Consumer staples giant Kimberly Clark (NYSE:KMB) recently posted an encouraging return to organic sales growth that kept the company on track with its modest expansion plans for the year. However, the maker of Huggies diapers and Kleenex tissues endured weaker profitability as it struggled to pass on higher costs to its customers.
Executives held a conference call with Wall Street analysts to put those mixed results into perspective. Below are a few highlights from that presentation.
Growth and market share
Organic sales grew 2% in the quarter, which is a good start to the year. Performance included benefits from targeted growth initiatives, innovations launched over the past 12 months, and increased investments in our brands. -- Chief Operating Officer Michael Hsu
Kimberly Clark returned to modest sales growth following three consecutive quarterly declines. The 2% boost included healthy volume gains in the Huggies diaper franchise thanks mainly to lower prices. An unusually strong cold and flu season, meanwhile, combined with price cuts to generate big volume gains in the tissue segment.
Broadly speaking, executives said they were happy with Kimberly Clark's market share positions, which stayed even or improved slightly in each of its eight core product categories.
Costs are rising faster than prices
Commodities were a drag of $175 million in the quarter. We're now expecting that full-year cost inflation will be between $400 and $550 million. That's $100 to $150 million more than we assumed in January. -- CFO Maria Henry
The company endured higher costs on raw materials like pulp. However, given the sluggish sales environment, management declined to pass those costs on to its customers. Instead, net selling prices were flat or negative in each of Kimberly Clark's three core divisions. Overall, prices fell 1%.
The poor pricing trends translated into reduced profitability. Adjusted gross margin fell by 3 percentage points to 33.8% of sales and operating margin dropped to 17.4% of sales from 18.8% a year ago. Thus, while reported earnings rose 9%, that improvement was mainly driven by a lower tax rate. Profit gains were 2% after stripping out that benefit.
We continue to expect $50 to $70 million of restructuring savings in 2018 with the vast majority of these savings occurring in the second half of the year as our workforce reductions ramp up. -- Henry
Kimberly Clark is implementing two major cost-cutting initiatives right now, but neither of them affected costs dramatically during the quarter. Its efficiency program delivered $90 million of savings, which only partly offset the nearly $200 million drag from increased commodity costs. Its recently announced restructuring plan, meanwhile, is just getting started as the company offered voluntary severance packages to most of its salaried employees during the quarter. Executives expect most of the benefits from these cost programs to occur in the second half of the fiscal year.
The 2018 outlook
We know we have more work to do because we continue to operate in a competitive environment. That said, our first quarter results and our plans going forward give me further confidence in our 1% organic growth target for the year. -- Hsu
Kimberly Clark affirmed the full-year growth target that calls for sales to inch higher by 1% to mark a tiny improvement over last year's flat result. Innovative product launches across the Huggies, Kleenex, and Depend franchises should help defend market share in the core U.S. segment, while prices are slated to rise in emerging markets like Eastern Europe and Latin America, where sales growth is stronger.
The extra commodity costs weren't in their original 2018 plan, but management said they built enough flexibility into their forecast to cover that surprise.
As a result, Kimberly Clark is still projecting earnings per share of between $6.90 and $7.20, for growth of between 11% and 16%. That outlook assumes profitability will improve over the next few quarters, mainly thanks to the company's cost-cutting initiatives.