Q3 2012 Earnings Call
October 24, 2012 10:00 am ET
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
Gail S. Glazerman - UBS Investment Bank, Research Division
Christopher Ferrara - BofA Merrill Lynch, Research Division
William Schmitz - Deutsche Bank AG, Research Division
Alice Beebe Longley - The Buckingham Research Group Incorporated
Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division
Wendy Nicholson - Citigroup Inc, Research Division
Caroline S. Levy - CLSA Asia-Pacific Markets, Research Division
Lauren R. Lieberman - Barclays Capital, Research Division
Chip A. Dillon - Vertical Research Partners Inc.
Javier Escalante - Consumer Edge Research, LLC
Constance Marie Maneaty - BMO Capital Markets U.S.
Jason Gere - RBC Capital Markets, LLC, Research Division
Linda Bolton-Weiser - Caris & Company, Inc., Research Division
John A. Faucher - JP Morgan Chase & Co, Research Division
[Operator Instructions] It is now my pleasure to introduce today's first speaker, Mr. Paul Alexander.
Paul J. Alexander
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Here's the agenda for our call. Mark will begin with a review of third quarter results and our full year outlook. Tom will follow Mark and focus his comments mostly on the strategic changes we're making in Europe. After that, we'll finish with Q&A.
As usual, we have a presentation of today's materials in the Investor Section of our website.
Let me remind everyone that we will 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 further discussion of forward-looking statements.
I'd also like to point out that we will be referring to adjusted results and outlook today, both of which exclude certain items described in this morning's news release. The news 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, and good morning. Let's start with the headlines. First, we delivered organic sales growth of 3%, highlighted by 9% growth in K-C International. Second, we significantly improved adjusted gross and operating margins, with both reaching 2.5-year highs. And third, we're raising our outlook for 2012 adjusted earnings per share for the second consecutive quarter.
Now let's cover the details of the quarter.
Third quarter sales were $5.2 billion, down 3% versus last year. Underlying organic sales rose 3%, driven by increased volumes of 2% and higher net selling prices of 1%. Unfavorable currency rates were a 5% drag on our top line, and lost sales in conjunction with our pulp and tissue restructuring further reduced sales by 1%.
Third quarter adjusted gross margin was 34.2%, up 290 basis points from last year. The increase was driven by organic sales growth, $85 million of FORCE cost savings and benefits from input cost deflation.
Moving down the P&L. Adjusted operating profit rose 8%, with an operating margin of 15.5%. That's up 140 basis points compared to the prior year. The growth in operating profit came despite a pretty significant currency headwind and continued investment between the lines. That includes a $25 million step up in strategic marketing investment and higher administrative and research spending to build capabilities and support future growth, particularly in K-C International.
The third quarter adjusted effective tax rate was 31.8%, toward the high end of our full year target of 30% to 32%. Compared to last year, the third quarter rate reduced it -- reduced adjusted earnings per share by $0.05. All in all, third quarter adjusted earnings per share were $1.34, up 6% versus last year.
Cash provided by operations in the third quarter was strong at $844 million. That's up from $750 million last year despite higher pension contributions.
Speaking of pension, let me comment briefly on the move we're making to reduce the size and potential future volatility of our U.S. pension obligation. This month, we offered about 10,000 former employees a one-time option to receive a lump sum distribution of their pension benefit. The benefit obligation associated with this offer is about $570 million. That's 15% of our total U.S. pension obligation. The payments will be funded from our pension plan assets and will occur by the end of the year. Depending on the amount of participants who choose this option, it could trigger a one-time, non-cash settlement charge in the fourth quarter. If that happens, we expect to exclude it from our adjusted earnings per share. Further details about this action are included in this morning's news release.
Now I'll highlight a few areas from our segment results for the quarter. In Personal Care, organic sales rose 6%, with volumes up 4% and net selling prices advancing 2%. K-C International had another quarter of strong volume growth, with high-single to low double-digit growth in each major region. Our key growth initiatives continue to perform very well. In fact, in the diaper category, China volumes grew about 45%, and volumes in Brazil and Russia were each up approximately 15%.
Elsewhere, our Personal Care volumes were up high-single digits in Europe. In North America, although volumes were down low-single digits, market shares were up or even with year-ago levels in every category, except baby wipes. Third quarter Personal Care operating margins of 18.1% rose 150 basis points, driven by organic sales growth, cost savings and input cost deflation.
Moving to Consumer Tissue, organic sales were up more than 1%, driven by higher volumes. Overall, net selling prices were flat as gains in K-C International were offset by higher promotional spending in developed markets. Consumer Tissue operating margins continue to be up year-on-year, with 150-basis-point improvement in the third quarter.