Kimberly-Clark Earnings Call Insights: KCI Growth and P&L Impact of Stranded Overhead

Kimberly-Clark Corporation (NYSE:KMB) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

KCI Growth

Ali Dibadj – Sanford Bernstein: A couple of questions. One is really around the very strong KCI growth this year at 10% organic as you mentioned, but kind of doing some algebra, the rest of the business being a little more subdued. So if you think about the 3% to 5% organic sales growth target for this year for 2013, can you help us with the composition of that by geography and by segment? Maybe in answering that, you can give us some sense about the distribution gain that you might continue to get, you mentioned one example of that in your prepared remarks, but any distribution gain you might be able to get on a continuous fashion, how much more runway there is for that? And do you need that to get your KCI current numbers? That’s the first question.

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

Mark A. Buthman – SVP and CFO: Yes, I’d say, Ali, the growth is, again, going to be heavily focused on K-C International and within that more focused on personal care as it was this year where you saw, I think, in KCI personal care organic volume was up 9% for the year. A part of that was distribution gain in China certainly. It’s also increasing our participation in the category as we moved into the mid-tier segment of the category. But in markets like Brazil, we are moving more aggressively into the northeastern part of Brazil. So that’s a big opportunity for us. We are there but we were not really fully represented. So we have got additional capacity starting up there. In Russia and in Eastern Europe we’ve got good presence in Moscow. We are moving out into broader distribution reach across Russia and some of the other Eastern European countries. And so that’s an opportunity for us. So it’s going to be a combination of innovation and a little bit of distribution gain and good execution to make that happen. In North America, I would say, the diaper category has kind of flattened out. So the birth rates were low. We expect diapers to be down about a point year-on-year. Child care, which was down 5% this year, may only be down 1% next year from a category standpoint. We’ve got a lot of innovation coming, so I think we will have less of a drag from North America in 2013 than we had in 2012, and we still have good momentum in adult care and fem care in North America that should carry over into 2013.

Ali Dibadj – Sanford Bernstein: Okay, let me ask the KCI question slightly differently, specifically on the 10% organic sales growth. Can you help us figure out how much of that is comp store growth versus how much of it is distribution growth?

Mark A. Buthman – SVP and CFO: I would say the analytics are probably not as precise there as you would like to think. As you know, because some of the Nielsen data doesn’t get you that. I’d say the bigger factor is broader participation in the category. So in China, for example, going into the mid-tier of the diaper segment across the geography that we are already in, but going from 70 to 80 cities, you can do the math. Now they don’t all start up and contribute at the full level of your existing base and you are in the big cities to start and you are going to the next tier down. So they are not – each incremental city is not as big of a pop as what you originally got. So I’d say the more of it is from the expansion of our participation in the category and the innovation that we are driving and that the additional geography is a relatively smaller part of the boost.

Ali Dibadj – Sanford Bernstein: So second piece is just about the incremental strategic spending, $10 million, which seems lower than it’s been all year. Can you comment a little bit about that? Is it launch timing, seasonality, and how should we expect that to trend going forward for the rest of the year?

Thomas J. Falk – Chairman and CEO: It’s probably launch timing but I also would say if you look back, we are ramping it up and so we’ve kind of hit more of a stable stage. So you’ll see it go up as faster than sales in 2013, but it won’t go up as much – we were probably up more than double our rate organic sales growth this year. It won’t be as big of a delta in 2013.

Ali Dibadj – Sanford Bernstein: My last question is just around competition broadly, so what are you seeing and maybe making it more specific, U.S. – and in the U.S. have you, for example, in the Consumer Tissue business tried to in your guidance take into account a new entrant in the U.S. with TAD technology and private label? Then in China we keep hearing from local competitors there that they are going to get more aggressive. They are not just going to give up their turf to folks like you who are coming into their cities. Can you comment on that as well?

Thomas J. Falk – Chairman and CEO: Yeah, sure. We have lots of tough competition everywhere. So in the Personal Care space, obviously we got P&G in most places, but we’re seeing Unicharm increasingly show up in markets around the world. They are obviously strong in Asia. They are now talking about expansion in Brazil and Mexico. So, they make very good product and we ran into them in large markets around the world. Some of the local Chinese players, they hang on and those folks tend to be at the lower end of the product spectrum, but they are trying to move their mix up and so you got to execute well and have great innovation and great marketing to be successful in these markets and so that’s what we are aiming at. In the U.S. the private label, if you look at private label shares in tissue in bath, it was up a point or two year-over-year and towels was up about point, but our shares were pretty stable and actually we’ve got a pretty good innovation agenda for Cottonelle and Kleenex. So, I think we feel cautiously optimistic about our tissue business going into 2013, particularly in North America.

Ali Dibadj – Sanford Bernstein: The TAD technology entering in private label doesn’t concern you?

Thomas J. Falk – Chairman and CEO: Not at this stage I mean, there is good quality private label around but we think that the branded products still are differentiated and offer consumers an attractive value and our Cottonelle business is showing that. I mean we had pretty strong share results in the fourth quarter and we’re feeling good about that business going in 2013.

P&L Impact of Stranded Overhead

Chris Ferrara – Bank of America: I wanted to try to better understand now that I guess you probably had better look at, it the P&L impact of stranded overhead on the European exit, right. So, I understand you are committed to clearing that out, right and still delivering obviously now 5% to 8% growth. But I guess can you talk about what you think the gross drag will be from that stranded overhead. I mean, you have to be finding offset, right. It’s not that you’re going to be able to clear all those expenses out at the same rate that the sales are going away, right? So, just kind of want to understand the gross impact if possible.

Thomas J. Falk – Chairman and CEO: No. I mean, Chris, really we are aiming to cut our overhead in Europe by at least as much as the sales rate, and so Kim Underhill and her team and Robert Abernathy, we are working on this for a good part of last year. Mark Buthman’s team is leading on it as well in terms of the back-office things and maybe Mark can chime in on that, but we are aggressively going after the European structure, and so we had probably overbuilt that a bit to expecting Europe to growing to be a bigger business, and so we have gone and stripped a lot of the overhead out. They have gone through the consultation process with most of the countries and in most of our team in Europe now knows whether they have a permanent role. They have a temporary role or their role has been eliminated. And so, I don’t know, Mark you’ve sat in on those calls lately, so I’ll let you add some color to that.

Mark A. Buthman – SVP and CFO: Chris, if you think about it as an enterprise, it’s a great opportunity for us to kind of paint a picture of what our overhead structure might look even more broadly across the world and they’ve got a real compelling business case to do it. And so, it’s on the top of our management agenda and we are watching it closely at high degree of difficulty, but high degree of confidence in the plans they put together.

Thomas J. Falk – Chairman and CEO: So, we know we have to execute it, and we’ll be transparent about how we are doing on that as the quarters progress in 2013.

Chris Ferrara – Bank of America: Thanks. That’s helpful. And I guess, moving over to KCI, obviously, the growth has been there. Can you try to dimensionalize where you think sort of long-term margin improvement comes from? Like do you think the KCI margins will progress at a rate faster than the overall company margins?

Thomas J. Falk – Chairman and CEO: Well, the KCI team is aiming at being the most attractive investment opportunity for Kimberly-Clark. So they know they’ve got to grow top line and they’ve got to grow bottom line. And so one of the things that was really pleasing about their results in 2012 is they had double digit top line but they also had strong double-digit operating profit growth too. And as you see, cities and markets get to scale, the gross margin structure is pretty attractive and we still got work to do and we can do better in lots of places. But they’ve got an aggressive program to continue to take out cost, to get more effective with our marketing investment and our trade-spend investments, and as we do that that should help our margins improve. We have individual markets in KCI that have got gross margins that are strongly accretive to the corporation. So we know it is possible.

Chris Ferrara – Bank of America: Then just one last follow-up on margins, when you benchmark yourself versus peers and I guess normalizing for product mix, and you look at that 34% gross margin that you guys are at right now, what do you think the opportunity is there for that gross over the long-term, because obviously you’ve accelerated your top line, KCI is accelerated, but what’s the opportunity on gross margin you think when you think longer term?

Mark A. Buthman – SVP and CFO: We’ve been higher in our own history and so if you go back before some of the commodity run-up, we were in high 30s and we were talking about scaling a 40% gross margin. So that’s certainly kind of a near-term goal that we are aiming at. I think we made a strong move toward it in 2012, and we will have commodity challenges from time-to-time that will forward our progress there. But we are certainly aiming at improving gross margin, being able to invest more of that in strategic marketing and then delivering a part of that to the bottom line and operating margin improvement.

A Closer Look: Kimberly-Clark Earnings Cheat Sheet>>