Kimberly-Clark Corp (KMB) — Q4 2022 Earnings Call Transcript

Thanks, Shelby. Hello, and welcome to our 2022 Year End Earnings Conference Call. Joining us today are Mike Hsu, our Chairman and Chief Executive Officer; Nelson Urdaneta, our Chief Financial Officer; and Brian Ezzell, our VP of Finance. We issued our press release and published supplemental materials that summarized our results and outlook this morning. You can find these resources on the Event page of our Investor Relations website. Before we begin today, a few reminders. Our statements will include forward-looking statements. Please refer to the latest Form 10-K or 10-Q for the list of factors that could cause our actual results to differ materially from expectations. Our remarks will focus on adjusted results, which will exclude certain items described in our Q4 2022 earnings news release. Please consult our press release and public filings for more information about these adjustments and a reconciliation to comparable GAAP financial measures. Mike will provide his perspective on the business, and then we will open the floor for Q&A. With that, let me turn it over to Mike.

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

Good morning, Dara.

Hey, Dara.

Hey, how are you?

Good.

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

I feel very optimistic about the global position of our brands and our business overall. We can discuss our fourth-quarter performance later, but I believe we will definitely achieve improved results in 2023. We intend to continue building on our organic growth momentum, with plans that include both carryover pricing and new pricing actions, most of which have already been communicated to our customers. I'm really excited about our strong innovation and commercial programs for 2023. I think this year will surpass last year's performance, and consumer demand in our categories remains quite robust, providing good investment opportunities. Regarding advertising, we're slightly increasing our spending, especially since we had reduced it in previous years due to various challenges. This adjustment brings us back to levels we saw around 2020, though it's also driven by the strength of our commercial programs which we are eager to support. We're consistently evaluating our investment returns to ensure their effectiveness. We are seeing ongoing organic growth and expect to make further progress in margin recovery while investing. We project high single-digit operating profit growth despite facing around $600 million in inflation and foreign exchange challenges. I want to emphasize that we are targeting the top of our internal range. Last year, we anticipated about $700 million in cost inflation but ended up facing closer to $1.7 billion and still managed to stay within our initial targets. This year, we have high-quality plans we are excited about, aiming for the upper end of our range. However, we recognize that volatility is extremely high due to fluctuating interest rates, foreign exchange, geopolitical issues, energy concerns, supply chain disruptions, and civil unrest. I'll pause here and let Nelson discuss pulp, and then we can address any follow-up questions you might have.

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

I think I’ll add, Dara, is also, while we’ll take some of those declines that you see in RISI will take a little time to work through our system. I would say if you saw a spot in what we’re paying you want to pay what we’re paying.

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

Yes, the spending reflects broad improvements. In major markets like the U.S. and particularly in the diaper category, we have some exciting developments that we want to support appropriately. I can't disclose specific details as they will be revealed in the second half, but you'll be really impressed when you see it. It relates to the more practical aspects of our business. We will achieve remarkable results in that area. Additionally, we have significant momentum in China, and the team is doing an excellent job there. We plan to continue investing in the brand and enhancing our advertising and digital capabilities in China. These are two key focus areas for us. We also have strong traction globally, and we feel confident about our investments around the world.

To address the question on foreign exchange, for next year we anticipate a top-line impact of about two percentage points for the full year. This effect will be more pronounced in the first half of the year when comparing year-over-year figures. However, we expect that this pressure will lessen in the second half from a revenue perspective. Additionally, regarding the bottom line, it's important to note that about half of our revenue and a third of our profit come from international markets. We also have significant costs associated with these operations that are affected by currency fluctuations. Furthermore, we use specific risk management strategies, which I won't detail here, to help manage currency exposure, and the effects on our profit and loss statement aren't always directly proportional to our hedging activities.

Great, thank you.

Okay, thanks Dara.

Good morning, Chris.

Hi, good morning. I have a follow-up regarding the currency issue and another question. The currency situation is receiving a lot of attention today because it behaves differently than what we typically see. I understand you have effective hedging strategies in place, so I’ll take that as a given. How should we view improvements or deteriorations in currency? Since you’re hedged, does this set the outlook, or should shifts in currency affect what flows through your model this year? It would be helpful if you could clarify this for us.

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

Okay. Okay, thank you. Just given, I think one other thing this morning is that the commodity outlook relative to what we can see on even forward prices would suggest worse than expected probably on that front. Clearly, you’re saying more of that’s happening in international markets may be harder to track. So I think that makes sense. But nevertheless, we’ll probably end the year now at a gross margin of, say, 32% still a few hundred basis points below pre-pandemic operating margins even farther below pre-pandemic. And I think conceptually, the organization does have goal to get back to that margin structure. It just feels like with commodity volatility and the non-operating inflation that you’re talking about. Do you still think that’s a realistic medium to long-term objective or has the inflation been such that there’s probably not enough pricing and savings to get you there or at least it will take a very long time. So, any thoughts on that.

Yes, Chris, I believe it's a realistic goal, and I think we will achieve it. I feel we have turned the corner on our margin recovery program. We saw strong organic performance in the fourth quarter. As I mentioned earlier, pricing outpaced input costs and inflation for the entire year, allowing us to fully offset inflation and foreign exchange for last year. The teams did an excellent job with this. Our operating margin stabilized in Q3 and improved by 200 basis points in Q4. Regarding the cost outlook, we're making significant progress. From my perspective, I see positive signs. Although we anticipate ongoing cost pressures this year, there are signs of improvement, and we've noticed some commodity prices starting to ease. Having been with the company for 10 years, I know that reversion can happen suddenly. Over the last couple of years, we have managed to offset extraordinary challenges, and we are looking at another 600 this year. Historically, rapid reversion has occurred, and we are observing some indicators of it. I can't predict when it will happen, whether this year or later, but it will happen eventually. When it does, it will boost our margin recovery. As I've stated before, we are not relying on reversion for our margin recovery, but when it occurs, it will expedite our timeline. I am confident in this, knowing that $3 billion over two years cannot remain at that level indefinitely; it will eventually decrease.

To provide some additional context on gross margin, we've successfully expanded it for three consecutive quarters. Notably, in Q4, we achieved year-over-year growth in gross margin for the first time since mid-2020. This trend supports Mike’s point about our commitment to a recovery in margins, which we believe will occur. Looking ahead, our strategy is to achieve year-over-year gross margin expansion every quarter. While we have a gross margin target of 32%, we are actually aiming for a higher number for the full year, as we anticipate expanding operating margins by 80 basis points. Additionally, we are investing approximately 100 basis points of net sales into our brands, which adds back to that 80 basis points and indicates our planned gross margin expansion. We are actively working on enhancing productivity, pursuing margin-accretive innovation, and implementing our net revenue growth management programs. All these efforts are positioning us well for future growth. As Mike has mentioned, if reversion occurs, it will further accelerate our progress.

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

Yes, yes. I want you to add, right. So it would be like this. We have 80 basis points of operating margin. You add 100 basis points that we are reinvesting into the brands. That gives you 180 basis points by which at least gross margin would have to expand.

That makes sense?

Okay. Yes. Thanks so much.

That’s the math.

Right. Thank you, both.

Okay. Thanks, Chris.

Hello, Steve.

Hi, Steve.

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

The path to margin recovery is challenging.

So Steve, I think there are a few points to clarify regarding the calculations. The key consideration is that we are currently looking at approximately $250 million in commodity costs at the midpoint, as we've indicated. For currency, we estimate around $350 million at the midpoint. Additionally, we have about $200 million in other costs. Altogether, we are set to achieve significant revenue growth management realization for another consecutive year, with around two-thirds of that directly carrying over from 2022. Ultimately, for the year, we expect to see positive pricing after accounting for commodity and foreign exchange, in contrast to last year when we were largely neutral, successfully offsetting $1.7 billion. This will have an impact moving forward. As we exit Q4, it won't be a straightforward progression, as Mike noted, because the quarters vary significantly, influenced by different category dynamics and cost impacts. However, on a year-over-year basis, we are continuously expanding margins, which is noteworthy because prior to COVID, our gross margins were around 35%. So we would be making solid headway on our annual goals based on the changes we are planning.

Yes, Steve, and maybe I’ll just add for context, I mean, I wasn’t trying to sound facetious, because when I say it’s a bumpy road, I’m not one for hyperbole and I think I said in my prepared remarks, unprecedented a few times. And so there’s been unprecedented effects kind of on the demand side and on the supply side, just in terms of demand, obviously, COVID in and out, the war, which caused demand to change in and out, then you have all the supply issues either associated with COVID, the war, or just the product availability or transportation availability. So there’s a lot of things moving around. Then you throw in our Texas storm, which, at this point, I’m on the third order impact of the Texas storm. And so you got all that. There’s a lot of volatility inherent in the numbers, and they were not consistent quarter-to-quarter and very unusual in our business, because typically, I think you all are right, this tends to be a very stable business. But because of that, both from a demand perspective and a cost perspective, things are going to move around from quarter-to-quarter a little bit.

Okay, that's fair, and I agree. Unprecedented has become the new normal. I have two follow-up questions. First, regarding the enhanced net pricing and revenue growth management, you mentioned mostly carryover, which makes sense. Do you expect any actual incremental pricing actions in addition to other revenue growth management actions? It would be helpful to get some insight into where these might occur and the proportion of them that are actual list price changes versus reductions. Secondly, in your release, you touched on retail inventory levels and some declines in trade inventory levels. Can you provide some insights into your observations and how you plan to address destocking inventory levels across the trade as we move through 2023? Thank you.

Thank you, Steve. We've moved quickly on pricing over the past couple of years, and I'm proud of the team's ability to offset inflation in 2022. For this year, most of our pricing will be carryover, but we've introduced some new actions, including list pricing that has already been announced in the markets. Additionally, we have implemented further revenue growth management actions, such as promotional changes and improvements in trade spending. These are standard programs we will continue to have in place. Overall, we are confident in our revenue growth management capabilities, which are performing well. Without the investments made over the past five years, we wouldn't be able to execute these strategies. Demand is holding steady, and I believe the elasticities are performing better than we initially projected. So that covers pricing. Do you have any follow-up questions on that, Steve?

No, that’s great. Thank you.

During a conference in September, many investors inquired about retail inventories, which were starting to shift for a few manufacturers. However, it hadn't impacted us at that time. Shortly after that meeting, we received updates from retailers indicating they would also evaluate their inventories within our categories. This has occurred as expected. In the fourth quarter, the inventory levels aligned with our forecasts. While it did influence consumption, our overall organic growth in North America between tissue and personal care was up 1%, which is somewhat weaker compared to consumption levels. For us, consumption is the key indicator of business performance. Other variables may affect shipments, but over time, shipments should match consumption. For the quarter, consumption increased by 7% in both personal care and tissue, indicating that the business remains in good health despite common retailer inventory challenges.

Okay. Very good. Thank you.

Okay. Thanks, Steve.

Good Morning.

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

Yes. Generally, regarding inflation, the $200 million to $300 million impact we mentioned is primarily seen in international markets. The U.S. will not be the main market affected by this. However, as we consider foreign exchange impacts, those will predominantly relate to international markets as well. On the other hand, costs are broadly affecting our entire portfolio.

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

Yes. As we’ve said in the past Anna, our FORCE savings are not linear and it all depends on movements within the quarters go live of projects. And it is very difficult for us to predict exactly how it comes into play. I would not skew FORCE into the first part of the year because typically, we’ve got a lot of projects that are going live. We’re still dealing and managing through some challenges, especially internationally on the supply chain bit. And that weighs into how FORCE plays throughout the year. But I can’t give you a specific percentage of what you should be planning. But I hope that helps guide you as to how we’re thinking about it.

Okay. Thanks very much.

Okay. Thank you, Anna.

Thank you.

Hi, Andrea. Good morning.

Thank you. Good morning. How are you? So I wanted to just perhaps hope to bridge the top line guidance a bit between volume and pricing. And Nelson, I understand you mentioned obviously you have some carryover impact of about two-thirds, I think you’re called out from pricing. So it implies that potentially you are announcing or embedding some additional pricing. So first of all, wanted to check on that. And by my math, probably you’re embedding flattish to slightly up volume for 2023. So I’m hoping to figure what regions would that be? And related to that from a regional perspective, D&E it was a bit softer in the fourth quarter. I understand like you called out Southeast Asia, and I’m thinking, and correct me if I’m wrong, Softex being an acquisition that you made towards the end of 2021. Perhaps there’s some puts and takes there. Anything you can add in terms of like 2022, it seems to me was a year that D&E had a very strong year. And actually, sorry, developed markets had a very strong year. D&E was a little bit softer. Is that going to reverse, because you’re obviously having tougher comps in China and in developed markets? So if you can help us with that.

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

Yes. Regarding the developed markets, what factors are included in your guidance? I assume you're expecting stronger elasticities this year, but in North America, it seems that the growth was limited in the fourth quarter. I'm curious if there are any factors you are considering as you raised prices and what you are incorporating into 2023.

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

We have a strong innovation pipeline in all developed markets that will come to fruition. I want to highlight a couple of points regarding the year. First, the first half of the year is expected to be more subdued. This is due to the ongoing effects of our exit from the private label sector in North America and the strong comparable results we achieved last year, where we grew by 10% in the first half and 5% in the second half. Additionally, we will see a lot of year-over-year pricing carryover impacting the first half. These factors combined will likely pressure volumes. However, we anticipate that things will improve as we move into the second half of the year, which is how I see it, Andrea.

That's helpful. Just to clarify, when you mentioned that two-thirds of the pricing is carryover, does that mean there is still one-third of pricing that will come through in the plan?

Yes. And I said earlier, I can’t remember, maybe it was with Steve, but yes, we have a significant portion of carryover pricing that was launched last year that still carries over into this year. And then we’ve taken additional pricing actions since then. And so we’ve generally announced pricing actions across markets that are taking an effect this quarter. And so that’s also factored in the plan.

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

Yes, and then on top of that, as I said to Steve, we have additional RGM actions or revenue growth management actions that are more typical in Evergreen.

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

Super helpful. Thank you for the clarification. I pass it all.

Okay. Thank you, Andrea.

Morning, Lauren.

Good morning. Thanks. So want to talk a little bit about consumer behavior in North America and elasticity. So, I guess first on personal care, I’m sure you’re not going to give us a number, but if I make some rough assumptions around the private label exit and inventory destocking, it looks like elasticity is less than kind of a one for one on the North America personal care business. So just kind of curious on your perspective on that and knowing how much of your innovation has been premium over the last few years. What you’re seeing in terms of trade down behavior, because the market share data looks not great, the brand is losing share to private label overall, but your shares look a little bit softer. And then just on tissue, there obviously expect there would be significant elasticity. There always is. But what are you seeing there in terms of that timeline to that kind of stabilizing? Should we think about it as when you start to lap the price and that the volume stabilizes? Or is the consumer under so much duress that there’s space for that trade down to persist?

I anticipated your question, Lauren, and Russ and I discussed this last night. First, I want to note that in North America and globally, we're witnessing a resilient consumer, which reflects the essential nature of our categories. Our point of sale or consumption volume aligns with expectations. However, we've seen a bit more shipment volatility due to some specific issues we've been addressing. I can say that observed elasticity was slightly higher in the second half than in the first half, but it remains significantly below what we modeled. This is indicative of our categories being essential. To share some numbers, in the fourth quarter, pricing for diapers increased by 7%, while the equivalent unit volume decreased by 3%. This suggests that the implied elasticity impact is lesser, certainly below one to one. Additionally, in the second half, both we and our competitors made various count changes across categories. The equivalent unit definition accounts for these count reductions as it's based on a standard unit; I would estimate that nearly half of the volume decline is tied to count changes, particularly in diapers. For bath tissue, in the fourth quarter, the price rose by 11%, and volume dropped by 7%. I believe that three or four points of that decline could be due to sheet count changes. Adult care is an exception, as prices increased by 8% while volume rose by 2%. Regarding the elasticities, it seems that the impact increased slightly in the second half. In the first half, prices rose by mid to high single digits, and volume continued to grow. The consumer environment has changed, and there’s more pressure on the consumer now, but I still believe the category remains quite resilient due to its essential nature. I'll stop there, Lauren. Does that address your question?

Yes, that is great. And just the one piece that you missed was the relative market share performance.

Oh, yes.

In personal care and any kind of mix dynamics.

We feel very positive about our overall performance. In adult care, we saw a 12% increase in consumption for the quarter, while feminine care experienced almost double-digit growth. Diapers, on the other hand, were down by five percent, primarily due to the exit from private label, which had a minor impact on us. A more significant factor was our intentional shift of a major retailer event from the fourth quarter of last year to the third quarter of this year, resulting in a loss. Additionally, there was a significant private label event that shifted from the third quarter to the fourth quarter, compounding the impact on our market share. This situation arose in October, and while we faced challenges early in the quarter, we observed improved performance from Huggies later on. We are optimistic about our position and excited about our commercial programs featuring Disney characters on our products and the new innovations we have planned. We look forward to discussing our strategy in more detail when you visit us.

I mean, I’m going to put the poop superiority visit. I have my agenda for 2023.

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

Yes, no, I got it. I get it. And then I’d be remiss if I didn’t jump in on a modeling question. But just briefly on the FX headwinds relative to what just seemed like not terribly well timed hedges unfortunately. And then the wage inflation that you called out, just any dimensional like gross margin versus OpEx, just how to treat those as we work through the pieces?

The 200 million is related to other operating costs, and that's all gross margin as you consider it. In terms of foreign exchange, a significant part would fall under gross margin. There's a minor impact from translation related to earnings and some adjustment for any foreign currency liabilities or assets we hold, but the majority would be reflected in gross margin.

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

All right. Thank you, Lauren.

Javier, good morning.

Hi, Javier.

Hi. Good morning, everyone. I want to revisit the elasticity question. You mentioned that it's healthier, yet your volumes are down 7%. Could you break down how much of this is due to underlying volume growth compared to market growth? Specifically, regarding the 7% volume decline, how much can be attributed to one-time events? I noted that another branded competitor also experienced a 6% volume decline. I'm concerned about how you plan to maintain your pricing levels given the contradiction in elasticity that you pointed out, despite the mid- to high-single-digit volume declines we are seeing.

Yes, Javier, it's important to understand the difference between consumption and what is sold through to consumers versus shipments. Other manufacturers, although I didn't listen to their call, likely experienced similar effects as us. In North America for the quarter, our Personal Care business saw a 7% growth in consumption, and our tissue business also grew by 7%. Over the long term, shipments should ideally equal consumption, meaning we won't continuously deplete retailer inventories or significantly increase them. This perspective helps in assessing the ongoing health of the business. We did notice some specific changes during the quarter, particularly related to retailer inventory, which had the most significant impact on us. Additionally, we exited a major private label contract, which contributed to this situation as well. Generally, the changes in retailer inventory align with what we typically observe and tend to balance out over time. Therefore, I don't consider retailer inventory changes indicative of elasticity; rather, I focus on consumer volume and spending for that insight. Does that make sense?

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

Well...

Yes, that’s the one-timers. We have about 3 points would have been the one-timers. If you think of the inventory destock, if you think of the private label contract that would have been about 3 points out of that set.

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

Yes. We exited our Personal Care business primarily, especially our diaper business in the U.K. about 10 years ago. So I’m not sure what you’re referencing there.

Andrex, the tissue business as well?

Yes, we have a strong tissue business and it's the market leader in the U.K. What’s the question?

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

Okay. I got it. I understand. Hey, yes, overall, again, we feel great about our brands and where their position is. Andrex we have taken significant pricing just as we’ve done in the U.S. this year. It continues to perform well and despite the price increases, it has grown share. And so it’s a leading brand in the United Kingdom and much by consumers. And so it’s a great business for us. Certainly, this year there’s room for improvement because of all the cost pressure. And so that’s the priority for us, as you’ve heard all here is we’ve been working to recover our margins on our branded businesses to offset the significant inflation that we’ve had over the course of the year. And I think the teams have done a fantastic job of that. That said our margins are still below where they were pre-pandemic, and so we’re working our way back up towards that.

Thank you so very much. Very helpful.

Okay. Thank you, Javier.

Hey, Kevin.

Hi, Kevin.

Hey. Great. Good morning everyone. Thanks for squeezing me in, and Christina, congratulations, and welcome. Hey, Mike, just to maybe tie together some of the more recent questions I wanted to hit on your U.S. market share, which I think Lauren touched on a bit. And then the promotional environment, which Javier, I think was kind of getting at a little bit, but very specifically, how this plays out with the promotional environment. Some of the conversations we have with investors now is the pricing stick, is the consumer going to be able to withstand it, particularly in some of your categories? And then obviously what’s going on with commodities is not lost on retailers either there’s still kind of a long way to go to get back to gross margin targets, but still more benign oil, pulp, etc. And then, I’m sure your share is not quite where you want it to be in some categories, where it’s eroded tissue, diapers, wipes, etc. So question just around promotional environment, how you see this playing out in your categories, given the recessionary backdrop and more benign commodity cost environment, and then may maybe what you’ve embedded in your outlook? And that’ll do it for me. Thanks guys.

Okay, let me summarize that. First, I want to address our market share, which was slightly lower than we would like in Q4, but I believe we are on the right path. The decline was mainly in diapers due to a significant event and a private label issue that impacted our market share this quarter. Over the entire year, we performed well in five out of eight categories, but we faced challenges in the remaining five in Q4, which is why I said share softened during that time. I'm optimistic about our plans for this year and confident in our commercial activities in North America and most international markets, where we have some specific initiatives underway. Regarding the pricing conditions, the promotional landscape is currently competitive but generally favorable, especially considering the broader pricing strategies from manufacturers in various categories. Promotion frequency has normalized in both tissue and personal care, although the depth of promotions is lighter than historical levels, likely due to the cost environment. From a consumer perspective, while my comments about demand elasticity and the essential nature of our products hold true, I perceive that consumers are feeling financial pressure. We're engaging with our top customers to understand this better, and we recognize the challenges consumers are facing financially. Thus, we aim to provide strong value in our offerings. Our goal is to lead in our categories, and we aren't focused solely on a niche premium approach; rather, we aim to provide a wide range of products that support our consumers effectively. Moving forward, we have implemented significant pricing strategies and will manage our promotions carefully to ensure we navigate these conditions appropriately. I'm not sure if that fully addresses your concerns, but I hope it helps clarify our position.

I think that helps. But just to kind of tie that in with, with your intentions on the advertising and marketing, is it fair to say that should the promotional environment pick up because of a weaker consumer potentially from your position, trade down in your categories that you, it’s not optimal, but you kind of view that a hundred basis points in advertising and marketing. If you have to reallocate that to trade promotion as the year progresses, then you’ll cross that bridge when you get there. Is that a fair way to think about it?

Yes, I’ll say we’ll address that issue when it arises. Personally, I'm not a supporter of driving the business primarily through promotions. While we can manage it effectively and understand our return on investments in trade promotions as well as advertising, I prefer the returns on advertising. I believe it’s better for the long-term health of the brand. Our customers expect us to focus on delivering value for their shoppers. They aren't particularly pleased with recent price increases, but they want us to develop commercial strategies that can grow the category over time. They are enthusiastic about our innovations and the commercial strategies we are introducing this year, which is a significant reason for increasing our investment in advertising.

Got it. Very good guys. Thanks for all the time. Good luck.

Okay.

Thank you.

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