Kimberly-Clark Corp (KMB) — Q2 2023 Earnings Call Transcript

Welcome, everyone, to our second quarter 2023 earnings conference call. Before we begin, please note today's presentation will include forward-looking statements. Our results may vary materially from those expressed or implied in our forward-looking statements and you should not place undue reliance on any forward-looking statements. Please refer to our SEC filings for a list of factors that could cause our actual results to deviate materially from our expectations. Our remarks today refer to adjusted results, which exclude certain items described in our news release. We use non-GAAP financial measures to help investors understand our ongoing business performance. Please consult our press release for a discussion of our non-GAAP financial measures and reconciliations to comparable GAAP financial measures. We have published supplemental material, which can be found in the Investor Relations section of our website. Participating in today's call are Chairman and CEO, Michael Hsu; and our Chief Financial Officer, Nelson Urdaneta. Mike will start the discussion with our strategic priorities and provide an overview of our performance for the quarter. Nelson will provide a detailed discussion on our Q1 results and our outlook before we open the floor for Q&A. With that, I turn the call over to Mike.

Thank you, Christina. We delivered another solid quarter with 5% organic growth while cycling 9% growth in the year-ago quarter. Organic sales were up across all segments with personal care and consumer tissue each up 4% and professional at 13%. Our growth strategy is working and our performance in the quarter reflects strong execution by our teams around the world. We continue to make strong progress in margin recovery. Adjusted gross margin was up 380 basis points and fueled a 17% increase in adjusted operating profit and a 23% increase in adjusted earnings per share. Given the strength of our first half, we're raising our full year 2023 outlook to 3% to 5% organic growth and 10% to 14% adjusted EPS growth. Our categories remain healthy. In North America, category sales were up 8%. And we continue to see robust growth in key developed markets including the UK and South Korea, which delivered double-digit and mid-single-digit increases, respectively. While category growth across the NEID has been more variable, we continue to see double-digit increases in Latin America. This growth reflects the essential nature of our categories. As category leaders, we've remained focused on serving all our consumers and recognize that many are facing economic challenges. With our broad portfolio, offering value to premium options, we're able to meet consumers where they need us. And we are well positioned with brands like Scott and Huggies Snug & Dry to serve the value-oriented consumer. Across markets, we're strengthening our price tag offering. And that means enhancing large count packs and big box channels, and making entry prices more affordable in small format channels. More importantly, we're accelerating innovation and cascading technology through our product offerings to ensure we're delivering a superior value proposition to consumers. Growing market share continues to be a top priority. In the quarter, year-over-year market share performance was soft, reflecting the relatively early actions we took to mitigate inflation. In the last six months, price gaps have begun to normalize and we are encouraged to see sequential improvement in market share in key cohorts including North America, where we've seen improvement in five of eight categories. Volume trends have improved, and we expect that to continue as we cycle inflationary measures and execute our strategy and commercial programs. Our enhanced commercial capabilities are enabling more real-time decision-making to drive sales, optimize brand investment, and balance value and volume. Furthermore, we expect increased brand investment and improved supply fulfillment to strengthen our market share performance over the balance of the year. Our commercial programs and innovation are core to our strategy to elevate and expand our categories. We're pleased with our launches in the first half and enthusiastic about our second half plans. Here are a few highlights. Huggies debuted its newest Baby Butts campaign this summer, celebrating Huggies’ unique curved design, which provides greater comfort and protection for babies on the move. Early results show excellent consumer engagement across our marketing channels. In China, we're raising the bar on skin health through a proprietary design that whisks away the baby's mess. Moving the mess away quickly from the baby's skin is key to reducing diaper rash. We believe this kind of innovation will further differentiate us from the competition and is the reason Huggies continues to expand its market leadership in China. Lastly, our Kotex Intimus She Can campaign in Latin America continues to resonate. We were recently recognized with a prestigious Cannes Lion award for this initiative reducing period stigma as part of menstrual education. In China, Kotex introduced Overnight, an overnight pad with a proprietary design that prevents leakage with instant absorb technology. Overall around the world, we are seeing growth driven by the overnight segment. This is a great example of superior product performance, coupled with effective brand strategy and communications to drive share gains and strong brand equity. Now I'd like to briefly address the impairment charges to intangible assets we recognized this quarter. We purchased Softex Indonesia to expand our presence in one of the world's fastest-growing personal care markets. Indonesia ranks among the top three markets for new births and we expect continued economic development will create more demand for our products over time. As the second largest diaper player in Indonesia, representing over a quarter of the market, Softex has built strong equity with local consumers. The impairment charges we took this quarter, which Nelson will discuss shortly, reflect our updated projections for the business. We have enhanced the team and taken actions to improve the business processes and our go-to-market approach. Indonesia remains an exciting growth market for Kimberly-Clark, and we're committed to this business for the long term. Now as we enter the back half, we expect continued progress in our journey to restore and eventually expand our margins. We're excited about our innovation and commercial plans and will invest more and more brands to improve our market share performance and growth trajectory. This is how we will elevate and expand our categories to deliver balanced and sustainable growth. Now I'll turn it over to Nelson for more details on the second quarter.

Thanks, Mike. Before I get into second quarter results, let me take a moment to discuss the divestiture of our Brazil tissue business and the impairment of intangible assets this quarter. We closed the sale of our Brazil tissue business in June, which enables us to focus even more on growth in personal care. As a result of this transaction, we recorded a pretax gain of $74 million and $30 million of related expenses, both of which are excluded from our adjusted results this quarter. I want to thank the many KC-iers who worked hard to complete this transaction. In addition, we conducted strategic reviews, forecasting, and integration assessments as part of our business planning cycle. Based on updated financial projections, a pretax non-cash impairment charge of $658 million was recorded, primarily related to intangible assets linked to the Softex acquisition. The charges reflect revised projections for certain brands due to modified consumer shopping behavior, post-COVID-19, inflationary pressures, and increased competitive activity in the region. We are confident in the prospects of the personal care market in Indonesia, and we are committed to continue investing in this business. Let me now turn to our second quarter results. Net sales were $5.1 billion, up 1% year-over-year; organic sales increased 5%. On a two-year basis, organic sales growth was strong across all three segments, with approximately 7% average growth for the company. Effective revenue growth management delivered favorable price realization and mix benefits, while volume trends continue to improve sequentially. Net sales in the quarter were impacted by approximately 400 basis points of currency headwinds. Turning to our segments. Personal care, representing approximately half of the company's revenue, grew 4% organically, led by mid-teens growth in feminine care and mid-single-digit growth in adult care. Infant care delivered broad-based growth in the quarter with a majority of regions growing mid-single digits. Operating profit for this segment improved 1%. Organic growth in consumer tissue was 4%, led by a 7% growth in North America, where volumes have turned positive, up low single digits in the quarter driven by Viva and Cottonelle. Operating profit for the segment was up 12%. Finally, our KC Professional business boasted a 13% organic growth; all geographies grew and notably, volumes turned positive in North America after six quarters of decline. Our focus on key commercial sectors, effective digital engagement, and innovations in sustainability are fueling the momentum in KC Professional. Favorable product mix and cost savings drove significant operating profit improvement in the quarter. Earnings for the rest of the D&E, second quarter adjusted gross margin increased 380 basis points to 34%. Revenue growth management in addition to FORCE savings of approximately $80 million more than offset cost inflation and currency headwinds. The cost environment remains mixed. Although energy prices have moderated in some markets, they remain elevated in others. Labor costs are structurally higher now due to cost of living adjustments and a tight job market in certain key geographies. In addition, auto manufacturing costs, which cover labor, were $85 million higher this quarter in line with our expectations. Between the lines spending on an adjusted basis was 19.8% of net sales, up 190 basis points versus the year-ago period. Driven by continued investments behind our brands and our capabilities as well as the impact from inflation on our cost base. Adjusted operating profit for the quarter increased 17%, and operating margin improved by 190 basis points to 14.2%. Foreign currency was a 16 percentage point headwind on operating profit in the quarter of which five points were due to the translation of earnings from our non-US operations. The balance was largely from transactional impacts. We have made good progress on our margin recovery over the last few quarters, and we remain committed to restoring them to pre-pandemic levels and expanding them over time. To achieve this, we are increasing our focus on productivity by building a long-term pipeline of opportunities that can generate significant end-to-end efficiencies. Lastly, the adjusted effective tax rate for the quarter was 20.5%, compared to 22% in the year-ago period. Strong overall performance, along with a lower tax rate resulted in adjusted earnings increasing by 23% to $1.65 per share. With the first half of the year, we generated $1.4 billion in cash flow from operations. Capital spending was $389 million, compared to $470 million last year. Year-to-date, we returned $850 million to shareholders through dividends and share repurchases. Now let me say a few words about our outlook. With our continued momentum this quarter, we are raising our full year guidance for organic growth of 3% to 5% and adjusted EPS growth of 10% to 14%. As a reminder, our previous guidance was 2% to 4% organic growth and 6% to 10% adjusted EPS growth. The Brazil divestiture, which was not reflected in our previous outlook, is expected to impact reported sales growth by approximately 100 basis points. We continue to expect currency to impact full year top-line growth by approximately 200 basis points. Based on the latest estimates for the year, we now expect input costs to be a headwind of approximately $100 million, an improvement versus the midpoint of our prior outlook of $100 million to $200 million. In addition, we continue to project approximately $200 million from higher wages and other manufacturing costs. Continued progress in gross margin recovery puts us in a great position to advance our commercial programs. We expect advertising spend to increase by approximately 100 basis points for the full year. This brings us to a projected operating profit growth in the low double-digit range, and an operating margin increase of approximately 150 basis points at the midpoint of our guidance range. We remain optimistic about the future and our ability to create long-term value for our stakeholders. We are also very proud of how our teams continue to execute our exciting growth agenda across the globe. With that, we will open the floor to questions.

Good morning. Hey, I wanted to just ask a bit about divisional margins. One thing that jumped out to me in the quarter was actually the margins in consumer tissue decelerated sequentially, they were down sequentially. And then also were up less than on a year-over-year basis. So was just curious kind of what's driving that, right? As you mentioned, there was some better volume performance in North America, the pricing is coming through, and costs are easing. So just some conversation around consumer tissue margins and the path to recovery would be really helpful. Thanks.

Yes, absolutely. So a few things. I mean, we don't speak about gross margin. But just to give you a context, Lauren, year-over-year, we did have a meaningful gain in gross margins on the segment, over 200 basis points. On a quarter-over-quarter basis, you're always going to see a few put and takes depending on mix and elements that flow through. But net-net, I mean, we are seeing an upward trend, so I wouldn't get too hung up on the overall movement quarter-to-quarter for the segment. Because overall, we are seeing an upward trend and recovery on the margins.

Okay, crystal, yes, okay, fine. Can I read into that though, when you think about reinvestment in the business and in other particular areas? I know you've talked a lot about innovation and potential for elevate and expand to apply in tissue as well as some of that exceeding these investments, or is it really just a matter of timing and mix?

Yes, it's a few things. I mean, one, obviously, we in North America have been doing the transition to the new artwork, and some of the upgrades that we're doing in Cottonelle. So we're a part of the thing has been, our transition on shelf is taking a little bit longer than what we had planned. So that's playing a little bit in the mix. But overall, I mean, that's progressing. And in terms of the elevate, we're also having initiatives in the UK in Andrex where we're doing some upgrades on the product line. And that's coming through. So that's progressing on that end. But Mike, I don't know if you want to add anything else on that end?

Yes, Lauren. Yes, I mean, I think when we talk about elevating, that holds for all our businesses around the world, and certainly consumer tissue, personal care, professional. We're happy to invest in all those. And it's paying out as Nelson just mentioned, in the UK, organic growth was up double digits, share continues to be strong and robust on Andrex. And part of that is because along with some pricing, we have upgraded the quality over the last couple of years. And so we feel good about that, where we stand there. And really proud if you look at year-on-year, I think our between the lines investment we mentioned was up about 190 basis points over the prior year. And that reflects our commitment to the brands and our belief that we got great commercial programming to invest behind.

Okay, great, because the genesis of I guess the question also is actually like one topic that we've been getting a lot of questions of late is around pricing pressure in consumer tissues, some of the discussion, particularly in Europe and the UK from retailers pushing back on pricing, or looking to roll back in consumer tissue. And we feel that a lot of questions about, a, if that would be an issue for Kimberly-Clark and b, in specific to Europe and the risk of that dynamic materializing in the US. So just maybe you can add perspective there as well, I think you've said a lot in terms of reinvestment and share momentum, but any perspective on pressure to quote, give back pricing in that category in the US and Europe would be helpful.

Yes, I’d say overall, Lauren, pricing initiatives, our net revenue management initiatives are on track, generally, across our business, personal care, professional, and consumer tissue. We're cognizant of the same discussions and similar pressure, and we will see maybe a little bit more promotional activity than we've seen in the past. However, thus far, it is not showing up in the results or dramatically impacting our outcomes. For the quarter, we had a very solid quarter across Western Europe. Demand was up about double digits; our organic was up about double digits, and volume is hanging in there pretty well. So we feel good about where we are, but also recognize that yes, it's going to be a competitive environment. And we have to be prepared for that. The great thing is as you've heard us talk about, we've invested in enhancing our revenue growth management analytic capabilities. And so we feel like we'll be able to make the right investments at the right time. That will be wise and not just overreact to things.

Hey, good morning, guys. I do would like to understand a little bit better. I think that you call between the line expanding the SG&A line which you do not break out. So if you can explain to us how much is this labor inflation versus more kind of like proactively investing in enhancing the products and the capabilities? And related to that and follow up to Lauren's question. You just did a strategic review and essentially exited Brazil, low down Indonesia. What is if you step back the main difference between Kimberly-Clark and Procter is, is that this international tissue business? Could you explain the role of the internet international tissue business and whether the margin profile is materially lower to the consumer tissue in the US. Thank you very much.

Yes, maybe that's... I do want to start with between the lines and how you're just so between the lines are a big bucket for us. So it includes both the advertising and as you point out some of our general administrative costs. And so maybe Nelson can comment?

Sure. So yes, to give you a sense, I mean, of the increase that we're seeing in between the lines, about half of that would be on support behind the brands, the advertising and promotional activities. And it's largely advertising because of all the products that we've been not just launching, but upgrading, and some of the campaigns that are underway. The other half really relates to a couple of things. One, we've been increasing investments behind certain capabilities, and that continues revenue growth management, our digital agenda, which includes upgrades that we're doing to some of our systems, including the migration to S4 HANA, and some of the other capabilities that we're laying on a multiyear basis across the enterprise. And then last but not least, is labor inflation, which, again, hits on the overheads and some of the compensation increases but really impacted us in April, starting in the second quarter, so that because of the timing of our merit increase.

Okay, and then maybe on the consumer tissue, or maybe it's a portfolio question, Javier, I'd say, hey, we love all our businesses and the segments that we operate in. Certainly as we talk about elevate and expand, we're elevating and expanding all those categories. And so we remain committed to that. That said, we are cognizant that performance of some businesses, especially in consumer tissue is a little bit more variable. And so I think we've been on the record in the past; our consumer tissue in North America is a little bit more profitable than some of our international businesses. But we have very strong, profitable international businesses as well. So the decision around exiting Brazil tissue, I think, is specific to the conditions in Brazil. What I've said in the past around portfolio is, hey, we're going to look to add businesses with a greater focus on personal care, I would say, internationally, where there's a lot of growth opportunity. Indonesia is one great example where while we just reduced our medium-term expectations for that business with the impairment, we still see a very long and bright future in that country for us. We remain committed to Indonesia for the long term because at some point, it's going to be in the top three of the largest type of markets in the world, and it's probably around the corner for us. So we remain excited about that. But that said, there are other markets that are more structurally challenged. And so Brazil tissue was one of those. And that was driven by, we would say, some policies that encouraged capital investment into tissue making. And so there was a lot of capacity coming in, and we felt like the Neve business and brand would have been in better hands with Suzano than with us. So I think our, we're looking at, we love all the sectors that we're in, but we're going to make decisions based on local market conditions and make sure our brands can be competitive for the long term.

So then, as a follow-up, this is very interesting, but as a follow-up, so we think that in countries where you have very large personal care businesses and some sort of ancillary tissue businesses like Brazil, for example, that you may continue divesting things like that, say it China or whatever, where you do have enough critical mass to run that business independently and do not need to have attached a low margin tissue business.

Yes, I guess it's always possible, Javier. I wouldn't overread into it. I mean, we're comfortable with our businesses and how they're performing where they are. But that said, I think if I would probably say we're going to stay close to local market conditions and make sure it's something I've talked about internally with our management, which is businesses need to perform for us. So while we love all our businesses, they do need to perform and performance is part of the game for us. And so that's probably the bigger barometer for us.

Hey, good morning, everyone. Can you perhaps just frame your expectations for price mix versus volumes for the full year or specifically for the back half of the year? And perhaps just related to that how you might be thinking about the spending to reaccelerate volumes. Mike, I heard you say promotions might take up a little bit. I don't know if that was a comment on any specific region. But some context on how you see volumes trending from here. And the types of actions that you might be taking to drive a little bit better volume performance would be helpful.

Okay, Chris, let me start and Nelson maybe give me some more specifics around the volume versus price. But hey, we're pleased with our volume trends. Certainly just to refresh your memory, Chris, we moved relatively early on pricing; we moved pretty quickly. So a lot of our pricing went in last year, maybe in the front half of the year and we should start to cycle the price element of the P&L as we approach the back half. And so what we would expect to see our volume trends improve, and we are encouraged because we have seen sequential volume improvement overall in the business, and specifically by sector, kind of as we've gone through the year, and so we expect to continue to see that. That said, as I said on the call, our market shares are a little soft; we were up or even in just below 40% of our cohorts, our market category combinations, which is a little less than we would prefer, right? We want to be over 50%. Two of the big drivers behind that, Chris, I'd say a couple of things. One is we were quick on pricing. And so in the parlance of one of our general managers, we're seeing competition, quote, unquote, scrape us a little bit and that means kind of lagging the price to take advantage perhaps of the share momentum side. And so that's one aspect. The other aspect is we are cycling a host of one-offs and supply challenges, which is also relevant to Lauren's question when she asked about tissue margin, there's a lot of noise in our numbers just because we're now lapping the third order effects of the Texas storm, and there's still supply challenges, etc. However, with that said, there's a bunch of one-off things related to both supply and the cycling that affect the business, and to be true, we definitely have some competitive issues that are, I would say, normal across our business. And we'd like to see performance improve in a few markets. That's why we want to continue to invest. We're committed to investing more behind our brands; we feel great about the innovation that we have coming generally globally, and we feel great about our commercial programs, and recognize that there's better opportunities for us to be felt that our investment to support the brands. We are, Chris, I'd say we're not really focused on driving promotion to earn back that share. Maybe we would respond certainly to competitive conditions. However, I'm much more focused on earning for the long term. That means kind of driving consumers to encourage them to try our products and then having them stay there because they liked the quality of our products. So that's really our focus. Nelson, you want to—

Yes, and then to add some flavor, Chris, on the outlook, and what we've seen, in terms of volume, from a perspective, I mean, we've seen continued improvement in our volume trends. If you step back Q4 of last year, volumes were down 7%, Q1 of this year, volumes were down 5%. Q2, the quarter we just closed, volumes were down 3%. Many of the actions that we have to take to deal with the inflation go back to the first half of last year, the majority of them. As we step into the third quarter of the year and the fourth quarter, we will begin lapping some of them, and what we would expect at this point is we're projecting is the volumes to continue to improve on a sequential basis as the year progresses. Overall revenue growth management actions should decrease in terms of the impact they're having on the top line growth. We've already seen that from a sequential quarter, Q1 to Q2, that came down. And then mix, we've been doing about a point; I would expect that to be the same as we progress.

That's really helpful perspective. Just one follow-up from an input inflation perspective. Can you talk about what specifically improved relative to your prior expectations? And if you have any comments on phasing, clearly, we're getting into it seems a bit deflationary into the back half—Is that Q3 and Q4? Is that all head to Q4? Or any context on the phasing would also be helpful. So thanks so much.

Yes, so just to give you context, I mean on, we, the latest guidance that we have on costs on input cost inflation is that it would be around $100 million. So that's about $50 million better than what we were forecasting back in April, when we last talked. Through the first half, we are at about $190 million negative. So it's an impact. So evidently, what's going to happen is we're seeing about a $90 million give or take benefit, as we go into the balance of the year. We will see some of that coming in Q3. And then the balance, obviously, in Q4. What we're seeing is, versus our prior outlook, the overall fiber complex has gotten a little bit better, and distribution costs have gotten a little bit better. I will, however, just highlight that on a year-over-year basis, we're still seeing pulp and the overall fiber complex inflationary for us. Even though if you take it as a whole, the latest outlooks have fiber being year-on-year down in the mid-teens if you aggregate everything. So net-net that's come down distribution is about flat now year-over-year for us. And then the only big cost bucket that's down significantly continues to be the resin complex, which again, that's down overall for the quarter by 50%. So we're projecting about 40% down.

Yes, I mean, Chris, the headline for me is the cost environment for us has stabilized, and that's really good news for us after cycling, I mean 2021 and 2022, where we had record inflation for us while it's still modestly inflationary, we can operate very well in a stable cost environment. So we're seeing both input costs stabilize, and also the supply environment while we still have some sporadic outages in supply; it's much improved. So we're bullish on the road ahead for us on the cost environment.

Hey, good morning. So, I just wanted to return to share for a bit. Your comments seemed more glass half-full here in terms of sequential improvement in share. However, if we look specifically at US scanner data, some fairly pronounced year-over-year share losses in Q2 in consumer tissue and diapers. So we're just hoping you can put the US scanner data in context. And then second, plans to drive improved share trends going forward, it sounds like perhaps there might be a bit more promotion, but not necessarily a big focus, innovation ramps up; is that sort of the plans to drive improved share from here? Or how do you think about the share trends in the back half of the year, specifically in the US?

Yes, Dara, yes, definitely, I believe the shares will improve. We feel very confident in our programming and our innovation that's coming. Year-to-date, we feel really good about what that's done in the marketplace. I would say the recent softness is, as I mentioned earlier, Dara, primarily related to the relatively faster pace of our price advances last year. So that kind of really is the primary effect. But I would also say that in North America specifically, we are facing a fairly tough comp, just to refresh your memory, I think personal care, in personal care, we were up 14% in the year-ago quarter, and across both personal care and tissue market shares were a bit elevated, that was an artifact. We were out of, our supply was tight in the first and second quarter of 2021, and thus we had the kind of restock impact and the kind of reselling impact in the year-ago quarter. So we did see our shares were higher in the year-ago quarter higher than they historically were. And I think that was related to the, I would say coming back into business in Q2 of 2022. But that said, we're not satisfied with our share performance. We definitely want to be up or even in over half. And so we are committed; we feel very good about our programming, especially in North America. I mentioned our Baby Butts advertising in our product improvements in North America on Huggies, and so we feel good about where we are, and we're going to continue to invest in the brands and make sure that we continue to touch base with consumers and encourage them to try our products and return.

Okay, great. And then on the innovation front, you sound excited there; any thoughts on if the contribution to sales growth should pick up significantly on innovation as we look out over the next couple of years versus the last couple of years? Any conceptual thoughts there will be helpful.

Well, just to point out, Dara, I think I don't have the numbers for this year yet. Last year, our contribution to sales from innovation was probably among the highest in the industry. We do track, we do have a couple internal metrics around net incrementality and then percent of sales related to the innovation. We felt very strong last year. And so we felt good about that. That said, some of the things that I just showed on the slides in our presentation this morning, we feel good about really good about the technology, and the product innovation on the premium side that we're having in diapers, especially in China. In China, organic was up nearly double digits against the backdrop where the category is declining double digits. And we’ve doubled our super premium mix over the last year or so. And then as I mentioned on the slides, we've launched two really exciting products over Cottonelle; six funnel that features really a two zone liner, that one that handles the urine and one that handles the solid waste, right, as I like to say poop. And then we have something that we're calling oxygen bar pro, which is really, really high breathability diaper, which moms in China really love, and so we feel good about that. And we're bringing technologies like those around the world.

Hi, how are you? Mike, I wanted to just kind of stick on the innovation topic. I mean, I think the messaging for me has been very clear in terms of how active you’re going to be later this year, probably even going into 2024. But one of the common pieces of feedback I get from the retail community is that everyone is really going to be very, very active innovation, because there were a lot of products that were not launched during the COVID timeframe. So I just wanted to kind of get your reaction to that. And thoughts on that; could we potentially see maybe some unexpected levels of spending just because you’re going to have to compete with so many other active innovation pipelines, and shelf space is finite? Thanks.

Yes, I mean, Nik, we feel good about our investment levels. I mean, they have ramped up significantly over the last five years. Again, as I just mentioned, we're up about 190 basis points year-to-date between the lines of which Nelson, you said about half is on the advertising side. You really—the model is we're investing in the advertising primarily to support the innovation. We feel very good about our programming. As I've said on prior calls, and Alison, our Chief Growth Officer has said at CAGNY presentations; what we're really focused on kind of big unmet needs, or internally, we'll call those demand spaces where we feel like, hey, there are important things that consumers are looking for out of the category in a category like diapers or adult care that may be around absorption or protection. I mentioned skin health earlier, which is something that hasn't been a big part of this category, where we think is a very important part of the category, particularly as it relates to solid waste. And then comfort, fit, breathability are all big factors. Those are kind of big areas for us to get better in where I feel like the categories can do a much better job over time. We shared a lot of our thinking around innovation with our customers over the long term and they remain very excited. We're receiving very strong customer support for innovation. So I think your point, yes, is there going to be more innovation from other manufacturers and across the category? Yes. But our focus is on driving the big innovations that we have, and making sure that we invest materially behind those to make sure that we can drive the conversion in the minds of the consumer.

Good morning. Thank you for the question. Just as a follow-up to Chris' question, I wanted to ask on how you're viewing the health of the consumer. You've mentioned a bit of bifurcation this year between the low and higher-income consumers on their ability to absorb price. And then the latest scanner data from this morning implies, some volumes are continuing to decelerate while you’re getting on price. So as a result, I was wondering if we should expect softer volumes to continue in Q3, offset by better pricing, and just how you're seeing these trends play out where the second half of the year between Q3 and Q4?

Yes, Anna, I would say consumer demand remains resilient. Our categories thus far remain healthy and demand has been robust. Just to pick up a few numbers: I mean, North American consumer across our categories is not just the categories of high single digit. Western Europe, which is a big developed market for us, is up teens in Latin America, double digits; KC Professional globally was up double digits. I would say the category overall demand remains pretty robust. Are we aware of concerns around the corner regarding related to the economy and economic pressures? For sure. We talk about that all the time, thus far it has not materialized. In the second quarter, the elasticity impact has remained somewhat muted. Just to give you an example, on diapers in the category for the quarter, the price was up six, and volume was up one; so that would probably indicate the elasticity impact has not been as we typically model. I'd say on that side it does reflect the essential nature of our categories. Our volume trends, as we kind of cycle our pricing from a year ago, we expect our volume trends to continue to improve and we think should improve in the back half, in addition, driven by the commercial programming innovation that we've been talking about. Overall, I’d say healthy, not seeing a whole lot of broad scale down tearing. We do see in pockets there is continued demand for premium and big development markets like the US, like China; even in Brazil and Argentina, we're seeing actually the premium tiers start to grow and the value tiers contract a little bit. There are some pockets of down tearing; we're seeing that in Southeast Asia and some markets in Latin America. But we’re in to manage through that. We’re going to continue to sharpen our value propositions. We’re very interested in serving all consumers as category leaders. We feel like we need to serve both the consumers that are looking for premium products and also the ones on the value side as well. So we have a broad portfolio that spans value to premium. And we're doing things like adjusting counts to make sure our large packs remain competitive and affordable. We're sharpening our entry price points and small format stores to make sure that consumers can afford to be in the category. And then probably most importantly in my mind is we've talked a lot about innovation. We are doing a better job of accelerating or cascading that innovation through our tiers from premium to value. That’s kind of how we will manage through it.

Thank you, that's very helpful. And you also talked a bit about promotion here; I know you're not necessarily interested in getting back to pre-COVID levels of promotion. Investing a little bit more in marketing with your current levels of marketing spend versus peers, potentially spending more, do you feel that your marketing spends here is efficient versus others in the industry?

Well, I'll answer the second part first, Anna. We are, I would say, highly efficient on the marketing side. I mean, we've invested quite a bit over the last several years around revenue management analytics, marketing ROI analytics, and so we maybe to a fault, we're perhaps overly analytical in terms of how we invest. But in general, I feel very good about the returns we're getting, which is why it gives us the confidence to invest more. We recognize we're not spending fully at the levels of some of our competitors, but we've made significant progress over the last few years. I think we're up several hundred, or a few hundred basis points in advertising spending over the last five years. We're pleased with that progress, but not satisfied. Part of the whole reason why we're very focused on being disciplined about how we drive both revenue, volume, mix, and innovation is that we feel like it's important to continue to invest behind these brands. Because that's the way that we can drive category growth and serve our consumers better.

And, Anna, another point on the investment: keep in mind that we have three segments, and we don't invest at the same level in each segment. So what we disclose is a total number for the company. So if you take as an example, KC Professional, the level of investment behind KC Professional is not going to be anywhere near what we're doing on personal care. If you look at consumer tissue, it will vary by market. So we look at that very closely, and as Mike said, we are very focused on return on investment and being efficient on those dollars that we spend per segment.

Good morning. How are you? Just first on the pricing. I have a question for both you Mike and also for clarification for Nelson. So on the pricing side, you're getting obviously strong realizations, but lapping the pricing that you mentioned, like you're ahead of your competitors. What are you embedding into the second half? Just to be clear, it seems like the guide, the new guide at midpoint implies about 3% organic in the second half? So how much do you expect—and it sounds as if you're expecting an inflection in volumes at some point? I don't; I mean, you said sequentially bad, of course, you had negative in the quarter. Just to clarify, what you are expecting for the third quarter and potentially the fourth. And then now so on the gross margin side, the $9 million benefit from prior outlook. My math is like about 45 basis points benefit for the year, your tax benefit from the impairment is another I think $0.05. So how should we be thinking of your EPS guidance raised? These 45 basis points benefits would go in flow through EBIT it seems I think you're flowing the whole portion. So in other words, you're not embedding additional promo pressure or marketing pressure in your Outlook. Thank you.

Yes, Andrea. Yes, thanks for the question. I don't know if how well I can answer it all because we I don't think we outlook kind of the components of price mix volume. However, I would say, am I expecting an inflection on volume? For sure. At some point, I don't know when that's going to be, but at some point, I want volumes to be positive. Just to give you refresh your memory pre-COVID, I think for the three years leading up to our— a lot of our revenue growth was primarily volume-driven. I do expect us—and this is why we’re investing in innovation and commercial programs for the business to grow healthy long term; we need the volumes to be up. Yes, for sure, I’m expecting an inflection point.

During 2023, I’m sorry just to make sure.

Again, I said our volume trends are improving. I can't give you the inflection point. I'm not going to forecast or give guidance on an inflection point. However, I would point out the majority of our pricing initiatives were more front-end loaded or front half loaded last year, and so we are starting to cycle those. I would expect the contribution of revenue from price to diminish and hopefully the contribution to revenue from volume and mix to continue to improve.

So, I would point you, Andrea, to the following: we've seen sequentially in the last couple of quarters an improvement of about 200 basis points in volume. So we went from down seven to down five to down three. Now, as Mike said, we're not going to— we don't forecast or disclose the next quarter and break down. However, clearly, you're seeing that the volumes have been improving sequentially. That has to do with one with the pricing but also with some of the innovation and the products we have been putting out in the marketplace and the increased investments behind the brands. Yes, we are expecting volumes to improve continuously; that's our expectation. We are expecting revenue growth management realization to be less of a driver; that has played out over the last few quarters. As I expressed earlier, that's kind of the way to think about it as the year progresses, and yes, we will get back to positive volumes. That's the plan on that end. In terms of the operating profit, again, I'll try to address the question. Your point around what are we flowing? How is it going? We've got a few things playing out in terms of operating profit. One, we have a slightly better performance in the first half, and we're flowing part of that flow because we know that's coming through the actuals. But also, we’re having a better outlook on costs, and that's also equating into better performance on the outlook for EBIT, which I believe that's a question you had. For EPS, there are a few puts and takes in the quarter. Yes, the tax rate was a bit of a driver, but we're still expecting the tax rate for the year to be in the 23% to 25%. So think of that more as a timing. We're not moving away from the guidance in terms of tax. Then between the lines, there's really not much of a bigger driver apart from that, that I would highlight at this point.

Hey, good morning, folks. Congrats on a solid first half of the year. A couple of comments so far or answers to the questions that have been posed to around market share have focused on competitors lagging your price increases. As you noted, those price increases have been in place for pretty long now; it's not uncommon for competitors to lag pricing by a couple of months, but it's not uncommon to have them lag for a couple quarters and then follow. So I imagine your assumption, and our assumption should be that they're just not going to fall. If that's the case, do you accept these market share losses like—you just got to live with them? Or should we expect you to have to close those price gaps to try to regain that market share?

Yes, couple things, Jason. I think great point. The thing I’ll say is generally at this point, I would say we've seen list prices move, but when I say, quote unquote, scraping or let your word lagging, I’d say we have seen a little bit higher promotion in some markets, particularly in Latin America, in Brazil, for instance. We've seen continued promotional activity. So I think that has been what we've observed more and more commonly. The list prices had lagged for a period; at this point, I’d say a lot of the brands have had moved as well. Overall, I’d say the tactic is around the promotional side. As I've mentioned, Jason, we're going to be smart about it; it's not the way that we think is the valuable way to build the business in these categories. But we have invested in our GMK capability; we do know the analytics, and we can make wise investments around promotion. The bigger thing is, and I think to your point, yes, I'm not going to live with—we have to grow shares over the long term to sustain the business, just like we have to have volumes up. Market shares need to grow. That's why our goal is to be upper even in more than half or more. That's the goal. But that's also why you've heard us talk quite a bit about our innovation and commercial programs. It's why we spent a lot of time with consumers talking about them and spent a lot of time with our customers talking about them, and we feel good about where we are. I think you're certainly pointing to the one area that I feel like we really need to improve, and we're committed to doing that.

Thanks operator. Hey, good morning, guys. Hope you're doing well. So I guess I've kind of wanted to get some more color on what's embedded in the outlook from a gross margin perspective. I think previously, the expectation was 230 basis points; you reiterated your outlook for an increase in ad spending of 100 bps this morning. So is the expectation for 250 basis points now? The premise of the question is that, it just seems that that would imply that gross margin improvement would kind of taper off in the back half of the year; and just given what you're seeing in terms of cost pressures and productivity, that would seem somewhat conservative. So just, if you could help us understand the outlook for gross margin today and any phasing in the back half of the year, that would be helpful.

Yes, sure. Let me walk a little bit through the outlook and some of the components that we have. And as a reminder, Peter, what I stated at the last call was that our expectation was at least 230 basis points because it was a straight math. Obviously, we've reached a 34% gross margins in the second quarter; we're very pleased with the progress that has been made as we seek to recover back to the pre-COVID levels of 35% and then expand from there. So we've had two quarters of very strong gains in gross margin. Obviously, as we go into the back half of the year, I’d state two things. One, we do expect the half year-over-year gain in gross margins. We do expect that gross margins as a whole, gross operating profit should expand in the second half, but not at the pace that we saw in the first half. So you’re thinking about your numbers, that’s the way I would think about it. So we would exit the year definitely stronger. The implied number, yes, as you say, would be 250 on the gross margin. But again, that’s at least the way I would characterize that. Because obviously, we’ve been expanding ahead of that year-to-date. As you think about the balance of the year, I’d also like to highlight a few things on the outlook on costs: we haven't changed that the currency impact that we foresee. We only took down costs by about $50 million; we still expect for the full year to be around the $300 million to $400 million of inflation in currency. In the other costs, we still expect around $200 million. It’s been playing out in the first half right around the level we expected; so net-net, good progress on margins. We’re pleased with how that’s coming along. We expect to continue to make gains, but not at the same pace as what we did in the first half.

Yes, maybe, Peter, the outlook as Nelson just teed up really does reflect the strength of our first half and our confidence in our underlying plan. As I mentioned earlier, our categories thus far remain healthy. Demand has been robust. We've strong innovation and commercial lineup, and we feel great about investing more than that. The cost environment has been stable. While it's still a headwind, I’d say we're seeing glimpses of reversion. The cost environment for us has stabilized and that's really, really good news for us after cycling, I mean 2021 and 2022, where we had record inflation for us. While it's still modestly inflationary, we can operate very well in a stable cost environment. We’re bullish on the road ahead for us on the cost environment.

Okay, thank you all for joining us for the call today. We look forward to seeing you in Q3, at the end of Q3. Thank you.