Kimberly-Clark Corp (KMB)

• Kimberly-Clark's gross margin has expanded to approximately 37% year-to-date, with consistent gains over the last 8 quarters. The company has strong confidence in achieving its long-term goal of at least 40% gross margin and operating margins of 18% to 20% before the end of the decade, driven by meaningful innovation and proactive cost management. -
• Significant productivity savings of $130 million in the quarter are fueling investments in innovation and growth initiatives. The company has a strong pipeline as part of its Powering Care strategy, aiming to deliver $3 billion over the next few years. -
• Positive progress on market share, particularly in the U.S., where the company is up or even in 7 of 8 categories compared to a year ago and 8 of 8 sequentially, driven by investments in pioneering innovation, improved advertising, and strong commercial execution. -

• The company is experiencing weaker-than-anticipated demand in certain markets, including Latin America, Southeast Asia, and the North American professional channels, which is creating pressures on growth in the near term. - - -
• Category growth is expected to be closer to 2%, down from the previously anticipated 2% to 3% range, due to factors such as reduced pricing benefits and market softness, potentially impacting organic sales growth. -
• Kimberly-Clark is considering strategic options for its international tissue and professional businesses, which may indicate challenges in these areas and could affect future growth and profitability. - -

1. Gross Margin Outlook
   Q: Is current gross margin expansion sustainable?
   A: Management is pleased with the trajectory of gross margins, averaging around 37% year-to-date and making strong year-over-year gains. They expect gross margin improvements to continue, supported by meaningful innovation, proactive cost management, and strong productivity from supply chain transformation. They also plan to increase advertising spend by at least 60 basis points in Q4. Overall, they remain confident in achieving their long-term gross margin goal of at least 40% by 2030. -

2. Exiting Private Label Business
   Q: How will exiting private label impact growth and margins?
   A: The company is focusing on proprietary, science-based innovation behind their brands and has been exiting private label businesses over the past 18 months. This has enabled growth in branded products, like Kleenex, which increased market share by nearly 500 basis points this quarter. They will cease production for a large club private label diaper business in the U.S. in 2025, creating a headwind of about 2% next year. As a result, private label mix will shrink from about 4% of sales in 2023 to about 2% next year, and they expect it to decline further over time. - , -

3. Organizational Changes
   Q: How will the new structure impact growth and visibility?
   A: The new "Wire for Growth" organization, officially implemented on October 1, is progressing well, with benefits already being realized. The structure enhances visibility and responsiveness, focusing on big markets and categories. Management remains largely unchanged in local markets, ensuring continuity. Despite some softness in Southeast Asia and Latin America, they feel confident in their ability to drive growth and manage the business effectively. - , -

4. Inventory Destocking
   Q: How is inventory destocking affecting results?
   A: Retail inventory reductions are impacting shipments, creating a disconnect with strong consumer consumption, which grew 3.2% in North America across Personal Care and Consumer Tissue. Transitory factors like inventory changes, hurricane impacts, and exits from private label contributed to about a 1.3 percentage point headwind in Q3, equating to an 80 basis point impact year-to-date. They expect inventory levels to normalize but acknowledge some dynamism in the environment. - , -

5. Market Share and Innovation
   Q: How are market shares and innovation efforts progressing?
   A: Management is pleased with market share progress, being globally flat on a weighted basis and making strong gains in the U.S., where they are up or even in 7 of 8 categories year-over-year. Innovation plays a key role, aiming both to grow market share and expand categories. Premium innovations like Skin Essentials are delivering great consumer benefits, while they continue to offer value across all tiers. The focus is on delighting consumers to drive both share gains and category expansion. -

6. Q4 Profit Outlook
   Q: What are expectations for Q4 operating profit?
   A: They expect to continue making year-over-year progress on margins but anticipate some pressures in Q4 due to increased investments in advertising and brand support by at least 60 basis points, discretionary costs hitting the P&L, and back-half-loaded input cost inflation. However, they project stronger top-line growth in Q4 compared to Q3, normalized for transitory factors, and remain focused on driving volume and mix-led organic growth. - , -

7. Strategic Options for Businesses
   Q: Are there strategic changes for international tissue and professional businesses?
   A: While management did not comment on news articles or rumors, they emphasized their commitment to adding value in categories where they have a right to win. They have made tough decisions in the past, such as exiting the Consumer Tissue business in Brazil due to structural factors, and will continue to optimize participation where appropriate. -

8. S/4HANA Implementation
   Q: How will S/4HANA impact volatility management?
   A: The organization successfully implemented S/4HANA in North America at the end of July, with minimal disruption. This advanced system enhances visibility and control, allowing better management of the cost basket and improved forecasting capabilities. The company believes this will contribute to managing volatility and supporting strategic initiatives moving forward. -

Annual guidance for FY 2024:

• Gross margin: 37% year-to-date with consistent year-over-year gains expected into Q4 (no prior guidance) - -
• Operating margin: Aiming for 18–20% by the end of the decade (no prior guidance) -
• Private Label Exit: Plans to reduce private label from 4% of total sales in 2023 to 2% in 2025, with an expected 2% headwind to sales growth in 2025 (no prior guidance) - -
• Productivity Savings: Targeting $3 billion over the next few years; delivered $130 million in gross productivity savings in Q3 2024 (no prior guidance) -
• Market Share and Consumption: Emphasis on volume and mix-driven organic growth, disciplined pricing, and promotional activities (no prior guidance) - -
• Retail Inventory Reductions: 1.3 percentage-point headwind in Q3 2024, expected to normalize over time (no prior guidance) -