Kimberly-Clark Corporation

Ladies and gentlemen, thank you for your patience and holding. We now have your presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question. It is now my pleasure to introduce today's first presenter, Mr. Paul Alexander.

Thank you, and good morning, everyone. Welcome to Kimberly Clark's first quarter earnings conference call. With us today are Mike Hsu, our Chief Executive Officer, and Maria Henry, our CFO. Here's the agenda for our call. Maria will start with a review of first quarter results. After that, Mike will provide his perspectives on our results and the outlook for the full year. We'll finish as usual with Q&A. We have a presentation of today's materials in the Investors section of our website. As a reminder, we will be making forward-looking statements today. Please see the Risk Factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements. Finally, we'll be referring to adjusted results and outlook. Both exclude certain items described in this morning's news release. That release has further information about these adjustments and reconciliations to comparable GAAP financial measures. And now I'll turn the call over to Maria.

Thanks, Paul, and good morning, everyone. Thanks for joining the call. Let me start with the headlines for the quarter. Organic sales increased 3% driven by higher net selling prices. Adjusted operating profit and earnings per share were down low single digits year-on-year. That said, we made solid progress with our margins compared to full-year 2018 performance. Additionally, we're on track with our overall capital plan, and we continue to return cash to shareholders. Now let's cover the details of our results, starting with sales. Our first quarter net sales were $4.6 billion. That's down 2% year-on-year with a five-point drag from currency rates. Organic sales were up 3%, which is a good start relative to our full-year target for 2% growth. Net selling prices increased 4%, and product mix improved 1%, while volumes fell 2%. Mike will provide more color on our top line in just a few minutes. Moving on to profitability, first quarter adjusted gross margin was 33.5%, down 30 basis points year-on-year. First quarter adjusted operating margin was 17.4%, even with a year ago. I'm encouraged that growth and operating margins were up 30 and 40 basis points, respectively, compared to full year 2018 levels. Commodities were a year-on-year drag of $135 million in the quarter. While that is still a meaningful amount, I was pleased to see market prices in North America for pulp, recycled fiber, and polymer fall a bit sequentially. Foreign currencies were also a headwind, reducing operating profit by a low double-digit rate. Our focus on achieving higher net selling prices offset much of the commodity and currency headwinds we faced in the quarter. We also generated solid cost savings of $115 million. That includes $55 million of forced savings, which was consistent with our plan, and $60 million of restructuring savings. On that, we continue to make good progress with our restructuring program. So far this year, we've announced the planned closure of two personal care facilities outside North America. We've now announced six of the approximate ten facilities that we intend to close or sell. Advertising spending was up in the quarter as we continued to support our brands. Even with that investment, total between-the-line spending was down 50 basis points to 16% of sales. The reduction was driven by our restructuring savings. Compared to the first quarter, I expect between-the-line spending as a percent of sales to move up a bit for the full year. So all in all, adjusted operating profit was down 2%. On the bottom line, adjusted earnings per share were $1.66 down 3% year-on-year. That included an approximate 2% drag from a higher tax rate, essentially offset by a lower share count. Let's turn to cash flow and capital efficiency. Cash provided by operations in the quarter was $317 million compared to $542 million in the year-ago quarter. The decrease was generally in line with our expectations and driven by higher working capital and restructuring payments. Capital spending was $316 million in the quarter. As expected, that's up from $189 million in the year-ago period and is driven by supply chain restructuring projects. We continue to allocate capital in shareholder-friendly ways. First quarter dividends and share repurchases total $510 million, And we continue to expect the full year amount will be between $2 and $2.3 billion. Turning to our segments, in personal care, organic sales were up 5%. Net selling prices increased 2%, and volumes and product mix were each up more than a point. Personal care operating margins were 21.3%, up 90 basis points year on year. The improvement was driven by organic sales growth and cost savings. In consumer tissue, organic sales were even with the year-ago period. Net selling prices increased 6%, which was offset by lower volumes. Consumer tissue operating margins of 15.8% were even year-on-year. In KC Professional, organic sales grew 3%. Selling prices rose 3%, while a one-point improvement in mix was offset by lower volumes. Casey professional operating margins of 18.4% were down 60 basis points. Results were impacted by commodity inflation and currency headwinds, partially offset by higher pricing and cost savings. So all in all, we're off to a solid start relative to our full year plan, and I'm encouraged by our progress. I'll now turn the call over to Mike for his perspectives on our results and outlook.

Okay, thanks, Maria. Good morning, everyone. I'm going to focus my comments on organic sales and our full year outlook. And let me start by saying I'm encouraged by our first quarter results. We're making strong progress realizing higher selling prices. We're launching innovations, investing in our brands, and pursuing our growth priorities. And we're leveraging our strong financial discipline. As Maria just mentioned, we grew organic sales 3% in the first quarter, which is a good start to the year. Overall, our pricing initiatives are on track and to date. the impact on our volumes has been reasonable. Let me share some of the top line highlights for the quarter. Starting in developed markets, organic sales increased 1% in North America consumer products. In North American personal care, organic sales grew 3%. Volumes increased high single digits in adult care with benefits from innovations, increased brand investment and category growth. Volumes were up low single digits across our baby and child care portfolio. In the first quarter, we increased selling prices on pull-ups training pants and premium Huggies diapers. Looking ahead, we have innovation on foist pads coming this quarter and premium innovation on Huggies diapers that are going to hit the market this summer. In North American consumer tissue, organic sales were down 2 percent compared to a 5 percent increase last year that was driven by strong promotion activity. Net selling prices rose 7 percent. Our pricing plans are overall on track we'll continue to monitor the impact on our volumes and competitive activity, but we remain focused and confident on realizing the benefits of the price increases. In North American KC Professional, organic sales increased 1% driven by solid price realization. Turning to developed markets outside North America, organic sales were up 1%. In South Korea, while our diaper business continues to be impacted by a lower birth rate, our other businesses are growing and offsetting that diaper category softness. We also had solid performance in Western and Central Europe in KC Professional. In developing and emerging markets, organic sales rose 7% overall, and that included nearly three points of growth from Argentina, which is consistent with our 2019 plan. In terms of our key personal care businesses, in Brazil, organic sales rose about 15% compared to a mid-single-digit increase in the base period. Growth was driven by higher selling prices, while category volume remained sluggish. In China, organic sales were down high single digits. Huggies diapers continues to be impacted by competitor price reductions that started last year. Nonetheless, volumes on our premium-tier Huggies were up, driven by strong product innovation. In feminine care, we continue to grow at double-digit rates, driven by our innovation trade-off strategies and supported by strong digital marketing. In ASEAN, organic sales rose about 10% with the strength on Huggies diapers in Vietnam. We're rolling out improved Huggies in most ASEAN markets this year. In Eastern Europe, organic sales increased about 20% with volumes and selling prices both up nicely. Our momentum in this region reflects the combination of excellent sales execution, winning product innovation backed by great marketing. We're launching further innovations on Huggies and Kotex this year. While diapers remain our biggest business in D&E, I'm pleased that in the first quarter, we grew organic sales double digits in femcare, adult care, and baby wipes. These businesses have strong growth opportunity, and we're making progress. Now, in terms of digital marketing, we're using digital on many of our brands, to help us build one-to-one consumer relationships. Digital is improving our marketing ROI and helping us grow in markets like femcare in China and South Korea, diapers in Vietnam, and adult care in North America. To summarize our top line, I'm optimistic about our start to the year. We have more work to do, and we continue to operate in a competitive environment. However, that said, I'm encouraged with our progress thus far. Now, moving beyond sales, I'll just build briefly on Maria's comments about margins. While we need to make more progress, I'm encouraged that first quarter performance was above our full year 2018 levels. Turning to the outlook, as we mentioned in this morning's news release, we're confirming our previous outlook for 2019, which calls for 2% organic sales growth and adjusted earnings per share of 650 to 670. We're also maintaining the key planning assumptions we outlined in January. Our first quarter results has improved our earnings profile somewhat compared to our initial view of the year. That said, we still believe it's more likely the earnings are gonna be somewhat higher in the second half of the year compared to the first half. Our teams have a lot to execute over the next nine months and we're gonna continue to closely watch the overall environment. While we work to achieve our 2019 targets, We'll continue to pursue the longer-term balanced and sustainable growth opportunities that are all part of our KC Strategy 2022. So in summary, we're off to a solid start for the year. We're confirming our full-year outlook, and we're confident in our ability to create shareholder value.

That concludes our prepared remarks, and now we'd be happy to take your questions. Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad now. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question now. Our first question comes from Jason English with Goldman Sachs.

Hey, Jason.

Hi.

Hi. This is actually Cody on for Jason today. How are you guys?

Hey, Cody. Good morning.

Can you provide us an update on your commodity outlook? Previously, you stated $300 million to $400 million of inflation today. Does that still hold? And can you also provide details by each commodity like you did last quarter?

Sure. Cody, it's Maria. On commodities, we had $135 million of headwinds in the quarter driven by pulp and other materials. That was slightly better than our expectations for the quarter with some relief on resin-based materials and recycled fibers. Distribution also remains inflationary in the quarter. We are holding our outlook at this point to $300 to $400 million of inflation for the year. It's early in the year. We're just through the first quarter. And while we're encouraged by some North America market prices that have started to come down sequentially in areas like polymer resin, eucalyptus, and recycled, it remains volatile. And we'll have to see how this plays out. And as we think about the P&L impact of the commodity changes, we have to think about commodity inflation in relationship to price when we look at the P&L holistically. If I cover them kind of piece by piece, if we look at fiber with eucalyptus, it was down 1% year on year and down 4% sequentially. And we're maintaining our outlook on eucalyptus for the year of 1125 to 1175 per metric ton for the full year average. On NBSK, we were up low teens year on year, and we were down low single digits sequentially. And when I'm quoting these, I'm quoting the market prices in North America for these commodities. And then on fluff, we were up, or the market was up high single digits year on year and down low single digits sequentially. On recycled fiber, those prices remained elevated. North America market was up more than 20%. However, it has fallen sequentially here. down about 10% on recycled. In terms of the oil-based commodities that we have on polymer, the first quarter average price was down mid-teens versus a year ago. We're expecting a modest increase in price in the back half of the year for polymer, so we'll have to see what happens there. On super absorbent, we were or the market was up high single digits versus a year ago and relatively flat on a sequential basis. And finally, I'll point out that outside of North America, inflation continues to run at moderate levels, particularly coming out of Latin America. So we're seeing some easing for the North America market prices. We've still got inflation when you look at it outside of the U.S. It's a very long answer. Hopefully that covers all the details you were looking for on what we think about what the markets are doing.

Yeah, that's very helpful. I can sneak in one more question related to your commodity costs. Your initial FY19 outlook assumed $400 to $450 million in cost savings with about $300 to $325 in force. Does that still hold today? I assume it does based on your reiterated outlook. But if inflation proves to be less onerous than you initially thought, How should we think about your potential savings for FY19 as the year progresses? Do you still expect to deliver at least $400 million in savings? Thank you and I'll pass it on.

Yes, we do expect to continue to deliver savings and we are holding our estimate in terms of the savings outlook for the year. I think that as you watch commodities and commodity inflation, the three to watch together are what's happening with currencies, commodities, and price when you think about the P&L, but the cost savings estimate remains unchanged.

And I just want to make sure that's unchanged even if commodities do roll over. I mean, greater force than we thought. Got it. Thank you very much.

Sure.

Thank you. Our next question comes from Lauren Lieberman with Barclays.

Great. Thanks. Good morning. I want to talk to something actually a little bit bigger picture was around innovation and news flow in the personal care categories, particularly in the U.S. I know, Mike, you mentioned that you've got innovation coming on Poise this quarter and something on Huggies over the summer, but I feel like the pace of activity is in these categories has dramatically stepped up, both from largest competitor from Procter, but even from retailers and also all the upstart brands that seem to be gaining some traction. So could you talk a little bit about how you're thinking about the right level of news flow and activity, your interest in kind of smaller brands and sort of natural, quote, organic, and any detail that you can offer on the Huggies innovation this summer would really be helpful. Thanks.

Okay. Thanks, Lauren. Yeah, maybe I'll start with the last point. I probably – I'm not ready to share details on the launch this year. I will tell you it's a premium Huggies diaper, and that's kind of the general space, and it's consistent with our overall strategy in personal care overall, but especially in diapers, which is we think there are opportunities for us to deliver improved benefits, especially on the dimensions of comfort, fit, protection, and all the things that you would expect. I think in terms of the overall strategy really does highlight the need for people you know, more impactful innovation, and we are ramping up our efforts. And I know, you know, we just kicked off our KC Strategy 2022 approach with our team, you know, earlier this, or last quarter, rolled that out with our top executives, and then we're now deploying regional teams and cross-functional teams around the world to kind of get after it. I would tell you, though, that while we're just launching it now, we've been kind of working it for probably the past year or so, And so some of the things that you're seeing in market, like some of the product launches or the launch we're talking about in North America this summer are a product of some of the teams working over the past year to accelerate some of this opportunity. So overall, a big opportunity on innovation. I think with your question on natural and organic, it is, I'd say in North America right now, it's still probably a niche opportunity or a smaller, you know, one to two, three share type opportunity and something that we're going to continue to look at. I think the question around small brands in big markets like North America is a really relevant question because, you know, we still keep tabs or Maria and I still keep tabs on the food side and we know what some of the smaller brands have done there. And so, you know, I think for us there's a question about whether, you know, there's an opportunity for us there and there may be, but we're not ready to share details on that yet. We are doing a pretty good job on pursuing natural organic in our Korean business and which that's a market where I think is one of the most sensitive about chemicals and contaminants of any market in the world. And we've got a number of brands, and they're doing very, very well, and more than just a couple share points.

Mike, is there a reason why you wouldn't have already done a sort of lift and shift then with some of the things you're pointing out, with South Korea having long been a lead market for you guys in terms of innovation, in terms of market share? to move quicker with taking kind of what's working there with a very, very discerning group of consumers and, you know, and moving quicker to bring it to other markets, to bring it to the U.S., for example?

Yeah, great question. Definitely, and I think that's the focus going forward, which is maybe I like your term, faster lift and shift, or we say adopt and apply. But that's part of it, and I think you will see some of that natural product flow into the U.S., perhaps in STEM care later this, you know, at some point. And then also, I think this diaper that I talked about that's coming out this summer in North America really is a joint Asia-Pac-North America development and a feature kind of a new way we're trying to work, which is more collaboratively around the world.

Have you started to sell that into retail yet? Because also it's funny, you see, right, there's new clothes from Target. There's Walmart with Hello Bello, right? There's just The retailers, even Target today, not so much in diapers, but I think it went into paper products, this new product launch that they've announced today. They seem to be charting their own course in what may well be a niche opportunity. Maybe it's big, but just curious about those conversations, how much they want to sort of go their own way versus opening up shelf space for you guys to be bringing some of this news flow in, maybe a little bit, again, behind where they've been themselves.

Yeah, so on your first point, we haven't started selling this product in yet with customers, which is why I'm not sharing that many details on it right now. I will tell you, though, we do have the collaborative discussions with most of our major retailers or all of our major retailers, and they're still very receptive to big brands and big innovation. They are pursuing some other opportunities, but I think we'll work with them as partners kind of leading these categories.

Okay, great. I'll pass it on and come back if I've got time. Thank you.

Thanks, Lauren. Thanks, Lauren. Thank you. Our next question comes from Nick Motey with RBC. Hey, Nick. One second. It looks like his line dropped. Give me just a moment.

Hello?

All right, Nick, your line's open.

Hey, Nick. Okay, thank you. Hey, how are you? Sorry about that. I guess, you know, it was a nice, you know, over delivery, at least relative to consensus this quarter. And Mike, I just, I guess it's a philosophical question. You know, as you think about your first year as CEO and you think about the priorities, I mean, clearly given the level of disruption in the marketplace, just generally across the CPG landscape, you know, there's all this stuff to spend money on, right? Capabilities, innovation, et cetera, et cetera. So I'm just curious, like on your thoughts on how you think about the goals for the year in terms of, hey, we could hit the high end of guidance, make commodity costs coming down, or hey, look, there's a lot to spend. This is the first year. Let's go get it. You know, I just was hoping you can give some guidance around how you think about that.

Well, I guess maybe my near-term focus is on delivering the mid-term objectives we outlined in January, right? And I do think maybe, and this is maybe the company culture, which is we want to deliver consistent, predictable, and positive earnings growth and sales growth. And so I think this quarter was a solid quarter for us and we're encouraged by it, especially encouraged by the price realization and the margin improvement, but it's a step along the way. I will point out, Nick, though, I think a couple of bright spots for us in the quarter were we saw broad improvement across a broad range of markets, all improving. The U.S., Brazil, Central Eastern Europe, ASEAN, UK, Western Europe, you know, India. So I think we've got a lot of markets heading in the right direction. And so that's a good thing. And then obviously with the pricing being on track, that's obviously helping the shape of our P&L.

Great. Thank you.

Thank you. Our next question comes from Ali Dabaj with Bernstein.

Hey, guys. So I have two questions on top line and then one on free cash flow. First, from a personal care top line perspective, if you think about PCNA and then the personal care outside North America, i.e., the developed markets together, it looks like the price mix, flattish for NA and then down three for outside North America developed markets, So it's negative on average. Volume for goods, I'm not denying that, and that's excellent. But I'm just scratching my head a little bit in terms of price mix elements there. Given what's happened to commodities obviously going up, given that you're spending on advertising, given that we hear everything about the competitive situation being more benign, yet unable to take prices. in the personal care area in developed markets, but just some of your perspective on that. Is that diagnostic fair? Maybe comment about market share along the way. It just struck me as why not take more pricing in that area in particular?

Yeah, probably, Ali, the biggest thing is maybe a bit of a lag on personal care in North America. That's probably the biggest mover and driver that we have, which is we're doing most of our pricing on diapers, uh, through a pack count change. And, uh, that started rolling through at the end of the first quarter and it's still rolling through now. And so we had a big rollover. Uh, it took a little time for us to get that lined up. And so that's, that's probably why you're not seeing as much price now, but that, that we expect will continue to improve as, as the year goes on.

And Ali, this is Paul. In, in, in developed markets outside North America, um, Broadly speaking, I'd say there hasn't been a lot of pricing in the marketplace in personal care. So this is Western, Central Europe, Australia, and South Korea. The price decline in Q1 came primarily in South Korea, where given the decline in the birth rate, there has been a bit of a pickup in everyone competing to pursue growth in a pie that's getting a little bit smaller over time. In terms of shares, you asked about In North America, across diapers and pants combined, or the mega category, if you will, our shares on an all-outlet basis are even year-on-year, and that might be a little bit better than you're seeing in the track data because we continue to do strong in non-measured channels, including club and e-commerce. Thank you.

Okay. Okay. That's helpful. Thank you. And then on consumer tissue, both North America and developed markets, almost the opposite question, right, where you're seeing very significant pricing. I get it because of the commodity costs. But the elasticity looks a little bit tougher, particularly North America. So the down 10 and then CT, as we call it, ONA or outside North America, down about 3%. Can you talk a little bit about how that's going to continue throughout the year? Is that kind of the right balance, or do you think there will be a better balance going forward?

Yeah, I think maybe the first point is with regard to Q1, we are cycling a pretty big set of events that we had in the plans last year. For reference, I think our volume was up almost 10% in tissue in North America first quarter last year. And overall, organic was up over, I think, over 5%. And so we are cycling that. We took those promotions out of the plan this year. So it's not that it's a timing difference. It's just out of the plan. And so I think the Q1 this year, therefore, in that effect, I would say right now the elasticity effect is probably as we predicted. We had a separate promo change that is as predicted. And so overall, we're on. I think the one thing for us to watch out at is Overall, I think the pricing is on track and the volume is in line with our expectations to date. The one thing we are keeping our eye on is, you know, I think some of the other private labels or some of the smaller brands have not, we haven't seen the price move up yet. And so it's a little sticky on the up swing. So we're keeping our eye on that. We'll be ready to adjust our plans as necessary to make sure that we protect our share long term.

Okay. And just my last question on the free cash flow point. You said it was in expectations that working capital is up, but I want to get a better sense of your free cash flow conversion here. It looked a little bit tougher. What we should expect going forward for the year and kind of what's going to make that change? Thank you.

Sure. On cash flow, while it was down year on year for the first quarter, it was in line with what we expected. We had higher working capital and we had an increase in restructuring cash payments. In working capital, that's really the big driver when you look at the numbers in the first quarter and there were a number of factors that went into that. On the payable side, we had a stronger than expected finish to 2018. and those higher payables got paid out in the first quarter. On the receivable side, we had a number of factors, including the timing of the sales and also the higher level of sales, and we ended the quarter on a Sunday, so we lose two days on collections, which causes a run-up in that balance. And then finally, on inventories, as we expected, As we get into the supply chain portion of the restructuring program, there are inventory bills in advance of moving equipment or basically taking equipment offline. So we expected that to happen, and we saw all of those factors play out in the first quarter. And for the year, as we said in January, we would expect cash from operations to be down slightly year on year.

Okay, thanks very much, guys.

Thank you. Our next question comes from Bonnie Herzog with Wells Fargo.

All right, thank you. Good morning. I had a question on your full-year organic sales growth guidance of 2%, which actually implies a bit of a deceleration on the top line through the balance of the year, but your comps do get easier in the next couple of quarters. So I guess I want to understand if we should interpret You know, your guidance says maybe conservative, or is there something else that we should be aware of that could cause growth to moderate? And then, you know, I'm just thinking about this in the context of, you know, you guys maybe lapping some of the higher promos you had last year.

Yeah, Bonnie, maybe I'll start. Maybe Maria can chime in. But, you know, we're making solid progress, you know, but we still have plenty of work to do to make sure that we have a strong 2019. So while we're encouraged with a start, there's a lot we have ahead of us. You know, while I just said to Nick, you know, we have broad improvement across a lot of markets, we're still on the early days of price. And as I mentioned to Ali just now, you know, we are watching, you know, elasticity and the volume effects are kind of in line with our expectations, maybe even actually slightly better in D&E especially. The thing that we are watching, though, is, you know, competitive pricing. It does seem to be a little sticky on the way up, and so we're keeping our eye on that. So, you know, I think I don't – you know, I wouldn't know that – I think we're calling it down the middle, which is what we believe, and 2% for us is a reasonable number. We've got nine months to go. There's a lot of work ahead for all of our teams.

Okay, and then if I could, I just wanted to circle back on innovation with a couple of quick questions. You know, first, you know, your full innovation pipeline this year, would you characterize it as more back half-weighted or – do you think pretty evenly spread throughout the years you roll out new products? And then second, curious, you know, how margin accretive some of, you know, the new innovation is, and was that possibly a key driver behind the sequential improvement you saw in your margins during the quarter? And then what could we expect in the future? Thanks.

Yeah, I think maybe a touch tilted to the back half, but I would say overall fairly balanced, although I think the impact that we're getting now is still from some of the benefits of innovation we launched last year. So we have an uptick, for example, in North American adult care. I think we're up high single digits in the quarter organically. That was on the backs of innovation that we launched last year with this discrete sizing, which has taken a little while to get traction in the marketplace, but it's getting that traction now. So I think we have a pretty robust innovation plan. It's balanced across quarters. In terms of the accretiveness, I don't have the exact number, but I think the strategy is to elevate our categories, or that means premiumizing our categories by making it worth it. So with premium innovation, in general, we're aiming to move to higher price points, hopefully accretive.

And I think, Bonnie, that bears out if you look at the sales changes in the quarter. Mix was up as a company one point, and it was up essentially between a half a point and a point in all three segments. So to Mike's strategy comment. I think we're making good early progress.

All right. Thank you.

Thank you. Our next question comes from Olivia Tong with Bank of America.

Great. Thanks. Good morning. I wanted to talk a little bit about marketing spend. You talked a lot about that last quarter and when we met in February. And obviously you mentioned that it was up this quarter. So can you discuss some of the things that you did this quarter, whether it's traditional or digital? Where is the lion's share of the dollar spend going? And then just a little bit of order of magnitude of the increase. And from this point forward, are you expecting it with Q1 sort of a high watermark, and then it sort of normalizes from here? Or is this just a start, and we should actually expect it to continue to increase as the year progresses? Thank you.

Sure, Olivia. I'll start, and then Mike can jump in. In terms of our advertising spend on the P&L, it was up in the first quarter. And we have an expectation that for the full year it will also be up year on year. And that is encouraging because not only is it up, but as we shift more of it to digital and as we continue our work to drive down the non-working portion of the advertising expense, the actual consumer impressions that we're getting from that spend is up as well. And so good support behind the brands and the innovations. Mike, I don't know if you want to talk more about what we're doing in advertising.

Yeah, Olivia, I think maybe a couple things, which is, one, you know, overall, I'd say with a couple key brands, most notably North American, adult care, and in diapers, I think increased levels of brand investment overall, you know, and brand support. And then more specifically, it is weighted to digital. And so some of the stuff that we're seeing and the reasons why we're growing faster perhaps in non-measured channels is the strong digital investments that we're making in search. And that's paying, you know, strong returns for us and doing very well. You know, we also have pretty good content now that we feel good about in terms of the messaging we're putting out there and we're rolling out. some new advertising on Cottonelle, which I think is being right now very, very effective. So overall, I think we feel good about kind of where we are. We know we can do better still, but, you know, looking forward to the progress.

And should we expect that to increase this year as you talk about the upcoming innovations, both in adult care and Huggies?

The benefit of innovations this year? Is that the question? You're kind of breaking up.

Oh, I'm sorry. In terms of the increase in advertising, should we expect that to – I'm sorry. Within advertising, are we expecting to increase advertising as the year progresses, especially as you fund or as you support innovation that's coming?

Yeah. Yeah, okay. Well, we – you know, as you know, we only disclose the advertising number, I think, once a year – And I don't want to get into how the quarters are going to flow. So suffice it to say that it was up on the P&L in the first quarter, and we would expect for the whole year that it will be up also.

Got it. And then just lastly on pricing, can you talk about how much of the pricing benefit you would attribute to just straight list price increases related to commodities versus some of the things that you're working on with respect to trade spend efficiency and innovation?

Yeah, I think it's an overall mix. I think in Q1, maybe, and I don't have an exact number, but I would say the vast majority of it is some form of pricing, straight pricing, whether it's list or pack count changes. But I think those are probably the big buckets for us right now. We're making progress, especially in North America, on trade efficiency, and we have some programs there. I don't know how much would show up in the P&L right now, but I know it's a big priority for the organization. and they're doing a good job with it.

Great. Thank you.

Thanks, Olivia. Thank you. Our next question comes from Andrea Teixeira with JPMorgan. Hey, Andrea.

Hi, thanks. Hi, good morning. So can you comment a little bit on the 15% organic growth in Brazil? I appreciate the detail. And it was driven by pricing, and I believe you're lapping this price increase in the third quarter. I just want to check that. So I'm wondering if competitors are now finally following or they're retrenching given the commodities pressures are not finally easing now. And also a follow-up question for Maria on the cash flow. So I appreciate the detail on the cash conversion cycle and the working capital. I was wondering if she can explain a little bit more of the capex and the timing aspects of it. Thank you.

Okay, Andrea, maybe I'll start with Brazil. First of all, the team's doing a great job down there, and we're experiencing strong growth in what I would characterize as a very challenging consumer environment. Our personal care organic volume was up, as we said, about 15%. Net selling prices were up double digits, and volume was up low single digits, Andrea. So I think we're not to find the laws of gravity there or elasticity there. I think the market pricing overall is generally moving in the right direction, but I would say there's a handful of local competitors that are lagging a little bit. The better-than-expected volume performance, however, is really a result of maybe great commercial execution, which is strong sales execution, a great brand value proposition, and good advertising, I would say, overall working together, and that's what the team's doing today. And it's why building out commercial capability in our KC strategy 2022 is so important. There's a number of markets that look like they're defying the laws of elasticity, but really it comes down to strong commercial execution, and Brazil is one of them.

Good.

No, go ahead.

Go ahead, Andrea. Thank you, Maria. So I appreciate, Mike, when you said that in the initial comments, I think you said it's luggage, so I wasn't sure if it was negative. So you're saying the volumes are still up in the low single digits in Brazil, which is encouraging. And now I just want to, yeah, okay, perfect.

Hey, Andrea, just to clarify, the volume was down low single digit. Ah, down, okay. Pricing was up double digits, pretty strong double digits. and volume was down low single digit, but I would say, you know, way better than what the elasticity model would have said.

Okay, perfect. Thank you.

And then on CapEx at $316 million in the quarter, that's in line with our expectations, and it reflects the – the supply chain portion of the restructuring program really kicking into gear this year. So we continue to expect $1.1 to $1.3 billion on CapEx for the year, and you started seeing some of that come through in the first quarter.

Thank you, Maria.

Thank you.

Thanks, Andrea. Thank you. Our next question comes from Steve Powers with the Deutsche Bank.

Thanks. Hey, so I guess I wanted to start on U.S. personal care, where the strength was really notable relative to at least what we've seen in scan data. So just maybe some comments on that and whether that's strength in untracked channels or whether that's an element of shipments running ahead of consumption. Just how you saw the growth this quarter and how we should kind of think about that momentum going forward.

Yes, Steve, thanks for that question. Definitely, I think strength in In non-measured channels, you know, overall the mega category was up about two points in the quarter. Our share overall, as Paul mentioned, was about flat. Huggies was up low single digits. And I think that's really been driven by strong product performance. And as we were just talking about increased brand investment and brand support, growth was especially strong in non-measured channels. And that for us is club and primarily e-com and club. And as I was mentioning, We've got a very strong digital program in e-commerce across all our customers, and I think that's really working a good effect right now. So, you know, we're encouraged by the progress in personal care. Pull-ups is up high single digits as well. Our adult care business is up high single digits, and so it's moving in the right direction.

Okay, great. And then I guess my broader question is just to get you, maybe, Mike, to expand a little bit more on how you're thinking about the media term, the duration of KC Strategy 2022. Because just building off this quarter, as you say, it looks like you're ahead of schedule. The tone today is deservedly very confident as a result. But on the other hand, you've called out, you still have a lot of improvement initiatives underway. Macro competitive conditions remain hard to call. And stepping back, year over year, operating profits in dollar terms have yet to inflect positive. They should, I agree, as you move forward. But it just seems like the pricing, which was great this quarter, is tied to FX and cost inflation. And if those come in lighter terms, Just how do you assess your ability to hold on to today's pricing and bank some of the productivity that you have underway in order to flow through better dollar-based bottom line results versus having to reinvest to sustain volume share versus competition? And I'm not really so focused on next quarter or even this year, but thinking really about what the evergreen model is over the course of that medium-term strategy.

Yeah, well, I think, Steve, you know, as I mentioned, we are together. You know, I'm really excited about the growth opportunities the company has ahead of it. And, you know, that really, you know, for me, the three big strategies of, you know, what I call elevate the core, which is premiumizing our categories with value-added innovation or capturing the growth or leading the development of developing and emerging markets and then building this consumer-digital relationship, I think are really kind of robust strategies. growth opportunities that are really, really good for us. I think to accelerate our progress, we've outlined a handful of capability areas that have to do with innovation or doing better job on innovation, sales execution, our digital execution, and also our revenue growth management or pricing management. So those are four big planks. I would say one of the reasons why we're encouraged with our progress in Q1 is We're starting to build and improving in these four areas that I just outlined on the commercial capability, and that's starting to play through. I mentioned Brazil, where our 15% organic is driven by pricing, but it's also driven by strong execution. We're seeing the same across ASEAN, where we've got good double-digit growth, price increasing, but volume also going up. CE, Central and Eastern Europe, is doing the same thing. So I think overall it's putting all these pieces together for us, which is the core of the strategy. We're going to stay focused on delivering consistent growth.

Okay. Thank you very much.

Thank you. Our next question comes from Kevin Grundy with Jefferies.

Hey, good morning, guys. This is Herb Epic on for Kevin. One quick one just on restructuring. So specifically $60 million in savings for the quarter and your outlook for $100 million, $125 million for the year. So savings have been building sequentially for the last couple of quarters, but your outlook assumes that this should slow. So is there anything we should be aware of? Maybe any phasing shifting into the first quarter? Any commentary there would be helpful. Thank you.

Yeah, we had $60 million in the quarter, which is a good savings number for us. But you'll recall that we had no savings in the first quarter of last year as the restructuring program was announced in January of last year and then took some time to ramp up. And so if you look at the 60 in relationship to the expectation for the year of 100 to 125 million, when we start to get into the second quarter, we will be lapping quarters where we were building savings through 2018. And so that's really the driver.

Okay, that's all. Thank you.

Thank you. Okay, thanks, Howard. Thank you. Our next question comes from Steve Strickula with UBS.

Hi, good morning, and congratulations on a good quarter. So I had a question. Last quarter, you mentioned that there might be some lumpiness on the quarter-to-quarter trends, and first quarter clearly came in well ahead of what a lot of the investment community was expecting. So Is there any lumpiness you would be mindful of for Q2 or the balance of the year in terms of sell-in versus sell-out, particularly as you start lapping some of the price increases that you phased in towards the end of last year?

Yeah, I'll make a comment and then Mike will jump in. We don't give quarterly guidance, but a few things that I'd say keep in mind. We have some... benefits in the first quarter with the Lunar New Year happening. And we typically have a strong first quarter around that. As we move into the second quarter, Kleenex will be kind of out of season in terms of cold and flu. And then the final thing, as Mike mentioned earlier, the pricing just went in on diapers here in the first quarter. So I think we we haven't seen how all of this is going to play out in our numbers. And we commented that we expect the second half to be up somewhat in relationship to the first half. So that kind of gives you a lot of different things to think about as you think about how you're going to lay out your expectations on the quarters.

Okay. Great, Mike. And then a follow-up for you. How should we think about, it seems like, volume trends were generally better than what you were expecting. Did you guys have success in winning some planograms that were some key call-outs you'd want to shed light on? And then what key emerging markets, if any, would you say were sequentially the end market demand just improved quarter on quarter? Thank you.

Well, yeah, Steve, I think maybe the second part first, I would say broadly across most markets, demand improved versus where it was maybe last quarter. And so if you go... who's in the markets. You know, CE was up about, you know, strong double digits for us. ASEAN was up double digits. Obviously, Brazil, we already mentioned. Argentina, obviously, a big number. India up double digits as well. China, Femcare up another strong, robust double-digit quarter. China, diapers, obviously, still down, but I think improving sequentially behind our new product improvements. So, I think across a broad array of markets, improving And I think in North America, again, improved commercial execution. There probably are some distribution changes here and there, and I think we've made some progress in some areas. But, you know, the other part of it is better product performance. I mean, we have made improvements broadly across diapers, across adult care, both on Depend and Poise. Poise is just shipping this quarter. Our Cottonelle back tissue, Scott Comfort Plus is all gaining performance. increase consumer traction. So we're feeling good about kind of the innovation piece of the puzzle.

All right. Thank you. Thank you. Our next question comes from Jonathan Feeney with Consumer Edge Research.

Good morning. Thanks very much. You had a little drop in You had a little drop in developing an emerging market volume in both personal care and tissue, just the volume piece. And I know there's a ton of pricing in there driven by commodities. But can you update us on the market-level volume growth roughly in your developing and emerging market portfolio overall? And maybe cite, I mean, was that a loss of volume share? And who would pick up that volume share? I'm looking at demographics. It would seem to me there'd be ongoing volume growth in those markets. Thanks.

Yeah, Jonathan, maybe I'll start just to put the volume decline in a little bit of context, and then Mike can give obviously more color. If you looked at across our total D&E lineup and set aside China and Argentina, our volumes would have been up a little bit in the quarter, which given the inflationary pricing environment we are all facing and consumers are facing, that was a pretty solid outcome.

Yeah.

Yeah, so overall, I think, you know... You know, we feel good about where the markets are heading. We feel good about our commercial execution broadly across D&E. And I think most of the volume, you know, the clients were related to price changes.

So did others not take – am I right that there's a little bit of share loss there? Did others not take that pricing? I'm just curious, like, what the competitive dynamics are in the wake of it.

Yeah, I think it's market by market, but I would say as a general rule of thumb, I would say – You know, major branded competitors moved in line with us or some ahead of us, and then you have some stickiness in local competitors or some of the smaller players. And so we're keeping a sharp eye on that.

Very helpful. Thank you very much.

Okay. Thanks, Jonathan. Thank you. Our next question comes from Ali Dabaj with Bernstein.

Hey, thanks for the follow-up. I just wanted to touch base on China with a little bit more detail. I know you put it in the prepared remarks in the PowerPoint, but can you give us just some more color about what's going on there from a pricing perspective? We clearly see the volumes as well, but that's been a hotspot recently. I just want to get an update, please. Thank you.

Yeah, thanks, Ollie. Yeah, I would say in diapers, pricing is kind of about where it was last quarter. So, you know, overall for us, Our premium Huggies is gaining traction behind the innovation that we talked about last quarter. And our FemCare continues the really strong momentum. We're really not satisfied with our performance yet, but we're making progress. You know, our personal care organic sales were down high single digit, which is an improvement versus the prior quarter. The competitive activity on price remains elevated. It remains kind of where pricing has been. But I think specifically, you know, our team's view and my view is The consumers in that market are still looking for better solutions, and our improved Tier 5 and 6 diapers are gaining traction. They're up significantly in volume and up in value as well. And we'll be rolling out that technology that we put into that across other tiers and other channels this year. So, you know, we're building for the long term, and I'm really feeling good about what the team is doing there.

Thank you. What do you think the competitive situation is looking like, whether it be from the regional players there, Japanese in particular, or from P&G?

We're still seeing pricing suppressed. We are getting wind of some additional product introductions. We don't have visibility on everything yet. Obviously, I think products and technology still matters a lot in China. That's what the consumer is looking for. That's why you're seeing the responsiveness in the premium tiers.

Okay, thanks very much.

Thanks, Ali. Thank you. Our next question comes from Caroline Levy with Macquarie.

Thank you so much. A couple of things. How important is the raw price of oil, which is up so much, to the outlook for polymers?

Yeah, the price on oil has gone up, and so when we When we think about our outlook on commodities overall, as I went through in the beginning of the call, kind of our puts and takes on the fiber-based commodities and other material commodities, the oil prices definitely have us watching the market. The relationship between oil prices and the exact commodities that we buy has not been as correlated as of late as it had been historically, but it certainly does have us remaining cautious on the full-year outlook for the oil-based derivative materials that we're using. So it's kind of mixed with the sequential improvements that we're seeing in some areas, but with the oil run-up, we're just keeping an eye on it.

Right, and thank you, Maria. And could you elaborate a little bit on the outlook for transport?

Sure. Distribution costs were up. They continue to be inflationary for us. They were higher a year ago, and distribution costs are a meaningful portion of our overall cost of sales, and the outlook for the year assumes that we will have distribution costs inflation for the full year, but it hasn't changed from what our position was when we talked to you in January. And I should note the increases on distribution costs are global.

Yeah, and the other note I'll make, Caroline, is that, you know, last quarter or at the end of the fourth quarter of 2018, we did have some additional expenses because of some distribution challenges. I think our team is making progress there, and, you know, we are improving.

That's great. Thank you. If I might, just a couple more. Could you comment on Mexico? It doesn't look like things have improved there in the way they have in Brazil, but maybe I'm missing something. And then the last one would be just to discuss your overall, how you think about development of private label, just whether you see it as a significant longer-term or medium-term threat and whether you would consider participating in it in any way.

Yeah, well, maybe I'll ask one first, Caroline. You know, we do do a bit of private label right now. It's not a strategic part of our business, but it is, you know, in certain instances we will produce some private label. We generally don't have the capacity to take it on as a big strategic bet, especially given the amounts of capital we've got to put in. It generally, I think, is not necessarily a great return on our capital to invest in on that type of capacity. However, I will say We're moderating it closely, because especially in North America right now in bat tissue, I'll note that private label is up a bit, and pricing has not moved upwards yet on a lot of private label, and so we're keeping a sharp eye on that. We'll be able to adjust our plans if necessary.

And then on Mexico, we're not going to comment since they haven't released yet. But what I would say is if you look at equity company contributions, it's relatively flat year on year.

I saw that. Yeah, I saw that. Then if I might just squeak in one more on China, what percentage of your business there is premium? Because I thought you largely only played premium, but your total sales are still down.

Yeah, the most two The most two premium tiers for us, Caroline, are a little bit more than half our total Huggies diaper business.

Thanks so much.

Okay. Thanks, Caroline.

Thank you. At this time, we have no further questioners in the queue.

All right. Well, we appreciate everyone's questions today, and we will speak with you next quarter. Thank you very much, and have a great day. Bye.

Ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines, and thank you for joining us this morning.