Kimberly-Clark (KMB)

Q2 2011 Earnings Call

July 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


Javier Escalante - Weeden & Co., LP

Chip Dillon - Citigroup

John Faucher - JP Morgan Chase & Co

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

Alice Longley - Buckingham Research Group, Inc.

Michael Lavery - CLSA Asia-Pacific Markets

Per Ostlund - Jefferies & Company, Inc.

William Schmitz - Deutsche Bank AG

Jason Gere - RBC Capital Markets, LLC

Wendy Nicholson - Citigroup Inc

Linda Weiser - Caris & Company

Christopher Ferrara - BofA Merrill Lynch

Gail Glazerman - UBS Investment Bank



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

Paul Alexander

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Thanks, David, and good morning, everyone. Welcome to Kimberly-Clark Second Quarter Earnings Conference Call. Here today 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 second quarter results. Tom will then provide his perspective on our results and discuss our full year 2011 outlook, and 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

Now before we begin, let me remind you 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. 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.

Now, I'll turn it over to Mark.

Mark Buthman

Thanks, Paul, and good morning. Let's start with a few headlines. First, we delivered organic sales growth of 3% highlighted by 8% growth in K-C International. Second, cash flow was strong and improved both year-over-year and sequentially from the first quarter. And third, we continue to focus on the right near-term actions to offset cost inflation, raising selling prices, delivering strong cost savings and reducing our overhead spending.

Now let's cover the details of the quarter. Overall, sales increased 8% to an all-time record $5.3 billion. Organic sales rose 3% on track with our full-year plan, sales volumes improved 2% while net selling prices were up 1 point. Volumes benefited from innovation and our targeted growth initiatives, although category demand remain soft in parts of North America. Second quarter adjusted operating profit rose 1%, with an operating margin of 13.6%. Performance benefited from topline growth and $45 million of FORCE cost savings, but was negatively impacted by input cost inflation of $180 million. That brings year-to-date cost inflation to $375 million, which is significantly higher than our previous plans.

Let me spend a few minutes on the cost environment. Cost for many of our oil-based materials have continued to rise, even though oil prices have moderated over the last 3 months. That's true for polymer resin, super absorbent, adhesives and other packaging materials. Cost have been impacted by tight supply for raw materials used in our production and strong global demand, particularly in China. As a result, we've raised our cost inflation assumption for the second consecutive quarter. For the full year, we now expect cost inflation of $650 million to $750 million, which is higher than our previous plan by $200 million. That's an incremental headwind of about $0.35 per share. Nonetheless, despite the pickup in cost inflation, we're maintaining our previous guidance for adjusted earnings for the year. Tom will talk more about that in a few minutes. We're also encouraged that market pulp prices are decreasing by -- in July by $20 to $30 per metric ton. That's included in our plan.

Now turning back to our second quarter results. Second quarter adjusted earnings per share were $1.18, compared to a $1.20 last year and benefited from a lower share count. Meanwhile, a higher adjusted effective tax rate reduced our earnings by $0.07 per share in the quarter.

Cash provided by operations increased 31% to $771 million, driven by lower working capital. As expected, cash generation also improved significantly versus the first quarter. I expect our cash flow in the second half of the year to be up nicely compared to the first half, as our earnings grow and nearly all of our pension plan contributions are behind us. We repurchased 5.3 million shares of KMB stock in the quarter with a cost of about $350 million. We're on track to execute our $1.5 billion share repurchase plans for 2011.

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 rose 3%. Sales volumes improved 2% and net selling prices were up 1%. We delivered high single-digit volume growth in K-C International outside of Venezuela, and adult care and baby wipes in North America. On the other hand, volumes fell significantly in Venezuela, and baby and child care volumes in North America reflect continued soft category demand along with a modest decline in market share compared to strong year-ago levels.

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