Kimberly Clark Corp Q1 FY2026 Earnings Call

Good morning, everyone. This is Chris Jakubik, Head of Investor Relations at Kimberly-Clark, and thank you for joining us. I'd like to remind everyone that during our comments today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures during these remarks. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at investor.Kimberly-clark.com. With that, I will turn it over to Mike for a few opening comments.

Okay. Thank you, Chris, and thanks to everyone for joining us this morning. Our first quarter results underscore the strong progress we're making toward creating a company unlike any other in our industry today. Our Powering Care growth engine is enabling Kimberly-Clark to continue building industry-leading base business momentum. We are delivering differentiated science-backed innovation in all rungs of the Good, Better, Best ladder. In the first quarter, innovation helped fuel our delivery of solid organic sales growth with volume plus mix growth increasing to 3%. This builds on two consecutive years of broad-based volume plus mix growth. We're building market share across our key focus areas of Baby Care, Women's Health and active aging, with a second-quarter launch slate that's one of our most active ever across the categories and markets where we compete. Our supply chain team continues advancing our commitment to deliver the best product at the lowest cost. We generated another quarter of industry-leading productivity, enabling us to continue investing for impact. Our fast, lean operating model is making us more agile in navigating external turbulence. It's also helping us continue to bring the best of Kimberly-Clark to the world with speed and efficiency. We're still in the early innings of our potential, and we're well positioned and continue accelerating our virtuous cycle of value creation. We look forward to seamlessly plugging Kenvue brands and businesses into our proven durable operating model. We're ready to raise the standard of care for billions of people around the world and deliver generational value for shareholders. I'm very proud of our teams for their passion and dedication as we work to make our bold ambition a reality. And with that, I'd like to open the line for questions, operator.

Our first question is coming from Dara Mohsenian of Morgan Stanley.

First, maybe just a clarification on the full-year guidance. Obviously, we're seeing commodity pressure today; oil staying above $100 a barrel is not officially in guidance nor are any mitigating actions. Nelson, I was hoping you can walk us through the range of potential actions you would take to help offset any pressure on full-year earnings if oil stays up here, maybe rank order how you think about pricing versus productivity versus flex on ad spend. And just conceptually, do you think it's realistic you can offset most of that if oil stays up here, understanding it's very volatile. Mike, if we can drill down a bit, I did want to delve more into the pricing side in North America. We've obviously seen a pretty promotional industry environment the last couple of quarters. At the same time, you're generating very healthy volume growth on your portfolio within that environment and now we have this unexpected cost ramp up externally. So just a lot of moving pieces, and I was hoping you could help us understand strategically how you plan to manage pricing in North America given all those factors.

Okay. Thanks for the question, Dara. There's a lot to unpack that. Let me give you the overall framework of how we think about it, and then I'll ask Nelson to give some of the details about how we'll process it and also ask Russ to comment on some of your questions about pricing. Overall, I feel like we're making great progress creating a new kind of health and wellness leader, and we're really encouraged by the strong base business momentum we're seeing. Three percent volume plus mix in the quarter builds on many consecutive quarters of solid volume plus mix growth. That volume plus mix growth is being driven by innovation, and we're not renting that through promotion. Promotion is supporting the innovation, and that's the big deal for us. On top of that, we feel like our supply chain is in full swing and generating industry-leading productivity, which enables us to reinvest back in the quality and the marketing of our brands. The environment promises to remain turbulent, but we're going to remain agile and disciplined. We've been through a number of these things over the last several years — COVID, wars, commodity situations — and we've had a lot of experience navigating different disruptions, including this quarter. Our process is to remain very disciplined. One concept we've felt very important is PNOC, pricing net of commodity input cost discipline. We expect that to be at least neutral over time, and we're going to leverage all the tools that we have to make sure we continue to do that. We have a lot of levers to pull in terms of managing our cost profile, which Nelson is going to talk more about right now. But I also say having that discipline on pricing net of cost is an important concept for us.

Yes. Picking up where Mike left off, Dara, a few things. As we look at the overall input cost inflation for the year and what we have factored into the outlook, it's important to bring up the last two years. For 2024 and 2025, we faced right around $200 million of input cost inflation. As we got into this year in January, the outlook was relatively flat all in, so we were staring at about a flat input cost outlook. With the latest data and information, let me unpack what's in the outlook and what we've yet to build into the outlook, including mitigation actions. For the second quarter, a couple of things. As we stated in the prepared remarks, we're going to face around a $20 million top-line impact from the California distribution center fire, which for North America would be in the 70 to 80 basis points of headwind in the quarter. On the bottom line, we expect in the second quarter around $50 million stemming from inflationary impacts related to the Middle East war and some impacts related to the LA distribution center fire, which we expect to recover in the second half of the year. If we look into the back half of the year and assume oil prices remain around $100 per barrel on average, we could face potentially gross incremental input costs of around $150 million to $170 million. We've not built this into the outlook because there are a lot of moving pieces, but we also have not built in potential mitigations, which our teams are currently working through as we roll through different scenarios. It's important to highlight that, as Mike said, we have instituted the philosophy of pricing net of costs over time being neutral, and this is embedded in our integrated margin management process. That ensures that over time we expand margins and keep on track with our Powering Care plan rollout. As such, we have several levers. First, revenue growth management. Second, a very strong pipeline of productivity initiatives. We've delivered two years of 6% gross productivity back to back. In this first quarter, we're already at 6%, and our plan is to deliver 6% for the full year. The pipeline is very rich. We're making significant investments in the North America supply chain with the $2 billion program announced a few quarters back, and that's progressing as planned. Lastly, we have strategic relationships with our suppliers in terms of pricing contracts as well as programmatic hedging elements we've put in place. I'd also remind everyone that we've got a solid track record over the last four years of recovering any input cost inflation and actually expanding margins. If you look at 2023 through 2025, we expanded both gross margins and operating profit margins beyond pre-pandemic levels. So we're confident in our ability to cover these input costs over time. We'll be back with more details in our next earnings call.

Sorry, I'm keeping track for you. I'm going to ask Russ to comment on the promotional environment.

Yes, sure. Thanks, Dara. I would underscore what Mike said: growing volume and mix profitably while maintaining PNOC discipline really is the key focus for us, and innovation is the key to that. Specifically within North America, on the promo environment, our overall pricing was in line in the first quarter. In fact, our overall weighted average promo intensity in North America is down versus pre-COVID and versus category levels. That's because we're focused on driving innovation. You will see promotion tick up when we have an innovation agenda that's really strong because we're trying to drive trial, and that's exactly what you're seeing in diapers right now. We are using more promotion to drive trial. We promoted Snug & Dry with a great innovation that drives softness in our new absorbent core, and we're pleased with the results. We've seen household penetration and velocities up on that post-promotion. We've also shifted some investments across channels with tactical programming to ensure our loyal Huggies buyers can find us after the recent distribution change in the club channel, as we talked about in the last call. I'd expect that to normalize as we go through 2026. Bottom line, in North America diapers, our 2025 promo was below category for the year, and it's below 2019 levels, just to give you context.

Our next question is coming from Peter Grom of UBS.

Great. Thank you, operator, and good morning, everyone. You updated your outlook for category growth to 2.5% versus 2% previously. Can you unpack that a bit more — what regions or categories are you seeing stronger performance in, and you noted stronger category growth in North America, about 3.3%. Do you think that's a realistic run rate moving forward, or do you think we could see a step back given a more uncertain operating backdrop?

Peter, I'll start and ask Russ to weigh in. We're encouraged by the resilience of our categories and the impact of our commercial programming. Notably, North America categories rebounded strongly in Q1. That was driven by shifts in the timing of competitive promotion activity, particularly in paper categories. In Q4 the categories had slowed down to just under 1 point, which related to events like port strikes and other disruptions in the prior year, so we were cycling against that. As we got into the end of the year, it was unclear whether that slowdown was endemic or a one-off. With the strong increase in the category and our organic results, it looks like it was a one-off. On a rolling 12-month basis, we're looking at 2.5% category growth across our categories globally, and that's how we're looking at it. We feel good about the progress.

Yes, and I'd add that we're not seeing any large-scale shifts in consumer buying behavior. Consumers remain under pressure, but that's been an ongoing dynamic. Our trailing 12-month weighted average category growth is around 2.5%, and we don't see a reason for that to evolve much. There are some puts and takes with respect to specific dynamics, but we feel comfortable with that view.

Our next question is coming from Javier Escalante of Evercore.

Thank you, operator. My question is on the merged entity. Mike, you laid out a new organizational structure. Can you help us understand it better? How will it help restore growth at Kenvue while preserving the competitiveness of the core stand-alone Kimberly-Clark? What are the biggest changes you made and how do you see those working? Also, on the combination, can you give updates on the completion of the joint venture with local partners? You may have some of it in the prepared remarks, and you can expand on that. And what is the status of the approval for the merger?

Okay. There's a lot to unpack there. After working on this since November, I would tell you for me and our team, and I think the team on both sides — Kenvue and KC — we have even more conviction in the growth potential of the company we're about to create. Kenvue will report their first-quarter results in early May, so I won't pre-empt that. We've been working on integration planning, category reviews, and Nelson, Russ and I have met with the Kenvue teams. Our view is that their recent challenges have been largely executional rather than structural. There are pockets of strong profitable growth throughout the company, but a few notable large challenges have overshadowed that, primarily North America skincare, North America oral care, and some of their business in China. The management team we've structured for the combined company reflects strong performance observed in the businesses on both sides. Kirk and that management team at Kenvue have taken positive steps, and we're confident Kenvue will improve this year. One of the moves they made was to adopt an operating model announced in February that is consistent with our market-centric balanced matrix approach. We're pleased with the integration planning progress. We've assembled what I view as a world-class team to create the preeminent health and wellness leader. The leadership bench from both sides is roughly 50-50, reflecting talent, market experience, functional capability and technical expertise. We felt it was important to retain the knowledge and leadership that's working while keeping strong institutional knowledge from both companies. The leadership composition also reflects strong performance in Kenvue's international markets. I'm bullish about what this team will do together. The operating model will be market-centric while leveraging global scale. The culture will emphasize ownership, speed and competitiveness, which dovetails with what Kenvue has been doing. Russ may add some thoughts.

I was going to pick up on execution. Execution has been something we've been building and strengthening at Kimberly-Clark for many years, both in how to drive growth and how to drive productivity and SG&A efficiency — and to do all those at the same time. We're applying that approach to the synergy process. We now have over 40 integration teams working on planning the combined company post-close to build the future company, drive synergies, and ensure we can operate effectively together. That process is going well. I'm impressed with the actions Kenvue has been taking recently in their base business and what they're bringing to the table for the combined future. We see good line of sight to synergies in all areas: COGS, SG&A, and revenue. For one quick example in COGS, their products tend to be small and dense while ours are bulky and light, so when we're shipping to the same places we can put them on the same truck and realize value there. In SG&A there are many opportunities beyond duplication: simplifying systems environment, consolidating processes, accelerating global business services, application rationalization, and using AI. On the revenue side, we're excited about opportunities in distribution and leveraging commercial capabilities like e-commerce. All of this requires execution fundamentals, and we're not waiting for the close; we're working on these things now with Kenvue and KC teams.

Just a high-level thought: do you think some of these execution issues on the Kenvue side had to do with the demerger from J&J at a time of great retail changes in the U.S. and China? Do you think that led to underperformance?

I can't comment on all the details. Running these businesses is hard. Small decisions can have big impacts. When I meet with large investors, I ask why quality of management matters so much — because these are arcane businesses with many operating rules, and small inconsequential decisions can sometimes have a big impact. Nelson, Chris and I saw examples of that back when we were at that company. I wasn't there for the full recent history, so I won't speculate further, but doing this well requires being lined up correctly across all fronts of operating a business.

Our next question is coming from Lauren Lieberman of Barclays.

I was hoping you could talk a little about the shipment timing you mentioned in the prepared remarks on North America because its category growth has accelerated. I don't recall if you use Nielsen or IRI, but Nielsen trends including Costco show your business grew 5% and you reported in sub-Q. Can you discuss in which categories in particular you're seeing headwinds? Is it an inventory correction or something timing related that picks up in Q2?

Sure, Lauren. Scanner data and consumption data were very strong. As we've seen in many quarters, there's always some noise between shipments and consumption. The key is consumption. Looking into North America consumer specifically, consumption was ahead of shipments by around 200 basis points. Trade stock inventory is not really the main issue. It's more that we had very strong activation programming in the first quarter that started in January, so some shipments came through in December, which anticipated what we did in Q1. That explains part of the difference. For Q2 we do expect organic sales growth to be slightly below Q1 for two reasons. First, we will be facing the strongest year-ago comp versus 2025, where total enterprise grew about 4% and North America volume was actually 5%. Second, we'll have a headwind from the distribution center fire in California that will be around $20 million or 70 to 80 basis points for the North America segment. As we go into the second half, we expect organic growth to accelerate because some of these noise elements will have been lapped.

Is my line still open?

Yes, yes.

Okay. For my follow-up: the operating profit headwind you talked about for Q2 largely reflects incremental inflation and some of the pressure from the DC fire. You've included roughly $50 million for Q2 and held guidance for the year. So what are the mitigating impacts for the inflation you'll feel in Q2 specifically? And if you're handling it that way for Q2, why not be more explicit about the full-year plan to offset the potential $150 million to $170 million of incremental cost in the back half? The 6% productivity rate is impressive, but you've already delivered at that level. It doesn't feel like an easy task to up that productivity to cover that incremental pressure.

Lauren, one thing to note is we know what the cost impact looks like today, but we don't know how it will evolve over the balance of the year. It's early; it's a moving target. That's why we're keeping our cards a bit close and allowing our teams to model scenarios and actions carefully.

Building on that, Lauren, two points. The $50 million for Q2 is something we feel confident we can maneuver through. We're about 80% covered in the entire cost basket between contractual arrangements, programmatic hedging and other items. We have the full toolkit within our integrated margin management approach, which starts with the philosophy of pricing net of costs. The toolkit includes revenue growth management and productivity. Yes, we've been at 6%, but we have had quarters ahead of 6% and a very strong pipeline of initiatives. The teams are actively working through this. We're having sit-downs with suppliers where surcharges or force majeure elements are being enacted, we're renegotiating contracts as needed, we're looking at price-pack architecture, and all elements of the toolkit. In the last two years we faced about $200 million of incremental costs. If you add what we estimate now plus the $50 million, you're roughly at that level. We want to take time to do this right. We'll continue to invest behind innovation and apply revenue growth management. It takes time, but we've done it in the past, and it's part of our toolkit.

Our next question is coming from Anna Lizzul of Bank of America.

Could you comment on the pacing of the top and bottom line as we move through the year, given the Q2 impact from the distribution center fire and the potential impacts from oil and rising input costs later? On the margin side, can you talk about the difference between Q3 and Q4?

A lot to unpack, Anna, but let me start with the top line. We had a strong start to the year at 2.5% organic growth. For Q2 we expect to be slightly below Q1 for reasons I explained: lapping the strongest quarter of last year and the $20 million headwind from the distribution fire. Heading into the second half, we expect top-line acceleration, and that's embedded in our full-year outlook. On the bottom line, we expect margins to pick up as the year progresses. In Q1 we saw a sequential expansion of gross margin versus Q4, though gross margin versus prior year was down about 60 basis points, largely because we're lapping the last full quarter impact from our exit of a private label contract in North America. Heading into Q2, Q3 and Q4, we're largely going to lap that, and we expect gross margins to expand continuously for the balance of the year based on the current outlook. On operating profit margin, we expanded operating profit margins this quarter by about 20 basis points, partly driven by a 90 basis point improvement year-on-year in overheads. We're getting good traction on delivering the $200 million or greater in savings as part of Powering Care. For the balance of the year we expect continued expansion in operating profit margins. For the full year, we expect gross margin and operating profit margin to expand both in the vicinity of 70 to 80 basis points relative to the comparable period.

Our next question is coming from Robert Moskow of TD Cowen.

I want to test the theme that the business is resilient to these unexpected cost headwinds. In 2025 you had tariffs as a big unexpected factor. Even though tariffs were mitigated for the full year, you still had to lower your profit guide for 2025. The $150 million to $170 million potential headwind here is higher than what the tariff headwind ended up being. How nervous should we be about the ability to offset that much cost?

Rob, let me give some historical context and then ask Nelson to comment. In 2022 and 2023 the business took on roughly $1.6 billion to $1.7 billion of additional costs in consecutive years during an all-time high inflation cycle. What we're talking about now is a fraction of that. Since that cycle we've developed stronger cost management capability, industry-leading productivity, and better revenue growth management discipline. I think we're in a better position today than five or ten years ago to manage input-cost volatility. We also use hedging and other techniques. We feel good about our capability, and we're bullish about the base business momentum. For perspective, we were up on share in 95% of sales-weighted markets in North America and 84% internationally, and we've seen improvement in cohort metrics. Nelson, do you want to add?

Our next question is coming from Edward Lewis of Rothschild & Co Redburn.

A couple of questions. How are you performing across Good, Better, Best — is Good doing better than Better or is Better doing better than Best? And on international, you called out good share gains in some markets. How are you feeling about those markets given concerns about the strait and potential impacts, particularly in Southeast Asia from slower shipping or tanker issues? Any updates there would be appreciated.

I'll ask Russ to comment on Good, Better, Best. First, on safety, thankfully all our employees have been safe in the latest conflict region and teams are working to keep the business operating while keeping everyone safe. Business and performance remain robust, especially in international markets, with double-digit growth in multiple markets. In Southeast Asia one of our businesses saw strong double-digit growth and meaningful share gains. In developed Asian markets like Korea, we're seeing a baby boom: births were up 6.5% last year and the category was up 20% in Korea where we have over a 60% share. So we're feeling very good internationally. Russ, please comment on Good, Better, Best.

I agree. We've seen a lot of strength across Southeast Asia, India, Australia and broadly. We haven't yet seen a significant impact from shipping constraints through the strait, though that could change. On Good, Better, Best, the premium side remains healthy and continues to grow; it's key to category growth. Consumers with higher incomes remain resilient. On the good and better tiers, we aren't seeing a clear pattern shifting down-market. What matters is the strength of the value proposition for each tier. In personal care, private label penetration continues to fall overall; branded value propositions that offer compelling value for money are winning, often in mid-priced tiers. Consumers in our categories are willing to pay for a strong value proposition. Our focus is to win across tiers and give consumers choice.

To add, what's driven our growth over multiple years is premiumization and improving product quality in premium tiers, driving positive mix. We're applying the same approach to value tiers by bringing our best product technology across tiers. In North America, we brought some of our best product technology from Asia and implemented it first in the value tier; it will eventually go across products in the U.S. The core strategy is bringing our best product at every rung of the Good, Better, Best ladder.

Our next question is coming from Chris Carey of Wells Fargo Securities.

To wrap up: first, at the Investor Day you talked about changing your ability to confront different commodity cycles. Can you give a sense of how you feel differently now versus the last commodity cycle — timing when commodities hit your P&L, mix changes, portfolio adjustments? Second, on PNOC, is there a prospect of incremental pricing or RGM that could disrupt volume improvements that you've been seeing, or can you continue to deliver volume if you lean more on price or RGM to control PNOC if inflation stays higher?

Chris, let me start. In my tenure many things have changed about commodity management. Historically, input cost volatility drove earnings volatility, which held the stock back. With Nelson's leadership we've reduced input-cost volatility by using all available techniques: contracting, hedging, strategic supplier relationships, and programmatic approaches. You can see progress in how we buy, how we contract, and partnerships developed over time. The beta on input-cost volatility has reduced significantly over the last five to ten years. Nelson can add more specifics.

Building on that, when I joined we were entering the second year of heightened inflation related to COVID, where we faced very large costs. We learned from that and developed muscles around risk management. We instituted programmatic hedging and strategic supplier relationships to get more visibility into costs and flexibility to manage through shocks. Four years ago we might be in a different position. Given what we've instituted, we're much better able to manage shocks. The other part is how proactive we are with the rest of the toolkit: pricing net of costs and integrated margin management. We're managing end-to-end and measuring teams end-to-end, leading to different outcomes. That's why our confidence in managing cycles is stronger.

Yes. We're in a much better position than five or ten years ago. All right. Thanks, everybody, for joining us. For analysts with further questions, Investor Relations will be around all day. Thanks very much, and have a great day.

Thank you very much. This concludes today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.