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

Okay. Good morning, everyone. We are pleased to kick off this busy day with Kimberly-Clark. We've got the full team here. We've got Mike Hsu, Chairman and CEO; Russ Torres, President and COO; and Nelson Urdaneta, CFO; and Chris I don't know your proper title other than Head of Investor whatever Okay. Well, thank you for joining us, everybody. So Mike, to say a little, like a lot has changed at Kimberly-Clark over the past few years, and that's probably an understatement. Before we get into that, though, I want to start just with the power and care strategy that you introduced at the March 2024 Investor Day. For those that may not be up to speed, could you just maybe give an overview of that strategy and detail how it differed from the company's prior strategy.

Okay. All right. Thanks for having us here, Lauren. Great conference and excited to be here. Yes, Power & Care, we introduced, as Lauren said at our Investor Day back in the spring of 2024, and we've been operating on that pretty consistently. It really has 3 big planks. Pipe number one, we call externally or accelerate pioneering innovation. Internally, we call it onslaught because that's kind of really the intent of what we're looking for, which is an onslaught of pioneering innovation marketing and activation. But I think the core idea there is, hey, to understand what consumer needs are that are kind of unmet. We want to deliver obvious superiority and then for us, superior performance is another way to deliver superior value. And so that's our big focus there. The second big plank is what we call optimize the margin structure. We felt like we had some room to improve in terms of our cost structure. We really think about that as how do we offer the best possible product at the lowest possible cost. And internally, it's not lower cost, it's lowest possible cost. And so we operate that way, and we've made strong progress, as you've seen over time, enhancing our margins. And then the third plank is why are the organization for growth. And historically, Kimberly-Clark was a very decentralized company and which led to a lot of positive things, Lauren, very entrepreneurial, very agile markets, but we underleveraged our scale. And so a big part of wiring the organization for growth is how do we leverage our scale more effectively and enable ourselves to go faster by bringing global might to the local fight. So I'll pause. I would say since '24 when we've been operating, I think it has helped us deliver consistent organic growth I think we're in our tenth quarter of volume and mix growth. We've expanded our margins and really dramatically reduced our earnings volatility, which you may remember from the battle base.

The many that have Yes, definitely. So in that context, you gave us a little lead in. Let's dive into the business performance. Just looking at the company, excluding what's now in the IFP JV. A -- so over the medium term, organic sales have held in well at 3.9% in 2024, 1.7% in '25, but things have slowed down again more recently. Can you just speak to how you aim to drive top line in categories that many would still say are very slow growth -- and then also touch maybe on trends you've seen closer in that resulted in you taking down your fiscal year organic guidance with reported out.

Yes, thanks for that. Maybe I'll lead off, Loren and I'll ask Russ and Nelson to comment with a little more detail. But I would say the headline for us is the categories we operate in, I would say, are very durable and resilient, and our focus is on superior value and expanding the categories. And that's really kind of how we're driving our growth. The resilient and durable category part, I mean, the reality is if you look at our categories like diapers, adult care back tissue, they really kind of if left alond grow with population growth, right? And so that's kind of the thing. And so it's not a fast-growing category tends to grow with population, but we feel like we can accelerate that category growth by adding premiumization into the mix. And that's what we've done in our 2 largest markets in North America and in China. I think back when I started with the company, I think we were about a 70% business was mixed driven by value in our value performance tiers. Today, we're over 80% premium. China, if you went back to 2019 was 6% premium. Today, it's well over 50%. So I think the One way we accelerate is bring value-added innovation to drive the premiumization of the category, and I think that's been working. And then the other big area is we feel like we can expand the category as category leaders by driving category consumption. And so an area that we focused on more recently in the last 3 years was on Kleenex. And we've been able to successfully drive household penetration over the last 3 years by focusing on kind of the category growth drivers, I think we've seen Russ, maybe about, I think, 7% compounded growth over the last 3 years on Kleenex. And so there are ways that we think about that we can drive it. I would say your note on what's been happening this year. I think, one, I would say the category has been choppier. We have seen an uptick in promotional intensity by competitors over the last few quarters? And whether they're new small brands or some of our major competitors, we have seen that occur. I think our -- our point on it is, and you've heard me say this before, Lauren, is like we're not really -- it doesn't really make sense for us to try to rent additional share through promotion. And the reason I say that in our categories, since they grow at the population, they're kind of fixed consumption in a lot of ways. And so when you overpromote the category, you kind of drive -- all you're doing is buying forward inventory or pantry loading consumers. And that's not really that valuable for consumers or the retailers.

Yes, Mike, I'll just add, you mentioned choppiness. It is a choppy environment out there. And I think our teams have demonstrated very good agility in responding to those one-off impacts. We talked about the China situation in our call in the second quarter. And just for those who didn't hear that was going to be an impact on the full year of about 100 basis points to our organic growth rate for the total company and about $0.18 of EPS. And -- and that will come through in a more significant way in the third quarter. So it's about a 250 basis point headwind for that. But our teams have really pivoted and focused on taking the playbook and applying that to other markets internationally. And so we've seen very good growth in share gains accelerating in markets like India, Vietnam, Korea, Indonesia, around the world. So our teams are pretty resilient. Since the second quarter, we did in North America, see 3 additional challenges arise that will likely cause the third quarter to come in softer than we had expected. The first was we had an innovation launch that we postponed due to some production issues. The second is in our professional business, we saw some pretty significant distributor disruptions. And that's a business that we've grown volume 7 quarters in a row. We've gained share in all of our categories in the second quarter but that distributor disruption is going to cause a significant inventory deload for us. And each of those too will be about 1 point of growth in our North America business, respectively in the third quarter. And then third, we've seen some -- as you probably have heard from others, the freight market and logistics market in North America is tightening. So we've seen the prices go up there. We're a little more exposed to that than we usually would be because of the Los Angeles distribution center of Fire so we had a lot more things that are being moved around, and that will also be a significant impact in the quarter of about $30 million to $40 million of incremental costs. And so -- our team in North America is working on offsetting all those things, but it is a choppy period. We're going to continue to execute our play and feel like we do believe, at this point, the full year will be consistent with what we had talked about on the second quarter call.

Okay. All right. So Nelson, just to bringing this to you. So no impact to the full year top line and bottom line. Is that correct? This is all within.

Well, let me unpack it a little bit more. So as we've said in the past, we focus on managing to the year, the midterm and the long term, not really the quarter. I mean there's just a lot of moving pieces. And more importantly, our focus is on profitable growth. Over time, things will move. But what Russ just explained is going to have an impact on the third quarter. That's the 1 thing we know. And as we looked at the third quarter right now, it's -- we are projecting that we're going to see our revenue contract into low single digits with a low teens decline in our EPS versus the prior year. There are a lot of moving pieces, and our teams are currently working through the action plans that will address some of those new news that we have, and we didn't have that at the time we reported earnings back in early August. If anything changes on the full year, Lauren, we'll provide an update concurrent with our next earnings call. Now the important thing to highlight is that for 2027 and 2028, we're still in line with the expectations that we have laid out post acquisition in terms of our algo. For 2027, that is no more than a mid-single-digit dilution versus our baseline stand-alone EPS for 2026. And then for 2028 and an algorithm year where we would see earnings per share growth growing in the mid- to high single-digit constant currency versus on a compounded basis versus our baseline 2026 stand-alone EPS.

Okay. A couple of things I want to just come back on. One was China. I know you said specifically 250 basis points in 3Q, just any updates there? How are things progressing? The 100 is still probably the right ballpark for the years is also go in the bucket of -- we'll get an update at 3Q.

We haven't seen on the consumer offtake side, any change in the situation versus what we had talked about in the second quarter call. So while we haven't seen any sequential deterioration in offtake, we haven't seen any meaningful improvement to normalize either. And we're -- the team is doing a very, very good job of executing the strategy, focusing on communicating our quality and safety to the stakeholders and working with the government and other retail partners to help get through the transition as quickly as we can and then obviously communicating with transparency. So we don't have an update at this point. And certainly, if something changes, we'll let everyone know.

Okay. And then just in terms of category growth, we -- we've heard generally, I mean, we're a day into this. But that consumers generally holding in despite some macro headwinds just wanted to get a sense for me like why do you think your categories in particular, have been choppy. Why have things slowed? We've heard sort of a more positive stance arguably on the consumer environment.

Yes. I think, Lauren, I'd say definitely, I would still say our categories are very durable despite the environment overall, I think, being very choppy. It's pretty clear that I think middle to low-income households are under increased pressure. And I think that by now, I think that's obvious. I think we've hung in better over time because I do think we made a pivot a few years ago to focus on superior value at all rungs of the Good, Better, Best ladder. And so what we've done is things like bring our best innovation. And in fact, in U.S. diapers, I think our most advanced absorbent core, we launched first in our value tier product. before rolling it through premium tier. So I think making the products better has helped us throughout this. However, we are seeing the choppiness is driven by, I think, I mentioned earlier, increased promotional intensity there is some shifts in our business among quarters between when a big retailer promotion kind of happened and a year ago versus this year. So I think there's those kind of effects. And then there has been some inventory changes. Generally, we don't get too obsessed over retail inventory changes because in the long run shipments lined up with consumption they have they kind of have to. And so -- so we're -- as kind of Nelson and Russ both point out, we're pretty, I would say, consistent in how we manage the business. We're managing the business for the long term, and we recognize that the environment is a little choppy, but we're going to navigate through it.

Okay. Great. And then coming back also to cost inflation as a result of the Middle East. You discussed $150 million in incremental inflation in the second half in order to stay not neutral that you'll leverage not just the tariff refunds, but also pricing. What can you tell us about pricing so far? And do you think that you'll expect to take incremental pricing in '27 to hit peanut neutral next year as well?

Sure. Let me give you some of the context and recap what we talked about in the earnings call and build in the new news that we just shared and then Russ might chime in on pricing and how that's going through. But the first thing is we're proud of how our teams are maneuvering through what's a very dynamic environment. We've had significant experience over the last few years in managing through significant volatility and being able to deliver growth consistently over the last 4 or 5 years or so. And the 1 thing is that at our August earnings update, we shared that we have built into our outlook for the second half, $150 million of incremental gross input cost inflation and that we expect to offset this pretty much through all the mitigating actions that are being undertaken, including pricing in several markets that is going into place or has already gone in place. And the onetime benefit from the second quarter collection of a tariff refund that took place in North America. However, as Russ shared, we now have new news in terms of some headwinds in costs, particularly in North America. The first is the 1 related to the spot freight transportation, which could amount to around $35 million to $40 million in the balance of the year with a meaningful impact already in the third quarter. And then the retaliatory tariffs that went into effect in Canada this week, that has the potential to add up to another $10 million of headwinds in the balance of the year. The teams are currently working through all the mitigating actions. And again, if we see any change in our full year view, we'll provide an update at our next earnings call. As to 2027, it's important to highlight that we will benefit from the carryover impact of the actions taken in 2026. Whether or not we need to take more incremental actions or other elements -- it's too early to tell at this stage.

Okay. Okay. Russ?

I'd just tag on to that quickly and just to reinforce that our strategy is to focus on growing volume mix and maintaining peanut discipline over time. And those pricing actions are flowing through, you'll start to see that in the scanner data in North America and in other geographies that we -- the ones we've already taken -- but pricing is just 1 lever. We also really focus on innovation and mix and revenue growth management actions like price-back architecture as well as driving the cost cycle over time to get to that profitable growth. So -- we look at it as a balanced mix, but we'll use all the tools in the toolkit to help manage PNOC over time.

And Lauren, if I can just add. I want to come back on the choppiness in terms of demand and the demand profile in the categories. I mean as Mike said, I mean we are in categories that are essentials. And the variability that we've seen quarter-to-quarter has been greater than the variability that we've seen on, say, a trailing 12 months basis. Our categories have been pretty consistent between 2% and 2.5% over the last few years on a trailing 12, but we have seen more choppiness month-to-month and a bit quarter-to-quarter. But I think relative to a lot of other categories that you follow, I think our demand profile is not stable.

Yes. Okay. Just wondered -- we've been pretty active on portfolio reshaping. We're going to step back a little higher level for the moment. Before we get to Kendi, I just wanted to talk about the joint venture with Suzano -- so just to refresh your people here, about 15 months ago, you announced a deal to sell 51% of your international family and professional care businesses, Suzano, the deal finally closed on July 1. So we created a company called RX -- can you just speak to the strategic rationale for this transaction?

Yes. Well, I would say that a big part of it is we're really excited to team up with an to create the international tissue leader. And they've been a great partner. They're our largest fiber supplier in the world. We work closely together with them. And so I think the rationale in this is you're going to combine Casey's great tissue-making expertise, our commercial, global commercial acumen and marketing tissue products with Suzano, which has the lowest fiber cost in the world, right? And so when you put those together, what you have is a great business with an inherently stable cost base. and that makes it a better business than the 2 businesses being separate. So what -- I think we would expect to see is inherently in that business, a set of winning capabilities plus volatility reduction within the business. And then obviously, for our portfolio, Lauren, and you've seen this evolve over time, which is 1 of the things we've been focused on since I came into this role, was to reduce our volatility on EPS. I think we looked at the math. And I think 1 of the things holding our stock back was I think the investors like in this room didn't care for the excess volatility that occurred in our stock. And so -- what was driving that volatility is the price of fiber. And so certainly, by putting this business together, it reduces that volatility and then reducing the mix in our overall composition within our portfolio does as much.

And just to add a couple of things there, Lauren. So partnering with Suzano under a joint venture structure maximizes the future value of both RBX, the new joint venture and Kimberly-Clark. And 4 things that drive that. The first 1 is it half our exposure to fiber-based inputs. For RBX, fiber-based inputs will represent right around 15% of net sales. Whereas for us, it will now be in the range of 6% to 8%. Secondly, it brings in a partner with significant capabilities and experience, which will allow RBC to truly compete effectively for market share in the markets it's in. Thirdly, we will benefit from the fact that we're expanding a strategic relationship with the world's preeminent fiber manufacturer, and that will yield benefits for our global Personal Care business as well as our North America tissue and professional business. And then lastly, we stand to benefit from the way we structured the joint venture. First, -- it's because we're getting a cash upfront, which we will deploy to fund part of the cash consideration for the Kanview acquisition. Secondly, we will benefit from the upside of RBX, which we see a lot of upside as it stands up and grows over the next 3 years. And then lastly, there's a clear exit mechanism in place in case Suzano chose us to buy our remaining stake down the road.