Kimberly-Clark Corp (KMB) — Q1 2016 Earnings Call Transcript

Thank you, David, and good morning, everyone. Welcome to Kimberly-Clark's First Quarter Earnings Conference Call. Here with me today are Tom Falk, Chairman and CEO; Maria Henry, CFO; and Mike Azbell, our Controller. Here's the agenda for the call. Maria will begin with a review of our first quarter results. Tom will then provide his perspectives on our results and the outlook for the full year. We'll finish with Q&A. As usual, we have a presentation of today's materials in the Investors section of our website. Now as a reminder, we will be making forward-looking statements today. Please see the risk factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements. We'll also be referring to adjusted results and outlook, both of which exclude certain items described in this morning's news release. The news release has further information on these adjustments and reconciliations to comparable GAAP financial measures. And now, I'll turn it over to Maria.

Thanks, Paul. Good morning, everyone, and thanks for joining the call. Let me start with the headlines for the quarter. Organic sales were up more than 2%, mostly due to higher volumes. We achieved strong cost savings, margin improvements, and growth in adjusted earnings per share. Cash generation was healthy, and we continue to allocate capital in shareholder-friendly ways. Now let's cover the details starting with sales. Our first quarter net sales were $4.5 billion, which is down 5%, with a 7-point drag from currency rates. Organic sales rose more than 2% in the quarter. That was slightly below our 3% to 5% full-year target, and Tom is going to provide more color on our top line in just a few minutes. On profitability, first quarter adjusted gross margin was 36.6%, up 100 basis points year-on-year. Adjusted operating margin was 18.3%, which is up 90 basis points. In addition to this overall improvement, I'm encouraged that our margins were up in all three business segments. Our FORCE cost savings for the quarter were $95 million, so we're off to a good start relative to our full-year target of at least $350 million. Our FORCE cost program continues to help us offset currency headwinds and fund growth investments in our brands. Our Organization Restructuring remains on track and generated $15 million of savings in the quarter. Commodities provided a $30 million benefit, mostly in oil-based materials. However, offsetting those benefits, the total earnings drag from currency this quarter was more than 20%. In addition to translation effects of about 7%, that figure includes substantial transaction effects in developing and emerging markets. Despite this headwind, our margins in the D&E market were essentially even with year-ago levels, primarily from the benefit of price increases and cost savings. On the bottom line, first quarter adjusted earnings per share were $1.53, representing an 8% increase year-on-year. A lower adjusted effective tax rate contributed approximately 6 points of that earnings growth. As we mentioned in January, the quarterly tax rate could be more variable this year, due to the timing of benefits from tax planning initiatives. For the full year, we continue to expect the tax rate to be between 30.5% and 32.5%. Now let's turn to cash flow. Cash provided by operations in the first quarter was $553 million and in line with our expectations. On capital allocation, first quarter dividend payments and share repurchases totaled nearly $500 million. In February, we announced a 4.5% increase in our dividend, taking it to $3.68 on an annual basis. This was our 44th consecutive annual increase in the dividend, helping us maintain our top-tier payout in the CPG industry. We continue to expect that full-year dividends and share repurchases should total between $1.9 billion and $2.2 billion. Looking at the segment results, in Personal Care, organic sales rose more than 4%, including 7% growth in developing and emerging markets. Overall Personal Care operating margins were 20.3%, which is up 60 basis points, driven by organic sales growth, cost savings and lower input costs. In Consumer Tissue, organic sales were flat year-on-year, as growth in North America was offset by declines in developed markets. Consumer Tissue operating margins of 18.7% were strong and up 20 basis points. Our K-C Professional business grew organic sales 1%, including 4% growth in both North America and developing and emerging markets. Lower sales of nonwovens to Halyard Health reduced the segment’s top line by about 2%. K-C Professional operating margins were 19.7%, which is up 280 basis points year-on-year, and includes benefits from organic sales growth and cost savings. Before wrapping up, let me go ahead and recap. We delivered growth in organic sales and adjusted earnings per share, along with significant cost savings and margin improvements, and we continue to allocate capital in shareholder-friendly ways. I'll now turn the call over to Tom.

Thanks, Maria, and good morning, everyone. Since Maria just reviewed the financial details of the quarter, I will focus my comments on organic sales growth and our full-year earnings outlook, then we'll open it up for your questions. So starting with the top line, as Maria mentioned, our organic sales increased more than 2% in the quarter. North America had a good start to the year, with volumes up nicely in all three business segments. Internationally, we continue to grow, although at a lower than normal rate this quarter. Let me review our top line results in a bit more detail, specifically on our international business. In developing and emerging markets, organic sales increased 5%. Looking at some of our key growth markets, in Eastern Europe, organic sales in diapers rose 25%. That’s on top of a 55% growth rate in the year-ago period, which included significant volume gains in Russia in advance of a price increase. In China, organic sales in diapers were up about 5% compared to a very strong growth rate of 35% last year. Our volume growth in China remains healthy, although results were impacted by competitive promotional activity. We expect better organic growth for the full year on Huggies in China, particularly in the second half, reflecting our plans for innovation, brand investment, city expansion, and improving category growth. In Brazil, organic sales in Personal Care fell about 5% compared to 20% growth in the base period. Volumes were impacted early in the quarter, particularly in diapers, by the price increases that we initiated in January. Category demand also continues to be down in Brazil. Nonetheless, our sales improved as the quarter progressed and we expect better results across the balance of the year. Elsewhere in developing and emerging markets, our feminine care and adult care organic sales were both up double-digits in the quarter, and baby wipes organic sales were up high single digits. We remain very optimistic about our developing and emerging markets businesses, and we continue to target high single-digit organic sales growth for the full year. Stronger results in Brazil and China, along with more benefits from innovation launches and selling price increases, should help us deliver higher growth compared to the first quarter. Moving to our developed markets business outside North America, organic sales were down slightly. We continue to generate good growth in South Korea, while market conditions were challenging in Western and Central Europe. Turning to our North American consumer businesses, our teams there delivered another strong quarter, with 4% volume growth and healthy market shares. Innovation, strong marketing programs, and good retail execution continued to drive results across our portfolio. Adult care volumes increased double digits in the quarter with strength on both Poise and Depend. Baby wipes and child care volumes each rose mid-single digits. Consumer Tissue volumes improved by 3%, with growth in all categories led by Viva and Scott paper towels and Kleenex facial tissue. Overall, our brand positions are healthy in North America. Our first quarter market shares improved or were even with prior year levels in seven of the eight consumer product categories in which we compete, including diapers, where Huggies' shares were up more than half a point year-on-year and up almost two points sequentially. Looking ahead, we have a number of near-term innovations launching in North America, including our best ever Pull-Ups training pant, upgrades on Huggies diapers and baby wipes, and new and improved Poise and Depend adult care products. Finally, in K-C Professional in North America, our organic sales were up 4% in the first quarter. Execution and volume growth were good in both washroom products and our higher-margin wiper category. Now, regarding our outlook for the year, we continue to target organic sales growth of 3% to 5% for 2016. Compared to the first quarter, we expect more benefits from targeted growth initiatives, product innovations, and improved net realized revenue. Our currency and commodity markets remain volatile. As we mentioned in this morning's news release, our current assumptions have improved somewhat compared to three months ago. While this helps our U.S. dollar results, it also means we're expecting fewer benefits from selling price increases this year. It’s important to view currencies, commodities, and selling prices together since they are all interconnected. We're now planning that the net impact of these three factors will be a mid to high single-digit drag on our bottom line growth this year, which is slightly better than what we shared with you in January. If this turns out to be the case, we’ll have added flexibility to invest more in our top line growth initiatives. In summary, we continue to expect adjusted earnings per share in the range of $5.95 to $6.15, representing 3% to 7% growth year-on-year, which we continue to believe is a good outcome in this environment. So in summary, we continue to execute our Global Business Plan strategies, we expect to deliver on our financial commitments again this year, and we’re optimistic about our prospects to continue generating attractive long-term shareholder returns. That wraps up our prepared remarks, and now, we'll begin to take your questions.

Great. Thanks so much.

Hey, Lauren.

Good morning. Just on D&E in Personal Care, you've been pretty clear on your view and optimism that it will get better from here. The comparisons weren't a surprise. That was known. So, what was it in the quarter that ended up being a negative surprise? You said it was early in the quarter. Is there anything in particular you can call out that took you by surprise?

I wouldn't say surprise so much as it was a little bit tougher situation in a couple of markets, Brazil in particular. The category volume for diapers and bath tissue is probably down about 4%, at least in the measured from Nielsen. Category value is pretty flat from pricing. So, you don't see category consumption go negative in markets in diapers and bath very often. That was probably a bit unusual. It reflects the tougher economic conditions in Brazil, I'd say. So that was probably one challenge we’ll be facing this year. On the other hand, we’ve pushed hard on price in January. Some retailers pushed back, so we had a little bit of volume hit on that front that picked up sequentially as the pricing went into the marketplace. That gives us some confidence that through price and a little bit better volume in the back half of the year, we’ll put a better result on the board in Brazil. China had more price competition in the quarter. We had a very strong fourth quarter with a big push on Singles Day and e-commerce. Had a strong January with some Chinese New Year promotions and I think some of the other competitors spent a little bit more aggressively. We wanted to ensure we sustained our momentum, so we met competitive pricing where we needed to make sure we kept our volume growth going and had good double-digit volume growth in China. I expect that to continue as well. If you look ahead in China, the price cut competition did heat up in the second half of the year, so our comps become a little easier as we roll into the back half of the year.

Okay. Great. And on Brazil, I guess, one would be, are you assuming that this kind of negative volume growth persists through the year? Is that part of the forecast at this point?

I would say we're still trying to figure out how much of it is household inventory destocking, or am I just buying smaller count packs? Is that part of it versus how much of it is I’ve shifted to the category, am I consuming less? So, I'd say, we're probably not modeling it to be as bad as it was in the first quarter, but we’re not expecting a robust category growth story in Brazil this year.

Okay. And then just finally overall on demand in emerging markets, I thought it was interesting that K-C Professional actually looked pretty solid. You hear sort of macro-wise, is it perhaps industrial production, things are getting better? Any view on the lag or relationship between KCP being a leading indicator for where consumer demand ultimately goes?

Well, I tell you, in North America, we had a strong quarter. We probably picked up some share. We had better execution, so the kind of 4%-ish growth that we saw in North America is probably ahead of category growth. Again, the shares aren't as robust and reliable as Nielsen, but what we have seen would suggest that we've picked up a little bit of share in North America. In developing and emerging markets, I think what you're seeing in addition to the underlying economic growth is a positive trend toward better workplace conditions. So, better access to having towels and tissue in the workplace, more awareness of the need for safety gear, and having the right gloves, glasses, ear protection, et cetera. I think that's a trend that will continue as more companies are held to the same worker safety standards.

Okay. All right. Great. Thank you so much.

Thanks, Lauren.

Hey, Tom. Good morning.

Hey, Bill.

Hey, can you just talk about the pacing of the organic growth throughout the quarter both for you guys and the category? I know it's still really early, but how's April sort of shaping up?

Actually, I haven't seen a ton of data on April because I've been spending some time getting ready to explain the first quarter. I would say that the momentum throughout the first quarter, particularly in some of the key emerging markets, they had a stronger March than they started the year, and so that’s a positive sign. I was just with a lot of our international teams recently at our brand week and I would say everybody is expecting their results to improve as the year progresses.

Okay, that's helpful. Regarding the 9% growth in emerging markets, as pricing decreases, does volume become a more significant part of the sales equation? What implications does this have for advertising spending and the necessary adjustments when transitioning from inflation-driven pricing to volume growth?

Yeah, absolutely, volume growth and category penetration and category development are going to be key parts of it. We’ve continued to invest more in emerging markets, particularly as you're opening up new market areas. So, as we've gone into Africa and places like Kenya and Nigeria, you end up spending ahead of your sales value to develop the category. I don’t think it’s going to shift our P&L in a dramatic way to achieve that. We are getting some efficiency and moving more to digital and getting some pretty good ROIs on that shift as well.

Okay, that's helpful. And then just one quick last one on the gross margin outlook. How do you see it pacing throughout the year? The reason I ask is I think you did sort of $30 million of commodity deflation this quarter. So, that's a little bit less than half at the midpoint of the full-year target. Is that the way to look at the gross margin outlook? I know there's probably some currency puts and takes, as currency gets a little bit more favorable probably in the gross margin line in the back half.

Yeah, I mean, Bill, that's probably a hard one to call just because there are such big, moving factors involved. It's going to be the combination of how pricing, commodity costs, and currency impacts any particular quarter. I'd say we're pleased with the progress in the first quarter and are looking forward to that continuing as the year progresses.

Hey, guys. Hey. I want to go back to the top line acceleration expectations for the rest of this year. You mentioned three drivers. Targeted growth initiatives, would love to understand what that means. Product innovations, is that to gain share or grow price? I want more context about product innovations if you can. The last one is improved net realized revenues. I'm trying to figure out how you do that one, especially if there's more competition in China in particular. It doesn't look like it's abating in the U.S. If there's a bit of a tougher consumer market in Brazil and in Latin America broadly. How is improved net realized revenues going to drive a top line, but at the same time, in your 2016 outlook, you say benefits from higher net selling prices are expected to be somewhat lower than prior assumptions?

If you look at diapers in China and Brazil, which were the two soft spots and set those aside for a second and say, gosh, fem-care was up double-digits in D&E, adult care was up double-digits in D&E, baby wipes were up high single digits in D&E. We’ve continued strong performance that we've had broadly across lots of markets driven by good innovation, solid marketing, and strong execution. I think on the China and Brazil question, we talked about those. In China, underlying volume growth in diapers was good. The price competitiveness was tougher than perhaps we expected going in. On the other hand, we're going to lap some of that in the second half of this year. We don't expect it to get worse. In Brazil, that’s probably where the categories have more challenges, we have been aggressive in pushing price given the currency transaction hit that’s taken place there. Regarding the contradiction, I don’t think it’s a – we’re comparing to two different things. One was compared to our original guidance for the year. We are probably going to receive less price than we thought because currency is a little less negative than what we anticipated. However, we are still going to get year-on-year benefits from price as we go through the year. So, we didn’t get it all in January; we announced it during the quarter. As the year picks up, we will get some benefit, not quite as much as we thought at the beginning of the year. We're just trying to provide those two perspectives to help you see it the same way we see it.

So, can you talk about the cost savings ramp-up? That looked pretty good for the quarter. What specifically are you seeing in terms of opportunity that allows you to ramp up the cost savings plan this year? Thanks.

We’re happy with our FORCE cost savings in the first quarter. We delivered $95 million, which is a good start against our full-year target of $350 million in savings. The teams delivered across all three major areas we look to drive cost savings so negotiating material prices was very strong in the quarter, and the global procurement team did a great job to start out the year. We made progress in optimizing the cost of our product specifications, and we also got improvements in productivity and waste within our supply chain and manufacturing operations. So, good start to the year, and we’re happy with what we were able to deliver on FORCE.

Okay, thanks very much.

Thanks, Ali.

Great. Hey, thanks. Maybe just following up on Ali's question on the top line there, not to belabor it, but you obviously talked about what's in your control, the innovation, the distribution gains. Can you just be a little bit more specific about what you're assuming from here sequentially on both the macro environment, stable, better, worse, as well as the competitive environment, stable, better, worse, versus what you saw in Q1?

Any particular geography you're interested in or just broadly?

Well, broadly. And then I've got a drill-down question on China specifically; I want to focus on.

If you look at the macro environment, we’ve included a lot of assumptions in the guidance deck. We are not assuming spot currency rates. We are looking at forwards, so the rates in our guidance probably aren’t quite as favorable as what the spot rates are at this point in time, but it's somewhere between where it was at the beginning of the year and where the spot rates are now. If the spot rates stay where they're at, there might be more favorability on currency and maybe more risk on pricing. On commodities, pulp got a little better in this forecast than where it had been. In terms of underlying economic growth in individual markets, we continue to say that it’s a relatively modest growth environment. We are not predicting a huge falloff or any other kind of economic crisis developing in a major market anywhere in the world at this point in time. Brazil is probably the one that we're watching most closely as obviously expecting slower category growth, but getting back to a flat organic growth number for the year will be the first priority given that they started out the quarter with negative 5% on diapers. In the U.S., we actually saw probably better growth in our business than the underlying category growth because we picked up share in a number of markets and consumers are still responsive to innovation. We saw private label shares flat to down in nearly every category we’re in, which is again a good sign for consumer health and probably may be more bullish on the outlook in North America than we would have been even at the beginning of the year.

Okay. And competitively, are there any pockets where you're expecting more competition than what you've seen so far?

I would say China is probably one market that has become more competitive. It's a terrific market. There's still great category growth. We're still expanding into more cities. The consumer is very responsive to innovation and it's worth investing in. The good news in China is that even though it’s been more price-competitive, we’ve also been very aggressive on cost savings there. So, our gross margins in China have been stable or even a little bit better despite the price investment to stay competitive in those markets. Our team in China has done a terrific job of executing their plan and improving the shape of their P&L.

Okay. In China specifically, we too had noticed a pick-up in intra-quarter intensity, especially in fem-care, online, and especially in the value tier. But from your comments, this kind of confirms my fears that it sounded more broad-based. Would you say it was more focused in one category, one price tier, one channel specifically, or was it more broad-based? It sounds like you expect it to persist.

I would say for us, our fem-care business had a pretty strong quarter, probably with a little bit less price sensitivity than we saw in diapers. We're probably not as well-developed on fem-care and e-commerce as we are in diapers. Certainly, the e-commerce market was more competitive, which in turn drives pricing in your traditional brick and mortar channels because everyone's price transparency is available everywhere these days.

Okay. Great. And last and I’ll move on. Any comments you might have about the cadence of marketing spend throughout the year as you follow through on the new innovations?

Yeah. We have a lot of launch activity coming. I'd say that in our first quarter, our spending was slightly down year-on-year while up slightly from our prior year average. We've got a lot of new launches coming in the second quarter across many markets, so you’ll probably see a slight increase, although again, it's not a big driver of our P&L.

Good morning. Thanks.

Hey, Olivia.

Hi. How are you?

Pretty good.

In terms of the year, is there more innovation this year than in years past to help out with that acceleration?

I don’t know if we have a good metric for that. However, I feel really good about our innovation across a number of categories. We've got some terrific things coming on diapers across multiple markets, diapers and diaper pants. That’s going well. There's been a lot of innovation on baby wipes and good responsiveness to that. Our fem-care team has great innovation coming. Adult care is launching innovations in lots of places, and there are good developments happening on Consumer Tissue as well. Our K-C Professional team has introduced a lot of new products in the market. We have a lot to talk about. I was with many of our key customers at the National Association of Chain Drug Stores Annual Meeting, where you do one-on-ones with customers across all classes of trade that operate drug departments. Our customers were very pleased with the innovation we've got coming and are excited about pulling that into their retail environment.

Tom, that sounds great, but it doesn't sound like the innovation delta relative to years past is going to change materially. If China is getting more competitive and price was clearly a bigger factor in Q1 and that’s likely here to stay, and emerging markets are so much more challenging in Consumer Tissue that volume is actually taking a big step down, what drives that acceleration as the year progresses?

I'd say the underlying volume growth in China was very strong. It was still strong double digits in diapers and in fem-care. The pricing comps get easier because some of the pricing competitiveness started in the second half of last year. Therefore, I am confident China is going to post another solid growth year, even though they started out a bit slow due to the rollover of pricing initiatives. Across our markets, Brazil had a slow start but we expect that to pick up, and we had good underlying performance in most of our other markets. I am pretty confident in the team executing the plan this year.

Got it. That's helpful. Thank you. And then on the diaper volume being flat in North America, obviously, it's hard to tell sometimes with the Nielsen data, but the Nielsen data did look fairly favorable. Typically, I believe some of the non-tracked channels, particularly online, do better than the tracked channels. So, was there an inventory issue or were there divergents in terms of trends in tracked versus non-tracked?

No, there had to be some inventory change in there because we picked up share. We were up 2 points sequentially and up half a point year-over-year. Last year, we were selling in the Snug & Dry relaunch, so there could have been some effect of that. We had a strong fourth quarter, so there might have been some early January promotional buying that got shipped in December. But by and large, I'd say we look at our weekly consumption and we're pretty happy with those trends, and eventually, that shows up in volume. So I'm not too worried about that one.

Got it. Thanks so much.

Thank you, Olivia.

Hey, Tom. So, as you think about Brazil, I guess I understand why the trends at their current level aren't ideal but you're expecting a bounce-back. As I look at this, we look at the Latin-American pricing and the FX-driven pricing rolling off. Where does the volume come from? Is it market share, right? Because birth rates aren't changing in that context. As the volume improves sequentially, is it market share because U.S. brands are less competitive from a pricing standpoint? Do consumers use more diapers, what have you? Does that question make sense? Why would the revenue get better as volumes sort of need to catch up as you lose the FX-related pricing?

Maybe let’s shift markets to Colombia. It's not one that we usually talk about a lot because it’s a relatively small market than the Indian market. They had 20% organic growth last year and around 25% in the first quarter. They are challenged; they have some linkage to the oil trade, although not as much as others, but they pulled through it. You look at Eastern Europe, with what’s happening in Russia and CIS. There’s a big currency devaluation, strong price increases, some negative GDP, yet we still see reasonably strong underlying volume growth and category demand. Brazil is a little bit of an outlier right now, and we’re trying to make sure we understand what's actually going on there from the consumer standpoint. On the tissue front, you saw in lots of markets this quarter, slight negative volume and positive price because we were pushing hard to recoup pricing, especially since you buy pulp in dollars and face a major transactional impact that you need to recover. Eventually, that will normalize and you’ll return to the more usual population-driven growth on Consumer Tissue. I believe Brazil will improve during the year, but it’s going to be challenging.

Great. So the way to think about that is maybe on the tissue side, the consumption gets impacted more by the pricing. On the diaper side, again, it doesn't seem like it would get hit that hard, but tissue is one where you feel like the actual pound consumption does get hit harder by the pricing.

It’s one where when pricing is pushed in a market like Brazil, where there's a substantial amount of general trade, they'll initially push back. January sales were soft as we pushed the pricing expectations, and they said no, thanks, and took a volume hit. As we look at our shares in Brazil, we only have January and February data, but we were down about a point in diapers in those two months. We were up a couple of points in fem-care and relatively flat in bath tissue. Not a major shift from a share standpoint despite the volume hit. As March was better, I would expect that we got much of that share back. Ultimately, you want to make sure you're holding or gaining share in those markets amid all the volatility of commodity and pricing changes.

Great. Thanks.

Thanks, John.

Thanks, John.

Hi. Thank you for taking the question. I was wondering if you could delve into a little bit more detail in terms of the competitive environment in China. You mentioned increased promotional activity. Are these competitive pressures coming from other national players or are you seeing that from locally domiciled peers in the market?

I would say in China, the toughest competition of late has been from our two Japanese-based competitors, Kao and Unicharm. The weaker yen last year helped them leverage that in a way that didn’t impact them as negatively compared to what we were seeing in the U.S. They have been more aggressive; Kao in particular. We have been rising in share, while Kao has also been gaining share, and Unicharm has been losing share. There's been more competition in that direction. Huangong, we do encounter at the low end of our business and the high end of their business, but they haven’t been as much of an aggressor in comparison to the other multinational competitors.

Thank you. That's very helpful. And I think you mentioned earlier about more increased propensity to spend in North America. One of the categories that’s been challenged over the last few years has been Pull-Ups in particularly, given that consumers haven't necessarily been placing their kids in Pull-Ups and keeping them in diapers while potty training. I know you talked about a new Pull-Up launch innovation coming to market later this year. I just wondered if you could bridge that gap and tell me whether you're seeing improving trends within that product category or if you foresee that happening later this year into next year.

We actually experienced a good mid-single-digit volume growth on our childcare business this quarter, and that was ahead of the product launch, which is rolling out literally as we speak. We are optimistic about this new product and hope we’ll see some category uptick as we move into the summer season, which is generally a peak season for Pull-Ups. We will observe how this plays out over the second and third quarters.

Okay. The mid-single-digit volume growth was across childcare, though, right? Both diapers and Pull-Ups, as opposed to Pull-Ups exclusively?

Childcare was defined as Pull-Ups, GoodNites, and Little Swimmers.

Okay. Thank you very much. I appreciate it.

Thank you.

Hey, good morning, Tom. Thank you for the question. I feel like we're beating this up pretty good, but I do want to come back to Brazil real quick. You referenced the January-February data out of Nielsen. When we look at that data, it shows your sales up 5% while the category was up plus 9%. Reflective of a 100 bps share loss, it’s still positive. You mentioned a bit of retailer reaction. How much of the weakness in Brazil do you think was due to destocking or retailer backlash? Then you said you saw a pickup in March, at least in terms of shipments. Can you tell us where you're running as you exited the quarter?

On the Nielsen data, as you know, it doesn't cover the traditional trade effectively, which is probably where we had more of the volume hit in the first part of the quarter, and that's the part that will have more inventory swings. I don’t have specific data on where we ran as we exited the quarter other than that we had a nice sequential uptick from where we were running in the first two months. We'll see how the shares look.

Yeah. So you're seeing a bit of improvement at the end of the quarter. North America might have had a little inventory shipment too, so maybe that was subdued. There seems to be some reason to believe it does get better moving forward.

Jason, I'm more bullish than the rest of the guys on this call. I have multiple reasons to believe in that sentiment.

Good. I'm glad. I hope it all plays out in the numbers forward. A question for Maria on the FX impact. The 20% number is a big number. It implies a much higher leverage on sales than we've seen in the past from a transaction hit. Just back of the envelope, it suggests that the transaction EBIT was around a 29% margin versus 19% last year. What drove this uptick in transactional leverage? Is there anything unique we should be aware of? As we think about the future, I think on the last call, you said all-in, it was a 15% drag. Where does that number stand today based on your currency assumption even if it’s not on spot?

The relationship between the top line and bottom line in terms of currency hit depends on the movement of currencies, particularly for this quarter. We had significant impacts in places like Eastern Europe, Russia, and Latin America, Brazil. Given where the mix of the currency changes hit, that’s what drove the bottom line impact to be a stronger multiple of the top line impact than we’re typically used to seeing. So, it’s mostly mix-driven.

Okay. And that 15% figure from last quarter?

15% was the combined impact of currency and commodities pricing for the overall. As you see in the release, we noted that the translation impact is expected to be toward the low end of the 5% to 6% range. Adding a reasonable multiplier effect, we should be seeing a low double-digit drag for the year regarding currency.

Got it. Thank you so much. I'll pass it on.

Thanks, Jason.

Thanks. Good morning. I wonder if you can update us on the Poise Impressa product.

Sure. So far, it's going quite well. It was a couple of points to our growth in Depend during the quarter. We were up double digits in the U.S. and would have been about 8% ex-Impressa. So, it has a meaningful impact. We were just with our retail customers at the Chain Drug Store Convention, and they were very, very bullish on what they’re seeing. We’re doing some work to assess our learning from the launch, what price points work, and how we can get more impact and improve our shelf mix. So, we'll be making adjustments to shelf positioning and promotion strategy to help it grow even faster going forward. This is an exciting solution for an issue some women have and it gives them another approach to improve their quality of life.

Thank you. That actually addresses the second part of the question - just on innovation in general. Would you say that, in general, you're premiumizing and getting pricing through mix when you innovate? It's a broad-based question across all categories.

Absolutely, you want to create value from your innovation at whatever tier you innovate in. When we’re innovating on something like Scott tissue, we want to create value for both our consumer and the business if we can. We do try to premiumize where we can, but some initiatives like we're launching a more value-tiered diaper in many markets—it's a better solution, yet it's a premium to other value-tiered diapers, but still aimed at the value-conscious consumer. We’re making sure we innovate at relevant price points across our product spectrum.

Thank you. And then just thinking about your pricing being flat overall for the company for the quarter, down in Europe and South Korea, up 5% in EM, flat in North America. I would have thought South Korea and Europe was a much smaller part of the volume. But net-net, you might have had some benefit of pricing. Can you tell us how to think about that today and also going forward?

In our developed markets outside of the U.S., specifically Western Europe, Central Europe, Korea, and Australia, those markets traditionally present quite a challenge for us to derive pricing. Those are also markets where we hedge our transactional currency exposure often. Thus, the requirement to secure price to cover your currency transactional hits is less than you’d see in Brazil or Russia. Therefore, we typically enter the year not expecting to achieve much price other than through product mix or innovation than an absolute list price change.

Do you see that trend continuing down in those developed markets?

I would say we do not expect to make further price realizations this year. And in markets like Western Europe, you might witness price erosion as those markets are rampantly competitive. South Korea, overall, is a very strong market for us. We had a terrific first quarter and strong volume growth. You continue to see a shift toward e-commerce in that market, which might result in some slight price drag, but we're not seeing much price movement up or down in developed markets.

Just lastly on that, thank you so much. If you consider e-commerce growing incredibly rapidly in China and some Asian markets, I assume this foreshadows what's going to happen globally. Do you think this net effect is negative for pricing with online growth?

We are looking to see how e-commerce scales. It’s a market like China where it’s skipping a generation of retail development; they do not have many retail channels developed. Especially with a high penetration of smartphones and low delivery costs for last-mile delivery. Almost every retailer today is looking for online options, even if it’s click and collect in their existing spaces. I think you’re correct in that we are seeing more price transparency, and that could have an effect particularly for retailers with high-low strategies. We'll have to see how e-commerce develops as more traditional retailers enter and employ these strategies.

Thanks so much. That's really helpful.

Thanks, Caroline.

Hi, good morning.

Hello, Javier.

Hello. How are you?

Very well.

I need a couple of clarifications on the pricing front. In the U.S., I've tried to reconcile the commentary on volumes and market share and yet this low top line. Is it an issue that the relaunch of the Huggies Snug & Dry has a lower price realization and you're witnessing negative mix, or is it more that you expended a lot on the trade to push innovation and didn’t get the lift you anticipated in North America? I have another clarification in China.

Are you just talking about diapers, Javier? Because overall, our North American volume was pretty good.

Diapers. Diapers. I know. I understand the volume was pretty good. But I'm looking at diapers, and in general, say, diapers and Pull-Ups, training pants. Not just specifically diapers and childcare.

In diapers, we initiated the Snug & Dry relaunch last year in the second quarter with a price reduction to narrow the gap and get the value right relative to some of the other more value-oriented products. We’ve seen since the relaunch that we have better performing product at a more attractive price, with consistent progress on volume and share. The first quarter seemed light on volume. We discussed the reasons for that. Some of it could be the sell-in last year for the Snug & Dry launch; some could be a strong sales in December. That being said, we’re looking over the entirety since the relaunch—our volumes are up nicely and our share is improving. It’s a long ways to go; we're not stating victory on that front. As for Pull-Ups, when you look out over multiple quarters, we really realigned some of our pack count price architecture in the second half of last year, and we saw some improved performance in the category late in the year. We started the year better but the strongest selling season for Pull-Ups is generally the second and third quarters. We have a new product out and we’ll see how that performs in the second and third quarters, but we’re optimistic about it.

Just to clarify, again, in North America. Did you increase trade spending and that's why it contributed to the lack of pricing in the quarter or not?

Whether it's through trade or a reduction in list price, we treat it the same way in our marketplace. On Snug & Dry, we did adjust the price into our retail partners to close the value gap. I don't know if it was through a trade promotion allowance or a list price change, but the marketplace effect remains the same.

Okay. Thank you very much. And finally, on China, again, just one clarification. The competition seems to be more pronounced because this is where Kao and Unicharm operate, also in the key cities in China. Procter just launched a premium diaper a few quarters ago. Could you comment on whether that launch negatively impacted your own trends, and whether that diaper is priced below yours, if you can clarify that? I mean, the Premium Pampers that Procter had been working on?

I know Procter has launched; however, I’d suggest we see more aggressive competition linked with the Japanese competitors. The weaker yen afforded them more headroom to price competitively in a way the U.S. brands might find challenging. They had been more aggressive—Kao in particular. For us, we’ve been capturing market share while Kao has been gaining share as well. Unicharm has been the one losing share, so there’s more competition in that direction. Huangong does influence at the low end of our business and the high end of theirs, but they haven't been quite as much of an aggressor when compared to the other multinationals.

But the push by Kao and Unicharm has been happening for a long time. So, the additional pressure seems to be from Procter. Now it coincides with your commentary about pricing competition, and the disparity in volume coupled with organic sales lagging. So, would you agree that this incremental competition from Procter is pressing on the market, particularly since they are still much larger than you in the diaper category in China?

Javier, I don’t see it that way. You'll get a chance to ask Procter about it on their calls next week. I’d suggest that the Japanese competitors are getting boosted by the weaker yen, causing some short-term pricing pressure. Other developments with trade zones and imported products have favorably impacted them; however, that is beginning to close off now. They also heated pricing competition in the second half of last year, which may have affected upcoming price moves as well. We will see what Procter tells you next week.

Yeah. We will definitely ask. Thank you very much.

Thanks.

Thanks. Hey, sorry. Didn't expect to get back in. Just one last lingering question on Brazil was just the degree to which you're saying trade down or some of the local players gaining some share; is that kind of what you're accounting for with volume declines in the market? Is that a dynamic you're seeing there at all or not really?

I wouldn't say the local players gained share. I took a quick look at the share coming in. We were down about a point in diapers, and I think Procter was the one that was up, while the total was pretty flat. We were up about 2.5 points in fem-care in the Jan-Feb shares. So I wouldn't say we are observing that, but we are vigilant about monitoring if there's any trade downs that occur within our marked categories. I think we may see a small shift to Tier 2 or the more value-oriented products, which signals the consumer pressure in that market, and we will continue to observe that as it unfolds.

Okay. And that value-tiered diaper pant you mentioned, I’m sorry. Did you say which markets it was launching in or where, or when?

That's across multiple markets including D&E in Latin America and Asia, in particular.

Okay. Great. Thank you so much.

Thanks, Lauren.

Once again, we appreciate the interest in Kimberly-Clark. We've had good momentum, we've got a strong plan for 2016, and expect us to continue to deliver on our commitments. Thanks, again, for spending time with us this morning.

Thank you very much.