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Kimberly-Clark moves away from pulp business

CHICAGO (Reuters) - Kimberly-Clark Corp KMB.N plans to get out of the business of making the pulp used in its paper products as it copes with rising fiber and oil costs.

Shares of the maker of Kleenex tissues and Huggies diapers rose more than 3 percent as it also announced a 6 percent dividend increase, a $1.5 billion stock repurchase plan and higher-than-expected quarterly earnings.

Kimberly-Clark is paying more for the fiber and oil-based materials such as resin used in its goods. At the same time, a heavy dose of discounting in the household products sector is putting pressure on sales.

Chief Executive Officer Thomas Falk said he expected the market to remain difficult this year, even as a Conference Board report showed U.S. consumer confidence rose.

“We still see a fairly cautious consumer out there,” Falk said in an interview. “Until you start to see more sustained decreases in unemployment and more job creation I think you are going to see the consumer going kind of sideways here.”

Kimberly-Clark said the restructuring, the latest in a string of overhauls at the Dallas-based company, mainly affects the $6.5 billion consumer tissue business, which makes items such as tissues, paper towels and toilet paper and has not met the company’s expectations.

“It is something that probably was long overdue,” said Edward Jones analyst Jack Russo, who rates Kimberly-Clark a “hold.” “They’re trying to really clean up their business.”

Kimberly-Clark currently makes about 8 percent of the 2.5 million tons of pulp it uses each year. It will streamline, sell or close five or six manufacturing facilities including a pulp and tissue plant in Everett, Washington, and its two Australian facilities that make pulp and tissue.

Those three plants employ about 1,450 people, or less than 3 percent of the company’s workforce. Kimberly-Clark did not say how many jobs would be cut in the overhaul.

It will also move some production to lower-cost locations and stop making certain products, mainly nonbranded ones.

The company plans to repurchase $1.5 billion of its shares this year, nearly double the $800 million it spent in 2010, and will take on more debt to fund $700 million of those buybacks.

“What they’re trying to do is show Wall Street that they’re committed to supporting their stock price,” Russo said. “They firmly believe that it’s undervalued, and it is.”

Kimberly-Clark trades at 13.8 times expected 2011 earnings, well below the ratio of many other household products makers such as Procter & Gamble Co PG.N and Colgate-Palmolive Co CL.N, which both issue quarterly results on Thursday.

Kimberly-Clark’s shares rose 3.1 percent to $65.95.

BY THE NUMBERS

Fourth-quarter profit was $520 million, or $1.20 per share, compared with $522 million, or $1.17 per share, a year earlier. Analysts on average expected $1.15 per share, according to Thomson Reuters I/B/E/S.

Sales rose 1.9 percent to $5.08 billion, ahead of the analysts’ average forecast of $5.03 billion. Volume was flat.

Costs rose $220 million in the quarter, including an increase of $130 million for fiber.

In 2010, costs rose $790 million and nearly half of those were offset by cost savings plans. This year, Kimberly-Clark expects costs to rise $200 million to $250 million and be fully offset by cost cutting.

In the consumer tissue business, sales rose 3.9 percent, prices jumped 5 percent and volume fell 1 percent.

“That’s obviously an area that is highly exposed to changes in commodity costs, and it’s also one that’s subject to intense private-label competition,” said Morningstar analyst Erin Swanson. Consumer tissue also has weaker margins than some of Kimberly-Clark’s other businesses, she said.

It was interesting to see the company raise prices, rather than resorting to heavy discounting as it had done earlier in the year, to sell its goods, she said.

The restructuring should cost $280 million to $420 million after tax. By 2013, the move should reduce annual net sales by $250 million to $300 million and boost operating profit by at least $75 million a year, the company said.

Kimberly-Clark forecast 2011 earnings of $4.90 to $5.05 per share, excluding restructuring costs, with sales up 3 percent to 4 percent. Analysts were expecting a profit of $5.00.

Reporting by Jessica Wohl; editing by Lisa Von Ahn and Maureen Bavdek

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