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A consumer-products giant fights on through the recession, helped by falling commodity prices and improvements to working capital. An interview with Mark A. Buthman, senior vice president and CFO, Kimberly-Clark Corp.
Edward Teach, CFO Magazine
October 1, 2009
Mark Buthman knows Kimberly-Clark from the inside out. In fact, he laughs, "it's the only real job I've ever had." Given that he went straight from college to the company, in 1982, the 48-year-old CFO isn't kidding. Over the past 27 years, Buthman has held a number of positions at the $19.4 billion health and hygiene consumer-goods company — mostly in financial analysis, but also including a stint as the head of a small tissue mill ("to get some operating experience") and "doing a lot of M&A in the 1990s," as the company changed its portfolio of businesses. He became finance chief in 2003.
Today, as cash-strapped consumers turn to private-label goods, Buthman is preoccupied with improving margins and lowering working capital; the latter effort has helped the company increase cash flow more than 40% in 2009.
Buthman says the maker of Kleenex tissue, Huggies diapers, and other products is committed to sustainability, and he's not just paying lip service to the cause du jour. In August, Kimberly-Clark said that it was adopting stronger standards for obtaining wood fiber from environmentally responsible sources — standards developed with the help of environmental group Greenpeace, which agreed to drop its "Kleercut" campaign against the company.
Greenpeace doesn't make peace with many companies, yet it recently gave its blessing to Kimberly-Clark's efforts. How did that come about?
Wood fiber is our largest raw-material input. We've had an ongoing dialogue with Greenpeace and some NGOs [nongovernmental organizations], resulting in a new fiber-procurement policy — increasing recycled content, moving to even more certified forestry. There is an emphasis on protecting old-growth forests.
Was there shareholder pressure behind this?
Certainly there are some shareholders for whom this issue is front and center on their agenda, but that wasn't a driving force behind our actions.
Are your sustainability efforts focused only on forestry issues?
No. Since 1995, for example, we've had [successive] five-year plans for trying to eliminate manufacturing waste sent to landfills. We look at everything from how to turn diaper [manufacturing] waste into fuel for boilers to how to use the output from tissue production as a soil additive. In many countries where we operate, the water that we discard is cleaner than the water we take in.
Sustainability is an important part of our culture. Dow Jones [the Dow Jones Sustainability World Index] recently named us the sustainability leader in the personal-care space for the fifth year in a row.
Let's talk about a different kind of sustainability: sustaining sales growth. It isn't easy in this economy as consumers spend less and shift to generic products. How do you protect and grow your brands?
It's about having the best products on the shelf every day, at a competitive price. We compete, basically, in eight categories; we invented five of those eight. There's typically a technology underpinning or an innovation underpinning to all of our products. Depending on the market, we have a range of products, from value-oriented all the way to premium.
Pricing is a tricky business. Didn't you increase pricing for Huggies diapers not long ago?
In 2008 we increased pricing across most of our consumer-products portfolio. During the five years prior to 2009 we had significant cost inflation — about $2 billion. We recovered about $1 billion in price realization by the end of 2008. This year, one of our strategies is to focus on recovering margin, partly through price realization, partly through cost savings. And that strategy has played out pretty well.
How much has the recent drop in commodity prices helped you?
This will be the first year in certainly the last five where commodity and energy pricing will be a net positive. We'll get between $600 million and $700 million of commodity-price improvement this year, based on our current outlook. That's against $2 billion of commodity headwinds over the last five years. So it's a step in the right direction.
How much of Kimberly-Clark's sales come from emerging markets?
About 80% of the world's population live outside the United States and Western Europe. Thirty percent of our sales are in those geographies, so we've got a huge growth opportunity. In 2003, developing and emerging markets made up a little more than one out of every five sales dollars. Today it's nearly one out of three. So the growth in our developing and emerging markets business has been dramatic.
Of the "BRICIT" countries — Brazil, Russia, India, China, Indonesia, and Turkey — Brazil is by far the largest market for us. It's a very well-developed business. China is rapidly growing. I think we've gotten to a model where we can grow profitably. It's focused on major cities, using them as a hub, rather than trying to blanket the whole country.
You've slightly improved your forecast for the rest of 2009. Do you see light at the end of the tunnel?
We're realistic. Certainly we're not expecting a significant turn in the economy; it's likely that we're going to bump along the bottom for a while. We started the year expecting $4 to $4.20 a share, roughly bracketing what we did in 2008, which was $4.13 a share. In July we took that guidance up, to $4.10 to $4.25, based on our performance this year. We've delivered terrific cost savings, we've had great working-capital reduction, and our cash flow for the first half of the year was up more than 40%.
In our last working-capital survey, Kimberly-Clark was one of the worst performers in its industry, but you've turned that around.
In the first half of this year we took eight days out of our cash conversion cycle and saved about $435 million of inventory, which I think is a phenomenal accomplishment.
How did you drive down working capital?
Step number one was aligning performance metrics and incentives. Then it was a variety of things: SKU rationalization, looking at end-to-end planning, reducing cycle times, producing to demand versus producing to make inventory.
The more space you have to store stuff, typically the more stuff gets stored. Heading into 2009 we were in more than 20 outside warehouses in the U.S., leased or rented. We set a goal to get out of those warehouses by year-end. By midyear we were.
Last month we noted here that Walgreen raised its dividend in 2009, for the 34th straight year. But Kimberly-Clark also raised its dividend, for the 37th straight year.
Over the last five years [through 2008] our dividends have increased at a compound rate of 11% a year. We don't want to be known as a yield stock, but in this kind of a market it's important that your investors know there's a significant return they can count on.
How much attention do you pay to Kimberly-Clark's stock performance?
I watch our stock price a couple of times a day; I don't watch it every minute. I watch our daily sales. That's my key performance indicator.