We estimate Kimberly-Clark to clock near 3% y-o-y organic sales growth in Q3 2013, led by growth in the international segment. This is achievable through a combination of organic volume growth, price hikes and an improved product mix. We expect currency headwinds to offset organic sales growth to a greater extent in the quarter due to increasing weakness in emerging market currencies. On the positive front, we believe EBITDA margins will improve due to the company’s restructuring and desheeting efforts and the FORCE program.
Our price estimate of $101 for Kimberly-Clark marks our valuation at a premium of about 5% to the current market price.
International Segment Will Continue To Lead, Cost Savings To Help Offset Currency Headwinds
Kimberly-Clark’s international business, K-C International, led the growth in Q2 2013, registering a 9% y-o-y increase in organic sales. The top-line growth in K-C International also remained healthy despite currency headwinds. The international business delivered double-digit organics sales growth in feminine care, adult care and baby care.
The company experienced particularly strong demand for diapers and baby wipes from emerging economies. Diaper volumes increased by 45% in China, 10% in Russia and 5% in Brazil. Sales of baby care products are increasing at a fast rate in these countries due to factors such as a large population, stronger purchasing power and greater brand awareness among consumers. We expect high single-digit growth in international organic sales in Q3 2013 on robust demand for baby care products across emerging markets.
On the flip side, the international business is likely to face the impact of weakening currency in emerging markets. Kimberly-Clark expects a 1-2% downward drag on its top-line due to currency headwinds, which compares with 0-1% in the previous quarter. Currency headwinds will have a negative impact on transactions and the effects of that will trickle down to the bottom-line. [2]
At its Q2 2013 earnings call, Kimberly-Clark revised its full year target for FORCE cost savings upwards by $50 million at both ends to $300 million–$350 million. According to the management, the increased savings would help overcome additional currency headwinds in the back half of the year.
Restructuring and Desheeting Exercises To Boost Operating Profit Margins
Kimberly-Clark decided to make strategic changes to its Western and Central European businesses in October 2012. The restructuring is expected to continue through 2014 and is aimed at improving profits. It involves exiting lower margin businesses in the consumer tissue segment and the slow-growing diaper business. By Q1 2013, the company had stopped selling Huggies diapers in 13 countries and exited its remaining five markets in Q2 2013. While the restructuring will have a negative impact on diaper sales, the overall baby care division should see better EBITDA margins in Q3 2013.
Tissues form an important division in Kimberly-Clark’s overall portfolio. The company derives slightly less than 50% of its revenues from tissue brands such as Kleenex and Scott. During Q3 2013, Kimberly-Clark rolled out bulkier Kleenex tissue papers in order to offer better quality. Although Kimberly-Clark made Kleenex tissues bulkier by 15%, it also reduced the number of tissues per box by 13% without changing the price of a box. (Read: Kimberly-Clark Plans Bulkier But Fewer Tissues Per Box To Fatten Margins)
The consumer tissue segment has historically witnessed the lowest EBITDA margins among all divisions. Despite some improvement, the segment’s EBITDA margin stood better only than the health care division in 2012. The desheeting technique should help the consumer tissue segment enhance EBITDA margins as the management believes that making thicker sheets is a more efficient manufacturing method and won’t require additional materials. [3] An increase of even 1 to 2 percentage points in EBITDA margins could lead to upside of 3%-5% in our price estimate for Kimberly-Clark’s stock.
We will update our price estimate of $101 for Kimberly-Clark based on the upcoming quarterly results.
No comments:
Post a Comment