Kimberly Clark (NYSE:KMB) investors have come to expect near-flat sales from the consumer-products giant, thanks to poor selling dynamics for branded staples like diapers and tissues. But, as if that challenge wasn't tough enough, the company also faces rising commodity costs and foreign currency swings, both of which threaten to push earnings lower in 2018.
Executives recently held a conference call with investors to discuss those issues within the broader context of their short-term and long-term growth goals. Below are a few highlights from that presentation.
1. It's a tough market out there
Organic sales were even year-on-year, as growth in international markets was offset by lower sales in North America. -- CFO Maria Henry
Sales growth slipped to a 1% rate from a 2% increase in the prior quarter. Yet management said the broader six months' worth of results kept Kimberly Clark right on pace to meet its wider objectives of 1% higher sales in 2018. Over that period, sales volumes are up by 2% while prices are down by about the same amount, leading to essentially even growth so far. As for market share, the company has protected or expanded share in five of its product categories while losing ground in three, management said.
2. Pricing trends will improve
In April, I outlined several of our actions to improve [pricing]. That included sheet-count reductions in North American bath tissue [and] price increases in Latin America and other international markets. These actions are broadly on track, and our pricing trends are improving. -- Chief operating officer Michael Hsu
Kimberly Clark's prices dipped during the quarter as a result of the weak selling environment and its focus on boosting sales volumes through promotions. That continued a painful trend for the business of pairing lower prices with higher expenses. In fact, gross and operating margins both declined in the period.
The good news is the pricing trends are headed in the right direction. They were down 2% two quarters back, fell 1% last quarter, and were down by about 0.5% in the most recent quarter. Success in recent price-boosting initiatives has given executives confidence that pricing will turn positive again over the next six months.
3. We're taking action
Clearly, the near-term environment has become more challenging, and we are responding by aggressively reducing costs and increasing selling prices. -- Michael Hsu
Kimberly Clark outlined two major challenges that have combined to lower the company's earnings expectations for 2018. First, foreign currencies have moved sharply lower against the U.S. dollar, turning an expected 1% sales boost into a 1% headwind. Second, and more importantly, raw material costs on commodities like pulp and oil have skyrocketed. Together, these two challenges are on pace to reduce profits by between 20% and 25%, though management had entered the year assuming a much more modest drag.
Executives have initiatives aimed at countering these negative trends, but investors will have to be patient in waiting for the results to bear fruit. "Nearly all the impact from any potential actions," Hsu explained, "would start to show up on our results next year."
In the meantime, 2018 earnings are now expected to range between $660 million and $680 million, down from the prior target range of between $690 million and $720 million. Kimberly Clark believes operating profit will fall by between 2% and 5% rather than rise by between 2% and 5%, as it had predicted back in April.
Additional savings from its cost-cutting programs, plus modest improvements in pricing trends, are helping. But for now, the company has limited flexibility to lift its profit margin.