Kimberly-Clark Corp (KMB) — Q3 2018 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our conference call. Here with us today are Tom Falk, Chairman and Chief Executive Officer; Mike Hsu, President and Chief Operating Officer; and Maria Henry, our CFO. Today's call will focus on three things: our third quarter 2018 results, our full-year outlook, and this morning's announcement that Mike Hsu has been elected Kimberly-Clark's next Chief Executive Officer, effective January 1, 2019. This morning, you'll hear from Tom, Mike, and Maria, and then we'll finish with Q&A. As usual, we have a presentation of today's materials in the Investor section of our website. As a reminder, we will be making forward-looking statements this morning. Please see the Risk Factors section of our latest Annual Report on Form 10-K for further discussion of forward-looking statements. Finally, we'll be referring to adjusted results and outlook; both exclude certain items described in this morning's earnings news release. That release has further information about these adjustments and reconciliations to comparable GAAP financial measures. Now, I'll turn the call over to Tom.

Thanks, Paul, and good morning, everyone. I'd like to be the first to congratulate Mike Hsu on his upcoming move to become Chief Executive Officer of Kimberly-Clark. So congratulations, Mike. The Board of Directors and I have been working on this succession plan for several years, and it was my recommendation that Mike is the right choice and now is the right time. So this is a carefully planned and natural transition. And I'm confident Mike is the right leader to build on Kimberly-Clark's nearly 150-year legacy of caring for the needs of people around the world while delivering top-tier performance. He is passionate about our people, our brands, and our businesses, and he has a deep understanding of what it takes to win in the marketplace. Now, let me hand the call over to Mike.

Good morning, everyone. First, I'd like to thank you, Tom, for your tremendous leadership of Kimberly-Clark over the past 35 years, especially the last 16 years as CEO. And during your tenure, you really transformed KC into one of the world's leading consumer products companies. You've also been a great mentor to me, and I'm honored to lead this great company, and I'm excited about our future. So now, back to the business at hand, I'm going to turn the call over to Maria to talk about the third quarter results.

Okay. Well, congratulations, both Tom and Mike. Tom, your great leadership and mentorship since I joined in 2015, and Mike, looking forward to the future. So, as awkward as it is, I'm going to pivot to the headlines for the quarter, so let's get into it. Organic sales were up 1% driven by 3% growth in developing and emerging markets. Margins and operating profit were impacted by significant commodity inflation and negative foreign currency effects. Helping to partially offset those headwinds, we delivered strong cost savings and reduced overhead spending. With the benefit of lower taxes, our adjusted earnings per share increased 7%. Finally, we continue to return cash to shareholders. Now, let's look at the details of the results, starting with sales. Our third quarter net sales were $4.6 billion, that's down 2% year-on-year with a three-point drag from currency rates. Organic sales increased 1% versus a year ago. Net selling prices and product mix each improved 1%, while volumes fell by one point. Moving on to profitability, the third quarter adjusted gross margin was 33.2%, down 250 basis points year-on-year. The third quarter adjusted operating margin was 17.4%, down 120 basis points. Commodities were a drag of $210 million in the quarter, primarily due to pulp and other raw materials. We are now expecting that full-year commodity inflation will be in the upper half of our previous estimate of $675 million to $775 million. Foreign currencies were also a sizable headwind in the quarter, reducing operating profit at a high single-digit rate. On the other hand, we achieved $105 million of FORCE cost savings, including significant benefits from negotiated short-term raw material contracts. We also delivered $40 million of cost savings from our restructuring program. In terms of that program, we're making good progress overall, including closing a small consumer tissue converting facility in Latin America this quarter. In addition to the restructuring, we also continue to reduce overhead costs. Overall, adjusted operating profit was down 8%. On the bottom line, third quarter adjusted earnings per share were $1.71, up 7% year-on-year. That included significant benefit from a lower tax rate, along with lower interest and share count. We now expect the full-year tax rate will be between 21% to 22%, which is better than our estimate of 23% from three months ago, largely because of some planning initiatives. I'm pleased that our effective tax rate is expected to be below target this year. Looking ahead at this point, I expect our rate in 2019 will move back up somewhere into the 23% to 26% range that we initially targeted for 2018. Therefore, we're expecting that the tax rate will be a pretty significant year-on-year earnings headwind for us in 2019. Now, let's turn to cash flow and capital efficiency. Cash provided by operations in the third quarter was $662 million, compared to $805 million in the year-ago quarter. The decrease included a $100 million U.S. pension plan contribution, restructuring payments, and the benefit of lower taxes. We continue to allocate capital in shareholder-friendly ways. Dividends and share repurchases totaled approximately $520 million in the third quarter. We expect the full-year amount will total $2.2 billion, in line with our $2.1 billion to $2.3 billion target. Looking at our segments; in Personal Care, organic sales were up 2%. Performance was led by developing and emerging markets, with organic sales up 5%. In terms of the highlights for D&E Personal Care this quarter, in Brazil, organic sales were up high teens, including inflationary-driven price increases and solid volume growth on diapers. In Argentina, organic sales were also up high teens as price realization continues to accelerate, while our volumes, both for us and for the category, were down. In Eastern Europe, organic sales increased double-digits for the fourth consecutive quarter, with strong volume growth on Huggies and Kotex. In China, organic sales were down high teens due to lower diaper sales and continued challenging market conditions. Elsewhere in Asia, ASEAN, which represents about 3% of Kimberly-Clark sales across all of our business segments, had strong double-digit organic sales growth in Personal Care driven by Huggies in Vietnam. Personal Care organic sales grew up 2% in North America. Infant and childcare volumes increased high single-digits compared to a mid-single-digit decline last year. Pull-Ups training pants momentum remained strong, and Huggies diapers benefited from growth in e-commerce and the timing of promotional shipments. Adult care volumes were down mid-single digits, reflecting strong growth last year, changes in promotional timing, and competitive activity. Overall, Personal Care segment operating margins continue to be healthy at 20.7%, although down 40 basis points year-on-year. Switching to the Consumer Tissue segment, organic sales fell 2%. North America organic sales declined 5%, primarily due to lower promotional activity. Overall, our initiatives to improve net realized revenue led to a 2% increase in net selling prices and a 1% improvement in mix. Developed markets outside of North America grew consumer tissue organic sales by 4% led by Western and Central Europe. Consumer Tissue segment operating margins were 14.4%. That's down 310 basis points, driven by commodity inflation and lower volumes, partially offset by higher pricing and cost savings. Lastly, in our Kimberly-Clark Professional segment, organic sales grew 1%. In D&E market, KC professional organic sales grew 4%, driven by continued volume growth in Asia-Pacific. Organic sales were up slightly in North America, including volume growth in washroom products and wipers. KC Professional segment operating margins were 18.9%. That's down 160 basis points versus record performance last year. Results this year were impacted by commodity and currency headwinds. In summary, our third quarter results were impacted by a difficult environment with depreciating currencies adding to continued significant commodity inflation. Nonetheless, we achieved higher net selling prices, delivered significant cost savings and reduced overhead spending, and we continue to allocate capital in shareholder-friendly ways. With that, I'll turn it back over to Mike to comment on our full-year outlook.

Okay. Thanks, Maria. As most of you know, while the overall environment remains challenging, especially the commodity inflation and currency volatility, we are responding by aggressively managing our business up and down the P&L. At the same time, we continue to execute our long-term strategies to deliver sustainable growth. As we mentioned in this morning's news release, we are confirming our previous outlook for our key top and bottom line financial targets. On the top line, we continue to target organic sales growth of approximately 1%. That's equal to our actual performance through nine months. I am encouraged that we are making progress improving net selling prices. Pricing went from being down 1% in the first half to up 1% in the third quarter, and that's consistent with what we said in July when we indicated that pricing should be modestly positive in the back half of the year. In mid-August, we announced price increases on the majority of our consumer business in North America. Many of those increases will start to go into effect in the first quarter of 2019. Realizing higher selling prices will be important next year given that recent commodity forecast and foreign currency rates imply pretty significant headwinds again in 2019. Now, looking at commodities and currencies for 2018, we expect these factors will negatively impact our adjusted operating profit by slightly more than the 20% to 25% range we assumed in July. That's mostly because of the recent weakness in many foreign currencies, especially in Latin America. In addition, our commodity inflation outlook is a bit higher on average, and so, as a result, our teams are further reducing costs and raising selling prices. In addition, as Maria mentioned, our outlook for this year's tax rate has improved. All in all, we continue to target bottom line adjusted earnings per share of 660 to 680 for the year. That's up 6% to 9% year-on-year. So let me wrap up with the following. First, I am extremely proud of the 40,000 KC employees around the world who are committed to our vision to lead the world in essentials for a better life. We have a strong senior leadership team in place to help lead this company forward. Second, while the current environment is challenging, I'm optimistic about the long-term opportunities we have to grow our brands around the world. And third, our teams are focused on improving our business, winning in the marketplace, and creating long-term shareholder value. So, that concludes our prepared remarks. Now, we'll be happy to take your questions.

Thanks. Good morning. First, congrats Mike, and congrats Tom. Wanted to ask you about the progress on price in Q2, particularly in Personal Care, obviously North America was still negative but less so. So as we go into Q4, should we expect it to swing positive as some of your price plans take hold, or are there still promotions still planned that could suppress that realization? And then in the developing and emerging markets, it's nice to see also that that swung positive, but how much more can you price even if it is cost-justified given the macro challenges across several of the key markets?

Yes, Maria, I'll address the first part. Overall, I believe our pricing strategy is on track globally, and we are cautiously optimistic about our progress. We have taken significant actions, particularly in North America, Europe, and Latin America. In North America and Europe, we have generally implemented mid to high single-digit price increases across the brands, while in Latin America, the increases have been double-digit. In North America retail, we have had extensive discussions and agree on trying to minimize any disruptive impact on consumers, although we acknowledge that the market needs to move upward. Currently, we are cautiously optimistic that this upward movement is occurring. Regarding developing and emerging markets, the situation is challenging. The Argentinean consumer is under significant stress, and we are implementing double-digit price increases to counteract the effects of commodity costs and currency fluctuations. This year, diaper prices are expected to nearly double, while wage increases have been only about a quarter of that. It's tough, but we are taking the necessary steps to manage the business.

Got it…

Go ahead, Olivia.

Oh, thank you. So, on China, you didn't touch on that, but with all the talk about the opportunity there, particularly in recent conferences. Are you concerned about the decline in China now that the volume is also down in addition to price? Was there any change in launch timing because I think you mentioned last quarter that you had some innovation coming. And I assume you still think this is just part of a cycle rather than a long-term market change so what are you doing to sort of shift the trajectory and what are the mile markers you're using to indicate where things stand?

Yes, we are not satisfied with our current performance in China. It continues to be our biggest long-term opportunity, but it is a complex market with its challenges. The team is focusing on the right areas, starting with product improvements. We are excited about the enhancements we've made, but we did lower pricing in the middle of Q2, and we plan to remain competitive in that market. However, I don't believe the market in China is becoming commoditized. Consumers are still interested in new products and quality. Several manufacturers have lowered their prices, so we will need to compete. I see this as a challenge, and it will likely continue in the near term, but long-term, it's a significant growth market. Year-to-date volume has increased in the high single digits, but pricing remains an issue.

Got it, thank you.

Hey, good morning, folks. Thank you for the question. Michael, you guys have clearly faced a lot of headwinds in the last couple of years, both on competition and cost. You've pulled a lot of levers to minimize sort of the pain at the bottom line, including reductions in a lot of discretionary spend as Hsu has highlighted once again in your release. Do you believe your reductions in discretionary spend have left you competitively vulnerable?

I think the simple answer, Jason, is no. The teams are doing a great job becoming more efficient with costs. We had a significant global restructuring announced at the beginning of this year that is progressing very well. We are discovering many good opportunities to improve our efficiency. However, we are still spending and currently investing in the right areas; product innovation, marketing programs, and sales execution are crucial growth drivers for us, and we believe we are investing wisely. Additionally, we have identified areas where we were not spending efficiently, and we are managing that more effectively. Maria, do you have anything to add?

Yes, I think that's certainly the headline, Mike. But if you look at where we're taking the biggest amount of cost out it's in the general administrative types of activities. And on the discretionary activities like travel, consulting, those types of things, really pulling back and working differently in order to get done what we need to get done. We've also had a big focus on reducing non-working advertising costs, and that has really paid off for us this year. So we're leveraging the restructuring program to structurally drive down the cost base of the company, and that portion of that will be sustainable.

Yes. I think I'll note further, Jason, is I think overall, I think our in-market performance in most geographies is improving, especially in big markets and in our big businesses in North America Consumer I think are getting better in diapers and in parts of Consumer Tissue. I think in many of our D&E markets, with one notable exception, China being that one, are having a good performance in their markets. So I think we are investing in the right places.

Very helpful, thank you.

Thanks, Jason.

Thanks, Jason.

Hey, congratulations Mike and Tom. I have a few questions. First, we were a bit surprised by the margin shortfall even with the startups and pricing looking favorable. It seems like we will experience continued pressure on EBIT since your guidance has slightly deteriorated. Much of that pressure appears to be coming from Consumer Tissues, specifically pulp. Additionally, FORCE seems to be underperforming compared to our expectations. Pricing remains competitive, and we expect it to improve. Can you discuss the margin trajectory you foresee over the next few quarters considering these factors?

Yes, I mean the trajectory will go up in the next few quarters. I think the challenge has been we announced our pricing in mid-August. And obviously most of that has not taken root yet. We did have net selling prices in Consumer Tissue up a couple of points this quarter in North America, which was good progress. That was related to some of the innovation and the desheet that we made more at the beginning of the year. So we've got more price increases coming through, generally mid to high single digits in North America, and we'll start to see that generally take place in the first quarter of 2019. And that includes Personal Care as well. And then in developing and emerging markets we have made significant progress, particularly in Latin America, but we've got huge currency headwinds there, and in Europe.

Yes, and if I comment on the cost side, Ali, what I'd say for the quarter, that pulp was relatively stable if you look at the breakdown of what we gave on the 210, on inflation. In the other raw materials, polymer was worse than we expected in the third quarter; it was up 40% year-on-year, and we weren't expecting that coming in. On FORCE cost savings, that $105 million, I describe it as a solid number, but it was somewhat behind our expectation. We had some plant outages in our KCP business, and so we lost some momentum there on the FORCE cost savings within that segment in the quarter. The other big one is currency. We had a significant drag from transactional currency in the quarter, particularly in Latin America, where we not only have the translational effect, but in those countries, they're buying U.S. dollar-denominated pulp. With the lower values currencies that's a double hit for that region of our business. So the transactional currency was a meaningful negative for us in the quarter.

Yes, interesting side note, I think if you add up and look at the quarter results, which the breakdown is pricing and cost savings generally offset commodities. It was the unexpected hit in currency that probably left that a little soft there.

To follow up on that, the pressure on margins was specifically in Consumer Tissue, which mainly affects the domestic business. It seems that pulp has stabilized. Regarding pricing in Latin America, if our calculations are correct, Argentina represents about 2% to 3% of your sales with a price inflation of 40% to 50%, meaning that a significant portion of your pricing increases originated from Argentina. Those are the points I wanted to clarify. Additionally, Mike, as you look ahead considering all the challenges and changes, are there specific areas of the business you feel deserve more attention in your vision for KMB?

Yes, let me address the situation in Argentina. In Latin America, we have implemented significant price increases in many markets, most notably in Brazil. So it extends beyond just Argentina. Additionally, Ali, I need clarification on your question regarding North America consumer tissue.

Well, so I'm just saying your consumer tissue operating margins were where you really kind of had some pressure this quarter. And that's disproportionately in North America business. So you're taking the pricing in North America, it's not going to be resolved going forward by international pricing. So I'm trying to understand the trajectory of, I guess, the Consumer Tissue operating margin in particular as you go forward here was well.

In the quarter, the North America Consumer Tissue team has made significant efforts to mitigate a substantial commodity impact. They have managed to offset about half of it. However, that isn't sufficient, which is why we implemented the initial price increase in August. We expect to see the effects of that beginning in January.

And Ali, I would just add that margins were up sequentially in that business by 30 basis points, and so that's in line with what we were expecting given that the pricing, as Mike has said a couple of times, hasn't come in to the market yet.

Yes. Regarding the third quarter and our strategic direction, my focus remains on finishing 2018 strongly. We'll have ample opportunities to discuss our strategic direction during the transition, and I'll provide more details then. For now, I want to highlight a couple of key points. One thing that won't change is our commitment to managing the business in a way that benefits our shareholders. We will maintain a long-term perspective on what drives shareholder value. As expected in a consumer packaged goods business, our focus will be on innovation, brand building, market execution, and cost savings. These are the four main areas we will manage, and it's all about how we prioritize them. When considering our strategic emphasis, one area we are exploring is our significant businesses in developed markets. Although these markets grow more slowly, there's a substantial opportunity to enhance and uplift these categories, making them worth a higher price. With actual performance differences in these categories, elevating our core business is a key opportunity. Another major opportunity lies in developing and emerging markets. We need to continue to lead the growth of our Personal Care business in these areas, which represents a multi-billion-dollar opportunity over time. We can improve our focus on driving the weight of this segment in our portfolio, as well as leading market development in important regions. Lastly, we see a transformative potential in digital and e-commerce. Our business is significant to our consumers and retailers, given their spending patterns, frequency of use, and the duration they engage with our products. Therefore, we will concentrate on how to enhance our business through digital and e-commerce. These are a few initial thoughts, and I hope this helps answer your question.

It helps. And look forward to chatting more about it. Congrats again.

Thanks, Ali.

Thank you. Good morning, and congrats to both Tom and Mike. I have a question on your 1% organic sales growth in the quarter. I'm wondering if this performance was better or maybe worse than your expectations internally. I guess I'm thinking about this in the context of your fourth quarter expectations, which imply that your organic sales growth won't accelerate sequentially for you to meet your 1% full-year guidance. So I guess I'm wondering why this is and how you guys are thinking about the impact of some of the pricing actions you've mentioned.

I think, Bonnie, overall, about on track for us. I mean, year-to-date we're up about 1%. We're expecting for the full-year to kind of be on that path. And the important thing is what I mentioned a little earlier. We are seeing improved performance in many of our key markets, including in North America and most of our D&E markets. In a lot of D&E markets we're up a few points on share in our key categories, and we are seeing good organic growth.

Okay. And then I had a couple of questions on private label. First, I was curious to hear from you why we're not seeing more trade-up into branded products from private labels especially given the current strength across the U.S. macro environment and the consumer. And then second, we're hearing a lot of the private label has followed on pricing. So could you guys confirm this? And then wondering how you see the relative price gaps narrowing and if you think this should encourage more trade-up to your brands. Thanks.

I would like to see a faster shift towards trade-up. The recent trends in private label seem somewhat mixed. In the third quarter, private label increased in three categories, decreased in three, and remained flat in two, resulting in an overall mixed outcome. However, there was a slight increase in our Consumer Tissue categories. We are noticing better performance, particularly in bath tissue with Scott 1000, Cottonelle, and Kleenex Premium, as well as improvements in our towels segment. Our main focus is on enhancing the product experience and fostering innovation, especially in bath tissue where we've introduced significant innovations this year, contributing to the improved performance. As mentioned, our overall organic growth in Consumer Tissue in North America was down five for the quarter, largely due to promotional shifts and reduced promotional spending aimed at enhancing business profitability. Nevertheless, the underlying performance of the business and the brands, particularly in bath, appears to be on the upswing.

Great, thank you. Good morning. I was hoping you could talk a little bit about the adult incontinence category in the U.S. So I think that when Procter reentered the category, the conversation was sort of more activity more advertising raises awareness, raises the profile of the category and grows the category. So share wasn't really the right metric to be watching. But recently, and you mentioned in the release, but also is it in the Nielsen data that actually sales trends have turned negative. So can you talk a little bit about what's going on in that business, if there was something in the quarter in particular in terms of promotional timing that may have impacted it, or if in fact it's now not just a share game or not just share isn't the indicator we should be watching, it's actually the sales growth? Thanks.

Yes, Lauren. In North American adult care I think it's also a soft area for us that we want to improve our performance. And I think the team is addressing it. But one is, that's probably the one category in North America where competitive and promotional activity remains fairly elevated. We are still seeing some aggressive couponing out there. And so that's kind of the environment we're operating in. Also in that, I think the opportunities for us is we have had some negative distribution changes that the team is working to correct. And we're also working on some product improvements as well. So I think it's a competitive category; there is still growth inherent in that business. The focus for us going forward is to make sure that we are focused on driving category growth. I'll note that, you know, I think before our P&G reentered, we were growing low double-digits or even mid-double digits for a number of years, and that growth has slowed down with maybe a little more competitive activity. My hypothesis would be a little bit more too much emphasis competing versus marketing message, driving category expansion, which is what we're getting back to; we're going to focus on bringing consumers back into the category, we call new category entrants back into the category.

Okay, that's really helpful. With that in mind, it seems like Procter, our main competitor, is executing differently in stores and possibly collaborating with retailers to enhance their display space and in-store activity. Can you discuss if your business, previously noting some distribution losses in incontinence, believes it is still receiving an adequate share of in-store activity? Do you think there's a need to adjust your approach in working with retailers to gain support for your innovations in stores?

We believe we are achieving a satisfactory level of performance, but there is significant potential for improvement in our global in-store execution. I have a background in sales, which makes me particularly focused on our performance, and I believe we can do better. While we acknowledge the actions of our competitors, we are committed to capitalizing on our own opportunities. Although we are content with many aspects of our performance, we recognize our potential for growth, and we will concentrate our efforts there.

Hey, good morning. Congrats, Tom and Mike. So I have two main questions. First, I guess this is just more of a forward-looking version of Jason's question, but I'd love to hear about any plans going forward in terms of reinvestment by the business in marketing or other areas under your leadership, Mike; it's typical that a new CEO often chooses to take the opportunity to reinvest in the business. There's been some market share pressure recently, theoretically, you need to support the business post pricing. So just given those factors, should we expect more reinvestment by the business as you look going forward? Could it be significant, or are you pretty comfortable with the level of investment that you're planning for leaving 2018? And then also, Mike, on 2019, I know you won't provide guidance today, but you did sort of go out of your way to cite the recent commodity forecasts and forward currency rates imply some significant headwinds. Maria mentioned the tax rates going back up significantly. It seems like some of those headwinds are worse than you would have expected a few months ago. So I'm curious, are there additional areas you're sort of coming up with and help offset those pressures? Obviously, given all the price increases, is it possible to get more going forward; you know, another round of pricing? Is there more room on the cost side where you've been effective for the last few years, beyond the specific programs you've outlined? It just feels like some of those headwinds could be pretty significant for next year. So I'm wondering about sort of some of the offsets the other way. Thanks.

Okay. Okay, maybe I'll start, and then maybe Maria, we could talk a little bit too, but…

Yes.

I believe the initial focus is on investment, and generally, it's rare for any General Manager to be satisfied with the current investment levels. While we allocate funds according to the average for a consumer packaged goods company, I would prefer to invest more behind promising ideas. This is a significant factor behind our restructuring efforts, aimed at enabling reinvestment, which we are pursuing in certain areas. Additionally, considering the previous discussion regarding Ali, the three main areas we are focusing on include strengthening our core business, advancing Personal Care development in developing and emerging markets, and enhancing our digital e-commerce growth. These are sectors that would benefit from increased investment. As we strategize on strengthening our market positions internationally, there should be beneficial allocation of investment resources for growth and innovation. We are not ready to disclose specific details yet, but those plans will be shared in due time. Regarding the outlook, we do not provide guidance for 2019 at this moment; we typically give that in January, and we will adhere to that schedule. To offer some context, we will maintain our emphasis on a comprehensive strategy, concentrating on sustainable long-term growth factors such as innovation, brand development, and cost efficiency. Nonetheless, it is important to note that the immediate challenges have become increasingly pronounced due to commodity inflation, which has been exacerbated in recent months. For reference, the combined effect of commodity prices and currency fluctuations this year is estimated to negatively impact earnings per share by about $1. We anticipate that these factors will present further challenges next year. Some of our contracted terms for key commodities like pulp may not be as advantageous as they are currently, considering the present circumstances. Thus, we will have to navigate through these issues. Our tax rate will also pose a challenge, but the benefits from pricing and cost efficiencies will support us in the upcoming year. We will provide more detailed guidance when we reconvene in January, but those are some initial thoughts.

Yes, I don't think I have anything to add. Obviously, we will update you in January when we are together, and the comments that we are making on a couple of those items that are just in the spirit of transparency to make sure you know what we are thinking in a couple of areas as we all start to think more about 2019.

Okay, thanks.

Thanks Dara.

Thank you. Mike, Tom, congratulations. If we compare our current situation to a few quarters ago, it seems to me that the overall conversation, not just for your company but for the entire industry, has softened regarding any potential friction between CPG suppliers and retailers. I’m interested to know if you share that view and, if so, why you think that is. From my perspective, the dialogue appears to be more constructive now, but I wonder if this is simply because retailers are not as aggressively competing against each other. Amazon seems to be focusing more on profitability rather than just acquiring customers, and our discount retailers have not dominated the market. Consumers are generally spending well, and Walmart is performing well, among others. This seems to create a healthier retail environment, which I believe has allowed you and other CPG companies to explore some pricing strategies. I’m trying to understand whether I’m imagining things or if you agree with my general assessment. If you do agree, what do you think is the more typical situation: the current, relatively calm state or the more competitive environment we experienced a couple of quarters ago? Thank you.

Steve, I’ll begin since I haven’t addressed the question in a while, and you’ll have to listen to me for a bit longer. I would say that I don’t believe it was ever perceived as negatively by investors as it seemed. Every retailer I’ve spoken to wants input on how to grow their category and execute their strategies. If you add value to that discussion through innovation and by supporting brands that matter to the consumers shopping in their stores, the conversation tends to be positive. The challenges arise if your innovation fails or if your service quality is poor. Those are the tough discussions, but fortunately, we usually perform well in those areas. Retailers are aware of the business climate, including commodity costs and exchange rates, so they aren’t taken by surprise during pricing talks. However, what really captures their attention is when you shift the focus to innovation, how you're going to expand the category, and how you plan to enhance execution in their stores. Mike, feel free to add to that.

I definitely agree with Tom. The discussion with retailers has been consistent over the years, and last year was no different. It may have received more attention in some areas, and you might be noticing changes due to the improved growth in the infant childcare category related to us. Last year, around mid-year, the infant childcare category was down about 5% in value, which caused concern for us and retailers. This year, however, while we were down five in July last year, the category is now up three in the latest quarter, marking a significant turnaround. This change might affect your perception of the tone, but the discussions with customers have remained consistent over the past few years.

Hi, just as a follow-up on the question on the taxes, I mean, it feels to an outsider that the lower taxes are helping you make your earnings target for this year, which is great, but I'm wondering given how many categories or markets or situation specifically that you referenced, where competitive activity has intensified whether you debated internally, hey, let's take some of that benefit from those lower taxes and plough them back into more competitive spending immediately. So forget the earnings guidance range, but just increase our competitive investment or promotion or advertising or whatever it is or hurry up on the new product activity to insulate some of your market shares, whether it's in China, whether it's in incontinence, et cetera, et cetera. And then sort of bigger picture, you know, Mike, if you look at the business, advertising spending is down if you think 3.5% of sales maybe this year, down from almost 4% just a few years ago, and your business has shifted I would argue to categories and markets where advertising spending is arguably more important than it was five years ago. So as you look forward over the next five years, do you think 3.5% of sales in advertising is right, do you think you need to migrate back up to the 4% maybe even higher given how intensive competitive these markets are et cetera, et cetera? Thanks so much.

Okay, Wendy, I will start on that part, and then let Mike continue. Regarding the tax rate discussion, part of it involves a one-time activity, putting an additional $100 million into the pension plan. This allows us to take a deduction based on last year's tax rates, which resulted in a unique tax benefit due to the new tax bill. We are also considering options to create shareholder value in this context. When looking at our investments in the business, we are investing as planned in the right innovations within the right markets. I believe we are doing well in tracking about 58 categories. We are also generating significant savings from non-working media as part of our restructuring, with much of that reinvested into advertising and promotional efforts. The team is now focused on implementing price increases in the latter half of the year, which is necessary. While there may be times when focusing on that could lead to missed opportunities elsewhere, I believe it is still the correct focus. I'll let Mike expand on that.

Yes, Wendy, overall yes, I would like to get the advertising spending. That said, at our number, you can't read too much into that number these days because it goes into a lot of lines. And so, for example, digital online spend sometimes can be slotted into the promotion even though it may feel more like an advertising expense. So, there's a lot of differences going on there. The other thing is given all the innovation that's occurring in a digital media, our ROIs are improving significantly. And so we're really excited about that. And I think that has a big impact for businesses like ours that are more continuity based or that are consumers in the category for a long time every day. And so I'm pretty excited about that. But overall, if you think about the areas that I had mentioned earlier around elevating the core, D&E markets and digital, yes, I would like to get us to spend more.

I don't know if this will make you feel any better, Wendy, but we're not disclosing this. However, in the quarter, our advertising spend was slightly above the full-year average. So we're spending at the appropriate levels even in this quarter.

It does make me feel better. And thank you, Tom, it's been a pleasure knowing you, and congratulations on your retirement.

Thanks, Wendy.

Thank you, good morning everyone, and congratulations to Mike and Tom as well. Mike, I have a question for you. I would like to hear your updated thoughts on balancing some pricing objectives given the margin degradation you're experiencing along with market share trends, which I imagine are somewhat disappointing, especially in the U.S. Looking at the recent Nielsen data, Kimberly-Clark has lost market share in every major category over the last four weeks, which I am sure is concerning for you. Could you elaborate on that? This brings up another point that was mentioned earlier: are you open to sacrificing short-term profitability to regain lost market share? How critical is this lost market share, especially to private label in tissue and towels? Additionally, please discuss your concerns regarding market share and your confidence in seeing improvements in the near future. Thank you.

Yes. Kevin, let me start with like the foundational principle, which is like, we exist to deliver a strong proposition to our consumers and that's what we're focused on, and that's the only way you can win over the long-term and I fundamentally believe in that. And that does go along with market share over the long-term. I think in the quarter in North America I think our data given a lot of that is probably slightly different. And so I have us up or even in five out of eight categories. There's a lot of activity going on in the club channel and also in online. So I think that's one. And then what I was saying earlier, I think our performance is broadly improving across many markets in D&E. In Russia, I think, we were up three points in diapers and up a point or so in feminine care. In Latin America, including both Brazil and Argentina, we're up two or three share points in diapers and up a point or two in feminine care. So we are seeing improved performance and we are very focused on market share. We have to recognize that we need to drive and you need to focus on driving the right value proposition which guides a lot of the pricing activity.

Thank you.

Thanks, Kevin.

Good morning, this is actually Steve Garmaise on for Nik, and we'd also like to echo congratulations to Tom and Mike, and then we were hoping just kind of building off that last question if you could talk about e-commerce and your market share positioning online versus offline and then what plans you had in place to further increase your share online? Thank you.

E-commerce is progressing very well for us, with our online market shares generally surpassing our offline shares. Our primary markets are China, Korea, and the U.S., and we are also seeing growth in other markets. Overall, our business has increased by double digits year-to-date, similar to last year's strong performance. Looking ahead, we believe we can leverage this even more effectively. Our teams are innovating in their engagement with e-commerce channel partners. Recently, we were ranked number one in terms of our effectiveness in e-commerce in China, which is exciting news. Many of our team members have not yet seen this data, but it reflects the excellent work our teams are doing globally, driving both efficiencies in spending and positive results.

Steve, I just want to add that we aim to be available with the right offers and product mix wherever moms choose to shop. We're heavily invested in e-commerce and also support many of our brick-and-mortar retailers with click-and-collect options. While this isn't fully represented in our data, every retailer we work with is focused on this initiative. Our goal is to ensure we have the right products and offerings available wherever moms are shopping, which is central to our overall strategy.

Thanks. Hi, good morning, Tom, Mike congrats on the news. So, Maria, on the upper end of commodity headwinds, what are your embedded assumptions for pulp and oil prices? And on a separate question to all of you in the competitive environment particularly North America and China - and I appreciate all the comments, but had volume now 8% in North America in consumer tissue and also declines in China too. So what are you going to do in terms of continued volume share losses? Or you are just timing as your key competitive is putting more money behind innovation while you are cutting? And given the commodity tax headwinds into 2019, should we assume that you'll continue to be cautious on the investment in marketing or just broadly as you said before not commenting on 2019, but do you expect that the investment in innovation to pick up as you progress into 2019? Thank you.

Sure. I'll ahead and start with some of that commodity questions that you have. Running through our assumptions on the key commodities, we are expecting that eucalyptus will be up about 20% for the full year. The same with polymer that we are expecting it will be up more than 20% for the full year. And then on SAM, super-absorbent, we are expecting that for the full year, it will be up low double digit. And so those are our commodity expectations. And I think something that worth noting is if you look at commodities and currencies combined for the full year, we are expecting that to be about just over a 25% drag on our operating profit. So, it is significant for the year.

Yes, on the - on the competitive front, Andrea, I think the I would say is in North America, I think it's mixed performance. But overall, I think improving. If you take North America infant and childcare, obviously I have mentioned that the category trends are improving, but the category trends were improving I think because of our performance. More recently, our share is up about a point in the quarter. Huggies volume was up mid-single digits, Pull-ups volume or childcare volumes were up low double digits. And so we feel good about where that is. I think the category is responding well to innovation that we put out there. I think in consumer tissue one of the big things is that we have been dialing back in our promotional activity. And that does come with some volume and share impacts. The big challenge given all the commodity inflation this year, it's a significant headwind. I think the team has done a good job chopping that back. But one of the levers they have pulled is pricing both in terms of sheet count reductions but also including promotion reductions. And so that's what we are seeing some of the effects there. The other that I mentioned, yes, adult care has been challenging. I think it was down about 3 points in share. And that's kind of the big focus area for us where we need to improve.

Okay. That's helpful. Thank you.

Hi, good morning. So, I had a question on China diapers. Wanted to know if you didn't say already, how did this business trend on the year-over-year basis? And competitively speaking, where are we in the shakeout of the industry? Are you seeing new local competitors and regional entrants? Has that kind of reached an asymptote, or are we now seeing a point where there is a little bit of fallout in the industry? And then I have a follow-up.

Yes, I think, Steve, I would say the competitive intensity in China in the last few quarters or maybe the last couple of years has escalated. And just to give you some reference, our personal care organic sales in the quarter were down in the high teens. We had strong growth in fem care but that was not enough to offset some of the declines in diapers for us. And so, diaper pricing dropped in the market by about 15 to 20% back in Q2. And so we are working our way through that. And that's kind of blown through our business and impacted our business right now. Overall, volumes, as I mentioned earlier, I think volumes in the category were up high single digits so far this year. But with pricing, the category is about flat or even slightly down in terms of value terms. So despite all these price moves personally I don't believe the category is commoditizing. And some of the effects you are seeing are consumers that are trying new products, local products that they perceive to be interesting or of high quality or have attributes that they are interested in. We have responded by upgrading our products. And we are really excited about the offering that we have out there. However, some of that impact is muted because of all the price activity. China is critical for us. It's the largest market in the world right now in diapers. It's going to continue to be, and we will continue to grow. And so, we are going to compete in China for the long term. And we are going to focus on the right value drivers, which include a great product offering, the right marketing and obviously a competitive price.

Okay, great. And then I have a quick follow-up across your three - top three diaper markets online, China, Korea, and United States, could you just comment for context what the penetration is roughly across this market? And on the last call you mentioned that private labels currently under indexing online. What's structurally driving that in your view relative to brick and mortar? Thank you.

Yes. I don't have a good hypothesis right now as to why that private label is under indexing. I would say that the reason some of our business is not performing well online is there is a lot of online marketing activity and digital marketing activity that we put in place to drive that. And the tools are becoming increasingly sophisticated and our teams are getting better at managing and marketing through those tools. And so that might be a reason why you see lower development levels of private label…

And then, Steve, I'll chime in on that one. I would say two things, one is physical store environment, you get to interact with the product. And so you can see packaging. You may not be able to necessarily touch and feel the product, but you know what you are getting; whereas online you know you are getting if you are buying a brand but may not know what you are going to get on private label. So it is little bit of a hurdle on that front. And then secondly, I mean a large super seller may have a 50 to 100,000 items in distribution, and e-tailer may have a couple million items on their distribution. So this is a complexity of managing private label across a number of different categories is not trivial and that could be another factor.

Yes, we are concerned about the failure rate issue and the importance of having a trusted brand. When consumers shop online and cannot interact with the brand, as Tom mentioned, they tend to shift towards established brands in our categories.

Great. Thank you. Congrats to both.

Thanks.

Thank you.

Good morning, Tom, congratulations on a successful period. Mike, congratulations and best wishes. I have three questions regarding mix. What are the main one or two sources of the positive mix that you've observed, not just broadly but within each segment? Is there an intentional strategy this year to address higher commodity prices? Additionally, how much of a positive influence does mix have on adjusted gross margin, considering that you view the business in terms of total dollars? Thank you.

Yes, I'll start. Is it intentional? Absolutely. So, typically we would like all of our innovation to be mixed accretive. And to your further point about pricing challenges, and if you can't get price easily you try to give mixed. And so, the teams will try to up-sell the better value performing item. And so, our sales teams are absolutely motivated by that. Now sometimes you can see mixed drag as the business grows in some of the larger format packs, which can be a countervailing force on that, but by and large, we would hope day in and day out, we're doing some things that will give us some improvement on mix and offset some of the headwinds that we face from growth in other channels.

Yes. And on the profit question, the positive mix was definitely a contributor both in the third quarter and year-to-date.

Thanks very much.

Thank you.

All right. We appreciate everyone's questions this morning. We'll conclude the call, and we look forward to speaking with you in January. Everybody have a good day.