Kimberly-Clark (KMB)

Q1 2011 Earnings Call

April 25, 2011 10:00 am ET


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

Mark Buthman - Chief Financial Officer and Senior Vice President

Paul Alexander - Director of Investor Relations



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Ladies and gentlemen, thank you for your patience and holding. We now have your speakers in conference. [Operator Instructions] It is now my pleasure to introduce Mr. Paul Alexander. Mr. Alexander.

Paul Alexander

Thanks, David, and good morning, everyone. Welcome to our first quarter earnings conference call. Here with me 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 the call. Mark will begin with a review of our first quarter results, followed by a brief overview of our full year outlook. Then Tom will then provide his perspective, and we'll finish with Q&A.

As usual, we have a presentation of today's materials in the Investors section of our website, which is

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, and I'd refer you to the Risk Factors section of our latest annual report on Form 10-K for a further discussion of forward-looking statements.

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I'd also like to point out that we will be referring to adjusted results and outlook. For 2010, adjusted results exclude a loss related to the move to highly inflationary accounting in Venezuela. For 2011, adjusted results and outlook exclude costs for the pulp and tissue restructuring and a nondeductible business tax charge in the first quarter related to a lot change in Colombia. For further information and reconciliations to comparable financial measures determined in accordance with GAAP, please see today's news release and additional information on our website. And now, I'll turn it over to Mark.

Mark Buthman

Thanks, Paul, and good morning. We start with three key headlines for the quarter. First, we delivered organic sales growth of more than 2% and made good progress with our targeted growth initiatives. Second, we returned a significant amount of capital to shareholders. And third, while cost inflation is weighing on our near-term profitability, we're taking a number of actions to ensure we deliver on our commitments for the year.

Now let's cover the details of the quarter. Overall sales increased 4% to $5 billion. Organic sales rose more than 2%, on track with our full-year plan. Sales volumes improved 2% while the combined impact of changes in net selling prices and product mix was slightly positive. Volumes benefited from innovation and targeted growth initiatives.

On the other hand, we experienced lower volumes in Venezuela and category demand remained soft in parts of North America. First quarter adjusted operating profit fell 14%, with an operating margin of 13.1%. Benefits from topline growth and $60 million of FORCE cost savings were more than offset by input cost inflation of $195 million.

First quarter adjusted earnings per share were $1.09 compared with $1.14 last year and included benefits from a decline in the tax rate and a lower share count. Cash provided by operations for the quarter was $250 million compared to $464 million in the prior year.

Looking forward, I expect our cash generation to build throughout the year as earnings grow and we complete nearly all of our pension plan contributions in the first half of the year. First quarter capital spending was $234 million compared to $184 million last year. We're off to a strong start supporting our growth, innovation and cost reduction programs. We repurchased 13.1 million shares of KMB stock at a cost of about $850 million in the quarter, and we're on track to execute our $1.5 billion share repurchase plan for 2011. In total, we allocated more than $1.1 billion to share repurchases and dividends in the first quarter as we continue to allocate capital in shareholder-friendly ways.

Now I'll highlight a few areas of our segment results for the quarter and as usual, further details are in this morning's news release.

In Personal Care, organic sales were even with last year. Sales volumes improved 2% offset by changes in net selling prices and product mix. In North America, we delivered double-digit volume growth in feminine care for the fifth consecutive quarter and high single-digit growth in adult care. Momentum also remained strong in our targeted growth initiatives across K-C International.

On the other hand, volumes fell significantly in Venezuela, and the baby and child care categories in North America remain relatively soft. Personal Care operating margins of 17.8% were impacted by cost inflation, primarily for oil-based materials and a higher level of promotional activity in North America. There were also a few smaller items, including some machine startups and supply-chain disruptions, which I wouldn't expect to recur going forward.

Now turning to Consumer Tissue, organic sales grew 3%. Net selling prices were up 2%, led by cost-driven price increases in K-C International and Europe. Changes in product mix improved sales 1%. Sales volumes were even with last year as gains in bathroom tissue and Kleenex facial tissue in North America were offset by declines elsewhere. Operating margins of 9% were below prior year levels as higher net selling prices and cost savings were more than offset by cost inflation, mostly fiber costs.

Moving to K-C Professional & Other. Organic sales increased 4%. Sales volumes grew 3%, including double-digit growth in our safety business in North America and a mid-single digit gain overall in K-C International.

On the other hand, relatively soft market demand continued to impact our washroom sales in North America. Operating margins of 13.5% were down slightly, though remain solid despite the challenging environment.

And lastly, Health Care organic sales were up 5%, driven by higher sales volumes of 6%. Volumes of high-margin medical devices were up high-single digits, paced by I-Flow and our airway management business. Supply volumes grew mid-single digits and benefited from a modest improvement in category demand in the North American market. Operating margins were down somewhat compared to last year, and it's mostly due to cost inflation and ongoing litigation expenses related to the I-Flow acquisition.

So that wraps up the review of the quarter. Before I hand it over to Tom, I'd like to briefly comment on the updated outlook that was provided in this morning's news release. We widened our estimate for 2011 adjusted earnings per share, which we now expect to be between $4.80 and $5.05 a share. There's been no change to the top-end of our previous guidance range, but we've lowered the bottom-end by $0.10 a share. A wider range reflects a significantly higher cost inflation assumption of $450 million to $550 million for the year. That's more than double our previous assumption and represents an incremental headwind of more than $0.45 per share compared to our previous plan.

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