Kimberly-Clark Q1 2024 Prepared Remarks Earnings Call Transcript

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April 23, 2024

There are 3 speakers on the call.

Operator

Hello. This is Chris Jakubik, Head of Investor Relations at Kimberly Clark, and welcome to our Q1 2024 business update. Today, our Chairman and CEO, Mike Hsu, will provide an update on our overall business performance and Nelson Urdineta, our Chief Financial Officer, will provide an overall financial review and our outlook for the balance of the year. We have also scheduled a separate live question and answer session with analysts. You can access our earnings release, supplemental materials and the audio of our Q and A session at investor.

Operator

Kimberly clark.com. A replay of the Q and A session will be available following the event through the same website. During our review, we will make some forward looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our earnings release and our filings with the SEC. We will discuss some non GAAP financial measures during these remarks.

Operator

These non GAAP financial measures should not be considered a replacement for and should be read together with GAAP results, And you can find the GAAP to non GAAP reconciliations within our earnings release and the supplemental materials posted at investor. Kimberley clark.com. With that, I will turn it over to Mike.

Speaker 1

Okay. Thanks, Chris, and thank you to everyone for joining us today and to everyone who participated in our recent Investor Day where we detailed our vision for the next chapter of growth for Kimberly Clark. Our solid Q1 results are an encouraging beginning to this next chapter of the Kimberly Clark story. We delivered sequentially stronger gains from volume plus mix driven by pioneering innovation with volume turning positive for the first time in 2 years. We are driving continued productivity momentum by optimizing our margin structure.

Speaker 1

In the Q1, we had a strong start with efficiencies generated through the value stream including manufacturing, distribution and product design. We are taking further steps to focus our enterprise as we move from the planning to the implementation phase of wiring our organization for growth, which I'll discuss in a moment. Now while we're still navigating a challenging and complex external environment, we remain optimistic about our business prospects and confident in our abilities to successfully implement our transformation. Overall, we delivered a healthier balance of growth. Underlying growth from volume plus mix improved sequentially.

Speaker 1

That's encouraging given that retail inventory reductions in North America, which we underscored in our previous call, did in fact materialize. Pricing was a greater than expected contributor to organic growth in the quarter as our pricing actions in hyperinflationary markets as well as related currency translation headwinds to reported growth came through sooner and stronger than anticipated. These headwinds accelerated as the quarter progressed. In the quarter, pricing in Argentina contributed approximately 4.50 basis to total company organic net sales growth and accounted for most of the price related gains in both Personal Care and Professional results. Beyond that, mix remained an important contributor to growth as we continue to elevate our categories and markets.

Speaker 1

We are encouraged by our Personal Care volume and market share performance in the U. S, China and Brazil as well as our U. K. Tissue business. In the U.

Speaker 1

S, market shares were up or even in 6 of 8 categories and even overall on a weighted basis versus year ago. We expect our share performance to improve further as the year progresses. In China, volumes were up strongly as year plan to create durable growth by harnessing our strengths and sharpening our strategic focus. We will do this by accelerating pioneering innovation to capture the significant growth available in our categories by solving big unmet consumer needs with category shaping technologies, optimizing our margin structure to deliver superior consumer propositions at every rung of the good, better, best ladder and wiring our organization for growth to make our enterprise stronger and faster. Today, I'll provide some additional context for where we stand in these areas and what you can expect of us in the coming months.

Speaker 1

Science is our competitive advantage and it fuels our pipeline of pioneering innovation. We invest systematically in material invention, product engineering and manufacturing process development. We develop and engineer proprietary manufacturing assets in both our personal care and tissue operations. And we have a diverse global R and D team that is continuously seeking better solutions to unmet consumer needs. We have a strong proprietary science based innovation pipeline aimed at serving 4 valuable consumer needs states: Skin Health and Wellness, Garment like Comfort, Make Free Confidence and Sustainability.

Speaker 1

We have created solid momentum on innovation. Our new product launches over the past 3 years represented more than 50% of our net sales in our consumer businesses and contributed approximately 60% of our incremental consumer organic growth in the Q1 of this year. We're doing this in a way that drives improved mix at the top line and margin accretion at the bottom line. There remains a huge opportunity to elevate and expand our categories and markets and we are well positioned to capture that opportunity. We are leveraging our global scale to pull the best ideas from around the world and deploying proprietary technology to drive them to market faster than competition.

Speaker 1

So as a result, we expect to exceed our target to have more than 75% of our top 25 projects scaled globally. Now here are a few examples of how pioneering innovation, superior marketing and genius execution drove strong gains for us in the Q1. In China, we're focused on delighting consumers across the value spectrum and our elevation strategy is driving growth in a tough environment. This quarter we saw strong double digit increase in net sales and a 200 basis point share increase driven by gains in both the premium and mainstream diaper segments. Our premium range products, Huggies PP Mask and Huggies Little Penguin further advanced the premiumization ladder by introducing a new level of innovative super premium offerings while redefining the consumer experience with top tier quality, addressing the ever escalating needs and wants of a new generation of mops.

Speaker 1

Our mainstream products Huggies Cloud Touch and Huggies Little Peach are converting share from local brands by delivering superior quality at a strong value. Pioneering innovation and bold commercial work fueled double digit volume and value organic growth this quarter for Andrex. Anderex has been the number one brand in the U. K. For decades and our R and D teams are constantly seeking new ways to serve consumers better.

Speaker 1

Supreme Quilts is an excellent example of how the brand is evolving to meet the needs of today's consumers. Supreme Quilts features adaptive sheets with condensed air pocket texture. This technology absorbs pressure for extreme comfort and results in a softer, more comfortable tissue with no compromise on strength. The team is also deploying advanced revenue management analytics, which resulted in the launch of our new Mega Role portfolio and this has helped Andrex accelerate volume growth at strategically important price points across the good, better, best ladder. Kleenex, one of our most iconic brands in North America is a great example of pioneering innovation that has stood the test of time.

Speaker 1

The brand's enduring value proposition is based on science backed product superiority and performance based differentiation. Having remedied supply constraints from the past year, we've launched new social media campaigns for cold, flu and allergy season and have resumed in store merchandising. Consumers have responded strongly. Kleenex delivered 6% volume growth with share up almost 400 basis points to 48% this quarter. We expect this momentum to continue in the coming months.

Speaker 1

So overall, we're off to a good start. We are seeing good momentum and we remain excited about our strong pipeline of category bending innovations we will introduce globally this year. For the last few quarters, we've highlighted our strong ongoing stream of cost savings that has enabled rapid recovery of gross margins and is fueling our innovation and capability investments for the future. This quarter, we built on that momentum with gross productivity gains coming in stronger and earlier than anticipated. We generated roughly $120,000,000 in gross productivity in this Q1 of our new plan from our integrated end to end approach to margin management that we outlined last month.

Speaker 1

We also generated incremental savings from enhanced procurement capabilities while strengthening relationships with strategic suppliers that will enable us to more effectively manage our cost basket moving forward. While input costs remain at elevated levels and supply chain volatility is still a watch out, our start on productivity strengthens our confidence in our plans for the full year. Our 3rd driver is wiring our organization for growth. We've launched Phase 1 of our organizational transformation with a fully dedicated team focused on moving the organization from planning to implementation. We're making good progress and we'll go live with our 3 focused business segment structure on October 1.

Speaker 1

We're cascading new role and responsibility organizational designs across the enterprise and activating new ways of working to enable a high performing network team. As we continue to progress on our transformation, we're working hard to ensure the organization's focus on executing with excellence to deliver our 2024 plans and priorities. We're also taking steps to sharpen our portfolio focus. We will focus on businesses that strengthen our market positions where we have proprietary science based innovation and a right to win over the long term. 2 weeks ago, we reached an agreement to divest our personal protective equipment business.

Speaker 1

This decision was made to streamline the focus of Kimberly Clark Professional portfolio ensuring that resources and investments are allocated to key competitive areas and core categories. The transaction is pending customary conditions and regulatory approval and is expected to close early in Q3 of 2024. We're also working through a decision to exit some private label business that will take place in 2025. This will likely result in a reduction in global net sales of approximately 2% next year and we'll share more in the second half of this year as our plans come to fruition. We're well positioned to accelerate our pioneering innovation across our portfolio in the coming months years and we'll focus our proprietary know how to strengthen the differentiation of our brands.

Speaker 1

Overall, we're off to a good start and we'll continue working hard to make KC stronger, faster and better positioned to drive durable profitable growth going forward, which is a good place to hand off to Nelson to cover our financial results and update our outlook for 2024.

Speaker 2

Thank you, Mike. We are tremendously proud of the faster, stronger start to the year that our team has delivered, especially as we head into the implementation phase of our transformation. 1st quarter volume growth came in stronger than anticipated. Revenue realization in hyperinflationary markets was faster than we planned, and we delivered strong cost benefits to our gross productivity initiatives and procurement related savings. At the same time, while we are increasing our outlook for the year, we continue to navigate macroeconomic uncertainties.

Speaker 2

Our investment spending will ramp up behind our innovation pipeline and the full implementation of our new organizational structure is still ahead of us. 1st quarter organic growth was 6%, reflecting further progress towards a healthier balance across price, mix and volume. Pricing was up 4%, with the contribution from pricing in hyperinflationary markets partially offset by lapping temporary energy surcharge related pricing in Western Europe last year. Volume growth turned positive and came in better than expected, continuing the sequential improvement that began several quarters ago. Gross margin increased 390 basis points to 37.1%.

Speaker 2

This reflects a combination of organic growth and productivity gains that more than offset cost headwinds largely driven by currency and local inflation in developing and hyperinflationary markets. Looking forward, our cost basket for the year is likely to remain somewhat inflationary considering the recent uptick in energy costs as well as currency headwinds impacting local cost in developing markets. Below gross profit, adjusted operating profit margin was up 2.30 basis points as we continue to invest in our brands and capabilities, with advertising as a percent of net sales increasing 50 basis points versus the year ago period. Adjusted earnings per share was up 20% versus prior year, reflecting the strong profit gains as well as some benefit from lower net interest expense, lower adjusted tax rate as well as higher income from non controlling equity interests. As to the impact of hyperinflationary markets performance in the quarter, I would make two notes regarding our Q1 results.

Speaker 2

First, while price led gains added approximately 10 percentage points to adjusted operating profit and EPS growth on a constant currency basis, they were a slight headwind on a reported basis given the strong negative impact from currency translation. 2nd, contribution from hyperinflationary markets in the quarter had no material impact on either adjusted gross margin or adjusted operating profit margin performance versus the prior year. Looking at our results by segment, Personal Care, we build further on our momentum from the second half of twenty twenty three. Pricing actions in hyperinflationary economies drove the 7 points of pricing in the quarter. Putting that aside, we were encouraged by the continued underlying progress towards volume and mix led growth from the portfolio.

Speaker 2

North America Personal Care grew 2% in Q1, driven entirely by volume and mix. Outside of North America, China grew volumes double digits, driven by strong Chinese New Year execution and continued innovation driven share gains. Gains in North America and China were partially offset by softer category volume trends in developed markets. It's worth noting that all categories within Personal Care grew high single digits to low double digits in the quarter. Volumemix gains, gross productivity Volume mix gains, gross productivity initiatives and procurement related savings drove strong Personal Care gross margin expansion, enabling investments in key geographies such as North America and China and resulting in operating margin expansion of 2 10 basis points versus the prior year to approximately 20%.

Speaker 2

In Consumer Tissue, organic sales were in line with the previous year when we grew 7%, resulting in a 2 year CAGR of approximately 4%. In North America, organic growth was 6% with volume and mix driving 3 percentage points of the gain with strong gains in our Kleenex franchise. Our U. K. Business drove a 3% volume gain in our developed markets, even though organic sales declined roughly 2% as we lapped temporary energy surcharge related pricing in the prior year period.

Speaker 2

As Mike highlighted, our U. K. Andrix business delivered both sequential and year over year share gains for the 2nd consecutive quarter as well as double digit organic growth. This was accompanied by strong volume led share growth in our Kleenex portfolio as we restored supply. At operating profit, margins expanded, reflecting the strong performance in key markets like North America and the U.

Speaker 2

K, ongoing productivity initiatives and procurement related savings. Finally, our KC Professional business results continue to reflect the success of our sharpened strategic focus on country category segments that we see as more resilient and responsive to investments in innovation that create value and sustainable solutions for our customers. Pricing and mix have been solid contributors for the past several quarters, reflecting the choices we've made to emphasize certain segments over others. In the Q1, pricing was driven by hyperinflationary markets. And consistent with what we said in January, our Q1 volumes reflected the ongoing rightsizing of the business towards profitable volume as well as the rightsizing of wholesale inventory levels, especially in North America.

Speaker 2

That said, we expect volume trends to improve further and turn positive as the year progresses. This combination of improved top line trends as well as ongoing productivity gains and procurement related savings drove a 400 basis point improvement in operating margin for Professional in Q1 versus the prior year period. Finally, in terms of free cash flow, we delivered $244,000,000 in Q1. While our Q1 is a seasonal low for free cash flow generation, we were also lower than the prior year. This mainly reflected timing differences versus the prior year that increased our quarter end accounts receivable levels.

Speaker 2

In the end, we remain on track with our plan and confident in our ability to deliver at least $2,000,000,000 of free cash flow in 2024. A key factor bolstering our confidence is that our cash conversion cycle in the Q1 was negative 4.2 days or approximately 6 days better than the Q1 of 2023, driven by further optimization of our inventory levels. This reflects further progress in modernizing our supply chain, capturing the $500,000,000 of incremental working capital savings in the next few years that we highlighted at our Investor Day last month, which brings me to our outlook for 2024. As Mike said earlier, we remain cautiously optimistic. We're cautious on the macroeconomic front due to ongoing turbulence and potential headwinds like currency and input costs as well as the ongoing geopolitical challenges we are navigating through.

Speaker 2

At the same time, we are optimistic given the strength of our operating momentum and plans to drive durable profitable growth. On the top line, we now expect mid single digit organic net sales growth, up from lowtomidsingledigits previously. This reflects our solid volume and mix performance in the Q1. It also reflects our expectation that pricing in hyperinflationary economies will contribute approximately 300 basis points of organic growth for the year versus our previous expectation of 200 basis points. Related to that, reported net sales growth is likely to be negatively impacted by roughly 400 basis points from currency translation versus the 300 basis point headwind we previously expected.

Speaker 2

We also expect that the impact on reported net sales from divestitures will be approximately 120 basis points versus the prior 60 basis points, considering our recently announced divestiture of the Personal Protective Equipment business. At adjusted operating profit, we now expect low teens growth on a constant currency basis. That's up from our previous outlook for high single digit to low double digit growth for the year. This reflects the faster, stronger start we've had this year on the top line and the gross productivity and procurement related savings fronts, partly offset by a negative impact from divestitures of approximately 100 basis points for the year. It also includes our continued expectation that costs for monetary losses in hyperinflationary economies captured within other income and expenses line will be roughly half the rate we experienced in 2023.

Speaker 2

Reported operating profit growth is now likely to see a 700 basis point negative impact from currency translation versus the 400 basis points we expected previously. And at adjusted earnings per share, we now expect low teens growth on a constant currency basis, up from our prior expectation for high single digit growth. This now includes an approximate 100 basis point headwind from divestitures as well net interest expenses and an effective tax rate slightly higher than the prior year. Here again, we expect reported earnings per share growth to be negatively impacted by approximately 700 basis points from currency translation. Finally, regarding pacing during the year, we continue to expect reported net sales to be relatively balanced between the first half and second half of the year.

Speaker 2

However, we now expect adjusted operating profit and earnings be split roughly 52% in the first half of the year versus 48% in the second half, reflecting both our results to date as well as the recently announced divestiture. I would like to thank our teams across the world for such an encouraging start to the year and for effectively managing all the headwinds they are navigating through as we wire our organization for growth. With that, I will turn it back to Mike for some closing thoughts.

Speaker 1

Okay. Thank you, Nelson. As I said at the outset, we are very encouraged by our start to the year. Our pioneering innovation is driving more balanced and more volume mix driven top line growth. We continue to capture the productivity gains we've identified in our journey to optimizing our margin structure and we continue to take important steps in wiring our organization for growth with tremendous opportunities still ahead.

Speaker 1

My leadership team and our more than 40,000 employees around the world thank you for your time and interest in Kimberly Clark as we launched our next chapter of growth by

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