Kimberly-Clark Corporation (NYSE:KMB) Barclays 2023 Global Consumer Staples Conference September 6, 2023 9:45 AM ET

Company Participants

Mike Hsu - Chairman and Chief Executive Officer
Nelson Urdaneta - Chief Financial Officer

Conference Call Participants

Lauren Lieberman - Barclays Capital

Lauren Lieberman

We are going to get started. Next up, we have Kimberly-Clark and we’ve got Mike Hsu, company’s Chairman and Chief Executive Officer, and Nelson Urdaneta, the company's Chief Financial Officer. [Technical Difficulty].

Mike Hsu

Lauren, thanks for having us. Great to see you. Thanks for having us.

Question-and-Answer Session

Q - Lauren Lieberman

So, Mike, I went back and we re-read the transcript of your first call as CEO. Can't help myself.

Mike Hsu

Yeah, feels like a long time ago.

Lauren Lieberman

I know.

Mike Hsu

It wasn't that long ago.

Lauren Lieberman

You had a lot to do since then, right. Back then, category growth was really challenged across geographies. A lot's changed. So maybe we could just start really big picture and think about your view and category growth from here forward.

Mike Hsu

Yeah.

Lauren Lieberman

Next three to five years, let's call it.

Mike Hsu

I'll start with my expectation, Lauren. I mean, one, going forward, what do I expect? I would expect a pretty stable growth. Now that's in the context of the last three to five years where, I think I'm proud of the company, we accelerated our growth. I think we were growing organically about 1% about five years before I became the CEO. And then we've been growing at about 4% since then.

So I think we've accelerated, but how we got there, as you all recognize, it's been a very bumpy ride. I think the good news as we think about the next three to five years, we've had some unique macro headwinds related to operating in a global pandemic, a war, global supply chain disruption, all those things. I would say at this point, they're not fully behind us, but they're largely behind us. So I think that's one component.

The second part, though, and the bigger part is, I love our categories, and I think they are attractive growth categories. I think three out of our categories are in the top 10 projected to grow in the next 10 years globally. I think you're well aware, we still think there is a lot of headroom for penetration, especially in developing emerging markets. In my short end, I tend to say, well, like, in the early innings, it was a long runway of growth because the categories, it's expensive to participate in our categories because if you're in diapers, you may spend somewhere between $500 to $2,000 a year in the category. And so that requires a pretty sizable income to be able to participate in the category.

So a lot of markets like Indonesia or -- still Brazil too are still coming up in terms of the affordability. So there's still inherent growth and penetration. And then I would say the bigger opportunity for us is in premiumization. On a value per baby basis, developed markets on average across the category, consumers may spend about $500 per baby in developing and emerging markets, it tends to be somewhere between one and 200. And so there's still a lot of headroom, I would say, to help serve the consumers better with better products. So with that, I would say, that should add up to hopefully a period of more stable growth for us.

Lauren Lieberman

Okay. And more stable growth for the categories you'd say that you think the categories globally are 2% to 3% kind of growth?

Mike Hsu

Yeah. I would say, low single-digit range and [Technical Difficulty] because we want to grow share, we want to do slightly better than that.

Lauren Lieberman

Okay. Do you think the macro backdrop has changed also? If I think back to that first call, right, there were considerable macro headwinds in Latin America, birth rate declines in the US, UK, South Korea at the time, high competition in China. Like, there was a there was a lot happening when you became CEO. So again, knowing we've had this crazy three to four year period. But how much has the macro backdrop helped accelerate category growth?

Mike Hsu

Well, I'd say a lot. Well, there's two buckets. I'd say the macro -- the ones I just clicked through, pandemic, war, global supply chain disruption, I would say those are truly the macro -- global macros. And I think they've been [getting] (ph) in this industry for over 30 years now. I would say historic. I'd say historically [indiscernible] difficulty. I have directors who've been in this industry for 50 years, who, let's say, we've never operated in an environment as difficult as this. And I think that's probably true because if you just reflect, Lauren, back, I mean, in March of 2020, we flew back from Uzbekistan of all places. Went right into a meeting at the airport and decided to close our offices globally, right?

And at the time, since we didn't know how COVID was transmitted, we didn't know if we could operate safely. And as you recall, there are companies that were shutting down, not as many in our industries, but we had all those choices. And then you go through all the disruption around supply chains -- and then now operating in this war, which on this scale has been unprecedented, at least in the last 20 years for, I'd say, a global CPG company. I think those have been very, very difficult, I think, macros to work through, and I'm really proud of how our company and our organization has navigated. And I think we've navigated that well.

Maybe some of the other things that you talked about I might characterize as like macroeconomic challenges for our business. Birth rate, good news. The bad news is, hey, both rates have declined. That's been kind of a demographic phenomenon. I think it comes with incomes rising in developing and emerging world. The good news is I think that -- I think that's gone to work and it tends to go, meaning. I would say a lot of birth rate declines are behind us. When I entered this role, I think there was 17 million babies being born in China. I think this year, we’ll about 9 million. And so I think our China business has managed that birth rate decline very, very well.

Korea, I think, as I just saw an article, is the lowest growth rate country in the world, which is our -- happens to be our second largest business. I think our Korea business has grown share substantially in that period to kind of offset those birth rate declines. So I think we've navigated some of that well. I'd say some of the other things like -- that I will characterize as micros, hey, entry -- competitive entry of, let's say, local small players or from price competition either driven by other manufacturers or retailers, I think that comes with the category. And so I think we've been able to navigate those well.

I think the -- so while I say I don't think the macros have helped us on that sense or the micros, it goes back to what I was just saying earlier. The long-term opportunity for us, which is, hey, essential categories that have a lot of penetration and, I would say, value growth opportunity to serve our consumers better. It's really a great opportunity for us.

Lauren Lieberman

So maybe we can talk a little bit about how the elevate and expand strategy has made the company arguably more in control of its own destiny. The example of birth rates -- it feels like that's been a bigger change that I think is appreciated by a lot of the investment community maybe. So maybe you could talk a little bit about that?

Nelson Urdaneta

Yeah. Well, I think you and I have talked about this, Lauren, and it just goes back to the underlying philosophy, what's the right way to build a business. And so -- you can look at elevate and expand and we use those words because I think elevate means to elevate our categories or premiumize our categories because I think the -- what I said when I came into the role was, hey, the spread between the lowest priced diaper and the highest priced diaper is a very narrow spread. And if you compare that to other categories and consumer products that have premiumized over time, we have a lot of opportunity to make better products that consumers think they should be willing to pay for.

Expand means taking kind of the proper leadership role and ensuring that markets like Indonesia or markets like Brazil or markets like Peru develop appropriately and versus waiting for it to happen. So I think that's the core of our strategy. But if you really reflect on it, it's kind of like almost like what every CPG should do. And so we're really not doing it to offset macros. It's more about, hey, I believe there are bigger needs that we can fill and fill better. And what are those? Well, I feel like everybody thinks tissue is a commodity category. I don't. I think it provides a really valuable service to our consumers and what's the need that's still unmet, a better clean. And I would say give me a shower fresh clean and then I'll say we'll be getting there, but we're not there yet, right?

Or if I think about diapers, definitely, protection was the core reason for why diapers were created. We do a pretty good job of that. I wouldn't say we're doing a perfect job of that yet. And so I still think there's opportunity to do a better job of protection. But then if you climb the or the hierarchy of needs, what comes next? Comfort. Your baby or if you're a senior, you're wearing the diaper 24/7. It's not comfortable, right? I don't think it's comfortable. And so I think there's still way better opportunities to make our products better for somebody who's wearing it all the time.

Let’s keep climbing the later. The next one is health and how can we help health. I said on a conference call, we got magic coming in poop. And I think that you can have technically, we call it BM or bowel movement. A running BM that we can separate that from the skin of the baby, and we have products out there that can do that, and I'll talk maybe more about that in subsequent quarters. But, so I think creating more valuable innovation for consumers I think, is really kind of our calling. And I think why we believe we can grow the business and continue to expand margins over time. We're not going to be immune to macro or micro headwinds, but I think if we run these plays, that's how we'll navigate them.

Lauren Lieberman

Great. Last question back to my pre-read of your transcript. Strategy is called K-C 2022. It’s 2023. So can we stay tuned for kind of updated thoughts on the financial algorithm? I know there is runway to get back to prior margins, but just thoughts on -- is there another strategy that…

Mike Hsu

You're a great analyst. You got us on the '22.

Nelson Urdaneta

Let me tackle it. So when we launched KC-2022 back in January of 2019, we were clear that it was a midterm algorithm. Really, our objective was to [Technical Difficulty] our teams in balanced and sustainable growth. There were three key tenets of the strategy, which remain true today. One was about growing our portfolio of iconic brands by elevating our categories and expanding our markets. Second was about leveraging our cost structure and being able to continue to be very disciplined around this and having financial discipline. And then the third key pillar of the strategy was around capital deployment and in ways that would generate returns that would be accretive to the overall enterprise. So those remain true today. Little did we know at the time of the launch of the strategy that we would be facing a global pandemic, a war in Europe, that's still underway, which -- both of which cost significant disruptions in supply chain and also significant spikes in costs that we had to deal with in the last few years.

At the time, we said that for this transition period, our top line growth objective organically was to be 1% to 3% annually. And as Mike just said, we've actually grown in the last four years at about 4% every year. However, on EPS, we said it was going to be mid-single digits. And given all the disruptions we had to deal with, we fell short of that objective at the time. And I think it's important to also highlight that prior to us launching this interim strategy, the algorithm, we said that our long term would be 3% to 5% top line growth organic. And we would be striving to get mid to high single-digit EPS. I'd say we're currently working through our long-term strategic plan and in the not-so-distant future, we're going to be back with an update. So stay tuned.

Lauren Lieberman

Okay. Great. So just sticking with financials for a minute, I want to talk a bit about gross margins. There's been significant progress, not far off the kind of 35% benchmark. And there's still significantly inflationary cost flow through the P&L. So you've spoken to needing to have a plan for margin recovery without relying on deflation to get there. But I guess, would it be -- it strikes me as reasonable to assume that there have been structural changes in the business and with cost savings, again, given the progress you've made on recovery and that there's still so much inflation in the P&L, it feels like 4Q in 2024, there should be a pretty clear path back and even a discussion to be that margin is going above prior pre-COVID levels -- that's a reasonable thought process [indiscernible]?

Nelson Urdaneta

You're onto something, one would hope. So as you stated, Lauren, we're very pleased with the progress made in the last five quarters of recovering margins. In fact, in the second quarter of this year, we got to 34% gross margin, which is a 400 basis point recovery versus the low point that we had at the end of 2021. We've been very clear and we're committed, and we have a line of sight in the near term to get back to that 35% and given a slew of changes we've done in the business over the last 4.5 years, we're confident that we will expand margins from there.

One of the things that we faced during 2021 through the end of this year, based on the latest projections we provided in July is that we're staring at about $3.6 million of incremental commodity constant currency in a 36-month period that we've had to deal with. And our teams have been very decisive in implementing revenue growth management actions with the tool kits that have been deployed to realize pricing, also in ensuring that we remain disciplined on costs, also ensuring that we launch margin accretive innovation and then, of course, continue to deliver savings through our FORCE program. In FORCE, there's an element of self-help as we've explained in the past, because remember, we get into material price negotiations with some of our vendors.

Some of our commodities are not as liquid as you would see in other CPGs. And we have one-to-one negotiations with global vendors with contracts that might cover multiple years or they lag a market index. And we have been already flowing through some savings in FORCE that have been coming through. We said in the last call that for the year, we expect around $100 million of commodity inflation. Yet if you look at the first half, we had a cumulative of $190 million. So based on what we provided as guidance in July, we would be expecting roughly $90 million based on that guidance to come our way favorably as we had -- as we go through the second half.

To the extent that commodity trends and the dynamics in the marketplace remain, yes, we should see some further benefits coming through. But the key really, Lauren, is that it's not one to one, as we've explained. And you can't just extrapolate directly from an index like [RISI] (ph) into what's going to flow into our P&L. But overall, we're seeing abatement. We've seen resins coming down multiple quarters, double digit. We've seen fiber -- the fiber complex finally start to come down in the second quarter of this year in aggregate, core key components on average were down in the low teens, and our projections still call for that to continue. Transportation normalized in the US in general, and to the extent that, that continues, we should expect benefits to come through.

Mike Hsu

We did view the margin, I would say, recovery to 2019 margins as a milestone, not a destination. And so when we -- when I came into the role back in 2019, margin expansion at that time was a goal, and it still remains one. So we still need to do that.

Lauren Lieberman

Okay. So just I guess, can you talk a little bit like the sort of structural things as you think about whether it's the path ahead to beyond 35%. But what are the types of structural changes at your disposal that you can kind of go after -- that I think it's important to talk about beyond the mechanics of cost inflation, the questions on pricing even if it's revenue growth management driven, but sort of underlying structural things that can improve the profit profile of this?

Nelson Urdaneta

Yeah. I would characterize them as a virtuous cycle of -- bucketed in three items, if you will. The first one starts with our strategy. We launched our strategy 4.5 years ago, Mike, when he took over as CEO, put together the notion of elevating our categories and expanding our markets. And this has been really fundamental to where we're at today, and we've got plenty of examples of how the strategy is coming together. China, which we tangentially touched on. Let me give a little bit of examples of what's been working in China and how that playbook can be scaled elsewhere in the globe.

In China, we've continued to premiumize the categories, and that's both diapers and feminine care in the last 4, 4.5 years. In that time period in China with all the structural situation that Mike explained, we've been able to grow our business in the high single digits to low teens year after year. We've consolidated our leadership position in diapers, where we've gained since 2019, 400 basis points of market share. In Seven&Care, we've strengthened our position, gaining in that same time period, 300 basis points of share. We have a tremendous focus in ensuring that we have the best products available in the China market. And then we quickly transfer the benefits in those upper tier products to the rest of the peers that we've got in both feminine care and diapers, and that, in turn, allows us to grow volumes in a margin accretive manner.

If we [double quick] (ph) diapers as an example. In 2020, we introduced the best product in the marketplace, and we have the best product today. It was a major improvement in terms of dryness and thinness. We then went ahead and launched a super premium product at a 50% premium through the next year, featuring cotton and a 3D liner. And then we've taken those benefits, and we've been quickly moving them to other tiers in diapers. If you take that playbook, we're very thoughtful about the fact that our categories are essentials and our consumers are not going to compromise on quality. They really want the best products for their babies and for their own personal care needs. And we're taking that playbook and applying it elsewhere in the globe both in developing and emerging markets and developed markets. The second component of why we've changed and why we feel confident of our ability to continue to move beyond the milestone of 2019 gross margins are the investments that we have been making in enhancing our capabilities.

First is revenue growth management. Mike talked about it. We've assembled the team that has been investing in digital tools to honing our skills and realizing pricing and realizing improvement in revenue growth management. We have playbooks that are being deployed on price bank architectures across the different markets, channels and formats that we operate in. Secondly, it's investments on our commercial capabilities and what we're calling internally the power of our network organization.

Last year, we opened our commercial hub in North America and Chicago, where we're assembling a top team that's focusing on product innovation and in market execution in North America. We've invested in capabilities for scale innovation quickly across the globe. If you look at [care] (ph) feminine care as an example. We've taken overnight pads, which we're launching across several markets, and we're doing that in a much more -- much faster way than in the past. Same applies for certain platforms in adult care. And if you take that to K-C Professional, our ICON tissue dispenser. We launched it in the US and we're now scaling quickly in Europe, and we'll scale it in the rest of the globe.

So those are capabilities that we didn't have before. and we've been really stepping them up. And then the third capability is on continuing to drive our gross productivity pipeline. We're investing in building that pipeline. I've talked about in our earnings calls. We believe that it will be a key unlock as we move in the next few years. And then the third component of why we're so confident is the partnership that we continue to build with our customers. They’re key in this whole trajectory change that we are doing. They fully understand the essential nature of the categories we compete in, and they understand that they need to be financially healthy. Because if our categories are financially healthy, it means that we can invest in innovation, and we can invest behind the brands. And that, in turn, creates value for our consumers, for our customers, for our shareholders.

As Mike has said, we sit down with our customers continuously to review our future innovation pipeline, what's coming in the pipeline two, three years from now. So they get to see where that money is going and why we are going to be continuing to drive value for the category, and that's what gets us really excited about what we bring to the table, leading in the categories we're in.

Lauren Lieberman

Okay. There's a lot there, but I want to -- before I come back to some questions on innovation and in-market performance, I want to ask one more question about margins in FORCE in the self-help. So savings in '22 and '23 were a bit kind of below the pre-COVID levels. And I know across our coverage, productivity and kind of tougher to get at when, well, factories were closed. [indiscernible] But also you've mentioned that some of the FORCE savings you see is on these negotiated material savings. And so historically, when you're in a deflationary market, less negotiated savings to be had. So [indiscernible] think about the magnitude of FORCE savings going forward? Do we get back to that as a high 300 to 400 kind of level per year? Yes. And then the top line has grown. So as a percentage of sales, it feels that we should be, but I don't know if that's a fair assessment.

Nelson Urdaneta

Yes. So two things. We have a big trajectory. We've had FORCE in place since -- 2006. So it's been probably 17 years. If you look at a broader historical delivery, the $300 million, give or take, of last year and this year is well within the range of what we've delivered. To your point, prior to these past two years, we were delivering slightly ahead of that. Obviously, in a deflationary environment, as you rightfully say, we're not going to be materializing significant material savings. But what I focus on is really on the gross productivity pipeline. That's what flows through. That's what's coming through. And that pipeline is very healthy, Lauren. So it fluctuates quarter-to-quarter. It fluctuates year-to-year. We're well within the range of what we delivered. Could it be higher down the road? Yeah, it is possible that it will be higher down the road, but it's well within the range of what we've done before.

Lauren Lieberman

Okay. Great. I wanted to just shift to North America specifically for a moment because I do get a lot of questions on what we see in the Nielsen data, and with certain topic on the second quarter call and the market share performance. So I guess a couple of things and reasons why it's important. One is that there's a question out there whether gross margin recovery gets pinched by the need to put some more promotional dollars back into the market? That's a question across the industry, I’d argue that one’s focused on volume. So that piece of it. And then the second is just with the market share. I guess would you say your US market shares have been in line with or worse or better than what you might have expected given the pricing, given the historical elasticity in the categories, the [indiscernible] et cetera?

Mike Hsu

Yeah. So for the -- I would say, for the past, let's say, 18 months market shares globally, and maybe -- and definitely in North America, not where I want them, right? And so how do I think about market share, philosophically? Well, here’s how we manage our business units and the markets, which we manage them on sales, operating profit, gross margin, cash and market share. And it's all -- I guess it's five of those things, right? That's a lot, and -- but they're all equally weighted. And what we tell them is, hey, these need to grow, and they don't have to all grow the same amount. But they all need to grow consistently over time. And so -- and we put that accountability.

But -- and philosophically, I feel like if you're not growing share, then you're harvesting the business, intentionally or not. So I think share is probably, in my mind, the most important marker. But also, I think we want to grow share the right way. I think globally, I think the company has done a pretty good job in share in the last five years. I think overall in personal care on a weighted basis, were up, I think, in three of our top four markets, we're up high single, low double digit in share points. I mean, in Korea, South Korea, I think we're up, I think, in four or five years, up over 20 points, and Australia up double digit. And so I said three or four, the one of the four that's not in there is North America, which is a focus area for us.

And so what's happened there. Definitely, our shares -- we are kind of moving in the right direction in a couple of years ago. I think what has caught us -- or affected our share trajectory has been our pricing. I think Nelson and I especially prioritize margin recovery because philosophic, I feel like anyone can sell a brand at no margin but to have a healthy business, it needs to add some margin. And so I think that was in my mind, the most important thing, especially looking at over $3 billion of inflation costs, right? So I think our teams have done an excellent job of that. I would say competitively, how we -- have other companies lagged behind us on the pricing, and that's explained a piece of it. I'd say the other part of it is maybe my emphasis, if I’d be self-critical I'd say, hey, maybe the teams have maybe overcorrected on margin recovery and maybe we lost a little traction on the execution. So overall, I would say there's some relative timing relative to competition that's affected chairs. And I think we're cycling through that now. We have some pockets where we need to see improved execution, both on the innovation and the advertising and the commercial programming.

And so -- but that said, I would say, the core tenets of elevate and expand, making products better, finding bigger needs and serving them better, I think I’ll hold, and we'll continue to run that set of plays. I think -- I did get the sense there's a lot of drama on the call related to the promotional environment. And I got a little bit one-on-one meetings this morning. And I think people are kind of maybe thinking about maybe old tapes. Because I think there's -- there likes to be a lot of drama related to type wars this and maybe that happened years ago, but I'm not a fan of growing share by renting share through promotion. I was talking a story in a one-on-one this morning. I once was new on a business, and we inherited a big brand [indiscernible] this is in another company. And the VP on that business comes in, like, yeah, I got a problem. And I’m like, what's the problem. He’s like, well, this is our biggest brand and we're promoting it 47 weeks. I’m like, I see the problem, which is like, what’s the growth strategy, 52 weeks approaching, right? So -- and then what do we do next year, right? So that's why I'm not a fan.

It's like a shortcut way to try to demonstrate some growth. I think it generally is dilutive to margin. It's not the healthy way to grow the business, and I'd rather earn it by making the products better, making our brands more attractive to consumers. And I use promotion -- I prefer to use promotion tactically to serve a marketing objective, which is, for me, tends to be trial for a great product that we want consumers to buy.

Lauren Lieberman

If you look in the personal care category, that seems like -- I don't want to call anything easier, but it’s a bit easier task, right. And certainly, your competition seems to articulate the same views on [indiscernible]. In consumer tissue, which I think a tougher spot, less predictable moving, but you've got private competitors. Would that be the area if you could -- where you say you sort of doing a little bit of analysis, saying maybe we overcorrected it. Is it more in the kind of -- consumer tissue side? Is this tougher thing to figure out?

Mike Hsu

I would say not -- well, I would say not North America yeah. I think definitely, so promotion is playing a bigger role in that category. If you just look at the percentage volume flow on deal, it's going to be slightly bigger. So it's definitely more important. But again, I still think -- I still think there are a lot of needs that can be served in a category like that tissue. We talked about a better way to clean. I think that's really, really important. And I think the category has been trading on this equity around soft and strong forever. But we think texture is really important and that it can help deliver a better clean. I think the wet dry routine regimen can add a lot of value to consumers. So I think there's different ways to kind of -- to manage that. But again, I don't think it goes back -- harkens back to saying, hey, the volume is a little soft, and so it's time to go BOGO. And I just don't think that's ever the answer, the right one for our brands in this business. But you are right, I mean volume matters. These are big businesses with expensive capacity that need to be kept full. And so we all recognize that. But again, I think for me, especially on the tissue side, operating discipline is really, really important.

Lauren Lieberman

Okay. Great. And this may come a little bit out of [indiscernible], but before we run out of time, I wanted to just talk a bit about Indonesia -- because I think the Softex acquisition has had a lot of promise, and it was [indiscernible] with the impairment charge that you just took you said no change in the optimism in the market and the market potential, but maybe you could just talk about what hasn't worked strategically and needs to change going forward?

Mike Hsu

Yeah. I’m so glad we made the deal. Nelson and I are going out later this month and so for a business review. Indonesia, I think today is number five hypermarket in the world, [indiscernible] I think projected over the next 10 years, it will probably climb to number three. So it's an important strategic market for us. Also, this business has a great set of brands in feminine care and also adult care. So it was a perfect fit. What changed versus our acquisition assumptions. One, we bought it and then COVID hit. And Indonesia was hit pretty hard by COVID. So we saw, especially in the diaper category, which is our largest business there, the category slowed down as a result of COVID, much slower than the assumptions we had made in the plan when we acquired it.

I think it will recover, but I think it's going to take a little bit more time to recover. And as you -- since you do DCF models, the medium term is the most important part of the model. And so that's one component. I think the other component is this was a privately run company, with the last few years run by private equity. So I think versus our expectation, maybe some of the business practices were not as disciplined as we liked. And so that's a piece that we've brought in our most experienced management that has a great track record of building up our positions in developing emerging markets and we deploy them to the business there. We're confident in their ability, we're confident in the business and the brands there, and it's just going to take us a little time to work through. But I remain super excited about Indonesia as a market and as a growth engine for us.

Lauren Lieberman

Okay. Great. We are out of time. We'll go to breakout. But please join me in thanking Nelson and Mike for being here with us today.