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 this morning's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you'd like to ask an audio question. It is now my pleasure to introduce Mr. Paul Alexander.

Thank you and good morning, everyone. Welcome to Kimberley Clark's Second Quarter Earnings Conference Call. With us today are Mike Hsu, our Chief Executive Officer, and Maria Henry, our CFO. Here's the agenda for the call. Maria will begin with a review of Second Quarter results. After that, Mike will provide his perspectives on our results and the outlook for the full year. We'll finish with Q&A. We have a presentation of today's materials in the Investors section of our Web site. As a reminder, we will be making forward-looking statements today. Please see the Risk Factors section of our latest Annual Report on Form 10K for further discussion of forward-looking statements. Lastly, we'll be referring to Adjusted Results and Outlook, which excludes certain items described in this morning's news release. That release has further information about these adjustments and reconciliations to comparable gap financial measures. And now I'll turn the call over to Maria.

Thanks, Paul, and good morning, everyone. Thanks for joining the call today. Let me start with the headlines for the quarter. Organic sales increased 5% driven by higher net selling prices. We achieved strong cost savings, margin improvements, and growth in adjusted earnings per share. And finally, we're broadly 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 second quarter net sales were $4.6 billion. That's even with year ago and includes a five-point drag from currency rates. Organic sales were up 5% compared to flat performance in the base period. Net selling prices increased 5%, and product mix improved 1 point, while volumes fell slightly. Mike will provide some more color in our top line in just a few minutes. Moving on to profitability. Second quarter adjusted gross margin was .6% of 120 basis points year on year. Adjusted gross profit increased 3%. We now expect full year commodity inflation of $150 to $250 million. On average, that's $150 million lower than our previous estimate. The reduction is driven primarily by pulse and secondarily other raw materials. Other manufacturing costs also increased in the quarter compared to a relatively modest level last year. These costs are expected to be a bit higher than we planned for for the full year. Moving further down the P&L, between the lines, spending was up 90 basis points as a percent of sales. That included higher advertising as we're investing more behind our brands, particularly in digital. G&A expense also increased, driven by higher incentive compensation. For the full year, because we've raised our sales and earnings outlook, we've also increased our incentive compensation estimate. The increase versus our original plan is equal to more than 1% of total operating profit. About half of that increase was reflected in our second quarter results. Foreign currencies were also a headwind in the quarter, reducing operating profit by a high single digit rate. All in all, adjusted operating profit was up 2%. Second quarter adjusted operating margin was .2% of 40 basis points versus year ago. That included broad based margin improvements in all three business segments. On the bottom line, adjusted earnings per share were $1.67, up 5% year on year. In addition to the higher operating profit, the bottom line benefited from a slightly lower adjusted effective tax rate, higher equity income, and a lower share count. Let's turn to cash flow and capital efficiency. Cash provided by operations in the second quarter was $609 million, compared to $787 million in the year ago quarter. The decrease was generally in line with our expectations and driven by higher tax payments and increased working capital. Capital spending was $253 million in the quarter. As expected, that's up versus last year, driven by supply chain restructuring projects. We continue to allocate capital in shareholder friendly ways. Second quarter dividends and share repurchases totaled $520 million, and we continue to expect the full year amount will be between $2 and $2.3 billion. Looking at our segment results, in personal care, organic sales were up 8%. Net selling prices increased 5%, and volumes and product mix were each up 1%. Personal care operating margins were 21.2%, up 80 basis points year on year. The improvement was driven by organic sales growth and cost savings. In consumer tissue, organic sales were up 4%. Net selling prices increased 5%, and product mix improved slightly, while volumes fell 2%. Consumer tissue operating margins were up 15%, up 90 basis points versus year ago, with significant benefits from higher pricing. In KC professional, organic sales grew 1%. Selling prices rose 3%, and product mix improved a point, while volumes were down 3%. KC professional operating margins of .7% were up 50 basis points versus prior year. So all in all, we delivered very good results in the quarter, while continuing to invest for future success. I'll now turn the call over to Mike.

Okay, thanks Maria. Good morning everyone. Let me start by saying we made excellent progress in the second quarter. We're executing our 2019 plan well, with a strong focus on price realization to improve our margins. We're launching innovations, investing more in our brands, and pursuing growth priorities for longer term success. We're also continuing to return significant cash to shareholders. As Maria just mentioned, we delivered 5% organic sales growth in the second quarter, and while that compares to a soft year ago, this was our best performance in over three years. Our pricing initiatives are on track. Our volumes are ahead of expectations, both in terms of the impact from price increases and from our growth initiatives. We also continue to improve mix, which was up one point for the second consecutive quarter. Let me share some of the top line highlights, starting in North America. Organic sales and consumer products increased 5% compared to a two point decline last year. Year to date, organic sales are up three, which is likely a better reflection of our ongoing performance. Growth in the quarter was driven by 4% higher selling prices. Our pricing plans are on track. Volumes in North America were up slightly overall. Adult care volumes were up high single digits, and we recently launched innovations on both Poyd and Append to keep that momentum going. Earlier this month, we launched Huggy Special Delivery, our new super premium diaper. Special Delivery uses the best of our technology from around the world. This is our softest diaper. It's made with plant-based materials and provides ultimate skin comfort. It's also premium priced and a great example of our the core strategy in action. In North American consumer KC Professional, organic sales increased 2% driven by disciplined execution of our pricing initiatives. Turning to developing and emerging markets, organic sales rose 9%, and that included three and a half points of growth from Argentina, which is consistent with our plan. In terms of our key personal care businesses, in Brazil, organic sales were up double digits, driven by higher selling prices, while category volumes remained sluggish for driving strong growth through disciplined market execution and focused expansion efforts in baby wipes and adult care. In China, organic sales were up double digits compared to a soft performance last year. In diapers, our targeted promotional spending. While Huggy's total volumes were down, the product innovations we've launched are delivering growth in the premium end of our lineup and improving mix significantly. In Femcare, we had another strong quarter and we're on track to achieve 20% plus organic growth for the third consecutive year. In Oseon, organic sales rose about 10%, with continued volume strength on Huggy's diapers in Vietnam. In Eastern Europe, organic sales increased about 20%, driven by double digit volume growth and positive pricing. Our momentum on both Huggy's and Co-Tex reflects excellent sales execution, winning product innovation and great marketing. Finally, in developed markets outside North America, organic sales were up 1%, with solid performance in South Korea and Australia. Beyond sales, I'm very encouraged with the margin improvement we've delivered while investing more in our business. Now turning to the full year, we're raising our outlook on both the top and bottom line. On the top line, we're increasing our organic sales outlook to 3%, and that's one point higher than our original plan and driven by stronger volumes. On the bottom line, we're now targeting adjusted earnings per share of $665 to $680, and that compares favorably to our prior outlook of $650 to $670. Our updated outlook reflects strong execution, the improving commodity environment, and higher reinvestment levels. We're encouraged that the commodity outlook has gotten better, and that's especially true for PULP, which has retreated from all-time high levels, although costs remain elevated from a longer-term perspective. We aren't expecting a significant increase in market promotion activity despite the improved commodity environment, but we'll continue to closely monitor competitive activity. We're increasing growth investments in our brands and commercial capabilities to position us better for the long-term success. Brand investments include more digital advertising, digital -to-improve marketing ROI, and help us grow in many parts of our business. We're also increasing our commercial capabilities, including revenue management, which is a focus of KC Strategy 2022. Overall, we expect to bring some of the commodity benefits to the bottom line while also reinvesting more for top-line growth. That's consistent with our balanced value creation model we outlined in KC Strategy 2022. So, in summary, we've made excellent progress in the first half. We're raising our full year outlook and investing more for the long term, and we're confident in our ability to create shareholder value. That concludes our prepared remarks, and now we'll be glad to take your questions.

Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. If you would like to ask an audio question, you may do so now by pressing star one on your touchtone phones. If at any time you need to remove yourself from the questioning queue or your question has been answered, press star two. Again, to ask a question, please press star one now. Our first question comes from Ali Devaj with Bernstein.

Hey, guys. A few questions for me, actually. One is on free cash flow. Maria, you mentioned that particularly on the working capital side, it was a planned change, but it's a pretty big reduction in free cash flow this year versus last year, even if you try to adjust for some sense of restructuring. So, love a sense of why that shouldn't worry us at all in terms of that trajectory and what you think the trajectory looks like going forward on the free cash flow side.

Sure. We said coming into the year that we were expecting operating cash flow to be down slightly year on year, and we still expect that. If you look at the quarter, the cash from operations of 609 was driven by higher cash taxes and working capital was also a use of funds. So, let me talk about both of those on cash taxes. It really has to do with timing. You look at the first part of 2018, we were in an overpayment situation, and so we were paying out less cash taxes last year than what would be kind of a normalized level. This year, we have the opposite. We have some catch-up payments that we had to make in the first half of this year and in the second quarter, and so that's what's going on with cash taxes. It just has to do with timing. We wouldn't call anything unusual out there. In terms of working capital, there's a number of factors. Our cash conversion days were 13, which compares to what was a very strong 11 days in 2018, and you'll recall that in the fourth quarter of last year, we had very strong cash flow benefits from working capital. We had very low cash conversion days. Part of that was driven by a higher payables balance, which got paid out in the first part of this year. In terms of working capital and cash conversion days, we are expecting and we are seeing inventory builds around our execution on the restructuring program. As we look at how we close down facilities or prepare to close down facilities and shut down lines and prepare to stand up new lines, we are building inventory so that we can maintain our service levels with customers, and we are seeing that on the accounts receivable or DSO side. We've got in the second quarter some timing differences between the sales and collections, particularly with the quarter ending on a Sunday. I would expect on the receivable side that to correct itself as we go through the remainder of the year. Finally, on payables, the team is executing some projects to get some benefits there, and that was a positive helping to offset the drag on inventory and the timing differences on DSO. It's a positive for the second half that we will have stronger free cash flow, and that for the year will still be down a little bit, Ali.

Okay. Okay. I appreciate the comprehensive answer and we'll keep watching it. A couple of other things. One is, I guess I was initially encouraged to see the emerging and developed markets growing 9% this quarter, saw China pricing a little bit better and start to ask the question of, oh gosh, are we back to kind of this high single digit type growth rate sustainably in the emerging markets for Kimberly Clark? But then I saw that you mentioned Argentina with three and a half points of that 9% growth, Mike. Brazil probably helped you out a little bit as well. China seems like you're investing a lot in that marketplace as well, obviously on the volume side. So just that tempered my expectations and my hope to a return of improvement in Kimberly Clark emerging and developed markets. Can you kind of right size our expectations on that on a sustainable basis, please?

Yeah. Ali, good point. I think I'd say overall in D&E, we're very encouraged and we're making strong progress. You know, that 9%, it's robust and I'd say it's the fourth consecutive quarter of accelerating performance. If you go back to the third quarter of last year, I think we were up three, then four, seven in the first quarter and then nine this quarter. While Argentina is a chunk of that, about a little over three points, we are seeing improved performance across many of the markets. You know, obviously price mix is a big piece of it, but we are seeing certainly less volume impact from pricing, from some of the significant pricing we've taken, for example, in Brazil and Argentina, less volume impact than we originally expected. And then, you know, on the positive front, in other markets, I'd say CE continues to grow at a strong double digit rate. We're seeing ASEAN growth at double digits and then China, obviously, returning the growth. Certainly aided by pricing or maybe set a different way. Some reductions in promotion spending in China, but we're seeing a good buying growth in our premium tiers and we're very encouraged by that progress.

Okay. And just my last question, maybe a little bit of a broader question. You know, the discourse around Kimberly-Clark among investors is that I think people generally understand that pricing has been pretty good because of commodities, you know, commodity driven pricing and the LCCC were better because T&G and GP and perhaps some of the competition in China was a little bit more stable. You know, Brazil seemed like it's getting a little bit better. Commodity costs were less than what we had anticipated. And all those things in the kind of Kimberly-Clark ecosystem are doing pretty well, but the challenge often in that discourse is, okay, so what's Kimberly-Clark itself doing? What's company specific here that Kimberly-Clark is doing that could benefit it differentially? Besides cost savings in particular, I think we all appreciate the cost savings has been quite good, but it's kind of like, you know, the ecosystem is going in Kimberly's favor, but we're not quite sure what company specifics are happening here. So if you could help us, you know, at least enlighten us on that, that would be helpful. Thank you.

Yeah. Yeah. Great question. It's certainly, I think one of the big things is the operating environment has improved, right? And I think that's significantly better than when we met maybe toward the end of January. You know, and I think the consumer demand is healthier than it was then. And, you know, I'd say our performance is better than it was then. One of the reasons are we're seeing less volume impact is not because the elasticities are lower. In fact, as we do the analysis, the elasticities are pretty close to what we modeled. It is really more the market execution. And what we got is, I think, very strong innovation and new products coming out across, let's say, North America, particularly in personal care. We've got strong marketing in those markets as well, driving an improvement in consumption. I think the China business, I think, is, you know, we're in China for the long haul. And I think the team really believes in innovation there. And I think the consumer is following. And so we are seeing strong growth in our premium tiers behind, you know, we think the best type are in the marketplace right now. And so there's a lot going on there. And then if you look at, you know, Latin America, double-digit pricing with almost minimal volume impact, it's not because there's low elasticity, it's because there's really strong innovation, marketing, and actually terrific sales execution. Okay. Thanks very much, Ted. Okay.

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

Great. Thanks. Good morning. Just following on that, I think it's telling, Mike, how many times you just mentioned kind of terrific sales execution. And it feels like in some of your larger emerging markets. I'm curiously degree to which, like I said, what's changed? So you've alluded to, of course, better operating environment, but the Kimberly Clark specific piece, let's go back to maybe what was missing or not as strong over the last two to three years from a commercial execution standpoint. Because I think that that's a piece of equation I'm still not grabbing onto, you know, and that it would be in so many markets at once that the execution has been like a step change. So anything further you could offer there would be great.

Yeah, Lauren. I think it's a combination of the factors I just mentioned, which is I think the operating environment has improved in which I think the consumer can see the innovation of the product and the marketing and respond to it. And, you know, if you rewind a couple years ago, it's tough to see innovation and advertising when you're going against a buy one get two free, right? And so, you know, pouring advertising into a marketplace like that just is not effective. But I think where the teams, you know, and we always believe in, you know, elevating our categories or driving better product benefit by making, you know, the premium products worth it. And so I think we've got plenty of innovation across markets that I just mentioned that's taken a hold and getting the consumer's attention and we're encouraged by that response. And then obviously, I think for all of us in CBG, we all know when you have good innovation, it allows your sales force to execute much more effectively and get the shell space you need, drive the promotions you need, and all that kind of behavior flows with it. So I think I don't think there's a magic bullet there. But I would say that, you know, I think we are focused on in a disciplined way, building our capabilities both in innovation, in digital, which is a big space for us from marketing, sales execution and revenue management. Those are the big capability areas we've been focusing on. And we're making a lot of progress.

Okay, great. And then now with the commodity environment being more benign, and you've adjusted your outlook, obviously, for this year, but even as we look forward to 2020, with that as a backdrop, and thinking about the things you've laid out as, Corda, your tenure, investing in selling capabilities, marketing, digital, revenue management, there's data needs to kind of get at those sorts of activities. How are you thinking about the greater flexibility you may well have today versus what you thought six months ago, and the reinvestment needs of the business, particularly with the new chief growth officer coming on who may have sort of a different perspective on what can be done with your suite of brands?

Yeah, I mean, I would, you know, Lauren, we're very bullish on our categories, both in the near term or long term. And I think that comes back to kind of two of the core strategies we have, which is in big developed markets, you know, elevating the core or making, you know, premiumizing our categories by making the categories worth more to our consumers. And then, of course, you know, we're still in the very early stages of development. So I think with, you know, maybe the commodities have been a little lower than we expected at the beginning of the year, that does give us the flexibility. I think the when you add up the operating environment, which I think is more conducive to growth and consumer demand is healthier than we had seen maybe in the past year or so. I think that gives us the confidence to invest. The other part of it is, we've talked about this back in January, which is I think our, you know, with the innovation and the marketing initiatives and the sales initiatives working, that gives us more confidence to put more money behind that. And we're very excited about that.

Okay, that's great. Thanks so much.

Thanks, Lauren. Thank you. Our next question comes from Dara Mosinian with Morgan Stanley.

Hey, Dara. You might be on mute. Dara Mosinian, your line may be on mute. You may be on mute to ask your question. We can't hear you, Dara.

On -single-digit pricing in the last couple quarters, but that was predicated upon a much higher commodity environment than we're sitting at today. So, curious if you're seeing any initial signs of pickup and promotion from either private label or branded competitors with the recent commodity pullback. And as you look going forward, you commented that you don't expect to see a significant increase in market promotion. What gives you confidence behind that and that you won't have to dial back some of this pricing eventually?

Yeah. Hey, Dara, I think we only got the last part of it. So, I'll try to answer, but maybe you can push me if I'm not kind of going in the direction that we're asking for. But I think it was related to pricing and what the environment looks like. You know, right now I'd say overall, you know, our pricing initiatives overall across, you know, globally are on track. If you're a little more focused on North America, they are also on track. You know, probably the big area for us was in North American consumer tissue. You know, I think, you know, the pricing was up, you know, as we expected. The big difference was that our private label in general still has not moved, but we are still seeing good buying growth from our brands and, you know, probably a little bit in excess of what we had planned. I think at this point we have not seen an uptick in maybe competitive promotional pricing. Don't expect it, mostly because, you know, it's a multi-year issue for us and we've had commodity inflation at record highs. It's still at a very high level. And so, you know, for us, you know, we are not planning, you know, our plans don't have a high promotion intensity. We're really focused on marketing, the innovation that we have and driving the advertising. I'll pause there and maybe, is that what you were looking for or something else?

Yes, that's helpful. And then just if I could flip to the second question, the gap between North American reported results and the US scanner data look like it widened pretty significantly to a few hundred basis points. Was there some inventory build at retail, particularly with the innovations that you mentioned, or is that more just the function of very strong on track channel growth? And maybe while we're on the subject, you can give us a bit of an update on e-commerce and the club channel and your sales growth and market share performance there. That'd be helpful.

Yeah. Yeah. A little different there. As Stink was saying in our commentary that maybe the plus three was probably a better, if you look at year to date, we're plus three. That's what we think our business is right now. We did have a few differences. Certainly non-measured for us is generally stronger than measured. So that's an ongoing refrain and a good thing in some ways. Also, we had some spending changes that affected net revenue realization. I recognize we're still dialing back to your prior question. We're still dialing back our promotion intensity. And so that affected it. And then we did have some minor retail inventory changes, but we had those in a lot of quarters.

Okay. That's helpful.

Thanks. Thank you. Our next question comes from Wendy Nicholson with City Group. Hey, Wendy.

Hi. Good morning. There was just a comment in North America, commentary on personal care that caught my eye, which was number one, that volumes were up high single digits in adult care. And I was curious what drove that because I know that's been obviously a very high margin area for you, but it's an area that's been under pressure. So is that category growth or is it innovation or more promotion that you're doing? And then similarly, volumes down, mid single digits in spend care in North America. What's the plan there? I know it's been, I mean, your COTEX restage that you did a few years ago that was so successful. Are there any plans for a follow-up to that? What are your plans in spend care to get that business growing again? And I'm really focused on volumes, not pricing. Thanks.

Yeah. We're making progress on adult care, Wendy. Yeah, up high single digit. I think the category is up somewhere probably about mid single digit in that range. And I think really it's about innovation and category building messaging that's gaining traction for us. Definitely our product enhancements that we launched last year are gaining traction. Discrete sizing, we've got Fit Flex on dependence going out now and then Poise Active and those are all working pretty well for us. And then we've got strong brand investment and more messaging that's more category building. So I think those are the two things that are working in adult care. In Fem Care, you know, it's a great category. We've got a great global We know we need to strengthen the performance of the brand in the US and the team's focused on product enhancements and improving our messaging.

Perfect. And then just going back to your comment on pricing generally, I mean, I can't remember the last time, you know, companies like you got the benefit of favorable pricing and favorable commodity impact. It's just been a long time. Those usually work opposite. And so just as you think about, you know, the current commodity environment, I know you said you don't expect promotional levels to increase, which, you know, hey, I hope that's the case, but that would strike me as a surprise. But as you look towards, you know, calendar 20, the pricing that you've taken, you know, at what point in the cycle do you get to a point where you need to contemplate maybe rolling back some of the price increases you've taken, you know, particularly in categories where you still are struggling from a market share perspective. Why not? Why not be the aggressor there, if you will? Thanks.

Yeah, I think if you sit on this side of the phone, you have a memory like an elephant. And so like last year, you know, I think our commodity inflation was 600, five or 600 million more than our plan. And, you know, so this year it's a little more favorable, but not even close to that. And so again, as I said, you know, the commodity impact is a multi-year impact. And I think that's driving our behavior as we work to recover margins. And I think, and you know, right now I think, you know, we're seeing in the retail environment, consumer demand is healthy. You know, I think in this environment, consumers can be more responsive to innovation and marketing. And I think that's a bit more value added for us and our competitors to grow the category versus driving a doomsday.

Fair enough. Thanks very much.

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

All right. Thank you. Good morning. I actually had a following question on private label pricing, which, you know, has remained largely unchanged in some of your key track channel categories such as diapers. So just want to hear from you guys, you know, how concerned you are with private label choosing not to follow your pricing moves. And then, you know, separately, could you comment on whether you're seeing any stepped up competitive pressures, you know, from some of your online retail partners with their own, you know, private label offerings?

Yeah. Yeah. We're watching the private label pricing pretty closely. It hasn't moved, notably in consumer tissue or especially in the bath category or in diapers yet. I do think our brands are performing very well despite that. And I think that speaks to kind of the iconic nature of Scott 1000, you know, our new advertising and our product enhancements with Cottonel. So we feel good about that direction, but it's something that we've got to keep a sharp eye on. You know, obviously, you know, we're a volume sensitive business. And so while we may fine tune our promotional plans to make sure we get the volumes that we need, you know, we're, you know, we're going to manage this category, our role in the category very responsibly.

All right. Thanks. And then just a second question from me on China. Could you drill down just a little further on your performance in that market? And it seems like volumes still seem to be under pressure. So just wanted to understand from you when we could see that, you know, turn positive or improved further.

Yeah. Okay. China, yeah, our biggest short-term opportunity, our biggest long-term opportunity. I think we're, I think the team's working in the right direction, which is making the investment and innovation. And we feel like we have the best sniper in the market right now. Organic was up double digits with, you know, big contributions from both diapers and Femcare. In diapers, we launched a breakthrough, what we call our 5-B diaper, toward the end of last, middle last year. And we think that's the best in the market. And that's really fueling the gains. We're up, we're up significantly in the premium tiers, still down a bit in the value tiers, but we're managing through that. Some of that is conscious because we've chosen to dial back the promotional price points or raise our promotional price points. And so that drove some of the net price realization that we had in the category. But I would say we're growing in the tiers that are very important to us, which is premium

and still declining a little bit in the value tiers. Thank you. Oh, yeah, sorry. Thank you.

Thanks, Bonnie. Thank you. Our next question comes from Jason English with Goldman Sachs.

Hi. Good morning, everybody. This is actually Kodion for Jason. Perhaps the biggest surprise to us was the 8% organic sales growth and personal care. Developing and emerging markets were led by price, which could be fleeting, but North America had a balanced contribution for the first time in many years. Can you provide more details and tell us what's driving this? Specifically, what do you think your end market growth is compared to what it was a quarter or two ago? How much market share do you think you're taking? And which categories are you seeing the most share gain in? And how sustainable do you think that is?

Yeah, good point, Cody. I think we are very pleased with the balanced nature of the growth in North America personal care. I think organic was up six, and that was balanced between being up three in price and three in volume for us. And that really reflects, in our minds, really strong product innovation and really strong in market execution. In diapers, we just launched – we've got great innovation coming out, and we just launched Huggy Special Delivery, which is going to deliver ultimate skin comfort. And it's got a lot of features, and if you'll indulge me, our softed diapers delivers really trusted protection. It's got plant-based materials, free of parabens and other harsh chemicals, and hypoallergenic for baby's skin. So it's got great products, great designs and packaging, and it's priced at a significant premium. And Cody, that's been a – it's really a good indicator or a good example of our elevate the core strategy in action. So we're excited about that. In adult care, likewise, we've got, as I just mentioned earlier, a number of product enhancements in Depend and Toys, and those are both working – those are all working well in the market.

Great. Thank you. My other question was, your revised guidance calls for higher marketing spend and G&A costs. Can you just provide more details about your spending initiatives? What products is it behind? When should we expect it to hit? And then also, what caused you to increase your spending outlook? Was it just reinvesting the savings that you have from a lower commodity outlook?

Yeah. I mean, Cody, there are a couple things. You know, one, certainly the outlook had a piece of it, but it's also, you know, given the robustness of consumer demand and I think the improving conditions in the operating environment gives us the confidence to invest. And then that said, some of the early returns from our innovation and our marketing lust for today, I think, gives us more confidence to invest further. So the big areas – I think Maria mentioned, and digital is one big area for us that's working effectively for us in a lot of areas. It has strong OIs. It's driving a lot of parts of our business. What we would call direct digital marketing in North America, personal care and tissue, China FEM, diapers in Russia. I think we've got multiple markets. And then from a capability perspective, we're also investing in people, process and tools to accelerate some of the capabilities that outline, including our in-market execution and our revenue growth management initiatives.

Great. Thank you. And if I can just sneak in one housekeeping item. You guys have had strong cost savings so far year to date. Even if commodities should come below your outlook for the 150 to 250 million, should we still expect you to hit that target range of 400 to 450 million in savings?

We are tracking well on our way to delivering the 400 to 450 million dollar savings this year. What I would say is the composition of that may be a bit different than what we were thinking. Our teams are delivering solid force cost savings as they work to deliver productivity and cost reductions in our manufacturing operations. Our restructuring program is very much on track. At the end of the day, it's possible that our force savings for the year may come in a bit light and our restructuring savings may come in a bit better than we were thinking. So in the total on the 400 to 450 million combined savings, I think we're well on our way to deliver that.

Great. Thank you very much. I'll pass it along.

Thanks, Cody. Thank you. Our next question comes from Andrea Tashira with JPMorgan.

Thank you. Good morning. How are you? So I have two questions. First to Maria on the fuel guidance. What are you assuming for poll prices and should we see commodities, I guess the spot prices have been rolling over by more than anticipated? So in your outlook as we progress through the year and probably as you said in a multi-year effect, should we see the timing of these contracts finally having a bigger impact and the level of like being conservative on these guidance and revised guidance is because you don't have visibility of how long it's going to linger, these lower prices. And then the second question is about China. So you have an impressive quarter. So in the premium segment that finally more than offset the mid-year segment decline, is it sustainable or you're seeing, are you being able to increase the marketing in spite of these marketing spend that you alluded to for the fast-growing channels including online and baby stores? Thank you.

All right. Why don't I start with the commodity outlook. I guess a good place to start on commodities is just a reminder that commodities were inflationary in the quarter and so that was still a headwind for us in the second quarter to the tune of about 10% impact on our operating profit. But that said, they did come in a bit better than we expected and while they were inflationary, it was the lowest level of inflation that we've seen in two years. So we are pleased with that. Cost on some of the resin-based materials as well as pulp and recycled fiber all eased versus our plan mostly in North America. We still do see inflation outside of North America, particularly in Latin America. Distribution costs are also continuing to run high. There's no change in our view on that but they do continue to run high. On your question around the contracts, those contracts in general are negotiated annually. So I'll remind you that we discussed the negotiations that we had coming out of 2017 when we got, I'm sorry, coming out of 2018 when we got on the call in January. So we have nothing new to report on that and we'll have to see where we land and where commodities are as we close out the calendar year and we get into our discussions with suppliers and set our contracts for next year. We'll update you on where all of that lands in January. And then the other thing I'd comment on is that in general, our outlook for commodity assumes that costs are relatively consistent with the recent spot prices except for pulp, which is forecast to move down a bit further from here. So that's kind of what's going on with commodities.

Okay, and Andrea, and then on China, I will tell you is we're really encouraged by the progress the team's taking. Their strategy is to elevate the category by driving sustainable long-term growth. And I think, do we believe it's sustainable? I think that's our intent. And the way we're doing that is through product innovation that seems to be working very effectively in the marketplace. We've got a diaper that we launched toward the end of last year, middle of last year, the 5D diaper that's soft and flexible, breathable as much as any product out there except that the differences in the marketplace and while it's winning is that it protects better than the other products in the category. At least that's our perspective. And so that's getting traction in the premium tiers. But just to be clear, our volume in diapers was down in the quarter. It's just that it was growing significantly in the premium side of the business. That said, organic was up because of the volume differences and also because of some net pricing changes. So I think the business is heading in the right direction. We think the work that we are doing is to drive long-term sustainable growth.

And just, that's helpful. Just on the follow-up with Maria, now I understand the contracts are one year set obviously with the suppliers, but so can you kind of bridge to us because the 800 million last year was obviously a big target. These year, what is your assumption for pulp embedded in your revised guidance?

Andrea, this is Paul. I would say in general, we're using, there's been no change in how we forecast commodities. And so we're using the forecasters that you know well, including RISD and then we generally line up with what they forecast.

And include the timing of the contracts, right? I'm assuming that they don't roll over the way your contracts roll, right? You can't have these spot prices because they are significantly lower now, but you can't embed it because of your contracts. Is that the way we should think?

Well, we've got both things that affect us. Obviously what the market price is and then as we've discussed, we also have contracts that affect what we report as commodity inflation for Kimberly-Clark. One you have visibility into and the other one you don't.

Correct, yeah. But you're not ready to give us as you did in the past where you gave us exactly the price of the pulp at this point.

If you're after what we're thinking in terms of our fiber commodities, what I'd say is that on eucalyptus, which is a major input for us on the fiber side, we've reduced our outlook range to $1050 to $1100 per metric ton and that's down $75 per metric ton.

Okay, that's very helpful, Maria. Thank you.

Sure. Thank you. Our next question comes from Olivia Ton with the Bank of America.

Great, thank you. You know, obviously given your commentary around brand spend initiatives, a few questions there. You know, clearly that's helping support some of your pricing and mix initiatives, but when do you actually expect these initiatives to drive some improvement in volume? So that's the first question. Then second, just a little bit more around the new Huggies, special delivery. You know, curious as to how you went about in terms of the thought process and the marketing around it because it's conveying a very different message versus what both you and your competitors have done in the past and it obviously stands out pretty dramatically on shelf. So a little bit more color, that would be helpful. Thank you.

Yeah, on the brand investment, I think maybe the overall sale of you, I think it has been working and that's a piece of the reason why it gives us the confidence to increase the investment in the back half. You know, the example I'll give you maybe is if you talk about Brazil, you know, pricing is up in the teens. Volume is essentially a little bit less than flat. And so, well, you know, our assessment is elasticity has taken hold, but we've got a lot of other things going on that make that volume better than what the elasticity would have modeled, which is innovation. We've got growth initiatives on adult care and baby wipes that's getting very, very strong growth and marketing behind those initiatives. And then increased advertising spend or improved advertising on the diaper products. So I think, you know, it's kind of one example, but I think we have seen that and it's part of the reason why we have more confidence to spend more.

And then on special delivery,

Mike. Yeah, special

delivery, yeah,

we're very excited about that. Yeah, you could definitely see some different hands on the business, very maybe a contemporary look and feel. You know, we've got a great young team on it that's kind of in tune with I think millennial mom and, you know, very well tested. You know, the technology is terrific. It's a showcase of, you know, I'd say, you know, maybe an enhanced approach from us, which is a partnership globally from a technology perspective. I mean, it takes the best of what we've been doing in North America, China, Korea and Latin America and the team worked together to launch this product. And we're very excited about all the features that has, which is, you know, softness, skin protection, plant-based liner, you know, a lot of free-froms that make it more attractive to the consumer. And then obviously the

standout designs. Okay, Livia?

Okay. Sorry, I was on mute. Just following up on Huggy's special delivery, I know it's only been on shelf a short time, but any early color on retailer feedback so far and did pipeline fill help at all in the quarter?

Yeah, there's probably a little bit of pipeline. And it's still a relatively, we're still relatively early, so I wouldn't say the pipeline was huge and significant in the quarter. But retailer response has been very, very positive. I think they're very excited about, obviously, look and the product quality. And so we've got big expectations for special delivery. We're excited about it.

Thank you.

Thank you. Our next question comes from Steve Powers with the Deutsche Bank. Hey, great. Thank you

both. Hey, just a quick follow-up on pulp. Maria, you know, we've heard from others the idea of expected deflation from where we are now in the near term, followed by some level of tightening later in the year and into 2020. Is that your expectation as well, or do you have an alternative view on where the underlying commodities trend?

I mean, that would be consistent with what we see as saying,

Steve. Okay. It's

a little too early for us to talk about 2020, but we see those same forecasts.

Okay. So, Farah, just to be clear, so Farah, just seeing that's sort of embedded in the planning process.

Yes.

Okay. All right, great. And then I guess another follow-up on the reinvestments you're making, above and beyond the incentive comp that you called out. It sounds like for the year it's mostly marketing with a bit more in-people processes and tools to further the ROIs you've been seeing and maybe counter some level of presumed competitive action as the industry benefits from low cost. But, Mike, in the past we've also talked about Kimberly Clark maybe being in a position to make some more assertive investments and assertive leading edge investments in opportunity markets like India going forward, just to position the company better for long-term growth. How are you thinking about that? Where do those types of initiatives rank in terms of the prioritization for future investment dollars?

Yeah, great question, Steve. And obviously, you know, I think, as I mentioned earlier, I think what's changed over the past six months or so is the category conditions make investment, I think, more worthwhile or more productive. And we're seeing some of that across multiple markets. Most of the current investment that we're talking about for the second half is going into digital and capability building around, you know, revenue growth management and sales execution. So those are the near-term focus areas. But we do believe we have great opportunity to enhance our investment in categories, let's say adult care globally, baby wipes, and then in markets like India. And so, you know, working through those as a team and think we've got a lot of good opportunities to invest in to accelerate growth.

Okay. I'll pass it on. Thanks. Thanks, Steve. Thank you. Our next question comes from Steve Strickler with UBS. Hi. Good morning and

congrats on a good execution quarter. Thanks, Steve. So a few quick questions. For Maria, I think I heard you say that on manufacturing expenses, we're going to be tracking a little bit higher than you expected versus the start of the year. What's driving that? I haven't heard a lot of other companies really speak to that.

Sure. There's a number of items that affect what we call other manufacturing costs, which are general expenses that hit us in our manufacturing operations. They include things like fixed cost absorption, labor rate changes and inflation, product improvement, investments, and other one-time types of impacts such as write-offs or startup costs associated with new equipment. It's not unusual that this is an inflationary area for us, but it is running a bit higher than we expected when we came into the year. Specifically for the second quarter, we saw increases across all of those levers. We talked about our volumes being off a bit, which leads to fixed cost absorption impacts with our labor rates. All the inflation that we're seeing particularly out of Latin America affects the cost there. Then one area, we just had the question on investment. One area where we are investing is in product improvement. We're investing there behind the innovations that we've been talking about. Those increased investments in product quality and improvements in innovation flows through that line item. That's what's going on there. I'd point to the fixed cost under absorption and the product investments as two of the drivers.

As a follow-up to that, if we think about the $150 million reduction to your initial inflation outlook, that's about $0.33 or an Acer 5 percentage point to the EBIT dollars. It feels like you're flowing through about a third of that to shareholders. Is it, Mike, that this is a really good opportunity to address the wish list of things that you have that are actionable right now in the marketplace, including increasing bonuses and whatnot out there, or is this conservatism as we think about the back half?

I think by our math, we're somewhere between flowing through between a third to a half. Again, I think part of it is the market opportunity. We think the conditions are good for us to invest. The brands are responding. It's going to be productive for the long-term health of the business. That's why we're doing that. Some of the comp stuff is more formulaic. Last year, we were cutting comp, and this year, it's just the math formula that goes back up. Really, the focus for us is about brand reinvestment, both, as Maria said, in products, in the digital or in the marketing spending. And then in some of the capability build.

Yeah, and I think if you took compensation aside, it would look a bit more like two-thirds flowing through.

Okay. And to close out, Mike, can you just walk us through a few of the key geographies as to what's happening on a constant currency basis across Brazil, Argentina, and China? You touched on at a high level on a few of them, but just give us a little bit more texture as to what's happening in those markets.

Yeah. Yeah, very solid growth. I think in Brazil, double-digit growth overall, not selling price and mix were up in the teens. Volume was down slightly, I would say, almost even. Overall, in Brazil, I think the market price has generally moved, although some local competitors have been lagging. The better expected volume performance really is related to great execution. And when I say execution, it is the whole ball of wax, meaning it's the innovation, it's the marketing, and then it's the selling. And all those things are working well for us. In addition, I think in a market like Brazil or Latin America more broadly, we've got very developed plans to expand kind of the categories in adult care and in life, and that's paying off this year. Argentina, I guess I would say, high double-digit organic growth. The volume decline was in the, I think, -single-digit level. So again, you could talk about the same thing, which is I think the consumer has kind of reset their expectations for price, but also very strong in-market execution of the teams that kind of reduced the volume impact that you would have expected from that level of pricing. So Latin America, very strong performance from a revenue perspective. Central and Eastern Europe up almost 20% or a little bit over 20%. Very strong performance in Ukraine and CIS. Russia continues to grow at a very good pace for us, although I will tell you our shares are a little bit more under pressure there than we've experienced over the prior couple years. But the formula there is also the same thing as it will be with frame. Innovation, marketing, and great in-market execution. ASEAN up double digits. So we're feeling good about most of our D&E markets.

Great. Thank you. Thanks, David. Thank you. Our next question comes from Caroline Levy with Macquarie Capital.

Good morning. Thank you so much. I have kind of a fun one first, which is I was very surprised to see a black diaper package. Are young families no longer doing blue and pink for their baby's bedrooms and stuff? So if you could just talk about the logic behind black packaging.

Yeah, Caroline, interesting. Yeah, I was saying we've got some new hands on the business. I think that the team is attuned with kind of what Millennial Mom is looking for. The black packaging kind of is striking off the shelf. I will tell you we've gotten strong retailer response to it. It is the first black packaging in the category and for us in the diaper category. Obviously we've been black for a while in the femtere category. So, you know, and I think it's so far early returns would say, even though it's too early to really say, but it's doing its job, which is it's striking its shelf. And it's got a great shelf impression. And I would say overall a more contemporary look and feel. And I think we're trying to, you know, address Millennial Mom. And so far it seems like it's set in the right direction.

Excellent. Thank you. So I wanted to just talk about birth rates. I mean, I remember maybe a year ago you talking about a shocking decline in South Korea. We're reading about North America seeing birth rate declines. And yet you're able to put up some really good numbers despite that in some of your, you know, in certainly North America. What do you think is going on and how do you deal with that as a long-term trend?

Yeah, still a decline, you know, maybe a little less shocking than the numbers that you may recall. South Korea, I think a couple of years ago, it was a low double digit decline. I think this year it looks like maybe about a high single digit. So that's an improvement, but it's still down. And the driver in South Korea is slower family formation. I mean, in fact, marriages are still down. So I think, you know, that's South Korea. In North America, similar birth rate has improved, but it's still down about in 2018. Our estimate's about down about 2%. And so, you know, I think, you know, in big developed markets, I think that's a trend that we have to deal with. And that's why you're seeing how these special delivery or some of the things we're trying to address. The big thing about special delivery is it sells at a significant premium to all the other products in the category. And the reason we feel good about that, and it's pretty well tested, it's got a lot of benefits that consumers are looking for. And that falls in line with the strategy we're really driving, which is elevate the core, which is you got to, in the big developed markets, the way to grow them is to drive premiumization. But the only way to make premiumization work is if you make the products worth more and worth paying that premium for. And that's what we're trying to do.

Excellent. Thank you. And just retailer pushback. I mean, you've talked about the fact that you haven't seen competitor, you know, dynamics change around the price increases. But I think there's quite a bit of fear that as retailers continue to try to compete with Amazon, they may come back to the manufacturers as costs come down and push back. And can you just address that and business history? Are you seeing anything different?

I don't know that we're seeing anything different. I think that's an ongoing issue, Caroline, in the industry. But it's also one that those of us who've been around for a long time have been dealing with for a long time. And so we're used to this dynamic and managing through it. I will say, you know, like most retailers that we, you know, that we deal with, you know, they're mostly interested in driving growth. And so while, you know, they may not like pricing in some, you know, in some categories or some retailers, they do like growth. And so that's where we're focused on working with them and partnering on the final right way to grow the category.

Got it. And just my last one on KC Professional, your Western Central Europe volume was down 8%. Can you just talk to what's going on there?

Yeah, you know, the biggest driver in KCP, and I'd say another solid quarter for KCP Professional, organic overall was up one. And North American developing and emerging markets were up two. I think the biggest thing is we're leading price in, you know, with our leadership position in KCP generally. Not all markets have followed, but we feel like this is the right move for us. And we recognize there's a little stickiness competitively, and there's going to be some blind impacts.

So you think that's temporary?

Yes. Well, we'll see if it's temporary, but it's something that we are, we're prepared to kind of deal with as we work through the year.

Caroline, I think what I'd add to that is focused on the net of price and extend volume, especially in that market. And if you do that across developed markets, we were down about 1%.

Got it. Thank you so much.

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

Hey, guys. Good morning, everyone. Hey, Mike. Congrats on a good result this quarter. Not to beat a dead horse, but I wanted to ask the question on the reinvestment a little bit differently. So the context, you know, of course, companies' results have not been what you've hoped over the past three years. So far, so good, first half of this year. But even, Mike, like as we look at the Nielsen data, market share trends, I suspect, in the U.S., still not quite where you'd hope. So the question is, as you're working through the quarter and thinking about, you know, how the business is progressing, what the guidance is going to be with pull prices rolling over, was there any thought to investing all of the upside to try to sustain the top line, which arguably is going to drive the most value for shareholders over time? So the question is really around the adequacy of the reinvestment and how you were thinking about that. Because, you know, when we met with you early in the year, the thinking was, you know, you were not going to do any sort of earnings reset because you didn't necessarily see the innovation pipeline sort of justifying it. So sorry for going on a bit, but it's really around the adequacy of the reinvestment, as you saw it, and balancing that with the earnings flow through. And then I have one follow-up.

Yeah, Kevin, I'm really glad you raised that. You know, that is one area we've got to really focus on. And if there's one part of the quarter that we need to improve on is our share results. And we're a little bit behind what our expectations are. You know, part of that is related toward leading price or, you know, being first mover on price in a lot of our markets and categories. And so we were in some ways expecting, you know, some share impact due to that. However, it's also a big reason why we wanted to drive this reinvestment here to shore up our share positions and make sure we're healthy for the long term. You know, I think, you know, we laid out in our KC Strategy 2022 that we were going to deliver a balanced value creation plan. And we think that this, you know, is an example of that.

Okay.

All right. Fair enough. I can leave that, I guess. And then separately, you guys, of course, in Tuck and M&A sort of picked up a bit here in the HBC space, particularly with an emphasis on personal care, largely skincare. Kimberly, of course, has not been very active on the M&A front in the past. And Mike, I think your commentary earlier was, you know, we probably should not expect much of a change. I just wanted to kind of revisit that in the current environment. Is that still the course we should really sort of expect investment behind the business and return cash to shareholders?

Yeah, I don't think we would expect a significant change versus what we told you earlier this year. I mean, you know, we like our categories. We still think there's a lot of growth potential in our categories, you know, especially when you look at both our first year. Our opportunity to elevate the categories and also the growing D&E. You know, however, we're going to continue to look at opportunities and we do that consistently. We've got a – it may not appear to be, but we've got a very active M&A and development team that is always looking at opportunities for us.

Mike, would you care to comment just on what specific areas and or geographies?

Maybe I'll pass for now, Kevin.

Okay. I thought I would try. All right. Thank you. Good luck.

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

All right. Well, we appreciate everyone's questions today and thanks to the support from our shareholders and we'll speak with you next quarter. Thank you very much. Bye-bye.

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