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Four years after the deal that was supposed to make it a global juggernaut, Kimberly-Clark Corp. may be starting to live up to its reputation.

After struggling through two restructurings, 5,000 layoffs, and chronic share losses of brands picked up in its 1995 Scott Paper Co. acquisition, K-C has begun to turn in the sort of market performance analysts were expecting.

Third-quarter sales grew 7%, with sales in K-C's personal-care business -- including Huggies diapers and Kotex feminine products -- posting a strong 15.5% rise for the quarter and a brisk 11.7% through the first nine months of the year.


Contrast that to rival Procter & Gamble Co., whose overall 4% sales gain in the third quarter was weighed down by a 2% decline in its paper businesses.

P&G didn't break out results for baby care and feminine products units, but acknowledged that its tissue sector, led by rollout of an improved Charmin, offset sales declines elsewhere.

K-C's tissue businesses, mostly brands acquired from Scott, continue to be weaker performers, but sales still grew 4.5% in the quarter on volume increases of 7%. Those results reflect little impact from product improvements and the first TV advertising in more than a decade for the Scott bath tissue and paper towel brands, which began midway through the quarter.

"They're following a very sound consumer products strategy that I'd like to see more companies employ," said William Steele, analyst with Bank of America Securities. "You improve your internal operating efficiency and free up cash flow that you use to reinvest behind your brands, in the form of higher advertising, promotion and product innovation."

Getting to that point wasn't easy, however. Kimberly-Clark's 1995 acquisition of Scott was widely lauded as a master stroke by analysts and consultants, who saw the combined company providing a serious challenge to P&G across all paper categories in most of the world.


Then, reality struck. As K-C began consolidating Scott in 1996, it found that neither the acquired company's manufacturing operations nor the new-product pipeline were quite as expected.

"Let's just say that what Kimberly bought was not exactly what Scott was selling," said Ken Harris, partner with Cannondale Associates. He said he believes the distractions of consolidating the acquisition tied K-C's hands even in its diaper business.

"Any time two large companies merge, to get the operational efficiencies, you have to get them on the same page, and it doesn't occur overnight," Mr. Steele said. "The synergies were still there, but it took longer to show up."

Some of the biggest gains for K-C may be coming in Europe, due to a reorganization last year that for the first time put executives in control of the strategic direction of its businesses worldwide.

"They have had very poor performance in Europe," said Chip Dillon, analyst with Salomon Smith Barney. "Before they put in Tom Falk [president-global tissue] and Kathi Seifert [president-global personal care] in the spring of 1998, it was very difficult to get the country divisions to cooperate. They represent some of the authority that was lacking."


Production and distribution efficiencies also have allowed K-C to plow cash back into advertising and product development at an even faster rate than sales growth in recent quarters.

K-C's ad and promotion spending was up 15.4% and research expenditures rose 14.8% in the third quarter. For the year to date, ad and promotion spending jumped 7.8% and research & development grew 10.7%.

That increased investment should bode well for future results too, Mr. Steele said.

Despite the strong overall performance, Kimberly-Clark's results are still mixed.

"Before and after the Scott acquisition, [K-C's] bread and butter was still personal care, and that business has been on a roll," Mr. Dillon said.

K-C's strongest category is its biggest one. Its Huggies and Pull-Ups brands collectively led P&G's Pampers and Luvs by a 43.7% to 37% margin in the third quarter in the $4 billion category, according to Information Resources Inc. data from Salomon Smith Barney.


K-C's lead was a smaller margin than the 8% gap a quarter earlier but still among its best performances ever. And the figures don't even factor in K-C's exclusive deal with Sam's Club stores, which dropped Pampers from most stores but whose sales aren't included in the IRI data.

"I don't think all of [K-C's] market share gains will be permanent," Mr. Dillon said, adding that he expects P&G to step up advertising and promotional support to close the gap further.

After gaining ground in feminine protection last year with the rollout of improved Kotex pads backed by the brand's first ad support in several years, Kimberly-Clark's shares slipped to year-ago levels in the third quarter. Some of the decline comes from a move to consolidate its New Freedom brand into Kotex. Ogilvy & Mather, New York, handles Kotex.

Even so, category leader P&G has seen its lead in sanitary pads fall from 14.1 to 10.6 share points in the past year, as Johnson & Johnson Personal Products gained on both.

In tampons, Kotex has held steady at around an 11% share, as Playtex and J&J continued to gain on P&G, which has lost share in every quarter since it acquired Tampax in 1997.


K-C has gained ground on P&G in toilet tissue, with rollouts of improved versions and new advertising for both Kleenex Cottonelle and Scott in the past year. And K-C is looking to reverse its long slide in paper towels with the first advertising in more than a decade for Scott, which broke this spring from J. Walter Thompson USA, New York.

"Their [results this year] would have been even more phenomenal had the tissue business been better," Mr. Dillon said. "But we see that business turning this year," he said, based on gains that should come following rollouts of new tissue

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