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4 Key Quotes From Kimberly Clark Corp's Earnings Call

By Demitri Kalogeropoulos - May 8, 2017 at 1:18PM

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Why sales growth disappointed management last quarter -- and what the company plans to do about it.

Kimberly-Clark's (KMB 1.80%) recently announced quarterly earnings results kicked off its new fiscal year with a whimper. Sales growth fell to a negative 1% pace, compared to 2% gains in 2016 and a 5% spike in 2015.

Below, we'll highlight a few of the key quotes from the consumer giant's management team on the company's latest performance and how they see the rest of 2017 playing out. 

Growth disappointment in the U.S.

Our first quarter organic sales were somewhat below my expectations, most of that coming from North America. -- CEO Thomas Falk

The 1% organic sales dip consisted of a slight uptick in volume paired with an even larger drop in average prices. Executives blamed the U.S. market for the shortfall. That segment saw organic sales slump 3% thanks to a spike in competition that occurred just as industry growth fell to a 0.5% pace from 1.5% last year.

A baby has its diaper changed.

Image source: Getty Images.

Kimberly-Clark endured flat market share in its baby care segment, which is home to the Huggies diaper brand. The company also lost ground in tissues as it scaled back on price cuts in the Kleenex brand.

Management believes things will improve in the U.S. segment starting in the second half of 2017, in part thanks to innovative product launches planned in the Kleenex, Kotex, and Huggies franchises.

Solid gains in developing markets

We delivered 4% organic sales growth in this part of our business, and performance and category conditions were broadly in line with our expectations from January. -- Falk

Developing markets turned in a solid performance, rising 4%. China contributed double-digit volume growth that was partially offset by falling prices. Kimberly-Clark is optimistic that pricing trends will improve over the coming quarters here, with help from a few new Huggies launches in the pipeline.

Brazil returned to strong growth as that economy mends, and in Argentina, where currency swings are still affecting results, business soared by double-digits as prices spiked and sales volumes slumped.

Improving profitability

Growth and operating margins were each up 30 basis points year-on-year. First quarter gross margin was 36.9%, and operating margin was 18.6%. The margin improvements included good progress in developing and emerging markets. -- Chief Financial Officer Maria Henry

Kimberly-Clark managed to boost profitability in a tough selling environment, with operating margin climbing toward 20% of sales. The biggest factor in this gain was cost cuts. Executives sliced $110 million out of its expense infrastructure in the quarter, putting it ahead of its target of saving at least $400 million for the full year.

KMB Operating Margin (TTM) Chart

KMB Operating Margin (TTM) data by YCharts.

That, plus a better outlook for currency exchange shifts, helped offset rising commodity costs to keep the company on track in terms of earnings. Executives still see profit weighing in at between $6.20 per share and $6.35 per share this year, representing growth of between 3% and 5%.

A reduced outlook

Regarding organic sales, we also expect growth of 1% to 2%, and that compares to our original estimate of approximately 2% and reflects our first quarter results, the category conditions in North America and slightly lower-price realization due to improve currencies. -- Henry

While its profit forecast is unchanged, Kimberly-Clark did lower its sales growth expectations slightly. Organic sales should rise by 1.5% at the midpoint of guidance, down from the 2% target they projected back in January.

If trends don't improve, 2017 will mark the second straight year of decelerating sales growth for Kimberly-Clark. The good news is profit gains are still accruing, and cash flow remains strong. However, a prolonged expansion slump will likely add pressure on the management team to step up their rebound initiatives next year -- perhaps by making more aggressive changes to the portfolio, the cost infrastructure, and/or the company's product pipeline.

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