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Kimberly-Clark (KMB) Earnings Report: Q1 2016 Conference Call Transcript

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The following Kimberly-Clark (KMB - Get Report) conference call took place on April 22, 2016, 10:00 AM ET. This is a transcript of that earnings call:

Company Participants

  • Paul Alexander; Kimberly-Clark; Investor Relations
  • Maria Henry; Kimberly-Clark; CFO
  • Tom Falk; Kimberly-Clark; Chairman & CEO

Other Participants

  • Lauren Lieberman; Barclays Capital; Analyst
  • Bill Schmitz; Deutsche Bank; Analyst
  • Ali Dibadj; Bernstein; Analyst
  • Stephen Powers; UBS; Analyst
  • Olivia Tong; BoA Merrill Lynch; Analyst
  • John Faucher; JPMorgan; Analyst
  • Erin Lash; Morningstar; Analyst
  • Jason English; Goldman Sachs; Analyst
  • Caroline Levy; CLSA Limited; Analyst
  • Javier Escalante; Consumer Edge Research; Analyst

MANAGEMENT DISCUSSION SECTION Operator: Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. (Operator Instructions) It is now my pleasure to introduce today's first presenter, Mr. Paul Alexander. Paul Alexander (Investor Relations): Thank you, Operator. Good morning, everyone. Welcome to Kimberly-Clark's first-quarter earnings conference call. Here with me today are Tom Falk, Chairman and CEO; Maria Henry, CFO; and Mike Azbell, our Controller. Here's the agenda for the call. Maria was will begin with a review of our first-quarter results. Tom will then provide his perspectives on our results and the outlook for the full year. We'll finish with Q&A. As usual, we have a presentation of today's materials in the investor section of our website. Now as a reminder, we will be making forward-looking statements today. Please see the risk factors section of our latest annual report on Form 10-K for a further discussion of forward-looking statements. We'll also be referring to adjusted results and outlook. Both exclude certain items described in this morning's news release. The news release has further information on these adjustments and reconciliations to comparable GAAP financial measures. And now I'll turn it over to Maria. Maria Henry (CFO): Thanks, Paul. Good morning, everyone. Thanks for joining the call. Let me start with the headlines for the quarter. Organic sales were up more than 2% mostly due to higher volumes. We achieved strong cost savings, margin improvements, and growth in adjusted earnings per share. And cash generation was healthy and we continued to allocate capital in shareholder friendly ways. Now let's cover the details, starting with sales. Our first quarter net sales were $4.5 billion; that's down 5% with a 7 point drag from currency rates. Organic sales rose more than 2% in the quarter. That was slightly below our 3% to 5% full-year target, and Tom's going to provide some more color on our top line in just a few minutes. On profitability, first-quarter adjusted gross margin was 36.6%, up 100 basis points year on year. Adjusted operating margin was 18.3%; that's up 90 basis points. In addition to this overall improvement, I'm encouraged that our margins were up in all three business segments. Our FORCE cost savings for the quarter were $95 million so we're off to a good start relative to our full-year target of at least $350 million. Our FORCE cost program continues to help us offset currency headwinds and fund growth investments on our brand. Our organization restructuring remains on track and generated $15 million of savings in the quarter. Commodities were a $30 million benefit mostly in oil based materials. Offsetting those benefits, the total earnings drag from currency this quarter was more than 20%. In addition to translation effects of about 7%, that figure includes substantial transaction effects in developing and emerging markets. Despite this headwind, our margins in the D&E markets were essentially even with year-ago levels, mostly from the benefit of price increases and cost savings. On the bottom line, first-quarter adjusted earnings per share were $1.53; that's up 8% year on year. A lower adjusted effective tax rate contributed about 6 points of that earnings growth. As we said in January, the quarterly tax rate could be more variable this year. This is the result of timing of benefits from tax planning initiatives. For the full year, we continue to expect the tax rate to be between 30.5% and 32.5%. Now let's turn to cash flow. Cash provided by operations in the first quarter was $553 million and in line with our expectations. On capital allocation, first-quarter dividend payments and share repurchases totaled nearly 0.5 billion. In February, we announced a 4.5% increase in our dividend, taking it to $3.68 on an annual basis. This was our 44th consecutive annual increase in the dividend helping us maintain our top tier payout in the CPG industry. We continue to expect that full-year dividends and share repurchases should total between $1.9 billion and $2.2 billion.


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Looking at the segment results, in personal care, organic sales rose more than 4%. That included 7% growth in developing and emerging markets. Overall personal care operating margins were 20.3%, up 60 basis points. The improvement was driven by organic sales growth, cost savings, and lower input costs.

In consumer tissue, organic sales were even with year ago as growth in North America was offset by declines in developed markets. Consumer tissue operating margins of 18.7% were strong and up 20 basis points. Our K-C Professional business grew organic sales 1%. That included 4% growth in both North America and developing and emerging markets. Lower sales of nonwovens to Halyard Health reduced the segment top line by about 2%. K-C Professional operating margins were 19.7%. That's up 280 basis points year on year and includes benefits from organic sales growth and cost savings. Before wrapping up, let me go ahead and recap. We delivered growth in organic sales and adjusted earnings per share along with significant cost savings and margin improvements, and we continued to allocate capital in shareholder friendly ways. I'll now turn the call over to Tom. Tom Falk (Chairman & CEO): Thanks, Maria, and good morning, everyone. Since Maria just reviewed the financial details of the quarter, I'll focus my comments on organic sales growth and our full-year earnings outlook. Then we'll open it up for your questions. So starting with the top line, as Maria mentioned, our organic sales increased more than 2% in the quarter. North America had a good start to the year with volumes up nicely in all three business segments. Internationally we continue to grow, although at a lower than normal rate this quarter. Let me review our top-line results in a bit more detail, and I'll start with our international business. In developing and emerging markets, organic sales increased 5%. Looking at some of our key growth markets, in Eastern Europe organic sales in diapers rose 25%. That's on top of a 55% growth rate in the year-ago period which included significant volume gains in Russia in advance of a price increase. In China, organic sales in diapers were up about 5% compared to a very strong growth rate of 35% last year. Our volume growth in China remains healthy although results were impacted by competitive promotion activity. We expect better organic growth for the full year on Huggies in China, particularly in the second half, and that reflects our plans for innovation, brand investment, city expansion, and improving category growth. In Brazil, organic sales in personal care fell about 5% compared to 20% growth in the base period. Volumes were impacted early in the quarter, particularly in diapers, by the price increases that we initiated in January. Category demand also continues to be down in Brazil. Nonetheless, our sales improved as the quarter progressed, and we expect better results across the balance of the year. Elsewhere in developing and emerging markets, our feminine care and adult care organic sales were both up double digits in the quarter, and baby wipes organic sales were up high-single digits. So we remain very optimistic about our developing and emerging markets businesses, and we continue to target high-single-digit organic sales growth for the full year. Stronger results in Brazil and China, along with more benefits from innovation launches and selling price increases should help us deliver higher growth compared to the first quarter. Moving to our developed markets business outside North America, organic sales were down slightly. We continue to generate good growth in South Korea, while market conditions were challenging in Western and central Europe. Turning to our North American consumer businesses, our teams there delivered another strong quarter with 4% volume growth and healthy market shares. Innovation, great marketing programs, and good retail execution continue to drive results across our portfolio. Adult care volumes increased double digits in the quarter with strength on both Poise and Depend. Baby wipes and childcare volumes each rose mid-single digits. Consumer tissue volumes improved 3% with growth in all categories led by Viva and Scott paper towels and Kleenex facial tissue. Overall, our brand positions are healthy in North America. Our first-quarter market shares improved or were even with prior-year levels in seven of the eight consumer products categories in which we compete. That includes diapers where Huggies shares were up more than 0.5 point year on year and up almost 2 points sequentially. Looking ahead, we have a number of near-term innovations launching in North America. That includes our best ever Pull-Ups training pants, upgrades on Huggies diapers and baby wipes, and new and improved Poise and Depend adult care products.


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Finally, in K-C Professional in North America, our organic sales were up 4% in the first quarter. Execution and volume growth was good in both washroom products and our higher margin wiper category.

Now moving on to our outlook for the year. We continue to target organic sales growth of 3% to 5% for 2016. Compared to the first quarter, we expect more benefits from targeted growth initiatives, product innovations, and improved net realized revenue. Our currency and commodity markets remain volatile. As we mentioned in this morning's news release, our current assumptions have improved somewhat compared to three months ago, and while this helps our US dollar results, it also means we're expecting less benefits from selling price increases this year. As we've said before, it's important to look at currencies, commodities, and selling prices together since they are all related. We're now planning that the net impact of these three factors will be a mid- to high-single-digit drag on our bottom-line growth this year, and that's slightly better than what we shared with you in January. If this turns out to be the case, we'll have added flexibility to invest more behind our top-line growth initiatives. So putting it all together, we continue to expect adjusted earnings per share in a range of $5.95 to $6.15. That represents 3% to 7% growth year on year, which we continue to believe is a good outcome in this environment. So in summary, we continue to execute our global business plan strategies. We expect to deliver on our financial commitments again this year, and we're optimistic about our prospects to continue to generate attractive long-term shareholder returns. So that wraps up our prepared remarks. Now we'll begin to take your questions. QUESTIONS & ANSWERS Operator: (Operator Instructions) Lauren Lieberman with Barclays. Lauren Lieberman (Analyst - Barclays Capital): Great. Thank you. Tom Falk (Chairman & CEO): Hello, Lauren. Lauren Lieberman (Analyst - Barclays Capital): Good morning. Just on D&E in personal care, you've been pretty clear on your view and optimism that it will get better from here. The comparisons weren't a surprise; that was known. What was it in the quarter that ended up being a negative surprise? You said it was early in the quarter. Is there anything in particular you can call out that took you by surprise? Tom Falk (Chairman & CEO): I wouldn't say surprise so much as it was a little bit tougher situation in a couple markets, Brazil in particular. The category volume for diapers and bath tissue is probably down about 4%, at least in the measured -- from Nielsen category. Value's pretty flat from pricing. You don't see category consumption go negative in markets in diapers and bath very often, so that was probably a bit unusual, reflects kind of the tougher economic conditions in Brazil. And I'd say so that was probably one that we'll be facing this year. On the other hand, we pushed hard on price in January. Some retailers pushed back so we had a little bit of a volume hit on that front. That picked up sequentially as the pricing went into the marketplace and so that gives us some confidence that through price and a little bit better volume in the back half of the year, we'll put a better result on the board in Brazil. China had more price competition in the quarter. We had a very strong fourth quarter with a big push on singles day and eCommerce. Had a strong January with some Chinese New Year stuff, and I think some of the other competitors spent a little bit more aggressively and we wanted to make sure we sustain our momentum. We met competitive pricing where we needed to to make sure we kept our volume growth going and had good double-digit volume growth in China. So I expect that to continue as well. And if you look going forward at China, price cut competition kind of did heat up in the second half of the year, so our comps get a little easier on that as we roll into the back half of this year. Lauren Lieberman (Analyst - Barclays Capital): Okay. Great. And on Brazil, I guess one would be -- are you assuming that this kind of negative volume growth persists through the year? Is that part of the forecast at this point? Tom Falk (Chairman & CEO): I would say we're still trying to figure out how much of it is household inventory destocking or am I just buying smaller count packs and is that part of it versus how much of it is if I shifted into the category, am I consuming less. So I'd say we're probably not modeling it to be as bad as it was in the first quarter, but we're not expecting a robust category growth story in Brazil this year.


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Okay. And then just finally overall on demand in emerging markets, I did think it was interesting that K-C Professional actually looked pretty solid and you hear sort of macro-wise, is it perhaps industrial production, things are getting better? Any view on the lag or relationship on KCP being a leading indicator for where consumer demand ultimately goes. Tom Falk (Chairman & CEO): I tell you, in North America, we had a strong quarter. We probably picked up some share. We had better execution, so the kind of 4%-ish growth that we saw in North America is probably ahead of category. Again, the shares aren't as robust and reliable as Nielsen. What we have seen, we'd say that we've picked up a little bit of share in North America. In developing and emerging markets, I think what you're seeing in addition to the underlying economic growth is a positive trend toward better workplace conditions. And so better access to having towels and tissue in the workplace, more awareness of need for safety gear and having the right gloves and glasses and ear protection, et cetera. And so I think that's a trend that will continue as more and more companies are really held to the same worker safety standards. Lauren Lieberman (Analyst - Barclays Capital): Okay. All right. Great. Thank you so much. Tom Falk (Chairman & CEO):

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Thanks, Lauren. Operator: Bill Schmitz with Deutsche Bank. Bill Schmitz (Analyst - Deutsche Bank): Hello, Tom. Good morning. Tom Falk (Chairman & CEO): Hello, Bill. Bill Schmitz (Analyst - Deutsche Bank): Hey, can you just talk about the pacing of the organic growth throughout the quarter, both for you guys and the category? I know it's still really early, but how's April sort of shaping up? Tom Falk (Chairman & CEO): Actually, I haven't seen a ton of data on April because I've been spending some time getting ready to explain the first quarter. But I would say the momentum throughout the first quarter, particularly in some of the key emerging markets, they had a stronger March than they started the year, and so that's a positive sign. I was just with a lot of our international teams recently at our brand week, and I would say everybody's expecting their results to improve as the year progresses, so. Bill Schmitz (Analyst - Deutsche Bank): Okay. That's helpful. And then just on the 9% emerging markets growth, this is probably an industry question also, but as the pricing rolls off, doesn't the volume become a much bigger component of the sales algorithm? And what does that mean in terms of advertising spending and what you need to do when you shift from inflationary pricing to volume growth? Tom Falk (Chairman & CEO): Absolutely, volume growth and category penetration, category development is going to be a key part of it. And so -- and we've continued to invest more in emerging markets, particularly as you're opening up new market areas. So as we've gone into Africa and places like Kenya and Nigeria, you do wind up spending ahead of your sales value to develop the category. But again, I don't think it's going to be one that's going to shift our P&L in a dramatic way to you achieve that. We are getting some efficiency and moving more into digital and getting some pretty good ROIs on that move as well. Bill Schmitz (Analyst - Deutsche Bank): That's helpful. Just one quick last one on the gross margin outlook. How do you see it pacing throughout the year? The reason I ask is I think you did $30 million of commodity deflation this quarter so that's a little bit less than half of the midpoint of the full-year target. So is that the way to kind of look at the gross margin outlook? I know there's probably some currency puts and takes as currency gets a little bit more favorable probably in the gross margin line in the back half. Tom Falk (Chairman & CEO): Bill, that's probably a hard one to call just because there are such big moving factors in it. It's going to be the combination of how does pricing, commodity costs, and currency hit in any particular quarter. We were pleased with the progress in the first quarter and are looking forward to that continuing as the year progresses. Bill Schmitz (Analyst - Deutsche Bank): Okay. Great. Thanks so much.


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Ali Dibadj with Bernstein. Tom Falk (Chairman & CEO): Good morning, Ali. Ali Dibadj (Analyst - Bernstein): Want to go back to the top-line acceleration expectations for the rest of this year. You mentioned three drivers, targeted growth initiatives, I'd love to understand what that means, product innovation. Is that to gain share or grow price or kind of more context about product innovations if you can? The last one is improved net realized revenues. And I'm trying to figure out how you do that one, especially if there's more competition in China in particular. It doesn't look like it's abating in the US. If there's a little bit of a tougher consumer market in Brazil, Latin America broadly. I'm trying to understand how you're saying improved net realized revenues will drive the top line at the same time in the 2016 outlook. You say benefits from higher net selling prices are expected to be somewhat lower than prior assumptions. I'm trying to figure out what that difference means. So those three buckets but really more time obviously on the net realized revenue and what sounds like a contradiction in your strategy. Tom Falk (Chairman & CEO): Let me come at it a different way, Ali, and say if you look at diapers in China and Brazil, which were the two soft spots, and set those aside for a second and say gosh, fem care was up double digits in D&E, adult care was up double digits in D&E, baby wipes were up high-single digits in D&E, so really a continued strong performance of the trajectory that we've been on, pretty broadly based across lots of markets, behind good innovation, behind great marketing, behind good execution and market. And so that's all going to continue. And so I think on the China and Brazil question, we talked about those. So China's underlying volume growth in diapers was good. The price competitiveness was tougher than maybe we expected going in. On the other hand, we're going to lap when that started in the second half of this year. So we'll see where it goes from here but our expectation is that it's not going to get worse. And in Brazil, that's probably one where the categories have had some more challenges. We have been aggressive on pushing price given the currency transaction hit that's taken place there. And to the question of the contradiction, we're comparing to two different things. One was compared to our original guidance for the year. We're probably going to get a little less price than we thought because currency is a little bit less negative than we thought so the need to get price is not as great. On the other hand sequentially, we still are going to get year-on-year benefit from price as we roll through the year. We didn't get it all in January. We announced it during the quarter. So we'll get some benefit as the year picks up but not quite as much as we thought going into the year. We're just trying to provide you with those two perspectives versus the plan and versus prior year to help you see it the same way that we're seeing it. Bill Schmitz (Analyst - Deutsche Bank): So what I'm trying to understand is then what gets better, right? So pricing is one of the ways things get better but you're going to be taking less than you expected. How does that get you out of the hole that you are right now? And you can talk about it without soft spots in China and Brazil. There's a hole in the top-line growth. I'm trying to find out, I'm trying to understand if it's not pricing, because that could be a little worse than you expected, what is it that you're changing? Tom Falk (Chairman & CEO): The pricing comps are going to get better. In US diapers, for example, we started a lot of the Huggies Snug & Dry price alignment in the second quarter. There was a first-quarter comp there that was still negative. That comp will get easier in the second quarter and second half. China diapers, the pricing and competitive environment started to heat up as we rolled into the second half of last year. That comp gets easier as we roll into the back half of this year on the price front. So the comps get a little easier on the pricing standpoint, and I think that first quarter was probably the low point for that.


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I apologize for this. That's not new, right? You're saying, take pricing, you're going to take pricing, the comps get easier but you knew that and you're saying now you can't take as much pricing as you planned to at the start of the year, right? That's what the outlook statement says. But you're also saying you're going to take pricing to offset the slower growth this quarter, which is clearly below your expectations. I'm just trying to figure out how to bridge that gap. Tom Falk (Chairman & CEO): I'm not saying we're not going to take price to offset the slower growth this quarter. We are saying that we are going to take more price as the year progresses in markets where we've had that but not quite as much as we thought going into the year. Bill Schmitz (Analyst - Deutsche Bank): Okay. On another note, can you talk about the cost savings ramp-up that you had? It looked pretty good for the quarter. What specifically are you seeing in terms of opportunity that allows you to ramp up the cost savings plan this year? Thanks. Maria Henry (CFO): We're happy with our FORCE cost savings in the first quarter. We delivered $95 million, and so that's a good start against our full-year target of $350 million in savings. The teams delivered across all three of the major areas that we look to drive cost savings. So negotiated material prices were very strong in the quarter. The global procurement team did a great job to start out the year. The progress in optimizing the cost of our product specifications, and we also got improvements in productivity waste within our supply chain and manufacturing operations. So good start to the year, happy with what we were able to deliver on FORCE. Bill Schmitz (Analyst - Deutsche Bank): Thanks very much. Tom Falk (Chairman & CEO): Thanks, Ali. Operator: Stephen Powers with UBS. Stephen Powers (Analyst - UBS): Great. Hello, thanks. Maybe just following up on Ali's question on the top line there, not to belabor it, but you obviously talked -- you talked about what's in your control, the innovation, the distribution gains. Can you just be a little more specific about what you're assuming from here sequentially on both the macro environment, stable, better, worse, as well as the competitive environment, stable, better, worse, versus what you saw in Q1? Tom Falk (Chairman & CEO): Any particular geography you're interested in or just broadly? Stephen Powers (Analyst - UBS): Well, broadly, and then I've got -- I do have a drill-down question on China specifically. But, yes, broadly. Tom Falk (Chairman & CEO): If you look at the macro environment, we put a lot of the assumptions in the guidance deck but essentially, we're not assuming spot currency rates. We look at forwards. So the rates in our guidance probably aren't quite as favorable as what's in today's spot but is somewhere between where it was at the beginning of the year and where the spot rates are at this point in time. If spot rates stay where they're at, there's probably more favorability on currency and maybe more risk on pricing. On commodities, pulp got a little better in this forecast than where it had been. In terms of underlying economic growth in individual markets, again, we continue to say relatively modest growth environment. We're not predicting a huge falloff or any other kind of economic crisis developing in a major market anywhere in the world at this point in time. Brazil's probably the one that we're watching most closely, obviously expecting slower category growth getting back to a -- for them, getting back to a flat organic growth number for the year will be the first priority given that they started out the quarter with negative 5 on diapers. In terms of the US, actually we saw probably better growth in our business than the underlying category growth because we picked up share in a number of markets and consumers are still responsive to innovation. We saw private label shares flat to down in nearly every category that we're in, which is again another sign of health of the consumer for us and are probably maybe more bullish on the outlook in North America at this point in time than maybe we would have been even at the beginning of the year.


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Okay. And competitively, is there any pockets of where you're expecting more competition than what you've seen so far? Tom Falk (Chairman & CEO): I would say China's probably one that has become more competitive. It's a terrific market. There's still great category growth. We're still expanding into more cities. The consumer's very responsive to innovation and it's worth investing in. The good news in China is that even though it's been more price competitive, we've also been very aggressive in China on cost savings. So our gross margins in China have been stable or even a little bit better despite the price investment to stay competitive in those markets. So our team in China has done a terrific job of executing their plan and improving the shape of their P&L. Stephen Powers (Analyst - UBS): Okay. And in China specifically, we too had picked up on intraquarter sort of intensity picking up, especially in fem care online and especially in the value tier. From your comments, this kind of confirms my fears. It sounds like it was a little bit more broad-based. Would you say it was more focused in one category, one price tier, one channel specifically, or was it broad-based and it sounds like you expect it to persist? Tom Falk (Chairman & CEO): I would say for us, our fem care business had a pretty strong quarter, probably a little bit less price sensitivity than we saw in diapers. We're probably not as well developed on fem care in eCommerce as we are in diapers and certainly eCom was a more competitive marketplace. But then that also drives pricing in your more traditional brick and mortar channels because everyone's got price transparency of what the deals are everywhere these days. Stephen Powers (Analyst - UBS): Great. Last, and I'll move on, but any comments you might have about the cadence of marketing spend throughout the year as you follow through on the new innovations that you called out. Thanks. Tom Falk (Chairman & CEO): We've got a lot of launch activity coming. I'd say our first quarter, we were I think down slightly year on year and up slightly from our prior-year average. But we've got a lot of stuff coming and launching in the second quarter in a lot of markets. So you probably will see it slightly higher although again, it's not a big driver of our P&L. Operator: Olivia Tong with the Bank of America


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Well, I'd say the underlying volume growth in China was very, very strong. It was still strong double digits in diapers and in fem care. The pricing comps get easier because some of the pricing competitiveness started in the second half of last year. So I'm confident China's going to post another solid growth year, even though they started out in diapers a little slow due to the lapping or the rollover of the pricing initiatives. And as you look at across our markets, Brazil we talked about had a little bit of a slow start. Expect that to pick up and close the gap. But we had good underlying performance in really most of our other markets. I'm pretty confident in the team delivering the plan this year. Olivia Tong (Analyst - BoA Merrill Lynch): Got it. That's helpful. Thank you. And then on diaper volume being flat in North America, obviously, it's hard to tell sometimes with the Nielsen data but the Nielsen data did look fairly favorable. Typically, correct me if I'm wrong, some of the non-tracked channels, particularly online, does better than the tracked channels. Was there an inventory issue or were there just divergence in terms of trends in tracked versus non-tracked? Tom Falk (Chairman & CEO): No, there had to be some inventory change in there because we picked up share. We were up 2 points sequentially and up 0.5 point year over year. Last year, we were selling in the Snug & Dry relaunch. There could have been some effect of that. We had a strong fourth quarter, so there could have been some early January promotional buying that got shipped in December. But by and large, I'd say we look at our weekly consumption and we're pretty happy with the trends and eventually that shows up in volume. So I'm not too worried about that one. Olivia Tong (Analyst - BoA Merrill Lynch): Got it. Thanks so much. Tom Falk (Chairman & CEO): Thank you, Olivia. Operator: John Faucher with JPMorgan


. Erin Lash (Analyst - Morningstar): Thank you for taking the question. I was wondering if you could kind of delve into a little bit more detail in terms of the competitive environment in China, and you talked about increased promotional activity and whether that increasing competitive pressures are from other national players or whether you're seeing that from the locally domiciled peers in the market. Tom Falk (Chairman & CEO): Yes, I would say in China in particular, the toughest competition of late has been our two Japanese based competitors, Kao and Unicharm. Obviously, the weaker yen last year helped them support that in a way. At least it didn't have as big of a negative impact on them relative to what was going on in the US. And so they've been more aggressive, Kao in particular. We've been gaining share. Kao has been gaining share. Unicharm has been losing share. So there's been more competition in that direction. Hang on, we do run into at the low end of our business and the high end of their business, but I wouldn't say they've been the aggressor as much as the other multinational competitors. Erin Lash (Analyst - Morningstar): Thank you. That's very helpful. And then I think you mentioned earlier on the call about more of an increased propensity to spend in North America. One of the categories that has been challenged I think over the last two years has been Pull-Ups in particular, given that consumers haven't necessarily been placing their kids in Pull-Ups, keeping them in diapers when potty training. I know you talked about a new Pull-Up launch innovation coming to market later this year. I just wondered if you could kind of bridge that gap and whether you're already seeing improving trends within that product category or whether you foresee that happening later in the year into next year. Tom Falk (Chairman & CEO): We've actually -- it was nice to see a good mid-single-digit volume growth on our childcare business this quarter, and that was ahead of the product launch which is rolling out literally as we speak. And so we're really excited about what this new product can do, and we hope we will see some category uptick as we roll into the summer season, which is typically a bit of a seasonal peak for Pull-Ups and we'll see how that plays out over the second and third quarter. Erin Lash (Analyst - Morningstar): The mid-single-digit volume growth was across childcare though, right, so that was both diapers as well as Pull-Ups as opposed to Pull-Ups exclusively? Tom Falk (Chairman & CEO): Childcare was we define it is essentially just Pull-Ups, Good Nights, and Little Swimmers. Diaper volume we would measure separately. Really in that childcare space, it was really all driven by Pull-Ups. It was a little early in the first quarter for much Little Swimmers volume. That's much more of a second and third quarter business. Erin Lash (Analyst - Morningstar): Got it. Thank you very much. I appreciate it. Tom Falk (Chairman & CEO): Thank you. Operator: Jason English with Goldman Sachs


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On the Nielsen data, as you know, it doesn't cover the traditional trade very effectively and that's probably where we had more of the volume hit in the first part of the quarter, and that is the part where they will have more inventory swings. I know you hear that from other CPG folks as well. And so in terms of as we exited the quarter, I don't know if I've got any specific data other than it was a nice sequential uptick from where they've been running in the first two months, so we'll see what the shares look like. Jason English (Analyst - Goldman Sachs): So you are seeing a little bit of improvement at the end of the quarter. North America, maybe a little inventory shipments so maybe that was subdued. So some reason to believe it does get better on the forward. Tom Falk (Chairman & CEO): Jason, I'm way more bullish than the rest of the guys on this call. I have a lot of reasons to believe, actually. Jason English (Analyst - Goldman Sachs): Well, good. I'm glad. I'm glad. I hope it all plays out in the numbers on the forward. A question for -- Tom Falk (Chairman & CEO): By the way, Jason, hope is not a strategy. We're going to make sure we deliver it. Jason English (Analyst - Goldman Sachs): Right on, Tom. That's exactly what we love to hear. A quick question for Maria on the FX impact. The 20% number is a big number. It implies much more of a multiple on sales than we've seen in the of past from a transaction hit. Just back of the envelope, it suggests maybe the transaction, the EBIT hit on the sales was around a 29% margin versus 19% last year. Why the uptick on transactional leverage? Anything unique to be aware of? And as we think about the forward, I think on the last call you had said sort of all-in a 15% drag. Where does that number stand today based on sort of at least your currency assumption even if it's not on spot? Maria Henry (CFO): Sure. The relationship between the top line and the bottom line in terms of the currency hit depends on where the currencies are moving, and in particular for this quarter, we had significant impacts in places like Eastern Europe, Russia, and in Latin America, Brazil, and given where the mix of the currency changes, the biggest currency impacts hit, that's what drove the bottom-line impact to be a stronger multiple of the top-line impact than what we're typically used to seeing. So it's mostly mix driven. Jason English (Analyst - Goldman Sachs): Okay. And that 15% figure from last quarter? Maria Henry (CFO): 15% was the combined impact of currency, commodities, pricing for the overall -- remind me on the 15%. Tom Falk (Chairman & CEO): Let me just build on that. We said last quarter approaching 15% for an all-in currency impact. As you see in the release, we said the translation impact is expected to be toward the low end of a 5% to 6% range. So adding in a reasonable multiplier effect, it should be in the low-double digits of a drag for the year for currency. Maria Henry (CFO): Just on the currency side. Jason English (Analyst - Goldman Sachs): Got it. Thank you so much. I'll pass it on. Tom Falk (Chairman & CEO): Thanks, Jason. Maria Henry (CFO): Thanks. Operator: Caroline Levy with CLSA. Tom Falk (Chairman & CEO): Hi, Caroline. Caroline Levy (Analyst - CLSA Limited): Good morning, hi. I'm wondering if you can update us on the Poise Impressa product. Tom Falk (Chairman & CEO): Yes, sure. I would say so far it's going quite well. And so it was, Paul, what, a couple points of our growth in Depend in the quarter. So we were up double digit in the US. We would have been up 8 ex Impressa. It's having a meaningful impact. We were just with our retail customers at the chain drugstore convention, as I mentioned, and they were very bullish on what they're seeing so far. We're doing some work to kind of assess what we've learned since the launch on what price points work and how do we get even more impact and improve our mix at shelf. And so we'll be making some adjustments on shelf position and promotion strategy as we roll through to help it go even a little bit faster. But so far, so good. And obviously, this is one that will take a bit of time for consumer behavior to change, but it is an exciting solution for an issue that some women have and another approach for them to help them improve their quality of life.


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Thank you. That actually gets to the second part of the question, just on innovation in general. Would you say that in general, you're premiumizing and getting pricing through mix when you innovate? It's a sort of broad based question across all categories. Tom Falk (Chairman & CEO): Yes, I would say that you want to try to create value from your innovation at whatever tier you innovate in. If you're innovating on something we're doing on Scott tissue, you want to also be able to create value for your consumer and for your business if you can. So we are trying to premiumize where we can. Some of the things we're doing, we're launching more of a value tier diaper pant in many markets. But it's a better solution. It's a premium to other value tiered diapers but it's still aimed at the value consumer. So we are trying to make sure we're innovating at relevant price points across our product spectrum. Caroline Levy (Analyst - CLSA Limited): Thank you. And then just thinking about your pricing being flat overall for the Company for the quarter and down in Europe South Korea, up 5% in EMEA, flat in North America, I would have thought South Korea Europe was a much smaller percent of the volume and so net-net you might have had some benefit of pricing. Can you tell us you how to think about that today and also going forward? Tom Falk (Chairman & CEO): Yes, sure. In our developed markets outside the US, so Western Europe, Central Europe, Korea, Australia, primarily, those are markets that are traditionally fairly challenging to get pricing in. Those are also markets where we do some hedging of our transactional currency exposure more regularly. And so the need to get price to cover your transactional currency hits is also less than you would see in a market like Brazil or Russia. And so I would say we typically go into the year not expecting to get much price. If you do get revenue realization, it's going to be more through mix or innovation than through absolute list price change. Caroline Levy (Analyst - CLSA Limited): Do you think that trick continues to trend down in those developed markets? Tom Falk (Chairman & CEO): You know, in terms of price or volume or --? Caroline Levy (Analyst - CLSA Limited): Price. Tom Falk (Chairman & CEO): I would say we don't expect to get much if any price realization this year, and in markets like Western Europe you could see some price erosion as those markets are a little bit more competitive. South Korea overall is a very strong market for us. We had a terrific first quarter, a very strong volume growth. You continue to see some move to eCommerce in that market, and so that sometimes can result in a bit of a price drag as the channel shifts to that direction. But by and large, we're not seeing much price move up or down in the developed markets. Caroline Levy (Analyst - CLSA Limited): Okay. Just lastly on that, thank you so much, but if you think about eCommerce growing incredibly rapidly in say China and some of the Asian markets, I think that probably foreshadows what's going to happen more globally. Do you think net-net that is negative for pricing, online growth? Tom Falk (Chairman & CEO): We are looking to see how eCommerce does scale. It's certainly in a market like China where it may be skipping a generation of retail development. You don't have as many retail channels developed in a lot of those markets and you are seeing very dense population, very high smartphone penetration, and a much lower delivery cost to get that last mile delivery. But I think almost every retailer these days is looking at an online option even if it's click and collect in their existing retail space. So I think that what you are seeing is more price transparency, and so that probably has an effect on particularly retailers that have a high/low strategy. But I think we'll have to wait and see how eCom develops as more and more traditional retailers get in the game with click and collect and other things. Caroline Levy (Analyst - CLSA Limited): Thanks so much. That's really helpful. Paul Alexander (Investor Relations): Thanks, Caroline. Operator: Javier Escalante with Consumer Edge Research.


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I did a couple of clarifications on the pricing front. In the US, I've been trying to reconcile the commentary on volumes and market share and yet this low top line. Is it an issue of that the relaunch of the Huggies, the Snug & Dry has a lower price realization and you are seeing negative mix, or is it more that do you spend a lot on the trade to push the innovation and you didn't get the lift that you expected to get in North America? And I have another clarification in China. Tom Falk (Chairman & CEO): Are you just talking about diapers, Javier? Javier Escalante (Analyst - Consumer Edge Research): Diapers. Tom Falk (Chairman & CEO): Because overall, our North American volumes were pretty good. Javier Escalante (Analyst - Consumer Edge Research): I understand the volumes were good. I'm looking at diapers and in general say diapers/pull-ups, say, training pants, not just specifically diapers/childcare. Tom Falk (Chairman & CEO): In diapers, we started the Snug & Dry relaunch last year in the second quarter, and that was with a price reduction that narrowed the gap and get the value right relative to some of the other more value oriented products that are in the market. And so we've seen since that, better performing product at a more attractive price, consistent progress on volume and share. First quarter was a little light on volume. We talked a little about what might have caused that. Some of it could have been sell-in last year for the Snug & Dry launch. Some of it could have been a little stronger December. But by and large, as we look over the -- since the relaunch, our volumes are up nicely. Our share is improving. Long way to go. We're not declaring victory on that front. On the Pull-Ups front, if you look out over multiple quarters, we really realigned some of our pack count price architecture in the second half of last year, saw some better performance in the category late in the year, still not where we want it to be. Had a better start to the year in the first quarter but the Pull-Ups strongest selling season is typically second and third quarter. We've got a new product out, and we'll see how it goes in the second and third quarter but we're optimistic about it. Javier Escalante (Analyst - Consumer Edge Research): Just to clarify again in North America. Do you increase trade or spending and that's why that contributed to the lack of pricing in the quarter or not? Tom Falk (Chairman & CEO): So whether it's a trade or list price reduction to us, we would treat it the same way. It's a price reduction. And so on Snug & Dry, we did reduce the price into our retail partners to narrow the value gap. I don't know if we did it through a trade promotion allowance or through a list price change, but the effect is the same in the marketplace. Javier Escalante (Analyst - Consumer Edge Research): Okay. Thank you very much. Finally, on China, again and just one clarification. So the competition seems to be more on the premium segment because this is where Kao and Unicharm operates and also in the main cities in China. Proctor just launched a few quarters ago a premium diaper. Could you comment whether that launch somehow had a negative impact on your own trends and whether that diaper is priced below yours, if you can clarify that? I mean the premium Pampers that proctor has been working on. Thank you. Tom Falk (Chairman & CEO): I know Proctor's launched -- again, I would say we would see more aggressive competition from some of our other multinational competitors, and we try to make sure we're competitive on pricing across the spectrum of products in the same tier that we're in. We want to make sure our super premium products are competitive with other super premium. Our premium would be the same. In any given retailer at any given day could somebody have a hot promotional price. They could. You try to look at it over a marketplace and a period of time. And so again, I would say we're competing as is Procter, as is Unicharm, as is Kao. It's sort of normal business. But a lot going on in China, and so it's a big attractive market that I think a lot of people are investing in.


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But the one thing that -- the push by Kao, its Merries, and Unicharm had been for a long time. So basically, the one new additional pressure seems to be coming from Procter. Now it's when it coincides with your commentary about price competition, about your commentary about volumes being up, organic sales lagging by a lot, volume. So that incremental launch and pressure from Procter is what is making the market more competitive because Procter still is much larger than you are in China in the diaper category. Tom Falk (Chairman & CEO): Well, Javier, I guess I don't see it that way. You'll have the chance to ask the P&G guys on their call in a little bit. I would actually say I think the weaker yen gave the Japanese competitors a little bit more head room to price competitively. There are some other things around free trade zone and imported product that benefited them over a short term. That's sort of closing off now. There's some other things in that marketplace caused price to be a little bit more competitive in the first quarter, and we'll see what Procter has to say about it next week sometime. Javier Escalante (Analyst - Consumer Edge Research): We will ask. Thank you very much. Tom Falk (Chairman & CEO): Thanks. Operator: Lauren Lieberman with Barclays. Tom Falk (Chairman & CEO): Hi, Lauren. Lauren Lieberman (Analyst - Barclays Capital): Sorry, I didn't expect to get back in. Just one last lingering question on Brazil. Was just to the degree that you're seeing trade down or some of the like local players gaining some share, is that kind of as you're kind of accounting for volume declines in the market? Is that a dynamic you're seeing there at all or not really? Tom Falk (Chairman & CEO): I wouldn't say the local players gained share. I took a quick look at the share coming in. We were down about 1 point on diapers, and I think Procter was the one that was up, Paul, but I don't remember looking at it on diapers in the first two months. Paul Alexander (Investor Relations): Pretty flattish. Tom Falk (Chairman & CEO): Pretty flattish. Not a lot of big movement. Then on fem care, we were up like 2.5 points in Jan-Feb shares. But there's more national players there. I wouldn't say -- where we are watching for that though, are they trading down even within our business within tier. I think we are seeing a little bit more what we would call Tier 2 or the more value oriented product mix shifting a bit which is another sign of the consumers under pressure in that market. But we want to continue to watch that and he see how it plays out. Lauren Lieberman (Analyst - Barclays Capital): Okay. And then value tier diaper pant you mentioned, I'm sorry, just did you say where -- which market it was launching in or where or when? Tom Falk (Chairman & CEO): There's a bunch of markets that we're launching that in. So really in a number of D&E markets across Latin America and Asia in particular. Lauren Lieberman (Analyst - Barclays Capital): Okay. Great. Thank you so much. Tom Falk (Chairman & CEO): Thanks, Lauren. Operator: At this time, we have no other questioners in the queue. Paul Alexander (Investor Relations): All right. Then we appreciate all the questions today, and we'll end with a closing comment or two from Tom. Tom Falk (Chairman & CEO): Once again, we appreciate the interest in Kimberly-Clark