Kimberly-Clark announces year-end 2018 results, 2019 outlook and introduces K-C Strategy 2022
- Fourth quarter 2018 net sales of $4.6 billion decreased 1 percent compared to the year-ago period. Changes in foreign currency exchange rates reduced sales by 4 percent while organic sales increased 3 percent. Full-year 2018 net sales of $18.5 billion rose 1 percent, including organic sales growth of 1 percent.
- Diluted net income per share for the fourth quarter was $1.18 in 2018 and $1.75 in 2017. Full-year diluted net income per share was $4.03 in 2018 and $6.40 in 2017.
- Fourth quarter adjusted earnings per share were $1.60 in 2018 and $1.57 in 2017. Adjusted earnings per share exclude certain items described later in this news release.
- Full-year adjusted earnings per share were $6.61 in 2018, up 6 percent compared to $6.23 in 2017. The company's previous guidance was for earnings of $6.60 to $6.80.
- Net sales in 2019 are expected to decrease between 1 and 2 percent, including a 3 to 4 percent negative impact from changes in foreign currency exchange rates. Organic sales are expected to increase 2 percent. Diluted net income per share for 2019 is anticipated to be $4.85 to $5.35, including 2018 Global Restructuring Program charges. Adjusted earnings per share in 2019 are expected to be $6.50 to $6.70, including year-over-year growth in adjusted operating profit and an increase in the adjusted effective tax rate.
- The company's Board of Directors has approved a 3 percent increase in the quarterly dividend for 2019, which is the 47th consecutive annual increase in the dividend.
- The company is introducing its K-C Strategy 2022 strategic plan and associated financial objectives as it looks ahead to its 150-year anniversary in 2022. The plan is focused on delivering balanced and sustainable growth over the next several years.
Chief Executive Officer Mike Hsu said, "In 2018, we returned to delivering organic sales growth and we continued to launch innovations, pursue our growth priorities and invest in our brands. Overall, it was a challenging macro environment and our margins declined, reflecting significant commodity inflation and currency volatility. Nonetheless, I'm encouraged that in response to these headwinds we achieved higher selling prices in the second half of the year. We also achieved $510 million of cost savings, generated strong cash flow and returned $2.2 billion to shareholders through dividends and share repurchases."
Hsu continued, "We expect the environment in 2019 will remain challenging, although somewhat better than in 2018. In this environment, our teams will continue to execute our strategies for long-term success. We are targeting to deliver a solid operating plan, with higher organic sales growth compared to 2018 and improved margins despite expectations for significant headwinds from commodities and currencies. We also expect to return substantial cash to shareholders."
Hsu concluded, "K-C Strategy 2022 is our plan to deliver balanced and sustainable growth by growing our portfolio of iconic brands, leveraging our strong cost and financial discipline and allocating capital in value-creating ways. We will build upon our strong foundation, sharpen our focus on the consumer and further improve our capabilities to create even more competitive advantage going forward. We're also establishing medium-term financial objectives associated with K-C Strategy 2022 that are appropriate and realistic in the current environment. Longer-term, we continue to have significant optimism in the potential of our categories. We are confident in our prospects and our ability to create shareholder value through successful execution of our strategies."
Fourth Quarter 2018 Operating Results
Sales of $4.6 billion in the fourth quarter of 2018 were down 1 percent compared to the year-ago period. Changes in foreign currency exchange rates reduced sales by 4 percent. Organic sales increased 3 percent, as net selling prices improved 3 percent. Organic sales declined 1 percent in the year-ago period. In North America, organic sales increased 6 percent in K-C Professional, and 3 percent in consumer products compared to a 3 percent decline in the base period. Outside North America, organic sales rose 4 percent in developing and emerging markets and were even year-on-year in developed markets.
Fourth quarter operating profit was $639 million in 2018, including charges related to the 2018 Global Restructuring Program, and $828 million in 2017. Fourth quarter adjusted operating profit was $742 million in 2018 and $852 million in 2017. Results were impacted by $215 million of higher input costs, driven by $115 million in pulp and $65 million in other raw materials. In addition, foreign currency translation effects decreased operating profit by $20 million and transaction effects also negatively impacted the comparison. Marketing, research and general spending increased, including higher advertising spending. On the other hand, results benefited from higher net selling prices, $75 million of cost savings from the company's FORCE (Focused On Reducing Costs Everywhere) program and $55 million of cost savings from the 2018 Global Restructuring Program.
The fourth quarter effective tax rate was 18.6 percent in 2018 and 19.2 percent in 2017. The fourth quarter adjusted effective tax rate was 19.1 percent in the fourth quarter of 2018 and 29.7 percent in 2017. The comparison benefited from U.S. tax reform, along with planning initiatives and resolution of certain matters.
Kimberly-Clark's share of net income of equity companies in the fourth quarter was $23 million in 2018 and $25 million in 2017. At Kimberly-Clark de Mexico, results were negatively impacted by higher input costs and a weaker Mexican peso, but benefited from organic sales growth and cost savings.
Cash Flow and Balance Sheet
Cash provided by operations in the fourth quarter was $949 million in 2018 and $863 million in 2017. Full-year cash provided by operations was $2,970 million in 2018 and $2,929 million in 2017. The comparison benefited from improved working capital and lower tax payments, mostly offset by lower earnings, payments related to the 2018 Global Restructuring Program and higher pension contributions. Capital spending for the fourth quarter was $311 million in 2018 and $190 million in 2017. Full-year spending was $877 million in 2018 and $785 million in 2017.
Fourth quarter 2018 share repurchases were 1.8 million shares at a cost of $199 million, bringing full-year repurchases to 7.3 million shares at a cost of $800 million. Total debt was $7.5 billion at the end of 2018 and $7.4 billion at the end of 2017.
Full Year 2018 Results
Sales of $18.5 billion increased 1 percent compared to the year-ago period. Organic sales rose more than 1 percent, as product mix, volumes and net selling prices were all up slightly. Changes in foreign currency exchange rates reduced sales approximately 1 percent. In North America, organic sales increased 3 percent in K-C Professional and 1 percent in consumer products. Outside North America, organic sales increased 2 percent in developing and emerging markets and 1 percent in developed markets.
Operating profit was $2,229 million in 2018, including charges related to the 2018 Global Restructuring Program, and $3,358 million in 2017. Adjusted operating profit was $3,138 million in 2018 and $3,382 million in 2017. The comparison was impacted by $795 million of higher input costs, along with unfavorable currency effects. Results benefited from organic sales growth, $375 million of FORCE cost savings, $135 million of cost savings from the 2018 Global Restructuring Program, and lower general and administrative costs.
Diluted net income per share was $4.03 in 2018 and $6.40 in 2017. The decline was mostly due to lower operating profit. Adjusted earnings per share of $6.61 in 2018 increased 6 percent compared to $6.23 in 2017. The comparison benefited from a lower adjusted effective tax rate, interest expense and share count, but was impacted by lower adjusted operating profit.
K-C Strategy 2022
Kimberly-Clark is introducing K-C Strategy 2022 as the company looks ahead to its 150-year anniversary in 2022. The plan's objectives are to deliver balanced and sustainable growth and to create shareholder value in what is assumed to be a continued challenging environment. The plan is focused on growing Kimberly-Clark's iconic brand portfolio, leveraging the company's strong cost and financial discipline and allocating capital in value-creating ways. Key highlights:
- The company will target to grow sales in-line with, or slightly ahead of, category growth rates. Kimberly-Clark's three growth pillars are to elevate core businesses, accelerate growth in D&E markets and drive digital marketing and e-commerce. The company expects to achieve these pillars by launching differentiated product innovations, driving category development and leveraging commercial capabilities in sales and marketing.
- The company will generate savings in order to fund growth initiatives and improve margins. Focus areas will include driving ongoing supply chain productivity improvements through the FORCE program, executing the 2018 Global Restructuring Program, rigorously controlling discretionary spending to sustain the company's top-tier overhead cost structure and driving further improvement in working capital.
- The company will allocate capital in value-creating ways, enabled by strong cash generation. Kimberly-Clark expects to spend capital at an annual rate of 4 to 5 percent of net sales after completing the 2018 Global Restructuring Program. In addition, the company plans to return significant amounts of cash to shareholders through dividends and share repurchases.
The company's medium-term financial objectives associated with K-C Strategy 2022 assume that category growth remains relatively modest and similar to recent conditions. The objectives are as follows:
- Sales and organic sales growth - 1 to 3 percent annually.
- Adjusted earnings per share growth - mid-single digits annually.
- Adjusted Return On Invested Capital - at least maintain at current level.
- Dividend growth - generally in line with adjusted earnings per share growth.
Fourth Quarter 2018 Business Segment Results
Personal Care Segment
Fourth quarter sales of $2.2 billion decreased 2 percent. Changes in currency rates reduced sales by 5 percent. Net selling prices increased approximately 2 percent, volumes rose 1 percent and product mix improved slightly. Fourth quarter operating profit of $436 million decreased 11 percent. The comparison was impacted by input cost inflation, unfavorable currency effects and increased marketing, research and general spending, while results benefited from cost savings and organic sales growth.
Sales in North America increased 4 percent due to higher volumes. Volumes were up mid-single digits in the infant and child care mega category, driven by growth in Pull-Ups training pants and GoodNites youth pants. Volumes were also up mid-single digits in adult care, led by Depend products.
Sales in developing and emerging markets decreased 9 percent. Currency rates were unfavorable by 12 percent, primarily in Latin America. Net selling prices rose 5 percent and product mix improved 1 percent, while volumes fell 3 percent. The higher net selling prices were primarily in Latin America and secondarily in the Middle East/Eastern Europe/Africa, partially offset by decreases in China. The lower volumes included declines in China and Argentina, and increases in ASEAN and Eastern Europe.
Sales in developed markets outside North America (Australia, South Korea and Western/Central Europe) decreased 4 percent, including a 3 point negative impact from changes in currency rates. Net selling prices fell approximately 2 percent.
Consumer Tissue Segment
Fourth quarter sales of $1.5 billion were essentially even year-on-year. Changes in currency rates reduced sales approximately 3 percent. Net selling prices increased 5 percent, while volumes decreased 2 percent and product mix was off slightly. Fourth quarter operating profit of $207 million decreased 21 percent. The comparison was impacted by input cost inflation, lower volumes, higher marketing, research and general spending and other manufacturing cost increases, while results benefited from increased net selling prices and cost savings.
Sales in North America increased 2 percent compared to a 4 percent decline in the year-ago period. Net selling prices rose 6 percent, reflecting price increases and lower promotion activity. Volumes fell 3 percent and product mix was off 1 percent.
Sales in developing and emerging markets decreased 3 percent. Currency rates were unfavorable by 7 percent, mostly in Latin America. Net selling prices increased 3 percent and product mix improved 1 percent.
Sales in developed markets outside North America decreased 2 percent. Changes in currency rates reduced sales by 4 percent. Net selling prices increased 4 percent, while volumes and product mix were each down 1 percent.
K-C Professional (KCP) Segment
Fourth quarter sales of $0.8 billion increased 2 percent. Changes in currency rates reduced sales by 3 percent. Net selling prices and volumes each increased 2 percent and product mix improved 1 percent. Fourth quarter operating profit of $151 million decreased 3 percent. The comparison was impacted by input cost inflation and unfavorable currency effects, mostly offset by organic sales growth and cost savings.
Sales in North America increased 6 percent. Volumes were up 3 percent, driven by increases in washroom and safety products. Net selling prices increased 2 percent and product mix improved 1 percent.
Sales in developing and emerging markets decreased 4 percent, including an 8 point negative impact from changes in currency rates. Net selling prices rose 3 percent and volumes increased 2 percent, while product mix was unfavorable by 1 percent.
Sales in developed markets outside North America were down 3 percent. Currency rates were unfavorable by 3 percent. Net selling prices increased 2 percent and product mix improved 1 percent, while volumes fell 3 percent.
2018 Global Restructuring Program
In January 2018, Kimberly-Clark initiated the 2018 Global Restructuring Program in order to reduce the company's structural cost base and enhance the company's flexibility to invest in its brands, growth initiatives and capabilities critical to delivering future growth. The program will make Kimberly-Clark's overhead organization structure and manufacturing supply chain less complex and more efficient and is expected to broadly impact all of the company's business segments and organizations in each major geography.
The company expects the program will generate annual pre-tax cost savings of $500 to $550 million by the end of 2021, driven by workforce reductions along with manufacturing supply chain efficiencies. As part of the program, Kimberly-Clark expects to exit or divest some low-margin businesses that generate approximately 1 percent of company net sales. The sales are concentrated in the consumer tissue business segment. To implement the program, the company expects to incur restructuring charges of $1,700 to $1,900 million pre-tax ($1,350 to $1,500 million after tax) by the end of 2020.
Fourth quarter 2018 restructuring charges were $180 million pre-tax ($134 million after tax), bringing cumulative charges to $1,036 million pre-tax ($783 million after tax). Fourth quarter 2018 restructuring savings were $55 million, bringing cumulative savings to $135 million.
2019 Outlook and Key Planning Assumptions
The company's key planning and guidance assumptions for 2019 are as follows:
- Net sales decrease of 1 to 2 percent.
- Foreign currency exchange rates unfavorable by 3 to 4 percent.
- Exited businesses in conjunction with the 2018 Global Restructuring Program expected to reduce sales slightly, mostly in K-C Professional.
- Organic sales increase of 2 percent, driven by higher net selling prices of at least 3 percent.
- Adjusted operating profit growth of 1 to 4 percent.
- Cost savings of $400 to $450 million, including $300 to $325 million from the FORCE program and $100 to $125 million from the 2018 Global Restructuring Program.
- Inflation in key cost inputs of $300 to $400 million. A majority of the inflation is anticipated to occur in international markets.
- Foreign currency translation effects expected to reduce operating profit by 2 to 3 percent and transaction effects also anticipated to negatively impact the comparison.
- Interest expense expected to increase somewhat year-on-year.
- Adjusted effective tax rate of 23 to 25 percent in 2019 compared to 21 percent in 2018. At the mid-point, the higher rate is equivalent to an approximate 3 ½ percent reduction in adjusted earnings per share.
- Net income from equity companies similar year-on-year.
- Adjusted earnings per share of $6.50 to $6.70 compared to $6.61 in 2018.
- Capital spending of $1,100 to $1,300 million, including significant spending related to the 2018 Global Restructuring Program.
- Dividend increase of 3 percent (approved by the Board of Directors and mentioned previously in this release). The quarterly dividend will increase to $1.03 per share, up from $1.00 per share in 2018. The first dividend will be payable on April 2, 2019 to stockholders of record on March 8, 2019.
- Share repurchases of $600 to $900 million, subject to market conditions.
Non-GAAP Financial Measures
This press release and the accompanying tables include the following financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S., or GAAP, and are therefore referred to as non-GAAP financial measures:
- Adjusted earnings and earnings per share
- Adjusted gross and operating profit
- Adjusted effective tax rate
These non-GAAP financial measures exclude the following items for the relevant time periods as indicated in the accompanying non-GAAP reconciliations to the comparable GAAP financial measures:
- 2018 Global Restructuring Program. Mentioned elsewhere in this release.
- U.S. tax reform. In the fourth quarter of 2017, the company recognized a net benefit as a result of U.S. tax reform and related activities. In the first, third and fourth quarters of 2018, the company recognized net charges associated with U.S. tax reform related matters.
The company provides these non-GAAP financial measures as supplemental information to our GAAP financial measures. Management and the company's Board of Directors use adjusted earnings, adjusted earnings per share and adjusted gross and operating profit to (a) evaluate the company's historical and prospective financial performance and its performance relative to its competitors, (b) allocate resources and (c) measure the operational performance of the company's business units and their managers. Management also believes that the use of an adjusted effective tax rate provides improved insight into the tax effects of our ongoing business operations.
Additionally, the Management Development and Compensation Committee of the company's Board of Directors has used certain of the non-GAAP financial measures when setting and assessing achievement of incentive compensation goals. These goals are based, in part, on the company's adjusted earnings per share and improvement in the company's adjusted return on invested capital and adjusted operating profit return on sales determined by excluding certain of the adjustments that are used in calculating these non-GAAP financial measures.
This news release includes information regarding organic sales growth, which describes the impact of changes in volume, net selling prices and product mix on net sales. Changes in foreign currency exchange rates and acquisitions and divestitures also impact the year-over-year change in net sales.
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