Kimberly-Clark Corp. (NYSE: KMB ) is a household name, with several brands that can be found in nearly every home across the United States. Just a few of its brands include Huggies, Kleenex, Cottonelle, and Scott. As you might expect, products like diapers and paper towels are used regularly regardless of the overall economic climate. This provides valuable insulation against economic volatility, which means Kimberly-Clark is highly regarded as a source of stable profits.
Last quarter, Kimberly-Clark lived up to that reputation. Here are a few things management had to say about the quarter in the conference call with analysts, and the near-term outlook for the company.
Another strong quarter
According to Chief Executive Officer Tom Falk, "K-C International had another strong quarter with 10% organic sales growth and improved margins."
Kimberly-Clark's second quarter was a good one. Organic sales grew 5%, which hit the top of the company's guidance. As previously mentioned, Kimberly-Clark has a well-entrenched position in the United States. The down side of this is that there isn't much growth to be had in such a saturated market. That's why Kimberly-Clark is counting on expansion in new geographies to propel future growth.
Kimberly-Clark is putting up much higher growth numbers internationally than it is in developed markets. For example, organic sales of diapers increased 30% in Russia and Eastern Europe, 20% in China, and 15% in Brazil, thanks to its strong Huggies brand.
According to CFO Mark Buthman, "We now expect that full year inflation will be toward the high end of our previously estimated range."
A key concern for a consumer staples company is input cost inflation. If raw materials prices increase significantly, it can put a lot of pressure on the bottom line. Unfortunately, that is happening to Kimberly-Clark. The company expects inflation will be close to $250 million this year, which is the top end of its forecast range, primarily due to high fiber prices.
May the FORCE be with you
Falk also said, "We continue to operate our company with financial discipline by generating significant cost savings."
In response to the threat of inflation, Kimberly-Clark is getting more aggressive with cost cuts. Management has embarked on a cost-savings program called FORCE, which stands for Focus On Reducing Costs Everywhere. This helped shave $75 million off operating costs in the last quarter. Because of this effort, in addition to top-line growth, management still expects earnings growth for the full year.
Growth through innovation
Despite the fact that there isn't a lot of growth opportunity in developed markets like North America, Kimberly-Clark is trying to produce growth through product innovation. According to Falk, "In North America, I am encouraged that innovations are helping grow our brands like Poise, Depend, U by Kotex, Viva and Huggies baby wipes."
Its brand strength is clear, as management stated that last quarter, its market share stayed even, or improved, in six of its eight consumer-product categories versus the same quarter one year ago. Kimberly-Clark's premium brands are what allow it to raise prices, which is critical to keeping up with input cost inflation.
The best defense: An innovative portfolio
Falk said, "I think having a great innovation portfolio behind those brands is the best defense for any kind of competitive activity." This statement was in response to an analyst's question regarding new competition from a familiar foe. Recently, Procter & Gamble announced it would enter the adult incontinence market, which is a multi-billion dollar industry by sales, and one in which Kimberly-Clark has a dominant position, through its Depend brand.
However, Kimberly-Clark isn't worried, because it believes product innovation, including its newly launched Depend Real Fit for men, and Silhouette for women, will keep its share position strong. Falk noted that last quarter, Kimberly-Clark picked up nine-10 points in market share, even with a more expensive product offering.
The Foolish bottom line
Kimberly-Clark is putting up solid growth, thanks, in large part, to its highly successful international operations. Growth potential is particularly strong in the emerging markets, like Russia and China.
In North America, management is counting on product innovations in some of its key products, like adult incontinence, to produce growth. And, despite rising input costs, the company will aggressively cut costs elsewhere to keep profit growth intact.
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