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

Okay. We're going to get started. Next up this morning, we are excited to welcome Kimberly-Clark to the stage. We're joined by a whole collection of people. We've got Mike Hsu, Chairman and CEO; Nelson Urdaneta, CFO; Russ Torres, President and COO; and Chris Jakubik, Head of Investor Relations. Before we get into our Q&A session, Mike, I know you wanted to spend a moment discussing progress against your strategy, the timing of Russ's appointment to his new role. And Russ, it would be great, if you can spend a few minutes talking about your background, broadly what's changed during your time running North America and also the new leadership appointment in that division.

Sounds great.

Okay.

Okay. Thank you, Lauren. Good morning, everyone. Yes, I just wanted to make a few brief prepared remarks. I did want to open discussing our strategy that we laid out at our Investor Day 18 months ago. Powering Care. Powering Care is powering our results. We've taken big steps to transform our portfolio. We're exiting the private label diaper business and entered into a venture with Suzano to jointly operate our international tissue and professional business. We're making strong progress, but we're just getting started. We're building strong momentum in each area of our strategy. We're transforming into a pure-play personal care and wellness company with $6 billion global brands and leading edge capabilities. We've developed deep knowledge of the unmet needs that matter most to our consumers in our categories. We've developed a multiyear pipeline of proprietary pioneering innovation to expand our categories. The world is just getting to see this new to category innovation and our strength and brand propositions at every run of the good, better, best ladder. Now to optimize our margins, we're beginning to leverage our global scale to unlock a higher level of efficiency gains. We're on track for another year of gross productivity of nearly 6%, which will continue to support strong reinvestment and profitable growth. In terms of wiring the organization for growth, the next phase of our strategy is focused on bringing our global expertise and proprietary technologies to every market as fast and effectively as possible. To accelerate our transformation, we elected Russ Torres to President and Chief Operating Officer earlier this year, and I'm delighted to have Russ here today to share his perspective on our strategy and our transformation. So Russ?

Thanks, Mike. Thanks Lauren for having us. For those I haven't met, my name is Russ Torres, I'm the President and Chief Operating Officer of Kimberly-Clark. I've worked in the CPG industry for 25 years. And my experience is mainly centered on transformation, first at Bain & Company and then subsequent leadership roles at Mondelez back at the time it was split with Kraft Foods and then most recently at Kimberly-Clark in the North America business, leading the $11 billion business, which is about 2/3 of Kimberly-Clark's revenues. Going back to 2021, when I took over the North America role, the mission was really to transform the business from a cash generator to an engine for growth and margin expansion. I'll talk a little bit about the things we did and the results to date. Our focus was on building an organization and culture that's capable of delivering sustainable top-tier growth. And we really focused on 3 key areas on the left-hand side of this slide. First, meaningfully accelerating marketing and innovation. And just some points to back that up, we tripled our forward-looking innovation funnel. We've significantly upgraded our marketing capabilities and the effectiveness of our programming. And we expanded and premiumized our categories. And one example of that is diapers and facial tissue. If you look back in time, the premium segment made up about 50% of the category back in 2019, and today, it's 70% of the category. The second big thing on the left-hand side there is productivity and revenue growth management to drive margins. We accelerated productivity significantly. We've got a lot more runway ahead, and we put strong focus on improving mix and revenue growth management. And the third big thing was really building a world-class commercial execution engine. In digital, for example, e-commerce has expanded to more than 25% of our consumer sales. We have a 125 share index versus our U.S. national share. And we really transformed the way we approached our retail partners from being transactional to strategic. And one of the things that really enabled this progress that most people really don't appreciate is the decision we made in 2021 to move our commercial headquarters from Neenah, Wisconsin to Chicago. This enabled us to attract high-caliber talent in specialist areas like digital, social, revenue growth management and brand building. In fact, about 70% of our commercial team members are new to K-C in the last 3 to 4 years and sourced from top-tier companies. We really are a new Kimberly-Clark. And the payoff on the right-hand side has been accelerating growth on both the top and the bottom line. In fact, since 2021, we delivered 4% net sales CAGR and transitioned to consistent volume and mix growth with sequential improvements over the last couple of years. And as of the second quarter, we're gaining or holding share in 7 of our 8 consumer categories, led by our Personal Care segment with a weighted average market share gain of 60 bps. And from a profitability standpoint, in the past 2 years, we delivered 300 basis points of improvement in operating margin, while improving our marketing spending by 33%, increasing that by 33%. And then lastly, from a commercial execution standpoint, we have been ranked #1 in the Advantage survey across all of the players in consumer products for an unprecedented 3 years running in the U.S., and we're very proud of that because it reflects our progress. And that said, while we're a very different business today, we're still in the very early innings of our potential, and there's a lot more to do. So because of that, we're excited to have John Carmichael, who's joining us from Nestle to head our North America business in my old role. John brings decades of proven CPG leadership experience and his decision to join our team underscores the strength of our strategy and the tremendous potential ahead. So with that, I'll turn it over to you, Lauren.

Okay. Great. Thank you so much for that. Notwithstanding these long-range comments, I wanted to start near term and talk a little bit about the consumer environment and organic sales growth. So first, just Kimberly-Clark is one of the few companies that's been putting up positive volume mix growth, while most other companies in HPC trends are kind of flattish. So just what are you seeing with your consumers that is allowing you to have that kind of performance?

Yes. Obviously, Lauren, yes, good quarter, second quarter, good year-to-date performance. We're encouraged by that performance. We still see plenty of room to elevate and expand our categories. And that's kind of the strategy that we've been operating under. #1, it's clear consumers want better performing products and are willing to trade up for them. Just to give you a couple of factoids. I think when I joined the company, our North American diaper business was 40% premium. Today, it's well over 70% premium, right? So there's been a big shift there. China in 2019 was 6% premium, and that's gone -- grown over the last 5 years to 42%. So there's been a big shift in nearly all our markets to premiumize, and that reflects that the consumer demand for better performing products is there. So we're excited about that, and we still think there's a long runway. We'll get to innovation, but there's a lot of good stuff coming that will drive that further. I think part 2 is that there's a long runway of category development in D&E. Our categories. We see that our categories, because of the high frequency of use and the long duration of use, it requires about $4,000 of annual income for a household to participate fully in our categories. And as you're well aware, in the markets like Indonesia has just gotten there. India is still coming. I think we believe we're still in the early stages of development across D&E markets. And so we're excited about that. But the last thing I'll say, and this probably affected our results year-to-date, probably the most, which is -- our strategy to cascade our innovation across all of our tiers good, better, best, is really what's driving our growth this year, and we're really proud of that. I think we've been focused we could see Lauren coming from a couple of years ago that consumers and developed economies like the U.S. were going to be -- their pocket books are going to be tight. And so we did pivot a couple of years ago to make sure that we are sharpening our offering, not just in premium, but in the value tiers as well. And so I'd say those are the big things. But maybe I think Russ would probably like to comment as well.

Yes. I would say we are seeing the consumer being under pressure and we don't really see a catalyst for that to change meaningfully in the near term around the world. But that said, to Mike's point, our strategy has really been meeting consumers where they need us at every tier and driving innovation and new benefits in the category. In terms of the numbers, our category growth rate in the second quarter was around 2% weighted average globally. So kind of in the zone. And so we don't really see a reason to evolve our strategy. We're going to continue to invest in the second half of the year in our programming as well as driving innovation and new benefits to help meet consumers where they need us and drive premiumization.

Okay. Great. I guess at the Investor Day in March of '24, medium to long term, you talked about expectation of categories growing in the 2% to 3% range. And Russ just said, we're around 2% right now. But the algorithm is to outpace categories. Can you just expand a bit on the drivers that 2% weighted category growth that you're seeing now? Like what gets the market back to 3% at the higher end of that range?

Yes, I can comment on that, certainly, others can weigh in. But I think it is running the play, and we're seeing this around the world of driving new benefits, new occasions, innovation, premiumization and really expanding out every tier of the price spectrum. And so it really comes down to that.

Let's switch to innovation. So when you're talking -- you just mentioned good, better, past. You've talked about stepping up the pace of innovation across the 3 tiers. And you've also discussed focusing R&D and innovation efforts on problem areas that face consumers. So comfort, skin health, absorbency as examples. I just want to talk about what the output of that should be? Do we expect to see a higher frequency of new product news? Or is it the impact of innovation should be greater? Is it a fewer, bigger, better approach? Or is it more?

Both, right? And I'll click back. And I think our confidence in our innovation Lauren, is really what leads us to ahead of category growth, right? And that's kind of our mindset there. But I would say, when I say both, I guess I'm not really joking. And I think maybe what you should see is an accelerated pace of category changing innovation, Internally, Chris, I'll say, the internal language I use is you're going to see an onslaught of innovation. We don't say that externally because I don't want you to think we're crazy, right? But that's kind of how we think about it inside, right? And what's working for us right now this year-to-date, I talked a little bit last year at Investor Day, hey, most of the industry and diapers or personal care is on this Gen 2 absorbing core. I won't get into all the details there, but we rolled out a Gen 3 core in China in 2018. That's why we've -- we've taken over market leadership in China. We're now about almost just under a 20% share, which is almost double #2, right? So I think we have a better mousetrap on the Gen 3 that's also driven our success in other markets like Korea, Australia. It's come to the U.S. this year, Brazil this year as well. So we think we have product superiority on the Gen 3 core for Personal Care. I think -- we're able to produce that, we think, at a very, very competitive cost in some markets, the lowest cost. So that's kind of the starting point, which is a great product now, but we have stuff the world hasn't seen yet, that we teased last year at Investor Day, a Gen 4 core, a Gen 5 core I talked about our vision to be natural forest free. So we've got a lot of, I would say, category-changing innovation in the works. Russ, you may talk Russ into sharing slightly more about that, but I'll let Russ decide it.

Sure. Yes. Just to underscore something that Mike mentioned is just a level set. Product performance is really important in our categories there everyday categories. And you might ask, why are you working on a Gen 3 core or Gen 4 core. Well, if I were to tell you what percentage of the -- of diapers actually leak any idea?

No, but probably all of them. Well...

You all know, it's in the high mid-single digits, the category. So if you think about that for a category that's been around for this long to still have kind of 1 in 20 times, mom or dad putting a diaper on a baby to have a leak occur. It's not that good. There's still tremendous room for improvement of performance in the core. And so that's why our focus on innovation is really important. Mike mentioned a couple of things. I'll expand on those. The next-generation core he's talking about is really a much thinner proprietary technical advancement that allows us to create significantly thinner absorbent cores with the same or better absorbency, and you can imagine what that does for both base core protection as well as comfort and flexibility and the other things that are really important to people across personal care, babies and beyond. And the other 1 that Mike mentioned on the new to world fiber is something we've been working on for a long time. And this is the history of the company. So we get excited about it. Mike under his leadership has really fostered a focus on these types of scientific breakthroughs, but new to world Fiber that not only is more sustainable at an accessible cost and will help us achieve our Forest free fiber commitment by 2030, but also delivers superior performance in the tissue segment. So these are the types of things we're working on that over the medium to long term we're going to start really impacting how we bring new benefits to the consumers in our categories.

Okay. Great. And just in terms of absolute investment levels, do you need to increase R&D spending? Or can you deliver the onslaught of innovation at the current rate of spend?

We're going to let Nelson decide.

Yes. So when we think about R&D, we need to think of investments in both what we spend in R&D and what we had spend on CapEx. In terms of R&D spend, we have a healthy level of spend at around 1.9% of our net revenue. And we've been becoming very efficient on every dollar that we deploy, as we have been driving the wiring of the R&D organization into our new operating model. If you then go into our CapEx investments, we have been stepping up our investments over the last few years, particularly our North America business and our new IPC segment, which we launched last year. As of 2024, our investments in CapEx were around 3.6% of net sales. And in the first half of this year, that was about $4.3 million. We expect to step that up to around 6% in the next few years as we drive the transformation of the supply chain, particularly in our North America business, where we had some big announcements a few months ago.

Okay. Great. Let's switch and talk about advertising. So Mike, last year, you talked about a desire to have Kimberly get better at in your words like storytelling to increase consumer affinity for your brand. You talked about the can awards, it's the 2Q earnings call doubling the prior 5 years worth of awards. So maybe you can talk a little bit about where you think the company is on that journey type of return you're seeing on that advertising investment? And then with the recast financials after the Suzano JV, advertising is at about 7% of sales. So is that the right long-term level for the company?

Yes, we're making great progress on the advertising. And I think we are accelerating our ability to be better storytellers. And I think that was a big need for us, huge progress. What we're trying to do, Lauren, we want to create brand love by showing consumers how our products can improve their lives. And so that's really our focus. I'd say over the past 5 years, I think we -- we've increased our advertising investment by $500 million or $600 million, right, in the last few years. But I would also say that's also come with higher ROIs because we've almost shifted to almost 100% digital, Lauren. And that digital for us is a powerful model. And maybe our most advanced model in the world is in China, where it's almost like a CRM model and it's an incredibly efficient spend for us. And the data is very, very good in helping us optimize our investing. So I'd say, we've developed advanced models in markets like China, Korea, we're bringing those to markets like Brazil and Indonesia right now. It's also influenced and Russ can talk more about this, how we've adapted that for the U.S., right? So I think we feel good about kind of the investment and then how we're executing against it. The other part that's equally important is this notion of brand love storytelling. I mean brand love is not a phrase that people in K-C heard me walk around saying much because I'm not wired that way. But it's something that I would say Patricia Corsi, our Chief Growth Officer; and Luiz Sanches, our Chief Creative Officer, have kind of brought that language to us and also made us at the leadership level, understand how important that is. And so I'd say what we're trying to do there is talk about the benefits of our products in a memorable way that consumers get and like, right? And I think that's kind of behind some of the wins that we've had at [ Con ] this year. And I couldn't even pronounce [ Con ] until I heard that we won some awards. So I think that's where we're going. And then the unique feature, which I mentioned on the call is we've in-house creative capability. I mean, this year, we'll make 4,000 ads for Kotex in China. Obviously, a lot of that's AI, all done in-house. Luiz is our internal Chief Creative Officer. He's probably 1 of the most awarded advertising agency chief creative officers in the world, right? And so having that kind of knowledge in-house has kind of changed how we think inside and also dramatically improving our execution in the markets. And so maybe Russ may want to talk a little bit about that because he's been through some of it.

Yes, sure. I can give you a few examples to bring it to life of what Brand Love really means. If you think about Luiz and Patricia have helped us work on this, in the area of crushing the stigma, the Goodnights campaign with astronauts, we talked about in the second quarter call is 1 example. The other 1 is the poise giggle dribble, where the insight there was it's a stigmatized category, but a lot of people don't realize that leaks are a natural consequence of childbirth. And so, we really highlighted that with -- in that campaign and normalized it with humor. And those have been very successful in growing the category. Another example that those of you who have kids may relate, it's the Huggies you may have seen and it started in the second quarter with the NBA Star Giannis and his real-life daughter, and he was doing basketball moves, and she's mimicking her dad. And anyone who's got -- who's got a child knows that, that's like a really touching moment as a parent and really creating that emotional connection that illustrates the product benefit of little movers being able to move with the Giannis' daughter. That really helped us a lot. I think that was part of the reason why Huggies gained 160 basis points a share in the second quarter. There's a lot of other reasons. But -- and then the last 1 I would have...