Kimberly Clark (KMB 5.51%) just wrapped up a difficult fiscal year. Sales growth slowed to zero in the fourth quarter and for the full 2017 year as the maker of Huggies diapers and Kleenex tissues struggled with weak consumer demand. Rising commodity costs also led to reduced profitability, since the company couldn't raise prices given the tough selling environment.
CEO Thomas Falk and his team held a conference call with Wall Street analysts to put those results in perspective while providing details on Kimberly Clark's new turnaround plan. Here are a few highlights from that discussion.
Image source: Getty Images.
Stalled growth
Total sales and organic sales were both pretty similar year-on-year. -- Chief Financial Officer Maria Henry
Organic sales growth trends held steady at a 1% decline, and while that performance met management's reduced outlook, it was still quite weak. For the full year, Kimberly Clark's sales were flat to mark its second straight year of decelerating growth (organic sales rose 5% in 2015 and 2% in 2016).
There was a stark geographic split in demand, with developing and emerging markets rising 3% while richer markets, including the U.S., fell. Management said the drop was due to increased competition and a falling birthrate in the U.S.
Falling prices
Net selling prices were down more than 1%, reflecting the competitive environment. -- Henry
Kimberly Clark elected to aggressively cut prices so that sales volumes could continue ticking higher. Prices were especially weak in the U.S. geography, where they fell 4%. Management attributed the slump to higher promotional spending across most of its personal care product categories.
That mirrors the experience of rival Procter & Gamble (PG 0.60%), which also reported a rare drop in selling prices across its portfolio this week. The decline pushed profitability down by 0.7 percentage points to 35.9% of sales since Kimberly Clark couldn't use higher prices to offset rising commodity costs.
The new plan
We expect the restructuring to generate cost savings of $500 million to $550 million by the end of 2021. And that means over this time period, we will have generated more than $2 billion in total savings from [the current cost plan] and the restructuring program. -- CEO Thomas Falk
Kimberly Clark announced a restructuring plan that executives described as their biggest strategic shift since 2003. The initiative aims to slash costs by closing or selling about a dozen manufacturing facilities, letting as many as 5,500 employees go, and divesting lower-margin brands that are responsible for about 1% of company sales today. "Even in slow-growth conditions, we know we need to grow our profit and earnings to deliver attractive shareholder returns," Falk said.
Growth priorities
We'll be able to invest more to drive our top line growth, and those investments will be focused on strengthening and growing our core businesses, accelerating our personal care growth opportunities in developing and emerging markets and further building our digital and e-commerce capabilities. -- Falk
Image source: Getty Images.
While the restructuring shift should protect profitability despite higher commodity costs, its primary purpose is to free up cash to invest in growth. Kimberly Clark is planning to speed up innovative launches in its core Huggies, Depend, and Kleenex franchises, and management intends to support the releases with higher marketing spending. Other big growth avenues include expansion deeper into developing markets like China. Kimberly Clark also aims to get the digital sales channel moving faster, given that its 30% increase last year trailed P&G's 40% spike.
A stable outlook
We expect 2018 will be pretty similar to 2017. We're assuming the category growth rates are only slightly better than this past year, and we expect competitive activity will remain elevated. And we're planning for another year of commodity cost inflation. -- Falk
Falk and his team think industry conditions will remain challenging in 2018, and their forecast for a 1% sales uptick implies continued market share losses. P&G, for example, is projecting 2.5% gains for its current fiscal year.
On the bright side, Kimberly Clark is predicting a return to pricing gains this year, improved profitability, and aggressive cash returns through dividends and stock repurchase spending. Those financial wins will help, but shareholders likely won't see persistent stock price gains until the company begins outgrowing its industry again.
