Kimberly-Clark Corporation (KMB)

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Kimberly-Clark (KMB)

Q4 2011 Earnings Call

January 24, 2012 10:00 am ET

Executives

Paul J. Alexander - Vice President of Investor Relations

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

Thomas J. Falk - Executive Chairman, Chief Executive Officer, President and Member of Executive Committee

Analysts

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

James Armstrong - Vertical Research Partners Inc.

Lauren R. Lieberman - Barclays Capital, Research Division

Jason Gere - RBC Capital Markets, LLC, Research Division

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

John P. San Marco - Janney Montgomery Scott LLC, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Alice Beebe Longley - Buckingham Research Group, Inc.

Javier Escalante - Consumer Edge Research, LLC

Chip A. Dillon - Vertical Research Partners Inc.

Gregory Hessler - BofA Merrill Lynch, Research Division

Constance Marie Maneaty - BMO Capital Markets U.S.

John A. Faucher - JP Morgan Chase & Co, Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

Presentation

Operator

[Operator Instructions] It is now my pleasure to introduce today's first speaker, Mr. Paul Alexander.

Paul J. Alexander

Thank you, David, and good morning, everyone. Welcome to our year-end 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's the agenda for our call. Mark will begin with a review of our fourth quarter results, followed by an update on Pulp and Tissue restructuring. Tom will then provide his perspectives on our full year results and our 2012 outlook. We'll finish with Q&A. As usual, we have a presentation of today's materials in the Investor Section of our website.

This morning's presentation also includes an appendix with the details of our 2012 planning assumptions.

Before we begin, let me remind you we'll be making forward-looking statements today. There can be no assurance that future events will occur as anticipated or that our results will be as estimated. Please see the Risk Factors section of our latest annual report on Form 10-K for a further discussion of forward-looking statements.

I'd also like to point out that we will be referring to adjusted results and outlook, both of which exclude certain items described in this morning's news release. For further information on these adjustments and reconciliations to comparable financial measures determined in accordance with GAAP, please see today's news release and additional information on our website. With that, I'll turn it over to Mark.

Mark A. Buthman

Thank you, Paul, and good morning. Let's start with the headlines. First, we achieved organic sales growth of 3%, highlighted by 7% growth in K-C International. Second, we generated solid improvements in both adjusted gross and operating margins. And third, we delivered adjusted earnings per share of $1.28. That's a 7% increase compared to the prior year.

Now let's cover the details of the quarter. Overall sales increased 2% to $5.2 billion. Organic sales rose 3%, driven by higher net selling prices of 2% and increased sales volumes of 1%. On the other hand, lost sales in conjunction with the divestiture, combined with the impact of our Pulp and Tissue restructuring, reduced sales by 1%.

Moving down to P&L. Adjusted gross margin was 32.6%. That's up 20 basis points year-on-year. The improvement was driven by higher selling prices and $70 million of FORCE cost savings. These items more than offset cost inflation of $55 million and the negative impact of lower production volumes. Fourth quarter adjusted operating profit rose 9%, and adjusted operating margin was 14.7%. That's up 90 basis points compared to the prior year. In addition to the gross margin improvement, adjusted operating margin benefited from flat between-the-line spending and higher other income.

Fourth quarter adjusted earnings per share were $1.28. That compares with $1.20 last year. The improvement came despite a higher effective tax rate and lower net income from equity companies. So for the year, adjusted earnings per share were $4.80, at the low end of our previous guidance range of $4.80 to $4.90 a share.

Cash provided by operations in the fourth quarter of 2011 was $517 million. That compares to $948 million in the prior year. The decline was driven by a significant improvement in working capital last year that didn't repeat in 2011, along with higher pension contributions. Fourth quarter 2011 primary working capital levels were solid overall, although receivables did increase somewhat including some impact from timing of collections. For the full year, our cash conversion cycle improved 3 days to a record low of 47 days, and I expect us to continue to show improvement in 2012. In addition, we anticipate modest pension contributions this year, which should help drive a substantial increase in operating cash flow in 2012.

Consistent with our previous guidance, we did not repurchase any common stock during the quarter. For the year, we repurchased 19 million shares at a cost of $1.24 billion. Including dividends, we returned approximately $2.3 billion of cash to shareholders during 2011. We'll continue to allocate capital in shareholder-friendly ways heading into 2012. We plan to invest $1 billion to $1.1 billion of capital spending to grow our businesses, and we expect to increase our dividend at a mid-single digit rate, which will be our 40th consecutive annual increase. We also expect to repurchase $900 million to $1.1 billion worth of our shares this year. Together, our plans for dividends and share purchases will total at least $2 billion of cash returned to shareholders in 2012.

Now I'll highlight a few areas from our segment results for the quarter. In Personal Care, organic sales rose 3% with volumes up 2% and net selling prices advancing 1%. K-C International had another great quarter with 11% organic growth led by Latin America, China, South Korea and Vietnam.

In North America, organic sales fell 5%, mostly due to lower volumes. We continued to generate solid volume growth in Adult Care. On the other hand, volumes were down in Infant and Child Care, including the impacts of category declines, competitive activity and some consumer trade-down in the Child Care category. Personal Care operating margins of 15.4% remained well below prior year. The decline was driven by input cost inflation, higher between-the-line spending and increased promotion spending in North American Diapers. We clearly aren't satisfied with margins at these levels, and we expect to bring more of the 2011 U.S. diaper price increase to the bottom line in 2012, which should help improve overall margin performance.

Now turning to Consumer Tissue. Organic sales were up 1%. Net selling prices rose 3%. Product mix was favorable by 1 point, while organic volumes fell 3%. Consumer Tissue operating margins improved to 14.3%. That's our best performance in over 2 years. That was driven by selling price increases, cost savings, input cost deflation and lower between-the-line spending. Margins were up in every region around the world, and I'm encouraged by the improved profitability that our Tissue teams delivered in 2011 and expect to see further progress in 2012.

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