area. And that we're going to have enough, I think, focus on both -- he calls it 3 horizons, right? Near term, medium, long, and we want to make sure that we have the appropriate mix of investment across all 3 horizons. And so I'm expecting for us to get more efficient with our overall spending, which I'm comfortable with at this point. I'd be delighted to spend more, especially as we continue to drive more funding through our powerhouse supply chain. But I'd be delighted to spend more behind great ideas that would accelerate growth.

Okay. And do you think that this yields, higher frequency of new product or is it more that the impact of innovation is greater? So is it fewer bigger or both?

I think both. That would be my expectation, right? So certainly, we feel good about the pipeline. I'd love to shore it up. I think innovation is what makes our categories grow. I think it's the lifeblood of our business. And so having more innovation, I think, is a good thing, but it has to make a difference. And we're trying to improve the lives of our consumers which is why we invented things like the 2-zoned diaper that separates the pee from the poo, and all those things. And so that's going to deliver great benefit to the child, to the parent. And we have a team of scientists that are excited about inventing these kinds of things. And so again, we're looking for both more frequency, but also bigger impact.

Okay. And then how does advertising fit into this? You really ramp spending in '23. So 5.3% of sales from 4.5% in '22. So really big increase and pre-COVID averaging below 4%. So -- and you've spoken, I think, about moving even higher in '24. So what's the right long-term level of advertising spend and process for allocating across geographies and categories?

Let me provide some perspective on our overall brand support spend, which includes advertising where we expect to be in 2024 and then Mike can chime in on what else? Where do we go from here? So a few things. I mean, first, we've been demonstrating our firm belief in building brands through strong investment behind them and strong fundamentals. And this is shown by the fact that we have been increasing on a sustainable basis over the last few years our investment behind the brands. If you look at advertising alone, we have pretty much doubled our dollar spend since 2018 with very strong returns on this investment. We've seen that play out over the last few years. What we talk about is overall brand support. That's the number that in the earnings calls we're talking about. And that is about 1 point higher than the advertising spend that we disclosed in the Form 10-K, which is the number you're quoting, Lauren. And what's -- for this year in our last earnings call, what we indicated is that we expected the year to be at around 6.5% level of net sales, which is up about 50 basis points year-on-year. But what's going to happen is in the second half of this year, it was going to ramp up to about 7%. And we feel that it's the right thing to do for multiple reasons. One, because our science-based innovation that's being launched into the market, which we're very excited about. And then secondly, because we've had a very strong first half, and it's the moment to keep investing to strengthen the initiatives that will come. With that said, there's a few things on the nature of our investment and our categories that I think it's important to lay out. First, it's business mix. If you look at our personal care business, we're actually investing more in the teens. But if you look at this as like professional, the level of brand investment, brand support is very small because you don't need that. It's not required for those categories. The second aspect to take into account in brand support and advertising is the highly targeted nature of our consumers. And that in turn drives effectiveness in our spend. It is very efficient in how we deploy the dollars to target our consumers. And then ultimately, it allows us to also leverage because of the nature of the engagement, digital mediums, which outright are much more efficient for us. Ultimately, for us, the key focus in how we're engaging with consumers through advertising and in-store merchandising activity is we need to reach them at the right moments. Why? Because our categories are about driving recruitment, about driving retention and ultimately about lifetime value. But I'll turn it over to Mike.

Yes, I think I'm pleased that we've been able to increase our investment. I think we're seeing great returns from it and would be happy to increase it further behind the right ideas that would accelerate growth. So that's part one. I think the thing for us is and when I'm looking from our organization to get better at is, we're calling storytelling, right, which is, hey, how do we talk to consumers, not only to land the trial of our pioneering innovation, right, all the innovation that we're landing, but also to increase the affinity for the brands, right? And I think we've done this well over the years in some categories, but I would say, inconsistently across the business. And this is a big part of Patricia Corsi, our new Chief Growth Officer, and she's got a lot of experience in this area. Where we've done a good job, I would say, fem care globally. Kotex is a brand, our campaign that we've been running for the last dozen years or so. She Can, I think, it has helped us in a like Australia and New Zealand, which is a big market for us. Our share has grown from 7% to almost 40, right, over that time period. Brazil, we took over market leadership. We're just under -- I think, we're right around a 40% share in Brazil. Much of Eastern Europe, we've more than doubled our share over the last 5 years. And so that's behind really, I would say, primarily a strong advertising kind of approach to driving brand differentiation. And so I think that's a great example. More recently, I think in the U.S. on Kleenex, that's a different approach. We use data analytics to target light and lapsed users on Kleenex. In the second quarter, I think our share was up about 400 basis points. That was also aided by being fully in supply, Lauren, on Kleenex. So I think that helped. But again, I think we are excited about kind of where we're going on advertising, but I think the storytelling part as we continue to ramp up our investment is going to get better over time.

Okay. Great. Let me just shift gears. I wanted to spend a moment on some of the portfolio actions that you've undertaken over the past year or so. So it's not acquisitions, but it's actually been exits and divestitures. So Brazil consumer tissue, KCP assets in June '23, Canada Kleenex, the PPE sale to [indiscernible] Nigeria and Bolivia and there's a private label exit in '25. So I'm just curious, what's sort of the internal process for evaluating the portfolio? How often are you going through this exercise, kind of key metrics to determine whether assets fit -- whether there's been a change in that in the last several years?

Yes, there probably has been a change, and probably part of it is my emphasis. I'd say, our portfolio approach isn't always on. It's a constant assessment. And I'd say it on 2 dimensions. On the in, hey, we're interested in adding geographies and category adjacencies that are going to be long-term accretive to margin and/or growth over the long term, right? So that's one, and that's kind of why we did -- we acquired Softex in Indonesia, which is a market I'm sure we'll come back to that. So that's on the plus side. And on the exit side, which we've had announced a few more recently, also always on, hey, over the long term, if we feel like there is a market that does not have the prospects to be accretive on a growth or margin perspective or has excess volatility, we're going to make a different decision on that. And that's largely behind. Couple of years ago, we had a decision to exit Brazil tissue, just the tissue category in Brazil because there were some structural factors happening in the tissue category alone that made it uneconomic for multinationals to keep it in that sector. We made a similar decision that we just announced in Nigeria. We had just made a significant investment in Nigeria, but I think the environmental and regulatory conditions, I think, and our minds changed, it made it tougher for us to compete effectively in that market. So I think, again, for me, it's an always-on approach. But we're looking, I think, constantly to improve the overall portfolio.

And to just add, I mean, we're -- what you are seeing, Lauren, is our strategy at play. And as Mike said, we will be very disciplined and methodical in our approach to assessing the portfolio and where we're at. We're not going to give value away. So we're always looking at if we're going to exit and the decision has been made -- is going to be made in an optimum manner. And that's what you're seeing play out over the last 1 year, 1.5 years.

Okay. Is there a bit more of a microscope on this? It's always on, but also with the reorganization sort of thinking about enterprise markets. I mean, is there arguably even more of a microscope on some of those smaller subscale markets? Is that a fair...

Yes, I think that's probably fair, Lauren, mostly because as we're going through the reorganization and working through enterprise markets, you're looking at your footprint, what the outlook is and whether that the kind of effort to kind of drive that business, it will have that return, right? And so -- and again, as we're going through an organizational restructuring and operational restructuring, it makes sense to look at those things at the same time.

Okay. Great. I'm going to squeeze in one more. I did want to ask about Indonesia. So you haven't been very acquisitive as a company, generally speaking. But then the exception, of course, is Indonesia, which yur acquired in 2020. So I would just love maybe an update. I mean, we've heard from other multinationals that compete either long-standing or newly Indonesia, it seems like a roller coaster at best maybe and then, of course, more recently, some backlash against American and Western brands. So just curious on the latest state of play in Indonesia for you?

Yes. Again, I think we still feel very good about investment in Indonesia over the long term. I think today, it's the #5 diaper market in the world. It's going to be #3 by the end of the decade. And so it's an important market for us. But I would also say, you might remember that we bought it at a tough time. I think we closed right before COVID hit. And then I think the country itself was hit pretty hard by COVID and the categories slowed down and haven't recovered yet. I would say -- so that's one set of things. I think the other set of things is we had some growing pains moving from a privately held Indonesian company to a global multinational, and there are some practices that we had to evolve as a company, which we've done. And so overall, I think prospects are improving. Volume turned positive last quarter. So the business is starting to grow again. We feel great about the team that we have in place there and the plans that we have in place. But we also recognize that in developing markets like Indonesia, there's going to be some choppiness. But the reality is we've navigated a lot of choppiness in a lot of markets, including a market like China, which there was questions for 20 years about whether that would be a business for us. And today, we would say, it's a great business for us. And so I think K-C has been in a lot of markets over a long time. And so have been able to navigate choppy waters successfully. And I think I'm confident in our team there. With regard to what's happening today, yes, I think that the thing about K-C in Indonesia, as you know, we acquired this brand Softex, which is depending on the category #1 or #2 brand in the categories that we compete in. And it's -- those are Indonesian brands. And so I think we have not experienced some of the things that you mentioned other companies have seen.

Okay. Perfect. We are out of time. So I'm going to stop there. But please join me in thanking the Kimberly-Clark for being with us this year.

Thanks for having us, Lauren.