Kimberly-Clark Announces First Quarter Results
1Q ’06 Sales Rose 4 Percent to $4.1 Billion; EPS Before Unusual Items Were 93 Cents, in Line With Previous Guidance for the Quarter
Company Reaffirms EPS Outlook for the Year
DALLAS, April 24, 2006--Kimberly-Clark Corporation (NYSE: KMB) today reported that net sales in the first quarter of 2006 rose 4.2 percent to $4.1 billion. Before currency effects, sales improved approximately 6 percent, driven by a 4 percent increase in sales volumes, with higher net selling prices and favorable product mix each contributing 1 percent. Diluted net income was 60 cents per share compared with 93 cents per share in 2005, a decrease of 35 percent. However, excluding charges related to competitive improvement initiatives for streamlining the company’s operations, earnings before unusual items in the first quarter of 2006 were 93 cents per share, in line with the company’s previous guidance of 90 to 93 cents per share.
Top-line growth, aggressive cost reductions and a lower share count all contributed positively to these results, enabling the company to offset significant cost inflation, a higher effective tax rate and incremental compensation expense for stock options recorded under the provisions of Statement of Financial Accounting Standards (SFAS) 123R.
Highlights of the improvement in first quarter sales included continued double-digit gains in developing and emerging markets along with solid volume growth for diapers and health care products in North America and Europe and for the company’s bathroom tissue, baby wipes, toiletries and incontinence care brands in North America.
Chairman and Chief Executive Officer Thomas J. Falk said, “We delivered on our commitments for the first quarter while absorbing almost $90 million in cost inflation. As we entered 2006, we knew higher costs would pressure our margins, particularly in the first half of the year. I am encouraged by the way K-C teams have risen to the challenge. By staying focused on our Global Business Plan, we generated good volume growth and improved selling prices in the first quarter, with net sales rising to a new quarterly record. At the same time, we cut costs by an additional $45 million, building on the success of our FORCE (Focused On Reducing Costs Everywhere) program and moving rapidly to implement the strategic cost reductions announced last year. We also have plans in place that give us confidence that we’ll continue to deliver on our commitments, quarter by quarter, over the balance of the year.”
Review of first quarter sales by segment
Sales of personal care products rose 6.0 percent in the first quarter, driven by sales volume growth of approximately 7 percent. Volumes improved in every region. Net selling prices declined about 1 percent primarily due to competitive activity in North America and Europe.
Personal care sales in North America increased more than 2 percent compared with the first quarter of 2005. Sales volumes were up approximately 4 percent, with good volume gains in adult care and across the company’s infant and child care categories, paced by double-digit growth for Huggies baby wipes and toiletries. These improvements were partially offset by lower sales volumes of Kotex feminine care products. Net selling prices decreased about 2 percent to match competitive moves and support product initiatives. In Europe, personal care sales decreased approximately 9 percent, but were 1 percent higher excluding currency. Sales volumes rose 5 percent, mostly offset by a 4 percent decline in selling prices. Child care volumes increased more than 10 percent and diaper volumes were up 4 percent overall, boosted by an 8 percent improvement in sales volumes of Huggies diapers in the company’s four core European markets - the U.K., France, Italy and Spain. In developing and
emerging markets, personal care sales climbed 15 percent, driven by double-digit volume growth, reflecting strong performance in Asia and Latin America, along with higher selling prices, improved product mix and currency benefits.
Sales of consumer tissue products increased 3.8 percent versus the first quarter of 2005 and moved ahead more than 6 percent before currency effects. Sales volumes grew 3 percent, net selling prices rose 2 percent and product mix improved 1 percent.
In North America, first quarter sales of consumer tissue products advanced approximately 7 percent, as sales volumes and net selling prices were both 3 percent higher and favorable product mix contributed an additional 1 percent. Sales comparisons benefited from continued strong growth in sales volumes of Scott bathroom tissue as well as recently implemented price increases for Cottonelle and Scott bathroom tissue and Viva and Scott paper towels. In Europe, consumer tissue sales decreased 5 percent, but were up 4 percent before currency effects. Sales volumes and net selling prices both rose about 1 percent, while product mix improved by approximately 2 percent, driven primarily by premium Andrex and Scottex bathroom tissue line extensions. Price increases averaging mid-single digits were implemented in a number of European markets during the quarter. Consumer tissue sales in developing and emerging markets improved 10 percent, with solid sales volume growth and higher
selling prices in all regions accounting for most of the improvement.
Sales of K-C Professional & other products increased 1.6 percent in the quarter and were about 4 percent better at constant currency exchange rates. Net selling prices rose 2 percent and favorable product mix contributed a similar amount, reflecting K-C Professional’s (KCP) strategies to improve revenue realization and enhance mix. KCP continues to successfully focus on more profitable market segments with distinctive, differentiated products such as Kleenex and Scottfold hand towels, WypAll X80 Towels, Kimtech wipers and offerings for the Do-It-Yourself channel. Overall sales volumes were unchanged, as global growth of 1 percent in KCP was offset by lower sales of other products.
Sales of health care products increased 5.0 percent in the quarter. Higher sales volumes were responsible for the entire increase, driven by double-digit growth outside North America and strong performance in face masks, sterilization wrap and new Sterling Nitrile exam gloves. Improved selling prices and product mix both added 1 percent to first quarter sales; however, these benefits were negated by weaker foreign currencies.
Other first quarter operating results
Operating profit before unusual items in the first quarter of 2006 was $629 million, approximately 1 percent below the prior year. Continued top-line growth and cost savings totaling about $45 million positively impacted first quarter operating results. At the same time, however, operating profit was negatively impacted by nearly $90 million of cost inflation. The total included nearly $35 million for raw materials other than fiber, driven by increases in the cost of polymer resins, superabsorbents and other oil-based materials, more than $30 million in energy costs, about $15 million in distribution costs as well as more than $5 million in higher fiber costs. Additionally, stock option expense, which the company began to record in 2006 using the prospective method under the provisions of SFAS 123R, reduced first quarter operating profit by about $10 million.
The company’s effective tax rate in the first quarter of 2006 was 27.8 percent. Excluding unusual items, however, the effective tax rate for the quarter was 27.0 percent compared with 21.2 percent in the prior year. The increase was primarily due to a lower level of income tax benefits from the company’s ownership interests in synthetic fuel partnership activities. Net of related nonoperating expense, the tax benefits contributed $4 million to net income in 2006 versus $13 million in 2005. Excluding unusual items in the current year and the effects of the synthetic fuel activities in both years, the effective tax rate was 29.6 percent in the first quarter of 2006 compared with 29.5 percent last year.
Kimberly-Clark’s share of net income of equity companies in the first quarter rose 14 percent to $39 million, driven by higher net income at Kimberly-Clark de Mexico, S.A. de C.V. Continued strong performance by its consumer business helped K-C de Mexico achieve double-digit growth in sales and operating profit before currency transaction expenses for the fifth straight quarter.
Competitive improvement initiatives
During the first quarter, the company made further progress implementing the strategic cost reductions that will support the targeted growth investments announced in July 2005. As previously noted, the company plans to reduce costs by streamlining manufacturing and administrative operations primarily in North America and Europe, creating an even more competitive platform for growth and margin improvement.
Pretax charges totaling $209 million (approximately $154 million after tax) related to these cost reduction initiatives were recorded in the first quarter. A majority of the pretax charges were noncash, primarily for accelerated depreciation and asset write-offs. Major components of the charges were for consolidation of North Atlantic feminine and adult care and North American infant and child care operations as well as cost structure improvements in Europe and Latin America.
To date, employees have been notified about workforce reductions and other actions at 18 of the approximately 24 facilities slated for sale, closure or streamlining as part of the cost reduction initiatives, and pretax charges of $437 million (about $321 million after tax) have been recorded. The company currently expects to incur cumulative pretax charges of $1.0 to $1.1 billion ($700 to $775 million after tax) through the end of 2008 that will yield annual pretax savings of at least $350 million in 2009.
Savings of approximately $15 million were realized in the first quarter of 2006. Based upon successful efforts to date and plans for the balance of the year, the company now expects to deliver at least $100 million of savings in 2006, up from its previous objective for savings of $80 to $100 million. Pretax charges for the full year are expected to total approximately $550 million.
Cash flow and balance sheet
Cash provided by operations decreased to $519 million in the first quarter compared with $608 million in 2005 primarily as a result of cash costs in 2006 related to the company’s strategic cost reductions. Capital spending was $179 million versus $109 million in the first quarter of last year. At March 31, 2006, total debt and preferred securities declined to $4.5 billion from $4.6 billion at the end of 2005.
During the first quarter, the company repurchased nearly 2.3 million shares of its common stock at a cost of $135 million. Share repurchases in 2005 and 2006 caused the average number of diluted shares outstanding to decrease versus the year-ago quarter by about 23 million shares, benefiting earnings per share comparisons by 5 percent.
Commenting on the outlook, Falk said, "Under our Global Business Plan, we’re focused on the right strategies to deliver sustainable top- and bottom-line growth and improve returns to shareholders. Over the balance of this year and beyond, we will continue to bring insight-driven innovation to market across all our businesses and drive strong growth in developing and emerging markets. We will also continue to relentlessly take costs out of the system. Meanwhile, we now believe that inflation in 2006 will be greater than our original planning assumptions, primarily due to recent increases in fiber and oil costs. As a result of our aggressive actions to reduce costs, we also expect to generate a higher level of savings than originally planned, which should enable us to fully offset the additional inflationary pressures.
"Taking these factors into consideration, we remain comfortable with our previous guidance that earnings per share before unusual items in 2006 will be in a range of $3.85 to $3.95.
“As for the second quarter, the top line should benefit from our product plans as well as recently implemented price increases. Although we expect costs to rise somewhat sequentially, we plan to support our growth initiatives with an increased level of strategic marketing spending. In total, we expect earnings per share before unusual items will be similar to or slightly better than the first quarter, in a range of 93 to 95 cents per share.”
Non-GAAP financial measures
Certain financial measures contained in this press release exclude charges related to competitive improvement initiatives for streamlining the company’s operations, currency effects and the effects of the company’s synthetic fuel partnership activities on the effective tax rate. Financial measures which exclude those items have not been determined in accordance with accounting principles generally accepted in the U.S. and are therefore “non-GAAP” financial measures.
Kimberly-Clark management believes that investors’ understanding of the company’s performance is enhanced by disclosing these non-GAAP financial measures as a reasonable basis for comparison of the company’s ongoing results of operations. Reconciliations of these non-GAAP financial measures to the most closely analogous measure determined in accordance with accounting principles generally accepted in the U.S. are attached.
A conference call to discuss this news release and other matters of interest to investors and analysts will be held at 9 a.m. (CDT) today. The conference call will be simultaneously broadcast over the World Wide Web. Stockholders and others are invited to listen to the live broadcast or a playback, which can be accessed by following the instructions set out in the Investors section of the company’s Web site (www.kimberly-clark.com).
Kimberly-Clark and its well-known global brands are an indispensable part of life for people in more than 150 countries. Every day, 1.3 billion people - nearly a quarter of the world’s population - trust K-C brands and the solutions they provide to enhance their health, hygiene and well-being. With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, Kimberly-Clark holds No. 1 or No. 2 share positions in more than 80 countries. To keep up with the latest K-C news and to learn more about the company’s 134-year history of innovation, visit www.kimberly-clark.com.
Copies of Kimberly-Clark’s Annual Report to Stockholders and its proxy statements and other SEC filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, are made available free of charge on the company’s Web site on the same day they are filed with the SEC. To view these filings, visit the Investors section of the company’s Web site.
Certain matters contained in this news release concerning the business outlook, including new product introductions, cost savings and acquisitions, anticipated costs and savings related to the Competitive Improvement Initiatives, anticipated financial and operating results, strategies, contingencies and anticipated transactions of the company constitute forward-looking statements and are based upon management’s expectations and beliefs concerning future events impacting the company. There can be no assurance that these future events will occur as anticipated or that the company’s results will be as estimated. For a description of certain factors that could cause the company’s future results to differ materially from those expressed in any such forward-looking statements, see the section of Part I, Item 1A of the company’s Annual Report on Form 10-K for the year ended December 31, 2005 entitled “Risk Factors.”
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- David J. Dickson
- Kimberly-Clark Corporation
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