Kimberly-Clark Earnings Call Nuggets: Key Growth Markets and Feminine Care

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

Key Growth Markets

Ali Dibadj – Sanford Bernstein: A couple of questions. One is around KCI. So, it clearly looks like it has accelerated sequentially, but still kind of lower than historical levels. I want to get a sense from you guys whether that’s driven by macro or an anomalous high growth rate (indiscernible) distribution gains you had or competition? Kind of what’s driving the slowdown? And then, as a part that, if you can give us a sense of Consumer Tissue clearly being the driver recently of KCI growth? Is that – over Personal Care, is that intentional or is that serendipity? And kind what are the implication there around capacity margins, the way you run your business et cetera, so all of that KCI (indiscernible).

Thomas J. Falk – Chairman and CEO: Good questions, Ali. A couple of quick (ones). I mean, I’d say overall, we hit on some of the key growth markets we talked about, how things are going in China which continues to go very well. It’s not really slowing down strong growth in the Brazil which despite some of the economic challenges in Brazil, the team there is executing very well and you’re seeing good growth there. A lot of innovation coming in the back half on Personal Care, some of that launched in the second quarter in places like Russia, you started to see that pick up. I’d say where we’ve seen a little bit of maybe slowdown in the quarter was probably the more developed end of the developing markets, so places like Australia and Korea were a little slower in the quarter. Those are also big business for us, so they have a disproportionate impact. If you look at the segment split, I mean you still saw a strong Personal Care growth, but one of the swings in the quarter or maybe it wasn’t as obvious was that, Venezuela did very well on Tissue and slowed down on Personal Care, and it was really more of a question on what kinds of things did the Venezuelan government want to support in terms of providing foreign exchange. So, they really want to emphasize bringing bathroom tissue and improving their in-stock position on that. So, we had a very strong bath tissue quarter in Venezuela and not as much on the diaper front. And just to put that in perspective, just that Venezuela swing was about third of the volume growth in the KCI tissue numbers in the quarter.

Ali Dibadj – Sanford Bernstein: So, Venezuela really being the driving factor of the (CTA) versus PC numbers…?

Thomas J. Falk – Chairman and CEO: As for margins I would say that was a biggest swing factor that hit us. There wasn’t really a fundamental shift in strategy.

Ali Dibadj – Sanford Bernstein: And then another question which was touched on KCI a little bit, but really around the price mix which I mean in at least for us is a little bit less than we had hoped broadly and the couple of things we noticed, one about the KCI pricing or price mix wasn’t great I want to get a sense of where you are versus inflation on that and kind of is there a competitive atmosphere that’s not allowing you to take prices very much as you’d like to? And then secondly, the North America mix number was negative in both segments. So, just give us a sense of why that is and I guess the overarching piece of this is when commodities aren’t going up do you guys have pricing power that really is always tied to commodity prices?

Thomas J. Falk – Chairman and CEO: Yeah, I would say broadly we will try to get a more price benefit through mix coupled with innovation I mean I would say most of our businesses around the world are not assuming that you’re going to get routine list price increases, you’ll get it when its driven by commodities and that’s probably why you didn’t see as much in KCI in the quarter. I mean KCI had – if you look at price and promotion together they had two points of improvement in Q2 versus three points in Q1. So, it wasn’t markedly different than what we were expecting going in. We’re probably more focused on using our trade funds more effectively in KCI and that will be a place that we will comp that as some price improvement as we roll forward. Beyond that we’ll get some price for this big currency swings in KCI and we saw some of that in Brazil in the first half and that will play out. If you see big currency swings, eventually you’ll see some price that moves there as well. On the North American front, we’ve typically have some negative mix built-in as more of the categories move to the larger format packs, but beyond that there wasn’t anything else that was going on there that was a big driver.

Ali Dibadj – Sanford Bernstein: So no extra competition really driving any of this from a price and mix prospective?

Thomas J. Falk – Chairman and CEO: No, I wouldn’t say so.

 

Feminine Care

Gail Glazerman – UBS: Just on Personal Care in terms of volumes. Can you talk a little bit about what’s going on in the fem care and is that a trend that you’d expect to continue?

Thomas J. Falk – Chairman and CEO: No. I mean, the fem care volume in the U.S. was – part was of a tougher comp. Last year we had double-digit growth. We had some pipeline fill with some new innovation that was launched and so that was more of the comparison. Our shares were pretty stable sequentially, so we didn’t see much change. So we’re still seeing good growth on U by Kotex and a little bit of weakness on our traditional Kotex, but we’ve got some good innovation coming across both those platforms in the coming quarter. So we do feel good about our feminine care plan overall.

Gail Glazerman – UBS: Then in terms of Europe, can you just remind me there is reference to solid performance and contribution from non-branded business. Is that something that rolls off as we enter the second half or at what point would you expect to see that business go away if at all?

Thomas J. Falk – Chairman and CEO: We’ve picked up some private label contracts a year ago, so we are still seeing the favorable comp of those and those will roll off in the second half of the year. So, we will some in Italy, but broadly, we’ll shed some of that business as we’ve exited facilities.

Gail Glazerman – UBS: And in terms of North America with the pricing benefit you saw in bath tissue in the quarter, how much of that would have benefited the quarter versus what you would expect to see in the second half?

Thomas J. Falk – Chairman and CEO: We took some de-sheeting in the quarter that will roll into the second half and what you’ll see is probably more positive price in the second in tissue in North America and less volume because we count volume in thousands of sheets, so you’ll see a volume drag and a positive price which net for us works out to be a positive.

Gail Glazerman – UBS: And just one last question sticking on North American tissue. Last quarter you talked about seeing some benefit as the competitor was struggling to put the stock on the shelves. Has that started to reverse yet or is that something that you’re able to maintain?

Thomas J. Falk – Chairman and CEO: I think we’ve heard and again, this is more anecdotal, they’ve returned to normal service and promotion levels by the end of the second quarter, albeit they’re at a lower market share. So, we are pleased that we picked up share in this environment private label business as well and we’ll be watching the competitive environment in the second half. In the meantime, we’ve got some great innovation coming with – we’ve got some improved Cottonelle variance, so we’ve got a big launch of our Cottonelle moist, some improvements on Kleenex and so actually a lot of news in the tissue category coming in the second half that we feel pretty good about.

Gail Glazerman – UBS: Just one last question on inflation. You mentioned oil. I was just wondering if you could talk a little bit about pulp. It seems like there is starting to be mounting pressure. Is that something that you’d expect in your second half forecast?

Thomas J. Falk – Chairman and CEO: Yeah, I mean, our Northern softwood guidance for the year really didn’t change in the quarter. We still call it (890 to 910) on average for the year. It will be above that in the third quarter. But we buy a lot more eucalyptus than northern softwood and we’re actually seeing eucalyptus trend down just a bit sequentially. And we do think that with the weaker Brazilian currency given that all the eucalypt producers fell in dollars, there is less need for them to get a price increase in this kind of environment. I think the other offsetting factor that we don’t talk as much about is recycled fiber. We buy above 1.2 million tons of recycled fiber a year, and that’s actually been a softer market. So, overall, fiber is just tracking pretty close to our expectations.

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