Kimberly-Clark Management Discusses Q2 2012 Results - Earnings Call Transcript

Kimberly-Clark (KMB)

Q2 2012 Earnings Call

July 26, 2012 10:00 am ET

Executives

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

Analysts

Gail S. Glazerman - UBS Investment Bank, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

Jason Gere - RBC Capital Markets, LLC, Research Division

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

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

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

Javier Escalante - Consumer Edge Research, LLC

Constance Marie Maneaty - BMO Capital Markets U.S.

John P. San Marco - Janney Montgomery Scott LLC, Research Division

Chip A. Dillon - Vertical Research Partners Inc.

Lauren R. Lieberman - Barclays Capital, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Presentation

Operator

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

Paul J. Alexander

Thank you, David, and good morning, everyone. Welcome to Kimberly-Clark Second Quarter Earnings Conference Call. With us 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 second quarter results; Tom will then provide his perspectives on results through the first half of the year and also our 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. Before we begin, let me remind you that we will be making forward-looking statements today. 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 this morning, 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 this morning's news release.

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 5%, as highlighted by 9% growth in K-C International. Second, we generated strong improvements in both adjusted gross and operating margins, as well as double-digit growth in adjusted earnings per share. And third, we reinvested significantly behind our brands, with higher levels of strategic marketing and R&D investment.

Now, let's cover the details of the quarter. Overall sales of $5.3 billion were even with the year-ago period, underlying organic sales rose a healthy 5%. It's driven by higher net selling prices of more than 2% and increased sales volumes of 2%. On the other hand, changes in foreign currency rates decreased sales by more than 3% and lost sales in conjunction with our pulp and tissue restructuring reduced sales by an additional 1%.

Moving down the P&L, adjusted gross margin was 33.6%. That's up 240 basis points year-on-year. The improvement was driven by organic sales growth and $70 million of FORCE cost savings. Although we benefited from input cost inflation of $30 million, this was mostly offset by unfavorable currency translation effects.

Let me spend a minute on our FORCE program. Our teams around the world have been working hard to identify and implement additional savings programs so that we can fund reinvestment and improve our margins. They've made excellent progress in the first half of the year, in particular by leveraging our global procurement organization and continuous improvement capabilities. As a result, we're increasing our 2012 full year savings target to at least $250 million, up from our previous estimate of $150 million to $200 million. This new guidance, our 2011 and 2012 combined total savings, are now projected to be at least $515 million. So we'll exceed our existing 3-year target of $400 million to $500 million after just 2 years.

Now turning back to our results. On an adjusted basis, second quarter operating profit rose 8% with an operating margin of 14.7%. That's up 110 basis points compared to prior year. Our investment between the lines increased, including a $35 million step-up in strategic marketing to support our product innovations and targeted growth initiatives. Administrative and research spending also increased as we continue to build capabilities to support future growth, particularly in K-C International.

Second quarter adjusted earnings per share were $1.30 compared with $1.18 last year. While we benefited from a slightly lower adjusted effective tax rate, that effect was mostly offset by lower equity income.

Cash provided by operations in the second quarter was a solid $740 million. That compares to a strong year-ago performance of $771 million. In terms of primary working capital, I'm encouraged that we're on track with our plan to reduce our cash conversion cycle by at least 2 days this year.

We continue to allocate capital in shareholder-friendly ways. During the second quarter, we repurchased 2.5 million shares of KMB stock at a cost of $200 million. We now anticipate full year share repurchases of $1.3 billion, up from our previous target of $900 million to $1.1 million for the year. This reflects our expectation for additional excess cash flow, including proceeds from the exercise of stock options.

And the last, we're now expecting a more moderate year-on-year decline in our diluted share count than we previously anticipated. That's mostly due to the accounting impact of option exercises.

Now I'll highlight a few areas from our segment results for the quarter. In Personal Care, organic sales rose 7%, with volumes up 4% and net selling prices advancing 3%. We had another quarter of strong volume growth in K-C International, including high-single digit growth in each of our major regions. The growth initiatives performed very well. In fact, in the Diaper category, specifically, China volumes grew by more than 40%, and Brazil and Russia volumes were each up approximately 20%. Elsewhere, our European business delivered solid volume growth in the quarter, while our North American volumes were down slightly.

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