Highlights of this issue of IR Quarterly include a look at K-C’s solid financial position as well as two profiles demonstrating our leadership—in a high-potential category and a high-potential geography.
Operating in turbulent times—CFO Mark Buthman reviews K-C’s financial fundamentals and prudent balance sheet decisions while we continue to support our brands for the health of the company over the long haul.
Growth and innovation in Adult Care—Substantial market leadership and ongoing product innovation make K-C well-positioned to take further advantage of the growth in the North American adult incontinence market.
Continued momentum in Brazil—Strong brands, innovation and nimble marketing strategies underlie Brazil’s contribution to K-C’s excellent results in developing and emerging markets.
As always, I’m interested in your questions and comments about our initiatives and this newsletter. Use the link below to send me your feedback.
Mark Buthman
Senior Vice President and Chief Financial Officer
K-C has had a solid balance sheet and capital structure throughout its 136-year history. This has served us well in both good times and bad, and will continue to do so in the current uncertain environment.
Despite volatility in markets around the world, our financial position remains stable. K-C generated more than $1.8 billion in cash provided by operations through the first nine months of the year—that’s up 5 percent compared to last year. It has never been more apparent that healthy cash flow is a key ingredient to succeeding in a challenging business environment.
K-C’s strong credit rating and balance sheet are providing sufficient access to the financing necessary for both day-to-day operations and longer-term investment in brands and innovation. We have ready access to credit, and demand for K-C commercial paper has remained high throughout the recent turbulence. Moreover, we’ve continued to get very attractive rates in line with or below the market.
We think it’s prudent in this environment to be somewhat more conservative with our balance sheet and deployment of capital. In keeping with this approach:
In October we scaled back our share repurchase plan for 2008, setting a new target of $600 to $650 million. Even so, this represents about 2 to 2.5 percent of our stock, in line with our 2 to 3 percent long-term target. Given the dramatic downturn in the equity markets this year, we anticipate making a $50 million contribution to our U.S. defined benefit pension plan in the fourth quarter of 2008, and are likely to make more significant contributions in 2009 to improve the plan’s funding level.
Toward the end of October we chose to enter the credit markets. We issued $500 million of 10-year fixed rate debt with a yield of 7.55 percent. I was pleased that the strength of K-C’s financial position and our company reputation led to favorable market pricing compared to other deals that occurred at the same time. Moreover, demand was quite strong—in fact, the offering was over-subscribed immediately.
Proceeds from this long-term financing were used to reduce commercial paper. We chose this route because we thought it was appropriate to be somewhat more conservative with the duration of our debt portfolio. In addition, we expect our commercial paper needs to increase in the first half of 2009, as we make the anticipated U.S. pension fund contribution and purchase the remaining ownership of our Andean partner (you can read more about this terrific transaction—which is modestly accretive for K-C from day one—in the News Brief in this issue)
Our businesses are diligently focused on cash generation and cash deployment to preserve flexibility and strong liquidity. How so?
First, we’re intent on improving working capital. Even though we’ve made some progress over the past few quarters, we have opportunities to improve further. Next, we are redoubling our efforts with regard to G&A spending. We are already very efficient in managing our overhead costs but are taking further steps to focus our spending. Third, we are making sure that capital projects provide solid returns, with an eye toward near-term margin-improvement opportunities.
Although the environment has changed dramatically this year, one thing that has not changed is our commitment to protect and strengthen our brands. We are home to some of the world’s most trusted brands, and we’ve increased strategic marketing spending behind them by more than $70 million through the first nine months of 2008. These brands are the lifeblood of our company, and improving them for the long haul through superior innovation, marketing and customer activities is the key to delivering sustainable growth and returns to shareholders.
We will continue to improve our brands and pursue our targeted growth initiatives, even in this uncertain time and difficult economy. Two clear examples of how we’re doing this – in our Adult Care business in North America and in our business in Brazil – are discussed elsewhere in this issue of IR Quarterly.
Thank you for your support and interest in Kimberly-Clark.
Growth and Innovation in Adult Care
Kimberly-Clark is leveraging its strong brands and ongoing innovation to further strengthen its leadership position in the North American adult care market. The effort is one of the company’s targeted growth initiatives.
The $1.2 billion adult incontinence category has been growing at a mid-single-digit rate for the past several years, a pace that is expected to continue as the Baby Boomer population ages.
K-C is the clear market leader, with shares in excess of 50 percent in the U.S. Offerings include DEPEND® products—the brand with which K-C launched the adult incontinence category in 1984—and POISE® products for women with light bladder weakness.
The company’s North American business has delivered strong performance over the past several years – volume growth has averaged 7 percent from 2005 through 2007. In 2008, volumes have risen 5 percent through nine months, despite a mid-year price increase, and market shares have increased about 1 point.
Favorable category dynamics point to expanded market potential. The U.S. Census Bureau reported recently that the number of Americans age 55 and over will increase from 67 million currently to approximately 76 million by 2010. The Bureau also noted that nearly 27 million will likely experience incontinence by that time, up from 19 million today.
“Our long-term market leadership in adult care is built on a rich tradition of mining consumer insights and introducing industry-leading innovations,” said Bruce Paynter, group president, North Atlantic Personal Care. “We are well-positioned to continue to leverage the opportunities in this attractive category.”
Launching Another Category First
A steady stream of innovation over the past two years has spurred K-C’s strong growth in adult care. For the DEPEND brand, K-C launched a significantly upgraded DEPEND step-in underwear product and an improved DEPEND Guard for Men in 2007 that provided substantially enhanced leakage protection, addressing the number one consumer need.
These successful enhancements are being followed by another groundbreaking adult care innovation in 2009: DEPEND Underwear for Women and Men will debut in March as the category’s first gender-specific adult absorbent underwear.
The patent-pending male and female designs of the new DEPEND Underwear are tailored to accommodate the unique body shape differences between men and women, providing a better fit and, therefore, better protection. Customized leg openings are
shaped to contour to male and female bodies, increasing comfort and preventing leakage. The products’ gender-specific absorbent design provides protection where men and women need it most.
“As the market leader for more than two decades, Kimberly-Clark understands the emotional impact incontinence can have on those who suffer from this medical condition,” said Andrew Meurer, vice president, North American Feminine and Adult Care. “We’re committed to delivering product solutions that provide users the confidence and dignity to overcome the withdrawal and other emotionally debilitating symptoms that can so often result from this condition, as well as help them maintain a normal and active life. Our DEPEND Underwear for Men and Women deliver on that commitment, offering consumers a gender-specific design that provides better comfort, enhanced discretion, and superior fit and protection.”
As part of the introduction, the DEPEND brand will unveil more intuitive packaging for its entire product line. Distinctive color coding, a new absorbency scale and a simplified sizing structure will help make choosing the right product solution faster and easier for shoppers.
The launch will be supported by the largest integrated marketing campaign in the history of the DEPEND brand. Elements will include television, print and online advertising, direct mail and other tactics. A Web “microsite” (www.preview.depend.com) within the primary DEPEND Web site highlights the new products and the new intuitive packaging designs. [For more information on the new DEPEND products and the launch campaign, read the news release.]
Enhancing Protection and Comfort in POISE
In the light bladder weakness segment, K-C followed its successful 2007 introduction of a redesigned POISE pad with a new product launch and additional improvements across the entire POISE product lineup in 2008.
The new product—the Ultimate Extra Coverage pad for overnight use—was introduced in July, providing a balance of superior protection and comfort. Meanwhile, all of the heavier absorbency POISE pads were improved in the second quarter with the addition of new purple Leak-Block* Sides. In addition, POISE liners and ultra thin pads were upgraded in the fourth quarter to make them thinner and more flexible, with a feminine look and feel added to both product and package.
“We’re committed to continue delivering superior discretionary product solutions to meet the needs of
consumers dealing with incontinence,” Meurer said. “Our strong brands, coupled with ongoing innovation supported by world class marketing initiatives, will reinforce our leadership and generate strong growth in this high-potential, high-margin business.
K-C’s Business in Brazil Supporting D&E Growth
Among the developing and emerging (D&E) markets dubbed BRICIT—Brazil, Russia, India, China, Indonesia, Turkey—that K-C is targeting as part of its strategic growth initiatives, Brazil continues to be a strong performer.
K-C’s businesses in this country generate more than half of overall company BRICIT sales, which in turn are 20-plus percent of total D&E sales. Brazil has been a solid contributor to the strong annual double-digit sales growth in the BRICIT countries that the company has generated over the last several years.
Growth in Brazil this year has been broad-based, with organic sales up at a double-digit rate through September in all three segments in which K-C does business in the country: personal care, consumer tissue and Kimberly-Clark Professional (KCP).
The bulk of K-C’s sales in Brazil are in personal care and consumer tissue products, propelled by the company’s strong market positions in these categories. K-C products are No. 1 in infant care, consumer tissue and baby wipes and No. 2 in feminine care.
“Our business in Brazil continues to play a key role in K-C’s overall strong performance in Latin America,” said Juan Ernesto de Bedout, group president, Latin American Operations. “We are building on our longtime market strength in the country by delivering product innovation, enhancing our brand-building efforts and further improving customer relationships.”
Innovation and Brand Strength
K-C is leveraging its well-known brands to introduce a stream of innovations across its product portfolio and is supporting these efforts with significant marketing support.
Baby and child care innovations in 2008 added several new offerings to the successful HUGGIES® Monica line, including an improved, better-fitting diaper that provides enhanced leakage protection. This upgrade was introduced in the third quarter and was followed in the fourth quarter by a new sun care line for infants and children.
In feminine care, K-C expanded the market position of its well-regarded INTIMUS® brand with pad, tampon and liner improvements in 2008, and introduced extensions to its successful Intimus Teen and Intimus Gel product line-ups.
Among the consumer tissue innovations brought to market this year was a third quarter improvement to SCOTT® bathroom tissue. The enhanced product is thicker and softer, providing consumers “new cushiony softness.”
Improving Mix
Another growth driver in Brazil has been the continued successful implementation of a strategy across both the personal care and consumer tissue businesses to move consumers to value-added, higher-margin offerings. In consumer tissue, for example, the business has made notable progress over the last several years trading bathroom tissue consumers up from single-ply to two-ply offerings.
In personal care, the diaper business has focused on being first-to-market with premium tier products such as HUGGIES Monica Soft Touch diapers, which feature a breathable cover, and Monica Newborn diapers. To spur trial, both products were made available in single-count packs. Innovations such as these have helped generate solid mix improvements and strong overall volume growth for the last several years.
Expanding Business for KCP
While currently still a fairly small percentage of K-C’s total Brazil business, sales continue to build for Kimberly-Clark Professional products for institutional and workplace settings—including bath and facial tissue, wipers and protective apparel. KCP products lead the market in the washroom tissue segment.
K-C has continued to build competitive advantage in this category by introducing a number of innovations in 2008. Among these are electronic no-touch dispensers for hand towels and bath tissue, a new KLEENGUARD* stretch coverall product and extensions to the WYPALL* wiper product line.
Building Strong Trade Relationships
K-C has leveraged its highly effective Latin American customer management program to particular advantage in Brazil. This approach comprises a balanced focus on developing sound customer relationships with both the burgeoning modern trade in Brazil’s metropolitan areas and the still-dominant traditional trade in smaller markets.
The program centers on enhancing K-C’s capabilities in reaching and meeting the specific needs of the variety of smaller customers in the market. As a result, K-C sales and distribution in the traditional trade continue to expand significantly.
“Our team has continued to execute well against our Global Business Plan strategies and objectives in Brazil,” said Bob Black, group president, Developing & Emerging Markets. “Even in the current volatile economic and currency environment, we believe that our focus on brands, innovation and customers will serve us well and will generate solid results in this market and in D&E overall.”
NEWS BRIEFS
K-C To Acquire Remaining Interest in Its Andean Affiliate
In October Kimberly-Clark reached an agreement to purchase the remaining 31 percent of its Andean region subsidiary, Colombiana Kimberly Colpapel S.A. (CKC). The transaction is expected to close in late January 2009 and will bring Kimberly-Clark’s ownership of CKC to 100 percent, bolstering K-C’s presence in the rapidly growing Andean region (Bolivia, Colombia, Ecuador, Peru, Venezuela). Kimberly-Clark expects the acquisition to be modestly accretive to 2009 bottom-line results. CKC is a leading manufacturer and marketer of consumer tissue and personal care products and also sells K-C Professional products. For more information, read our news release.
HUGGIES® Brand Celebrates 30th Anniversary
Kimberly-Clark’s global HUGGIES brand marked its 30th year in October. Launched as a premium disposable diaper brand in the U.S. in 1978, today the HUGGIES brand is the cornerstone of K-C’s global diaper business that generates annual sales in excess of $4 billion. The success of the diaper business led to the extension of HUGGIES into baby wipes, training pants, swim pants, bath/body toiletries and sun care products.
K-C Named One of 43 Companies Receiving Top Corporate Governance Score
GovernanceMetrics International (GMI), a corporate governance research and ratings agency, has ranked Kimberly-Clark in the top one percent among the nearly 4,200 companies surveyed for its most recent ratings release. As one of the top 43 companies, K-C received an overall global rating of 10.0, the highest that GMI assigns. The top-ranking companies were recognized for having best-in-class corporate governance standards.
4Q Earnings Release Set for January 26 Kimberly-Clark’s fourth-quarter earnings release is scheduled for January 26, 2009. The fourth-quarter earnings conference call also is set for that day at 9:00 a.m. Central Time. For more information, visit the events calendar.
Kimberly-Clark Investors : IR Newsletter
Forward-Looking Statement:
Certain matters contained in this newsletter concerning the business outlook,
including new product introductions, cost savings and acquisitions, anticipated
financial and operating results, strategies, contingencies and 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, 2007, entitled "Risk Factors".
Mike Masseth
consumers dealing with incontinence,” Meurer said. “Our strong brands, coupled with ongoing innovation supported by world class marketing initiatives, will reinforce our leadership and generate strong growth in this high-potential, high-margin business.
In feminine care, K-C expanded the market position of its well-regarded INTIMUS® brand with pad, tampon and liner improvements in 2008, and introduced extensions to its successful Intimus Teen and Intimus Gel product line-ups.
