Kimberly-Clark Corporation (NYSE:KMB) Barclays Global Consumer Staples Conference September 8, 2021 10:40 AM ET

Company Participants

Mike Hsu - Chief Executive Officer
Maria Henry - Chief Financial Officer
Alison Lewis - Chief Growth Officer

Conference Call Participants

Lauren Lieberman - Barclays Capital

Lauren Lieberman

So, next up, we have Kimberly-Clark. Through the dramatic ebbs and flow of consumer tissue demands [technical difficulty] cost inflation, those have been the headline stories for the past year. The evolution in growth of the personal care business has certainly surpassed any prior health expectations, even in the face of declining birth rates. Today, we're lucky to have CEO, Mike Hsu; CFO, Maria Henry; and Chief Growth Officer, Alison Lewis with us. They're going to go through some prepared remarks, and then I'll do some Q&A.

So, Mike, I'm going to pass it over to you.

Mike Hsu

Okay, good morning. Thank you, Lauren. We're glad to be here and appreciate the opportunity to discuss our company with you today. I'm going to start by sharing some of our strategies for growth and long-term value creation, and will also touch on some of the specific challenges, that you just mentioned, that we're facing this year.

First, the standard reminders apply today about any forward-looking statements we might make and any reference to non-GAAP financial measures, I'll refer you to our latest 10-K and Web site for further information.

Kimberly-Clark, for those of you getting to know us, is a global company with a long, successful history of innovation and category development. We compete in three segments, the largest being Personal Care, which makes up about half of our sales. We have a portfolio of iconic and trusted brands, including Huggies, Kleenex, Kotex, Scott. And our brands hold the number one or number two market share position in about 80 countries, and our brands, categories, and markets have significant growth potential. Our purpose is to provide better care for a better world, and we're really motivated to provide better care for our consumers, our stakeholders, and, of course, our plant. And so, this purpose drives our social and environmental commitments.

We've been focused on sustainability for a long time, and have an excellent track record. And you can learn more from our recently published 18th Annual Sustainability Report. The last year, we launched the next phase of our sustainability journey, which we're calling, Sustainability Strategy 2030. So, by 2030, we aspire to advance the wellbeing of one billion people through our social programs, and we plan to reduce our environmental footprint by half, with a focus on plastics, water, carbon, and forests. This strategy has clearly defined objectives, and we're actively tracking scorecards on every element. We're strongly committed to sustainability, and are proud of our track record.

Now, when I assumed the CEO role, back in 2019, we introduced K-C's Strategy 2022 as our medium-term plan to drive balance and sustainable growth, and create shareholder value. This strategy has three pillars, which you can see on the slide; driving growth of our portfolio of iconic brands, leveraging our cost and financial discipline, and allocating capital in value-creating ways. We're delivering on all three. And at the midpoint of our current guidance organic sales has averaged 3% over the last three years. And over the last two-and-a-half years, our cumulative savings through [force] [Ph] and restructuring is $1.25 billion. And we've returned over $5.4 billion to shareholders through dividends and buybacks.

I'd like to highlight our first pillar -- strategic pillar, growing our portfolio of iconic brands. Now, when I joined K-C, almost a decade ago, I saw a long runway for growth. And I see that even more clearly today. Accelerating growth and enhancing commercial capabilities has enabled sustained top line growth, and will continue to be my top priority. We intend to grow by elevating our categories and expanding our markets. Elevate or category means driving [indiscernible] especially through innovation [which delivers] [Ph] enhanced consumer benefits. And expand our markets is making our products available to more consumers, and accelerate the development of our D&E markets.

Our focus there is on Personal Care, which is still in the early stages of development across D&E, and where there remains a tremendous opportunity to expand category penetration. Now, to enable these strategies, we're investing more in our brands and strengthening our commercial capabilities. We're unlocking growth by improving our commercial capability; we're building a commercial powerhouse in the way we innovate, market, and sell our products to more fully leverage our global scale. These areas of focus, innovation, digital, in-market execution, and revenue growth management are all highly correlated to growth and market share, and a key driver of our global improvement in personal care.

Now, just two years ago, less than a third of our top innovation was moving across regions. And today, more than 75% of our top initiatives are scaled across three or more regions. We've increased media investment over the past three years. Approximately 70% of our media is digital, which enables us to improve targeting and personalization, resulting in significantly improved ROI. Our in-market execution work in both bricks and clicks is moving us towards perfect store and shelf, and has helped us strengthen our customer partnerships. We're also making faster, smarter, more profitable revenue management decisions every day, with balance across price, mix, and volume.

In fact, we've delivered positive net price and positive mix in the last two years, and are on track to do so again this year. Our focus on enhancing commercial capability is resulting in better and faster strategy execution in our markets. With a focus on a more relevant suite of operating metrics, our teams are creating better innovation, and our markets are pulling good ideas faster. Our strategy is working. Our performance has improved, especially in Personal Care where our organic has accelerated over the past three years, driven by tailored local strategies, enhanced by strong execution of our commercial initiatives.

Our D&E growth has also accelerated significantly. Despite cycling COVID and major economic headwinds, we have a long runway of growth in D&E. And our team has provided strong leadership, and accelerated development of these important growth markets. We're focused on delivering balanced and sustainable growth, and believe improving our market positions is a critical performance indicator. We're growing or holding market share in more than 60% of our 85 category market combinations. And we're performing very well in the world's two largest diaper markets. U.S. diapers had an outstanding share performance in 2020, which continued into the first quarter. While year-to-date performance was hampered in Q2 by supply challenges, shares have been recovering nicely.

In China, our year-to-date diaper market shares were up almost three points, and we now hold the number one diaper market share position. In 2020, we delivered significant gains I most key markets, including multipoint gains in markets as diverse as South Korea and Kazakhstan, the U.S., Russian, India, and Peru. And as you can see on this chart, our momentum has continued this year. While we know that our strategy is working, the near-term operating environment is impacted by unprecedented volatility. The ongoing health crisis related to COVID-19 and the secondary economic impacts of the pandemic results in an environment that remains dynamic and hard to call.

In addition to comping a record 2020, our first-half results and outlook have been impacted by several discreet issues, including record commodity inflation, COVID-related U.S. tissue category dynamics, and unprecedented disruption in the global supply chain. I am not pleased with our results and outlook, and we're taking decisive action. We've moved quickly to increase selling prices, and continue to take additional actions as the cost situation continues to evolve. We're also accelerating cost savings. Although significant, we plan to fully offset the effects of inflation with net price realization and cost savings over time.

Now, despite the volatile conditions, our underlying brand performance is strong and improving. We're moving aggressively to offset record headwinds, while also continuing to provide support to ensure our ability to deliver balanced and sustainable growth, now, and in the future.

So, in closing, our strategy is working. We're providing our consumers with strong value-added innovation, building stronger digitally enhanced relationships, and executing well locally. Our teams are executing K-C Strategy 2022 well, positioning the company for long-term success while also pivoting to offset near-term volatility. I remain confident in our ability to deliver balanced and sustainable growth, and create long-term value for our shareholders.

So, with that, Lauren, I'll hand it back to you.

Lauren Lieberman

Okay, great, thank you. So, I have plenty of questions to follow on the discussion you kind of kicked off around personal care. But I think to need to start with tissue.

Question-and-Answer Session

Q - Lauren Lieberman

So, just -- has visibility improved at all into near-term trends? And where would you say we stand on demand normalizing, knowing also there is Delta variant, there has been some coverage in the Wall Street Journal about tissue demand elevating again, so, was curious where that stands.

Mike Hsu

Yes, Lauren, yes, thanks for that. Yes, I wouldn’t say visibility is improving; it's about where it was maybe when we talked about six weeks ago. We're continuing to experience high volatility in the category. The evolving -- the pandemic is evolving right before our eyes, and I think you can see that, here in the U.S. And so, we expect that volatility to persist for the balance of this year, and even perhaps, likely, now into next year. I do believe, however, one, I think we've cycled the peak demand that we experienced in the first-half of last year, okay. But that demand continues to be somewhat lumpy. Consumption and retail consumer stocking has been kind of tough to predict. And I think that is likely to persist, that kind of lumpiness is going to persist.

I think there had been increase, especially here in the U.S., of infection rates across much of the U.S. that does appear to have driven some recent additional consumption and/or consumer and retail stocking. I think, in August, the consumption looked like it was up high single digits, low double digits. And that's an improvement versus maybe the prior two months; June and July were both down high single digits. And so, I think that's kind of one thing. The other thing I'll point out though about consumer tissue, and I think you know this, Lauren, which is, historically, this is the most stable of all consumer categories. It's tied to kind of a fixed consumption behavior.

And so -- and I think it's going to continue to be stable once we normalize in this post-pandemic or endemic environment, depending on what we want to call it. My personal belief is as COVID normalizes, the category should be somewhat larger than our 2019 base year. The logic being I expect remote working to be elevated versus per-pandemic days. And that should result in more at-home consumption. But, that said, it's been -- I recognize it's been very, very lumpy over the past 18 months or so.

Lauren Lieberman

Okay. And it does sound like most recent data that you have seen consumption or at least consumer purchasing behavior kind of step back up?

Mike Hsu

Yes, high single-digit, low double, for the moment.

Lauren Lieberman

Okay. And, I guess, stepping back and digging a little bit longer-term, I mean how do you think about the role of consumer tissue in the portfolio? I know you talked it's historically very stable. But how do you kind of walk the line between managing that business for cash or for profitability but still meet -- supporting the business so you maintain competitiveness?

Mike Hsu

Yes. I mean you were exactly right, Lauren, in your opening introduction for us. We had been emphasizing personal care globally as our global growth -- and opportunity for global growth and expansion, and that's been performing very well. I'd still say consumer tissue plays an important role for K-C, especially in developed markets where we have strong market positions, like in the U.S., the U.K., South Korea. And the reason I say that, one, as I just said before, solid stable growth with growth built in, generally with the population. I still believe there's, being a marketer, and Alison may comment more on this. But still believe there's room for innovation and value redesign in the category.

I think there's ample opportunity, especially in developed markets, to elevate the category and improve our value position. And I think the category has been stuck kind of the attributes of soft and strong forever. And we've been moving the -- our business more in the direction of a better clean, which I think creates more value for consumers. It's certainly what I prefer. So, I think, on the one hand, it's still -- consumer tissue is still going to play an important role for us. That said, I'll also recognize that our performance in tissue has been less consistent in some markets.

And so, we are looking for improvement across all of our markets. And we need to improve our performance by getting more focused on both elevating the category strategy, and then applying our commercial leverage with more discipline across the board. So, I think we still want to see better improvement across the other markets. And the last thing I'll say is I'll also recognize that consumer tissue for us has more -- I would say more inherent volatility in earnings. And we're working to reduce that volatility, over time, through both strategic and operational actions. I'm not promising that yet, but I just want you and our investors to recognize that we recognize that, and we're working on it.

Lauren Lieberman

Okay, great. And I think on the last earnings call, Mike, you did make a mention of taking a hard look at businesses that aren’t additive to the company's growth profile or accretive to profitability. So, can you just talk about the evaluation process you go through, kind of how regularly that happens? Maybe this is better suited for Maria, key criteria for stay or go. Because I think a lot of people heard that said, "Wait. Is that a comment on something related to consumer tissue?" So, would love to hear what you really meant in that mention?

Mike Hsu

Yes, I know, it got a little attention. I think we've said the same thing in the past, Lauren. So, I don’t know that our operating direction has changed. But, that said, I think we're going to look at our portfolio with discipline. And so, maybe, I'll ham and egg this with Maria a little bit. But, one, I'll say, creating shareholder is a primarily objective of ours, and we believe we can best do that by consistently delivering balanced and sustainable growth. And so, over the past few years, we feel good that we've been able to improve our growth profile in nearly all markets. And I think you've recognized that in your commentary.

On that dimension I'll say local agility is our secret sauce, and our strategies are tailored at the local market level. And our teams are doing a great job pulling great ideas from our global leaders. So, I think that's one change. But balanced and sustainable growth is the expectation for all of our markets. And that means, be able to balance organic growth, net sales growth, profit and share, right. And so, where we can achieve that we’re going to take a hard look at the market or the category and its role long-term in that portfolio. That said, we're going to remain disciplined about capital allocation. So, any move we would make would have to create value, but maybe Maria, I’ll let you comment more about how we think about it.

Maria Henry

Sure, I think with divestitures, just like acquisitions, we are very disciplined about it. And on the divestiture front, we have to consider scale effects and [dis-synergies] [Ph], just like we look on acquisition side to gain scale and produce synergies, especially after we've built some stronger commercial capabilities, which is really an overall asset for the company that we can leverage. But we do regular reviews on a quarterly basis, and once a year we go through a strategic planning process where we take a deep dive and broader look by country and by categories to understand where we stack on the items that Mike just talked about. So, we're continually looking at it and evaluating it. And as always, it's really where can we create shareholder value with our assets on our portfolio, and that really is the guidepost both on acquisitions and divestitures.

Lauren Lieberman

Okay, all right, great. I want to switch gears a little bit, and talk a little bit about what drives growth. And I think there's still a perception that revenue growth is very tied to birth rate trends globally. Alison, you address this [indiscernible] did a great job, it was really -- it was very interesting, you took it on. But I do think it'd be helpful maybe if you walk through the China case study a little bit, birth rates were down to 18% in China in 2020, and your business grew double-digits, the total personal care business. And I think with much improved profitability. So, if you can walk through kind of the changes in that business, the degree to which we can think about or should think about as a template for the way the business can grow even with a challenge birth rate backdrop would be great.

Alison Lewis

Great. So, Lauren, I'll catch that one. And I'll start with saying, there is a lot of growth in our categories. Even in markets where there's declining birth rates, the key is finding and following that growth. That's what we're looking to do. And I think China is a terrific example where the elevate and expand strategies, combined with the competitively advantaged commercial capabilities that we're building are really delivering the growth in the overall results.

So, if we go back a little bit in history, 2016 to 2018, personal care growth in China was at best sort of mid single-digits. We had a low point in 2018, where organic sales were down in the low-teens, market pricing very aggressive, and without sort of a winning product proposition we found ourselves sort of following the market and chasing the market down, which is really not a place that you want to be. The turnaround really came from a focus on consumer preferred iterative and fast pace premium innovation. It's been about three years since we launched the first phase of our thin and flexible diaper in our premium tiers, and we're now on Version 5. So, in three years, almost every six months, we're iterating and upgrading that diaper. And the speed that we're moving and sort of the continual improvements that we're making are all about delighting the consumer while also improving our profitability.

So, key to all this was sort of yes, then flexible, which gave us more comfort movement, better absorbency for the baby, but the further segmentation based on true consumer insight and benefits is really the difference maker here where we can keep moving people up that pricing and benefit ladder. So, what we've done in Naturals as an example, with plant-based liners, what we've done to sort of elevate the softness where we've added real silk most recently. So, all of these are examples of how you can continue to tier up add added benefits based on true consumer insights and needs. We also took some bold moves and we exited the lower end of the market. So, the Tier 3 diapers given the pricing dynamics in China, it was more than a quarter of our sales in 2017 and we did that while giving the consumer a reason to trade up with our elevated premium diapers. And so, it all seems to be working, and you know that we're winning market share, and we've moved into that number one position, and we're getting more votes from the consumer every day.

And then, all of that innovation was sort of combined with commercial capabilities, and they come in as well here where e-commerce has been key to our success, we have a competitively advantaged position there. It's well over half the category in diapers, e-commerce sales. But we over-index and we have strong partnerships with the online retailers, and we use a really data-driven marketing approach to really bring consumers and drive them through to retention and ultimately drive them through to loyalty.

And then getting to expand, it actually goes beyond diapers in that we've applied that same strategy to feminine care. And so in 2017, again a reflection back, we were less than a 4 share in femcare in China and year-to-date Kotex is 7 share and we've almost doubled our business in less than four years. And interestingly enough, China is actually getting close to being our largest global femcare market, maybe not a surprise to anyone as we just think about China and the power of China. So, just great examples of sort of elevate and expand. And then even on femcare, we're taking and wrapping the commercial capabilities around that. So really awesome consumer inspired innovation, cotton imported from Australia, Kotex Naturals, Kotex paw pads or a small little pad that can fit in your hand. We're 100% digital marketing using again that data science approach.

And then in market execution focus it's really around city expansion. So continuing to expand within China, and then all doing that while managing investments and maximizing revenue generation. So suffice to say we're very pleased with the progress in China. And I think it gives us confidence on the elevate and expand strategies combined with the commercial capabilities that it really is a formula that works for driving the business overall on top-line and bottom-line.

Mike Hsu

Hey, Lauren.

Lauren Lieberman

That’s great. Yes, go for it.

Mike Hsu

If I could just pile on to Alison -- [multiple speakers] but it's gets clear with Alison joined on the company, and the team that she's brought in both promoting from within, but also bringing in some select talent externally. I would say Alison and her team in combination with the business unit, or our regional leadership teams have really the big thing they've done is really shift that I think the organization to having more of a growth mindset right, asking how could we.

And the big thing that she -- it was really embedded in what Alison was talking about, I think one of the biggest thing was grounding it in some consumer truths or consumer insights with clarity about what has to change in our market or our portfolio or our approach to unlock that growth, right. And I think that's a big shift, because what we were doing, I think, a few years ago was probably chasing competition a little bit too much, right. So I think that's one big change. The other big change is, I think I mentioned earlier, I think we have business, or local market leaders that are more willing to pull on good ideas, and I think that's really changed, but also we have better functional leaders that have -- are able to kind of tease out good ideas more effectively. And so, I think we have both those things working, and that's kind of reflected in some of the leadership changes that how we've evolved our leadership approach over the last few years.

Lauren Lieberman

So another -- a follow on to that also would be think about that advertising. And in your slide, you highlighted the acceleration, you've seen in personal care. And we've talked about innovation, but I think advertising is something that's also really interesting, you're spending in 2020 was nearly a billion dollars in that comparison of $650 million, right at the trough level between 2016 and 2018. So I guess, how did you feel up around that billion dollar level? And I guess if I make a guess on the rate of spend on consumer tissue, it feels like you've got the personal care business that like a high single-digit, even double-digit percentage of sales now. So, what can you tell me about the advertising budget? How does it feel around those levels? Yes, I'd be curious about that that piece of the story.

Alison Lewis

Yes. So I mean, what I would say about advertising is, these personal care brands are responsive to advertising. And we're committed to continue to drive investments, obviously balancing that with the overall P&L and what we're managing with some of the volatility. But I do believe that our approach to advertising has really helped contribute to the personal care growth, and you can't separate advertising out from everything else, because all the commercial capabilities sort of work together. But I can talk a little bit more specifically about advertising and sort of what we're doing that I think is different and that we're really trying to change the game on how we approach it. I've talked before, and Mike mentioned that we're moving to a digital first model, 70% of the investment is in digital, but I think what might be more interesting is how we're investing those dollars? And it really is in two ways I would say that are different. First, creating better storytelling and experiences for consumers across all the touch points and the storytelling is really born from the brand's purpose. So, we've worked hard over the last couple of years to put brand purpose in each of our brand profiles overall. And then we're leveraging those stories around brand purpose in an end-to-end way to really fully unleash sort of the digital and PR ecosystem that you can use today, which you couldn't use 10 or 15 years ago to the same degree. And that really drives sort of a marketing multiplier effect on that storytelling.

So just great example, Russia just recently launched a Huggies, first hugs program, born out of the purpose for Huggies diapers, where there's a lot of false information out there on parenting and what you should and shouldn't do. And so, the rest of the team partnered with leading doctors and World Health Organizations and sort of push that information out through paid media, but did that in a way where they got first party data back. So, they got a significant amount of first party data back. The thing that they pushed out with the World Health Organization leading doctors in Russia was so newsworthy that PR agency -- PR publications picked up on it, and there was a lot of third-party buzz around what was happening. It was so newsworthy to consumers and so refreshing that they started posting on social media, so we got a ton of sharing. In fact, we actually saw purchase intent increased six points from this activity. That's huge. You don't see that on an everyday basis. And then what we did was we took this first hugs program where we integrated into all the owned digital assets. So the chatbots, VK, which is the Russian version of Facebook, our CRM program, our loyalty programs, and really all because we brought value as a brand to that consumer through our storytelling, and then we amplified that through a digital first ecosystem. So that's a great example of what we're doing.

Second exempt piece of what we're doing I think that's different, and then I'll close quickly is really taking those digital signals and better target, our categories and the consumers in our categories have real problems that they're facing, and we can find digital signals and use data science to really turn marketing into math. So, you know that we do that in China very well, but we're moving and doing that in other parts of the world. So just taking those signals, personalizing the messages, and then using that data to continue to bring people through the purchase funnel from awareness all the way through to conversion. So really exciting when you think about those two things coming together where there's purpose led storytelling, that's orchestrated and amplified combined with data science and signals that drive personalized journeys through the conversion. So that's really what's different about our marketing and it does increase the return on investment, but I think it was more interesting to tell you about the actual stuff underneath.

Lauren Lieberman

Absolutely, especially in markets where we don't live, I'm going to wrap up, I hate to do it short-term, but it's kind of my job too. So I have to do this. But just latest thinking on commodities, freight, labor costs, there have been storms, any relief or lack thereof of the last month or so, and as we just kind of look out over the next six months or so, already announced pricing is in place. How should we think about margin progression as we look forward over the next six months or so?

Maria Henry

Lauren, they all remain very difficult. This unprecedented macro volatility that's heavily influenced in your firm operating environment is certainly continuing. And frankly it's unlike anything I've ever seen in my career. Commodity costs with both resins and pulp are at or near all-time highs. But honestly we're used to managing the input cost volatility, but this year we have what all called compounded volatility with the unusual patterns in consumer tissue in North America, and as you've likely been reading a lot about lately other supply chain issues, which include labor shortages, labor inflation, transportation availability, and overall there is just log jams in the logistics systems particularly in the United States.

And then on top of that, we have the continued global effects of COVID on consumer's economies, and even our own workforce. And many of these factors continue to move around, worsening in most cases making the year very challenging to call. And this is not just for us, but these factors are also affecting many businesses and industries. And so when I look at our margins, all of this has had a significant impact on the company margins this year. So, in the near-term, our margins are pressured, in part due to the timing of the lag with pricing, but also just the absolute scale of the macro moves that are happening. And these macro headwinds are on top of some discrete headwinds that we have as a company, including lapping the elevated COVID-related demands with this year’s de-stock and the weather disruptions have made this a really challenging year from a margin perspective.

Now, as you know, we're taking actions to mitigate those headwinds, including rising selling prices as you noted, but also accelerating cost savings and reducing our spending levels. So, we expect all of those actions to help stabilize our margins. And we're certainly confident that will improve margins over time, but we're really going to have to see how COVID plays out and how quickly the broader supply chain issues and the macro disruptions get resolved. So, the timing and degree and how all of that unfolds over time, we'll certainly have to see, but we expect our strategy of elevating our categories along with our cost savings discipline to really help deliver that overall margin expansion over time.

Lauren Lieberman

Okay, great. I'm going to have to wrap it there, but thank you all three of you. It was really great to do this and like we were talking before we started can't wait to do it in person. So, thank you.

Mike Hsu

All right. Thank you for having us.

Maria Henry

Thanks, Lauren.

Lauren Lieberman

Okay.

Alison Lewis

Thanks, Lauren.

Lauren Lieberman

Bye.