Q1 2023 Kimberly-Clark Corporation Earnings Call

Speaker 1: The P.

Speaker 2: Good day everyone and welcome to the Kimberley Clark First Quarter 2023 earnings call.

Speaker 2: At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation.

Speaker 2: It is not my pleasure to turn the floor over to your host, Christina Chang. Man, the floor is yours.

Speaker 3: Welcome everyone to our first quarter of 2023 earnings conference call. Before we begin, please note today's presentation will include forward-looking statements.

Speaker 3: Our actual results may vary materially from those expressed through implied in our forward looking statements and you should not place undue aligns in any forward looking statements.

Speaker 3: These refer to our SEC Filing for a list of factors that could cause or actual results to deviate materially from our expectations.

Speaker 3: A remarks today refer to adjusted results which exclude certain items described in our news release.

Speaker 3: We use non-GAAP financial measures to help investors understand our ongoing business performance.

Speaker 3: Please consult our press release for a discussion of our non-GAAP financial measures and reconciliation to comparable GAAP financial measures.

Speaker 3: We have published supplemental material which can be found in the Investor Relations section of our website. Participating in today's call are a chairman and CEO , Michael Schoo, in our Chief Financial Officer Nelson Ordeneta.

Speaker 3: Michael started discussion with our strategic priorities and provide an overview of our performance for the quarter. Nelson will provide a detailed discussion on our Q1 results in our outlook before we open the floor for Q&A.

Speaker 3: With that, I turn the call over to Mike. Thank you, Christina.

Speaker 4: I'm encouraged by our sound start to the year.

Speaker 4: We delivered organic growth of 5% cycling 10% growth in the year ago quarter.

Speaker 4: Category growth for man healthy, pricing execution was strong, and costs have begun to stabilize.

Speaker 4: These primary factors enabled us to continue improving gross margin, resulting in a 25% increase in adjusted operating profit and a 24% increase in adjusted earnings per share.

Speaker 4: Given our Q1 performance and increasing confidence in our underlying operating plan assumptions, we're raising our 2023 EPS Outlook to 6 to 10 percent growth.

Speaker 4: Margin Recovery continues to be a top priority and I'm pleased with the strong progress we're making.

Speaker 4: This quarter we expanded Gross Margin by 340 basis points versus year ago, building on our momentum from the second half of 2022.

Speaker 4: While we're encouraged with our progress, we're still operating in a challenging environment. But costs have stabilized but continue to trade well above 2019 levels.

Speaker 4: With adjusted gross margins nearly 200 basis points below pre-pandemic levels, we'll continue to operate with cost and financial discipline.

Speaker 4: We're leaning harder into productivity and taking aggressive action to secure supply to better meet the needs of our customers.

Speaker 4: We remain committed to returning our margins to historic levels and eventually expanding from there. We've taken a thoughtful and holistic approach to mitigating inflationary pressures, carefully balancing price realization with our focus on offering a superior value proposition.

Speaker 4: This is to enable us to meet our enduring goal of growing market share.

Speaker 4: In Q1, we continue to gain a whole chair in approximately 50% of our personal care cohorts.

Speaker 4: We've invested in building strong revenue growth management capability and that has been critical to our agile and effective price deployment globally.

Speaker 4: Caterer growth has remained healthy and broad-based as the elasticity impact on volume continues to be somewhat muted.

Speaker 4: This reflects the essential nature of the categories we lead.

Speaker 4: While the categories continue to grow, we see by vacation and consumer demand.

Speaker 4: We've observed resilience and higher income development markets like the US.

Speaker 4: but also increasing demand for value in lower income geographies, especially within D&E markets.

Speaker 4: Where media are consumers where they need us.

Speaker 4: As category leaders, we have a broad offering that spans value to premium.

Speaker 4: While we're continuing to see momentum in the premium tiers of our business.

Speaker 4: We're accommodating tighter budgets and more rapidly cascading innovation and product features through our portfolio, including our value offerings.

Speaker 4: Our brand's offer excellent value.

Speaker 4: For parents economizing through usage, superior products like Goodnight's XL overnight diapers enable their children to get a better night's sleep with 35% less leaks.

Speaker 4: Good night serves an important need and we're stepping up our brand communications with breakthrough campaigns that highlight the superior performance and value of our offering.

Speaker 4: Advantage product technologies are key to our brand value proposition and over the past few years, concerted investment in innovation has resulted in an exciting pipeline that will help us elevate and expand our categories.

Speaker 4: I'll highlight a few that you'll see later this quarter.

Speaker 4: We're refreshing cotton-null ultra comfort and ultra clean in North America, behind a powerful insight. Half the users in the category are dissatisfied with their existing, quote unquote, soft and strong bath tissue.

Speaker 4: We're focused on delivering a superior clean and we'll launch this initiative with some fairly provocative advertising that highlights down their care and we're talking about the real down their issues that we all face. Our suite of products will help address these unmet needs.

Speaker 4: In China, we're launching Kotex Polar Night, our best ever overnight feminine pad.

Speaker 4: Polar Night offers superior protection from back leaks, one of the biggest issues for overnight users.

Speaker 4: Internationally, KC Professional is debuting our new ICON collection, our most advanced tireless fencing system.

Speaker 4: ICON has fully customizable panels and ultra high reliability enabling end users to be more productive with labor and waste. ICON has been a hit in North America and we are excited to roll it around the world.

Speaker 4: We have more innovation to launch later this year, including exciting news on Huggies. Our teams are working hard on innovation pipeline, where confident will bring more value to our consumers while elevating our categories and expanding our markets.

Speaker 4: In closing, we're encouraged by our strong start to the year and our momentum on the top and bottom line.

Speaker 4: We serve essential categories and demand for our brands remains healthy.

Speaker 4: We have a long runway of growth ahead of us and we're committed to delivering balanced and sustainable growth to create long-term value for all of our stakeholders.

Speaker 4: So now I'll turn it over to Nelson. Thanks Mike.

Speaker 5: and please to report a solid start to the year.

Speaker 5: First quarter net sales were 5.2 billion, up 2% year over year.

Speaker 5: Organic sales increased 5%, compared the last year's 10% increase.

Speaker 5: On a two-year basis, organic sales growth was consistent across all three segments.

Speaker 5: with approximately 8% average growth for the company.

Speaker 5: Strong revenue growth management delivered favorable price and mix benefits.

Speaker 5: with a better than expected elasticity impact on volume. Organic growth for our personal care business.

Speaker 5: Representing approximately half of the company's revenue.

Speaker 5: grew 3% with a healthy contribution from price and mix.

Speaker 5: and healthy underlying consumption. Growth was negatively impacted by approximately one percentage point by the exit of a private label contract in North America.

Speaker 5: All personal care major geographies contributed to organic growth.

Speaker 5: After lapping a particularly strong Q1 last year, with North America setting a new quarterly sales record.

Speaker 5: Feminine care and adult care grew at healthy rates, and we continue to focus on the tremendous growth opportunities created by the aging population and ongoing innovation in women's health.

Speaker 5: In baby and child care, gains from product innovation moderated the impact of lower birth rates in China and South Korea.

Speaker 5: Operating profit for the segment improved 3% in the first quarter.

Speaker 5: We are confident our strategy to address significant on met needs will continue to unlock a long runway of growth for our personal care business.

Speaker 5: Organic growth in consumer tissue was 7%.

Speaker 5: with broad-based growth across all geographies. We continue to improve the profitability of our tissue business, with operating profit for the segment up 40% for the quarter.

Speaker 5: Finally, RKC Professional Business posted 11% organic growth.

Speaker 5: All geographies grew with North America and developed markets delivering double digit organic growth.

Speaker 5: Although volume remains below pre-pandemic levels, we remain focused on opportunities where we can deliver value and growth. Operating profit for our professional segment grew 77% in the first quarter of the year.

Speaker 5: and we are continuing to make investments in the business to drive long-term sustainable growth.

Speaker 5: First quarter gross margin increased 340 basis points.

Speaker 5: to 33.2%. Pricing, in addition to four savings of approximately 105 million, more than offset the impact of input costs of approximately 160 million, which represented a roughly 300 basis point impact this quarter.

Speaker 5: Between the lines, spending on an adjusted basis was 18.1% of net sales.

Speaker 5: up 60 basis points versus a year ago.

Speaker 5: 60 basis points versus year ago driven by higher investments in our business.

Speaker 5: Adjusted operating profit for the quarter increased 25% and operating margin was 15.1%.

Speaker 5: an increase of 280 basis points versus last year's adjusted operating margin.

Speaker 5: Foreign currency was a 12% point headwind on operating profit in the quarter.

Speaker 5: of which 5 percentage points was due to the impact of translating our foreign subsidiary earnings into US dollars.

Speaker 5: and the balance impacting input costs. We have made good progress on our margin recovery over the last few quarters.

Speaker 5: However, our gross margins are still approximately 200 basis points below pre-pandemic levels.

Speaker 5: We remain committed to restoring and expanding our margins over time.

Speaker 5: The effective tax rate was 24.5% compared to an adjusted effective tax rate of 21% in the year-ago period.

Speaker 5: Better than expected top line and margin performance resulted in earnings per share of $1.67.

Speaker 5: Up 24% versus adjusted results last year.

Speaker 5: This quarter also resulted in strong cash generation. Cash provided by operations was approximately $600 million.

Speaker 5: driven by our healthy increase in operating profit and management of working capital.

Speaker 5: Capital spending was 201 million.

Speaker 5: compared to $253 million last year. During the first quarter, we returned $425 million to shareholders through dividends and share repurchases.

Speaker 5: Now let me say a few words about our outlook.

Speaker 5: We are raising our full-year earnings guidance to reflect our Q1 performance and the moderation of commodity headwinds.

Speaker 5: increasing it to a range of 6 to 10 percent growth from our prior guidance of 2 to 6 percent growth.

Speaker 5: We've maintained a full year outlook for organic growth of 2 to 4 percent as we lap last year's pricing actions against a softer economic backdrop. We are committed to investing behind our brands and people and will methodically assess incremental opportunities.

Speaker 5: to drive near-term returns. As we scale recent innovation to more markets and advance our commercial capabilities, we expect the step-up brand investments in the second quarter and the rest of the year as we set last quarter.

Speaker 5: We are optimistic about bringing superior value propositions that will increase household penetration and market share over time. With a success from our Innovation Pipeline and Brand Investments,

Speaker 5: We have increased confidence in our ability to deliver in the top half of our guidance range for organic growth. Our input costs assumptions for the year have improved but remain a headwind of 100 to 200 million.

Speaker 5: in addition to the $200 million headwind from higher wages and other manufacturing costs, as stated last quarter.

Speaker 5: Most of the impact of input costs have been realized in the first quarter.

Speaker 5: and we expect headwinds to dissipate throughout the year.

Speaker 5: Bear in mind that the outlook for commodities remains mixed and cost levels continue to hover significantly above 2019 levels.

Speaker 5: Our revised input costs assumptions take into account benefits from lower transportation and energy costs.

Speaker 5: However, beyond these, we have not seen material changes in other commodities versus our prior outlook and markets remain volatile. For example, oil prices have reversed the downward trend.

Speaker 5: on these, we have not seen material changes in other commodities versus our prior outlook and markets remain volatile. For example, oil prices have reversed the downward trend with the recent round of supply cuts.

Speaker 5: and supply restrictions have contributed to higher prices in other raw materials. Global logistics are improving, however, the labor markets remains tight. Certainly, we hope to see commodity abatement in the future.

Speaker 5: But we cannot count on it to recover the significant impact of inflation in the last three years. We are going to focus on what we can control, which is continuing to offer consumers superior products. Maintain our focus on revenue growth initiatives.

Speaker 5: We are raising our outlook for operating profit growth to a low double digit percent range and for operating margin to increase by approximately 130 basis points at the midpoint of our guidance. Currency is expected to impact operating profit.

Speaker 5: by 300 to 400 million, the majority of which will impact our costs.

Speaker 5: Based on these assumptions, we have increased our outlook for earnings per share growth to a range of 6 to 10%.

Speaker 5: While we do not provide quarterly guidance, let me remind you that we are lapping tough sales comparisons and expect to have continued currency headwinds in the second quarter.

Speaker 5: As Mike said, we have a full slate of commercial programs coming up, and our teams are laser-focused on executing with excellence. I am proud of our team's execution leading to a strong start to the year, and we are committed to delivering balanced and sustainable growth.

Speaker 2: that will create shareholder value. With that, we will open the floor for questions. Certainly, at this time, we'll be conducting a question and answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening as speaker.

Speaker 2: Your line is live.

Speaker 4: Want to Chris?

Speaker 6: Hi, Chris. Hi, good morning. So I just wanted to start on the gross margin line. Clearly, you have strong expectations this quarter. If anything, the debate will be why can't you continue to sequentially climb from here as?

Speaker 6: pricing remains strong and commodities continue to deflate. So I wonder if you have any thoughts on just the sequential cadence of growth for orange development here and perhaps any of the you know investment into that line item that might be a bit more you know a typical relative to you know what seems a pretty sequence.

Speaker 4: you know, the organization where we're accelerating growth and restoring margins while still investing to drive long-term balance and sustainable growth. So that's kind of what our overall play is. But on the margin recovery, yeah, you know, in the margin of what we said on the prepared remarks,

Speaker 4: Gross and operating margins were each up about 300 basis points. You know, we had excellent price execution. And I'd say our pricing has been commensurate with what our expectations for cost net of our ramped up productivity would deliver. And so I think the teams have really done an excellent job around the world there. Input cost has stabilized. And I think actually for the past two quarters.

Speaker 4: And this is about the most ability we've seen. I think the call is about the same as it was back in January . And so for that, we've probably seen about 16 weeks of stability, which gives us something good to aim for. And I think the team has done a great job kind of working the productivity. We are seeing some green shoots.

Speaker 4: transportation being a current area, but our current view is that the overall cost environment.

Speaker 4: It's going to be fairly consistent with what we said overall. I mean, it's going to be about half a billion. We're going to pick up a little bit of favorability, we think. I would add though, Chris, I definitely see a reversion around the corner, the costs. We're up to now three point, we expect to be over the last three years, three point seven billion of inflation.

Speaker 4: I would expect that the history of these categories and our commodities that we buy generally comes back out. I don't really see that thus far this year, but we will see maybe some moderation in the second half of this year. But no, so we want to give them a little more texture.

Speaker 5: Sure, just to build on what Mike was saying, Chris, a few things. So the majority of our cost headwind, and that's just the now 100 to 200 million.

Speaker 5: wouldn't hit us in Q1. We don't expect it to be too significant for the balance of the year. In fact, we do expect that to begin subsiding as we go into the back half of the year. Do your questions specifically on, are we going to see further gross margin gains as the year progresses? Are the answers yes? I mean, we expect gross margin to continue to gain gain.

Speaker 5: as we go through the year. This marks the second quarter in a row that we expand gross margins and by not an insignificant amount versus prior year. And as a reminder, you know, the last time that had happened had been a quarter's ago, if you step back in time. So we are very encouraged by the progress made.

Speaker 5: A couple of things to keep in mind are the fact that we were early in terms of pricing. So, we will begin to lap some of the pricing as we go into the second half of the year. Hence, why some of the increases that we've seen in last quarter and this quarter on gross margin in terms of absolutes, we don't expect that to remain. We...

Speaker 5: We do expect the exit Q4 at a higher gross margin than what we delivered in Q1 and that really puts us on good track To get back to our pre-pandemic level of gross margin of roughly 35% that we saw in 2019

Speaker 5: In addition to that, we continue to have a very healthy pipeline of productivity and the teams focused on managing through all the levers to drive the margin recovery that we've committed to and then start expanding from there.

Speaker 6: Thank you so much for that perspective. Just one quick follow up. You know, your gross margin historically have recovered in quite a linear fashion in the same way that they've actually gone down during times of pressure.

Speaker 6: Is there any reason why your gross margin should step up kind of each quarter through the year and context of your Q4 exit rate being higher than Q1? And I just wonder if you have that level of sequential gross margin progression.

Speaker 6: Can you just remind about your overall investment philosophies and your willingness or desire to put more spending back into the system as opposed to letting this flow to the bottom line that could be for this year or going to next year as well. So thanks so much for that.

Speaker 5: Sure, so a couple of things. We have seen an acceleration in the last two quarters, and it's been fairly strong, so I don't expect that to sustain, because as I said, two things. One, costful subside as we go into the second half, but pricing will also subside because we'll lap it. The good news is we do expect to be, you know,

Speaker 5: continuing to gain as the year progresses. So yes, it'll continue to be a straight line, but the slope will change and it will get a little bit more muted and it's as expected. But go into the investment philosophy, I think it's important to highlight that this quarter

Speaker 5: We increased our investment behind the brands and innovation versus prior years, 60 basis points. And if you remember when we gave the outlook back in January , we said that for the full year, we were expecting at least about 100 basis points of investment.

Speaker 5: You would have seen in our prepared remarks that we have a very strong pipeline of innovation that's been put into market and we are supporting it.

Speaker 5: As we speak and this is really the key and our philosophy even with all the headwinds that we were facing last year and the prior year Has been that we're in this for the long run. We don't go for the quarters. We go for you know the long run We've been around for 150 years and And counting and and the key has been we've been very disciplined about investing

Speaker 4: that have done. Yeah, Chris, just to tack on, you know, we're continuing to invest in our brands to drive long-term balance and sustainable growth. And we're trying to create a, you know, the proverbial, a virtuous cycle, right? And so we definitely see that this year and that opportunity this year, certainly I think the good start gives us a little more room and confidence to be able to invest further.