Kimberly-Clark Corporation (KMB)

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Kimberly-Clark Corporation (KMB)

Q3 2013 Earnings Conference Call

October 22, 2013 10:00 AM

Executives

Paul Alexander – Vice President of Investor Relations

Thomas J. Falk – Chairman and Chief Executive Officer

Mark A. Buthman – Senior Vice President and Chief Financial Officer

Analysts

Ali Dibadj – Sanford C. Bernstein & Co. LLC

Wendy Nicholson – Citi Investment Research

Gail Glazerman – UBS Warburg

Chip A. Dillon – Vertical Research Partners, LLC

Caroline Levy – CLSA

Chris Ferrara – Wells Fargo

Bill Schmitz – Deutsche Bank

Jason English – Goldman Sachs

Javier Escalante – Consumer Edge Research

Lauren Lieberman – Barclays Capital

Olivia Tong – Bank of America Merrill Lynch

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 follow, if you’d like to ask a question.

It is now my pleasure to introduce, Mr. Paul Alexander.

Paul Alexander

Thank you, and good morning, everyone. Welcome to Kimberly-Clark’s Third Quarter Earnings Conference Call. With us today 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. Mark will begin with a review of third quarter results. Tom will then provide his perspectives on our results and the outlook for the year. We’ll finish with Q&A. As usual we have a presentation of today’s materials in the Investor section of our website, which is www.kimberly-clark.com.

As a reminder, we will be making forward-looking statements today. Please see the risk factor section of our last Annual Report on Form 10-K for further discussion of forward-looking statements. We will also be referring to adjusted results and outlook. Both excludes 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’ll turn it over to Mark.

Mark A. Buthman

Thanks, Paul. Good morning. Let’s start with the headlines. First, we achieved organic sales growth of 5% in the third quarter highlighted by 10% growth in K-C International. Second, we increased adjusted earnings per share of 7%, including benefits from organic sales growth and strong cost savings. And third, we’re on track with our overall capital plan, including working capital, capital spending, and allocating cash to shareholders.

Now, let’s cover some of the details of the quarter, starting with the top line, third quarter sales were $5.3 billion even with last year. Underlying organic sales rose 5%. That included higher volumes of 3% and 1 point of growth from both higher net selling prices and improved product mix, while sales in conjunction with our restructuring activities and unfavorable currency rates each reduced net sales by more than 2%.

I’m encouraged by the pickup in organic sales growth in the quarter, which Tom will talk more about in a few minutes. Third quarter adjusted gross margin was 34.4%, up 20 basis points from last year, adjusted operating profit rose 1 point with an operating margin of 15.6%, that’s up 10 basis points compared to prior year.

Results benefited from our organic sales growth and $70 million of FORCE cost savings, in other hand we absorbed $55 million of cost inflation and $25 million of negative currency translation effects, currency transaction effects also with the comparisons.

Total spending between Alliance was down 10 basis points as a percent of sales as slightly lower marketing costs were mostly offset by higher administrative and research spending. Third quarter adjusted effective tax rate was 30.2%, that’s down from last year, but in line with the low end of our full-year target of 30% to 32%. Equity income was up 14% as K-C de Mexico had another solid quarter.

Finally, our lower diluted share count added $0.04 of EPS compared to last year. So putting it all together, third quarter adjusted earnings per share were $1.44, that’s up 7% year-on-year.

Now, turning to cash flow, our cash provided by operations in the third quarter was $912 million, up 8% compared to $844 million last year. The increase included benefits from working capital and lower pension contributions partially offset by payments related to the changes we’re making in Europe.

We continue to manage primary working capital well. Our year-to-date cash conversion cycle is down four days compared to full-year 2012. So we’re on track to exceed our original one-day improvement target.

In terms of capital allocation, third quarter dividend payments and share repurchases totaled more than $450 million. We repurchased $150 million of KMB stock in the quarter, and we continue to expect full-year share repurchases of $1.2 billion.

Now, I’ll highlight a few areas from our segment results for the quarter. In Personal Care, organic sales rose more than 5%, driven by volume growth of 5%. Performance was led by K-C International, where organic sales were up 10%. Third quarter Personal Care operating margins were solid at 17.9%, although down just slightly year-on-year.

Moving to Consumer Tissue, organic sales were up 5%, net selling prices increased 3% with higher volumes and favorable mix each adding 1 point of growth. The organic growth was driven by a 10% increase in K-C International and a 4% improvement in North America.

Consumer Tissue operating margins up 14.3%, or up 80 basis points versus last year. Our margins continue to benefit from revenue realization strategies, cost savings and disciplined management of between Alliance spending.

Turning to K-C Professional, organic sales were up 5%, net selling prices and volumes each increased 2%, product mix was favorable by 1 point. Performance was led by K-C International with 11% organic growth. Organic sales were up low single-digits in both North America and Europe. Our KCP team continues to deliver strong margins. This quarter margins were 18.4%, up 90 basis points year-on-year.

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