Kimberly-Clark Corporation (KMB)

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Kimberly-Clark Corporation (KMB)

Q1 2013 Earnings Conference Call

April 19, 2013 10:00 ET

Executives

Paul Alexander - Vice President, Investor Relations

Tom Falk - Chairman and Chief Executive Officer

Mark Buthman - Senior Vice President and Chief Financial Officer

Mike Azbell - Vice President and Controller

Analysts

Gail Glazerman - UBS

Wendy Nicholson - Citi Research

Ali Dibadj - Sanford Bernstein

Linda Bolton Weiser - B. Riley & Company

Bill Schmitz - Deutsche Bank

Jason Gere - RBC Capital Markets

Lauren Lieberman - Barclays

Chris Ferrara - Bank of America

Alice Longley - Buckingham Research

Javier Escalante - Consumer Edge Research

Jason English - Goldman Sachs

Caroline Levy – CLSA

Leigh Ferst - Wellington Shields

Linda Bolton Weiser - B Riley & Company

Presentation

Operator

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today’s presentation, we will open the floor for your questions. At that time, instructions will be given as to the procedure to ask if you would like to ask a question.

It is now my pleasure to introduce today’s first presenter, Mr. Paul Alexander.

Paul Alexander

Thanks, David, and good morning, everyone. Welcome to our first quarter earnings conference call. Here with me today in Dallas are Tom Falk, Chairman and CEO; Mark Buthman, Senior VP and CFO; and Mike Azbell, Vice President and Controller.

Here is the agenda for our call. After an opening comment from Tom, Mark will begin with the review of first quarter results. He will also provide an update on the strategic changes we are making in Europe. Tom will then provide his perspectives on our results and the outlook for the full year, and we will finish with Q&A. We have a presentation of today’s materials in the Investors section of our website, which is kimberly-clark.com.

We will be making forward-looking statements today. Please see the Risk Factors section of our latest Annual Report on Form 10-K for further discussion of forward-looking statements. We will also be referring to adjusted results and outlook. Both exclude certain items described in this morning’s news release. The release has further information on these adjustments and reconciliations to comparable GAAP financial measures.

Now, I will turn it over to Tom.

Tom Falk

Well, good morning everyone. I just thought it would be appropriate for me to start this morning by commenting that we are well aware that the eyes of the nation are on the events that are unfolding this morning in Boston, and I just like to start by offering our condolences regarding the tragic event that happened earlier this week in Boston, and please know that the thoughts and prayers of everyone at Kimberly-Clark as well as those of the entire nation are with the families of the victims of this terrible event.

I’d also like to let you know that we are sitting down here in Dallas, Texas very close to the small town of West Texas, and so we would like to also extend our deepest sympathies to our neighbors to the south as they deal with the aftermath of the explosion of the fertilizer plant that happened at that small community this week. So, it’s truly been a difficult week for Americans in various places across the country. So, I just thought we should start with that and remind everyone what’s really important going on around us today, but with that, I will turn it over to Mark Buthman.

Mark Buthman

Okay, thanks Tom. Good morning everyone. Let me start with the headlines. First, we achieved organic sales growth of 3% that included increases of 6% in our North American consumer tissue business and 5% in K-C International. Second, we delivered adjusted earnings per share of $1.48, that’s an all-time record and up 19% year-on-year boosted by strong cost savings. And third, we continue to allocate capital in shareholder friendly ways through dividends and share repurchases.

Now, let’s cover the details of the quarter. First quarter sales were $5.3 billion, up 1% versus last year. Underlying organic sales rose 3% versus a tough comparison of 6% growth a year ago. The results this quarter were driven by increased volumes of 2%, higher net selling prices of 1%. Unfavorable currency rates and lost sales in conjunction with our restructuring activities each reduced sales by 1 point. First quarter adjusted gross margin was 34.6%. It’s up 140 basis points from last year. The increase was driven by organic sales growth and $85 million of FORCE cost savings partially offset by $35 million of input cost inflation. We are off to a great start with our FORCE program this year relative to our full year target of $250 million to $300 million. Our teams are pushing hard to free up funds to reinvest to field our business and to drive additional bottom line growth.

Moving down to P&L between the line spending increased 10 basis points as a percent of sales and that was driven by small increases in G&A. Strategic marketing spending was down slightly, mostly due to the timing of innovation launches, which relative to last year are going to be more towards the latter part of the year. Other income and expense benefited from a gain in the sale of some non-core assets.

Adjusted operating profit rose 16% with an operating margin of 16%, that’s up 200 basis points compared to prior year. Really encouraged by our margin performance to start the year as both our growth and operating margins were highest we have achieved in 3.5 years. The first quarter adjusted effective tax rate was 30.8% now that’s up from last year but its in-line with our full year targeted at 30% to 32%. Equity income was up 36% in the quarter as K-C Mexico had a great start to the year. So putting it all together, first quarter adjusted earnings per share rose 19% to a $1.48 as well above of what we expected three months ago and plus continued momentum in KC International, strong cost savings and above plant volume growth in our North American consumer tissue business. Now turning to cash flow, cash provided by operations in the first quarter $607 million that’s up 4% year-on-year. The improvement was driven by earnings growth, a smaller increase in working capital relative to last year now is partially offset by higher cash debt payments.

We continue to allocate capital and shareholder from ways with the first quarter dividend payments in share repurchases totally nearly $800 million. In February we announced our 41st consecutive annual increase in the dividend, the 9.5% increase should help maintain our position as a top-tier dividend payer. In addition we repurchased $0.5 billion of KMB stock in the quarter. We continue to expect full year repurchases to be between 1 billion and 1.2 billion. Now I’m going to highlight a few areas from our segment results for the quarter. We first look here organic sales growth is 4% with volume growth of 3% and net selling prices up 1 point. Compared to a tough comparison of the year, our toughest comparison for the year KC International had another good quarter with organic sales up 7%. We continue to make excellent progress with targeted growth initiatives in KCI. This momentum helped offset volume declines in Venezuela and in Australia where heavy diaper promotions last year affected the comparison. Tom will talk more about KCI in minute. Also in Personal Care organic sales were flat in North America and up double digits in Europe.

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