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

All right. Well, thanks, everyone, for coming. It's -- welcome to, this is Piper's Fourth Annual Growth Frontiers Conference. It's our pleasure today to have Kimberly-Clark here with us. We've got Mike Hsu, the Chairman and CEO; Nelson Urdaneta, CFO; and Chris Jakubik, Head of IR. Mike's been CEO since 2019 and has driven an interesting evolution of Kimberly-Clark by reshaping the portfolio, a greater focus on premium, more value-added offerings and stronger on brand building and building a consumer-centric team. I actually knew the company about 15 years ago as the junior, at a different firm, and it's quite a different story today and much more interesting in my opinion.

Maybe Mike, could you just start with some of the ways that the transformation has gone in recent years, and how you've reshaped the portfolio and really changed it from a bit more of an industrial type company to really CPG focused?

Okay. Mike, thanks for having us. It's great to be here in Nashville. Yes. I think -- so this year, the company is 153 years old, right? Founded as -- I think we invented paper in the U.S. And for much of the company's history, we were a very industrial company, as you mentioned. Like we -- if you name a paper, we probably invented it, and we are the leader of it, cigarette paper, newsprint, stationary, you name it, right? So I think that was the heritage of the company, and there -- and if you listen to that background, the company didn't decide to become a consumer company until, I would say, the late '80s, early '90s. And so we're a very young CPG company. I was brought in by my predecessor, Tom Falk, in the Board because recognizing that we want to be a world-class CPG. I was the first senior executive to come from a consumer packaged goods company, right? So in my mind, a pretty clear remit, which is -- and we all work -- including Michael, we all used to work at Kraft, right, and recognizing -- and where it's a different company than it was 20 years ago, but we -- I viewed Kraft as what I called an academy company that had world-class capability. And so really my focus was to instill world-class consumer products capability into the company. And where I'd say the great starting point that Kimberly-Clark always had, Michael, is if you listen to all that -- all the categories that we are in, the common thread is the company has fantastic science and engineering. Like we invented most of our categories. We invented how to make most of our products. And we still build the machines that make our products today, right? So that's the kind of -- we're a very engineering-centric company. So that was great base to start from. If you have to have 1 thing, you have to have the product, right? I think where we were able to enhance the capability is more of the consumer perspective. And I would say starting with like dividing great consumer understanding, consumer insights, laddering that into how we communicate with consumers through our marketing, digital, how we execute at retail with our customers. And then lastly, while we are great manufacturers, I think strengthening our productivity cost discipline has been a real big focus. So I'd say from a capability perspective, what we're trying to build is like world-class capability. And I think we've come a long way in mind. I think I'm in year 13 now. And so we feel good about that. The other thing that had to change is kind of where you led off, Michael, was on the portfolio we had to reshape the portfolio. One of the challenges that I was wrestling with, as I came into this role about 7 years ago, was it was clear that our valuation or multiple relative to our peer set was lower. And if you looked at -- asked the question, and I'm a quant, so we built multiple regression models to kind of explain the variance. Number 1 driver was we had lower organic growth in our peer set. Since I came into this role, we've been growing at about 4% compounded. We had the lowest gross margins of our peer set. You'll hear us talk more about productivity, and why that's so important, why we feel very bullish about that. The third one is one that people don't talk about as much, Michael, which is we had the highest EPS volatility of our peer set, and why? And it's primarily driven by our exposure to pulp cost. And so while the price of tissue does not vary in the market at retail, the cost of pulp varies quite a bit. And so that's the impetus behind our last move that we announced earlier this summer, where we we've entered in a joint venture with Suzano, who is the largest producer of eucalyptus pulp. We're the largest customer globally, and they're taking the majority ownership of our international family and professional business, and we'll be the 49% owner. But there are couple of things. One, certainly, when you have a very efficient eucalyptus producer, majority owning that business, inherently, I think you might understand that the volatility behind that business is going to be reduced significantly. And then secondly, importantly, I think by deepening our relationship with them and recognizing the volatility isn't great for either of us, I think it gives us better visibility into the other parts of our tissue business that are remaining with the company. So again, I think those are the big areas, both capability and then portfolio reshaping the structurally reduced volatility.

No, that's great stuff. And we'll come back and drill into a little bit more of the marketing side and brand building piece. But maybe first, Nelson, can you touch on some how the portfolio evolution impacts or shapes, you're thinking on your 2030 targets, which I think if I've got them right or like a 40% gross margin and 18% EBITDA.

Sure. So happy to be here and a few things. I mean we've been building great momentum on the business in the last couple of years since we launched our Powering Care transformation. We've transitioned to a volume mix led growth in the last 1.5 years or so. And we've made significant progress in our margin progression targets, which again, those are milestones, those are not end states. And with the recently announced transaction, we should see an acceleration in reaching those milestones. As we said, that was an objective by 2030, but because of the mix of the portfolio and North America and IPC being higher margin businesses, we should be able to get to that milestone ahead of what had been planned. Few things on that end. One, we are ahead of where we expected to be on the gross productivity front. We announced a $3 billion-plus program for the next 5 years, and we are tracking ahead of that in terms of the timing of when we expect to deliver that. Added to that is the SG&A savings, which was another $200 million, and that's an enabler to push margins ahead. And that's also tracking very well as we're in about half the year where we said in 2 years, we'll be delivering that number. We expect all of our businesses to deliver at least their fair share of these savings. And with IFP in the transaction, we still expect the benefit from the ongoing savings that the IFP business will continue to drive with Suzano, a very strong operator and an expert in fiber bringing to bear at that end. There will be some stranded costs as a result of the transaction, say about $150 million, which we pointed out when we announced it. And we're confident in our ability to add that to our objective of savings going forward. We're working on those plans, and we'll be sharing them as we get closer to closing the transaction in midway through next year.

Two quick follow-ups. On the stranded cost mitigation or ultimately ideally removal. Any sense of what that timing might be, or is that still a bit to be determined? And then the second 1 with the divestiture, can you give a sense of how to think about the go-forward portfolio, whichever way might be the most helpful to split it. The family products, I think is mostly things like toilet tissue, the feminine care and diapers are more value added or have room for premiumization. If you maybe kind of think about the more differentiated or premiumizable categories versus the rest of -- how does that look now for where you...

So I'll touch upon the stranded a little bit in the portfolio, and if Mike or Chris want to add anything. But on the stranded, a couple of things. One, we expect in the immediate years, and that's -- once we close the transaction, we'll action the plans to address the $150 million. It will take not an unreasonable amount of time for us to address it. We're talking in the $0.30 to $0.40 out of the gate EPS. That's kind of the impact that we've guided to. But we expect to be in a position to fully offset that in the next few years right after the transaction. Again, those costs are related to largely shared services that we have across the enterprise, global supply chain costs and unallocated overheads. But again, given our track record of cost savings, delivery over time and being ahead of where we expect it to be, that should be something we can address. On the portfolio, a couple of things to keep in mind, 2/3 of our portfolio of the remaining company will be personal care. So very different margin profile to begin with. And of the tissue and professional business, that's in North America, which is a fairly profitable business. I mean that's a business that has an operating profit that's around 20%. So it will be a very different profile than what we were seeing before. And hence, why Mike was referring to before, the fact that it was a much lower business, the IFP. Premiumization, all the portfolio that remains is subject to premiumization. There's ample opportunity for us to keep elevating our categories in the way we talk internally because there are unmet needs across both tissue and the personal care categories that we have.

And then back to some of the brand spending, you've been increasing it, both quantity and quality seems to be improving. Can you maybe give us some context for that and maybe touch on some of the recognition you've received recently that seems to validate that externally as well?

Yes, yes. Advertising -- well, actually, I learned just before we came on that we both worked on Jell-O back in the day, not at the same time, but I think Michael understands how important advertising is to a consumer -- to a consumer business. And so really what we're trying to do, Michael, a new term for me. Brand love is what we're trying to achieve, right? And that's -- I think, for me, a newer fangle term, but what do I mean by that? It's like what we're trying to illustrate to consumers is the positive impact our categories, our products can do for consumers. The positive things our brands can do for consumers through the product features that create brand love, right, that create that connection with the brand. I think in the past, since I came into this role, maybe in the last 5 years or so, we significantly increased our advertising investment $500 million to $600 million or several hundred basis points of investment. And he wouldn't do it if it wasn't a positive ROI. And the underlying thing is why is it such a positive ROI, it's because it's -- we've also, at the same time, almost shifted entirely to digital, right? And if you think about our categories, the reason that's so important and different than Jell-O is that even though it's a big brand, they're very narrow -- they target narrow slices of consumers. So if you think about in the U.S. Huggies, we're only trying to reach 6 million people, right? And so you can imagine when you think about those numbers, then advertising on TV is a gigantic waste, right? But if you can target them on search or other digital avenues that's a much more efficient spend. And so -- and we're -- I think we've advanced that model the most is in China for us. And we've built an advanced -- there's an advanced digital ecosystem that's tied to e-commerce in that market. We have a very innovative model that we've pioneered in China, very AI driven. So for example, this year on our femcare business, Kotex in China, we'll produce over 4,000 ads this year, Michael. And obviously, we couldn't do that if we weren't using AI, right? So I think it's -- there's an advanced model, but also it's become very scientific. I started my career in direct response marketing or mail order in direct response, and it's become a little bit more like that, right, where it's almost like a CRM relationship with consumers. And that's why we feel so confident in our investment and our spending. So that's 1 big piece. You kind of mentioned the award. I had to -- before our last earnings call, I had to learn how to pronounce, Cannes. I think how -- this is -- it wasn't a big focus of mine. And for the prior 5 years, I think we had picked up maybe 5 or 6 Lion Awards at Cannes in the past. We won 11 this year, so more than doubling our 5-year cumulative total. And what's changed with us there is we wanted to get great brand love. We brought in a new Chief Growth Officer, Patricia Corsi, who kind of brought this language Cannes, brand love to us, and we've in-housed a lot of our creative talent. And doesn't mean we make all of our ads internally. In China, we make most of our ads internally, but we have brought in creative people that were chief creative officers of major agencies. And in fact, our head of creative is probably the most awarded chief creative officer in the last 10 years. And so because of that, I'd say what we're trying to do is create advertising that both expands the category, but also demonstrates how our products improve wise in a, I would say, a memorable and charming way. And the examples I'll give you is, I'll tell you a funny story, we got called down by our largest customer. "Hey, you got to come to this important meeting, we want to meet with you all," sort of stuff. And so we get down there, and they're like, "Well, we want to know what's going on in the category." And we're like, "What's your concern." They're like, "Well, it's growing like more than we thought." And they said, we took it all apart. We've analyzed this. And the only thing we can figure is it's your advertising, right? And so the other point was do more of it, right? And so that was on adult care, right? So if you've seen we have a couple of campaigns in adult care, in childcare. Internally, we say we want to crush the stigma associated with some of these categories, right? And so on Poise or Depend, right, there's a stigma associated with using the product. And what we're trying to do is normalize the condition. So we've worked with Katherine Heigl, the actress from Grey's Anatomy to kind of -- and her -- she likes to talk about with her friends, the giggle dribble, because really women start leaking in an earlier age than people think, right? It typically comes with childbirth, right? And so normalizing that condition is helping expand the category. We brought in Emmitt Smith and Deion Sanders to talk about prostate cancer and -- because that is what drives kind of leakage for men, right? And so that's grown the Depend category. And then with GoodNites switches, the bedwetting garment that we have, we brought in astronaut, Scott Kelly, right, and demonstrating how astronauts use products like Depend because they have nowhere else to go when they're in space. So I think that is doing a great job expanding the category for us. And then the other side of it is we say, "Well, let's also talk about how our products improve lives with some, I would say, charm and memorably. You could probably see -- I don't know if you have seen, we have this diaper on Huggies called the 360 blowout blocker is the innovation. And if you ever had a baby, you will know what a block is, I won't describe it here, but it can be messy. And so if I want to tell you, hey, we made an ad to market the blowout blocker, the ad could -- in your head, it could be very gross, right? And I think our team has found a way to deliver that message memorably with charm fun and not gross. So I think our marketing is getting better. We think it's a real driver of the business and what our brands deserve.

It's a tight rope to walk. So yes, a nice job. Maybe just elaborating a little bit more on innovation. Can you maybe give us a sense of how you approach it, what kind of -- how robust your pipeline might be at the moment and a little bit of what sort of investments it takes to deliver that?

So the founding principle -- the #1 founding principle of the company, Michael, if you go back, and we have this all over our walls, and we have books at this, we make the best product. That's like #1 job for people at Kimberly-Clark. And so where we really rely on our engineering, our ability to make a better product. And so right now, I think why we feel great about the first half that we delivered is it's on the backs of great performing products. And so we feel like we have product superiority. Also at a very competitive or in some markets, we would say, at lowest cost. And -- so that's a powerful lever, and that's kind of where it starts with us. And the back story is we developed an innovative core, if you think about for diapers, but this can apply to the balance of personal care. We've developed an innovative absorbent core technology that we're the leaders on and still rolling out globally. And so that's been a driver of our current success. So we first launched this in China back in 2018. In 2020, we became market leaders. We rolled it to Korea and Australia back in 2022, and those were a little higher share in those markets. So we -- so our shares have grown from, let's say, the low 40s to the 60s. In that time period on the back of the technology. And then -- so that's all good, and we're in the process. We just launched it in the U.S. at the end of the second quarter and Brazil earlier this summer. So we still have plenty of opportunity to kind of roll out what we think is an advantage, absorbing core technology around the world. The other thing I'll say though, Michael, is we've been focusing our technology bets and concentrating them based on the insights that we've kind of defined. And so we have what I would call the next-generation core, the next-generation fiber that we're working on that's in the pipeline and in the work. So we're very bullish on our technology, and we've got set to roll out.

No, that's great color, and...

Yes. So investments 2 things, right, because we -- to take into account. The first 1 is how much we're investing in R&D per se, and how much we're investing in CapEx. R&D levels are pretty healthy. We're investing about 1.9% of our net sales. And we're driving a lot of efficiency, especially as we are implementing our Powering Care transformation, our new ways of working across the globe. CapEx wise, we've been stepping up investments, especially in North America and International Personal Care. We invested around 3.6% of net sales last year. First half of this year, we're up at 4.3% of net sales. And in the next few years, we expect to be more on the 6% as we drive particularly the transformation of the supply chain in North America behind some of the platforms as well that Mike was referring to.

One more quick 1 for you. First, just from a little bit of a handholding perspective for investors about any puts and takes over the next year or so from the IFP divestiture transition. And then would love to hear from you as well on just what investors might be missing on the Kimberly-Clark story, but we'll do a little housekeeping first and then hand it off to you to...

So housekeeping, I mean, let me start with kind of the categories because I think it's important to kind of give a perspective. Categories were growing -- have been growing through the first half at around 2%. We've seen some heightened especially in the last couple of months, promotional activity, particularly in diapers and some of the private label and in-house brands. That -- again, that's driving a subdued category in diapers. Recently, we're seeing 1%. So again, we're choosing not to participate in those activities that are happening in the marketplace. And there's some level of pantry loading as a result. So we expect some of our activities to move more towards Q4. So that's kind of thinking of the short term. As it refers to the transaction itself or any impact on financials, how to think about it, EPS-wise for 2025, 3 factors. First one, it will reflect our North America and our International Personal Care business, that's our ongoing operations. Secondly, it will reflect the 100% of our international family and professional business as discontinued operations, but still, we'll own it for the full year, so it will be in EPS. And then last but not least, it will be a onetime benefit of about $0.16 in depreciation and amortization because of the halting of the depreciation and amortization of that business. For next year, EPS growth, constant currency will reflect: one, and assuming that the transaction closes around midway through the year. The ongoing business or continuing operations of North America and IPC. And then we'll have to deduct any dilution that we'll have from the transaction once it goes live as well as the fact that we'll lap the depreciation and amortization benefit, which will be around 7 months in 2025 and around 6 months for next year. We will -- we're working through the plans to offset all of the stranded costs, which I referred to earlier, and we'll come back with that once we get closer to the transaction next year.

Yes. No, that's very helpful. Mike, could you just wrap up maybe how you see what -- how to think about the stock maybe some of what investors might be missing and any other closing thoughts?

Yes. Maybe the big thing, Michael, is I would say we're a better, more capable company than we were, let's say, a decade ago. And I think Part 1 and maybe this has been missing, we structurally reduced or eliminated our earnings volatility because of what we've done with the portfolio and our partnerships with our primary supplier, so that's part one. Two, just was articularly in innovation, we have a fantastic pipeline that the world hasn't seen yet. And that gives us confidence to -- our strategy and why we're doing well this year is we're cascading our best technology from premium tiers into our value tiers. And the reason we can do that is because we know what's coming behind it, right? And so we have more that we're going to be launching. So I think we're really excited about that. Nelson mentioned it, but we are in the very early innings of becoming world-class of productivity. So we delivered 6%, about 6% last year. We're on the path to high 5s, low -- around 6 this year, that would -- we would consider world-class. And -- but we're in the early innings because of our historical, I would say, more decentralized approach to cost management. We're getting much better leveraging scale. So there's a long runway of productivity ahead for us. And then the other thing I talked about the world-class capability, but I would say that's all packaged together in what I think is a little different in our industry, which is a lean and fast operating model. We are very market centric. We're very nimble and agile and everything we're doing from a corporate perspective is we're working to help win in the local markets, and that's our job. And so I think we're very bullish on our future. We'd love to get investors bullish, too. So thank you for the time, Michael.

Thank you for being here. I appreciate your time. I appreciate all the thoughts and color, and thanks, again.

Thank you.