As Chairman and CEO Mike Hsu says, Kimberly Clarke (NYSE: KMB) is in the business of poop. It manufactures and markets personal care and consumer products worldwide. These include diapers, baby wipes, feminine and incontinence products, bathroom tissues, and other products such as facial wipes, paper tissues, etc. under many well-known brand names.
KMB recently released what were, at first viewing, pretty good Q4 2021 results. Yet the stock price took a hit, falling by 2% on the day of the results announcement.
Before we summarize the key points from the earnings call, let’s look at the numbers:
- At $5.0 billion, revenues remained unchanged compared to the same quarter last year
- Organic sales grew by 5% in the quarter, with organic sales for the year up by 7%
- Diluted EPS for the quarter was $1.50, compared to $1.06 in the corresponding quarter in 2021
- Adjusted EPS was $1.54 compared to $1.30 in Q4 2021: an increase of 18%
- The dividend has been increased by 1.7% ─ the 51st consecutive annual increase.
Sales volumes were, however, down 7% on the year.
Here’s what we learned in KMB’s very forward-looking call:
KMB Business Strategy in Three Themes
Mike Hsu emphasizes three themes of the KMB business strategy:
Accelerating Growth
Since 2019, KMB has grown its sales by around $1.5 billion, with an average of around 4% growth in organic sales per year. This rate of growth has been accelerating, reaching 7% in 2022 – despite an extremely challenging year. Much of this growth is due to the company’s innovative approach:
“We are inventors at heart,” says Hsu. “New products created during the last three years contributed to over 60% of our organic growth in 2022. Whether it’s Kotex DreamWear for ultimate overnight protection, or Kleenex Allergy Comfort, our product obsession, advantage technology and consumer-centric focus is enabling us to create meaningful value and accelerate category growth.”
Margin Recovery
KMB has navigated an extremely challenging year to deliver improved margins. It is planning for an improvement of 80 basis points in operating margin by mid-2023, which will deliver a 2% to 6% increase in EPS in 2023.
In 2022, gross margin stabilized in Q3 and increased in Q4 year-on-year by 2%. This is despite facing a number of macro headwinds during the year:
- Higher inflation and interest rates
- Forex volatility
- The Ukraine war
- Energy disruption and prices
- Problematic supply chaos
- COVID
- Civil unrest
Hsu expects a ‘buffy’ road to recovery:
“When I say it’s a bumpy road, I’m not one for hyperbole… there’s been unprecedented effects kind of on the demand side and on the supply side… There’s a lot of volatility inherent in the numbers, and they were not consistent quarter-to-quarter and very unusual in our business, because typically, I think you all are right, this tends to be a very stable business. But because of that, both from a demand perspective and a cost perspective, things are going to move around from quarter-to-quarter a little bit.”
Investing to Drive Balanced and Sustainable Growth
Looking forward, Hsu says:
“We’re scaling innovation that delivers better value, more benefits and better care for our consumers. We continue to see strong demand for great-performing products…
“We’ll be launching several exciting initiatives in 2023… At the same time, we’ll leverage the broad range of our offering to address the growing need for value through compelling commercial programs…
“We’ve assembled an excellent management team that has tremendous experience unlocking global growth…
“We have a long runway of growth ahead of us, and we’ll continue to invest in balanced and sustainable growth to create long-term value for our shareholders.”
CEO Believes Commodity Pricing Will Ease In 2023
KMB’s 2022 full year results were impacted by $1.5 billion of higher input costs, higher marketing, research and general spending as well as unfavorable foreign exchange.
Given its ambition to reduce costs, commodity prices have been a major bugbear. Most of the impact of commodity inflation is in its international markets. KMB is penciling in $200-300 million of commodity inflation in 2023, with Hsu believing that commodity cost pressures will ease:
“From my seat, I’ll say there’s – I see green shoots, okay? But even though we still see cost headwinds coming into the year, there are green shoots, and we have seen selected commodities start to ease.”
When the market prices of inputs ease, this easing will improve KMB’s margins, and increase the bottom line.
The Plan Is for Margin Growth Every Quarter
The company has seen three-quarters of gross margin expansion. The fourth quarter expansion delivered the first year-over-year growth since mid-2020. With the easing of commodity prices, good cost management, and increasing end-product prices, management is planning for continuous growth in 2023.
Chief Financial Officer Nelson Urdaneta says that the board has been focusing on margin growth since July 2022, and that, “… recovery in the margins is going to happen. As we stare at this year, our plan calls for year-over-year margin expansion in gross margin every quarter. That’s what we have in place.”
Developed Markets Are Performing Well
Developed markets performed well for KMB. Overall, these contributed a double-digit growth outside the United States. However, the U.S. was only up about 1%, though there were some headwinds that contributed to this below-par performance, including retail inventory changes, exiting a private label brand, and changing timings/exiting a significant promotion with a major retailer.
Going forward, Hsu says that the company is expecting continued good performance from all its developed markets.
Developing and Emerging Markets Have Been More of a Challenge
Growth in sales in developed and emerging markets (D&E) softened in the fourth quarter – from 11% growth in Q3 to around 2% in Q4.
Here are some highlights:
- Indonesia was particularly challenging, where KMB has to change its business approach
- The company is experiencing increased competition in Vietnam and India
- China has delivered double-digit growth
- Sales in Latin America are growing in the mid-20s
- African revenues grew in the mid-single digits
Overall, the board still feels good about its D&E performance and plans to drive price execution and innovation to boost its commercial programs.
Why the Discrepancy Between Sales Revenues and Volumes?
So the big question is, how can the company announce growth in consumption of its products, but a decline in sales volumes?
Hsu explains it this way:
“… there’s a difference between what’s happening in consumption, right? And what’s happening sold-through to consumers versus shipments, right?
“… hopefully, you’ll agree that in the long run shipments should equal consumption, right? So you’re not going to perpetually deplete the retailer inventories or eventually grow retail inventories over time, right? So generally, that’s kind of what I look at as kind of the ongoing health of the business.”
This partly explains the discrepancy between 7% growth in personal care and tissue, but perhaps not the volume decline of 7%. Hsu further said that 3% of that 7% was because of the one-timers (the exit from the private label, for example).
We Shouldn’t Expect Too Much in the First Half of 2023…
Nelson Urdaneta cautioned against being too optimistic for results in the first half of the year. There are still costs coming through from the private label exit in 2022, and the first half of 2022 was so incredibly strong (growth of 10%) that comparisons will be difficult to make. There is also carryover pricing from 2022 that will impact the first half of 2023.
“All that would pressure on volumes,” says Urdaneta. “As we go into the second part of the year, then that would ease, and that’s our expectation.”
But the Full Year Should Deliver on Its Promise
Looking at full year 2023, Hsu says, “I’d say we plan to deliver a better performance in 2023 for sure. We’re going to build on our organic growth momentum. There is plenty of carryover pricing, but there are new pricing actions in the plan as well…
“I think this year will be stronger than last year, and we feel good about that. Consumer demand in our categories generally remains very resilient. And so I think from that aspect, we have good things to invest in.”
Wrapping up, Hsu says that he is confident in:
- The strength of KMB’s brands
- KMB’s commercial capability to position the company for long-term growth
- The management talent within the organization
- The ability to drive long-term shareholder value
KMB current dividend yield of 3.57% is pretty inviting for dividend investors, and there is a bounce in margins that Hsu believes is imminent the second half of in 2023
Talking of the cost headwinds experienced over the last two years, he says:
“Having been in this company for 10 years, reversion is around the corner. When it happens, it happens fast. We offset extraordinary headwinds over the last couple of years, as I mentioned…
“Historically, though, there has been rapid reversion, and we’ve seen some signs of it. I don’t have a timetable for that. I don’t know if it’s going to hit this year or not.
“But at some point, it will happen. And when that does happen, it will accelerate our margin recovery. And as I said in the past, we’re not counting on reversion to deliver the margin recovery.”