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Kimberly-Clark (KMB) Misses on Q4 Earnings, Cost Woes Linger

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Kimberly-Clark Corporation (KMB - Free Report) reported mixed fourth-quarter 2018 results, as the top line beat the Zacks Consensus Estimate, while the bottom line missed the same. While earnings increased year over year, sales declined owing to currency headwinds.

Also, the company continued to witness commodity cost inflation, though it remains on track with its 2018 Global Restructuring Program and newly introduced K-C Strategy 2022. These should help Kimberly-Clark battle the challenges in 2019.

Quarter in Detail

The quarterly adjusted earnings of $1.60 per share came below of the Zacks Consensus Estimate of $1.68. Adjusted earnings increased nearly 2% 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 19.1% compared with 29.7% in the year-ago quarter.

Kimberly-Clark’s sales came in at $4,569 million, which surpassed the Zacks Consensus Estimate of $4,460 million. However, the top line inched down almost 1% from the year-ago period. Unfavorable currency movements weighed on sales by 4%. Organic sales rose 3% year over year, thanks to an equal rise in net selling prices.

Within North America, organic sales in consumer products rose 3%, while it increased 6% at K-C Professional. Internationally, organic sales increased 4% across developing and emerging markets, while it remained flat year over year in the developed markets.

Adjusted operating profit came in at $742 million, down from $852 million in the year-ago quarter. Results in the quarter were hurt by higher input costs to the tune of about $215 million, stemming from increased prices of pulp and other raw materials. Also, unfavorable currency translations negatively impacted the adjusted operating profit metric in the reported quarter.

Nevertheless, these downsides were somewhat compensated by improved net selling prices, cost savings of $75 million from the Focused On Reducing Costs Everywhere (FORCE) program and savings of $55 million from the 2018 Global Restructuring Program.



We note that Kimberly-Clark’s dedicated endeavors to reduce costs have been boosting investors’ optimism in this Zacks Rank #3 (Hold) stock. The company’s shares returned 8.6% in the past six months, against the industry’s decline of 1.4%.

Segment Details

Personal Care Products: Segment sales of $2,221 million went down roughly 2%, thanks to unfavorable currency rates, partly cushioned by increased net selling prices. Further, sales increased in North America, while it declined across developing and emerging markets as well as in developed markets outside North America.

Consumer Tissue: Segment sales remained flat year over year at $1,495 million as adverse currency movements, slightly unfavorable product mix and volume declines were compensated by improved net selling prices. Further, segment sales declined across developed regions outside North America, and the developing and emerging markets. In North America, sales witnessed a year-over-year increase.

K-C Professional (KCP): Segment sales rose 2% from the prior-year quarter’s tally to $841 million, thanks to growth in volumes, improved product mix and higher net selling prices, which were somewhat countered by adverse currency rates. Further, sales improved in North America, while the same declined in emerging and developing markets, and developed markets outside North America.

Other Financial Updates

The company ended the quarter with cash and cash equivalents of $539 million, long-term debt of $6,247 million and total stockholders' deficit of $46 million.

Further, Kimberly-Clark generated cash flow of $949 million from operating activities during 2018. During the same time frame, management incurred capital expenditures of $877 million. In 2019, the company plans to incur capital expenditures of $1,100-$1,300 million, which includes a considerable contribution toward the 2018 Global Restructuring Program.

During the fourth quarter, Kimberly-Clark bought back 1.8 million shares for approximately $199 million. In 2018 as a whole, the company repurchased 7.3 million shares worth $800 million, and returned $2.2 million to the investors through these buybacks and dividend payments.

Concurrently, management announced a 3% rise in quarterly dividend for 2019, which will mark the company’s 47th straight annual dividend hike. Management raised its dividend from $1.00 per share to $1.03, which is payable on Apr 2, 2019. Moreover, Kimberly-Clark expects to repurchase shares worth $600-$900 million in 2019.

Other Developments

Management is on track with 2018 Global Restructuring Program, which is the biggest restructuring plan in a long time. During the fourth quarter, pre-tax restructuring charges under the initiative amounted to $180 million, which took the cumulative pre-tax charges to $1,036 million for 2018. Further, cumulative savings from the program came in at $135 million.

Along with the earnings release, Kimberly-Clark also introduced a K-C Strategy 2022, as the year will mark the company’s 150th anniversary. The strategy is aimed at generating balanced and sustainable growth to return value to shareholders in a tough environment. The program also concentrates on strengthening the company’s brand portfolio, undertaking efficient capital allocation and executing robust cost discipline.

Medium-term goals related to K-C Strategy 2022 include annual and organic sales growth of 1-3% and mid-single-digit rise in adjusted earnings per share. Further, the program is likely to lead to dividend increase in line with bottom-line growth and maintain adjusted ROIC at current levels at least.

Guidance

The year 2018 remained challenging for the company, thanks to input-cost inflation and unfavorable currency impacts. This led to soft margins. Nonetheless, Kimberly-Clark managed to revert to organic sales growth and continued to focus on key priorities and innovations. Notably, the company generated higher selling prices toward the second half of 2018, and also delivered solid cash flows and cost savings of $510 million in the year.

While the company anticipates the environment to remain difficult in 2019, it is expected to be somewhat better than the previous year. Kimberly-Clark aims to deliver increased organic sales growth and enhanced margins even amid considerable currency and commodity inflation-related hurdles.

That said, management issued an outlook for 2019. Net sales are expected to dip 1-2% year over year.

Adjusted operating profit is expected to increase 1-4%. Further, management projects adjusted effective tax rate of 23-25%, which may weigh on bottom-line growth.

All said, management envisions adjusted earnings per share (EPS) for 2019 to be $6.50-$6.70 compared with the year-ago quarter’s earnings of $6.61. The Zacks Consensus Estimate is currently pegged at $6.82.

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