Operator:

Good morning, and welcome to Kimberly-Clark's Second Quarter 2024 Earnings Question-and-Answer Session. I'll now hand the conference over to Chris Jakubik, Vice President, Investor Relations. Please go ahead.

Mike Hsu:

Thank you, Chris. Before we jump into the Q&A, I would like to start by saying thank you to my colleagues at Kimberly-Clark, who are working diligently on the augmentation of our comprehensive innovation like growth strategy and delivered strong results for the first half. We're excited about the opportunity to accelerate investments to build our powerhouse categories and brands and our pipeline of innovation. We are effectively navigating external dynamics, while driving our consumer centric culture. We're making the company better, stronger and faster, and we are turbo charging our ability to provide better care to consumers around the globe. I'm very proud of our progress to date. It bolsters our confidence in delivering our outlook for the year, and our ability to ramp-up our investments to further leverage our core strengths and achieve our potential. We are on an exciting path, and I'm -- and are well-positioned to deliver durable growth and sustainable shareholder returns. So with that, I'd be happy to open it up to questions.

Lauren Lieberman:

Great, thanks. Good morning. So first, I wanted to check in and talk a little bit, Mike, about market share trends and -- because the organic sales growth this quarter was really solid. Volumes were up. You had this unexpected headwind from inventory de-stock. But I wanted to also check in a bit on market share trends, where you stand versus not just competition, but also what you're seeing from private label of weight? Thank you.

Lauren Lieberman:

Okay, great. I'm just curious, I know you mentioned a couple of market share, a bunch of market share positions outside of North America and China that have been very strong. But when do we start to see that translate into growth? Because I think one of the interesting parts of this strategy you've laid out in this sort of shifting the focus a bit, so that we can get more visibility into other areas of your business. But when should we start to see growth become more material in a matter more moves the needle more in markets outside of the US and China?

Lauren Lieberman:

Great. Thanks so much. I'll pass it on.

Operator:

Thank you. Your next question is coming from Dara Mohsenian from Morgan Stanley. Your line is live.

Mike Hsu:

Hey, Dara.

Nelson Urdaneta:

Sure, Dara. So let me let me start by echoing what Mike said. I mean, we're very proud of our teams have executed in the first half of the year than we've gained momentum on a number of fronts. Relative to our power and great care strategy. As a reminder, I mean, as we think about margins, our main focus is on driving profit dollar growth margins for us, as we've stated, our milestones, and we're moving on that progression. Growth in the first -- in the second quarter on the first half, reflected solid volume mix-driven gains and on the third quarter -- it’s a third quarter in a row that we drive positive volume mix. Importantly, in some of our largest, most profitable geographies like the U.S., China, and the U.K., we saw solid volume mix growth, which is something we've been folks focusing on. And as Mike said, I mean, it is the key for our long-term algorithm. We delivered more than half of our profit objectives for the year in the first half and this actually gives us flexibility for the second half to further invest in strengthening our brands and our innovation pipeline, especially as we manage through some of the challenges in the macro environment and some of the increased and consumer pressure that we're all seeing. As we think of cadence of first half second half on the top line, we would expect the second half to grow at a similar pace of what we saw in the second quarter with again volume and mix key drivers of growth, while pricing will continue to play a lesser role sequentially. At the profits, four things to keep in mind, first one, productivity delivery. It's been solid in the first half and ahead of our original plans, given timing of some of the projects. So, we do expect a lower absolute dollar productive delivering in the second half, but still very strong on the year. Secondly, pricing net of costs, it's been strong and favorable in the first half due to timing of pricing actions relative to costs and you've got to take into account Argentina, which again, a lot of the hits that we took on the currency were in the second half of last year. So, we're going to be lapping that as we head into the second half of it this year. For the balance of the year, we expect pricing at a cost benefits to taper off. However, it's important to reiterate that on a full year basis, we expect to be at least pricing net of cost neutral. The third aspect is timing of investments. In the back half of the year, we expect to step up investments behind our brands, given timing of some of innovation programs that we have. As a reminder, on the first half of the year, our spend on our brands was approximately 6% of sales. Heading into the second half, this number is going to be closer to 7%. As we take advantage of our strong first half and we strengthened the overall our investment profile setting up the time for us to continue growing sustainably in years to come. And then last, but not least, is the divestiture of our personal protective equipment. We expected to be a headwind in terms of profits of around 180 basis points in the second half of the year. We didn't have that in the first half of the year. Two more things that you think of EPS, equity method investment income, while it grew in the first half of the year, some of it had to do not just with the underlying performance of our equity method investments, it also had to do with the strength of the Mexican peso in the first half year on year. That's going to revert in the second half of the year and we expect the net equity investment to be largely flat in the second half of the year. And the other item on EPS is the effective -- the adjusted effective tax rate. For the full year, we're now projecting 23% to 24% adjusted effective tax rate. And for the first half, our adjusted effective tax rate was 22.3%. So, when you combine all those factors, that gives you the cadence of how we're looking at the first half and second half.

Mike Hsu :

Hey, yes, thanks, Dara. Yes. And overall on the pricing environment, particularly in North America, I'd say it remains stable. And as you may recall, since COVID, in the COVID environment, or the pandemic related environment, we did see a reduction in promotional activity in our categories. I'd say, over the past two years, that has kind of return and normalized post pandemic. And I'd say, it's remained at that level. We are seeing a touch of promotion in some categories and in some retailers. But overall, again, our strategy is to remain focused on volume and mix driven growth. And we're maintaining what we're calling PNOC, or pricing net of input cost discipline. And so overall, as you're well aware, pricing to offset cost inflation is receiving for us as expected. We really want to be more valuable at every rung of the good, better, best ladder. I think one of the things that's great about our portfolio is that we do serve all consumers from value to up to premium, even though premium is really the big growth driver for us. And so we're really focused on working to ensure that our value propositions all along the value spectrum are going to remain strong. And so our focus on building brands with advertising, great storytelling, pioneering innovation. But again, we also recognize in some categories, promotion is very important, and we're going to be competitive where we need to be. But again, we're focused on driving the category's growth through advertising.

Mike Hsu :

Okay. Thanks, Dara.

Nik Modi:

Thank you. Good morning, everyone.

Nelson Urdaneta:

Good morning, Nik.

Mike Hsu :

Yes, great. Nik, okay, you're all over it. I think that's a great question. As I mentioned, I think in the prepared script, we made an interim move on effective July 1 that changed some of the reporting in our global supply chain in North America and then Brazil moving into International Personal Care on an interim basis. And so I'd say, your observation around an interim structure, we've done some significant shifts there already. And again, it goes back to you know, I had some experience with another corporate transition where Nelson and Chris and I worked and so having that interim model working before you officially make those moves, helps a lot. And I think the organization is making tons of progress in the new ways of working very, very excited about the progress the teams are making and very appreciative of all the hard work that they're putting in to make this happen. So I again, I feel I feel great thus far about our wider for growth initiative or the organizational change. And we're making strong progress there. With regard to Patricia and Craig, I'm excited to have him onboard Allison Lewis, who is our Chief Growth Officer, and Robert Long, our Chief Innovation Officer, R&D Officer. They did great work for us and really advanced. The agenda has been both those areas very, very strongly, but I knew I intercepted them at a point in their career where they want to go on at some point and do other things. And so I think I think we have an excellent transition period between the four of these leaders on and as Patricia and Craig come aboard, I think they both bring great skills to Kimberly-Clark. Patricia has worked at companies like Kraft and Unilever and Heineken before Bayer. And so and knows a lot about the consumer health space, a really, really focused on marketing and advertising, which is a great thing for us. And then Craig has a real great transformational leader with Unilever and some products further in his background as well as a great run at Campbell's. And so I think they'll bring a lot both in terms of organizational development, but also our expertise in their fields that will advance the things that we're working on with power and care.

Mike Hsu:

Okay. Thank you, Nik.

Javier Escalante:

Hi, good morning, everyone. I would like to see whether I can get more color on the savings, because at least I see three buckets, so basically you're announcing something in North America. My understanding is that the supply chain. So if you can talk about the benefits of what you're trying to do there, you are exiting two small markets. But when you look at the P&L it feels as if, the SG&A is where we get better numbers went to consensus. So if you can expand that and then I have a follow-up. Thank you.

Nelson Urdaneta:

Yeah. In terms of, Javier, the sources of the savings, there are two poles. I mean, first and foremost, and the lion's share of the savings will derive from our supply chain transformation. And as a reminder, they encompass three strategies. The first one is our value stream simplification. And as I've explained and Tamera has explained, this has to do with product specifications and a few other items that will drive significant savings over time. Second one is optimizing our network. And it's the footprint. It's our four walls. And you're seeing some actions that are being taken today. And they'll be taken over the next few years. And then the third bucket is scalable automation, and that encompasses two areas. One is actual automation of supply chain processes in our factories and our warehouses, and the second one is digital automation, where we're deploying tools to optimize our procurement capabilities as well as our supply and demand capabilities. We are on the early stages of our transformation journey, especially in the supply chain, and we're pleased with where we're at in the first half of the year. Productivity delivery is ahead of what we had planned. We are at about $255 million a year-to-date on the supply chain productivity, and that does not include procurement. We will update annually on the procurement savings, but well on track as we seek to deliver the $3 billion over the next five years, as we said. Specifically on actions that have been taken and what's driving this. One, we're seeing conversion and waste reduction. That's a big bucket that's helping us drive, and that, again, is within the value stream. It's product material specification standardization. That's starting to happen, and we've been working to get that going in the last year and a half or so. And then lastly, it's transportation and warehousing cost reductions. So that's in a nutshell what's driving the savings on the supply chain. The other bid is on the overheads. On the overheads, we said that our target is to deliver about $200 million of savings over the next two, three years. The lion's share of those savings is really going to kick in once the full organizational model is in place. And that goes into effect in the latter part of the year. So we will see not a lot of savings this year on the overheads line coming from that item. What you're seeing on the overheads, which I think you're alluding to, is we're seeing absolute dollars largely flat sequentially, is that the discipline that we've had on overall spend is still in place. I mean, we're driving a lot of discipline in terms of spending and costs, and that's flowing through, and you're seeing it in the P&L at this stage.

Mike Hsu:

Yeah. Maybe I'll start with that Javier. I think my adage is in the end, shipments must track with consumption. And so I tend to focus more on the consumption numbers. We feel great about the progression we're making on volume and mix. And I think in the quarter, I think if you add volume and mix, it was up about 2 combined. And so that's the progress we're making. I think it's great to cycle. We're very glad to have cycled a lot of pricing moves that we had to take to offset inflation. But you know, we think the underlying momentum in our categories remained solid. These are essentials and daily use categories and so we're encouraged to see that volume progression. There's going to be some noise because of retail inventory changes in North America, you had two effects because there were some -- I would say there were some -- we're comping a soft quarter last year because of supply issues. And so probably a little more inventory going in on personal care. And then we are -- on the tissue side, we saw consumption stronger than organic and so that implies we saw some inventory to come out of tissue. And so I think that's I would say, generally typical and so that stuff is going to move around from quarter-to-quarter, but overall, we're very encouraged with our volume trends.

Anna Lizzul:

Hi, good morning.

Anna Lizzul:

Morning. Thank you so much for the question. I was wondering if you could just elaborate more on the volume improvement that we found the quarter, just where you're seeing gains across the categories more specifically? And also in the back half, there is an expectation on additional cost inflation, which you mentioned. Was wondering if you can touch on the balance on pricing and investing and innovation to help offset this? Thank you.

Anna Lizzul:

Great. Very helpful. Thank you so much.

Operator:

Thank you. Your next question is coming from Andrea Teixeira from JPMorgan. Your line is live.

Mike Hsu:

Yes. Well, let me start with the tissue in North America. Overall, again, as I said, there was a bit of a retail inventory change. And so our organic numbers are different than kind of what the consumption was. Consumption was up three in the quarter, which is just a little bit under what the category did overall. And so again, I think the tissue categories in North America remain robust or healthy, resilient depending on what adjective you want to use. I'd say overall share, we've made strong progress on Kleenex. I think Kleenex was up almost 500 basis points on share in the quarter. That does reflect an improved supply condition that I said we're cycling versus last year. On bad tissue, I think our share was a little -- was a bit soft, a little bit under 1 point in share down. And that reflects a couple of things, a hard -- what we call a hard rollover a packaging change and shelving reset on Cotton And then Scott 1000 has still been somewhat supply constrained year-to-date. And so we cut back on our normal merchandising calendar. And so therefore, because of that, we are seeing a little bit more increased promotional availability for private label, and that's kind of had a bit of an effect on Scott 1000. And I think the brand remains very, very healthy, and it's a power brand, especially for value consumers in this environment, and we feel great about that. But overall, I think we feel great about the progress. I think the inventory change was a little bit different than what we were expecting coming into the quarter. But I think I would hope that we're mostly through that.

Andrea Teixeira:

And the -- this is super helpful, the exit rate of personal care. Do you think even with the merchandise, I'm assuming that you shifted merchandising dollars from Consumer Tissue into Personal Care, or you just on basically kind of flow through? And then now you can kind of as you regularly in the supply chain improves into Consumer Tissue, you're going to merchandise more into the second half? Or just as an exit rate, just an idea of how Personal Care continues to do well into the remaining of the month right into June?

Andrea Teixeira:

Thank you very much. I'll pass it on. Thank you both.

Nelson Urdaneta:

Thank you.

Operator:

Certainly. The next question is coming from Bonnie Herzog from Goldman Sachs. Your line is live.

Nelson Urdaneta:

Good morning, Bonnie.

Mike Hsu :

Yes, maybe I'll start with the last part, Bonnie. I again, I tend to focus a little bit more on the consumption and the consumption trends remain. I would say, healthy. I think there's going to be some shifting here and there. I don't expect ongoing retail inventory contractions, but there could be some moves here and there, we don't control those, right? But we are -- we do work with these are big categories. And so our customers do work with us very closely to plan these out over time. And so I feel good about the inventory positions that we have right now, but can't exactly predict what will go forward on it -- what will happen on a go-forward basis. On the promotional environment, I do think, hey, I recognize broadly across Staples that there is increased consumer price sensitivity. And so making sure that we have the right value proposition is going to be important. The thing I'll point you to is what's fundamentally changed in these categories over the past 10 years, five years is the analytics that we have available to drive the right decision making. And so and I know of it gets a lot of play about the promotional environment. But you know, in the last five years, we've invested a lot in the predictive modeling tools that make -- enable us to make the right choices on promotion. And so again, I tend to focus this more on profitable growth and promotion is a -- trade promotion as a tool to drive the overall brand strategy. But it is not a strategy in my mind itself. And so again, I think will work to make sure that our products are affordable and competitive. But again, we're focused on growing the categories.

Mike Hsu:

Yeah. Well, I'd say, yeah. I mean, we've shifted our emphasis to volume and mix-driven growth. And so, yeah, over time, we're expecting all of our businesses to drive positive volumes, and that's kind of the model on how we want to grow. So I think that includes North America tissue.

Mike Hsu:

Okay. Thank you, Bonnie.

Mike Hsu:

All right. Well, thanks to everybody for joining us. And if anybody has any follow-up calls, we'll be available to take them today. So thanks very much for your time.

Operator:

Good morning everyone and welcome to the Kimberly-Clark’s First Quarter 2024 Earnings Call. At this time all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host Chris Jakubik. Sir, the floor is yours.

Mike Hsu:

Okay, thank you Chris. Hey, before we get into the Q&A I would like to start by saying thank you to all my colleagues at Kimberly-Clark who worked really diligently over the past few years to build our strong foundation and to deliver these Q1 results that provide a very good start to our next chapter of growth. Our strategy to elevate our categories with breakthrough innovation and expand our markets is working. We are effectively navigating the ever changing external dynamics of today’s new normal while driving our consumer centric culture. We are making the company better, stronger, and faster. I am very, very proud of our progress to date and I am confident that we are going to continue to leverage our core strengths to achieve our potential. We are on an exciting path and are well positioned to deliver durable growth and sustainable shareholder returns. So with that I would like to open it up for your questions.

Mike Hsu:

Good morning Bonnie.

Mike Hsu:

Yeah, Bonnie, maybe I'll start and Nelson will talk about why we decided to pass through and our logic for that. But really, I'm encouraged with our good start. I think our organization is running very, very well in what we would call internally our new normal. And I think this is like the first year in a few that we've had kind of a stable business despite a lot of the geopolitical things that are going on. So the underlying strength in the quarter was predicated on a couple of good fundamental factors. One, better volume, which you observed, and there was no pull forward. In fact, it was the opposite. We had an inventory, retail inventory reduction in the quarter, but kind of, I think the volume, the inherent strength and the consumption kind of overshot -- overcompensated for that. And so I think that was probably when also the market shares are moving kind of in the right direction. So I think we feel very good about the underlying volume momentum in the business. And then on top of that, then with a stable input cost environment, the productivity that was strong in the quarter tends to drop a little bit stronger through the bottom line. And so that's the underlying kind of driver of our strong Q1. And we feel really great about it. The team's done a great job operating. There's still a couple wars going on in the world, as you're well aware. Argentina's been very volatile and our teams are doing a great job there. So, we feel like we're really running well in a new normal environment. Nelson?

Bonnie Herzog:

Alright, thank you.

Operator:

Thank you. [Operator Instructions]. Your next questions come from Anna Lizzul from Bank of America. Your line is live.

Mike Hsu:

Good morning, Anna.

Mike Hsu:

Okay. Yes. Anna, thanks for the question. Great question. Market share I'm very encouraged. I think we've made very, very solid progress on overall market share. I expect further improvement in the year as the year progresses. Overall, in the quarter, we were up and even in just under 60% of our market category combinations. Although I would say also flat on a weighted basis, and we look at share in two ways on both metrics. Importantly, I'd say North America improving. North America was up or even in 6 of 8 categories. We were soft in 2023, as you may recall, a lot of that was predicated on severe supply constraints that we had last year. And so I think this was like maybe the second quarter that we've had in a row of unconstrained supply. And I think that kind of performance reflects our ability to ship product and kind of restore promotion. Just for reference, Kleenex in the quarter was up 400 basis points on share -- or more than 400 basis points on share. What drove it, well, we did have new social media campaign around cold, flu, and allergy season which I think has been very, very good. But the other part is we restored merchandising which we had been off from for several months. And so again, I think our merchandising, we still plan -- we're probably still under-indexed versus the overall category. But we're just kind of returning to kind of normalized merchandising behavior. So we feel good about our performance overall. And again, market share in other markets like in China, we were up a couple -- a couple of hundred basis points on how these diapers had a very, very strong Chinese New Year execution. So volumes were up double-digit against the category that was still down about 10% in China. So I think overall, we're feeling very optimistic about the performance of the business and feel good about the volume delivery of the business.

Anna Lizzul:

Thank you, very helpful.

Operator:

Thank you. Your next question is coming from Lauren Lieberman from Barclays. Your line is live.

Lauren Lieberman:

Hey, good morning. Hey, guys. So first thing I wanted to ask about was the productivity in the release. In the prepared remarks you called out $120 million realized this quarter. And I was just curious how to think about that in the context of the $3 billion in productivity and also $200 million of SG&A savings that you articulated at the Investor Day? So that's just my first question.

Nelson Urdaneta:

Yes. And then just to give a little bit of color on the $3 billion and the $200 million, Lauren. So overall, first, it's based on the integrated margin management process that we unveiled in our Investor Day at the end of March. This has really given us a new enterprise-wide visibility, discipline, accountability, end-to-end across the whole value chain. And really, it's about a focus on driving lower costs at a total deliver cost, which is a very different approach as what we had in the past, and we've been working on it for the last year or so. As you said, and we had a strong start to the year on gross productivity, I'll reiterate, this is non-procurement-related savings, and this is the $120 million that we talked about in the release and in our prepared remarks. And we also had additional savings that were delivered from the procurement side of the house, and that's embedded in our net input costs, which again were and net not that much of a headwind in the first quarter because of all these efforts. As we think about the cadence and what we expect to have on the $3 billion, we're off to a good start on that number. And we would expect that to be roughly about linear over the next few years as we deliver the whole $3 billion. In terms of the $200 million of SG&A savings, as a reminder, we will go live with our new operating model on October 1st of this year. So we don't expect much of that $200 million in savings in SG&A to materialize this year. That will really come into play more in 2025 and 2026. But again, really a good start to the year in productivity and procurement-related savings.

Mike Hsu:

Yeah, I mean, one, I'll start, Lauren, and -- but one, we feel great about our investments in advertising and I think we're -- we've made significant progress. I think we're up 200 to 300 basis points since I became -- came into this role. However, I'd say we're probably still underspent relative to our peer set. And so do we need -- and I think I said this in Investor Day, I don't know that we have to match them right. But I would like to continue to increase our investment. I think you're exactly right on kind of, hey, well, there's two factors that kind of caused us to phase our investment. I would say, if you recall, back in 2018, 2019, I did not feel like we had all the capability we needed to spend that significantly. And I think you may recall in some sessions we had or some calls people were asking, why didn't you reset invest harder, at that point, I wasn't confident what the advertising was going to do, right. And so in the last five years, I think we've really built what I would characterize as kind of world-class capability on the commercial front through the help of Alison as you're well aware. And so we've done that. We have made progress. So that was one factor we were building the capability. And right now, our returns on investment on our advertising particularly on digital and we've migrated from not having a whole lot of digital maybe 5 or 10 years ago to almost being entirely digital and those returns are significantly higher than we're driving now. So that's one factor. The other big factor, I think, that people forget is we had two years of a super inflation cycle. We had more than offset -- more than a full year of operating profit in that cycle. And so we are busy doing trying to recover margins as well. And so there's a lot going on in addition to all the geopolitical issues that I think Lauren you are really well aware of. So there's a lot of things going on. And so we're making steps in the right direction. We're not all the way to where we want to be, but we think we can kind of manage the business in the right way to kind of deliver both a healthy top line, healthy bottom line, while continuing to invest in our business for the long term.

Operator:

Your next question is coming from Nik Modi from RBC Capital Markets. Your line is live.

Mike Hsu:

Yes, thanks Nik. Great questions. Yes, we did see a retail inventory reduction in the first quarter as expected, and we were given the heads up on that. And so we planned for it, it was about an 80 basis point headwind to global and about 170 bps of North America sales. And so I'd say the behavior is typical. I don't think it's unusual. We tend to see in that December, January time frame, retailers trying to get a little more efficient with how much inventory they're carrying. We tend to be very, very efficient with retailers, and I think they like our logistics capability. And so we're kind of generally early adopters of all the new systems that retailers go on to kind of try to manage their inventories better. So we're kind of on top of it. It's been baked into our outlook for the full year, but I don't know that I expect a whole lot different going forward, but it's -- what we expected in Q1 did in fact happen. I think I said earlier, our volume was a little bit stronger than we had anticipated. So more than fully offset that. So I think that was the first part. Is that enough -- clear enough on your retail inventory part, Nik?

Mike Hsu:

No, for us across the board. And just to note, nothing unusual in our mind. So like typical for what we see every year. So I think that's part one. I think your question on the consumer, I guess I would characterize the consumer environment overall for us globally, but especially in North America, is resilient. Still bifurcating, but part of that bifurcating is actually adding to category growth as well. So the category demand overall remains very, very robust. As you could see in North America our categories, on average, overall, were up about 5% or mid-single digit. I think that -- as you well know, we make daily essentials. And so there is low substitution in our categories and so I think that's reflected in the overall category demand. Importantly to note Nick is, premium continues to grow very, very robustly, especially in developed markets like the U.S., like in China, UK, South Korea, but also premium is growing and developing in emerging markets like Brazil. And so we're continuing to see that demand there. That all said, clearly, I would say, middle to lower income households look like they are -- they're becoming more stretched based on all the economic data we're seeing. So I would say the bifurcation is I see a limited trade down in a few categories, notably adult care, some in household towels, but we have a very, very detailed tracker across every category. I think we're tracking like nine different dimensions. And I'd say -- so we're very vigilant about monitoring that. The thing about it is the trade down is limited at this point, but we really intend to be more valuable to our consumers at every rung of the good, better, best ladder. And so what that means is I think Anna was asking about private label or value to our quality. I mean we're making all of our products better across the board. And that certainly, I think the growth driver for us over the long term is by making products better, premiumizing, elevating our categories. But we want to serve the value-oriented consumer as well, too. And we have big brands like Scott, Bath and Kleenex Mainline depend main line that serves those consumers well too.

Mike Hsu:

Okay, thanks Nik.

Mike Hsu:

Hey, Chris.

Mike Hsu:

Yes. I'll start on China. Again, if you kind of saw the Investor Day presentation with Katie's leadership, our China team is doing a fantastic job there. And they've grown consistently double digits over the past five years, and it's become our best -- one of our best performing businesses in the company. I would say the -- I think the driver performance -- there's a couple of factors. Certainly, a strong Chinese New Year execution. But overall, we make a great product. I believe it's the best product in the marketplace. I think consumers are excited about the products that we offer. And then we have really, really strong digital executions that really kind of drive that relationship with consumers. And so to answer your question, I think it's more of a share pickup. The category itself based on the data I'm seeing was still down about 10% in the quarter, consistent with the birth rate trends and everything else we're seeing. So it's a share pickup. And I'll point out we're the market leader in China but that's predicated, we're only at a, I would say, a mid to high-teens shift at this point. And so we feel very good about our positions, but it's a fragmented category. And so there's a lot of opportunity for us to drive further share growth in the market. Importantly, I think for us, we're also picking up on our mainstream business. And part of the strategy, when I say, hey, we want to be great at every tier or every run of the good, better, best ladder, we want to accelerate innovation at the top end and then cascade that quickly through our line. And so we're doing that. And I think we're seeing that in the results in China for sure and similarly in the U.S.

Mike Hsu:

Well, I'm going to start with -- Nelson could disagree with me if you want, Nelson. I would say, manageable at this point because here's. I said, hey, new normal. I think this is what I'd characterize as a more normal year for CPG for the first time in the last three or four years for us, which is, hey, a stable input cost environment. It's still not deflationary. At some point, one would hope that it becomes deflationary. But I'd say, hey, it's slightly inflationary, but relatively stable. That's different than the past three or four years for us. And so I think for us, we have very good productivity plans. And so if the cost -- input costs remain stable, we can operate very, very well in a stable cost environment and let that productivity drop through. So that's one part. And then the other part of the normal is, I think with -- there's been a lot of volatility in demand with COVID and everything else over the past few years. I think we're starting to see demand stabilize. And so with those two factors, I think we can operate well. We're very cognizant and Nelson will talk about it, that we're there are some demand signals around different pulp environmental changes, but we're well aware of that, and we think we have that accounted for in our current call. But Nelson.

Mike Hsu:

Yes, Chris, just to calibrate you. I think, Nelson when we're looking at a couple of hundred million of inflationary impact, just to calibrate you in 2021 and 2022, we took on $1.6 billion and $1.7 billion, respectively. So I would say that's kind of why we feel like it's -- that's one reason why we feel like it's more manageable. The scale is totally different. And then the other thing is as Nelson points out, we've changed how we manage the business in some ways to try to become a little more predictable. And we have better tools than we had maybe five years ago and so.

Christopher Carey:

Thank you very much. Very helpful.

Operator:

Thank you. Your next question is coming from Steve Powers from Deutsche Bank. Your line is live.

Mike Hsu:

Hey, maybe I'll say a couple of things. One, Steve, is I think the analyst community and the investor committee, I think, made very clear to me when I came into this role that one of the issues they had with KMB is the earnings volatility. And so I've been very cognizant of that fact. And so we've over the past five years, kind of worked significant -- worked pretty hard to kind of reduce some of the underlying volatility in our business. Nelson, with an outside perspective has really worked hard to bring some different kinds of tools into our thinking. And so we've been applying that over the last couple of years and we feel very good about that. Certainly, there is inherent volatility in our business certainly in pulp. One would think at some point with the super cycle of inflation that we have on pulp, it's still elevated and at some point, it needs to come back in our history would say it's going to come back down further. That said, I think we've built the right tools. And Nelson, you may comment about what we're doing there.

Stephen Powers:

Yes, okay. That's very helpful. And this answer -- the next question may be short, if you've already addressed it, you can tell me to just go read the transcript afterwards. I joined late. I apologize. But in the…

Stephen Powers:

In the prepared remarks, you mentioned private -- your plans to exit some private label businesses. I know those plans are still kind of under construction, but you did make mention of it with some impacts on 2025. If you could -- if anything further you can say on that today, that would be great.

Nelson Urdaneta:

And just to add further color on what we would expect from a bottom line standpoint, Steve, it should be consistent with what you're seeing in the top line. And then, obviously, we're working through supply chain transition, repurposing, and related cost opportunities within the context of our whole network optimization initiative, which is one of our three strategies in the supply chain strategy that we unveiled at Investor Day. We will have more to say as we go into 2025 guidance period.

Mike Hsu:

Thanks. If you could take maybe one more question, that would be great.

Mike Hsu:

Javier, how are you?

Nelson Urdaneta:

Yes, the short answer, Javier, is yes, it is part. We said that our new chapter started in Q1 of this year, and that's part of the five years commitment to deliver that. The 120 is part of that and then there's an element of procurement savings that we're not disclosing today. We are committed to disclosing the entire savings, including procurement, annually, so that you get a perspective of how we're tracking against the $3 billion that we committed to.

Mike Hsu:

Well, I'll just start. Javier, I'd say, hey, we're still early in the year, and we feel really good about our start. We feel very confident in our performance this year. But that said, there's -- as Nelson pointed out in his remarks and in our prepared remarks, there's still a lot of uncertainty out in the world right now, both in terms of the geopolitical situation and the effects that could have on global demand. But also, as you've heard just on the last few questions on the input cost environment. So I probably would say, yes, we're taking a prudent approach to make on our call. But certainly, encouraged by our start to the year and would love to drive to a very strong result this year. Nelson?

Javier Escalante:

Well, I will take that as a conservative guidance. Thank you very much, okay.

Nelson Urdaneta:

Thanks Javier.

Operator:

Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Chris Jakubik:

Hello. This is Chris Jakubik, Head of Investor Relations at Kimberly-Clark, and welcome to our Fourth Quarter 2023 Business Update. During our review, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our earnings release and our filings with the SEC. We will discuss some non-GAAP financial measures during these remarks. These non-GAAP financial measures should not be considered a replacement for, and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at investor.kimberly-clark.com. Today, our Chairman and CEO, Mike Hsu, will provide an update on our overall business performance, and Nelson Urdaneta, our Chief Financial Officer, will provide an overall financial review and our outlook for the coming year. We have also scheduled a separate live question-and-answer session with analysts. You can access our earnings release, supplemental materials and audio of our Q&A session at investor.kimberly-clark.com. A replay of the Q&A session will be available following the event through the same website. With that, I will turn it over to Mike.

Nelson Urdaneta:

Thank you, Mike. The stronger financial position we now enjoy truly resides in the exceptional execution, discipline, and portfolio optimization our team has displayed these past two years. As we look back at 2023, we have many reasons to believe in our potential and our ability to drive that momentum across the enterprise. Fourth quarter organic growth was 3%, reflecting further, gradual progress in getting towards a healthier balance across price, mix and volume, with volumes flat as we begin to lap the strong pricing actions taken over the past several quarters. In fact, pricing in the second half of 2023 was predominantly driven by price increases in inflationary, developing markets, a profile we expect will continue in 2024. Gross margin increased 210 basis points to 34.9%, reflecting improved revenue realization, mix, and cost savings that more than offset other manufacturing costs and currency headwinds. Looking forward, our cost basket in the near term is likely to remain mixed, with favorability in some raw materials, contrasting with higher distribution and labor costs as well as currency headwinds. Below gross profit, adjusted operating income margin was down 80 basis points and adjusted earnings per share was $0.03 below Q4 last year. Currency headwinds, both in the form of translation as well as a negative impact from monetary losses in hyperinflationary economies, were in fact a significant factor that held back operating profit growth, operating margin and EPS in the fourth quarter. The negative impact from monetary losses in hyperinflationary economies, captured in the other income and expense line, was approximately $70 million in Q4, representing more than 100 basis points of negative impact to operating margins. At adjusted EPS, this impact was partially offset by higher interest income, resulting in a roughly $0.09 per share negative impact in the quarter. These impacts were largely driven by a significant devaluation since we last updated our guidance in late October. For the full year, we built further on the strong organic sales gains in 2022 as pricing faded, as expected, and volume plus mix gradually turned positive, adjusted gross margin for the year improved 370 basis points to 34.5%, reflecting our hard-fought return to pre-pandemic gross margin levels in the second half of the year, while adjusted operating margin grew 150 basis points and adjusted earnings per share were up 17%, mainly for the same reasons. There were two other factors driving our full year results worth highlighting. First, at operating profit and EPS, note that the full year negative impact from monetary losses in hyperinflationary economies was about $115 million, representing a roughly 50 basis point negative impact to adjusted operating margin. At EPS, we saw a roughly $0.16 impact net of interest income from our monetary positions in those hyperinflationary economies. Second, and more important, is our investments in our brands, our people, and our capabilities, investments we've continued to make despite the ups and downs in our gross margin. Our 2023 marketing, research and general expense levels, specifically, reflect advertising spending of more than 5% of net sales, up almost $200 million from last year, the successful deployment of revenue growth management capabilities. It also reflects the upgrading of our commercial talent, and technology investments that include a new system to increase procurement efficiency across the enterprise, as well as higher incentive compensation. While this has held back our operating profit margins versus 2019 levels, as we've highlighted today, those investments have been critical in recovering our baseline earnings power and driving organic growth. And as we make further progress towards a volume and mix driven organic growth profile, we're confident that we will begin to see the type of margin leverage we expect from these investments. Before I get to our 2024 outlook, I'll provide some highlights on each of our segments. In Personal Care, the momentum we saw in the second half and the quality of fourth quarter results is both encouraging and something we expect to build upon. Organic sales growth reflected a shift to a more balanced contribution from volume, mix and price in the second half, with volumes positive for the second consecutive quarter. North America Personal Care grew 5% in Q4, driven entirely by volume and mix. Outside of North America, China grew volumes in the high-single digits for the full year, while other markets saw improving volume and mix trends as the year progressed, relative to strong, but necessary, year-on-year price increases throughout the year. At a category level, it's worth noting continued momentum in Feminine Care from share gains leading to double-digit organic growth for the full year. At the operating margin, Q4 levels reflected both a typical seasonal low in the business as well as an unfavorable swing in one-off, discrete costs versus the prior year. That said, the mid-17% margins in the second half and full year represent a solid base from which we expect to build going forward. In Consumer Tissue, the organic growth trend into Q4 reflected improved volumes sequentially as we begin to lap considerable pricing taken in previous quarters. Full year organic growth was driven by North America and Developed Markets, with North America delivering flat volumes for the full year. And in the UK, momentum of our Andrex brand continued as we recover from supply chain disruptions. Specifically, we saw both sequential and year-over-year share gains in Q4 as well as double-digit consumption growth for the full year. At operating profit, margins for the segment strengthened as the year progressed, reflecting the improving volume trends as well as ongoing productivity initiatives. Finally, our K-C Professional business results reflected the success of our sharpened strategic focus on country category segments that we see as more resilient, as well as investments in innovation to create value-driven propositions and sustainable solutions for our customers. As a result, organic growth has been driven by a strong contribution from necessary pricing that was largely lapped in North America and other Developed Markets in the fourth quarter. Volumes have primarily reflected expected elasticity from pricing, while mix has been a solid contributor throughout because of the choices we've made to emphasize certain segments over others. In Q4, volumes in North America reflected the ongoing rightsizing of the business in terms of both our own focus on profitable volume as well as wholesale inventory levels. We would expect a more subdued volume picture to continue into Q1 for the same reasons, with improved trends as the year progresses. In terms of operating margin for Professional, while Q4 levels reflected typical seasonality versus the rest of the year, full year gross and operating margins in the business improved to levels that enable us to shift our full focus on investing to drive growth going forward. The last area that I want to touch upon, and speaks as much to the strengthening of our financial profile as our P&L, is our cash flow and balance sheet. In 2023, we generated $2.8 billion in free cash flow while investing roughly $770 million in CapEx spending. This reflected both the recovery in our baseline earnings power as well as better working capital discipline that we're beginning to drive throughout the organization. As a result, we've been able to rapidly reduce both net debt and our net leverage to levels consistent with our long-term, single-A credit rating target. Taken together, we now have the strong financial footing to accelerate the type of step-change in the business we know we're capable of. Our confidence in our path forward is also reflected in the dividend increase we announced today. Which brings me to our outlook for 2024. Overall, while significant exogenous headwinds like currency are likely to remain a factor in our reported results, we are cautiously optimistic that both the consumer environment and our own operating momentum will continue to lead to durable, profitable growth. On the top-line, we are expecting low-to-mid single digit organic net sales growth, a range of organic growth that we expect will include approximately 200 basis points from pricing in hyperinflationary economies. At the same time, reported net sales growth is likely to be negatively impacted by roughly 300 basis points from currency translation and another 60 basis points from divestitures. At operating profit, we currently expect high single-digit to low double-digit growth on a constant currency basis. This reflects our expectations for further improvements in revenue realization, business mix and cost savings. It also includes an assumption for costs from monetary losses in hyperinflationary economies, captured within the other income and expenses line, at roughly half the rate we experienced in 2023. Reported operating profit growth is likely to be negatively impacted by approximately 400 basis points from currency translation. We currently expect high single-digit earnings per share growth on a constant currency basis, reflecting both interest expenses and effective tax rate slightly higher versus the prior year. Here again, we expect reported EPS results to be impacted by approximately 400 basis points from currency translation. As far as pacing during the year, we expect 2024 reported net sales to be relatively balanced between the first half and second half of the year, although with a relatively lower rate of organic net sales growth in the first quarter versus the full year as our 2024 programming has a greater impact as the year unfolds. At the same time, we expect operating profit and earnings this year to be more 48% versus 52%, first half versus second half weighted, compared to what turned out to be more of 51:49 split in 2023. This reflects a combination of the balance of sales, greater currency headwinds in the first half and our expectation for greater productivity gains as the year progresses. With that, I will turn it back to Mike for some closing thoughts.

Operator:

Good morning, and welcome to Kimberly-Clark's fourth quarter 2023 earnings question-and-answer session. I will now hand the call over to Chris Jakubik, Vice President, Investor Relations. Please go ahead.

Mike Hsu:

Okay. Thank you, Chris. And first of all, I'd like to just welcome Chris to Kimberly-Clark. This is his first earnings call with us, but it's probably a triple-digit number in earnings calls that he has done in his career. So, welcome to K-C, Chris. Hey, I'd like to just start by sharing that we're really proud of our performance in 2023, but, of course, we're not yet satisfied. We've built a strong foundation and positioned Kimberly-Clark for our next chapter of growth. These past few years, we've consistently invested to build a consumer-centric organization while navigating unprecedented challenges. Our strategy to elevate our categories and expand our market is working, and we're on an exciting path and positioned to deliver durable growth and returns for shareholders in our next chapter. And as we mentioned in our prepared remarks, we're looking forward to detailing our strategic priorities, our long-term algorithm, and outline the key initiatives behind our plans in March. And so with that, love to open it up for questions.

Dara Mohsenian:

Hey, guys. I just wanted to touch on the organic sales growth guidance for next year. Low to mid single digit seems pretty robust relative to the 3% this quarter and just starting out the year lower in Q1. Obviously you mentioned the 200 basis points from the hyperinflationary markets next year in the prepared remarks, so that's part of it. Maybe, A, give us a sense of how much those markets contributed in Q4. And then, just as you look at the base business, ex those markets, maybe some commentary on pricing versus volume and what you're expecting? And if you could also just touch on market share performance in Q4. The U.S. track channels are weaker. So, just any update on how you're feeling about your market share performance and plans on that front as you look out to '24 would be helpful. Thanks.

Nelson Urdaneta:

Yeah, there was a question on the decomposition of our top-line growth for the year and how it relates to Q4, let me address that a little bit, Dara. I think to recap, the fourth quarter was a quarter in which we attained flat volumes and pricing was only 2% of the contribution with mix being 1%. That 2% was largely hyperinflationary economies. And as you think about this year, this is going to be a year in which we see volumes beginning to pick up from Q2 on. And we expect pricing to be in that 200 basis point range, right in-line with what we saw in the last quarter of the year and that pricing is really going to be driven based on what we expect today by hyperinflationary economies. So, the profile is really on the pricing side, very similar to what we saw in Q4.

Mike Hsu:

We're pretty pleased, Dara. I think we've made very, very solid progress on volume and consumers responded very favorably on our categories. So, I'd say, first of all, our next chapter, which I think we're turning the page and shifting to a volume mix-driven plan, which is returning to that, which -- that was kind of our approach pre-pandemic and so we're going back to that. So, contribution pricing to help offset the record inflation that we've got, it's going to recede and has already started receding. There might be a need to address some particular higher costs in some markets or locations. But that's going to be pretty surgical, and will likely reflect if there's pricing reflect inflation at local levels. But overall, I think we're feeling very good about driving the volume on our business. We have seen our businesses start to improve, including in North America on a share perspective in the fourth quarter, and believe we have the right mix and growth drivers in our plan to drive the business going forward.

Mike Hsu:

Okay. Thank you, Dara.

Operator:

Thank you. Your next question is coming from Lauren Lieberman from Barclays. Your line is live.

Mike Hsu:

Hi, Lauren.

Nelson Urdaneta:

Sure. So, let me start, Lauren, by saying that this phase of cost recovery and supply chain stabilization, we would think of it as largely behind us. A lot of the disruptions and the super cycle that we saw, our expectation is for that to not happen in the foreseeable future and certainly in 2024 based on what we know today. So, thinking about cost as a whole, first, our aggregate cost basket is easing in inflation, but there is no deflation, because there are several components that I'd like to unpack. We expect the '24 cost environment to be more stable. But we will still remain at higher levels of costs mostly in-line with what we've seen in this super cycle these past three years. As you know, core commodities like pulp, resin, energy in dollar terms are expected to be somewhat favorable following the trends that we saw in the back half of last year. However, if you think of other components of our cost basket like distribution, logistics, and labor inflation, that's actually going to remain a headwind in this year, in '24, and that's pretty much offsetting the tailwinds that we're seeing on the core commodities, which leaves us with currency-related inflation on imported materials, largely impacting our emerging market hyperinflationary markets, which will need to be addressed, and we've been addressing that over the past years and we intend to do that in the course of the year. Just as a perspective, the overall net cost headwind when you include all of the components is projected to be around 100 basis points for the year, which we see as much more manageable than what we've seen in the past. We've got very strong productivity plans and a little need to price outside of local inflation in these hyperinflationary markets. Turning to FORCE and our productivity targets, the outlook we provided shows that we feel very good about our ability to continue generating strong productivity. You saw that we ended last year with FORCE results of around $325 million. And it's important to highlight that over the last 20 years, FORCE has delivered a little north of $6 billion of cumulative identified productivity that has flown to the P&L. More recently, and we've been talking about it even at your conference in September, we're evolving our culture towards an end-to-end integrated cost management perspective, really focused on gross productivity. We're building a proactive multi-year pipeline of initiatives. We see our pipeline of gross productivity out to 36 months pretty strong, and that should flow to the bottom-line, and this is reflected in the outlook we are providing today. I'm excited to talk more about our transition to gross productivity and integrated margin management at our March meeting when we talk about the future a little more.

Mike Hsu:

Okay. Hey, Lauren, thanks for the question. Hey, let me start with the overall on the path forward, I will say, hey, we're staying the course, but we're, of course, going to balance potential against the inherent volatility in the business. And so, we're going to remain prudent. I do want to say, I'm really inspired, and we've got people operating in some difficult conditions in Argentina and also other markets. So, as a company, we're really inspired by the impact our employees make in these markets and really proud to shoulder that responsibility of serving our consumers in these difficult conditions. At the same time, I will say we will not just hang around where conditions become untenable. And then, of course, you would double-click and say, what's untenable. I'll let you know when we see it. But certainly, if we can't make product or if we can't convert currency at some point that becomes somewhat untenable. But right now, we're working our way through it in multiple markets like Argentina, like Ukraine. And so, again, that's the high-level answer on path forward is we're staying the course.

Lauren Lieberman:

Sorry, keep going.

Lauren Lieberman:

Okay, great. Thanks so much.

Operator:

Thank you. Your next question is coming from Jason English from Goldman Sachs. Your line is live.

Mike Hsu:

Hey, Jason.

Mike Hsu:

As always, Jason, you're right on the issue. So, a good one. But I think if you look at the margin profile of the business, I think the team has done a great job addressing, I would say the volume softness or volume change in the environment. And a couple different things. One, we had to adjust rapidly to this work-from-home demand environment that kind of came on with the advent of COVID as you might recall. And you may recall our washroom business, which is the majority of our business in K-C Professional tends to be higher development in offices. And so, that's really where the volume has gone up. I would say right now, that volume on a category basis is running about 80% to 85% of what it was pre-pandemic. And it's not going to bounce back that quickly, the reality is. And I'm not sure you're in your office at Goldman in New York every day. And so that's the same thing. As we look around our offices, we're not fully back in, right? And so, it's partial at best. So that's, I would say, an ongoing challenge in that business. But I think our team has adjusted to that and treated as a reality. We have rightsized some of the business and some of it was from a cost perspective. The reality is we were doing a lot of volume and co-packing a lot of volume on the external market. And so I'd say, we haven't had to address fixed costs as much as you might have thought of. And so -- and I think that's reflected. So, I think the team has done a good job of recapturing margins from a -- both from a price perspective, mix perspective, and also while growing volumes at the same time behind great innovations like our ICON dispenser, which I believe is really the best dispenser in that side of the business. So, anyway, so I think the team has done a great job and I think you can see that in the margin and definitely have recovered from pre-'19 margins on that business and actually exceeding at this point.

Mike Hsu:

One could only hope, Jason. We could only hope that. But actually, I think, first of all, a couple of things. Yeah, we did have some pretty significant supply constraints in our North American Consumer business for the majority of last year, definitely through Q3. And that had to do with some supply conditions with external suppliers, for example, on packaging that made availability difficult across Personal Care. Also some in our Kleenex business, I think we've talked about a key ingredient that we weren't able to get access to, that we developed a secondary source to during the course of the year. So, those were kind of the big factors, I would say. I think we mentioned that on the last quarter call, we didn't make the biggest deal about it. We were working through this challenge with our suppliers, with our customers, and they were fully aware of it. But it's not something that we communicated publicly that often. But I would say for the better part of the year, that did suppress our share performance. I'm not saying that was the only driver, but I think it was a fairly significant driver. We have addressed those issues. I'd say our commercial execution is going to be stronger than ever. We're really past all these constraints that I talked about. And our consumption is moving in the right direction. Our share has moved in the right direction in the fourth quarter as well in North America.

Mike Hsu:

Okay. Thanks, Jason. Thank you.

Anna Lizzul:

Hi, good morning, and thank you for the question. I wanted to follow up on market share in light of your exposure to private label, since in your track channels, private label share has been creeping up in some of your categories. Just wondering, how are you thinking about brand investment with marketing versus promotions in order to maintain and grow market share? Thank you.

Anna Lizzul:

Great. Very helpful. Thank you.

Operator:

Thank you. Your next question is coming from Steve Powers from Deutsche Bank. Your line is live.

Mike Hsu:

Hi, Steve.

Nelson Urdaneta:

Sure, Steve. So, I'll start by reiterating that we're very encouraged by how we finished 2023, a strong foundation for us to build from and a position in which volumes have stabilized. And we had a quarter in which we're flattened volume and mix was another 100 basis points of growth. As we think about the cadence of the year, our first half, second half, balance of sales and earnings, and our quarterly pacing is reflecting a combination of three things. One, our go-to-market plans; two, our productivity initiatives; and thirdly, the current shape of currency headwinds that I talked about a little while ago. On organic sales growth, we see a relatively balanced across the year, but Q1 somewhat muted due to softer volumes on a sequential basis. We have more programming coming into play as the year progresses, especially as Q2 kicks in. And this includes incremental innovation that will be going into market at that stage. So, we should see progressively improvement in volumes and a mix-led organic growth and margins following Q1. The other bit that, again, as we think about Q1 in terms of volumes, we've built into the plan a gradual improvement across the year. And in Q1 specifically, we're expecting another relatively flat volume quarter, also because of the possibility that retail inventory softness pushes us slightly even below that level. But that's reflected in our outlook for the full year, and we expect again, volumes to pick up as the year progresses.

Mike Hsu:

Yeah. I'll just -- I'll make a couple of comments and then Nelson maybe can give some additional detail. But look, see, I would say we are running our Consumer Tissue business, some might say externally, a little differently. I look at our Consumer Tissue business and see it as a premier consumer franchise and I'm proud of the strong margin recovery that we've made over a short period of time in this business. To note, I would say, on a volume basis, if you look at North America for the quarter, our organic and tissue was up 3% and the volume was up 2%. I'm very excited about the volume kind of resiliency in that business. I think it reflects the essential nature of the category. As you know, you're not moving away from the bath category, no matter what the condition is. And so, we recognize we have an important kind of responsibility for consumers. But I think the thing that changed in the past few years, first of all, the amount of inflation that's occurred on our overall business, but especially tissue, has been, not to be dramatic, but fundamentally historic, right? Two years in a row of 2x what the all-time high ever was, right? And so, our teams have done a phenomenal job, I would say, recovering the margins on the business that were necessary to keep that franchise healthy going forward. A couple other things that we've done to improve our ability to manage the business better is, better risk management tools to get us more stability from costs. And hopefully, you guys are seeing that. We're not talking a lot about that, but with Nelson coming in, we've changed some of our practices. With Tamera, our Chief Supply Officer, coming in, we've changed some of our supply chain practices. And so we're trying to reduce the volatility of the input costs. I would say if you looked at the margin recovery, the biggest driver is really, really disciplined application of, we call internally, revenue growth management tools. But if we had not made those investments over the past five years, we would not have been able to move at the pace we moved over the last two years on revenue management. And then, probably the most important thing going forward is the fact that we're driving value-added innovation. And we recognize as a consumer franchise, we have to have a great offering, a superior offering. I mentioned in the UK Andrex, I think we hit about a 33 or 34 share in the quarter. Our price gap has widened over the past three years, but our quality has improved significantly. And we've invested in new technologies in our European tissue business that's allowing us to differentiate that product. And so, we feel good about our position on tissue. There are some pockets of challenge, some markets can be very tough and we're able to operate in those. But we're really pleased with the kind of rapid recovery of margins and how our teams are managing that business right now.

Steve Powers:

Okay. Great. Thanks a lot, and I'll pass it on.

Chris Jakubik:

If we could take maybe one more question, that'd be great.

Andrea Teixeira:

Thank you. Good morning. And welcome, Chris. So, can you -- I have one question and a clarification on your comments, Nelson, towards the end of the last question. First, can you break down a bit the 2024 guide by division? I'm assuming you're still looking at like between to get to your number, mid-single digits for Personal Care, some growth in volume there, because that's where you get most of the growth, and then, Tissue to be flattish -- Consumer Tissue to be flattish or to grow low single, and then Professionals to be negative, especially in the first quarter as you lap those contracts. The reason why I ask is that historically, for a good reason, it's a better ROI, but you're more dependent on Personal Care than the others. And you've been, to your point and to your benefit, getting market share, in particular in U.S. and China in diapers and Fem Care. So, I was wondering how you feel about the comps and how you feel about being able to meet this number in between low-single and mid-single. I mean, at least at the high end of the guide, it does imply that you have a strong volume growth in Personal Care. So, I was wondering how you feel and how you could decompose by division. And then, a clarification on the reinvestment. You said -- Nelson, you mentioned $200 million was the actual number, roughly, of the investment, and then this year would be about half of it. And I was wondering, what is the incrementality? It's more displays and shelf space, promo? What is going to be the main source? Because to be fair, you've been, to your point, investing for a while now since Mike took over five years ago? Thank you.

Nelson Urdaneta:

Yeah. So, in terms of kind of the breakdown by segment, I mean, we expect Personal Care to be growing in the mid to high single digits. So think of mid-single digits overall at the high end. And in the other two segments, we will be growing in the low-single digits. And that kind of gets you to the algorithm that we've provided. As I stated at the beginning, our plan is a vol mix, largely lead plan. And keep in mind that pricing will be around 200 basis points of that. And that's largely related to currency-related movements in hyperinflationary economies. So that's kind of the breakdown on how you should be thinking of our segment growth next year.

Operator:

Thank you. That concludes our Q&A session. I'll now hand the conference back to Chris Jakubik for closing remarks. Please go ahead.

Operator:

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Operator:

Good day and welcome to the Kimberly-Clark Third Quarter 2023 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Christina Cheng. Ma'am, the floor is yours.

Michael Hsu:

Thank you, Christina. We delivered another quarter of strong results. I'm proud of how our teams around the world are executing our growth strategy. Our innovation and commercial programs are contributing to the top line momentum with improving volume and market share trends and strong gross margin expansion. Based on the strength of our year-to-date performance, we are raising our full year outlook. Third quarter and year-to-date organic sales increased 5%, with growth across all segments. Personal Care, our largest business, led the way with 7% organic growth and importantly, 2% volume growth. Further gains in price and mix were enabled by strong revenue growth management capability, while volume improved sequentially for a third consecutive quarter. We expect volume trends to continue improving as we cycle prior pricing actions and continue to invest in our brands. We also continue to make excellent progress on margin recovery. Gross margin was up 530 basis points and exceeded 2019 levels, an important milestone in our commitment to restore our gross margin. Operating profit was up 18% and adjusted earnings per share grew 24%. Given the strength of our year-to-date performance, we're raising our 2023 outlook. We now expect organic sales to grow 4% to 5% and adjusted earnings per share to increase 15% to 17%. Global demand in our categories and for our brands remains resilient. In key markets, we're seeing a healthier balance of growth in both price and volume. In North America Consumer, organic sales were up 7%, with volume up 3%. Dynamics were similar in EMEA. In China, organic sales and volume were both up double digits despite ongoing category softness. While growth across D&E continues to be mixed, consumption increased double digits in Latin America. In our largest markets, our market shares are improving. In North America, we saw a sequential improvement in 6 of 8 categories. This was enabled by strong commercial execution, marketing activation and a significant easing of year-to-date supply constraints in personal care and facial tissue. In the U.K., new performance-enhancing designs, price pack offerings and digital initiatives have resulted in over 200 basis points of year-over-year share gains for Andrex. And in China, we're continuing to see strong market share momentum with Huggies share up nearly 200 basis points in the quarter. As market leaders, we're raising the bar by elevating and expanding our categories with superior products and advantaged technology to address unmet needs. We're also committed to meeting consumers where they need us by offering a comprehensive range of products across the value spectrum. I'll highlight a few examples. In China, we introduced a breakthrough design for Huggies with innovation that whisks away both forms of babies mess to reduce the frequency of diaper rash. This is a foundational element of our global skin health platform. In North America, we launched new Poise 7-drop ultra observancy pads and 8-drop overnight. These higher-capacity designs provide better absorbency in protection than daytime pads. Also in North America tissue, Scott 1000 lasts longer and dissolve faster and this has been core to Scott's powerful proposition among value-oriented consumers and that's why Scott continues to deliver robust growth in this important daily use segment. We believe our ongoing investment in advantage technology and brand communications will attract more consumers, increase usage occasions and ultimately grow our categories. I'm proud of the progress we've made to offset the multiyear impact of inflation on our P&L. Restoring margins to pre-pandemic levels was a milestone and not our end goal. We will continue to expand margins by executing our commercial and productivity programs to deliver balanced and sustainable growth for the long term. I'll now turn it over to Nelson to provide more details on our third quarter and outlook for the remainder of the year.

Operator:

[Operator Instructions] Your first question is coming from Chris Carey from Wells Fargo.

Michael Hsu:

Yes. I'll start with a quick comment and then I'll ask Nelson to kind of give you a lot more additional context and detail. But one, Chris, I'd say, we finally saw inflection in the cost environment for us. As you know, we've taken on a lot of inflation over the past couple of years. And even this year, the plan was additional, between currency and commodities, about $500 million of impact. And so in the quarter -- so our first quarter were -- the costs actually were favorable. And so that's a significant inflection point for us. I do expect input cost to be a modest tailwind going forward but don't expect necessarily that there's going to be a lot that's come behind that. The one thing is, though, we do believe and I mentioned this in the prepared remarks that it's our job to expand margins over time and we believe we have a lot of opportunity to do that on an ongoing basis between what we're doing on the revenue side and also on the cost side. But Nelson, maybe...

Chris Carey:

That's very helpful. And then 1 follow-up just on Personal Care and specifically the North America part of the Personal Care division. The volume growth there, can you just talk to the durability, what year ago comps had to do with that? And then within the North America business. I wonder if you can talk about what categories are driving this?

Nelson Urdaneta:

And on the comp, Chris, also remember the last year in Q3 in September, we had a bit of a destock; so that's also kind of weighing in. But very pleased with where we ended up. And more importantly, the underlying consumption in North America.

Anna Lizzul:

I also had a question on the better gross margins which clearly benefited from the lower input costs. I was wondering are you seeing a reversal of that recently with the input costs like the higher oil prices? Just to follow up on Chris' question. And also, if you can elaborate on what drove the better cost savings in FORCE this quarter?

Michael Hsu:

And then, Anna, maybe just an additional comment. I think the maybe underlying your question and Chris before, was, hey, there appears to be some underlying volatility in cost -- input costs and they're likely is. And we've dealt with that significantly over the past several years. I would say, longer term, we believe it's our job to continue to enhance margins, so we would remain disciplined in terms of our revenue management program and capability and also our cost management capability.

Anna Lizzul:

Great. That's very helpful. And just as a follow-up, you did have the benefit from better-than-expected pricing in the quarter, while volumes were soft. So you did see a nice sequential improvement in the change of volumes from Q2 to Q3? I was wondering how we should think about the sequential improvement potentially from Q3 to Q4 in volumes?

Operator:

Your next question is coming from Javier Escalante from Evercore ISI.

Michael Hsu:

Yes. Well, I'd say part one, Javier, I think I said this in the past and philosophically, I think we view trade promotion as a path to drive trial, especially of new items. And so that's kind of where it fits in our marketing mix. And so I'm not a fan of using promotion to rent or borrow share for a period of time. And so I think any data that you might say -- I'd say, we are promoting still below, as you point out, 2019 levels. But I think we have participated in some promotions. I did see your note and I would say one thing that kind of skews the analysis a little bit is this whole metric the denominator is EQ, right, or equivalent units. And for all the tissue categories, the equivalent unit is 10,000 sheets and for diapers, it's 1,000 diapers. And so when you do it on that basis or on a per piece basis, what happens, especially in our consumer tissue business is Scott 1000 by definition has 1,000 sheets. And so that's about, let's say, between 4x and 6x more than any other brands. And so that tends to skew kind of the measures a little bit makes us look a little bit underpriced when you do it on an EQ basis. But overall, I think we've taken pricing, we've probably moved faster on pricing than other brands. And so I'd say to me, our normal price gaps have begun to normalize.

Michael Hsu:

I'll start and then I'll let Nelson correct me. But I would say, it's our job. And so from my chair, I would say we have to do it, right? And so -- and the back story -- and I know you came out last year or so, Javier. But when I came into this role, the 3 things that we set out to do was, one, accelerate organic growth; second, reduce our earnings volatility; and the third thing, importantly, is enhance our margins; and so that was a fundamental goal when I came into this role. The kind of the curveball that came in, in between that was COVID, the demand shock, supply shocks and everything else in the inflation shocks. And so over the last couple of years, we said, hey, we've got an interim goal of, one, we got to restore our margins which I think this quarter kind of marks a pretty significant point for us that hey, we are back pre-COVID or 2019 levels. But still, as we talk internally, it's our job to enhance margins from here. And that's what I'm saying is we have to continue to be disciplined around our commercial programming, our innovation our revenue management and also just a discipline on the cost program and I still see further opportunity for us to expand our margins. But maybe I'll give you -- I'll ask Nelson to kind of give you some more specifics around the near term.

Operator:

Your next question is coming from Steve Powers from Deutsche Bank.

Nelson Urdaneta:

Sure. So as you indicated, we took our call from $200 million to $250 million through the first 3 quarters of the year were close to $200 million, just a tad below. And what's really driving this is a few things. One, keep in mind that a lot of the service inflation and lease inflation, et cetera and some cost inflation flow through this number. And it's being weighed in by some of the hyperinflationary economies that we deal with. So we're being impacted on that end because we've seen some costs accelerate outside of the U.S., Steve. So that's part of what's driving that $250 million based on where we're at, at this stage.

Michael Hsu:

Yes. Thanks, Steve. One, I'm really pleased with the team. We are delivering what we set out to do which is balanced and sustainable growth. As you could see, the organic momentum remains very strong. The margins are coming along as we mentioned, restored them the pre-COVID levels. And so we feel good about that. I would say we've made a lot of progress in the investment. We've made a lot of progress in building improved capability. We've made a lot of progress in improving our innovation capability and the innovation pipeline. And so I think over the last 5 years, we're probably up a couple of hundred basis points in advertising investment. I think from there, we really need to make that investment. At this point, we're approaching 6% overall sales. And so I would say that's competitive in our business. It's perhaps not as much as our primary global competitor but our plan is not to outspend them. And our plan would be to drive great innovation, great commercial programming and have a competitive spend. And so I don't expect -- Steve, I don't think, I'll go and say, "Hey, we need to continue with increased advertising investment in a straight line infinitely". Do I think there's some opportunity for us to continue to invest? Yes. But do I think we also have to leverage the investments we've already made better? Yes.

Michael Hsu:

Yes. Because 5 years ago, we were spending in the 3s and so that was -- I think I felt like too low for a company of the categories that we operate in. I feel competitive at this point. But we also have great opportunities to spend on and ROIs are great. And so especially as we continue to migrate more and more to digital and so there's going to be plenty of things that we're going to want to invest in.

Unidentified Analyst:

This is Shabana [ph] on for Andrea. I just wanted to ask you, can you please add color on your views regarding carryover pricing into 2024 and how to think about the possibly the need to roll back some of this pricing into 2024, especially with the retailers seeing some commodities coming in better? I mean I understand you just elaborated that pulp is lower but resin may potentially go up, especially with oil coming in higher. If you could just like, in aggregate, give us a little bit more picture?

Operator:

That concludes our Q&A session. I will now hand the conference back to Chief Executive Officer, Mike Hsu, for closing remarks. Please go ahead.

Operator:

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Operator:

Good day, everyone And welcome to the Kimberly-Clark Second Quarter 2023 Earnings Call. At this time, all participants are placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Christina Cheng, Vice President of Investor Relations. Ma'am, the floor is yours.

Michael Hsu:

Thank you, Christina. We delivered another solid quarter with 5% organic growth while cycling 9% growth in the year ago quarter. Organic sales were up across all segments with personal care and consumer tissue each up 4% and professional at 13%. Our growth strategy is working and our performance in the quarter reflects strong execution by our teams around the world. We continue to make strong progress in margin recovery. Adjusted gross margin was up 380 basis points and fueled a 17% increase in adjusted operating profit and a 23% increase in adjusted earnings per share. Given the strength of our first half, we're raising our full year 2023 outlook to 3% to 5% organic growth and 10% to 14% adjusted EPS growth. Our categories remain healthy. In North America, category sales were up 8%. And we continue to see robust growth in key developed markets including the UK and South Korea, which delivered double digit and mid-single digit increases, respectively. While category growth across the NEID. 0:00:25.0,P4 been more variable, we continue to see double digit increases in Latin America. This growth reflects the essential nature of our categories. As category leaders, we've remained focused on serving all our consumers and recognize that many are facing economic challenges. With our broad portfolio, offering value to premium options, we're able to meet consumers where they need us. And we are well positioned with brands like Scott and Huggies Snug & Dry to serve the value oriented consumer. Across markets, we're strengthening our price tag offering. And that means enhancing large count packs and big box channels, and making entry prices more affordable and small format channels. More importantly, we're accelerating innovation and cascading technology through our product offerings to ensure we're delivering a superior value proposition to consumers. Growing market share continues to be a top priority. In the quarter, year-over-year market share performance was soft, reflecting the relatively early actions we took to mitigate inflation. In the last six months, price gaps have begun to normalize and we are encouraged to see sequential improvement in market share in key cohorts including North America, where we've seen improvement in five of eight categories. Volume trends have improved, and we expect that to continue as we cycle inflationary measures and execute our strategy and commercial programs. Our enhanced commercial capabilities are enabling more real time decision making the drive sales, optimize brand investment and balance value and volume. Furthermore, we expect increased brand investment and improved supply fulfillment to strengthen our market share performance over the balance of the year. Our commercial programs and innovation are core to our strategy to elevate and expand our categories. We're pleased with our launches in the first half and enthusiastic about our second half plans. Here are a few highlights. Huggies debut its newest Baby Butts campaign this summer, celebrating Huggies’ unique curved design, which provides greater comfort and protection for babies on the move. Early results show excellent consumer engagement across our marketing channels. In China, we're raising the bar on skin health through a proprietary design that whisks away the baby's mess. Moving the mess away quickly from baby's skin is key to reducing diaper rash. We believe this kind of innovation will further differentiate us from the competition. And as the reason Huggies continues expand its market leadership in China. Lastly, our Kotex Intimus She Can campaign in Latin America continues to resonate. We were recently recognized with a prestigious Cannes Lion award for this initiative reducing period stigma as part of menstrual education. In China, Kotex introduced Overnight, an overnight pad with a proprietary design that prevents leakage with instant absorb technology. Overall around the world, we are seeing growth driven by the overnight segment. This a great example of superior product performance, coupled with effective brand strategy and communications to drive share gains and strong brand equity. Now I'd like to briefly address the impairment charges to intangible assets we recognize this quarter. We purchased Softex Indonesia to expand our presence in one of the world's fastest growing personal care markets. Indonesia ranks among the top three markets for new birth and we expect continued economic development will create more demand for our products over time. As a second largest diaper player in Indonesia, representing over a quarter of the market, Softex has built a strong equity with local consumers. The impairment charges we took this quarter, which Nelson will discuss shortly reflect our updated projections for the business. We have enhanced the team and taken actions to improve the business processes and our go-to-market approach. Indonesia remains an exciting growth market for Kimberly-Clark, and we're committed to this business for the long term. Now as we enter the back half, we expect continued progress in our journey to restore and eventually expand our margins. We're excited about our innovation and commercial plans and will invest more and more brands to improve our market share performance and growth trajectory. This is how we will elevate and expand our categories to deliver balanced and sustainable growth. Now I'll turn it over Nelson for more details on the second quarter.

Operator:

[Operator Instructions] Your first question is coming from Lauren Lieberman from Barclays.

Michael Hsu:

Yes, no, absolutely. So a few things. I mean, we don't speak about gross margin. But just to give you a context, Lauren, year-over-year, we did have a meaningful gain in gross margins on the segment, over 200 basis points. We on a quarter-over-quarter, you're always going to see a few puts and takes depending on mix and elements that flow through. But net-net, I mean, we are seeing an upward trend, so I wouldn't get too hung up on the overall movement quarter-to-quarter for the segment. Because overall, we are seeing an upward trend and recovery on the margins.

Nelson Urdaneta:

Yes, it's a few things. I mean, one, obviously, we in North America have been doing the transition to the new artwork, and some of the upgrades that we're doing in Cottonelle. So we're a part of the thing has been, our transition on shelf is taking a little bit longer than what we had planned. So that's playing a little bit in the mix. But overall, I mean, that's progressing. And in terms of the elevate, we're also having initiatives in the UK in Andrex where we're doing some upgrades on the product line. And that's coming through. So that's progressing on that end. But Mike, I don't know if you want to add anything else on that end?

Lauren Lieberman:

Okay, great, because the genesis of I guess the question also is actually like one topic that we've been getting a lot of questions of late is around pricing pressure in consumer tissues, some of the discussion, particularly in Europe and UK from retailers pushing back on pricing, or looking to roll back in consumer tissue. And we feel that a lot of questions about, a, if that would be an issue for Kimberly-Clark Clark and b, in specific to Europe and the risk of that dynamic materializing in the US. So just maybe you can add perspective there as well, I think you've said a lot in terms of reinvestment and share momentum, but any perspective on pressure to quote, give back pricing in that category in US and Europe would be helpful.

Operator:

Your next question is coming from Javier Escalante from Evercore.

Michael Hsu:

Yes, maybe that's, I do want to us start with between the lines and how you're just so between the lines are big bucket for us, so it includes both the advertising and as you point out some of our general administrative costs, and so maybe Nelson comment?

Michael Hsu:

Okay, and then maybe on the consumer tissue, or maybe it's a portfolio question, Javier, I'd say, hey, we love all our businesses, and the segments that we operate in. Certainly and as we talk about elevate and expand, we're elevating and expanding all those categories. And so we remain committed to that. That said, we are cognizant that performance of some businesses especially in consumer tissue is a little bit more variable. And so I think we've been on the record in the past, our consumer tissue in the North America is a little bit more profitable, and some our international businesses, but we have very strong profitable international businesses as well. And so the decision around exiting Brazil tissue, I think, is specific to the conditions in Brazil, what I've said in the past around portfolio is, hey, we're going to look to add businesses most more, with a greater focus on personal care, I would say, internationally, where there's a lot of growth opportunity. Indonesia is one great example where while we just reduced our medium term expectations for that business with the impairment, we still see a very long and bright future in that country for us. And we remain committed to Indonesia for long term because at some point, it's going to be in the top three of the largest type of markets in the world, and it's probably around the corner for us. And so we remain excited about that. But that said, there are other markets that are more structurally challenged. And so Brazil tissue was one of those. And that was driven by, we would say, some policies that encouraged capital investment into tissue making. And so there was a lot of capacity coming in, and we felt like the Neve business and brand would have been in better hands with Suzano, than with us. And so we made that transaction. So I think our, we're looking at, we love all the sectors that we're in, but we're going to make decisions based on local market conditions and make sure our brands can be competitive for the long term.

Michael Hsu:

Yes, I guess it's always possible, Javier, I wouldn't overread into it. I mean we're comfortable with our businesses and how they're performing where they are. But that said, I think if I would probably say we're going to stay close to local market conditions and make sure it's something I've talked about internally with our management, which is businesses need to perform for us. And so while we love all our businesses, they do need to perform and performance as part of the game for us. And so that's probably the bigger barometer for us.

Chris Carey:

Hey, good morning, everyone. Can you perhaps just frame your expectations for price mix versus volumes for the full year or specifically for the back half of the year? And perhaps just related to that how you might be thinking about the spending to reaccelerate volumes. Mike, I heard you say promotions might take up a little bit. I don't know if that was a comment on any specific region. But some context on how you see volumes trending from here. And the types of actions that you might be taking to drive a little bit better volume performance would be helpful.

Nelson Urdaneta:

Yes, and then to add some flavor, Chris, on the outlook, and what we've seen, in terms of volume, I mean, at some perspective, I mean, we've seen continued improvement in our volume trends. If you step back Q4 of last year volumes were down 7%, Q1 of this year, volumes were down 5%. Q2, the quarter, we just closed volumes were down 3%. Many of the actions that we have to take to deal with the inflation go back to the first half of last year, the majority of them. So as we step into the third quarter of the year and the fourth quarter, we will begin lapping some of them, and what we would expect that this point of we're projecting is the volumes to continue to improve on a sequential basis as the year progresses. And the overall revenue growth management actions should decrease in terms of the impact they're having on the top line growth. We've already seen that from a sequential quarter, Q1 to Q2, that came down. And then mix, we've been doing about a point, I would expect that to be the same as we progress.

Nelson Urdaneta:

Yes, so just to give you a context, I mean on a, we, the latest guidance that we have on costs on input cost inflation is that it would be at around $100 million. So that's about $50 million better than what we were forecasting back in April, when we last talked. Through the first half, we are at about $190 million negative. So it's an impact. So evidently, what's going to happen is we're seeing about a $90 million give or take benefit, as we go into the balance of the year. We will see some of that coming in Q3. And then the balance, obviously, in Q4, what we're seeing is versus our prior outlook, the overall fibre complex has gotten a little bit better, and distribution costs have gotten a little bit better. I will, however, just highlight that on a year-over-year basis, we're still seeing pulp and the overall fiber complex inflationary for us. Even though if you take it as a whole, the latest outlooks have fiber being year on year down in the mid-teens, if you aggregate everything. So net-net that's come down distribution is about flat now year-over-year for us. And then the only big cost bucket that's down significantly continues to be the resin complex, which again, that's down overall for the quarter 50%. So we're projecting about 40% down.

Operator:

Your next question is coming from Dara Mohsenian from Morgan Stanley.

Michael Hsu:

Yes, Dara, yes, definitely, I believe the shares will improve. We feel very confident in our programming and our innovation that's coming. And year-to-date, we feel really good about what that's done in the marketplace. I would say, the recent softness is, as I mentioned earlier, Dara, primarily related to the relatively faster pace of our price advances last year. And so that kind of really is the primary effect. But I would also say, in North America, specifically we are facing a fairly tough comp, just to refresh your memory, I think personal care, in personal care we were up 14%, in the year ago quarter, and across both personal care and tissue market shares were a bit elevated, that was an artifact. And I think we've talked about this time a year ago, which was, we're out of, our supply was tight in the first and second quarter of 2021. And so we had the kind of restock impact and the kind of reselling impact in the year ago quarter, and we're cycling that now. So we did see our shares were higher in the year ago quarter higher than they historically were. And I think that was related to the, I would say coming back into business in Q2 of 2022. But that said, we're not satisfied with our share performance. And definitely want to be up or even in over half. And so we are committed, we feel very good about our programming, especially in North America, I mentioned our Baby Butts advertising in our product improvements in North America on Huggies, and so we feel good about where we are, and we're going to continue to invest in the brands and make sure that we continue to touch base by consumers and encourage them to try our products and return.

Michael Hsu:

Well, just to point out, Dara, I think I don't have the numbers for this year yet. The last year, our contribution to sales from innovation was probably among the highest in the industry. And so we do track, we do have a couple internal metrics around, net incrementality. And then percent of sales related to the innovation. And so we felt very strong last year. And so we felt good about that. But that said some of the things that I just showed on the slides in our presentation this morning, we feel good about really good about the technology, and the product innovation on the premium side that we're having in diapers, especially in China. In China, organic was up nearly double digit against the backdrop where the category is declining double digit, and so, and we've doubled our super premium mix over the last year or so. And then as I mentioned, on the slides, we've launched two really exciting products over Cottonelle six funnel that features really a two zone liner, that one that handles the urine, and one that handles the solid waste, right as a as I like to say poop, and then we have something that we're calling oxygen bar pro, which is really, really high breathability diaper, which moms in China really love and so we feel good about that. And we're bringing technologies like those around the world.

Nik Modi:

Hi, how are you? Mike, I wanted to just kind of stick on the innovation topic. I mean, I think the messaging for me has been very clear in terms of how active you're going to be later this year, probably even going into 2024. But one of the common pieces of feedback I get from the retail community is that everyone is really going to be very, very active innovation, because there was a lot of products that was not launched during the COVID timeframe. So I just wanted to kind of get your reaction to that. And thoughts on that and could we potentially see maybe some unexpected levels of spending just because you're going to have to compete with so many other active innovation pipeline and shelf space is finite? Thanks.

Operator:

Your next question is coming from Anna Lizzul with Bank of America.

Michael Hsu:

Yes, Anna, I would say consumer demand remains resilient. Our categories thus far remain healthy and demand has been robust, just pick up a few numbers, I mean, North American consumer across our categories, is not just the categories of high single digit. Western Europe, which is a big developed market for us, teens in Latin America, double digits, KC Professional globally was up double digits. And so, I would say the category overall demand remains pretty robust. Are we aware of concerns around the corner regarding related to the economy and economic pressures, for sure. And we talk about that all the time, thus far it has not materialized. In the second quarter, the elasticity impact has remained muted, somewhat muted. Just to give you an example, on diapers in the category for the quarter price was up six, and volume was up one, so that would probably say the elasticity impact has not been as we typically model. And so I I'd say on that side it does reflect the essential nature of our categories. So, our volume trends as we kind of cycle our pricing from year ago we expect our volume trends to continue to improve and we think should improve in the back half, in addition, driven by the commercial programming innovation that we've been talking about. And so I think overall I'd say healthy, not seeing a whole lot of broad scale down tearing. We do see in pockets there is continued demand for premium and big development markets like the US like China, even in Brazil and Argentina, we're seeing actually the premium tiers start to grow and the value tiers contract a little bit. There are some pockets of down tearing. We're seeing that in Southeast Asia, some markets in Latin America, and but we're in to manage through that we're going to continue to sharpen our value propositions. I mean, we're very interested in serving all consumers as category leaders. We feel like we need to serve both in the consumers that are looking for premium products, but also the ones on the value side as well. And so we have a broad portfolio that spans value to premium. And we're doing things like adjusting counts to make sure our large packs remain competitive and affordable. We're sharpening our entry price points and small format stores, to make sure that consumers can afford to be in the category. And then probably most importantly, in my mind is we've talked a lot about innovation. We are doing a better job of accelerating or cascading, that innovation through our tiers from premium to value. And so that's kind of how we will manage through it.

Michael Hsu:

Well, I'll answer the second part first, Anna, we are, I would say we're highly efficient on the marketing side. I mean, we've invested quite a bit over the last several years around revenue management analytics, marketing ROI analytics, and so we maybe to a fault, we're perhaps overly analytical in terms of how we invest. But in general, I feel very good about the returns are getting we're getting, which is why, which is also why it gives us the confidence to invest more. We recognize we're not spending fully at the levels of some of our competitors. But we've made significant progress over the last few years, I think we're up several 100, or a few 100 basis points in advertising spending over the last five years. And so we're, I would say, pleased with that progress, but not satisfied. And part of the whole reason why we're very focused on being disciplined about how we drive both revenue, volume mix, innovation is that we feel like it's important to continue and invest behind these brands. Because that's the way that we can drive category growth and serve our consumers better.

Operator:

Your next question is coming from Andrea Teixeira from JPMorgan.

Michael Hsu:

Yes, Andrea. Yes, thanks for the question. I don't know if how well I can answer it all because we I don't think we outlook kind of the components of price mix volume. However, I would say, am I expecting an inflection on volume? For sure. At some point, I don't know when that's going to be but at some point, I want volumes to be positive. And just to give you, refresh your memory pre- COVID, I think for the three years leading up to our -- a lot of our revenue growth was primarily volume driven. And so I do expect us and this is why we're investing in innovation and commercial programs. For the business to grow healthy long term, we need the volumes to be up. And so yes, for sure I'm expecting an inflection end of point.

Michael Hsu:

Again, I said our volume trends are improving. I can't give you the inflection point. And I'm not going to forecast or give guidance on an inflection point. However, I would point out the majority of our pricing initiatives were more front end loaded or front half loaded last year, and so we are starting to cycle those. And so I would expect our, the contribution of revenue from price to diminish and hopefully the contribution to revenue from volume and mix to continue to improve.

Operator:

Your next question is coming from Jason English from Goldman Sachs.

Michael Hsu:

Yes, couple things, Jason. I think great point, thing I'll say is generally at this point I would say we've seen list prices move but when I say quote unquote, scraping or let your word lagging, I'd say we have seen a little bit higher promotion in some markets, particularly in Latin America, in Brazil, for instance. We've seen continued promotional activity. So I think that has been what we've observed more and more commonly. The list prices had lagged for a period, at this point, I'd say a lot of the brands have had moved as well. And so overall, I'd say the tactic is around the promotional side. And as I've mentioned, Jason, hey, we're going to be smart about it, it's not the way that we think is the valuable way to build the business in these categories. And so but we have invested in our GMK capability, we do know, the analytics, and we can make wise investments around promotion. That the bigger thing is, and I think to your point, yes, I'm not going to live with, we have to grow shares over the long term to sustain the business, just like we have to have volumes up. And so market shares need to grow. That's why our goal is to be upper even in more than in about half or more. And that's the goal. And so, but that's also why you've heard us talk quite a bit about our innovation and commercial programs. It's why we spent a lot of time with consumers talking about them and spent a lot of time with our customers talking about them, and we feel good about where we are. But I think you're certainly pointing to the one area that I feel like we really need to improve, and we're committed to doing that.

Peter Grom:

Thanks operator. Hey, good morning, guys. Hope you're doing well. So I guess I've kind of wanted to get some more color on what's embedded in the outlook from a gross margin perspective. I think previously, the expectation was 230 basis points, you reiterated your outlook for an increase in ad spending of 100 bps this morning. So is the expectation for 250 basis points now? The premise of the question is that, it just seems that that would imply that gross margin improvement, would kind of taper off in the back half of the year, and just given what you're seeing in terms of cost pressures, and productivity, that would seem somewhat conservative. So just, if you could help us understand the outlook for gross margin today, and any phasing in the back half of the year, that would be helpful.

Michael Hsu:

Yes, maybe, Peter, I'll just add just the outlook as Nelson just teed up really does reflect the strength of our first half and our confidence in our underlying plan. As I mentioned earlier, our categories, thus far remained healthy. And demand has been robust. We've strong innovation and commercial lineup, and we feel great to be investing more than that. The cost environment has been stable. And so while it's still a headwind, I'd say we're seeing glimpses of reversion. And so that's a good thing. But the other part of it, in our outlook embedded in it, and it is we do expect ongoing volatility. And so certainly as you're well aware, there's a lot of economic uncertainty in our major markets, soft versus a hard landing and the implications for consumer spending first and foremost. We're still dealing with a lot of political uncertainty, including the effects of the war. And then as I mentioned earlier, we still have some sporadic supply challenges, while it's much improved versus where it was two years ago. We still have some outages and so there's some inherent volatility, but overall, we feel very good about where the business is and where we're going and feel very good about our outlook.

Michael Hsu:

Well, certainly I'll start with, I don't think I'm going to give you guidance on ‘24 yet, but I think definitely very pleased with our progress on margin recovery. Certainly, as you saw our gross and operating margins expand, I think we've done a great job with the revenue realization managing the cost environment, and so we feel very good about that. Our goal is to restore our margins to where they were back in 2019, our gross margins. I think we are making that progress, but we are not going to stop there either. So when I got into this role back in 2019, I said at that time one of our goals is to expand our margins over time. And so what we're trying to do, Peter, is one, restore, and then when we get there then we need to expand and there's not two parts of the plan. There's one plan. And so we're going to continue to work that all the levers that we've talked about, both from a revenue management perspective and a cost management perspective, to drive ongoing margin expansion.

Michael Hsu:

Okay, thank you all for joining us for the call today. We look forward to seeing you in Q3, at the end of Q3. Thank you.

Operator:

Good day, everyone, and welcome to the Kimberly-Clark First Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Christina Cheng. Ma'am, the floor is yours.

Mike Hsu:

Thank you, Christina. I'm encouraged by our solid start to the year. We delivered organic growth of 5%, cycling 10% growth in the year-ago quarter. Category growth remain healthy, pricing execution was strong, and costs have begun to stabilize. These primary factors enabled us to continue improving gross margin resulting in a 25% increase in adjusted operating profit and a 24% increase in adjusted earnings per share. Given our Q1 performance and increasing confidence in our underlying operating plan assumptions, we're raising our 2023 EPS outlook to 6% to 10% growth. Margin recovery continues to be a top priority, and I'm pleased with the strong progress we're making. This quarter we expanded gross margin by 340 basis points versus year ago building on our momentum from the second half of 2022. While we are encouraged with our progress, we're still operating in a challenging environment, input costs have stabilized, but continue to trade well-above 2019 levels. With adjusted gross margins nearly 200 basis points below pre-pandemic levels, we'll continue to operate the cost and financial discipline. We're leaning harder into productivity and taking aggressive action to secure supply to better meet the needs of our customers. We remain committed to returning our margins to historic levels, and eventually expanding from there. We've taken a thoughtful and holistic approach to mitigating inflationary pressures, carefully balancing price realization with our focus on offering a superior value proposition. This is to enable us to meet our enduring goal of growing market share. In Q1, we continue to gain or hold share in approximately 50% of our Personal Care cohorts. We've invested in building strong revenue growth management capability and that has been critical to our agile and effective price deployment globally. Category growth has remained healthy and broad-based as the elasticity impact on volume continues to be somewhat muted. This reflects the essential nature of the categories we read. While our categories continue to grow, we see bifurcation in consumer demand. We've observed resilience and higher-income developed markets like the U.S., but also increasing demand for value in lower-income geographies, especially within D&E markets. We're meeting our consumers where they need us. As category leaders, we have a broad offering that spans value to premium. While we're continuing to see momentum in the premium tiers of our business, we're accommodating tighter budgets and more rapidly cascading innovation and product features through our portfolio, including our value offerings. Our brands offer excellent value. For parents economizing through usage, superior products like GoodNites XL overnight diapers enable their children to get a better night sleep with 35% less leaks. GoodNites serves an important need and we're stepping up our brand communications with breakthrough campaigns that highlight the superior performance and value of our offering. Advantage product technologies are key to our brand value propositions and over the past few years concerted investment in innovation has resulted in an exciting pipeline that will help us elevate and expand our categories. I'll highlight a few that you'll see later this quarter. We're refreshing Cottonelle Ultra Comfort and Ultra Clean in North America, behind a powerful insight. Half of the users in the category are dissatisfied with their existing "Soft & Strong bath tissue". We're focused on delivering a superior clean and we'll launch this initiative with some fairly provocative advertising that highlights down their care and we're talking about the real down -- their issues that we all face. Our suite of products will help address these unmet needs. In China, we're launching Kotex POLAR NIGHT, our best-ever overnight feminine pads. POLAR NIGHT offer superior protection from back leaks, one of the biggest issues for overnight users. Internationally, KC Professional is debuting our new icon collection, our most advanced towel dispensing system. ICON has fully customizable panels and ultra-high reliability enabling end-users to be more productive with labor and waste. ICON has been a hit in North America and we are excited to roll it around the world. We have more innovations to launch later this year, including exciting news on Huggies. Our teams are working hard on the innovation pipeline, we're confident we'll bring more value to our consumers while elevating our categories, and expanding our markets. In closing, we are encouraged by our strong start to the year and our momentum on the top and bottom line. We serve essential categories and demand for our brands remains healthy. We have a long runway of growth ahead of us and we're committed to delivering balanced and sustainable growth to create long-term value for all of our stakeholders. So now, I will turn it over to Nelson.

Operator:

Certainly. [Operator Instructions] Your first question is coming from Chris Carey from Wells Fargo. Your line is live.

Nelson Urdaneta:

Hi, Chris.

Mike Hsu:

Okay Chris, I'll start and I'm sure Nelson will want to give you some more color and texture definitely encouraged by - what I would say, it's excellent progress on margin recovery just for reference. I'm really proud of the team, the organization we're accelerating growth and restoring margins, while still investing to drive long-term balanced and sustainable growth. So, that's kind of what our overall play is. But on the margin recovery, yes, in the margin we said on the prepared remarks, gross and operating margins were each up about 300 basis points. We had excellent price execution, and I'd say our pricing has been commensurate with what our expectations for cost net of our ramped-up productivity would deliver. And so I think teams have really done an excellent job around the world there. Input costs, has stabilized and I pick actually for the past two quarters, and this is about the most ability we've seen. I think the call is about the same as it was back in January and so for that, we've had probably seen about 16 weeks of stability, which gives us something good to aim for, and I think the teams have done a great job kind of work in the productivity. We are seeing some green shoots transportation being a current area. But our current view is that the overall cost environment, it's going to be fairly consistent what we said overall. I mean it's going to be about $0.5 billion. We're going to pick up a little bit of favorability we think. I would add though Chris, I definitely see reversion around the corner, the costs were up to now three-point. We expect to be over the last three years, $3.7 billion of inflation. I would expect the history of these categories in - our commodities that we buy it generally comes back out. I don't really see that thus far this year, but we will see maybe some moderation in the second half of this year. But Nelson, you want to give him a little more texture?

ChrisCarey:

Thank you so much for that perspective. Just one quick follow-up. Your gross margin historically have recovered in quite a linear fashion in the same way that they've actually gone down during times of pressure. Is there any reason why your gross margin should step up kind of each quarter through the year in context of your Q4 exit rate being higher than Q1? And I just wonder if you have that level of sequential gross margin progression. Can you just remind about your overall investment philosophies and your willingness to, or desire, to put more spending back into the system as opposed to letting this flow to the bottom line, that could be for this year or going into next year as well. So thanks so much for that.

Mike Hsu:

Yes. Chris, just to tack on, we're continuing to invest in our brands to drive long-term balance and sustainable growth. We're trying to create the proverbial virtuous cycle, right? And so we definitely see that this year, in that opportunity this year. Certainly, I think the good start gives us a little more room and confidence to be able to invest further. And so even beyond kind of what we had thought during the start of the year, I think we would probably look for additional opportunity because, one, we really are excited about our innovation. I highlighted a little bit of that in our prepared remarks when we have great stuff for 2023. I think there's magic coming in poop, and kind of what we can do with poop. I talked about Cottonelle with the superior clean comfort protection on diapers. So we got great news. The other thing that we're really focused on and our retail partners, I think value, is we're really focused on expanding the categories, right? And so driving trial and penetration in these categories through advertising, and that's what some of the investment will be earmarked for. And so -- and we think there's great opportunity to expand penetration, even in the most highly developed category in the world, which is bath tissue, as I highlighted. Because a lot of consumers are still unsatisfied with what the category does. So we feel like we're improving our brand propositions. We have great news. And so putting more money behind the brands, I think, will work very hard for us, and we're excited to do that this year.

Mike Hsu:

Okay. Thank you.

Operator:

Thank you. Your next question is coming from Kevin Grundy from Jefferies. Your line is live.

Nelson Urdaneta:

So let me start, Kevin, with the organic growth outlook and how we see it evolving in the course of the year. So obviously, we've seen that pricing has continued to be the big driver behind our top line growth over the last three quarters. And in this particular quarter, as we stated, our performance was better than what we had initially projected, and that had to do largely with the category dynamics. Categories were stronger than what we expected, and the impact of elasticities on volume was more muted, frankly, than what we had projected. So that helped. But despite that, pricing continued to be the big driver of top line growth. What we expect to happen as we cycle many of the pricing actions that we took, because remember, we were one -- we led in many of the markets, the pricing actions dating back to Q4 2021. So we will be -- we'll start to lap many of those as we exit Q2. So our expectation as the year progresses is that the volume impacts that we've seen, and we saw 7% in Q4, we saw a 5% drop in Q1, will begin to taper off because the impact of the pricing will go away. But by the same token, as all the carryover pricing is lapped, we will also expect pricing to subside. So it will turn into a more balanced algorithm in terms of top line growth as we progress through the back half of the year. And then yes, we did hold to our guidance of 2% to 4%. We highlighted that we're aiming for the top end of the guidance in light of the performance that we had in Q1. And also, because we're taking into account the stronger category performance that we've seen, given the resilience of our consumers and the innovation that's being put into the marketplace. So overall, we are aiming for that top end of the guidance, as I just stated. And I've just given you a little bit of flavor of how we see the evolution of volume and pricing as the year goes by. But Mike?

Kevin Grundy:

Yes. Mike, a quick follow-up, and I'll try to be brief with this, because that was a lot of fantastic color from you and from Nelson. It's just on trade promotion, right? So the narrative, it's remarkable how quickly it can change. It was sort of drinking out of a fire hose with commodity costs and now things moderate a bit. And the narrative is now a lot more worried about trade down and what's the potential for trade support to ramp significantly? What's the potential for some of the competitive players, maybe who do not play nicely in the sandbox, whether this is in Europe with private label? What are your thoughts around that, that competitive intensity ramps here significantly as commodity costs moderate? And then I'll pass it on? Thank you.

Kevin Grundy:

Okay very good. Thanks for all the time, I appreciate it. Good luck.

Nelson Urdaneta:

Thank you.

Mike Hsu:

Hi Andrea good morning.

Mike Hsu:

Yes. Okay yes. First of all, I think on the - yes I mean, you're exactly right on the usage front. I mean, we do see in some markets, and I'd say it tends to be more developing in emerging markets where incomes are a little - budgets are a little tighter that you see the trade down. And that's occurred - that occurred starting three years ago, four years ago now with COVID, and we saw that extensively in Latin America where people were stretching out usage. And if they were using, let's say, three diapers a day, they had gone down to two. And so - and in some cases, I think that would explain, to your point exactly, Andrea, we're trading up to a higher quality, maybe higher capacity diaper, we've seen some of that behavior. But I think in Latin America, in particular, we've seen behavior shift. We had seen in the prior two or three years ago, some shift from premium to value. As I mentioned, we're now seeing some shift from value to premium the other way, but we've seen that usage change before. A little less - I think we would observe that behavior a little less in developed markets like the U.S., but it still does occur nonetheless. So that's kind of factored into our approach, and that's why you'll see from us, and I highlighted it in the prepared remarks. I mean we're really going to emphasize our advertising, the value of our products and the performance of our products. And so, we're really - we'll address it that way, and also by cascading better features through our product line. So I think that's - maybe that's the first part. And on the private label front, I think your question is correct. And certainly, as costs come down in the category, we might expect some pricing to come down. We're still working through that. At this point, we're still operating at the peak, even though we have a little bit of relief. We're still operating at the highs and you can look at the forecast. I mean some of our costs have come down a bit, but costs remain still well above billions over what they were two or three years ago. And so, but we will plan for that. Nelson, anything to add?

Andrea Teixeira:

Just as a quick one, Mike, and this is super helpful. When you say it's going to take a while, so we're looking at probably early next year where we might see things kind of leveling off or lapping on an inflation perspective?

Andrea Teixeira:

Okay.

Andrea Teixeira:

Yes. But that $500 million and that's an average, but if you think about like how it's front-loaded, right? So it's the $500 million on average, I'm just making it up numbers. But let's say, it's $1 billion in the first half and then it's plus $500 million in the second half, reversing back. So what I'm saying is that, okay, retailers are smart enough to know because they own the private label and they know their contracts. So they will not immediately have to - that benefit or have to pass through that impact? But what I'm saying is that it will coincide that you're going to lap the pricing and you're going to start to see your inflation going the other way. So you're starting to see deflation, not on an annualized basis, but you're going to see on a quarterly basis. So I think what does that do with your - when you're sitting down in the fall, to talk about pricing into spring of the following - or into the beginning of next year?

Andrea Teixeira:

Yes, that's fair. All right thank you so much. Appreciate the time.

Operator:

Thank you. [Operator Instructions] Your next question is coming from Jason English from Goldman Sachs. Your line is live.

Nelson Urdaneta:

Hi Jason.

Nelson Urdaneta:

Yes, so for gross margins, Jason, at the very least, we're expecting to expand them around 230 basis points year-over-year. Because remember, we're expanding at the midpoint of our guidance, operating margin by 130 basis points. We took that up 50 bps versus our prior outlook. And we are putting in the incremental on 100 bps at least of investments into the brands. So that would put the year-on-year gain in gross margins at about 230 at the bottom.

Nelson Urdaneta:

That's a good follow up, Jason. So the thing would be - it wouldn't be necessarily sideways. Because as I said, I mean, we do expect to see continued progression in gross margin. I wouldn't call it linear. I don't expect it to be a straight line between now and Q4, because we have a few puts and takes with how commodities and pricing and FORCE will play. But we do expect to exit the year above the average for the full year. Does that help?

Mike Hsu:

Well, let me just - I'll give you a little more perspective, Jason, because here's the deal. Look, we updated the outlook - I think it definitely reflects the strength of the first quarter relative to our expectations at the beginning of the year and our growing confidence in our underlying plan assumptions. I think we're off to a good start. And so the unset part of it is, I would say, Nelson and I, we probably had more muted expectations for our first quarter, closer to what you guys were all thinking and so hey, we had a very strong start. As I mentioned, the other underlying category performance has been healthy. The cost environment has been stable. But that said, but I would say also in the first quarter, the shape of the P&L has performed very well. And I'd say the cost - the quarter, I think, exceeding our own internal expectations pretty healthy in a way that I would say the primary drivers were volume, price and cost. So if you take those three factors, those are pretty good quality factors. Could it continue to get better? It could. But I think we've made our call on the outlook and generally it feels a little soon to call - revise our guidance up after the first quarter. But based on the strength of the first quarter, we felt like we should. But is there more room as we go through the year? There could be. But there's also a lot of volatility that remains, which is kind of why we call it the way we've called it. And so what are the down factors on volatility? We're all seeing the same reports about recessionary risk in the second half. We don't exactly know what's going to happen to the cost - input costs and currency. And so, there are a lot of factors on both the plus side and the negative side. And so we're - we feel like this is a good call for now. And we were - I think I will retain the right to change our mind later.

Mike Hsu:

Thanks, Jason.

Operator:

Thank you. Your next question is coming from Lauren Lieberman from Barclays. Your line is live.

Lauren Lieberman:

Great thanks. Hi, how are you? I wanted to talk about consumer tissue innovation. I know it's a topic that we've touched on before without going back into the detailed poop conversation?

Lauren Lieberman:

But you guys have talked for a long time about the ability or the intention to elevate the category and bring innovation there, and this seems like the big - the first kind of like, big chunky move in that direction. I was curious your view on kind of category development, right? If I think about it, I would argue that you're probably the only player that's really focusing on innovation and premiumization in the category in this demonstrative way? How are you going to see the category evolving over time, right? Is there a higher margin profiles that's structurally more interesting? Does this kind of raise the innovation game for everyone, more bifurcation between private label and branded? I'm just - yes, curious on views on what your initial research and maybe test markets have shown you, if you've done that on them, and how the category could evolve things with this move on innovation?

Lauren Lieberman:

And then just from a profitability standpoint with this, right? So margins made a big step up this quarter in consumer tissue. But if I think back, the story in this category for KC for a long time has been recognizing the cyclicality of the cost environment that you'll see here. But making the -- raising the bar, right, the highs are higher and so are the lows, right, in terms of margin percentage. But as you push forward on innovation here, I mean, is there a scope for this business to have peak margins that are, I mean, call me crazy, like 19%, 20%? I think prior peak is maybe around 18%. But just not thinking this year, obviously, but over a multiyear horizon, what this means, could mean structurally for profitability in the category.

Lauren Lieberman:

Okay. That's great. Thanks so much.

Nelson Urdaneta:

Thank you.

Javier Escalante:

Hi, good morning. [indiscernible]. Hello, good morning, guys. Question is, I wonder, perhaps Nelson, if you guys have an estimate on how much pricing have you taken, which is put us kind of like a one-on-one basis relative to the cost that took $3.7 billion in cost. Do you have any estimate how much in the past 18 months, how much pricing you have taken?

Javier Escalante:

Yes, that's absolutely, very helpful. And then I'm going to have a little follow-up. If you look at, kind of data, particularly in U.S. tissue, you see private label and Proctor, your main competitor, realizing more price mix. Is that real pricing? Or it's just basically that because you have the Scott business, you are seeing trade down within your portfolio under for - you are realizing less pricing than what so for your competitors and private label?

Javier Escalante:

And I do have a third one, if you don't mind. And it goes back to the Professional business. I saw in the presentation that you said that the business is back to 2019 levels. I believe that probably is sales or price, so pricing -- exactly. So if you can give us similarly, do you have an estimate on a volume basis, how much are you back given all these issues about vacancies and stuff like that? And if the volume is significantly -- still significantly below 2019, does it open opportunities for optimizing the size of that business? And thank you very, very much.

Javier Escalante:

Thank you very much.

Nelson Urdaneta:

Thanks Javier.

Mike Hsu:

Good morning, Steve.

Steve Powers:

Morning. Thanks, hi. So I might just ask one because we're short on time. But the one I want to ask first, just to clarify. So you talked about a lot of good things that I think we all see as evident in the first quarter, working in your favor and promise boding well for the year. But the guidance raise really only contemplates the $100 million relief in your commodity cost outlook. All the other levers of upside really, implicitly in the guide, are either implied to mean revert lower or, I guess, provide you allowance to invest back against them. I just wanted to play that back and make sure that -- I'm not sure it's the wrong outlook. It seems prudent, but I just wanted to make sure that, that that's sort of the right characterization.

Steve Powers:

Yes. Okay. And maybe just real quick, just your perspective on market share, you talked about it earlier. I think it's clear you're prioritizing margin recovery, probably especially so in consumer tissue. You seem pleased overall. I think you mentioned Personal Care shares on a global basis were essentially holding or gaining in about half, half year category country combinations. But we've seen, I guess, softer trends in the track data, which has created some intra-quarter controversies. So just maybe some perspective on that and where you see trends being a bit softer than you'd like or being a bit stronger, just to kind of help round us out relative to the data we all see?

Steve Powers:

Understood. Thank you very much.

Operator:

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Operator:

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of this morning’s short remarks, we will open the floor for questions. At that time, instructions will be given after the procedure to follow if you would like to ask a question. It is now my pleasure to introduce today’s first presenter, Christina Cheng.

Mike Hsu:

Okay. Thank you, Christina, and welcome to K-C. Good morning and thank you all for joining us today. Back when we introduced our strategy in 2019, we could not have imagined the unprecedented challenges we are about to face. Over the past four years, K-Cers did what we do best, provide great care, care that our consumers, our customers, our employees and our communities needed all around the world. At the peak of the pandemic, people counted on our brands to support the health and hygiene of their families, and I’m proud of what our teams were able to achieve to fulfill our purpose of Better Care for a Better World. Now as we look back at our results, there are three themes I’d like to emphasize. Theme number one, our strategy to accelerate growth is working. Since 2019, we’ve grown our business by about $1.5 billion in sales and delivered 4% average organic sales growth. In that time, we’ve accelerated our organic growth by improving our product offering and market positions, with meaningful innovation and world-class commercial execution. In 2022, organic sales increased by 7% and over delivering on our goals at the beginning of the year. This was achieved in what turned out to be a uniquely challenging global environment. 2022 also marked Kimberly-Clark’s 150th anniversary, a year in which we celebrated generations of category defining innovation. We’re proud to have created many of our categories, including feminine care and facial tissue under the leadership of our Kotex and Kleenex brands. We are inventors at heart. New products created during the last three years contributed to over 60% of our organic growth in 2022. Whether it’s Kotex DreamWear for ultimate overnight protection, or Kleenex Allergy Comfort, our product obsession, advantage technology and consumer-centric focus is enabling us to create meaningful value and accelerate category growth. This is perhaps most evident in China, where we continue to post double-digit organic growth in the face of a declining birth rate and challenging COVID operating conditions. With major upgrades in dryness and thinness, our products are among the best in the market, led by Huggies Super Deluxe, the softest diaper in China. Our strong portfolio supported by superior technology will continue to anchor Kimberly-Clark’s leadership in the world’s largest baby and child care market. Theme number two, we’re making strong progress on margin recovery. Over the past two years, we faced unprecedented inflation worth over $3 billion, a roughly 1,500 basis point headwind to gross margin. Our teams have done an excellent job mitigating this impact. Our product leadership, commercial agility and cost discipline enabled us to rapidly implement broad pricing actions and generate over $700 million in cost savings. The successful implementation of revenue growth management actions drove an inflection in our profitability in the second half of the year. Gross margin stabilized in Q3 and increased year-over-year in Q4 by over 200 basis points. This was our first major improvement in the last eight quarters. Collectively, these actions enabled us to fully offset inflation and currency headwinds in 2022 on a dollar basis. Recently, market prices of some inputs have begun to ease, although they remain elevated relative to pre-pandemic levels. While we’re encouraged by this, it will take time for these benefits to work through our contracts and flow through the P&L. Nevertheless, we’ll continue to leverage our scale to improve efficiency and reduce costs. At the same time, we expect our revenue management efforts will continue to positively impact this year. This will aid ongoing gross margin recovery while also enabling us to continue investing in our business. At the midpoint of our 2023 guidance range, we plan to improve operating margin by approximately 80 basis points. With incremental headwinds below the line, this translates to 2% to 6% growth in earnings per share in 2023. We also intend to increase our dividend for the 51st consecutive year. Theme number three, we will continue to invest to drive balanced and sustainable growth. We’re scaling innovation that delivers better value, more benefits and better care for our consumers. We continue to see strong demand for great performing products. New Poise Ultra Thins and expanded sizing for the pants drove share gains in adult care, both from a dollar and unit standpoint this past year in North America. We’ll be launching several exciting initiatives in 2023, including our GoodNites Youth Pants, which can hold the equivalent of three bottles of water! as well as exciting performance upgrades for Huggies diapers. At the same time, we’ll leverage the broad range of our offering to address the growing need for value through compelling commercial programs. Now to wrap up my prepared remarks, I’m very proud of K-Cers around the world. They continue to execute with excellence, standing tall in the face of countless challenges all to fulfill our purpose of Better Care for a Better World. We’ve assembled an excellent management team that has tremendous experience unlocking global growth. We have a long runway of growth ahead of us, and we’ll continue to invest in balanced and sustainable growth to create long-term value for our shareholders. Now Shelby, if you wouldn’t mind, let’s open the line for questions.

Mike Hsu:

Good morning, Dara.

Dara Mohsenian:

Hey, how are you?

Dara Mohsenian:

So, I just wanted to go into the 2023 outlook in a little more detail. First, Mike, can you just outline what you’re assuming for pulp prices as you look out to next year? I’m assuming you’re not fully using the RISI forecast, but maybe you are, just any clarity there would be helpful. And then you talked about the greater investment in growth in people by 100 basis points to margin. Can you just help us understand the motivation behind that? Are there specific areas of opportunity? Is it more you had to pull back a little bit in 2022, just given such a tough commodity environment? How are you sort of thinking about that? And also maybe just a little more detail on functionally where you are spending, is it ad spend, or is it other areas, is it headcount and maybe geographies and product categories you plan to invest? So that would be helpful. Thanks.

Nelson Urdaneta:

Yes. And to add, Dara, in terms of pulp and the fiber complex as a whole, I think, just to give a little bit of context of where we’re at. Overall, the fiber market prices have plateaued in Q3, and they actually began to turn slightly in Q4. And to your question as to do we take RISI as a reference, yes, we take it as a reference. And just reiterating where we’re at today, prices have more or less remained largely in line with where we in Q3 and what we’re projecting into this year is that on average, eucalyptus, as an example, would be down 10% for the full year. Now same goes for fluff, and NBSK and some of the other components of the whole fiber complex. We would see prices begin to ease throughout 2023. One thing that we need to take into account is that we don’t cover at RISI. I mean we actually enter into specific contracts in all the different components of fiber. So what you see in RISI or some of these indexes does not necessarily translate one to one at that time to our P&L. So that’s also what’s playing out. To give you a context, out of the commodity inflation of $200 million to $300 million that we’re quoting in our guidance. The pulp complex as a whole is right around half of that at the midpoint. We will see pulp as a whole, be up for us in 2023 based on what we’re forecasting at this stage, albeit a very small number compared to what we’ve seen before and markets are giving up on that end.

Dara Mohsenian:

Great. That’s helpful. And just one quick follow-up. On the higher ad spend, are there specific geographies or product categories you’re most focused on, Mike? And then if I can slip one additional question in, also just the FX guidance for 2023. The revenue guidance is worse than our currency models indicate based on your country exposure. So just any clarity there would be helpful, but also the flow-through to profit look pretty severe in terms of the FX impact to profit relative to revenue. So any clarity there would be helpful. Thanks.

Nelson Urdaneta:

And addressing the question on the ForEx, Dara, just to unlock that a little bit, so for next year on the top line, we’ve said that for the full year, we’re talking around two percentage points of a drag. And it’s important to highlight that we are seeing that concentrated in the first half of the year, when we do the comps year-over-year. I mean we would not -- we would see that really ease or not be that much of a headwind as we get into the second half from a top line standpoint. So you could work that out and there. And then when we go down to the flow-through to the bottom line, a couple of things. As a reminder, we’ve got about half of our revenue coming from overseas and about a third of our profit coming from overseas. But we do have a significant amount of costs that impact the P&L, either exposed to hard currencies in the foreign subs in which we operate. The other element you need to take into account as you model is that we’re not covering the spot rates. I mean, we have particular risk management strategies in place that I’m not going to get into details in the call, but we have to work through those risk management strategies as they flow through the P&L. As you know, that’s not a one-to-one if you’re engaging in hedging and doing risk management strategies that we do.

Mike Hsu:

Okay, thanks Dara.

Mike Hsu:

Good morning, Chris.

Nelson Urdaneta:

That’s a fair question, Chris. And a couple of things, obviously, on top line, it will be what it will be because we don’t hedge top line. So that’s in essence what’s going to happen, so it will translate. When you go to costs, we have models in place for risk management strategies, and there are currencies we hedge, there are currencies we don’t hedge, and it depends on the amounts we do. So it’s model-driven. So changes in currency, to your question, would have impacts. Now it won’t apply to all the currency payers because it depends on where we’re at, at any given point in time. So definitely on top line, yes, we will see that very fluid as markets move, and that’s happening literally on the hour. As to profits, we will also see, to some extent, some flow as the currency changes and we update our models depending on what’s hedged and what’s not hedged.

Mike Hsu:

Yes, Chris, I definitely feel like it’s a realistic goal, and I think we’ll get there. And my view is we’ve turned the corner on our margin recovery program. We -- obviously, we saw in the fourth quarter continued strong organic performance. But for the -- I said this in my prepared remarks, pricing exceeded input costs and inflation for the full year. So, we fully offset inflation and FX for the full year last year. So, I think the teams did a great job there. And our operating margin, as I said, stabilized in Q3 and expanded by 200 basis points in Q4. In terms of the cost outlook, so I think we’re making great progress there. And let me say this about costs. One, from my seat, I’ll say there’s -- I see green shoots, okay? But even though we still see cost headwinds coming into the year, there are green shoots, and we have seen selected commodities start to ease. And I’ll also say, having been in this company for 10 years, reversion is around the corner. When it happens, it happens fast. We offset extraordinary headwinds over the last couple of years, as I mentioned. We see another 600 this year. Historically, though, there has been rapid reversion, and we’ve seen some signs of it. I don’t have a timetable for that. I don’t know if it’s going to hit this year or not. But at some point, it will happen. And when that does happen, it will accelerate our margin recovery. And as I said in the past, we’re not counting on reversion to deliver the margin recovery. But when it does, it will accelerate our time line, which is why I feel confident about it because we all know $3 billion over two years, it’s not going to stay at that level, right? At some point, it’s going to come back down.

Chris Carey:

So can I just confirm, and I apologize, because I’ve gotten questions on this, and I’m going to get back in the queue. Do you expect gross margins up, but the 100 basis points is what you’re investing into gross margins. So if you can you just maybe confirm what your expectation for gross margin is for 2023? Because I think there has been some confusion.

Mike Hsu:

That makes sense?

Nelson Urdaneta:

That’s the math.

Mike Hsu:

Okay. Thanks, Chris.

Mike Hsu:

Hello, Steve.

Steve Powers:

Hello, good morning. Good morning. Just to pick up on that math because that’s sort of the math that we’re working with too. But that implies, if you take the numbers literally that the 23% gross margin objective is a tick below the 4Q 2022 gross margin that you realized. So just to Nelson’s point about seeing that progressive gross margin improvement sequentially, it doesn’t imply a lot more movement in 2023. So maybe just talk about that in the context of, overtime, easing costs and the like.

Nelson Urdaneta:

So Steve, I think a few things that -- just to add a little bit of color or how we get there on the math. So I think the important thing to take into account is we’re staring right now at about $250 million of commodity costs at the midpoint, as we’ve guided. We have about -- in terms of currency, about $350 million at the midpoint in currency. And then in other costs, we have around $200 million. So when you add it all up, we will be for another year in a row, having a significant revenue growth management realization that we’ve planned for, which, by the way, around two-thirds of that is solely carry over from 2022. So what happens at the end is, for the year, we’re going to be realizing positive pricing net of commodity and ForEx, whereas last year, we were pretty much neutral. We were able to fully offset the $1.7 billion. So that’s going to flow through. And exiting Q4, it’s not a straight line as Mike indicated, because, again, the quarters are pretty different and the dynamics between the categories and the mix and our cost impact us differs. But the reality is that on a year-over-year basis, we continue to expand margins, and it would be quite the game because if you recall, our pre-COVID gross margins were around 35%. So we would be getting -- we would be making pretty good advance on the full year with the movement that we’re planning for.

Steve Powers:

Okay. That’s fair. And I agree. Unprecedented has become the new precedent. So two other, I guess, follow-ups, if I could. One is on the enhanced essentially net pricing, revenue growth management. I guess, you talked about mostly carryover. That’s great. That makes sense. In terms of the incremental, is -- do you anticipate incremental actual pricing actions versus just kind of other RGM actions? And you -- just some color around where those might occur and what portion of them are actually list price movements versus count reductions, that kind of thing would be helpful. And then another thing that you mentioned in the release, it’s been a topic across other companies that have been reporting just in terms of retail inventory levels and some downshifting in terms of trade inventory levels, just some color around what you’ve seen and how you’re thinking about destocking inventory levels across the trade as you go through 2023? Thanks very much.

Steve Powers:

No, that’s great. Thank you.

Steve Powers:

Okay. Very good. Thank you.

Operator:

We’ll take our next question from Anna Lizzul with Bank of America.

Anna Lizzul:

Hi. Good morning. Thank you so much for the question. I was wondering if you can comment from your guidance on why most of your inflation is outside of the U.S. in 2023. Meaning what is different really in terms of the markets outside of the U.S. in terms of rising costs? And then I have a follow up.

Anna Lizzul:

Okay. And then just how should we think about the phasing of your forced cost savings through the year, just given the rising input cost are more pronounced in the first half. Should we expect greater cost savings to offset that in the first half as well?

Anna Lizzul:

Okay. Thanks very much.

Nelson Urdaneta:

Thank you.

Mike Hsu:

Hi, Andrea. Good morning.

Mike Hsu:

Okay. Maybe Andrea, I’ll start with the D&E and then maybe Nelson you can come back in on the on bridging the top line. D&E, yes, it did soften. So in Q3 I think we were up about 11% Andrea, and then it was plus 2% in the fourth quarter. I would say, as you already talked about primarily due to what I would call discrete challenges in Southeast Asia. So what we’re doing is, we’re excited about our business in Indonesia, it’s great business, great brand. I would say we’re working through some business approaches that we prefer. And so that’s had an effect of the year. They did things a certain way, I prefer to do them a different way. And so we’re just working through that. And that had an impact on sales kind of in the quarter. Hopefully we’re through that. And then beyond Indonesia, we’re seeing a little increased competition in Vietnam and India. And so we’re going to work through that and something that’s been going off and on for a couple years now. Beyond Southeast Asia, China was up double-digits. Latin America was up in the 20s, and Middle East and Africa was up mid-single-digit for us. So, we’re still, we still feel very good about our D&E performance overall, but recognize we have a little bit of work to do in Southeast Asia. I mean, the team overall is doing a great job executing bringing innovation into these markets, driving the price execution, which we’ve talked about and we feel great about our commercial programming for this coming year. Does that give you enough on the D&E?

Mike Hsu:

Yes, well, let me just say, we had great performance across developed markets in the fourth quarter. I think generally, approaching a double-digit in developed markets outside the U.S. U.S. as I mentioned, was up, I think if you add tissue and personal care was up about 1%, mostly driven by retail inventory changes differences. We exited a private label contract that was pretty significant. We exited or changed timing on a pretty significant promotion at a big retailer. And so that affected I would say the fourth quarter overall in the U.S. But overall, I don’t think we’re putting out a number there specifically on each of these segments, but we are expecting continued good performance both in North America and developed markets internationally and very excited about the plans going there too.

Andrea Teixeira:

That’s helpful. Just as one clarification that’s missing on the, when you said two-thirds of the --correct me if I’m wrong, I understood, it’s like everything that you have in plan, in terms of pricing is about two-thirds carryover, so it implies that you have another one-third of pricing to come through in the plan?

Nelson Urdaneta:

Yes, they go into effect in the biggest markets at the end of Q1.

Nelson Urdaneta:

Like hyperinflationary markets. So where, we have that pricing as part of the overall number.

Mike Hsu:

Okay. Thank you, Andrea.

Mike Hsu:

Morning, Lauren.

Mike Hsu:

Okay, Lauren, I knew you were going to ask this, and so Russ and I were on the phone last night working through this, and so as so anyways here’s a couple things. One, let me just say in North America and I would say globally overall, we’re seeing a resilient consumer. And I think that does reflect the essential nature of our categories. Generally, as you know, our POS or consumption volume where the POS Nielsen sales is in line with expectations. As I mentioned, our shipment volatility has been a little higher just because of some of these discrete items that we’ve worked through. This is the thing Russ and I were looking at last night. I definitely would say observed elasticity was slightly higher or the elasticity impact on volume was a little bit higher in the second half than the first half. But remains, I would say far below what’s modeled. And I think that does reflect the nature of our categories as being essential. And I’ll throw a couple numbers at you. And these are category numbers, so not brand and they’re public anyways, so not proprietary us. But in Q4, pricing was up 7% in diapers and Eq, right, equivalent units, the measure of volume was down three. And so I think as you point out, therefore, the implied elasticity impact is less, certainly far below one to one. The thing that I would throw in there on top of that is in the second half us and our competitors have made a lot of count changes across all these categories. And so the Eq definition includes count reductions because it’s based on a standard unit, right? And so my venture to guess almost half of the volume decline is related to count and tissue sheet count changes. So that was diapers and then the bath tissue, yes, for the fourth quarter price was up 11 for the category and volume was down seven. And recognize, I might factor in, three or four points of that seven is likely to be sheet count changes. And then adult care of the outlier because, price was up eight and then volume was still up, right up to. And the delta, I think those were all fourth quarter numbers. What we -- and the reason I say the elasticities kind of seems like the impact has increased slightly in the second half. Is -- in the first half, pricing was up mid to high single digit and volume continue to be up. And so there is a difference. I think the consumer environment was different. I do think there is more pressure on the consumer, but I still think the category remains very resilient because of the essential nature of the category. So I’ll pause there, Lauren. Is that answer?

Mike Hsu:

Oh, yes.

Mike Hsu:

Yes, again, we feel very good about overall performance. At the brands, I think, in adult care, we were up 12% in consumption of the quarter. Feminine care, we’re up almost double digits. Diapers was down five. And the biggest driver behind that, private -- that private label exit was a minor one for us. But the bigger one was we have a large retailer that we knowingly shifted an event from Q4 last year, prior year into Q3 of this year. So we lost that. On top of that, they had a big private label event, which we know about and planned for. And that moved from Q3 to Q4. So there’s a double whammy on the share side, and that accounted for the majority of our share impact in the quarter. And that happened in October, I think the cycle for us. And so we saw later in the quarter, certainly, better performance from Huggies and we feel great about where we stand. And as I told you, we have -- this is the Disney 100. So we’ve got great commercial programs for our characters on our products. We’ve got great innovation that we’re really excited about. I hate to say, but -- well, when you come out and visit with us, we’ll take you to our war room on poop [ph] superiority. And so, but we feel very good about our offering and what we’re going to be doing there.

Mike Hsu:

I know it sounds funny on a call. This is the business I’m in.

Nelson Urdaneta:

Yes. So, the 200 million is on the other operating costs. That’s all gross margin as you model it. And the -- in terms of the Forex, a meaningful portion of it would be gross margin. There’s a little bit on translation because of earnings, and there’s a little bit on mark-to-market of any liabilities or assets we have in foreign currency, but the lion share of it would be in gross margin.

Mike Hsu:

All right. Thank you, Lauren.

Mike Hsu:

Javier, good morning.

Javier Escalante:

Hi. Good morning, everyone. I would like to come back to this elasticity question. So you mentioned that it’s healthier, but yet your volumes are down 7%, and I’m sure you could have itemized how much is your underlying volume growth versus market growth? So if you can give us that, so what is the underlying growth without going to this happening in incontinence or diapers, just tell us, of the 7% volume decline, how much were one-timers? Because the other branded competitor also saw volume decline of 6%. And my concern is how -- what makes you think that you can keep pricing at these levels given what this contradiction between the elasticity that you mentioned that is better, but we see this mid- to high-single-digit volume declines?

Javier Escalante:

Yes, I couldn’t agree more, but you have not quantified those one-timers. So what I’m asking you is to tell me, what do you think is underlying category growth for you...

Javier Escalante:

...the branded competitor and inclusive of private label because you are talking about price increases in addition to whatever carryover comes from this year. And we wonder to what extent you are taking too much pricing and whether you can keep it?

Javier Escalante:

So what about volume, not pricing. I’m referring to volume declines of 7%, Mike, if you could explain the underlying volume compliance?

Javier Escalante:

Go ahead.

Javier Escalante:

Excellent. And then I have a more, a strategic question when it comes to private label. What do you see private label role in diapers, both in the U.S. and Europe? And to what extent that does it make sense to hold on to your operations in the U.K.? Thank you.

Javier Escalante:

Andrex, the tissue business as well?

Javier Escalante:

The question is if you can tell us how is private label pricing in the U.S. versus the U.K., which we don’t have, I personally don’t have access to and whether it makes sense to hold onto the tissue operations in the U.K. given the situation there? Thank you.

Javier Escalante:

Thank you so very much. Very helpful.

Operator:

We’ll take our last question from Kevin Grundy with Jefferies.

Nelson Urdaneta:

Hi, Kevin.

Mike Hsu:

Okay. Yes. Kevin, let me try to package that up. I mean one, let me start with the share. It was a bit softer than we like in Q4, but I feel confident we’re moving on the right track. I mean, the softness was primarily in diapers for the reason I told Lauren, which is we had a big event come out and then a big private label event, which we happen to supply go in and so that had a big impact on market share in the quarter. For the full year we were upper, even in five of eight categories we were down in five and Q4, that’s why it, I said it’s softened in Q4, but we’ll get it back on the right track. I do think, I feel really good about our plans for this year and feel confident in our commercial activation in North America, and then, in nearly all markets around the world when we have a few discrete items we’re working across in international markets. In terms of the pricing environment, I would say the promotion environment right now remains competitive. But I would say overall constructive, given the cost environment, we’ve seen kind of, obviously the broad pricing actions from most manufacturers across categories. Promotion frequency has returned to normal levels, both in tissue and personal care. And that, that happened, a while back. I would say the depth of promotion remains a bit shallower than historical. And I think that’s related to the cost environment. However, on the consumer side, we can certainly, our, my comments on elasticity and the essential nature of our categories, notwithstanding, I do sense the consumers under pressure. And so, and we’re -- we’ve been, out talking to our top customers, and so we recognize that the consumer is working through some challenges pocketbook wise. And so, we’re going to meet them where they need us and make sure that we’re continuing to offer a strong value across our business. And the thing about us is, our aim is to lead our categories. And so we’re not really, we’re not a niche premium player. We want to play across both value and premium. And so we have a broad offering and we want to make sure we support our consumers effectively along that. But for the most part, yes we have taken significant pricing we are managing our promotions with discipline and we’ll continue to do that. I don’t know if that answers exactly, what you’re looking for, Kevin.

Mike Hsu:

Yes. We’ll, yes, I’ll say yes, we’ll cross that bridge when we get there. You’ll have to, no, my personal bias is I’m not a fan of driving the business through promotion. I don’t -- I can, we can do it effectively, because we know our ROIs on trade promotion as well as we know our advertising ROIs. And so and frankly, now the returns, on both are okay. I like the advertising ones better. And so that’s kind of my go-to. And I think it’s better for the long-term health of the brand. And frankly, Kevin, this is related to the question you’re asking. Our customers expect it. I mean, they they’re concerned about value for their shoppers. And so, they’re not the biggest fans of all these price increases, but part of what they’re looking for from us is to make sure that we’re bringing commercial programming to grow the category for the long-term. And they’re so, they’re excited about our innovation and they’re excited about the, the commercial ideas that we’re bringing this year. And so they, they want us to bring it. And so that’s probably the bigger reason, why we’ve ticked up the investment in our advertising.

Mike Hsu:

Okay.

Mike Hsu:

All right. Thank you, Kevin. And Shelby, I’m going to make my closing comments. Hey, I’ll just say a couple things one, I’m confident in the strength of our brands and our commercial capabilities to position Kimberly-Clark for the long-term. I’m really proud of the focus leadership talent in this organization, and confident that we’ll drive business, drive our business great long-term shareholder value and fulfill our purpose of better care for a better world. So I want to thank you all for joining us today. And with that, we’ll sign off.

Operator:

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. [Operator Instructions] It is now my pleasure to introduce today's first presenter, Brian Ezzell. Please go ahead.

Mike Hsu :

All right. Thank you, Brian. Good morning, everyone. Our teams around the world continue to execute strongly in what remains a dynamic and challenging environment. I'm pleased with our continued organic sales growth momentum with 5% growth in the third quarter, reflecting broad gains in all of our segments. Our third quarter results also reflect ongoing volatility in the operating environment, which continue to pressure operating margin and earnings. Throughout the year, we've taken decisive action to offset persistent inflation with pricing and cost savings. We're making progress as those initiatives enabled sequential expansion of gross and operating margins in the quarter. As we near the close of 2022, we're maintaining our sales and earnings outlook for the year. We continue to manage our business with discipline and remain confident we'll restore our margins over time. We're executing our growth strategy to elevate our categories and expand our markets by putting the consumers front and center. We'll continue to invest in innovation and our commercial programs to continually sharpen the value proposition of our brands. We're committed to delivering balanced and sustainable growth over the long term as we work to fulfill our purpose of Better Care for a Better World. With that, we're ready to address your questions.

Lauren Lieberman:

I was hoping if we could just start out with an update on the input cost outlook. You've held the outlook for the year. There's one quarter to go. But just we see -- what we see, it looks like pulp is kind of flattening out in terms of market data, but there are industry participants that have sort of said otherwise. We've gotten a lot of questions in the last few weeks about European energy prices, how that impacts your business? So any color you can provide would be great. And also, I know it's early, but looking into 2023 as well.

Nelson Urdaneta:

Sure. And Lauren, I mean, a few things there. I mean we've held our guidance for the full year in the $1.4 billion to $1.6 billion. And it's important to note that through the first nine months of the year, we've seen about $1.2 billion of these costs materialize. We did see sequential improvement in terms of the impact as we lap last year's $1 billion out of the $1.5 billion that impacted us in the second half of the year. So for the quarter, you would have seen a $360 million commodity impact versus $470 million in Q1 and $405 million in Q2. So the trend that we had talked about is playing out in Q3. Secondly, overall, we're not calling down because the reality is commodities remain elevated. The environment remains quite challenging, and we're maneuvering through it. We've seen overall a few dynamics that I'd like to highlight. First, on the pulp and fiber components, prices remain pretty elevated. Eucalyptus is trading today at around $1,600. That's an all-time high. And we -- while the market is projecting for some easing at the end of this year, we have yet to see that play out. If we look at distribution costs, those remain challenging as well, especially on the international front. We have seen some giving up a prices on spot transportation in North America, but still, that's not offsetting the overall challenges we're seeing on a global basis. So net-net, we remain at the guidance that we had provided. And the messages I would say in terms of next year, right now, it's too early for us to provide any guidance on 2023. We'd still have the full year to play out. But a few thoughts that I'd share. One, we remain at historical highs in the whole commodity and cost structure. As a reminder, on a two-year stack, with $3 billion at the midpoint of our guidance today. And again, we have not seen any meaningful move versus our assumptions that we gave you back in July. Secondly, ForEx markets. We have seen, and you see it in our -- in the deconstruction of our numbers. ForEx has become more volatile and challenging. And as a reminder, we have about 1/3 of our profits coming from overseas. So that is something that we are taking into account in our outlook, but we will have to carefully watch as we think about next year. The underlying business environment remains volatile. As Mike said in his opening remarks, we're managing through it, but it's something we will take into account again over the next few months as we prep up to give you guidance in January when we talk about Q4.

Lauren Lieberman :

No, it's great. I'll always take it. Thanks.

Kevin Grundy:

A question for me, just kind of zooming out a bit, Mike, just observations on kind of the elephant in the room, right? Observations on consumer demand and then elasticities. I guess as we kind of look at the quarter, elasticities are a bit better in tissue and towel, worse in Personal Care, at least versus our model. So maybe just comment on what you're seeing from a consumer perspective, any signs of consumer weakness that are at all worrisome to you? And then maybe you could just share your own thoughts on how the elasticities in the quarter came in relative to your own expectations and thoughts as we look ahead.

Kevin Grundy :

I'm sure there's a number of other questions into queue, Mike. That's really helpful. I'll pass it on.

Christopher Carey :

I just wanted to follow up on that line of questioning around volumes, specifically in Personal Care, but perhaps from a bit different angle. It's harder for us to see, but just taking what you said about commodities and what we know about pricing, it doesn't look like you've experienced much notable volume deleverage to gross margins this quarter from the weaker volumes, but certainly, the operating margin performance was different. Can you just frame how do you think weaker volumes to the extent that sustains are expected to impact your P&L as you go forward, specifically between the gross and operating margin line. And just connected to that, how you would envision addressing some of the weaker volume performance that we've seen, whether in demand building? Or is it simply that your algorithm will change between pricing and volume such that you're still achieving your overall organic sales growth objectives.

Nelson Urdaneta :

No, absolutely. So a couple of things there that I would highlight, Chris. I mean, one, the pricing realization that we had in the quarter really accelerated. So that's flowing through. And you can see that in the margins, which you rightfully point out. And that is something that we were talking about back in July based on the pricing actions that we had taken midway in the latter part of Q2 and also in Q3. So that's more than helping offset some of the deleverage that you would see on the overall business. Secondly, we begin to lap some of the commodity increases from last year, not that commodities are deflating, but they begin to not be as high in terms of the impact year-on-year. And those two are playing out for us to have for the first time in several quarters, a net pricing -- favorable realization net of commodities and ForEx. That's one thing. Secondly, if you look at our segments, the only segment where we saw a drop in margins for the quarter was really Personal Care. And that had to do with one, the one-offs that Mike's talked about, and we factored in some of those as we go into Q4, but some of those, we do expect to maintain as we go there. But then secondly was the fact that, yes, we had a little bit of a mix as well in there because North America Personal Care is our most profitable region within the segment in Personal Care. So that factored in into that one, which would have been that. Obviously, we continue to be very watchful of overall costs and fixed costs. And the teams are doing all the actions necessary to ensure we address that.

Mike Hsu:

Yes. Chris, again, I feel very good about our commercial execution around the world. I mean we have we had strong innovation this year. I feel great about our line-up for next year even though we're not talking about next year yet. But -- and I think we feel very good about our advertising. Our digital investments are working very hard for us. And then our sales execution has been very, very strong around the world. And so overall, I think our commercial programs overall are working as intended. We're going to keep a close eye on the promotional environment, though. I'll comment in terms of North America, I would say the environment at this point remains fairly typical, and that's kind of -- it's rebounded from being I would say, more suppressed during the peak years of COVID and is now, I would say, normalized in terms of promotional frequency, may be still a little lower on depth. And frankly, we're not going to drive our business by driving depth. It doesn't fit with our high road approach to building the brand. And so -- but we're prepared. And one thing I'll add, though, too, is I think we're being prudent in developing the right kind of action plans in the case of a more environment. And so as I mentioned, we're going to -- our strategy is to elevate and premiumize our categories over time. That is exactly the right long-term strategy. And I think that's going to be our strategy for a long time to come. That said, we recognize the environment we're operating in, and we've been very good at running, I would say, more value plays when necessary. But our goal is to make those productive and profitable as well while addressing the needs that the consumers have.

Steve Powers :

And apologies, you may have been talking a little bit about this with Chris. I got called away from the call for a brief second there. But -- just as you march from 3Q to 4Q, it implies, I think, either a lot of SG&A leverage or a really big step-up in gross margin sequentially and year-over-year. And I guess I'm just -- I guess will play that back to you and figure out kind of what the main drivers are? Because I get that the inflation gets a little bit less impactful as you go through Q4, FORCE picks up. But it just seems like you need some other variables to really move the needle as much as I think is implied in the guidance. I just want to play that back to you.

Steve Powers:

Okay. Yes, that makes sense. That's helpful. I guess the other thing that I wanted to ask about, and I appreciate that '23 is a long way away. You're not really talking about it. But consensus estimates have the company delivering above algorithm EPS growth next year, which I think implies that the price realization that you just spoke to continues to hold even as you get some relief on costs. And I wanted to get your perspective on just your comfort level with that level of assumption as you look at it. And especially in the context of -- I appreciate what you said earlier about sort of the timing impacts in North America and how that impacted shipments. But we are watching those private label shares in Personal Care, specifically diapers pick up. Hopefully, that gets better. But as you push through more price and the consumer potentially degrades from a confidence perspective, concerns about that, those share trends not rebounding. And it just -- it speaks to if the deflationary backdrop does play out next year, do you have to roll back some of this price. So a lot in there, but just really thinking about the consumer demand trends, your pricing trends, net of commodities and just some perspective on your comfort level with consensus being above algo next year?

Nelson Urdaneta :

Yes. No, I fully agree, Mike. And as I said to Lauren in terms of her ask, one of the variables that, again, we're looking into today as we build plans and everything is where we stand today. And the reality is commodities have not subsided. They remain pretty elevated, and ForEx is becoming and has become a bit of a challenge as we look forward. We've got 3 months to go for the year, but it's a variable that we're going to have to take into account, Steve, as we look forward, too. So again, too early for us to comment, but those would be kind of my thoughts in terms of where we stand today.

Operator:

Our next question comes from Jason English of Goldman Sachs.

Nelson Urdaneta:

No, no. In general, it remains where we're at.

Nelson Urdaneta :

Sure. So a quick one there, Jason. As we've said in the past, FORCE is not necessarily a straight line. We've never seen that in the past, and I don't project that that's going to happen in the future, because it builds up over the year, and we do see ups and downs. Because remember, it is a net number. So it does build some of the -- some headwinds and costs that we might be facing. As you indicated, there is a step-up in Q4. And to me, the key to look at is what happened in Q3. In Q3, we delivered $80 million versus an average for Q1 and Q2 that was below $50 million. So the acceleration was there, and we delivered year-to-date $175 million. We expect to see further delivery in Q4 based on the strong pipeline of productivity that our teams have across the globe. As we look into next year, yes, the teams are building up the gross productivity pipeline, and I'll stress that gross productivity pipeline. And again, we will be walking through the delivery as we go through next year. But I can't -- and I would not commit to whatever run rate we have exiting this year and Q3 being what we see in the first couple of quarters of next year. It's too early to say, Jason.

Operator:

Our next question comes from Andrea Teixeira with JPMorgan.

Mike Hsu:

Okay. All right. That's great list of questions. And so let me try to tackle 1 between Nelson and I will team here. First of all, on the -- I think on the pricing versus peers, I think probably what you're seeing is the fact that we were out fastest generally in pricing in most markets. And so if you're seeing a lag there because we've already started cycling our pricing a year ago. I mean the reality is, I think, in general, we've priced, I would say, very early, we moved very quickly on pricing last year. And I would say we also moved at higher levels than a lot of our competitors. And so -- and the reference for that is -- I think we've had a price gap, meaning we've been ahead on price on Huggies all year until I would say recently, maybe in the last couple of weeks or so. So overall, I think our pricing is in line with where we set it. And I think the good news, Andrea, is that in general, in most markets, we are seeing the market -- rest of market pricing kind of move generally in the direction that we've moved. That's not the case in all areas and -- but generally, that's kind of my overall take. In terms of elasticity, I'd say in the first half, I think the volume performance really outdrove the elasticity models. And I think that's where I think the consumers are feeling confident. You remember all the unemployment reports and stimulus and all those other things that were driving consumer confidence. I have seen a change in that in some markets. And so at this point, the elasticities that we're seeing are more "normalized" or what we originally modeled. And so we are seeing a bit more volume come out in relation to all the pricing. That's notable. And I would -- from my earlier comments on maybe the bifurcation, it's coming out a little bit more on more of the value-oriented tiers, let's say, Snug & Dry diapers for us, which is our value tier diaper in the U.S. or Scott 1000. So those are some things that we're going to pay closer attention to and make sure that we're managing the business in the appropriate way to serve our consumers where they need us. So again, that's the overall take. I don't know if -- I know there's a couple of other questions. I think Nelson will address some. But did that answer kind of the first part?

Nelson Urdaneta :

Yes. Andrea, let me address that. So first, I think the important thing to look at is spending in absolute dollars for the third quarter for between the lines, which includes our SG&A and our advertising and promotion was roughly in line with what we saw in Q1 and Q2. So there was really not a big step-up or change sequentially throughout the year. The thing that would have -- that you would have seen is an expansion in terms of percent year-over-year in terms of the between lines, and that was really driven largely because of last year's onetime adjustment to incentive compensation, which we talked about at the third quarter earnings call. So that was the lion's share of the change. It was a onetime we were lapping. Absent that, as we've been saying all year long, we are continuing to invest behind the business. It's the right thing to do. As Mike has said, we are fully committed to sustainable and long-term balanced profitable growth. And the only way to achieve this is to continue to invest in the business. We are investing behind our brands. We're investing behind innovation. We're investing behind capabilities and our people to ensure that we're there to go forward. Those investments are there, and we've continued to make them, but there was no particular step-up in Q3 versus Q2 or Q1.

Mike Hsu:

Yes. I'll let me make a couple of comments, not exactly your question, but I did want to address a couple of things related to the resulted tissue agreement. Overall, Andrea, hopefully, you'll recognize it's consistent with our overall approach that we've been talking about on portfolio management. I really believe we have a long runway of growth ahead of us in our categories and our markets. And we're going to pursue on the plus side, markets and adjacencies that are going to be accretive to our growth in margin. And I've always said for a few years now that we'll consider exits in businesses that are not accretive to our growth and/or margin profile that we expect. So this transaction specifically enables us to focus on our faster-growing, higher-margin Personal Care business in Brazil and creates a better future for both the Neve brand and the tissue business -- the Brazilian tissue business. The Neve business in combination with Suzano is really going to be better positioned to adapt to the unique dynamics of the local market. And we fully expect our partnership -- strong partnership with Suzano to continue well. I'll defer to Nelson. I don't think we're ready to comment on any specifics related to the transaction and...

Operator:

Our next question comes from Anna Lizzul of Bank of America.

Mike Hsu:

Yes, I would say -- and it's less differences by category. I would say, in general, where we're driving premiumization is generally working across markets. And so not specific there. I think it is more typically by sub-brand or sub-line or what we might call internally our tiers, right? Like the value tiers tend to be a little bit more price sensitive in this environment because, as I was mentioning earlier, there are a significant number of households, let's say, in the U.S. that are -- have less to spend now given all the inflation that's occurred over the last couple of years or so. So I think it's more on a sub-brand basis or a tier basis in our vernacular -- and that's where I say, working to continue to drive our premiumization strategy or creating more value through our premium products. We feel great about our innovation line-up this year. As I mentioned, we've got a lot of more coming next year with great features that I think consumers are really going to like. That said, we're also making the right adjustments as we said earlier, that to prepare for a recessionary footing if needed. And that means that emphasizing the great value that our brands offer. And in some cases, we will make some adjustments, whether that's related to pack count or sizing or something along those lines to make sure that consumers have the right pack and affordability that they need.

Mike Hsu:

Well, Huggies. Again, I think we feel great about our diaper line up, our adult care line-up in North America. But if you go around diapers, China, we continue to have mid- to high single-digit growth, double-digit growth in feminine care. And so we feel good about that. Latin America, where consumers are very value-oriented because of what's happening in the economy the last few years and our organic performance was up strong double digits in the quarter. So overall, across our markets, we saw strong organic growth, and that's because we feel that we've continued to improve the products. At the same time, we are recognizing that we are taking price to offset the commodity headwinds.

Javier Escalante :

I would like to come back to the U.S. And if you can, Mike, comment on how you see retailers approaching pricing and the profitability of their own private label operations in tissue versus diapers? And I have a follow-up.

Javier Escalante:

That's great to know. And then basically, Mike, again, on tissue versus diapers, you feel I mean, from the outside, that Scott is very clearly positioned on the value side. Huggies has been premium and I appreciate that you mentioned that I believe a competitor just follow price increases and that we do not have an all-channel view. But if you can walk again on the drivers of your confidence that Huggies didn't take too much pricing and you are competitive on the pricing front vis-a-vis your main branded competitor and private label because in our data, we do not see private label following price increases

Operator:

Our next question comes from Jonathan Feeney of Consumer Edge.

Mike Hsu:

Yes. So a couple of things in there. I mean -- and I would say, well, if you go into Nielsen and longer, but I used to be the highest user of Nielsen throughout my career. So there are so many variables that are related to promotional -- measuring promotion. And so -- so what I said earlier, Jonathan, was frequency kind of returned to normal in tissue probably in 2020, the third quarter were -- but maybe by the end of last year. And then in Personal Care, I would say, at the beginning of this year, and that's in terms of frequency. The volume -- and I would say the other key measure is depth. And I would say depth is shallower both in Personal Care and tissue than it historically had been and remains so. And I think that's an artifact of all the inflation that all the companies are seeing. And then if you look at the percent of volumes sold on promotion, it's a little bit lower, right, slightly lower, which is, I think, corresponds to what you were looking at. So overall, that's why I say I put promotion "normalized" but it's probably still a little bit lower than historical at this point. So that was, I think, part 1. And then any follow-up to that, Jonathan?

Mike Hsu:

No, no. I'm proud. I feel like I invented half of these measures. So -- but...

Mike Hsu:

The other side that you asked about was inventories. I mean there's a couple of points. Certainly, I mentioned earlier, we are cycling some retailer inventory build back. And at the same time, and I think we mentioned in our prepared remarks, there was some retail inventory reductions late in the quarter. And so that was a topic that came up at the last investment conference that I was at. And so that remains out there. And I would say that it's typically the case. Every other year or maybe every year retail inventory changes, and that's part of what we get paid to manage on. In terms of the household inventories, we think they've reverted back to normal. There was -- and really where it was really relevant was on Consumer Tissue, there was quite the build-up, I would say, self critically, I don't know that we were very good at predicting how the household inventories were going to evolve. But I think over the past years, and there was a lot of volatility in the tissue demand. I think in the second quarter of 2020, I think our tissue demand was up -- fac tissue was up 30%. And then a year later, it was down 27%. So again, fac tissue historically is very stable and goes with -- certainly, volume growth goes with highly correlated to population growth. At this point, we feel like it has reverted back to normalized levels. But it might be fair to say that there's a lot of people carrying more fac tissue than they were three years ago.

Lauren Lieberman:

I'm back. It's okay. I can let it go to -- I'll follow up offline. Thank you.

Lauren Lieberman:

Okay. Then I guess, we've come in a couple of different ways through different series of questions and so on. But I guess, how do you think about volume versus pricing versus market share? Because I think one thing that I get asked about quite a bit with regard to your business, in particular, is sort of, hey, but don't you see private label dot-dot-dot. And my read is that, yes, that's a dynamic of your categories. It always is in economic cycles. It's what you -- it's what you'd expect to happen, is it private label would gain some share there be some change in consumer behavior. So I don't know how you would -- could answer this. But as you look at how to manage through the continued high levels of inflation as you put in the incremental pricing that you mentioned this quarter, is market share the right gauge for you to judge kind of the health of the business at this point? Is it aggregate organic sales growth? What are the metrics by with you gauge if you've gone too far or not gone far enough?

Lauren Lieberman:

Well, then, I'm glad we waited.

Operator:

And at this time, it appears we have no further questions. I'll turn it back to management for any additional or closing remarks.

Operator:

This concludes today's call. Thank you for your participation. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. [Operator Instructions]. It is now my pleasure to introduce today's first presenter, Taryn Miller. Please go ahead.

Michael Hsu:

Okay. Thank you, Taryn. Good morning, everyone. I'm proud of our team's execution as we closed our first half with 9% organic sales growth in the second quarter. We delivered robust gains in all segments, our growth strategy is working, and our teams are executing with excellence in what continues to be a volatile operating environment. Clearly, our results reflect this ongoing volatility. For the year, we're now anticipating $300 million of additional input cost inflation. We remain committed to recovering and eventually expanding our margins and thus, we've taken further action to realize additional pricing and cost savings to mitigate these headwinds. We continue to expect pricing and cost savings to fully offset the effects of inflation over time. Based on the strength of our top line, we're raising our full year organic sales outlook to increase 5% to 7%. We're maintaining our adjusted EPS guidance. However, based on current conditions, including our updated input cost outlook, we now expect to be in the lower end of that EPS range. We'll continue to manage our business with discipline as we navigate near-term headwinds. Based on the pace and breadth of our pricing actions, we anticipate some volume impact over the balance of the year. Still, we're encouraged by the overall health of our categories and our brands. Our brands remain essential. We also know consumers are seeking greater value and we'll continue to sharpen our offering to enhance our market position. We remain committed to delivering balanced and sustainable growth. In the near term, we're taking necessary action to recover margins. We're also continuing to invest in our brands to enable us to grow sustainably now and for the long term. Now we'd like to address your questions.

Dara Mohsenian:

So first, just a couple of clarity questions. The increase in your full year organic sales growth guidance for 2022, is that driven by higher pricing or a higher volume assumption? And then second, with the $300 million in higher cost pressures now expected for the full year, you obviously mentioned a combination of pricing and cost savings to help offset that. Can you just be a bit more specific if you're planning additional price increases, specifically in the back half of the year? Does that offset a good amount of the cost pressures? How should we sort of think about the pricing outlook changing in response to the cost outlook, specifically in the back half of the year?

Nelson Urdaneta:

Absolutely. And I would add, Dara, a couple of things there as well. I mean, one, yes, as Mike said, I mean, pricing is one of the key levers as we're seeking to offset the pricing pressures that we're having. But also, we got to keep in mind our cost savings FORCE program, which will accelerate as we go into the second half. So the combination of those 2 will help us offset as we exit the year that bit.

Michael Hsu:

Yes. Great questions, Dara. A couple of things. And you and I have talked about this in the past. I'd say that retailer behavior is -- I know there's a lot being said out there. I find it to be consistent with what it's been historically over my 30 years of working in this industry. And I think it starts with the fact that I think we've learned over time, our interests are generally aligned. I mean -- and what do I mean by that? And one is we're both after the long-term growth of our categories, right? We jointly run these categories together. For them, it's in their store and for us, it is our business overall. But we're after kind of long-term sustainable growth. And that's one big thing. Second big thing we're after is delivering consumers a great value. And that comes in many different ways. In some ways, that comes with solid price points that reflect the value consumers are seeking. In a lot of ways, especially in our categories, it reflects -- it means the right kind of innovation on product quality that delivers to consumers the benefits that they're seeking. And so I think with those 2 foundational points, we are sensitive to the pricing. But we also do both -- I'd say, on both sides, I understand that we need to be able to profitably grow over the long term. And so again, we're sensitive to the pressure that's out there. We read the similar news reports. We've had the discussions with our customers, and we have been taking price. But we are doing it, I would say, thoughtfully and planfully. So maybe that's part one. And then on the D&E question, yes, I think overall price -- the pricing and volume strength really reflects the consumer resilience and the essential nature of our categories overall. I would say, Dara, that consumers appear to be somewhat more resilient in developed markets. Our performance, high single, low double-digit growth across all of our developed markets, multiple share point growth -- multi-point share growth in most of our developed markets. I think we have seen some price lagging in D&E from competitors. And so our shares have softened a bit in D&E. And while we have been driving price, we recognize that we've advanced pricing maybe further and faster than some of the competition. So we're going to have to continue to monitor that situation closely. The other thing that we're seeing a little bit more in D&E than we are in developed markets is a bit more trade-down. I wouldn't say significantly more but there is a difference there. And I think I've talked about this in past calls. In Latin America, we have a leading -- the leading value offering and the leading premium offering. And we're really glad we have the breadth of that scope because that allows us to pivot our business appropriately when the consumers are looking for that. So overall, we feel good about where we stand. We are watching price gaps in D&E, a little bit in North America as well and we're sensitive to that.

Lauren Lieberman:

So just following actually on that thread around some sensitivity and watching for trade-down and the mention of the portfolio breadth you have in Latin America. I was curious on what, if anything, you are doing in terms of shelf sets, merchandising of the more value or mid-tier products in the portfolio versus the premium end. Are there things that you are doing proactively rather than reactively to shift the mix of what you are supporting? And if not, why not? Because your categories do, over time, tend to feature on the higher end of the list of those that can see trade-down and be more sensitive not in terms of overall consumption but rather what is being consumed.

Lauren Lieberman:

Okay, great. And then on the cost savings, as Nelson, you mentioned, there's significant -- it looks like there'll be more FORCE savings in the back half of the year. And just knowing that not just for Kimberly-Clark but for many of your peers in the industry, getting at productivity has been pretty tough in this environment, whether it's asking suppliers for better pricing, whether it's getting into the plants and working on putting in place new cost savings, mechanisms or projects. So I was curious, frankly, a degree of confidence in that acceleration. What is it that you expect to change that should allow for you to see greater FORCE savings in the back half of the year?

Operator:

Our next question will come from Kevin Grundy with Jefferies.

Nelson Urdaneta:

Sure. So Kevin, I mean, overall, a few things I would highlight. I mean, I'm pretty impressed by the team and the resilience of the team and the focus and the priorities and the strategic imperatives. I've been able to see that as I've been getting out there in the field and working through all the difficulties and challenges that we've been seeing. I think it's a very resilient organization. And there's very strong capability and muscle that's been built, which has allowed us to deliver the kind of results we're delivering as of the first half of the year in Q2. Secondly, I mean, one of my key priorities working with the team is to continue to push forward on the margin recovery. I mean, this is something that is critical for us and we're very focused on it from all angles. And we're going to do it in a smart way. We will continue to invest in the business. That is something that we've done in the first half of the year, and we've got to keep doing that because that's what will allow us to drive forward a sustainable, profitable growth as we progress. So overall, I'd say those are my key priorities at this moment. In terms of capital allocation and other elements, I don't have a different opinion versus where we're at today. I believe those are the right buckets where I stand today. And as we progress over the plans and what we've got for the future years, I mean, I'll -- we will come back with what we've got.

Nelson Urdaneta:

Sure. So first, I mean, to cover the -- to give you a walk-through of the commodity update that we've got right now. And so as we pointed out in the remarks, I mean, we are calling now for the year a range of $1.4 billion to $1.6 billion. At the midpoint, it's $1.5 billion. This is an increase of $300 million. And what we're seeing is really first on fiber. Fiber, we're hitting all-time highs in Yook. As we exited June, we saw sequential growth in prices for Yook through the month of June, hit historical high in June. We're also seeing, in other pulp grades, elevated prices, and that's one of the key drivers behind what we're calling. Secondly, it's energy. If we think about energy and natural gas, in particular, we've seen in Europe a 10x versus a year ago in prices. And in our Western European U.K. business, which has a sizable tissue business, it is energy-intensive and that's bearing in kind of what we're projecting at this stage. And then the other one is distribution costs. Overall, we're seeing distribution costs also increase. And I'd say this is more largely on the international side of the house, and this is reflecting and bearing on what we're showing in terms of our expectations at the midpoint of our guidance for costs. A green shoot or a benefit we're beginning to see is in resins. I mean, that's probably the only big element within our cost bucket that we're beginning to see prices to come down on a sequential basis. And again, this is the one I'd highlight as I look at it. Overall, I'd like to -- I think it's also important to highlight that in a 2-year stack, we're staring at a $3 billion overall incremental cost, which is north of 1,500 basis points of margin that we're taking a hit as a business in 24 months. So it's quite sizable that we're managing through. And then that takes me to your point around conservatism on the guidance. The first thing is we -- overall, in the bottom line and the EPS, we've made our best estimate based on what we're seeing today and what's playing out in the market. We've also taken into account all of the cost-saving initiatives, as I just talked about before, FORCE, and that's embedded in what we have here. And then lastly, it's also our pricing. We were very encouraged by how our pricing came through. Our teams did pretty well in terms of executing the pricing in the second quarter, which sequentially was much better than what we had in the first quarter. And that's the other element that would bear in how we would see the second half playing out.

Operator:

Our next question will come from Chris Carey with Wells Fargo Securities.

Nelson Urdaneta:

Sure, Chris. And yes, absolutely, our targets and the way I've been looking at it are mid, long-term target margins for KCP remains unchanged at the high teens. I mean, we are aiming for that and we will get back. The plans are in place. I think it's important to recall that our KCP business has been the most impacted by COVID, I mean, including the reduced travel, the shift to remote hybrid work, and that's been bearing on the business. The business has continued to recover with high single-digit top line growth, and washroom sales are already over 90% of pre-pandemic levels. In fact, in North America, it's even at the very high end. We're almost there in full-time -- full recovery. However, margins, as you said, I mean, did slide for Q2 a bit. But this was really a combination of 2 factors

Christopher Carey:

That's very helpful. I just have a couple of questions on Europe and I'll jump back in. Just in the personal care business, it's the first quarter in a while, maybe 5 years, excluding the Texas storms, where volumes have gone negative. But it looks to be happening all almost entirely in Eastern Europe within the overall global personal care business. Can you just comment on what's going on in that market specifically and whether you think that headwind could persist here? And then just secondly, on the cost side in Western Europe, Nelson mentioned tissue businesses being very energy-intensive. Comment well taken. Just with natural gas availability looking like it could get even worse, given some news this week, can you maybe just talk about how you're framing or preparing for potential risk of force majeure because of lack of energy or paying any surcharges to procure low availability of natural gas? Just these types of situations seem to be coming ahead, so just curious your thoughts there.

Christopher Carey:

Yes, that was very helpful.

Michael Hsu:

Yes. The thing I'll tack on there though, Chris, in Western Europe, again, the operating conditions remain very challenging and volatile. I would say that our pricing and the volume and the organic was up low double digits, with price up double digits and volume up high single digits. So again, that's a developed market. I think the consumer is proving to be resilient. Our teams are doing a terrific job executing in what you're -- I'm sure you're familiar with being a very challenging environment. So again, we're paying close attention and the team is doing a very good job running in a tough environment.

Stephen Powers:

Sorry. Thanks, I was on mute there. So I guess, just maybe you could build a little bit on the costs just to clean it up a little bit. So given where we are in the year, natural timing lags in the supply chain, your hedge positions, I guess my inclination is to say that your line of sight to the $1.4 billion to $1.6 billion in higher cost is now fairly well locked in. Is that the case? Or is it more that you still see realistic risk that the $1.4 billion, $1.6 billion could still shift around if we saw further cost volatility? And if so, is it the energy bucket that's the biggest swing factor? Or is it equal across energy and pulp and distribution?

Nelson Urdaneta:

Right. So yes, so the thing there is there's not -- I mean, some of our key commodities are not as liquid as we'd have in the CME. So the reality is not all of this is locked in today. I think one of the important things to highlight is right now, based on where we're at and at the $1.5 billion midpoint, our forecast would call for $875 million already hit us in the first half and then $625 million would hit us in the second half based on what we know today, Steve. Again, there's moving pieces. I mean, we do expect fiber to remain elevated based on what's out there and what's public. You can see it in the indices. And we would expect some easing as we go into the back half, Q4 of the year on the fiber side. That's what we're projecting at this moment. But again, it's a moving situation overall.

Taryn Miller:

Yes, Stephen, maybe I'll jump in here. On the -- we don't -- we do -- we have shared before that we have negotiated material prices. We don't reveal the specifics or disclose the specifics of those contracts. I think what's fair to say or reasonable to assume in the cost outlook, building on what Nelson said, is that again, based on our current assumptions, the fiber prices, we expect to remain elevated in Q3 before easing somewhat in the later part of Q4. I think energy and distribution, particularly international distribution, are the 2 that we're seeing some of the more volatility and we'll look through the balance of the year. And as Nelson said...

Michael Hsu:

Right. Great push, Steve. I mean, that's exactly the issue. And I think if you -- and when you listen to the earnings call from some of our big customers, I mean, I think they'll say the same thing, which is there is a segment of consumers, let's say, in a developed market like the U.S. that is trading down, but it's not all consumers. There may be a few more consumers that are more price-sensitive in the developing market where there is not the government subsidy in a tough time like COVID in, let's say, in Brazil as much as there was in the U.S. So consumer is a little more affected there. But I think that's right. We do see it across personal care and tissue. Typically in the U.S., in a market like the U.S., what you'll see is maybe the trade-down means maybe not trading the brand out but moving to a smaller count pack, right, to make it more affordable in the short term. And so -- and Lauren mentioned it earlier. So there's a host of moves that we make in partnership with our customers to kind of shift in merchandise what's appropriate for the consumer. But again, I think we also want to be very cognizant that we don't want to move the whole market that way. And there are plenty of consumers that, I'd say, despite some of the impact of the economy, the affordability in our categories remains strong. And again, they're still looking to trade up. And we're seeing the growth. It's kind of the old barbell description. We're seeing great growth on the high end as well. And we're continuing to innovate and promote our brands and advertise our brands on the high end. And that's what's rough in driving China. I'd say, again, super strong performance on mix, double-digit organic growth in the quarter against a category that's down multiple share point growth on diapers. And that's all driven by value-added consumer benefits. We've really upgraded our line over the last couple of years and feel great about the technology that we have in all of our key markets. And I think that's reflected in the momentum that we're seeing, let's say, in diapers when you look at all developed markets. I mean, we have multi-point share gains in our biggest markets. U.S. was up -- Huggies was up 3 points in the U.S. in the quarter. China was up almost 2 points. South Korea, for us, which is our second largest market, was up 4 share points in the quarter. So again, I think we're skating -- as you say, skating to where the puck is. We want to be able to meet the consumer where they need us to be. And some are still looking for better quality and premiumization, and others are looking for us to extend them a better value and we're doing both.

Jason English:

Congrats on that market share momentum that you just referenced in personal care.

Jason English:

I appreciate that flag. And mostly -- so you're actually net lagging a little bit on that side of the business. It certainly seems like you're lagging on the Pro business, too, which I want to come back to. I know you referenced some choppiness in terms of like COVID comps. But even comparing to 2019, I think your volume is down now in the 20s versus high teens before. So we're kind of falling away and eroding versus 2019. Can you -- I appreciate that offices are a component, but it seems like office occupancy sequentially has gotten better, not worse. Why is your volume sequentially getting worse? What's -- can you help us understand what's happening within that business?

Jason English:

For sure, for sure, which is why I'm trying just to like look at 2019 and look at the volume of that because I appreciate the noise. And back to your comment on some areas where you've got some price gaps that you're trying to manage. Are we at a point where you would expect to start to maybe give some of the pricing back to get a little more promotional juice into the market to try to manage those price gaps? Or is it not meaningful enough to have to start to do some those activities?

Operator:

Our next question will come from Andrea Teixeira with JPMorgan.

Michael Hsu:

Okay. I'll start on the pricing, Andrea. Yes. If you track or go with the fact that we expect pricing to offset inflation over time, obviously, we'd like to get as much of that as soon as possible. And so if you looked over the course of the year, some of the pricing or inflation impacts hit outside of the U.S. earlier this year. And then more recently, there have been more impacts in the U.S. And so I'd say our pricing around the world has kind of followed where the inflation is around the world more directly. We did announce pricing in the U.S. last week. It was typical for what we've done in prior rounds, which is about a mid-single-digit increase. And again, we're still in the early stages of execution on that. And then we've announced similar actions at different times throughout the year in the rest of our markets.

Michael Hsu:

Yes. I would say Latin America, generally, overall, we're up double digits on price and so significantly higher. That reflects what's going on in the local market there.

Andrea Teixeira:

And Nelson, how much does it cover now, would you say, to track these prices and contracted prices? Or how much is floating, how much is saved? What change do you see?

Andrea Teixeira:

Right. And one last, if I can, on China. And I'm sorry if I missed that. How much was the drag in the quarter for D&E? And what is -- with the reopening, how much has been improving or it hasn't been that big? You continue to be able to service, given that you are more spread than the other players?

Andrea Teixeira:

Yes. Congrats to the team.

Peter Grom:

So yes, I just kind of wanted to understand how we should think about the phasing of margin in the back half of the year or specifically how much of that remaining $625 million should hit in 3Q versus 4Q. And then I guess I just -- I appreciate the commentary around margin improvement. But previously, there seems to be some sort of expectation that we could potentially get to margin expansion at some point in the back half of the year. And I know it will take time to fully recover the margin. But based on where things stand today, when do you expect to see kind of margin expansion?

Nelson Urdaneta:

Yes. And adding to that, I mean, Peter, a couple of things. One, we did expand gross margins in Q2 by 40 basis points. I mean, we realized significant pricing already versus Q1. So we saw that sequential improvement in Q2. And as we head into the back half, and we don't give guidance on quarterly margins, but we remain confident that based on what we know today, we will continue to expand margins. I mean, the plans are in place. As a reminder, we will continue to realize pricing. And based on what we've got today and what we saw in Q2, that will play out in the second half. Secondly, we've got our FORCE cost savings, which will accelerate in the back half versus what we saw in the first half, and that's the second component. And then as you said, there is a more subdued year-over-year impact of the commodities in the back half. So we'll see, as you mentioned, $625 million, which I'm not going to give the breakdown between Q3 and Q4, but we'll see that in the back half versus the $875 million that we saw in the first half. So that gives us the confidence based on what we see, that we will see progressive margin improvement in the second half.