Kimberly-Clark Earnings Call Nuggets: Personal Care Growth, Competitive Activity

On Friday, Kimberly-Clark Corporation (NYSE:KMB) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Personal Care Growth

Ali Dibadj – Sanford C. Bernstein: A few questions. It was actually helpful that you spent some time on the KCI business and particularly in Personal Care, want to get sense from you guys of how much of the growth is distribution growth or driven by distributive gains versus sort of same store sales, because that will tell us a little bit about the sustainability of that growth rate, and I got a sub part of that question is just around the margin impact of that growth in emerging markets, I know used to be that your margins, they were pretty darn closed in the developed world. So, I’d love to get a sense of that as well please.

Thomas J. Falk – Chairman and CEO: So I’d say, we would say we took share in most of the emerging markets of the kind of growth levels that we saw and the market like Latin America, for example, where we’re up 25% in Personal Care. We’ve got most of the distribution in the place that we need there. So, there are some places in Brazil that we’re expanding, in the Northeast that’s sort of new territory for us, but other than that we’re pretty fully penetrated. Russia, we’ve got great distribution in and around the Moscow region, but we’re expanding more to the east and into the balance of the country, but we also would say we had some share gains behind innovation there. China was the one that was – has a big number and I think we went from, I think, 72 cities at the end of last year to 80 cities now, so part of it is distribution related, but we also moved into Tier 3 so we’re expanding our offering and we’re just in the process of launching diaper pants. So, there’s probably a little bit of a pipeline filled there. So, yeah, some share growth but a lot of innovation and some distribution expansion. It’s tough to break those down, but I’d say probably in China, in particular, was more – you’re expanding in the new categories, in new markets and Latin America was probably more share growth.

Ali Dibadj – Sanford C. Bernstein: So, just if I could follow-up on the margins part. So, if you were to say kind of the Personal Care business 19%, I think, is the organic growth number you take two-thirds same-store sales – same-store sales as one-third distribution gain. Is that the fair gut (try)?

Thomas J. Falk – Chairman and CEO: I’d be guessing. I would say that doesn’t sound wildly out of balance, but we don’t have good data that really track it at that level of detail.

Ali Dibadj – Sanford C. Bernstein: Then I had a second part to that question.

Thomas J. Falk – Chairman and CEO: On the margin front, we saw some good margin improvement from KCP as well. So, we saw double-digit profit growth in many of these markets as well. So, good cost savings performance, good price realization probably nearly half of the price realization in dollar terms from the total corporate standpoint was in K-C International, and they are off to a good start this year on top-line and bottom-line.

Ali Dibadj – Sanford C. Bernstein: Switching gears a little bit to free cash flow and I have asked this question before, but I just want to continue to get comfortable maybe I’m just too old fashion about this stuff. Your free cash flow is again less than the dividend and stock repurchase or basically the payment to shareholders. I’m just trying to get a sense of how I can feel comfortable with that, especially when you’re not getting – we’re not being hit as much by restructuring charges turning to cash. So, how should we feel about that?

Thomas J. Falk – Chairman and CEO: I’ll let Mark to talk to that one.

Mark A. Buthman – SVP and CFO: We look at it on an annual basis, so our cash flow isn’t going to be consistent. Our operating cash flow grow over the year, we knew we are going to come out of the gate strong with share repurchases, we are out of the market in the fourth quarter, so we wanted to start strong. We’ve got about half of the low end of our share repurchases in the bank already in the first quarter built a little bit of debt, but that will come down as the year progresses. For the full year, I think, you’ll see probably $3 billion of operating cash flow with about a third going to capital spending, and third going to dividends, and a third going to share repurchases. So, for the full year we’re not looking to increase significantly our debt. To back-up strategically over the last 10 years, I think, in ’07 and then last year we made a choice to increase our debt, but other than that we are funding share repurchases and our goal is to fund amount of available operating cash flow.

Ali Dibadj – Sanford C. Bernstein: Then just my last question if you would is around the increased marketing spend $45 million this quarter for example. Can you give us a sense of how you prioritize that, so I guess what I’m getting at is how much of that is spent in the emerging markets to grow the brand, to grow education etcetera versus new innovations in the U.S. versus competing in Western Europe because it looks like it so much comparative. How do you break that up, I know you mentioned your innovations and other projects, but how do you prioritize that spend?

Thomas J. Falk – Chairman and CEO: Each of our teams around the world, we really own the P&Ls on the geographic basis, so they put together a plan they work with our global brand teams to make sure that we’re resourcing the plan in the right way and that we’re looking at the relative ROI in each of these markets and the opportunity there. We have a series of global planning substance where we work through and say yeah, this will make sense, this will not, meaning to go we’ve got do a little bit more work and run through that as part of our ongoing business planning process. So, as you can imagine a mixture of some center view of the market and some local view of the opportunity and those usually come together in a business plan that then we go execute.

Ali Dibadj – Sanford C. Bernstein: I understand the process, but when you put roll it all up obviously you kind of look through and say are we taxing the right stuff. So, again how much of that can you tell or do you not – maybe do this in the end in the emerging markets, versus developed world versus defending those buckets?

Thomas J. Falk – Chairman and CEO: We do it at that level but there isn’t a big calculator of corporate that’s got that level of scientific view. So if you look at China and say the opportunity is huge. So the question is how can we go even faster when you know that, you don’t look at a one year payback and compare that around the world and what’s your relative competitive position, what’s the strength of your innovation, what’s it going to take to communicate that message to the consumer and you look at those opportunities and decide which of the opportunity set that you have balances against your strategy and attack those.

Competitive Activity

Alice Longley – Buckingham Research: Can you comment on why you are holding to your guidance and what kind of deceleration you know your guidance assumes in the second quarter as opposed to the second half? I mean you beat so much and I know that the gross margin — you’ve already said the gross margin will be up less in the second half than the first, but I think you indicated that the first quarter was a surprise to you too, so why holding this guidance?

Thomas J. Falk – Chairman and CEO: I think we’re three months into the year, so it’s relatively early in the plan. There are still lots of things to worry about and you know lots of competitive activity happening in the marketplace. If you look at the earnings, the $0.03 of it was really related to little lower effective rate. That was in our guidance for the full year just that the individual settlement happened in the first quarter. So, if you look from that standpoint, you’re on a normalized tax rate. We’re not that far ahead of what we said and so, I still think it’s the right level of guidance. If we’re sitting here three months from now and things momentum continues, we will take another look at that and give you an update at that point.

Alice Longley – Buckingham Research: You just cited, said there was a lot of competitive activity out there. Could you tell us which category and which region you think our competition will be heating up?

Thomas J. Falk – Chairman and CEO: Well surely in fem care P&G has got a major re-launch coming in the U.S. in diapers they have got a re-launch coming midyear and they have got a big Olympic program in the third quarter. They are going to drive that globally. So, there is plenty of stuff to react to and we’re off to a good start. We’re encouraged by that, and we’re certainly going to keep – my goal, Alice, is to deliver terrific results and not necessarily be the most accurate forecast that you’ve ever had.

Alice Longley – Buckingham Research: Then my last question is to circle back to the emerging regions. What percentage of your revenues in emerging regions comes from baby care, roughly?

Thomas J. Falk – Chairman and CEO: Paul, have we got the split of that?

Paul J. Alexander – VP, IR: Yeah, we don’t breakout precisely, but if you added up infant care and child care it would be at least half.