It took a few years, but Kimberly-Clark (NYSE:KMB) is back in growth mode. The consumer products company, best known for its Huggies and Kleenex brands, recently reported robust sales growth and rising profitability, giving management confidence to raise its outlook for the full 2019 year.
CEO Mike Hsu and his team held a conference call with analysts to put those results into perspective, and below we'll look at a few highlights from that presentation.
Firming growth rates
Our pricing initiatives are on track. Our volumes are ahead of expectations both in terms of the impact from price increases and from our growth initiatives. We also continue to improve mix, which was up 1 point for the second consecutive quarter.
Kimberly-Clark faced an easy comparison with a prior-year period that included zero sales growth. Yet its 5% spike this quarter still impressed given that it was its fastest quarterly expansion rate in over three years.
The gains included slightly lower sales volumes, which management says was all according to plan. Investors will still want to follow that metric for signs of an eventual rebound. However, it's clearly good news for the business that Kimberly-Clark could pass along higher prices while maintaining its market share and making inroads in niches like premium diapers and feminine care.
Adjusted operating margin was 17.2%, up 40 basis points versus a year ago. That included broad-based margin improvements in all three business segments.
-- CFO Maria Henry
The company spent more cash on advertising and marketing to support its brands, but that pinch was offset by cost cuts elsewhere and by higher pricing overall. Ultimately, profitability inched higher to cross 17% of sales but still remain below rival Procter & Gamble (NYSE:PG) and its industry-leading 20% operating margin.
Kimberly-Clark's financial success was only partly due to management's pricing and cost-cutting initiatives, with a significant chunk of the gains coming from declining prices for key inputs like pulp. These costs became a more modest drag on profits, helping net income rise 6% even though reported sales were flat.
A brighter outlook
Our updated outlook reflects strong execution, the improving commodity environment, and higher reinvestment levels. We're encouraged that the commodity outlook has gotten better.
Thanks mainly to falling prices for pulp, one of its biggest inputs, the company now sees commodity cost pressures landing at between $150 million and $250 million, or about $150 million lower than its prior prediction. Executives are planning to direct some of those savings into growth initiatives like marketing and innovation spending. But the bulk of the gains will trickle down to the bottom line, which is now on pace to rise by 2% rather than hold flat for the year.
Meanwhile, Kimberly-Clark believes organic sales will rise by 3% to put it ahead of its past 2% prediction and just behind P&G's 4% expansion rate. In addition to seeing sales accelerate closer to that rate, investors will be watching for signs that the company can achieve better balance by boosting volumes, especially in the U.S. market that accounts for so much of its earnings.
That said, the latest results show solid progress in Kimberly-Clark's rebound initiatives as it enters the second half of 2019 and begins to look forward to fiscal 2020.