Kimberly Clark (NYSE:KMB) has a growth problem that might take years to fix. The consumer products titan maintains the first- or second-place market share position in key staples like diapers and tissues, but that premium spot wasn't enough to deliver strong operating results in 2018. Instead, the company just announced that sales growth slowed to near zero as profitability slumped last year.
In a conference call with investors, incoming CEO Mike Hsu and his executive team reviewed what went wrong in 2018. More importantly, the company outlined its plan for getting the business back on track over the next few years. Below are the highlights from that presentation.
Conditions improved in the fourth quarter
We delivered 3% organic sales growth in the fourth quarter and a 1% increase for the full year, consistent with our target. It was a challenging macro environment, and our profitability was impacted by significant commodity inflation and currency volatility. -- CFO Maria Henry
Kimberly Clark's full-year results were disappointing on a few levels. Sales growth was just 1%, which lagged rival Procter & Gamble (NYSE:PG) and translated into flat or declining market share in most of its product niches. Gross profit fell 15% as price increases failed to offset dramatic cost spikes. Kimberly Clark's sales volumes were near flat, too, which means most of its sales growth came from rising prices.
The good news is that each of these trends ended the year on a positive note, with modest sequential improvements heading into 2019. Kimberly Clark's overall sales growth of 3% last quarter was just a step below P&G's expansion pace, while the gap was much bigger in the fiscal third quarter.
Given the overall level of pricing we expect to achieve, we're planning for some negative volume impacts. -- Henry
The scale of last year's commodity cost jump was massive. Executives said higher prices on things like paper, plastics, and shipping hurt earnings by $800 million, or more than double the rate they had predicted going into the year.
As a result, Kimberly Clark is busy raising prices on everything from Huggies diapers to Kleenex tissues. While the boosts should help shore up profitability, they might come at the expense of market share, so investors will want to watch how pricing and volume trends contribute to overall organic growth over the next few quarters.
Planning for a difficult period ahead
It's appropriate not to plan for much improvement right now. -- Hsu
The improving pricing and demand trends in the year's final quarter gave management confidence to predict faster growth in 2019. However, their short-term and medium-term outlooks reflect expectations for years of tough industry conditions ahead.
In 2019, organic sales should rise by 2% compared to last year's 1% uptick, with gains entirely driven by price increases as volume falls. Adjusted profits will expand at about the same pace thanks to the cost cuts that are projected to offset continued inflation.
Looking further out, Kimberly Clark believes the industry will inch higher at a rate of between 1% and 2% from 2019 to 2022, with major drags coming from economic weakness in Latin America and price-based competition in China. Executives still see emerging markets as huge long-term growth opportunities, but selling conditions are looking less attractive there at the moment.
The good news for shareholders is that this prediction implies better results over the next few years than investors endured in 2018. Yet core profit growth of about 4%, plus a modest dividend payment, equates to lower overall returns than Kimberly Clark routinely generated as recently as 2015.