Kimberly-Clark (KMB +1.66%) investors had modest expectations heading into the company's fourth quarter earnings report. The consumer staples specialist had been struggling with below-market growth through most of 2019, during what management was referring to as the first of a three-year transformation period for the business.
On Thursday, the company revealed operating results that kept it significantly behind rival Procter & Gamble (PG +0.38%) in key growth and cash flow metrics. Yet Kimberly-Clark also had good news to report about its profitability outlook and its progress toward becoming a much stronger business by 2022. Below we'll look at a few takeaways from those results, as highlighted in management's conference call with Wall Street analysts.
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Pushing through major price increases
CEO Mike Hsu said: "Our team has maintained strong focus on price realization and executed their plans well throughout the year. As a result, pricing was up 4%. And that's the highest realization we've achieved in a decade and it was necessary because of the multi-year inflation that we faced."
Kimberly-Clark's growth rate has trailed the wider industry and its main rivals. Organic sales rose by just 3% for the fourth quarter and 4% for the full fiscal 2019. P&G grew 6% over the same period. Kimberly-Clark also underperformed with respect to sales volumes, which declined and left nearly all of its growth as coming from higher prices.
The good news is that the consumer staples company successfully moved higher prices through most of its portfolio without sacrificing too much in terms of volumes. That metric dipped 1% overall, mainly because its tissue segment slumped 5% as prices surged by 7%. Executives said that volume result was better than they expected at the start of 2019.
Getting more profitable
CFO Maria Henry said: "Adjusted operating margin was 17.8%, up 80 basis points, and adjusted operating profit grew 5%. Operating margins were up nicely in all three business segments, led by consumer tissue."
A portfolio-wide price hike can do wonders to your profitability, but Kimberly-Clark also got big contributions from its cost-cutting program and its significant efficiency initiatives. These factors helped push gross profit margin up to 35% of sales in 2019 from 33.2% a year earlier. Operating margin also inched higher, up to nearly 18% of sales from 17%, despite increased marketing spending.
Success in these areas allowed adjusted core earnings to rise 4% for the year even as reported net sales were flat.
Projecting stronger results
"Our [2020] plan is consistent with our balanced approach to value creation, includes higher growth investments and aligns with our [transformation initiative's] financial objectives," Hsu said.
Kimberly-Clark's 2% sales growth outlook appears weak given that P&G is projecting a 4% increase for its current fiscal year. Still, management detailed a few projections that imply better results as the year progresses. Specifically, Hsu and his team are calling for stable market share and for volume trends to improve in the back half of the year so that overall volume returns to modest growth in 2020.
Executives say they are confident that the investments they are making in areas like innovation and marketing will support more robust sales gains, but shareholders might have to wait until later in the year before seeing concrete evidence of this rebound. In the meantime, they can collect more cash returns from the recently hiked dividend and Kimberly-Clark's stock repurchase program. These channels together are expected to produce a tenth straight year of over $2 billion in direct cash returns in 2020.
