Fitch Rates Kimberly-Clark Corp.'s $800MM Senior Unsecured Notes 'A'
The new notes contain a Change of Control Repurchase Event clause. Upon the occurrence of both a Change of Control and ratings below investment grade by each of the three rating agencies and unless Kimberly exercises its right to redeem the notes, the company will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount plus accrued and unpaid interest.
KEY RATING DRIVERS
Scale, Leadership in Stable Sector: Kimberly's scale, with approximately \\$19 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 hygiene company with approximately 50% of net sales and 60% of operating profit (before Corporate & Other expenses) generated in North America. 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 3% to 6% range in each of the past 10 years. Importantly, volume growth was positive in all but one of those years and provided the bulk of the 4% organic top line growth in 2015. Fitch expects organic growth to remain in the 3% to 4% range in the next two years though pricing is likely the larger factor in 2016 when late 2015 pricing actions anniversary.
Importantly, 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 from 18.9% in 2011 to 22% in 2015 despite strong pressure from F/X over the past two years. Fitch anticipates that EBITDA margins will improve modestly in 2016 with the benign commodity environment but should flatten or decline modestly if commodity costs increase.
Commitment to Rating Profile: Kimberly's management has publicly stated its commitment to operating within the 'A' 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. Fitch also notes that given the pressure on profits from negative F/X which is continuing into 2016, the company lowered its share repurchase target for 2016 to \\$600 million to \\$900 million after repurchasing an average of nearly \\$1.5 billion in shares over the past four years.
Fitch expects leverage to be maintained below 2x given the company's commitment to maintaining strong credit protection measures.
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. The near term commodity outlook is benign and likely to be modestly deflationary given the rapid decline in oil prices. However, longer term, oil and other input costs will generally remain volatile and could pressure margins on price increases.
--Low-single digit revenue declines in 2016 with underlying revenue growth in the 3%-4% range over the next two years. Negative currency impact of 6% in 2016 is in line with management's guidance.
--Modest 30 basis points (bps) improvement in EBITDA to 22.3% in 2016 due to the realization of cost savings programs and a favorable input cost environment.
--Capital expenditures of \\$1 billion annually.
--Free cash flow (FCF) ranging from \\$800 million-\\$900 million annually, after neutral to modest benefit from swings in working capital.
--Share repurchases of \\$900 million-\\$1 billion annually, funded primarily with FCF.
--Leverage remains at or below 2x through the medium term.
Future developments that may, individually or collectively, lead to an upgrade 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 increases in major commodities concurrent with an inability to fully pass on price increases would be of concern.
Comfortable Liquidity and Maturity Profile: At Dec. 31, 2015, Kimberly-Clark had very comfortable liquidity of \\$2.6 billion with \\$619 million in cash on hand and a \\$2 billion unutilized revolver maturing in June 2019. 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 include \\$750 million due in 2016 and \\$950 million due in 2017, which Fitch expects will be refinanced.
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. FCF expectations are at \\$800 million-\\$900 million annually, after a neutral to modest benefit from swings in working capital. FCF has been low over the past two years averaging \\$520 million. However, if one time outflows such as the additional \\$150 million in cash taxes related to the Halyard spin in 2014 and roughly \\$300 million in contributions in conjunction with the pension settlement were excluded, average FCF would have been \\$750 million.
FULL LIST OF RATING ACTIONS
Fitch assigns the following rating to Kimberly-Clark:
--Senior unsecured notes 'A'.
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'.