This is the second of two articles on finance at consumer packaged goods giant Kimberly-Clark. The first focused on “Power of a CFO,” an initiative to get finance team members to think more expansively about their jobs.
By lots of measures, the finance team at Kimberly-Clark is pulling its weight, and then some.
Finance oversees an aggressive cost-cutting program, called FORCE (for “focus on reducing costs everywhere”), that measures year-over-year operational performance. It’s been in place for a long time; savings, which averaged $190 million a year from 2004 through 2010, expanded to $265 million, then $295 million, then $310 million in the following three years.
Net sales marched forward at a compound annual growth rate of 4% from 2004 through 2013, but, largely because of the cost savings, the CAGR for earnings per share was 6%. The company’s operating margin improved from 14.5% in 2010 to 15.7% last year.
Return on invested capital (ROIC) has climbed from 13.7% in 2003 to 17.5% last year. And working-capital performance has surged, with the cash conversion cycle having plummeted from 73 days in 2008 to 39 days last year.
The company has provided a 155% total return for shareholders over the past 10 years, compared to 104% for the S&P 500. The per-share dividend rose from $1.36 to $3.24 over that span. And just since 2010 the company has repurchased more than $4.5 billion worth of its stock.
Kimberly-Clark finance chief Mark Buthman recently talked with CFO about the company’s financial performance. An edited transcript of the discussion follows.
What does the FORCE initiative consist of?
We took a great idea from one of our businesses and translated it into an enterprise program. It’s about driving three elements: price savings on materials; productivity and reduced waste through lean manufacturing; and sustainable product design. It’s pretty amazing that all three contribute about a third of overall savings. It varies a bit from year to year, but over 10 years they’ve been very balanced.
We’re often asked, when will the savings run out? We’ve gotten all the low-hanging fruit. Intuitively, you’d think there would be diminishing returns. But building the capability to drive improved efficiency and effectiveness finds new opportunities we never knew existed. So I would say that while the degree of difficulty is increasing, our capability is getting better.
Your stock-buyback program seems unusually aggressive. In just the past four years the shares you’ve bought back amount to more than 10% of your current market capitalization. Why is this such a high-priority use of your cash?
I wouldn’t say it’s a high priority. It’s our third priority. Our approach to cash deployment is first and foremost to grow our business. So our first priority is capital spending. We want to invest every dollar we can to drive growth, margin improvement and innovation. The second priority is to be a top-tier dividend player among our [consumer packaged goods] peer group. Whatever is left over goes into buybacks.
We’re a tremendous cash generator. One of our core metrics is ROIC, and over time we’ve dramatically improved our returns on capital deployed. One of the ways we do that is to limit the amount of cash on the balance sheet. We see share buybacks as a return of residual cash that isn’t used to grow and strengthen our business or to pay dividends.
How have you been able to so substantially improve your working-capital performance?
Other than capital spending, the single biggest variable we manage is working capital. That has been a big driver of our improved ROIC performance over time.
The most important factor has been more aggressively managing our payment terms. Part of that has been working with banks to provide supplier financing. Kimberly-Clark was an early adopter of giving some benefit to our suppliers who might not have access to the capital markets to the extent we do.
With regard to inventories, introducing lean manufacturing principles has really allowed us to dramatically reduce the amount of inventory that’s necessary to service our customers’ requirements.
And then we’ve worked hard on days sales outstanding in all of our businesses around the world, trying to collect on invoices faster and, more importantly, just collecting on them consistently with the terms we have established. It’s easy in certain markets to set a term then let it slip.
You’ve said that mergers and acquisitions are not a core part of your growth strategy. Why is that?
We just have so many opportunities to grow our current business. Look at the global penetration of disposable diapers, feminine-care products, adult-incontinence products and even baby wipes. If we could get every mom around the world to use one baby wipe, that’s a billion-dollar incremental growth opportunity. If you’re a U.S. mom, you can’t imagine changing a diaper without a baby wipe, but that’s not true in most places around the world.
We find that we are most successful when we leverage the capabilities we have internally. It’s not that we would be shy about M&A. It’s just not front and center in our business strategy. We’re going to be best when we’re driving the businesses we know the best.
Is that why you’re spinning off your health-care business – because it’s really not very much like your other businesses? Or is it because it’s your smallest product segment and has the lowest margin?
It’s more the difference of the business. And as we tried to grow it, it became more and more different, especially as we got into the medical-device category. There was a different rhythm of innovation. The sales teams in that business are different from our consumer sales teams and have different comp programs. And there’s a talent-attraction component. People in the health-care space want to work for a health-care company.
As the growth opportunities in our consumer businesses expanded, and as our international sales started to expand its share of our overall mix, health care had a tougher time competing for capital within the Kimberly-Clark portfolio. The spinoff is about putting that business in a position to create the most value.
You’ve worked at Kimberly-Clark since 1982. How do you think that plays into your value to your employer, vs. what you might have been able to offer to multiple employers had you changed jobs a few times and absorbed additional experiences?
I always say that this is the only real job I’ve ever had. I think there’s no one recipe. Building a career means building a set of experiences and growing your skills and business judgment over time. I just happen to have been able to accomplish all those things at one company.
When I became CFO 12 years ago I started to establish my own CFO network, reaching out to more experienced people at other companies. I have found them to be tremendously helpful and kind. Now that I’m a more experienced CFO, I try to pay that forward by coaching and mentoring those at other companies that are less experienced.
I ran a small tissue mill at one point in my career. I learned how to do M&A. I helped to lead the integration of Scott Paper and Kimberly-Clark, which was really a non-financial experience. I’ve been involved in most of our businesses around the world. But I do recognize that my experience set is limited, and my network of relationships with my peers gives me insights into doing things differently.