On the top line, revenue fell by 2.1% yr/yr to $4.63 billion, also exceeding the $4.55 billion expectation. Click here to access the earnings press release.
There are a couple of main themes underlying KMB's recent financial performance, including rising commodity prices and KMB's efforts to offset those.
Last year, commodity prices pressured the company’s profitability by $795 mln. That was an all-time high and was well above its expectations of $300-$400 mln. While it did implement some price increases to help curb rising input costs, its Q4 gross margin still dove by 420 basis points.
The other primary component behind KMB's results is its aggressive cost savings and restructuring programs. In January 2018, it implemented a global restructuring program, which includes its FORCE (Focus on Reducing Costs Everywhere) initiative. The objectives of the program are to lower its structural cost base and manufacturing supply chain by exiting low-margin businesses, closing plants, and reducing the workforce.
At the same time, KMB intends to reinvest in its higher-growth brands, accelerate its presence in emerging markets, and focus on its digital marketing and e-commerce capabilities.
Both of these key factors played a significant role in this morning's solid quarterly report. In Q1, commodities were a $135 mln headwind. While this was a meaningful amount, prices in North America for pulp recycled fiber eased on a sequential basis with KMB's higher selling prices largely offsetting commodity costs. Consequently, its adjusted operating margin was flat on a yr/yr basis at 17.4%, better than the 16.6% consensus and up 40 basis points compared to FY18 levels.
Simultaneously, KMB achieved cost savings of $115 mln, partly attributable to the closure of two personal care facilities.
These items enabled KMB to reaffirm its FY19 EPS guidance of $6.50-$6.70 and organic growth of +2%. In fact, during the earnings call, management stated that its Q1 results improved its earnings outlook compared to its initial view of the year. Given the volatility surrounding commodity prices, KMB probably felt it was more prudent to take a conservative approach to its guidance.
For the remainder of the year, restructuring efforts will continue to be a major factor, especially for its K-C Professional segment, which includes its Kleenex brand. It may exit or divest some of its lower-margin consumer tissue business that account for about 1% of its total sales. In all, KMB is striving to generate annual pre-tax savings of $500-$550 mln by the end of 2021.
Key Takeaways: Due to its exposure to commodity costs, KMB is considered primarily to be a margin and earnings story. So, the fact that operating margin steadied in Q1 following a steep drop-off last quarter comes as a relief. KMB has successfully pushed through some price increases and pulp prices have eased, leading to the improved margins. KMB has also targeted several areas for cost savings, which provided another driver to the upside earnings performance.
Looking ahead, the company believes there is ample opportunity to cut costs further with an emphasis on lower margin businesses, such as its Kleenex brand. The prospect of further margin improvement down the road is a key catalyst for the stock's rally today.