Kimberly-Clark (KMB) Tops Q2 Earnings, Cuts View on Cost Woes

Kimberly-Clark CorporationKMB reported second-quarter 2018 results, wherein both top and bottom lines improved year over year. However, this was not enough to please investors who were let down by management's lowered outlook for 2018. This, in turn, was a result of significant commodity inflation, which is likely to remain a hurdle.

Consequently, this Zacks Rank #4 (Sell) stock is down close to 3% during the pre-market trading session. In fact, rising input costs have long been marring investors' optimism in Kimberly-Clark, which has lost 13% in the past six months, in comparison with the industry 's fall of 7.6%

Quarter in Detail

The quarterly adjusted earnings of $1.59 per share came ahead of the Zacks Consensus Estimate of $1.57 and increased nearly 7% year over year.

Kimberly-Clark Corporation Price, Consensus and EPS Surprise

Kimberly-Clark Corporation Price, Consensus and EPS Surprise | Kimberly-Clark Corporation Quote

Notably, adjusted effective tax rate in the quarter was 23% compared with 28.2% in the year-ago quarter.

Kimberly-Clark's sales advanced almost 1% to $4,604 million, while the Zacks Consensus Estimate was pegged at $4,606 million. Favorable currency movements benefitted sales by 1%. Organic sales remained flat year over year, as a 1% rise in product mix was offset by 1% dip in volumes and a marginal decline in net selling prices.

Within North America, organic sales in consumer products dropped 2%, while it climbed by an equal rate at K-C Professional. Internationally, organic sales increased 1% across the developed, developing and emerging markets.

Adjusted operating profit came in at $774 million, whereas operating profit was $814 million in the same period last year. Results in this quarter were hurt by higher input costs to the tune of about $200 million, which, in turn, stemmed from increased prices of pulp and other raw materials. Nonetheless, this was somewhat compensated by cost savings of $110 million from the Focused On Reducing Costs Everywhere (FORCE) program and savings of $40 million from the 2018 Global Restructuring Program. Moreover, better product mix, and lower marketing, research and general expenditures benefited adjusted operating profit.

Segment Details

Personal Care Products: The segment includes products like disposable diapers, training/ youth/swim pants, baby wipes, and feminine and incontinence care products.

Segment sales of $2,257 million went down roughly 1% during the quarter, owing to lower net selling prices, partly cushioned by improved product mix. Sales declined across North American, developing and emerging markets, while it improved in the developed markets outside North America.

Segment operating profit fell 3% to $461 million in the quarter, due to input cost inflation and lower net selling prices, partly offset by cost savings, reduced marketing, research and general expenditures, and improved product mix.

Consumer Tissue: The segment includes bathroom tissue, paper towels, napkins and related products for household use.

Segment sales gained approximately 1% to $1,472 million in the quarter, owing to favorable currency rates, slight improvement in product mix and increased net selling prices. This was partly countered by lower volumes. Segment sales gained year over year across developed regions outside North America, while it declined within the continent. Sales across developing and emerging markets remained flat year over year.

Segment operating profit plunged 16% to $207 million in the quarter, on account of input cost inflation and soft volumes, which were somewhat offset by cost savings, better product mix, higher net selling prices as well as lower marketing, research and general costs.

K-C Professional Corporate (KCP) & Other: The segment consists of facial and bathroom tissues, paper towels, napkins, wipers and a range of safety products.

Segment sales grew 3% from the prior-year to $861 million in the quarter, backed by growth in volumes, improved product mix as well as positive impacts from currency rates. Sales improved across all regions, including North American, developing and emerging markets, and developed markets outside North America.

The segment posted an operating loss of $149 million, wider than the year-ago period loss of $68 million.

Other Financial Updates

The company ended the quarter with cash and cash equivalents of $484 million, long-term debt of $5,746 million and stockholders' equity of $178 million.

Further, Kimberly-Clark generated cash flow of $787 million from operating activities, during second-quarter 2018. During the same time frame, management incurred capital expenditures of $158 million.

During the quarter, the company returned nearly $575 million to shareholders through dividends and share buybacks. Well, Kimberly-Clark bought back 2.2 million shares for $224 million during the quarter.

Update on Restructuring Program

Management remains on track with its 2018 Global Restructuring Program, which marks the biggest restructuring in a long time. This plan is likely to enhance the company's underlying profitability, help it compete better and provide greater flexibility to undertake growth-oriented investments. Delving deeper, we note that the program is expected to simplify Kimberly-Clark's overhead organization and manufacturing supply-chain structures

During the second quarter, pre-tax restructuring charges under this initiative amounted to $130 million, which took the cumulative pre-tax charges to $707 million. Further, second quarter and cumulative savings from the program came in at $40 million. Earlier, management expected 2018 savings from this initiative to come in a range of $50-$70 million.

Guidance for 2018

Despite facing a tough environment, owing to input cost inflation, the company managed to maintain its financial discipline. Though management retained its organic sales outlook for 2018, it expects flared up commodity costs to remain a drag on the bottom line. Also, results are expected to be hurt by the recent adverse fluctuations of most foreign currencies.

Though the company remains on track to manage costs and elevate net selling prices, the near-term landscape remains difficult. Consequently, management trimmed its earnings and net sales view for 2018. Net sales growth is now expected in a range of flat to increase 1% compared with the previous band of 2-3%.

Adjusted operating profit is now expected to decline in a band of 2-5%, against a 2-5% growth expected earlier. Further, management projects adjusted effective tax rate to be at the lower end of 23-26% range.

All said, management now envisions adjusted earnings per share for 2018 to range between $6.60 and $6.80 per share, in comparison with the previously expected range of $6.90-$7.20. The Zacks Consensus Estimate for 2018 is currently pegged at $6.76.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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