Kimberly-Clark (KMB)

Q3 2011 Earnings Call

October 24, 2011 10:00 am ET

Executives

Paul J. Alexander - Director 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

Javier Escalante - Morgan Stanley

Chip Dillon - Citigroup

Christopher Ferrara - BofA Merrill Lynch, Research Division

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

Lauren R. Lieberman - Barclays Capital, Research Division

Jason Gere - RBC Capital Markets, LLC, Research Division

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

William Schmitz - Deutsche Bank AG, Research Division

Chip A. Dillon - Vertical Research Partners Inc.

Karen Lamark - Federated Investors

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 Mr. Paul Alexander.

Paul J. Alexander

Thank you, David, and good morning, everyone. Welcome to Kimberly-Clark's Third Quarter Earnings Conference Call. Here with me in Dallas 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 the call. Mark will begin with the review of our third quarter results. Tom will then provide his perspectives on our results and also the full year outlook. 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 www.kimberly-clark.com.

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 further discussion of forward-looking statements.

We'll also 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.

With that, I'll turn it over to Mark

Mark A. Buthman

Thanks, Paul, and good morning. I'll start with the headlines. First, we delivered organic sales growth of 4%, highlighted by 11% growth in K-C International. Second, adjusted earnings per share were $1.26, an 11% increase compared to last year. And third, cash flow remained strong as we generated approximately $0.75 billion dollars in cash provided by operations.

Now, let's cover the details of the quarter. Overall sales increased 8% to an all-time record $5.4 billion. Organic sales rose 4%, driven by higher net selling prices of 3%. Product mix and sales volumes each improved slightly. Volumes benefited from product innovation and targeted growth initiatives. However, soft demand in portions of North America and Europe largely offset these gains.

Third quarter adjusted operating profit rose 8%, with an operating margin of 14.1%. Benefits from top line growth and $90 million of FORCE cost savings more than offset cost inflation of $150 million and higher than expected production curtailment to manage inventory levels. As expected, FORCE savings picked up nicely from the first half of the year, and our teams continue to push aggressively to maximize savings. Nonetheless, with year-to-date savings of $195 million, we could fall somewhat short of our target range of $300 million to $350 million of savings for the year.

Third quarter adjusted earnings per share were $1.26 compared to $1.14 last year. Improvement was driven by higher operating profit, along with a lower share count and a lower effective tax rate. Given our year-to-date adjusted tax rate of 30.1%, we now expect the full year rate to be toward the low end of our target for the year of 30% to 32%.

Cash provided by operations increased slightly to $750 million in the third quarter. I'm encouraged by our cash generation and expect a strong finish to the year.

We repurchased 0.6 million shares of KMB stock in the quarter at a cost of $40 million. As mentioned in our news release, we've decided to accelerate an additional $260 million of pension contributions into 2011, and reduce our full year share repurchase target by the same amount. This will improve our pension-funded status nicely from current levels, and it will allow us to make much more modest contributions next year, while setting us up for a strong year of share repurchases in 2012.

Now I'll highlight a few areas from our segment results for the quarter. As usual, further details are in our news release. In Personal Care, organic sales rose 5% with volumes and net selling prices each advancing about 3%. K-C International had a terrific quarter with 15% organic growth, led by strong performance in Latin America, China and South Korea.

In North America, we continue to generate high single-digit to low double-digit volume growth in adult care, feminine care and baby wipes. On the other hand, volumes were down in infant and child care. The volume softness reflects category declines, competitive promotional activity, reductions at customer inventory levels in diapers and some consumer trade-down in the child care category.

Personal Care operating margins of 16.6% remained below prior year. Input cost inflation, production curtailment and higher between-the-line spending were partially offset by benefits from top line growth and cost savings.

Now turning to Consumer Tissue. Organic sales were off 1%. Net selling prices rose 4% in response to cost inflation and product mix was favorable by 1%. On the other hand, volumes fell 6% reflecting sheet count reductions in North America, our focus on revenue realization and strong promotion support for COTTONELLE bath tissue in the third quarter last year.

Consumer Tissue operating margins improved to 12%, our best performance in 2 years that was driven by sales growth, cost savings and lower between-the-line spending.

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