Kimberly-Clark Corp (KMB) — Q4 2018 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to Kimberly-Clark's year-end earnings conference call. With us today are Mike Hsu, our Chief Executive Officer, and Maria Henry, our CFO. This morning Maria will discuss our 2018 results and 2019 outlook. Mike will then talk about our medium-term strategic priorities and financial objectives. Our remarks will be a little longer than normal this morning, but we'll finish as usual with Q&A. We would ask each analyst to limit their questions to just a few so we can get to everyone efficiently. 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 be referring to adjusted results and outlook; both exclude certain items described in this morning's 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 Maria.

Thanks, Paul. Good morning everyone. Thanks for joining the call today. Let me start with the headlines on our full year results. We delivered 3% organic sales growth in the fourth quarter and a 1% increase for the full year consistent with our target. It was a challenging macro environment and our profitability was impacted by significant commodity inflation and currency volatility. Nonetheless, we delivered significant cost savings and achieved higher selling prices in the second half of the year and improved capital efficiency, returning significant cash to shareholders. Now, let's take a look at the details of our results. Starting with sales, full year net sales were $18.5 billion, up 1%. Organic sales rose 1%, and that included about 2 points of positive pricing in the second half of the year. Looking at the top-line by geography, in North America, organic sales in consumer products increased 1%, driven by an increase of more than 1% in personal care including solid volume growth in baby care and adult care. In K-C Professional in North America, organic sales increased 3% driven by higher volumes in all major product categories. In developing and emerging markets, organic sales rose 2%. In terms of key Personal Care markets, organic sales increased double digits in Eastern Europe and ASEAN and mid-single digits in Latin America, but fell low-teens in China. In developed markets outside of North America, organic sales rose 1%. Moving on to profitability, full year gross margin was 33.2%, down 270 basis points year-on-year. Commodities were a drag of $795 million, well above our initial planning assumption coming into 2018 of $300 million to $400 million. Foreign currencies were also headwinds. Those two factors combined reduced operating profit by high 20's percent. We delivered full year cost savings of $510 million including our FORCE and Restructuring program. Restructuring savings were $135 million, well above our initial target of $50 million to $70 million. We made excellent progress in the first year of this program and we remain on track with our overall plan. While FORCE cost savings of $375 million were substantial, we did have a soft fourth quarter. Performance in the quarter included elevated transportation and distribution costs in North America, particularly in Consumer Tissue, along with some higher manufacturing related operating costs. These factors are controllable for us, and we will manage through them as we go through 2019. Moving down the P&L, between-the-lines spending fell 130 basis points as a percent of net sales, reflecting restructuring benefits, tight management, discretionary spending, and secondarily lower incentive compensation. Adjusted operating margin was 17%, down 140 basis points, and adjusted operating profit fell 7%. Our adjusted effective tax rate in 2018 was 21%, that was down significantly year-on-year and below our original plans. Full year adjusted earnings per share was $6.61, up 6% year-on-year and driven by the lower tax rate. Our October guidance was for earnings per share of $6.60 - $6.80. Now, let's turn to cash flow and capital efficiency. Cash provided by operations was $3 billion, up slightly year-on-year. We reduced working capital cash conversion cycle by five days and we improved adjusted return on invested capital by 240 basis points, ending the year at 26.5%. On capital allocation, dividends and share repurchases totaled $2.2 billion. That's the eighth consecutive year we've returned at least $2 billion to shareholders. Now, let me turn to our 2019 outlook. We expect the environment will remain challenging, although somewhat better than in 2018. We're targeting to deliver a solid improvement in our operating performance that includes higher organic sales growth compared to our 2018 performance and improved operating profit and margins. On the top-line, total sales are expected to decline 1% to 2%, which includes an expected 3% to 4% headwind from currencies. We plan to grow organic sales by 2%, similar to our expectation for overall market growth. We expect higher net selling prices of at least 3%. Our progress in the back half of 2018 with price realization bodes well for our 2019 plans. Given the overall level of pricing, we expect to achieve or are planning for some negative volume impacts, particularly in Consumer Tissue. We have a number of innovation launches in our plan and we'll support our brands with strong marketing programs. Moving beyond sales, we plan to grow adjusted operating profit by 1% to 4%. At the midpoint of our guidance targets, that implies margin improvement of 70 basis points. On average, we expect commodities and currencies in total will be a headwind on operating profit of about 20%, including a high single digit drag from currency rates. We expect to offset much of that with higher pricing. We expect commodity inflation of $300 million to $400 million. That's much less than we experienced in 2018, which we believe represented a cyclical peak in terms of year-on-year headwinds. We're targeting to deliver $400 million to $450 million of total cost savings. That includes FORCE savings of $300 million to $325 million and Restructuring savings of $100 million to $125 million. Our FORCE target reflects lower value generated from our commodity contracts versus what we've achieved over the last couple of years. Outside of this, we expect strong performance on the other components of our FORCE program. In addition, supply chain related restructuring activities and savings will be ramping up in 2019. Overall, we continue to have high confidence in our ability to deliver healthy levels of supply chain savings going forward. We expect the adjusted effective tax rate will return to a more normal level and be between 23% and 25%. At the midpoint, that represents a year-on-year earnings drag of about 3.5%. All-in-all, we're targeting full year adjusted earnings per share of $6.50 to $6.70, which at the mid-point is essentially even year-on-year. In terms of our earnings profile, we expect earnings will be higher in the second half of the year compared to the first half. That's primarily because of the expected timing of the net benefit from selling price increases. Finally, on cash flow and capital allocation, we expect cash provided by operations will be slightly below our strong performance in 2018. We expect to allocate between $2 billion and $2.3 billion to dividends and share repurchases. We plan to repurchase $600 million to $900 million of Kimberly-Clark stock, in addition to increasing our dividend by 3%, marking our 47th consecutive annual increase in the dividend. Now let me hand the call over to Mike.

Thanks, Maria. Good morning everyone. Maria walked you through our results and 2019 outlook, and while we aren't satisfied with our margin in 2018, I was encouraged with several points. We returned to delivering organic sales growth and improved net selling prices in the second half, including strong fourth quarter performance. Our market share positions improved in about half of the 80 category country combinations that we track. We leveraged our financial discipline and made excellent progress on our global restructure. Since this is my first earnings call as CEO, I'd like to tell you that I'm excited about K-C's future. It's a great time to have the opportunity to lead this great company and it's a real honor. Our strategic priorities are to grow our portfolio by iconic brands, leverage our strong cost and financial discipline, and allocate capital in value-creating ways. We're calling this K-C Strategy 2022 and it's how we intend to deliver balanced sustainable growth and create shareholder value in what we assume will be a continued challenging environment. So let me outline a few thoughts. First, we'll continue to be lean on cost and be stewards of shareholders' capital. Those will always be hallmarks of Kimberly-Clark. Second, to drive top-line growth, we will sharpen and increase our focus on the consumer and better meet their needs, as we've shown over the past few years. To do that, we plan to develop and launch more meaningful innovation, increase investments in digital marketing, and improve in-store sales execution. While our commercial capabilities that drive the top-line are good, I believe we can make them great. We're launching internal initiatives in these areas to strengthen our capability, just like we've made ongoing cost savings a superior capability. Now, let me spend the next few minutes describing our growth priorities. We intend to grow our portfolio of iconic brands in line with or slightly ahead of our categories. We're starting from a position of strength. We built some of the world's most well-known and trusted brands and hold the number one or two market share position in 80 countries. Our objective is to maintain or improve our overall market share position, especially in key categories. We have three main growth pillars, all of which are consumer-centered. The first is to elevate core businesses. Improving the product experience, making our products more valuable, and working more for consumers is what I mean by elevating core businesses. We'll launch differentiated product innovation to drive growth in core markets. These innovations will be based on deep understanding of consumer insights. We'll deliver better performance and will drive trade-off. You'll see some examples of that in the market in 2019, including in baby care. Our upgraded and more standardized manufacturing footprint, enabled by our global restructuring, will help us bring our innovation pipeline to market more rapidly and more consistently around the world. Beyond innovation, we'll grow in core businesses by deploying category-expanding marketing, including in underpenetrated categories like adult incontinence and training pants; that's how we built large and leading brands like Depend, Poise, and Pull-Ups. Net revenue management will also help us grow core businesses. With more process discipline and more consistent utilization of tools, we can generate more revenue through pricing strategies, promotion effectiveness, and product mix. Our second growth pillar is to accelerate Developing and Emerging markets with an emphasis on Personal Care and K-C Professional. D&E accounts for about 30% of company revenue, and while we have had a lot of success here, it remains our largest growth opportunity because of the relatively low levels of category penetration and frequency. We have the resources and plans to achieve success going forward. For example, we'll invest to drive category development in diapers, which represents a $35 billion incremental market opportunity if the average spending per baby goes from today's 15% of the US level to one-third of the US level. We'll also invest in feminine care, adult care, and baby wipes, which all have significant penetration opportunities. Priority markets for us are in Personal Care in Latin America, China, Eastern Europe, and ASEAN. We'll also focus on some early-stage markets, such as India and Africa, which are relatively smaller today but have significant long-term potential. In developed markets, we'll deploy our consumer insight-based innovation model in D&E as well. As part of our restructuring, we're moving more R&D resources into the local markets to enable better and faster innovation. We're using an adopt-and-deploy model for smaller markets. Beyond innovation, we'll drive growth through stronger in-store sales execution by optimizing distribution, pricing, shelving, and merchandising. We'll also deploy category-building marketing campaigns and in-market activities to help develop these markets. In K-C Professional, only 20% of the business is in D&E. We have a significant whitespace opportunity as industrialization and economic development continue, and our near-term focus markets will include Latin America and China. Our third growth pillar is to drive digital marketing and e-commerce. Through digital, we can build one-to-one consumer relationships, which will enable us to maximize lifetime value for our consumers. We'll invest even more in digital marketing to help us build those relationships. Today, digital is approximately half of our working media mix, and that percentage is growing. We'll deploy data-driven and compelling marketing with precision targeting to engage with consumers at the right time with the right content. We've gained deep experience with this approach, including in China, South Korea, and the US, and plan to utilize it more globally to engage, acquire, and retain consumers. Data-driven digital marketing and dynamic content development are helping us improve consumer engagement, loyalty, and ROI. In addition, e-commerce is an important and growing part of our business. This channel is growing double digits and it constitutes about 10% of our overall revenue. Our online shares in key countries are slightly ahead of or similar to our offline positions. Our products are well positioned because they have high recognition and consumer trust, and they're also critical to helping our customers grow since they're important traffic drivers. We plan to leverage our capabilities and attract consumers to capture the opportunities that exist in e-commerce. Digital marketing and e-commerce further enable our strategies to elevate core businesses and accelerate growth in D&E markets. We have a strong portfolio of brands, the right strategies and organization structure, and a solid foundation to build on going forward. We also have significant opportunities to accelerate our capabilities to drive growth. We have pockets of excellence around the world, and I expect us to drive more consistency globally and achieve a step change in capabilities overall. Our second strategic priority is to leverage our strong cost and financial discipline to fund growth and improve margins. We have a strong legacy in this area, and that's something we expect to continue going forward. We'll drive ongoing supply chain productivity through our FORCE program. FORCE has generated savings of $3.4 billion over the last decade, and we expect significant savings for years to come. We'll also continue to execute the 2018 restructuring program. This is the biggest restructuring in our history, and it's making us leaner, stronger, and faster. We'll rigorously control discretionary spending to help us sustain our top-tier SG&A cost structure, and we'll drive down working capital with benefits from global supply chain initiatives and our improved manufacturing footprint. Our last strategic priority is to allocate capital in value-creating ways, which is consistent with how we've operated historically. After we complete our restructuring, we'll target annual capital spending of 4% to 5% of net sales, down from our current target of 4.5% to 5%. We're planning to continue providing shareholders a top-tier dividend. We will evaluate M&A opportunities in a disciplined manner with a bias for tuck-in transactions in existing categories. M&A is not expected to be a significant part of our growth strategy. Finally, we plan to allocate healthy amounts of cash flow to share repurchases. Now, let me turn to our medium-term financial objectives that come with K-C Strategy 2022. Our top-line objective is to grow sales and organic sales by 1% to 3% annually. That assumes category growth in a range of 1% to 2%, similar to recent conditions. Macro headwinds in Latin America, birth rate declines in South Korea and the US, and price competition in China diapers have all impacted category growth in the last few years. We believe these factors are largely cyclical, and we'll focus on doing our part to drive these categories, but we also believe it's appropriate not to plan for much improvement right now. Depending on how our categories evolve and the success of our initiatives, we'll work to achieve the upper half of that 1% to 2% target range. On the bottom line, our objective is to increase adjusted earnings per share in the mid-single digits annually. We expect to grow operating profit by 3% to 5% on average, which implies annual operating margin improvement of 30 to 40 basis points. Our strategy is to increase gross margin somewhat faster and reinvest in advertising and marketing to fuel the top line. Ongoing share repurchases should also benefit EPS growth. In terms of capital efficiency, our objective is to at least maintain our top-tier ROIC at its current level. Over the last 15 years, we've nearly doubled ROIC, and it's currently over 26%. We'll continue to be disciplined with our investment strategies, but we won't turn away value-creating opportunities with attractive returns that may be below our overall average. Lastly, we're targeting to increase our dividend generally in line with our growth in adjusted earnings per share. Our payout ratio is in the low 60s, and our yields about 3.5%. We continue to believe that a strong dividend is an important part of our investment proposition. I believe these medium-term financial objectives are appropriate and realistic in the current environment. Longer-term, we continue to have significant optimism about the potential of our categories and our business. Our categories are essential for consumers and have significant development opportunities. We have very strong brands that we're investing behind, and we're focused on raising our game on key growth capabilities. This morning, I've outlined the key components of our medium-term strategy. We look forward to sharing more information with you and updating you on our progress as the year progresses. Overall, we're confident in our ability to create shareholder value through successful execution of our strategies. That concludes our prepared remarks, and now we'll take your questions.

Hey, good morning, guys.

Hi, Dara.

So on the 2022 strategy changes, it was helpful to hear about the areas you're focused on and how you get there. I'm wondering what sort of the net level of incremental investment to attack the three strategic priorities you mentioned: the core, D&E and digital marketing and e-commerce. Is this sort of the strategy changes more about the way you're structured or executed, or should we assume there's an incremental level of investment behind them? And then on the other hand, in terms of the cost savings that you mentioned, is there actual incremental cost savings you're announcing today, or is this more executing on the prior programs you've announced?

Hey, Dara. Thanks for the question. I'll start with the first part. I would say the overall game plan is, we do want to increase our overall investment behind brands, like to drive our advertising up, drive our in-market execution investments up, and also our digital marketing. But I do think that's why we've executed our restructuring. The underlying premise of that restructuring is to create the room and the investment funds that we need to drive our business. From my perspective, the bigger notion of what needs to be different in terms of our going forward, one, I think you get the message, which is a big focus on the consumer, and I think we have that opportunity to raise our game in how we approach the consumer and how we serve them. I think what we're trying to accomplish here is maybe emulating what we've done on cost transformation, which is we've been very systematic and put in a robust management system to drive cost transformation and we're trying to bring the same approach to driving what we're calling commercial discipline, which is how we manage our innovation resources and our sales and marketing resources to drive growth. And then on the cost savings question, Maria, do you want to take that one?

Yeah, the cost savings, there was no new news there. It's the continuation of the restructuring program that we have announced and are executing and also that continued execution on our FORCE cost savings program.

Okay. That's helpful. And then on the 2019 outlook, the $350 million in input cost pressures. Can you detail some of the key underlying assumptions there that are embedded for oil and pulp prices? And it looks like A&P spending was up as a percent of sales in Q4 year-over-year. Would you anticipate that in 2019 also? Is that embedded in the guidance? Thanks.

Sure. I'll take advertising first, and then I'll kind of walk you through our commodities outlook. The advertising spend in the fourth quarter of '18 was higher than it was in last year's fourth quarter, but last year's fourth quarter was low. So it was in line with our expectations, and the year-over-year really has more to do with the trend that we saw last year. For the full year, it was relatively flat. Looking at next year, we do intend to fully support our brands and also the innovations that we put out into the market. We will see how the numbers shake out, but we will continue to be supportive there. Probably, I don't know if we're giving a specific number for advertising, but it continues to be a core focus of the strategy that Mike outlined. In terms of the commodities outlook that we have, I'll just comment for the fourth quarter, which was one of the drivers of the pressure on the gross margin. In terms of commodities, fiber was flat to up sequentially in the fourth quarter for us, which put some pressure on gross margins. But if I look forward to 2019, I'll pick through a couple of the key commodities: on eucalyptus, we're expecting that to be down mid to high single digits; secondary fiber we expect to be up mid-teens; on other key input costs, we're expecting polypropylene will be down mid-single digits, and we're expecting super absorbent will be similar to what we saw in 2018. On crude oil, we're expecting it to be in the $50s, but it'll be down from $66 a barrel this year. The correlation between crude oil and polypropylene and super absorbent has not proven to be strong in the last couple of years, which is why we see some differences there. In terms of some of our other fiber types, we're expecting those to be up in 2019 also. So 2019 commodities we expect to still be inflationary but not nearly as much as what we saw in 2018.

Dara, let me just tag on here. I would tell you that although we plan to make solid progress in 2019, and I think you can see that in the results that we're planning for, we're improving the organic growth and the overall shape of our P&L. One of the things that we're encouraged about in our Q4 was that we saw the net selling price improvement, which gives us confidence about our plans for 2019. We're also making a significant improvement on our key growth prospects in 1% to 4% growth and that's 70 basis points margin expansion, so we're feeling better about that. Obviously, we're not delighted about EPS growth, but we do have those currency and tax drags.

Right. Okay. That's very helpful. Thank you.

Thanks Dara.

Hi. Just first question, the organic sales increase that you're forecasting for '19 of 2%. Can you give us directionally personal care versus consumer tissue, what you expect for each of those segments?

Yeah. We're not going to provide specific guidance by segment for 2019.

Okay. But more pricing, I assume, in consumer tissue. Is that a fair assumption?

Yes, that is.

Okay. The second question, though, shifting gears just to the comment on accelerating growth in D&E markets generally. And, Mike, I appreciate everything you went through in terms of reorganizing the business a little bit thinking about how to reinvest in the business. But if you look out over the next three years maybe, would you say those D&E markets, and I'm thinking a lot about China, but also about a market like Brazil and Mexico. Do you think the profit pool in your diaper and sun care business in those D&E markets is going up? It just seems the level of competition has intensified so much in those markets. I'm just wondering if you think as you accelerate growth whether that's going to mean margins actually contract. Thanks.

Yeah, Wendy, thanks for that question. You know, one, you can tell, you know, we're very bullish on D&E, and I think that is the future. Why that is? I think specifically your question there. You know, certainly, we're seeing pressure, competitive pressure in China and everybody is aware of that. Our team's doing a great job; they're building a business to win for the long haul. In a market that the consumers still want to see premiumize, where they're still buying better-performing products. So we do need to work on a profit pool. We do need to continue to focus on our margins in China. Brazil, I think we are seeing improvement. For the quarter, we are up mid-teens, healthy growth in price, healthy growth in volume as well. Our team is doing a great job there, and what's really driving that is they're being very disciplined on price management and cost management. A key component of the strategy going forward, this commercial discipline that I'm talking about, is the sales execution driving a big piece of our growth. Our pricing is up low- double digits in Brazil this year. The volume is also up, which is due to execution.

Just one question about pricing in Brazil, I'm sorry, is that for the overall business or is that just diapers? Or does that include sun care too?

Personal Care.

Got it. Okay, fine.

Yeah. And maybe just back to your original point, which is the options and I think - if I could just say my perspective is informed by kind of almost 30 years in and around this industry and having seen a lot of companies and worked in other companies that do it different ways. I'm really excited about opportunities going forward for a couple of different reasons. First and foremost, the whitespace opportunity you just highlighted in D&E. It's real for us. If I say, hey, it's going to be $10 billion over this period or $50 billion, both numbers are probably right. There's a lot of growth inherent in our categories because of the low levels of development. That's one big thing that I see, that's different that I've seen in other companies. The second thing is still even in developed markets in our categories, I really believe there's a lot of opportunities to expand our categories through what I call elevation, meaning value-added premiumization. I think we can solve bigger problems or meet certain unmet needs for our consumers in different ways and expand the value that's available in the category and premiumize the category. The third area is this digital opportunity. We're approaching the Holy Grail territory of everything a marketer dreamed of. It creates much more value in our categories because consumers use our products every day. They spend a lot of money on them and they're in these categories for a long time. We're really moving fast on getting closer to our consumers and jumping on the digital train.

Got it. That's helpful. Thank you very much.

Thanks, Wendy.

Hi, guys, so I have three questions. One is, besides that there is almost a tradition of a rebase when a new CEO starts. Congrats by the way, Mike. Why is this the right time to give the 2022 outlook, because we've already seen several years of a little bit challenging results? Is there anything you see in the consumer just recently or competition or retailers that really prompted you to say okay, we need to reset between now and 2022? And then also, why is it just a 2022, why not be a long-term guidance as well?

Sure. Ali, I guess saw the rebase term, I don't know if my team would feel that way and that it's a rebase. I do think we're working hard on our 2019 numbers to make the progress we're making both on the organic and the operating profit side. But I will say these are mid-term targets, and they're really reflecting what we're seeing in the marketplace and our expectation of market conditions. I definitely believe that we've got long-term growth potential in our categories and we believe as leaders we play a significant role in driving the category to realize that. That's what the strategies we're talking about in K-C 2022 are all about. However, given some of the uncertainty we're seeing in this environment, I don't think it's prudent to go out longer than that four years at this point. So that's why we're steering this direction here.

Okay. And that's helpful. Then within that, you spoke about a 30 to 40 basis points on your prepared remarks, average operating margin enhancement over the next three years, four years, and higher than that on gross margin. Can you talk a little bit about what the drivers for that are? Are you just keeping commodities flat? Do you have new gross margin improvement buckets? And then if your operating margin is improving 30 to 40 basis points over the next few years, and the ROIC stays flat. That would suggest that your invested capital turns are getting worse, or certainly not improving, and sounds like they're getting worse. Is that more CapEx need for innovation, or is that less efficient rollout of assets in emerging markets? What is it that’s driving ROIC also?

Yeah. So maybe, Ali, I'll start, and then maybe Maria could add. The first part is operating margin improvement. One, obviously, our FORCE program. Maybe a soft year '19, I think people understand because of the commodity impact. Notwithstanding, we do have plans to continue to raise our game on FORCE and our overall cost savings approach. Importantly, I think the strategy that we're discussing here, K-C 2022, we do intend to premiumize our business, and that will drive margin and mix. We've also got opportunities with net revenue management, which is being a much more important part of our strategy going forward. We're expecting to step forward this year with getting list prices, but we also have opportunities to be a little more strategic on price to drive the trial we want or the trade-up we want or the mix that we want. Then we have a big opportunity, I would liken it to a FORCE cost savings opportunity in terms of how we think about our trade spending and how we get much more efficient in it. And then maybe the analogy I'll give you is, we've made a lot of improvement in OEE over the years and I think we have that similar opportunity in trade.

Yeah. And then I would like to see the gross margin go a bit ahead so that we also have some more room for investment in the key areas that keep the flywheel going on the top-line growth. That kind of algorithm makes sense to us. On ROIC, the big driver there for the next couple of years, Ali, is the investment in the restructuring program. We talked about the fact that we're expecting between $600 million and $700 million of incremental CapEx as we execute that program. In 2018, we did a great job on the restructuring; a lot of what you saw was on the SG&A side of the house. 80% of the savings this year were really coming from there, and we're just now getting going in earnest on the supply chain part of that program as we move into 2019. This incremental CapEx will impact the asset base and will also affect our ability to drive improvements in working capital.

Okay. That's helpful. And just my third question will be more of a 2019 tax. I guess, we've been hearing from a lot of retailers trying to skinny down their suppliers, including in baby care and really trying to go to one as private label in some instances even. Could you talk a little bit about your shelf space expectations for 2019 at some of the major retailers actually in the U.S. but perhaps even in Europe?

Yeah, Ali, I think that's a great question. I think maybe what we are seeing in some pockets, particularly in the smaller retailers, but in our plan right now we are planning to grow distribution overall. That's a focus for us. As you probably know, distribution tends to be one of the largest drivers of share, so that's a big focus area for us, not just in the U.S. but globally.

Okay. Thanks very much, guys.

Thanks, Ali.

All right. Thank you, good morning.

Good morning, Bonnie.

I just had a quick question regarding your medium-term organic top-line growth target of 1% to 3%. I'm curious if you guys are expecting that to be a better balance between pricing and volume than maybe what you're seeing now?

Yeah, for sure, Bonnie, and I think embedded in that is not just list pricing but, as I mentioned earlier when I was talking with Ali, is net revenue management for us, which includes list price, strategic price pack architecture, and trade spend efficiency.

Okay. And then my second question is on promotional spending. In looking at the track channel data, it looks like you guys have pulled back on promotions in a few categories, I guess in the last few months. So curious if that is, in fact, true. If so, does this suggest in general terms that you think the promotional environment is becoming more rational, or is this just something more strategic from your end as you're making a conscious decision to possibly sacrifice some market share right now in order to support your margins?

Yes, great observation. You can see in our behavior that we're faced with big inflation, particularly in North America, making the right choices to drive the business in the direction we need to make. If you recall two years ago, we were dialing up promotion due to some of the competition. I don't know that I would write the businesses or the categories being more rational, but I do think the market is focused on recovering some of the cost inflation and making sure that our margins are protected.

Okay. Very helpful. Thank you.

One additional point I’d like to mention is that underlying, especially in bath and towels in North America, the underlying base trends are very healthy and heading in the right direction amidst this inflation we're experiencing.

Hi, Maria. Hey, Michael. Good morning, everyone. Thank you for taking my question and Happy New Year and congrats on officially taking the reins. A few different questions here and I'll try to bang through them. First, Maria, the FORCE savings, I appreciate why you're expecting a smaller number this year. Can you give us a sense of the FORCE savings you've achieved in the last year or maybe last two years? How much of it was really structural in nature versus just buying better than the markets?

Yeah, we do provide the specific details of each, but I can tell you that we generated significant value from what we call negotiated material savings, which is the value that we get from basically buying better than the market, to use your words. Looking forward to 2019, that is the portion of the FORCE cost savings that will be lower than it has been in the last couple of years. As our contracts reset, we still have value from those contracts, which is positive, but the value of the contracts compared to what we had in 2018 is lower. That's what's affecting the FORCE number. The other components of our FORCE program all have healthy levels of activities and savings associated with those for 2019.

And if spot prices were to rollover or weaken from the current levels or your planning assumptions, is it fair to assume that your FORCE savings will be dragged down with it?

If spot prices move lower, I would tell you that we have short-term contracts that help provide stability in our forecast, but we don't have coverage on 100% of our buy. So it will show up in the numbers. It won't necessarily have a big impact on the FORCE cost savings number.

That's helpful. Thank you. And last question, tissue margins have come in substantially for understandable reasons. I think you've lost over 400 basis points over the last couple of years. But we finished despite 5% price growth this quarter at the weakest margin level we've seen in a number of years. As we think about medium term, what is the sustainable margin level for that business in your view? Is there a path back to peaks we've seen before, or, given we've kind of finished on a weak note; are we still trying to settle into a lower and more durable margin structure for that business?

Yeah, I'll comment and then Mike feel free to chime in. I want to emphasize the point that not only did we see inflation in commodities, but we also had execution challenges in the fourth quarter, which led to lower FORCE cost savings. One of the biggest areas that was affected was North America tissue; what happened is the mix of the orders that came in at a brand pack level was different than what we expected, resulting in higher logistics costs and lost opportunities on the productivity side. Essentially, the Consumer Tissue business in North America incurred additional expenses in the fourth quarter and that weighed down the margins. Mike, you want to discuss longer-term how we see tissue?

Yeah, just a comment on the fourth quarter, Jason. I work closely with that team in North America family care for a long time, and they're a great team. The trick of this business is like driving an 18-wheeler that needs to turn like a Ferrari—it's a big business. We got a little out of sync in terms of where our inventory was and where it needed to be for customers, and that added some additional costs. I have confidence that team is going to get things back on track. It may take a quarter or two to realign, but we'll resolve those operational issues. We've always said overall on tissue that we want these margins to be in the mid to high teens; we're currently on the lower end of that, but I believe we will make progress.

Got it, very helpful. Thank you guys.

Thanks, Jason.

Hey, good morning. So I just want to try to unpack next year's guidance a little bit more if I could. Maybe tie back Mike to the 2022 objectives, because the forecast calls for net sales to be down 1 to 2, profits up 1 to 4 despite inflation and the FX headwinds, which I think, Maria, you cited as a 20% headwind in the profits. I'm trying to understand the cost savings you have lined up, which basically look poised to offset base commodity inflation and some translation effects. Just seems as I'm doing the math that the forecast is dependent a good deal if not entirely on net price realization and it really doesn't seem to allow for a lot of reinvestment behind those early strategy 2022 initiatives like e-commerce and marketing and end market investments. I guess I'm just trying to test if that's fair. I know you cited a plan to invest in digital marketing next year and I get that and view that positively, but do you have room to net invest in overall marketing next year and also make this right to e-commerce and change structures in markets like China? Just feel like the math is tight and I'm looking for some perspective on that. Thanks.

Yeah, Steve, definitely pricing is a key component of our plan for 2019, and a critical factor for us, but however we do have investments in terms of our advertising, A&CP mix and importantly, we're shifting more towards digital, which is more productive for us. We've accounted for all these elements, and Maria, is there anything you want to add?

Yeah, and if you think about the puts and takes of the outlook for next year, we've got currency impacts as a headwind, we have input cost inflation we're expecting to get strong pricing against the two of those. If you look at the full year 2018 for the combination of currency and commodity prices, that was a mid-20s drag on operating profit. With the pricing that we're implementing for next year, we would expect that it will have very strong coverage, and viewing the combination leads to an operating profit change. We have FORCE cost savings and restructuring savings coming into the P&L as well, bringing these elements together is how we drive to our change in operating profit.

Okay, okay. So I guess within that then, what it sounds like you don't see much risk, but how do you handicap the risk of the pricing pull through that you're expecting just not coming through given the competitive backdrop? And if I can tack on one more question then I'll pass it on, but focusing on China. Mike, I know you stated that you like what the team is doing in terms of positioning the business for the future, but if you took a snapshot today, you're clearly losing some ground just given what you report versus what P&G reports today. So I guess what's the plan there or the building blocks of the plan and what should we be thinking about in terms of the cost and time to achieve future success? Thanks.

Okay, yeah. I would say, although we plan to make solid progress in 2019, I'm encouraged by the pricing we saw in Q4. We're on the right track, and we have significant plans throughout 19', most of which have been announced and worked through with customers. The market is responding in a similar fashion, not everybody yet, but we’re seeing it broadly. Regarding China, one, I guess I'll highlight the performance overall for the quarter and it was similar to Q3. You're right; it continues to be a very competitive market, and we're not satisfied with our performance. Our team is building for the long term. The area where we're losing run is in the lower tiers, our tier 3, but we’re growing in tier 5 and tier 6 where we've launched significant and important innovation focusing on premiumization of the category. We're seeing good consumer response to it; it's growing tier 5 and tier 6 share, although response is muted because of all the pricing activity in the marketplace. We feel great about the plan, rolling that technology out more broadly across our lines throughout China.

Okay, thank you.

Thanks, Steve.

Thanks. I just want to go back to FORCE, given the savings came in below your expectations and that was the case last quarter too. Last quarter, you mentioned some of the pulp pricing arrangements that you had in fiscal '18 that won't repeat. Could you talk about the delta there fiscal '19 versus fiscal '18? Relative to your expectations, where did the specific buckets for FORCE fall short beyond the pulp dynamic? And then for fiscal '19 just by segment, you spoke to some of the issues in consumer tissue, which makes sense, but are you expecting margin expansion in each of the divisions in fiscal '19?

Okay the so a couple of things here. First, on the delta: as you can picture how this works, if you think about where we were coming into 2018 and where everyone thought commodities would go, that was the negotiating environment as we entered into 2018 and then you fast forward to as they have contracts come up in the end of the year. We are in a very different environment now. The 2018 contracts we negotiated had significant value to us given how much commodities rose and the steepness of the curve. When you look at where we are going into 2019, the intuition would say we must be at a pretty high point in terms of commodity prices, so it's a different environment as these contracts reset. The value of the contract is lower for us in 2019 than it was in 2018. This affects the negotiated material price portion of our FORCE cost savings. As for what we saw in 2018 in the fourth quarter, FORCE was lower not due to negotiated material prices but more on the operating components of FORCE, particularly productivity and logistics.

Got it and are you back to normal levels at this point?

We are not; we are on it. I'll take a controllable issue over an uncontrollable any day, and the issues we had in the fourth quarter are controllable issues. We're very confident in our supply chain capabilities and the opportunities. The teams are addressing the challenges we saw, and they're working through them. We will resolve those, though it may not be immediate, but they absolutely will get resolved.

Got it, okay. And then for fiscal '19 just by segment, are you expecting margin expansion in all those divisions?

Olivia, remember we don't give guidance at the segment level, but you can imagine that given the overall company targets we've talked about, all three segments aim for margin improvement.

Got it, thank you.

Thank you.

Thanks, good morning. I just wanted to go back to earlier when someone mentioned that the outlook, medium term let alone for '19, doesn't imply tremendous incremental reinvestment in the business, which Mike you pretty specifically also talked about. What I was curious about though is where you stand on capability building, so analytics, what exists in-house today vision for getting going on this greater push for revenue realization or the highly targeted one-to-one marketing e-commerce...

Yeah Lauren, great question. One, I will tell you just to be clear, we are just standing up initiatives in all these areas now; however, the basis for why we have defined these as critical is because we've made progress in different areas. Historically, we've been a bit more decentralized as an operating model, which enabled us to be very nimble but resulted in developing pockets of excellence. In North America, I think we're a little ahead on the revenue management, and we've been developing Six Sigma-like tools on trade efficiency, so big progress. But the big opportunity for us is to standardize and roll them out more consistently across markets.

To provide context for our restructuring program we established in 2017, we saw the opportunity to structurally lower the costs of our business but we knew we needed investment room to build capabilities that unlock the growth opportunities. So, along with restructuring, we had both of those things in mind. You didn't necessarily see everything play out in 2018 due to unexpected commodity and currency inflation, but moving forward, especially as Mike lays out detailed strategies, the purpose of the restructuring program was to shift costs from less useful areas to ones that would support growth.

Okay, and if I could just ask one more question on revenue realization because I think it's something that's been talked about for a decade at K-C, but in this next iteration one thing I'm wondering about is how this relates to competition. It’s one thing to look within your portfolio and see the opportunity to be more strategic, but obviously the categories in which you compete are undergoing dynamic changes. So how does that factor into thought process around pursuing revenue realization as a way to improve operations?

Yeah, definitely true statement Lauren, which is especially if you're talking about list price changes, a lot of that circumstances depend on the retail environment and competitive moves, and we recognize that. I think, in terms of pack-architecture or price pack architecture or thinking about pricing strategies, there's certainly a level of control over those aspects we provide. Nevertheless, regarding trade spending, you can imagine there's competitive constraints there too. The beauty of it is, it’s like lean six sigma. There's a huge range of variation in how we spend money across brands and categories. Anytime you're spending billions of dollars with a wide array of stakeholders, it's complex, making optimizing much tougher. We’re driving the next step aimed at improving processes and systems to promote more efficiency.

Okay, alright, great. Thank you so much.

Thanks Lauren.

Thank you, just for squeezing me in. The first question is on the progression of the pricing initiatives. From the last calls, you were planning to increase prices for Scott in Kleenex in the first quarter and second quarter respectively. Are you still keeping this plan and if so what has been the reception? Are you increasing promotions amid that initiative, which may explain how conservative you've been with the 2019 guidance? And my second question is, you've talked about FORCE back in 2018, establishing a total target of $1.5 billion in four years. It sounds like you aren't taking that target down due to your comments to Ali and just in the short-term and to your answer to Jason and Olivia. What do you think should drive acceleration for 2020 and 2021? Thank you.

Yeah, Andrea. So I'll start with the pricing one and maybe Maria can weigh in. Yes, the pricing in North America is on track and the plans that we have are largely in place right now. Again, some of the impact you saw in Q4 was related to desheeting we did in bath tissue and a little inflated by merchandising pullback. Most of our list price changes are going in the first quarter or through the end of this quarter and have been received well. So that is being supportive of overall pricing.

On the FORCE target, we did not change the $1.5 billion target we have. We're still working against that target. In terms of where the savings come from, we expect the savings will come from all four categories of FORCE: negotiated material prices beyond next year, productivity in our operations as we drive out waste, the way we engineer our product to cost optimize them, and overall costs across the supply chain, including logistics—all areas of opportunity. We have a global supply chain organization running an extensive program, and we continue to drive opportunities.

Thank you.

Thanks.

Yeah, thanks a lot for squeezing me in. Just two quick questions, Mike. You indicated M&A is not going to be a big part of your vision right now. Just curious what that means for Kimberly, and would they ever be interested in getting into a new pillar of growth or new category? Just wanting some more perspective?

Yeah, thanks Nik. Overall, I like our portfolio in the three business segments we operate in. They're large, essential, and profitable categories, and as we've said in the past, we believe there are strong synergies in how we buy, make, sell, and ship. That said, we will pursue opportunities to improve our portfolio; right now, I'm looking more towards opportunities to enhance or leverage our geographic scale, a new technology capability or a new commercial capability to accelerate us either in revenue management or this digital world that we're targeting.

Great, thanks a lot.

Thanks, Nik.

Hey, thanks, good morning everyone.

Good morning.

First, a quick one, Maria, just on the tax rate, what's driving the acceleration in fiscal '19? A little bit of a broader question just to come back to the quarter and sort of understand some of the moving parts here and potential implications on the outlook for fiscal '19.

Sure. So the tax guidance that we gave for next year is reflective of our exposure, and we see that as our tax rate in the environment as it is. In 2018, we had favorability on the tax rate from some settlements and from tax planning opportunities resulting from the US tax reform. We accrued some benefits that were better than our expectations. If you think about it at a normalized level of 23% to 26%, about two-thirds of our statutory income is in the US. We have the 21% rate, while outside the US our tax rate is in the upper 20's along with a couple points coming from state taxes, leading to the normalized tax rate in the guidance range provided.

In terms of the fourth quarter from our expectations, I know we’ve spoken a lot about the Consumer Tissue issue, but significant gross margin miss. I'm trying to also understand some of the moving parts in the quarter and some of the margin shortfall; anything else you'd highlight besides the tissue business in North America?

First is around gross margin. We've discussed issues related to execution in the FORCE number, and as stated, commodity inflation was strong in the fourth quarter. There was additional pressure on commodities versus what we were expecting, and those impacted our margins.

From a broader perspective, I think across most markets, barring one or two exceptions, the business is improving health-wise, and consumer resilience was evident. In North America, organic was up 3 in the quarter—personal care was up mid-single digits, and our infant child-care business was in low double-digits. Broadly across D&E markets like Brazil, CEE, ASEAN, and India, we were up double digits and gaining share in most of those markets. This gives us some confidence in our 2019 outlook.

Okay, thank you very much, good luck.

Thank you.

Thanks.

Hi Mike, congrats on your new post. Question for you, wanted to see if you could speak a little more about your 2019 gross margin outlook, particularly how should we think about the timing of the year. Maybe midyear for a commodity being favorable for you guys.

Sure. As mentioned earlier, we expect distribution to be inflationary next year to the tune of double digits. Looking at next year, stronger performance is expected in the second half versus the first half based on a couple of factors. One would be the expectation of commodity inflation; the timing of our pricing coming into the market will also be a factor.

Okay, great. Would you say then holistically for the year that would be safe to say the gross margin should be net positive for the year given by the back half of strength relative to the front half?

We anticipate margin improvement in 2019, so the combination of pricing and commodities will have a significant impact on operational profitability.

Okay, thank you.

Thanks very much. Two questions, within North America what have you been so successful recently in Pull-Ups, GoodNites, and Depends versus diapers? Is there some matter just to focus there, brand quality, or maybe structurally different dynamics?

On Pull-Ups, it's the fundamentals. We're back on our big kid messaging which has worked for us over a long time. Our focus needs to be about bringing consumers into the category and showcasing the benefits of training pants. We do feel like we have our best ever Pull-Ups currently, and that’s what's driving the double-digit growth.

And the second question is, the US drug channel has been an issue for some CPG companies we've seen both in the lower store traffic that's already happened and maybe looking forward to whatever the ultimate adoption of delivering online will bring. Is that an issue for you and how do you win in that channel specifically?

Yeah, there is a little softness there and we're working through that. We have great relationships with our drug customers and things are lining up well. The overall focus continues across the channels in the U.S.

Okay, very helpful. Thank you.

Thank you.

Alright, great. We appreciate all the questions today and we'll wrap up with a couple of closing thoughts from Mike.

Thank you for tuning in and your support of Kimberly-Clark. We're going to make solid progress in 2019 and we're going to accelerate our growth while maintaining our strong financial discipline as we develop our K-C Strategy 2022. So thank you very much.

Thank you.