Kimberly-Clark Corp (KMB) — Q2 2018 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to Kimberly-Clark's Second Quarter Earnings Conference Call. Here with me today are Tom Falk, Chairman and CEO; Mike Hsu, President and Chief Operating Officer; and Maria Henry, our CFO. Here's the agenda for the call. Maria will begin with the review of second quarter results. After that, Mike will provide his perspectives on our results and the outlook for the full year. We'll finish with Q&A with Tom, Mike and Maria. 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. Lastly, we'll also be referring to adjusted results and outlook. Both exclude certain items described in this morning's news release. The release has further information about these adjustments and reconciliations to comparable GAAP financial measures. And now, I'll turn it over to Maria.

Thanks, Paul. Good morning, everyone. Thanks for joining the call. I'll start with the headlines for the quarter. Organic sales were flat year-on-year as growth in international markets was offset by lower sales in North America. Margins and operating profit were impacted by significant commodity inflation. Helping to offset those headwinds, we delivered strong cost savings and reduced overhead spending and our adjusted earnings per share were up 7%. And finally, we're on track with our restructuring program. Moving on to the details of our results, starting with sales. Our second quarter net sales were $4.6 billion, that's up 1% year-on-year with a 1 point benefit from currency rates. Organic sales were flat compared to the year ago. Mix improved by 1%, while volumes fell less than 1% and net selling prices were down slightly. On profitability, second quarter adjusted gross margin was 33.4%, down 270 basis points year-on-year. Second quarter adjusted operating margin was 16.8%, down 100 basis points. Commodities were a drag of $200 million in the quarter primarily due to higher pulp costs, and secondarily, inflation in other raw materials. We're now expecting that full year commodity cost inflation will be between $675 million and $775 million. On average, that's $250 million more than we assumed in April, and $375 million more than what we planned in our original plan in January. While commodities are higher than expected, our teams continue to do a great job delivering cost savings and tightly managing overhead and discretionary spending. We achieved $110 million of FORCE cost savings in the quarter, and we're now targeting $425 million to $450 million of savings for the year, that's $25 million to $50 million higher than our original target, including more value from negotiated raw material contracts. In addition, we delivered $40 million of cost savings from our restructuring program. We're accelerating actions where feasible, and we now expect full year savings between $100 million and $120 million. That's $50 million higher than our original target. In addition to the restructuring, we continued to reduce overhead costs. In total, between-the-lines spending declined by 180 basis points as a percent of net sales. All in all, adjusted operating profit was down 5%. On the bottom line, second quarter adjusted earnings per share were $1.59, up 7% year-on-year. That included about 7 points of earnings growth from a lower tax rate, along with benefits from lower interest expense and share count. We expect our full year adjusted effective tax rate will be at the low end of our 23% to 26% target range. Let's turn to cash flow and capital efficiency. Cash provided by operations in the second quarter was $787 million compared to $825 million in the year-ago quarter. This decrease was in line with our expectation, and it includes cash restructuring payments and the benefits of lower taxes. We continue to allocate capital in a shareholder-friendly way. Dividends and share repurchases totaled approximately $575 million in the second quarter, and we continue to expect the full year amount will total $2.1 billion to $2.3 billion. Looking at our segment results. In Personal Care, organic sales were down 1%. Net selling prices declined 2%, while product mix improved 1 point. Overall Personal Care operating margins remained healthy at 20.4%, although down 50 basis points year-on-year. In Consumer Tissue, organic sales fell 1%. Volumes decreased 3%, while net selling prices increased about 2% and product mix improved slightly. Consumer Tissue operating margins of 14.1% were down 260 basis points. Significantly higher pulp costs and lower volumes were partially offset by cost savings, lower overhead spending as well as favorable selling prices and product mix. In our K-C Professional business, organic sales grew 2%, with gains in all major geographies. Volumes and product mix each increased 1%. K-C Professional operating margins of 19.2% were down 80 basis points compared to a strong year ago quarter. Results were impacted by commodity inflation, partially offset by cost savings and benefits from top line growth. In summary, our second quarter results were impacted by a difficult environment particularly with significant commodity inflation. Nonetheless, we are achieving strong cost savings, we're making good early progress with our restructuring program and we continue to allocate capital in a shareholder-friendly way. With that, I'll turn the call over to Mike.

Thanks, Maria. Good morning, everyone. Today I'm going to focus my comments on organic sales, pricing and our full year outlook. As Maria just mentioned, organic sales were flat in the quarter. That said, organic sales were up 1% year-to-date, which is right in line with our full year target. Let me spend a few minutes on our 3 main growth priorities for 2018. Our first priority is to strengthen and grow our core businesses. In North American consumer products, following the strong first quarter, organic sales were down 2% in the second quarter. Halfway through the year, which is a better indicator of our performance because of some changes in our promotional shipments, volume is up 2% and organic sales were flat year-on-year. Our year-to-date market shares are up or even year-on-year in 5 of 8 product categories. We've launched a number of innovations and are supporting our brands with strong marketing and promotion programs. Overall, these initiatives are on track with our expectations. In our K-C Professional business, second quarter organic sales were up 2% in North America, with volume growth in all major product categories. K-C Professional organic sales increased 3% in developing and emerging markets, led by Asia Pacific. In developed markets outside North America, organic sales rose 1%. In South Korea, while our diaper business continues to be impacted by a lower birth rate, our other brands are growing nicely. Now let me turn to our second key priority, which is to accelerate Personal Care growth in developing and emerging markets. Second quarter organic sales for these businesses were flat year-on-year. In China, organic sales were down about 10%. Competitive promotion activity in the diaper market has increased, and we are responding appropriately. During the second quarter, we launched our upgraded Huggies premium diaper. And this quarter, we're rolling out an improved premium diaper pant. We continue to be optimistic about these innovations, although in the near term, we do expect market conditions will remain challenging. In Brazil, organic sales were up mid-single digits compared to a high single-digit decline in the base period. Volumes were up slightly despite a modest impact from the country-wide transportation strike. Pricing has now turned positive following the increases we've implemented this year. In Argentina, organic sales were up mid-single digits. Price realization continues to be positive, while volumes for us in the category are down, which reflects the difficult economic conditions. In Eastern Europe, organic sales increased double digits for the third consecutive quarter. Volumes rose double digits on both Huggies and Kotex behind innovations, strong marketing programs and continued expansion outside of Russia. In terms of our market positions, trends are positive in most of these key markets. Shares are up in Brazil, Argentina and Eastern Europe, but down in China diapers. Regarding our third growth priority, which is to further build digital and e-commerce capabilities, we continue to make good progress. Our digital marketing programs, joint customer business plans and investments in tools are producing good results. Online sales continue to grow at healthy double-digit rates so far this year. Now let me switch to the topic of selling prices. In April, I outlined several of our actions to improve net realized revenue. That included sheet count reductions in North American bath tissue, price increases in Latin America and other international markets and initiatives globally in K-C Professional. These actions are broadly on track and our pricing trends are improving. Net selling prices have gone from being down 2% in the fourth quarter last year to down 1% in the first quarter this year and down about 0.5% in the second quarter. We expect overall pricing in the second half to turn modestly positive, mostly because of the actions we've taken in the first 6 months of the year. We will also be lapping elevated promotion activity in North America, especially in the fourth quarter. Still, given the headwinds we face, it's clear that we need more pricing. As a result, our businesses around the world, including North America, are closely evaluating further opportunities to increase net selling prices. We anticipate that nearly all the impact from any potential actions would start to show up in our results next year. Now let me turn to our outlook. Clearly, the near-term environment has become more challenging, and we are responding by aggressively reducing costs and increasing selling prices. At the same time, we continue to execute our long-term strategies to deliver balanced and profitable growth. We continue to innovate, support our brands with category-building marketing campaigns, pursue targeted growth initiatives and improve key capabilities. We also continue to focus on sustainable cost reductions while we implement our global restructuring to make our company even stronger for the long haul. In terms of our specific targets for the year on the top line, we continue to target organic sales growth of approximately 1%. On the other hand, the outlook on foreign currency has gotten considerably worse since April; we now expect currencies will have a neutral to 1% negative impact on our net sales. Three months ago, we expected a 1% to 2% positive impact. On the bottom line, we are now targeting full year 2018 adjusted earnings per share of $6.60 to $6.80. Our previous outlook was $6.90 to $7.20. To put that reduction in perspective, we're now expecting that commodities and currencies will be a combined year-on-year operating profit headwind of about 20% to 25%. Our original plan for the year included a net drag in the high single-digit to low double-digit range. We expect to offset approximately half of the additional headwinds with more benefits from pricing, cost savings and spending reductions. In summary, we are aggressively managing our business to benefit near-term results in a challenging environment. At the same time, we're executing our long-term strategies to create sustainable shareholder value. That wraps up our prepared remarks, and now we'll begin to take your questions.

So I have a few questions here. One is, you mentioned a couple of times in the release and in your prepared remarks about marketing spend being a help, whether it be on the growth to net or just pure advertising spend. Can you talk about where you are in marketing spend at this point? Obviously, the cynic in me says you need to cut marketing spend to make your bottom line numbers. Can you just give us some comfort there, please?

Yes, I'll start and maybe Mike can build on. I mean, I would say broadly if you look at our advertising and promotion spend in the quarter, it's pretty similar to the full year average for 2017. So it's down a bit from the prior year second quarter. And the thing that you're maybe not able to see is we are cutting nonworking fairly substantially and reinvesting those savings. And so if we look at our plan for the year embedded in our guidance is relatively flat marketing spend. So we're not cutting marketing spend broadly to make the number. Mike, maybe you want to build on that.

Yes, actually Maria and I were just huddling on it earlier and if you go line-by-line, all of our working lines are actually up versus the plan. If you see, it's the nonworking numbers that are down significantly. And maybe to give you a little background, Ali, is when we went to our global restructuring planning, obviously taking a hard look at all lines of nonlabor was an important initiative for us. We just found that there was a lot better ways to manage our nonworking spend or getting more efficient in terms of how we produce our copy or our promotional programs around the world. You can imagine the inefficiencies that might exist when you have these marketing initiatives distributed around the world. So we pulled some back, and we're really just getting out of some of the nonproductive spend.

Okay. And that's helpful. And then the corollary to that is, obviously, brand power and pricing, and you put a very helpful slide, thank you, Mike, I think you went through it on Page 20 in the presentation just around selling prices. I'm worried about pricing, you guys would probably know this from some of our last discussions or some of the pieces that we've written. What gives you confidence that you'll be able to take the pricing that you laid out, that you're not going to be promoting it back, that the competitive environment is going to allow you to take pricing in different parts of the world? I think it's a big controversy for the whole sector, but certainly for you?

Yes. No, I'd say, we know we've got to show you. So it's been a while since we've had commodities cost at this kind of level, and we were kind of going back through history. If you look at 2008, 2009, 2010, 2008 and 2010 both had commodity cost hits that were about in the range that we're in. I think in 2008, we took two price increases. 2009 was the recession, so we gave some of it back. 2010, we took another round of price increases. We came out of it with higher margins than we started. So it takes us a while to get price and so we do suffer during the period of time while we're getting that embedded in the market, but we feel confident that with the commodity cost hit at this level that the cost structure for most of our competitors is similar and there will be more broad scale price. But I don't know Mike if there's anything else you want to add to that one.

No, I guess the addition only is that we have made some pricing, taken some pricing actions around the world this year and we have progressed there. And so that's one piece. Second, as Tom mentioned, when you have a commodity impact as large and significant as it is right now, I think our customers understand that. We do have to recover and improve our net revenue realization. So we are going to take the appropriate actions. We've seen maybe some evidence in the markets and various markets that would show maybe: one, the promotion intensity in markets is easing a bit; and second, we have seen some early indications of some pricing moves by competitors.

And so we're not leading it everywhere.

Okay. And then just related to that my last question is around the implications of that on EBIT, right? Because although you try to recover some of the commodity cost, it doesn't seem like you're able to recover as much as you'd like, and so the pressure on EBIT, obviously, is very obvious and very clear here. And if you could comment on your EBIT trajectory, certainly in the context as well as what a lot of folks look at Q4, which is returning cash to shareholders. How should we think about the EBIT pressure you're facing and the challenging environment that you're facing in the context also of the sustainability of your dividend payout ratio and your share repurchases?

Sure, Ali, I'll take that. We gave a range on share repurchases of $700 million to $900 million for the year, and we're still tracking to do that and you know what the dividend is. We do expect that our leverage will be up slightly as we come out of this year versus where it was when we started into the year. If you put all those things together, I think we're still tracking to what we set on shareholder returns, which in total would be $2.1 billion to $2.3 billion for the year.

Can we discuss the pricing issue further? You seemed very confident in your response to Ali's question about your ability to implement price increases. However, we haven't seen this trend in the first half of the year. The expectation of modestly higher pricing in the second half doesn't seem particularly ambitious. Looking back at the benchmarks you mentioned—2008, '09, '10—it appears that pricing adjustments happened, even if not immediately, more quickly and robustly than what we are observing this cycle. What has changed? How much of the pricing pressure you are experiencing do you believe is temporary versus something more structural in your categories?

Yes, I'll let Mike elaborate on that. I would say it's probably fair to say that it may take a bit longer to get price, particularly if we're going to take price through either package counter sheet count; there are some supply chain implications to that, doing it in the middle of a big restructuring. We probably had some other people focused on other things. But it's probably takes us a bit longer to get price in the market. Typically, with your retailers, you're 3 to 6 months out on promotion plans as well. I'd say, that's probably a fair push, but Mike maybe there's some other color you might want to add to that.

Yes. Steve, we've taken some actions year-to-date in most markets, including North America. I would say that they were not at the level because I think the commodity impact was, as we said earlier, far higher than what we were expecting at the beginning of the year. At this point, we're looking at another round of pricing. And I would say, a couple of big changes. We've made pretty good progress this year in the business like North American Consumer Tissue. Our pricing is up 2 points in Q2 after being flat in Q1. And that's all an artifact of the desheets that we've bundled with our product improvement there. And you might have seen, you could probably see in the numbers, in Personal Care we've lagged a bit. Our pricing was still down a bit from Q2. Part of that is also an artifact that we wanted to support our innovation on Huggies this year and in adult care. We're doing that pretty well. That said, we also had some pretty strong promotion plans that were locked at the end of last year that we plan on adjusting and easing promoted depth and frequency as we go through the balance of the year.

Yes, I understand the cost pressures are increasing. I'm looking for your thoughts on this. It seems that the Personal Care and baby care categories are extremely important to retailers right now as they aim to attract consumers. As a result, there is significant pressure to keep prices low, and there is a push for private label products. Your main competitor is keen to perform well in what is likely their largest profit category. Therefore, it appears that there are structural challenges in Personal Care that will make pricing difficult not just for the latter half of this year, but for the foreseeable future. Do you agree, or am I exaggerating?

Well, I think it depends on the market. I'd say the thesis isn't wrong, although that hasn't changed all that much. I mean, baby care has always been an important category for our retailers for a long, long time. They want to be competitive. I think our customers, they understand industry price changes when the commodity cost shifts. They just want to be advantaged somehow. That's what we have to work with as we implement it. The good news is as you look at private-label shares and Personal Care broadly, they haven't moved very much. In fact, if anything, they're down a tick in diapers, which has positively driven innovation and that's helped us on the mix front a bit.

Great. I have one question on a different topic, specifically regarding savings. I notice the reductions in SG&A and appreciate your comments to Ali about avoiding cuts to working media. It seems that the reductions you've implemented, not just this year but over the past three years, are quite significant in terms of overhead or the nonworking portion of SG&A. My question is about the sources of these cuts. To what extent is this belt-tightening meant to provide some relief before potentially being reinvested back into the business? Can you maintain this level of reductions? Looking ahead to next year, it appears that this source of profit growth or inflation offset might not be available. I'm seeking guidance on how to address that issue.

Yes, sure. We have a number of things going on, on that between-the-lines spending front. You saw in our results in the second quarter that we delivered $40 million of savings from our restructuring program, 80% of that fell between the line. So below gross margin, and that certainly has helped our ratios in the second quarter. Beyond that, we have been very tightly managing discretionary overhead spend and you saw that come through our results really starting in the second half of last year, and those are things like T&E, meeting expense, all of those types of those activities. We really have our whole workforce focused on taking out either unnecessary or less valuable types of spend so that we can protect the investments that we're making behind growth. Your question on, is it sustainable. I'm not going to say that the second quarter rate is going to be the rate every quarter, but you know from our guidance on the restructuring program that over the next couple of years, we will continue to work the cost structure hard. We've got $500 million to $550 million of savings associated with that program, and probably 1/3 of that is going to accrue to the SG&A part of our P&L. The area where you're seeing the biggest reductions when you look at where is it between the lines is really in the general and administrative side of the house. As I said, working the discretionary hard, working the restructuring hard, where we're looking to take work out of the system and leveraging various productivity programs. So we're hard at it, and our goal is really to fundamentally lower the cost structure of the business and continue to invest behind our brands to grow the top line.

I would like to inquire more about your plans beyond this year. There has clearly been significant focus on the increasing challenges faced by various companies, such as your pricing strategies and consumers' readiness to pay for premium priced products. Can you provide some insight into your ability to achieve your long-term goals moving forward, and what adjustments you intend to make to reach those goals? While we have discussed reducing nonessential spending, will there be a need for further investment in other areas, such as increased marketing in critical segments? Given the circumstances in the first half of the year, it appears to be quite challenging to meet your long-term expectations.

Yes. And so, Olivia, the quality of the line wasn't very good, so I think I heard most of the question was really kind of questioning how do we get back to our longer-term growth algorithm and when are you going to see signs of progress and what changes do we have to make to get there. Is that a good summary of the question?

Yes, you got it.

Okay. So I'll start, but I'll let Mike pile on. We've talked about some of the factors, the lower birth rate in some markets, some of the things that are going on in Latin America where we've seen kind of double-digit unit volume declines and places like Argentina have made the headwinds a little stiffer, places like Korea where the birth rate is down 9% and our second largest diaper market, obviously aren't helping. On the other hand, we do see the best for baby as a powerful instinct all over the world, which is driving more premium products in places like the U.S. and in places like China. We've got a robust innovation pipeline that we're investing behind, and we'll use that across our portfolio to drive that. But Mike, maybe you can comment a little bit more on that.

Yes, Olivia, we are very optimistic about our categories. While we will need support from some markets to return to our growth algorithm, we believe there are significant opportunities in our core markets to elevate our categories. There is a strong value consumer base and also a substantial number of premium consumers. We believe we produce the best products globally, yet there is still room for improvement in key areas where we are innovating. We see potential to enhance the category and attract more consumers in major developed markets, as well as significant opportunities in developing markets. As I have mentioned before, China is currently our largest market, and we anticipate considerable growth there in the coming years. We also plan to expand in India and other markets. While we have growth strategies in place, we need to demonstrate our progress.

That's all very helpful. As a follow-up, can you provide some insights into the discussions regarding developed markets in the U.S.? It sounds like those discussions have begun. Can you share what has transpired or if anything has changed in your plans? You've mentioned pricing through a reduction in package count, but prices seemed to worsen in Q2, and the channel data indicates that promotional levels are still quite high. Regarding China, you mentioned innovation and new product rollouts alongside pricing stabilization, but it seems that, given the competitive challenges, things haven't unfolded as you expected.

Yes, it has not, but I'll return to China. In North America, there have been some pricing adjustments and competitive down counts in our bath tissue products. We have begun to reduce the promotional depth and frequency in some categories, with plans for further action. We've had discussions with our customers regarding this, and they recognize that to grow the category in the long term, we need to enhance it or provide more value. Our strategy isn’t simply to increase prices indiscriminately; instead, it focuses on adding value to our products that consumers would be willing to pay more for. Regarding China, it has been one of the most premium markets globally, but it's currently experiencing some pricing pressure. We have launched an excellent new product, the 5D core, which offers superior thinness, flexibility, and breathability compared to other major manufacturers in China. However, our progress has been somewhat limited because overall market pricing has decreased by double digits in the most recent quarter. We have sometimes matched these prices as we introduced this product, which has dampened our impact. We anticipate that China will be somewhat challenging at this time as it represents our largest growth opportunity. All our competitors recognize this opportunity and are pursuing it as well. However, we are committed to succeeding in China for the long term, supported by a talented team that excels at developing winning products and operating within a lean cost structure to achieve the required margins.

I wanted to go back on Consumer Tissue business and drill down a little bit further, you guys took some pricing in the quarter, it was up 2%, yet your volumes were down 3% on a somewhat easy comp. So I'd like to first hear your thoughts on price elasticity? And then maybe how your elasticity is changing in this environment? And then second, in thinking about the strong volume, you guys reported in that segment in Q1. How much loading occurred that might have also contributed to the weaker volume in Q2?

So Bonnie, I'll start and I'll hand it over to Mike. I'd say, we typically don't load and customers really don't want to load tissue anyway, it's a very heavy load. The strong promotional calendar in the first quarter that sold through. The second thing and Mike will give you a little more color, on the second quarter, whenever you do a desheet, you see negative volume and positive price. If your customers were holding 100 cases before, with fewer sheets in it, you're going to show less volume and yes, there's some inventory decline in both the customer and consumer. We typically don't try to measure that or call that out, but it's not unusual to see some volume softening in a desheet or down count environment. That's something just to watch for and know that it exists. It's not an elasticity issue; it's just a fact of life that there's fewer standard units in each case that we ship. As we look at Consumer Tissue for the first half, we're more or less on track with the plan. Our shares are stable, and we've had positive organic growth. But Mike, I don't know if there's anything else you'd add to that.

No, I'll just speak on few numbers, Bonnie, our Q2 organic was down 4%, and most of that was due to that shift in promotional timing that Tom talked about. Just to refresh your memory, back in Q1, I think our volume was up in North American Consumer Tissue 9%, and we said at the time that, that is not the run rate of the business. So it was a big shift. It wasn't a load; it was more volume that sold through in Q1 that was in Q2 of last year. So that's one big change. And as Tom said, year-to-date, our sales were up 1%, which is in line with our plan. The additional thing I'll tell you is our innovation in family care this year are off to a very good start, Kleenex wet wipes are doing very well at launch. I think it's already at the velocity rate it is just the largest wipe in the marketplace right now. Cottonelle wavy ripple is selling very well, performing very well and getting great customer feedback. It's a consumer-preferred product. If you exclude kind of some of the promotional shifts, the base velocity is up mid-single digits. So we're pretty excited about the new items we have. We are getting some price realization in the family care business and looking forward to more.

Okay. That's helpful. And then I just wanted to go back to China with a follow-up question. I was actually in the market a few months ago, and it seems there is a perception from the Chinese consumer that the quality of your key competitors' brands is actually perceived to be better, but a lot of times they're priced more attractively. So just kind of love to hear your perspective on this? And then what changes you may be implementing to improve your positioning in that market? You touched on some innovation that you're bringing into the marketplace, but just wondering if more needs to be done there?

Yes, there's definitely more work to be done, but I believe we've made a solid start this year. The team has successfully launched the new Tier 5 diapers at the end of the first quarter and the beginning of the second quarter. We're also introducing a similar diaper-pant that has been well received. Our testing indicates a strong preference for our new product compared to all the multinational competitors. However, the challenge in the China market is that competitors are being very aggressive with pricing, and we are committed to a long-term strategy. Currently, we are matching prices, but we aim to compete based on product quality and brand positioning instead. Those are the objectives we are focusing on in this competitive market.

So Maria, I want to follow up on Steve's earlier question. You mentioned what is contributing to the cost savings this year and toward the end of last year. However, I'm curious about whether there might be any lingering effects as we look toward 2019. Are some of these cutbacks, particularly in areas like discretionary travel or incentive compensation, likely to be temporary, with spending potentially increasing again in 2019? I understand you may be cautious about discussing 2019, but my question focuses on the cost savings in 2018—how much of that is related to discretionary measures and cost-cutting that might need to be reinstated as we plan for 2019?

So I think there is a number of factors that will affect what our SG&A rates are within any given quarter. What we're fundamentally trying to do is run our company on a lower-cost structure. So finding new ways of working that didn't require us to spend as much money on lower-value added activities. That's something that we're hitting hard in the restructuring. In terms of kind of the non-restructuring reduction in discretionary spend, clearly, we are not on our target for the year, as you see, in what's happening in the macro environment and our guidance range adjustment. We do have a comp benefit this year that will hopefully not repeat next year. But for the most part, the changes that we're making in the business are structural. The timing of these changes is going to vary quarter-to-quarter. So let me give you an example, we talked about the fact that in our restructuring program, we've accelerated certain actions, which is why we increased our restructuring savings number by $50 million within 2018. We are through our voluntary severance program and so we've had a lot of employees leave the business. The restructuring program and the savings that we've given is actually a net number. I would say that we're probably a little ahead on the excess and a little bit lagging on the add-back in the business. We may have some timing shifts there around headcount that'll play itself out through the year. Overall, the fact that our savings number has accelerated for 2018 is a good thing, and it's showing the hard work that the teams are doing to really help us offset some of the headwinds that we're seeing in this year. But overall, the goal here is to fundamentally lower the cost structure of the business, and that's what that restructuring program is all about.

Okay. That's helpful. And then I wanted to return to the pricing front in Personal Care. I guess it sounds like it's more sort of business as usual in the back half of the year in terms of some typical pricing actions, stepped in frequency, et cetera. It doesn't sound like there has been a big change in mindset around pricing, and I'm just trying to understand that, given if you look over the last year, it looks like the combined impact of pricing and input cost in Personal Care is $200 million, it's a big number. So I guess just help me understand why it's not a bigger focus? Is it just the competitive environment that's limiting your ability? Does that competitive environment change going forward? And as we think about your own internal pricing actions, are these significant actions? Or is it more can you recover a lot of what you've lost? Or is it more moderate given the competitive environment?

Yes, I'll start and then let Mike build. I mean, I guess if we gave you the impression it was business as usual, that was probably the wrong impression. When we typically run the business, we're assuming we're not going to get much price in a relatively stable commodity environment; that we can compete on innovation and execution. In this kind of commodity cost environment, we're looking to get price in lots of places, and some places that takes longer than others. We're looking at it through lots of different vehicles, whether that price count, promotion, trying to pull all those levers. I'd say the team is heavily focused on that while not trying to take their eye off the ball and executing the innovation plan and getting the right winning products in the marketplace.

Yes. To add, last year in the U.S. diaper market, the promotional environment had become more intense. At this time last year, we mentioned that our strategies were becoming more competitive, requiring deeper and more frequent promotions. This year, there has been a significant change, and I believe the market has normalized to its historical levels of promotional intensity. What I meant to convey is that we are adjusting our pricing to align more closely with our historical practices. Additionally, we are exploring further pricing opportunities as we are facing considerable increases in input costs within the Personal Care business, and we feel the need to make some adjustments there.

So I just wanted to go to kind of the performance in D&E markets, Personal Care kind of...

Oops, we lost you, Lauren.

You got me now. Okay, hold on let me put down my headset and speak before, okay, all right. So I was just looking at organic performance in D&E markets in Personal Care. So organic growth overall was flat this quarter, but when in the script you went through some of the markets sort of China down 10%, but everything else, the big chunky things, Brazil, up mid-single digits, Argentina mid-single, Eastern Europe have doubled. I'm having trouble figuring out how that all squares to the business being flat in the quarter. So what other markets maybe if there were other markets that were particularly weak. What am I missing to tie out to D&E having decelerated again kind of both sequentially and on a 2-year stack, because I look forward I think that's the thing that probably through now probably 4 quarters in to D&E markets not improving in a way that I might have expected even just based on the comparisons? So that's a piece of the puzzle. I'd love a little help understanding both dynamics in the quarter and how things get better from here?

Yes. I think maybe Mike or Paul can give you a little more detail. I think probably the only other big piece that you're missing is the rest of Latin America was relatively soft, and that was a trend from the first quarter. There are some positive signs, and we could go through the litany of what's going on in the Caribbean with recovery from hurricane or in Central America with issues going on in Nicaragua, there's some political upheaval in some of those spots that are part of it. Other parts of it, there is a little bit more competitive activity, but that's probably the biggest one. The relative size of China is the other factor, that's a pretty, pretty big number. The other ones aren't as big to offset it.

Yes, and Lauren, if you've looked at Q2 versus Q1, you would see that Latin American total was pretty similar to similar performance. Argentina was a bit softer. Brazil was pretty similar and China was softer.

Okay. Looking ahead, what elements are you considering that might improve? You've recently launched a significant product in China, but it's facing challenges due to the pricing environment. Is Latin America just relying on macroeconomic stability for improvement? I'd appreciate any insights on how you see these markets evolving, particularly as Personal Care and D&E are key focuses for you in 2018.

Yes. Lauren, one, I think some of the underlying performance I think we feel very good about. As I mentioned in Brazil, I think our market shares were up about three points in diapers and two in femcare. Similarly, in Eastern Europe, up a couple of share points in diapers and femcare. I think some of the fundamentals of the things that the teams are working on in terms of improving our value proposition or improving our offering particularly both in the value tiers and the premium tiers, I think it's working pretty well. I think part of the challenges we've got to work through is China is a challenging market right now with some of the pricing environment, and we're going to need to work through that. As Tom mentioned, it's a pretty significant piece of our business. Year-to-date overall in D&E, we're up about 1%. Our developed markets are a little bit ahead and maybe D&E is a little bit behind. So on our call for the year, our best call right now is probably the second half looks a little bit like the first half in D&E for the balance of this year. But we do think we've got share moving in the right direction in most major markets and D&E, and we're working on the right things.

Could we discuss profitability in Consumer Tissue? I recognize that the cost pressures are primarily affecting this segment more than others, but a 14% margin seems to be the lowest we've observed in about 5 to 6 years. Considering the long-term structural profitability for Consumer Tissue, once you've established pricing that you deem suitable, you've indicated plans to exit low-margin areas as part of your restructuring and some concerns recalled in the press regarding Europe. What do you anticipate as the long-term margin rate for Consumer Tissue? Are we looking at high-teens or low to mid-teens? This 14% margin stands out compared to where the business has been over the past five years.

Yes, it's a good question, Lauren, you and I've been around long enough, but you and I remember high single-digits.

Tom, don't remind, everyone. Don't remind them how long I've been doing this.

And so when you go through a pulp price spike like this where it's $1,200 plus box a ton, that business is going to take it, and it takes a little while to get price, especially if we're going to do it through sheet count. The good news is that the low point is a lot higher than the prior cycle lows. Hopefully, we're shifting that range up over time by improving the mix, improving the innovation, and improving the cost structure. If we can continue to do that, I think we'll be in that hopefully mid-teens to upper teens across the cycle. We were up in the 18 plus range not long ago. The good news is in this kind of commodity costs cycle, you look at the KCP margins at 19 plus, and that shows you what's possible in a tissue heavy business. You still see Personal Care hanging in at north of 20% in a fairly stiff commodity headwind. We know we've got some work to do in tissue, we've got to get some revenue realization. There's obviously some cost savings that will come from the restructuring, and that's a focus for us as we go through the balance of the year and into next year.

And what if anything do you think has changed from a consumer or competitive standpoint in Consumer Tissue, say, today versus the last cycle? So let's point to the 2008 cycle where margins got to what, like sub 8% at the lows, I think. So in terms of consumer demand, openness and prevalence of private label, the things that everyone is worried about, how much do you think has actually changed? Has the threat gotten worse? Have shares really changed in this 10-year period? I could think that this would be helpful too.

Yes. Private-label shares have generally increased. If you go back, I think when you look at some data from 2012 over something like that, I think, there it's up 5 or 6 points in towels in the U.S. Our share is flat, we don't have a huge towel share, so it's not like we’ve been the big donor, past years I think are up 3-year or up 5 in that period, and I think we’re down a point or 2. So if you looked at Europe, you generally see private-label shares up. The thing that's probably changed for us is we may be have a healthier portfolio; we went to the tissue restructuring since the last time that we talked that helped exit some less-profitable business. We’ve continued to kind of work that part of the portfolio. We've mix shifted more of our capacity in emerging markets, especially into the more premium tiers. Choice will be about where we expand that business. We're trying to manage it to get growth where we can get profitable growth and to get margin where we should get margin. Overall, I'm not satisfied with where we are, but I'm pleased with the progress that we've made.

I guess I want to dig deeper on the dynamics in a couple of your core markets, and why don't we start with China. This persistent price competition in the market, is there any way for you to unpack it and give us a beat or give us your sense of how much is due to maybe tariff changes in the market? How much is due to just an aggressive stance from your major Japanese and U.S. competitors? How much is due to just the broader proliferation in the market? On the proliferation point, it's something you've highlighted in the past, and there's been some question about how much of the proliferation or proliferated products could actually stick and endure and whether or not there could be a shakeout on the horizon that could make things a bit easier? I'd love an update on the thought process around that and what you're seeing in the market.

I’ll begin again and let Mike expand on it. First of all, I don’t think any of this is related to the tariff discussion. Most of the products we sell in China are made in China, with a small portion imported from Korea. We do not import or export anything from the U.S., and we manufacture all products for the U.S. market domestically. Therefore, it’s not a significant issue for either of those regions. Regarding competition, it's common for everyone to believe that competitors initiated the conflict. When we launch a major innovation, competitors without similar innovations may resort to competing on price. China presents a substantial growth opportunity for all companies, and no one wants to miss out. It’s also a significant e-commerce market, with probably half of our business generated online. There’s greater price transparency in that space, and e-tailers are vying with each other to succeed in this category. This market will continue to be dynamic and exciting for the foreseeable future.

Yes, Jason, I probably would do a better job answering this question after this week, I'm flying out to Shanghai this afternoon. So I'll be able to let you know more. But I would tell you my sense is, hey, there’s been some traction from some local players who've picked up a pretty nice chunk of share over the last couple of years or maybe over the last 18 months or so. Some of the price is in response to that growth. Major manufacturers don't want to let their share growth. Our response has been to help beat them outmatch them on product quality and innovation, which is why we had the big push we had this year with our 5D core. Long-term, the right strategy for China is to create more value added. It’s a market where the consumers demonstrated their want to get what's best for baby. That market is, in my mind, right now, the most premium market that we have in our business system. I think there's still more potential to create more value-added going forward.

And while we've had some price cutting, the prices in China are quite attractive relative to other markets as well.

I'll be brief. Quick clarification on China in the quarter, down 10% organically. What was the price mix and volume composition of that? And then a broader strategic question on private-label, which has been touched on in the past, I think it's less than 5% in the company sales. Strategically, do you think the company, the board would get to a point where that becomes a bigger emphasis philosophically? Are you opposed to that becoming much bigger than 5% of sales? Would you be comfortable if it reaches 10% or even greater than that over time? If so, can you talk about the margin and return differential for that part of the business?

Yes, so maybe I'll start with the private-label question first and then we'll come back to the first question. Mike, I'd say this, we typically are doing private label with very few people and doing it in areas where we think it advantages our overall relationship. To that extent, I think there we continue to be the lens that we've looked at through to decide what we wanted to do from that standpoint. Mike, I don't know if you want to come back to....

Okay, in China. Yes, in China the pricing, we're low double-digits down on price mix or pricing in China. I think our mix was a little favorable. That reflects the competitive environment that we talk about. I think the overall category pricing came down, I don't know what the right term is, Paul, mid-single; mid-double digits and it's a little bit more than what we came down.

And the other mix in China total is our femcare business was up strong double digits in the quarter. That blunted some of the price and volume hit in diapers.

All right, thanks for the questions this morning, and we'll wrap up with a comment from Tom.

Once again, challenging environment, and you can count on us to do the best job we can of delivering results in a challenging environment. We appreciate your support of Kimberly-Clark. Thanks for dialing in today.

Thank you.