August 31, 2017 / 3:45 PM / a year ago

Fitch Rates Kimberly-Clark's EUR500MM Sr. Unsecured Notes 'A'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, August 31 (Fitch) Fitch Ratings has assigned an 'A' rating to Kimberly-Clark Corporation's (Kimberly-Clark) newly issued EUR500 million seven-year senior unsecured notes due September 2024. The Rating Outlook is Stable. The notes, senior obligations of the company, rank equally with all Kimberly-Clark's present and future unsecured and unsubordinated indebtedness. Proceeds will be used to repay a portion of Kimberly-Clark's outstanding commercial paper which was incurred in order to repay part of Kimberly-Clark's 6.125%, $950 million note which matured Aug. 1, 2017. A complete list of ratings follows at the end of this release. KEY RATING DRIVERS Scale, Leadership in Stable Sector: Kimberly-Clark's scale, with approximately $18 billion in revenues, leading market shares in tissue-based personal care products and strong liquidity, are key underpinnings to the rating. The firm is a global consumer packaged goods company with approximately 52% of net sales and 65% of operating profit (before Corporate & Other expenses) generated in North America in 2016. Its principal products such as Huggies diapers, Depends for adult incontinence and Andrex toilet paper occupy leading positions in most markets. Consistently Solid Operating Metrics: The company's organic growth rate has been in the 2% to 5% range in each of the past five years, although net sales have been negatively impacted by currency. For example, in 2016 organic volume grew 2%, but foreign exchange negatively impacted sales by 4% resulting in a 2% decline, and in 2015 organic volumes increased 5%, product mix contributed an additional 1%, and currency negatively impacted the top-line by 10%. Notably, consolidated organic volume growth was positive in each of the past five years. For the first half of 2017, organic sales were down approximately 1% driven by lower net selling prices. Fitch expects organic growth in the low-single-digit range in the forecast period, driven primarily by volume growth, as pricing appears to be challenging, particularly in North America and China. In addition, ongoing and intermittent restructuring programs, pricing in some markets, and exiting low margin regions and product lines has led to sequential improvement in EBITDA margin (Fitch adjusted) from 18.9% in 2011 to 22.8% in 2016, despite strong pressure from foreign exchange over the past two years. Fitch anticipates that EBITDA margins will improve modestly as a result of ongoing cost saving efforts, which will outpace commodity cost pressure, but could flatten or decline modestly if commodity costs were to increase beyond expectations. Intermittent Input Cost Pressures: Commodities used in the manufacturing process, such as resin, pulp, and energy, experience periods of price volatility that can pressure margins. Commodity costs which had been declining over the past few years are anticipated to be a modest headwind in 2017, given the current volatility in oil prices and its effect on other commodities. Management expects the total impact to be between $150 million to $250 million of cost inflation. Additionally, regional inflation could potentially increase commodity prices in some international markets. The most significant commodity price risk relates to the price of pulp, which is the primary raw material for Kimberly-Clark's tissue products. Longer-term, oil and other input costs will generally remain volatile and could pressure margins on input price increases. Commitment to Rating Profile: Kimberly-Clark's management has publicly stated its commitment to operating within the 'A' rating category. Historically, discretionary activities such as share repurchases have been scaled back when cash flows experience pressure or when the company has done fill-in acquisitions. For example, the company suspended share repurchases and increased the contribution to its pension plan by $716 million in 2009 to partially close the large funding gap that developed after the financial crisis of 2008. Given the pressure on profits from the strong U.S. dollar and higher pension contribution in 2016, the company lowered its 2016 share repurchase to $739 million, comparing to an average of nearly $1.4 billion from 2013 to 2015. Fitch expects leverage to be maintained below 2x given the company's commitment to maintaining strong credit protection measures. DERIVATION SUMMARY Kimberly-Clark is a global consumer packaged goods company with $18 billion revenue in 2016. It has manufacturing facilities in 38 countries, and sells products in more than 175 countries. Products for household use are sold directly to supermarkets, mass merchandisers, drugstores, warehouse clubs, variety and department stores and other retail outlets, as well as through other distributors and e-commerce. Products for away-from-home use are sold through distributors and directly to manufacturing, lodging, office building, food service, and high volume public facilities. Net sales to Wal-Mart represented approximately 14% of Kimberly-Clark's net sales in 2016. Kimberly-Clark's 'A' rating is a reflection of the company's large scale, market leader position, and strong investment grade credit profile. Comparing to other consumer companies that are in Fitch's U.S. corporate public rating coverage universe, Kimberly-Clark has the largest scale, a stable EBITDA margin, and total Debt/EBITDA leverage ratio under 2x as of December 2016. Hasbro (BBB+/Stable) had annual revenue of $5 billion and was levered at 1.7x total Debt/EBITDA as of December 2016. Mattel (BBB/Negative) had annual revenue of $5.5 billion and was levered at 2.7x total Debt/EBITDA as of December 2016. Newell (BBB-/Stable) had annual revenue of $13.3 billion and was levered at 4.7x total Debt/EBITDA as of December 2016. KEY ASSUMPTIONS Fitch's assumptions in its base case projections are as follows: --2017 revenue is projected to be flattish to 2016. In the forecast out years, revenue is projected to grow at a low-single-digit rate. --Modest EBITDA margin improvement of 20 basis points (bps) in 2017/2018 due to the realization of cost savings programs partially mitigated by commodity price increases. --Capital expenditures of $900 million annually. --Free cash flow ranging from $850 million-$950 million annually. --Share repurchases of $800 million-$1 billion annually. --Leverage remains at or below 2x through the forecast period. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to a positive rating action include: --Committing to operating with leverage below 1.5x with strong business trends would support upward ratings migration. However, the company appears comfortable with its current credit protection measures and thus an upgrade does not appear likely. Future developments that may potentially lead to a negative rating action include: --A change in financial strategy to operate with leverage above 2x, most likely through a large debt financed share repurchase program or a transformative acquisition, would be a negative driver. --Meaningful market share losses in a major category such as diapers or prolonged and significant price increases in major commodities concurrent with an inability to fully pass on price increases would be of concern. LIQUIDITY At June 30, 2017, Kimberly-Clark had very comfortable liquidity with $1,051 million in cash on hand and a $2 billion unutilized revolver maturing in 2021. This revolver supports its $2 billion commercial paper program. The company normally holds most of its cash in international markets and as such it may not all be available to reduce debt balances. Long-term debt maturities in the next two years are moderate with $800 million due in 2018 and $700 million due in 2019. Fitch expects that the upcoming maturities would be refinanced fully and gives management the opportunity to balance their current maturity towers. The company's strong financial flexibility stems from its ability to consistently generate approximately $3 billion in operating cash flow annually. Dividends and capex have a $2.3 billion run-rate and are the basics needed to re-invest in the company and meet shareholder expectations. Kimberly-Clark has generated at least $2.3 billion in operating cash flow since 2002. FULL LIST OF RATING ACTIONS Fitch currently rates Kimberly-Clark as follows: --Long-term Issuer Default Rating (IDR) 'A'; --Short-term IDR 'F1'; --$2 billion commercial paper (CP) program 'F1'; --$2 billion revolving credit facility 'A'; --Senior unsecured notes and debentures 'A'. The Rating Outlook is Stable. Contact: Primary Analyst Ellen Itskovitz, CFA Senior Director +1-312-368-3118 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst David Silverman, CFA Senior Director +1-212-908-0840 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Date of Relevant Rating Committee: May 12, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and restructuring costs. For example, Fitch added back $77 million in non-cash stock-based compensation and $35 million restructuring charges in 2016. 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