Kimberly-Clark Corporation

Ladies and gentlemen, thank you for your patience and holding. We now have your presenters in conference. Please be aware, each of your lines is in a listen-only mode. At the conclusion of this morning's presentation, we'll be opening the floor for questions, and 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 today's first presenter, Mr. Paul Alexander. Please go ahead, sir.

Thank you, David. Good morning, everyone. Welcome to Kimberly Clark's third quarter earnings conference call. This morning, you'll hear from Mike Hsu, our Chairman and Chief Executive Officer, and Maria Henry, our CFO. We have a presentation of today's materials in the investor section of our website. As a reminder, we will be making forward-looking statements this morning. Please see the risk factors section of our latest quarterly and annual reports for further discussion of forward-looking statements. Lastly, 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. Now I'll turn the call over to Maria.

Thanks, Paul, and good morning, everyone. Thanks for joining us on the call this morning. Let me start with the headlines for the quarter. Organic sales increased 3% with good underlying momentum and benefits from increased demand related to COVID-19. We significantly increased our growth investments and improved our market positions. We had another strong quarter of achieving cost savings and returning cash to shareholders. And finally, while earnings were down as expected, we are increasing our full-year outlook. Now let's look at the details of our results, starting with sales. Our third quarter net sales were $4.7 billion. That's up 1% from a year ago and includes a two-point drag from currency rates. Volumes were up 2%, and the combined impact of changes in net selling prices and product mix increased sales by 1%. By segment, organic sales rose 10% in consumer tissue and 5% in personal care, but declined 15% in KC Professional. Mike will talk more about our top line and our market share performance in just a few minutes. Moving on to profitability, third quarter adjusted gross margin, was 36.2 percent, up 40 basis points year-on-year. Adjusted gross profit increased 2 percent. We had excellent cost savings performance in the quarter. Combined savings from our force and restructuring programs totaled $140 million, including continued strong productivity improvements. Commodities were a benefit of $25 million in the quarter, driven by pulp and other raw materials. Other manufacturing costs were higher year-on-year. That included incremental costs related to COVID-19. Foreign currencies were also a headwind, reducing operating profit by a high single-digit rate in the quarter. Moving further down the P&L, between-the-line spending was 18.9% of sales. That's up 180 basis points and driven by a big step up in digital advertising. G&A also increased. including capability-building investments and higher incentive compensation expense. We expect between-the-line spending will rise further sequentially in the fourth quarter. Our SG&A spending is typically high in the fourth quarter, and this year we'll also have project activities that were temporarily delayed because of COVID-19. All in all, for the third quarter, adjusted operating profit was down 6%, An operating margin was 17.2%, down 130 basis points versus a year ago. By segment, operating margins were up in consumer tissue and healthy and personal care. KC professional margins were down significantly, including an approximate 600 basis point drag from fixed cost under absorption. On the bottom line, adjusted earnings per share were $1.72 in the quarter compared to $1.84 in the year-ago period. Turning to cash flow and capital efficiency, cash provided by operations in the third quarter was $559 million compared to $886 million in the year-ago quarter. The decrease was as expected and driven by the timing of tax payments and higher working capital. We continue to allocate capital in shareholder-friendly ways. Third quarter dividends and share repurchases totaled approximately $560 million. And for the full year, we expect the total will be $2.15 billion. So let me now turn to the full year. The overall headline is that we're raising our top and bottom line outlook. On the top line, we now expect organic sales growth of 5% compared to our prior target of 4% to 5%. Through nine months, organic sales are up nearly 6%, and we expect a solid fourth quarter. On average, we expect slightly less headwinds from currency rates than previously anticipated. In addition, we'll begin consolidating the soft tax Indonesia business into our results on November 1st on a one-month lag. All in all, we expect net sales will grow 2 to 3 percent this year. That's one point better than our previous estimate. On the bottom line, our new outlook is for adjusted earnings per share of $7.50 to $7.65. That represents year-on-year growth of 9 to 11 percent. Our prior outlook was for adjusted EPS of $7.40 to $7.60. The increase in our outlook is driven by improved top line, partially offset by higher incentive compensation expense and other manufacturing costs. Overall, I'm encouraged that we're improving our near-term outlook and investing significantly in the business for longer-term growth. I'll now turn it over to Mike.

Thank you, Maria. Good morning, everyone. I'll begin by reinforcing that we remain focused on three near-term priorities that we established since the outbreak of COVID-19. First, we're focused on protecting the health and safety of our employees and our consumers. Second, we're proactively managing our supply chain to ensure supply of our essential products. And third, we're prudently managing the business through near-term volatility while continuing to strengthen the long-term health of Kimberly-Clark. Our 40,000 employees continue to do heroic work in this COVID environment. Our supply chain operations have remained online with strong productivity gains and fewer COVID-related disruptions over the last three months. The environment is still dynamic, and we're closely monitoring virus hotspots. And thus far, our supply chain has been resilient, and our teams have done a great job overcoming daily challenges. Now I'll turn to our results focusing on organic sales, category conditions, and our market shares. As Maria mentioned, organic sales increased 3% and a quarter. In North American consumer products, organic sales rose 8%. Now, within that, personal care grew 6%, driven by broad-based volume growth in baby and child care. We improved our market shares on diapers, baby wipes, and in child care. In late July, we launched Pull-Up's New Leaf Training Pants, which features super soft natural materials and is our most premium training pant. This is another example of our Elevate the Core strategy in action. A new leaf is off to a very good start. In North American consumer tissue, organic sales increased 11% and that reflects strong demand due to the COVID-19 work from home environment and strong momentum on Kleenex facial tissue. Bathroom tissue shipments benefited from our efforts to restore customer inventory levels. In the fourth quarter, we expect more benefit from those efforts and from people continuing to spend more time at home. Our market share performance in North American consumer products was strong in the third quarter. Shares were up or even in six of eight categories. Turning to KC Professional North America, organic sales declined 15%. Sales were down about 35% in washroom products, and as you'd expect, the category has been significantly impacted. There are fewer people working in offices and lower levels of business activity, including in travel and lodging. Sales were a bit better in September, but we're planning for only a modest near-term improvement in the environment. On the other hand, KCP sales were up double digits in wipers, safety, and other products. Our efforts to expand our face mask business by leveraging our superior nonwovens technology is off to a good start. We're also expanding our wipers lineup with Scott 24-hour, which delivers long-lasting surface protection from bacteria. Moving to D&E markets, organic sales were up 2%. That was driven by 7% growth in personal care. In terms of key personal care markets, organic sales were up mid-teens in China, mid-single digits in both Latin America and Eastern Europe, and strong double digits in India. Organic sales were down mid-single digits in ASEAN. We also improved our market shares in many countries in the quarter, and that includes Brazil, China, throughout Eastern Europe, India, and Peru. While category conditions remain difficult in many D&E countries, government restrictions on social mobility and store operations have eased somewhat since the last quarter. Finally, in developed markets, organic sales were up 3% driven by strong growth in consumer tissue. Looking ahead, we're launching Kleenex Proactive Care in the U.K. and other markets in EMEA. This lineup includes hand towels, antibacterial hand and face wipes, sanitizing gel, and face masks. Now, in terms of market share performance, we continue to make good progress. We're on track to grow or maintain share in approximately 60 percent of the 80 country combinations that we track. This is a result of higher investment levels, innovations, and strong in-market executions. Our capabilities are driving our results, and our investments are working hard for us. Through nine months, I'm very encouraged with our performance, how we're navigating this environment, and how our teams are taking care of each other and our customers. Before closing, I'd like to comment on our recent acquisition of Softex. This transaction is a strong strategic fit with our focus on accelerating growth in personal care and D&E markets. Softex expands our presence in a high-growth market where we had limited exposure. The diaper market in Indonesia is already the sixth largest in the world, and it's projected to nearly triple in size over the next decade. Our Softex team has built a strong business with deep local market knowledge, excellent brands and market positions, and strong profitability. This transaction improves our underlying growth prospects, and we're looking forward to leveraging our combined strengths in innovation, marketing, and go-to-market. In conclusion, we're managing through the COVID environment safely and effectively. We remain optimistic about our opportunities to generate long-term growth and create shareholder value. We're investing in our brands and improving our market positions. We're raising our full-year outlook and are on track to achieve excellent financial results. And we continue to operate our business with a balanced and sustainable approach as we execute KC Strategy 2022. Now that concludes our prepared remarks, and now Maria, Paul, and I will be happy 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 a question, you may do so by pressing star 1 on your touchtone phones now. If you're on a speakerphone, please make sure that your mute function is disabled to allow the signal to reach our equipment. Again, press star 1 to ask a question now. And our first question comes from Lauren Lieberman with Barclays.

Great. Thanks. Good morning, everyone. Hey, so I was hoping we could just dive in a bit on KC Professional and that operating margin headwind from lower absorption that Maria called out. I know you don't discuss gross margins at the operating unit level, but was wondering if that's really kind of the core drag on gross margins is quarter on the manufacturing costs. And if that's the case, kind of what made it so significant this quarter versus in 2Q, right? Because the business is already under pressure. And then in that vein, as we look forward, how should we think about manufacturing dynamics of that business? Thanks.

Okay. Hey, Lauren, let me start. Go ahead, Maria.

Go ahead, Mike. Sorry, we're not in the same room as you can tell. Yeah.

Yeah, sorry, I'll give you the high level, and then Maria can give you a little bit more texture there. But I would say overall, Lauren, the overall is the business was down about 15%. I think the business actually outperformed what mobility tells us is the general kind of B2B environment, what that looks like. And so we feel good about the pivot that the teams are making to drive safety and wipers and masks. But the washroom business is significantly down. I think for us overall, maybe the big change between Q2 and Q3, a big impact was we knew we had deferred maybe some of the volume impact in Q1 and Q2, and it did come to realization in Q3. Because I think the market environment was soft in Q1 and Q2, but as we mentioned on those calls, there were distributors and end users buying in to make sure that they had the right inventory when businesses were set to go back. And so we experienced some of that. at the tail end of Q1, at the beginning of Q2. I think this does represent kind of the current run rate of where the market is, and I think it's better than kind of where the overall market is, but it's a pretty significant hit, and so it's affecting our, obviously we have high fixed costs, and so it's affecting our fixed absorption and other factors. But, you know, Maria, maybe you can give a little bit more detail here.

Sure. Lauren, I would say you're spot on in how you're thinking about it. And while we don't give specifics on gross margin, what I tell you is that we had a nice improvement in personal care in the quarter and very nice improvement in consumer tissue, as you would expect on the organic sales in that segment being up 10%. The whole story here is around, Casey, professional, which the gross margins were down meaningfully, primarily driven by these other manufacturing costs. The 600 basis points on fixed cost absorption that I mentioned in my prepared remarks, that's a meaningful dollar number and was a big contributor to why our other manufacturing costs were up meaningfully in the quarter. So you're right on with that.

Okay, that's great. And then sticking with that, I know at our conference, and you brought it up again today, some of the innovations that you're launching, can you just talk a little bit about how that's progressing if you're adding staff, kind of what needs to happen to sort of build up a more material, but even more material business, I guess you could say, in safety and wipers. And anything in terms of progress, or is it still too early days on, you know, kind of incremental opportunities on the hand towel business and professional channels and transitioning customers away from air dryers?

Yeah, I think we're making very good progress on all those fronts, Lauren. In fact, we have added staff. we did announce that we are making some organizational changes to exactly do what you're saying, which is add more resources to where the growth areas are. And not only are we adding people resources, but we are making capital investments to support the growth and expansion of that business, particularly in more advanced nonwovens capacity. So I think we feel very good about where that is going. Our mass business is off to a very strong start. We just started shipping in Q3, and so we feel good about the trajectory of that business. We're launching, as I mentioned in my remarks, Scott 24-hour relaunching in a different format, and we think that would be a very good offering for customers and end users. And so we're excited about that as well. So we are going to be bringing more innovation. We think both in safety, masks, wipers, that there's a lot more room for more fundamental innovation and With our superior nonwovens technology, I think we feel like we can offer differentiated solutions. So we're looking forward to building that business.

Great. All right. Thanks so much.

Thanks, Lauren. Thank you. Our next question comes from Olivia Tong with the Bank of America.

Great. Thanks. Good morning. Good morning, Olivia. How are you? I wanted to ask you about price mix, which continues to be pretty positive in Q3, but it looks like what's really driving that is a professional business. So I assume lower away from home tissue while hurting you on gross margin is benefiting you a bit on price mix and more in the industrial wipers and such. So does that price mix benefit reverse when COVID conditions normalize? And then flipping over to the consumer business, can you talk about the promotional environment overall, like what you're expecting over the next 12 months? And obviously, this applies more to personal care than consumer tissue and kind of compare and contrast what you expect to see from branded versus private label competitors. Thanks.

Yeah, thanks, Olivia. Yeah, you know, overall, you know, I would say, you know, the organic was more driven by volume in the quarter. And so price mix, you know, were, you know, combined overall for us up about a point. And I think that the dynamic that we saw in Q1 and Q2 is, is persisting, I think, in Q3, which is that price has been, in general, fairly neutral, mostly because in developed markets where there's been high demand, our promotion intensity for the category and for our brands in particular have come down a bit. And so I think as demand remains elevated, we'll see this. There are some categories that we are seeing perhaps a return to more normalized promotion levels that happens to be more in personal care at this point. And so I think the overall pricing environment in Olivia, I would say, is generally constructive, but there are a few selected hotspots. You know, we're seeing elevated promotions in adult care in North America in particular, and promotions have increased a bit somewhat, I would say, in the consumer tissue business in Europe.

Got it. That's helpful. And then your U.S. diaper performance is actually quite strong. So just want a little bit more color there in terms of what you're seeing, the state of competition, promotion levels, and things like that. Proctor did talk on their call earlier this week about a new mid-tier diaper. So just would love a little bit more color there. Thank you.

Yeah, Olivia, our North American diaper team is doing a fantastic job. And I think You know, when you peel the onion, there's no kind of secret bullet or silver bullet going on there. It's really, you know, very strong product offering lineup. And I think they've put very diligent efforts to improve the product offering and bring innovation. This year, the big innovation was a new and improved snug and dry or our Tier 4 product on a shape diaper that was a significant improvement versus our previous version. But, you know, when you take great product performance with very strong marketing and strong digital investment, we feel like it's working very hard. And they're working in great partnership with our customers with great retail plans. And so, you know, we feel very good about it. The business overall was up low double digits despite the category being down a couple points overall. And our share was up. as you can see in the Nielsen's. I would tell you that All Outlook wasn't up as much because we had some promotion timing or promotion events that came out of the quarter versus prior year. But we feel very good about our momentum on that business, and we'll continue to bring strong innovation.

Great. Thanks. I'll pass it along.

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

Hi, guys. So, Mike, can you discuss your viewpoint on birth rates in the U.S. and some of the other key geographies around the world as we look out to 2021? How much impact you're expecting from COVID on birth rates and category growth as you look out?

Yeah, Dara, I'll start with North America. You know, I think the The last set of data that we had, which generally lags a year, Dara, would say the category birth rate was down about 1%, which was an improvement over the prior couple of years, which were down about 2-ish percent. So I think it was heading in the right direction. We're reading the same articles you may be reading about the category, and there's all different kinds of predictions, including baby boom because there's less to do, and also birth a decline because the affordability is tougher. And so we're not seeing that yet. And thus far, as I mentioned, the category has been off about 2% year-to-date. And so we're watching that very closely. Gladys says, our performance has been better than that. And that's, as I just mentioned with Olivia, because of the strong share performance and the strong product performance and marketing performance that we have in North America. I think in other markets, I would say it's a mixed bag across different markets. Certainly, one of the big reasons why we made the acquisition of SoftEx was to buy into a market that was expanding on the cusp of strong household income growth in the population and strong birth rates, and that's Indonesia. Several of the markets that have that profile for us. In our bigger developed markets, We have seen somewhat of a slowdown. Now, for instance, South Korea, I think our team has done a great job rebuilding our share position, and so we've seen significant share gains, but the birth rates in South Korea continue to be a bit soft. So overall, I don't have a great view right now at this point as long-term effects of COVID. I will say... The long-term math is our categories have a long runway of growth, particularly in D&E markets, which is why we're continuing to invest to build our business there. You know, the overall DARA is, you know, my theory would be, you know, the category is less than a third developed in D&E. And so we're going to continue emphasizing and building that business.

Okay. That's helpful. And then, obviously, with the new earnings guidance, you're expecting, you know, growth around 10% of your midpoint. that's clearly well above the mid-single-digit longer-term algorithm. So just wondering, as we think about 2021, 2022, sort of medium-term earnings going forward, should we think about 2020 as the right EPS base to work off of? Is it more 2019 as the right base and look at two- and three-year averages versus whatever you might consider a typical algorithm to be as we look out to 21 and 22 and Part of the reason behind that question is in the past you've sort of flexed marketing spending, I think, to get to more of that sustained mid-single-digit type of earnings growth rate year-to-year, both on the positive and negative side. So just wondering sort of conceptually, coming off this above-trend year, how you view the medium-term earnings growth profile from here.

Yeah, Dara, I might ask Maria to comment, but I will say, one, we'll provide our 2021 outlook in January. You know, I think a good thought from my perspective would be to look at the combo of 19-20 as a trajectory. But, you know, for certain for us, we're in the middle of planning. There's a lot of uncertainty environment, as you can probably well surmise, and so we're still working through the details. You can expect us to continue to focus on improving our market positions by making the kind of investments that we're making this year and continue to make progress on the value drivers like in investing in brands and commercial capability. You know, cost savings and community drive force is going to be a big feature of our plan and ongoing discipline in capital allocation. But, you know, Maria, any additional thoughts here?

Yeah, I think that's exactly right. And I would not look at 2020 as a baseline year as we benefited from some one-time net positives from the effects on our business from the COVID situation. Next year, as we look ahead, you know, mathematically, that'll be a challenging comp. But if you put the two years together on 2020 and 2021, you know, I think that's probably a good way to look at it. And, you know, we're not coming off kind of our KC 2022 algorithm at this point.

Great. Thanks. That's helpful. Thank you. Our next question comes from Kevin Grundy with Jefferies.

Thanks. Morning, Kevin. Hey, good morning. I wanted to start on the advertising spending in the quarter. Mike, you mentioned, or excuse me, in the press release that you indicated it was up significantly year over year. And if you just sort of tumble through the numbers in terms of the benefits behind forced savings and restructuring and commodities, it could be up quite a bit. Can you frame that number for us, either year over year or percent of sales or both? And then I have a follow-up from Maria. Yeah.

Yeah, I think overall, I think our investment between the lines overall, which includes advertising, but also some of our capability build, and I think incentive comps affected. I think we said, you know, it's in the remarks or in our release, which was up about 180 basis points. So that's a pretty significant impact in the quarter. You know, we do feel like we have strong underlying business momentum across our businesses, both globally and both consumer tissue-wise. and in personal care. Pleasant surprise in the quarter was, I think, a very strong improvement versus Q2 in developing emerging markets. So we feel good about that. We feel like the spend is working, and it's something that we feel like is going to yield dividends in quarters to come. So, Maria, any additional thoughts here?

I'm sorry.

No, I think nothing to add.

Thanks, guys. And then just quick follow-up, and I hate to belabor this, but the KC professional margins, I think it's important. I just want to make sure I understand it clearly because I think it frankly overshadows what was otherwise a pretty strong quarter for the company. What was treated differently about the fixed cost absorption? I guess I say that in the context, volumes were down in the segment 16% in 2Q, 21% in 3Q, so obviously worse, but margins were up 170 bits in the second quarter, down substantially 860 bits in the third quarter. So what specifically changed with regard to how fixed cost absorption was being treated? What changed in terms of customer mix or otherwise? I just want to make sure I understand clearly. Thank you.

Yeah, I think what you're seeing is that in the second quarter, you know, we had record levels of performance on the consumer side of the house. And so we had... a big fixed cost absorption benefit coming from that, and that was offsetting the negative fixed cost absorption that we were experiencing in the KC professional business. As that has come down from the second quarter, our total fixed cost absorption for the company was negative in the third quarter, driven by the professional business, and it just wasn't up by nearly as much in terms of a benefit on the consumer side of the house as it was in the second quarter. And so what you see in the third quarter on the margins is the impact of the volumes being down meaningfully in the KC professional business showing up on the total company P&L.

Okay, I'll take it offline with Paul. Thank you very much for the time. I appreciate it. Great. Thanks, Kevin.

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

Thanks. Hey, good morning, everybody. Not to belabor this even more, but just on the professional thread, is the outsized magnitude to be limited to 3Q, or are you expecting that fixed cost to leverage impact to directionally persistent to 4Q as well?

The macro trends that are affecting the KC professional business are not likely to change from what they were in the third quarter. And as long as those volumes stay down as people continue to work from home and as mobility is limited, I would expect to continue to have a negative fixed cost absorption impact coming through the P&L.

Okay. Okay. Thanks. I think we've got that one pretty well vetted now. I guess, Maria, maybe while I have you talking, I guess can you just maybe frame for us in a bit more detail how you're sizing up the cost outlook exiting the calendar year and I guess entering your 4Q contracting season? We've seen some upward pressure on inputs as well as freight, and P&G echoed those sentiments earlier this week. So how would you frame that outlook from where you're currently situated, just looking out over year end and out over the horizon?

Sure. Well, on the commodity side of the house, in the quarter it was in line with our expectations overall. When I think about what's new from the last time we spoke, in July, while recycled fiber is still inflationary. It was down from the peaks that we saw in the second quarter. On the other hand, resin-based materials are rising. And if I look at what happened in the quarter, our polymer costs increased double digits versus our expectation coming into the quarter. So we are seeing the oil-based commodities rise, and so that'll certainly be a factor exiting the year. The other area that you mentioned is on our distribution costs, which are also a bit more inflationary than they were in the first half of the year, and that's due to the tighter capacity in the system. Those are kind of the big trends as I see them. As I look forward, pulp has been favorable globally year on year, and it's been quite stable sequentially. If you look at the forecast there, the forecasters are calling for it to rise, although they've been calling for that for a while. And so with COVID, I think that gets pushed out a little bit. What else would I tell you? The other thing I'd call out is in the fourth quarter, overall commodities could be inflationary for us. And I think you see that kind of the outlook that we gave for the year. We're at a $215 million benefit year to date. My current point of view on that is that we'd be at the midpoint of the range for the year, so commodities turning slightly inflationary in the fourth quarter and as we head into next year.

Perfect. Thank you so much. I guess if I could just squeeze in one more and just put that in the context, Mike. of what you were talking about earlier. I don't think you were painting a picture, you know, negatively at all. But you did mention some competitive, I think you used the word hotspots, in adult care, tissue in Europe. Again, harking back to P&G earlier this week, they were talking about elevated promotion that they saw from competition, I presume, from you in pockets of diapers. So just as you have these elevated competitive, you know, hotspots, I guess, juxtaposed against that more inflationary outlook, is that a concern from where you stand, or that's just sort of be aware, but overall it's all pretty rational and level-headed?

Yeah, I feel like, you know, I think I use the term generally constructive, and I feel that way. I think there have been some some hotspots. You know, hopefully I don't think they were talking about us because I think our promotion levels have been down and our percent sold on promotion has been down consistently through this year. And frankly, you know, we feel good about, you know, driving volume through product innovation and advertising, particularly digital. And so that's kind of the direction we've been moving in. Steve, and I think it's working. I think when I say some hotspots, you know, we are seeing some elevated promotions actually from Proctor in adult care. And then in a few other caregivers, I think that may be more driven by retailer, you know, strategies. But I wouldn't say, you know, again, I think it's still, I think, constructive and, you know, we feel good about where it is right now. But we're keeping a close eye on it, obviously. Okay.

Okay, thank you so much.

Okay, thanks, Steve. Thank you. Our next question comes from Andrea Teixeira with J.P. Morgan.

Yeah, hi, good morning. Thank you. So could you discuss a little bit of the consumption and shipments, particularly in personal care, and also in tissue if you can, into your guidance for the fourth quarter. So I think if we discuss a little bit also the promotional environment that we elaborate more in the last question, I think you, Steve, posed. I think in other larger markets, as I can see from your prepared remarks in China, Australia, South Korea, and I would say, I don't know, in Brazil, it seems the same. But from your comments, it seems like the prices went down, and I'm surprised that You know, you needed to do that now, given that volumes are still up. So is that the mix is a trade-down, or are you seeing in those countries also some competitive environment increasing from, I think, what we hear from your competitors as well? Thank you.

Yeah, okay. Good morning, Andrea. Yeah, let me start with maybe the consumption and shipments dynamic. I'll probably speak mostly about North America, because I think that's where kind of the big divergence has occurred through the first three quarters. In personal care, I'd say consumption and shipments have largely caught up. And so, you know, in the first quarter there was, you know, a period where demand had kind of exceeded supply a bit on personal care. But I think most of that kind of reversed out during the second quarter. And I think our overall, our Our performance has been solid and shipments have been strong and kind of reflecting kind of where the, you know, consumption has been. I think in consumer tissue we've been working to catch up to demand all year. I think in the first quarter the category is up about 30 percent and as you're well aware now, you know, consumer tissue businesses aren't geared to be able to ramp up at that speed. So we have been working to restore customer inventory levels. We're making progress. In the third quarter, the category of tissue was up about 9%. That's an overall category number. And you can see on our numbers, we shipped 11. And so we shipped a little bit more than what was consumed with consumers, and that's restoring inventory levels. I think it will take us at least all of Q4 – to get our customers back to the inventory positions on tissue that they really want to be at. So that's that point. And then with regard to global pricing, you know, I wouldn't say, at this point, you know, our plan is to hold pricing kind of where it is. There have been some changes. I mentioned earlier, you know, in Europe, I think pricing has come down a point or two, and that's more reflecting of retailers wanting to get back to their promotion strategies. Similarly in China, we are seeing a little bit more promotion activity. Again, that's not our strategy in China, and our strategy is to drive, and we feel like we're doing a very good job growing the business right now through strong product performance and digital advertising. And then, so generally, you know, our strategy has been, as we articulated in KC 2022, you know, great innovation supported by strong executional capability Promotion is not really the way that we want to earn business going forward.

Thank you, Mike.

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

Good morning, Jason. Hey. Hey. Good morning, folks.

I hope all is well. Congrats on the market show momentum. I know we've kind of come up margins a few different times, but I've got to be honest. I'm still really confused here. I'm looking at your margins in KCP or tissue or consolidated at the gross margins. And the volumetric components for the company don't foot with a deleveraged story from 2Q to 3Q. It looks like there's something else going on. But if I look at 1Q to 3Q, it kind of makes sense. So it brings me back to the question of was 2Q just – just inflated to a degree that's unsustainable in a substantial way. And our issue is less about where 3Q landed. It's more the comparison, the sequential comparison to 2Q. So why the big swing between the two? Is there an accounting thing going on? Were we not absorbing enough cost in the second quarter and we had to push it into the third quarter? Just help me understand the moving pieces because the overall firm, Volume growth, one Q plus nine-ish plus one and a half in two Q plus one and a half in three Q. Volume leverage doesn't seem to explain the swing factors we're seeing in Q2Q.

Sure. Yeah, maybe I'll start.

Oh, go ahead, Maria.

No, go ahead. Go ahead.

No, I was just saying, I think just to amplify on Maria's prior response, you know, I think, Jason, it does reflect, I would tell you, extraordinary performance in our consumer tissue business Under extraordinary circumstances, right? There was extraordinary demand, and we simplified our assortment and drove strong utilization on the consumer tissue side in the second quarter. I think that has probably come back a little bit in the third quarter. And at the same time, you know, we probably didn't fully realize the fixed cost absorption in KCP in the second quarter because we had a little additional volume then. But, you know, Maria, any additional thoughts here?

Yeah, I think that that's it. If I look at the drivers of the gross margin in the third quarter, we've already commented on the differences by the three segments. But, you know, overall, the margin was up on volume X benefit, continued price realization, strong cost savings, still had some modest commodity deflation in the quarter and the benefits of that were offset by the higher other manufacturing costs and currency headwinds. So that is it. There was no accounting change or any other unusual things going on that would have affected the results. Paul, I don't know if you have any additional color to add.

Thanks, Maria. The one thing I would add, Jason, is that If you look at where the volumes were up in the second quarter, we had very strong performance in North America, and that's where our margins are the highest, both gross and operating. And in the third quarter, the volume growth, while still strong in North America, was not nearly as strong as Q2, and we had better performance internationally in developing and emerging markets. where our margins are lower. So there was a geographic mixed component sequentially from Q2 to Q3 as well.

Okay. Okay. Thank you. That's helpful. I'll pass it off.

Okay. Thanks, Jason. Thank you. Our next question comes from Wendy Nicholson with Citi.

Hi, good morning. My question, believe it or not, actually has to do with the top line growth in a professional business, not so much the margins. Can you give us a sense, I mean, I was actually a little bit surprised. I know you said it came in line with your expectations, but I was surprised that there was as much of a sequential deceleration on the organic volume side as there was. So can you talk about maybe what you're seeing? I know it's, you know, only whatever, three weeks into the new quarter, but what are you expecting in that business in the fourth quarter? and kind of obviously we get into incredibly easy comps by the time we get to the June quarter, but when do you think that business starts to pick up?

Yeah, Wendy, you know, I do think overall I think the business is outperforming what at least our data would suggest is kind of the B2B kind of activity or general business environment for offices and industrial and travel and lodging, etc., And you're probably well aware of kind of where those are. But, you know, generally the data that we say, mobility data would tell us, you know, those are generally off between 30 and 50%. Our business down 15, you know, does reflect we're down 35% in the washroom business in North America. You know, but, you know, overall we're down 15% in North America, and that's because our wipers and our safety business has really started to grow at double-digit rates. And so... So I think we are pivoting to where the growth is right now. I think the washroom business is where it's going to be at for a while. I mean, you can look at the projections for what the COVID infection rates are going to do. There appears to be an escalation in Q4 before it starts to come down sometime in Q1. And I do expect people to remain working from home you know, for the next, you know, for the foreseeable period into next year. And so we, you know, I think, again, overall, I think our professional business is outperforming what the environment says, but it is a pretty significant decline and we're managing through it.

Got it. And I guess second question, just as we sort of think about capital allocation, you know, The acquisition sounds like it's a great fit and all that good stuff. But your CapEx has been running high both last year and this year, higher than we've seen for a while. Where do you expect that to be next year just directionally? That would be great.

Sure.

On CapEx, it is higher than it previously had been driven by our global restructuring program. When we launched that program, we said that we would have $600 to $700 million of incremental capital that we would be spending as we execute that program. And so that's what's driving the elevated CapEx. When I look at the number for the year, the range is 1.2 to 1.3. I believe we will come in there. I would comment that we have had some programs that were scheduled for this year move into next year as there were COVID-related delays as people couldn't travel, people couldn't get into our manufacturing facilities for safety reasons, and we needed to keep our operations focused on producing products given the elevated level of demand. So some of the 2020 projects have been pushed into 2021. And then we added some very attractive projects this year that were enabled by COVID-related opportunities, particularly around PPE. So we're not giving a number yet for next year, but I would call out that we know that some of the programs that we're expecting to do this year are pushed into next year. in the midst of our planning process, as Mike mentioned. So we'll be evaluating the opportunities on CapEx, both for growth capital and productivity capital. And as always, we'll be disciplined on that. But we also won't be shy about investing in our business if we have high return opportunities. But we'll have more to say in January.

Fair enough. And Mike, I just wanted to ask a quick follow-up on one of the comments you made. You said that the retailers were getting a little bit more aggressive when it comes to some promotional activity. Can you just clarify, do you mean that they're promoting national brands, or are they promoting more of their own private label?

Well, I think I meant, and that comment reflected national brands. Overall, Wendy, if you look at the private label shares, I think they're up in one of our categories and flatter down in seven, right? And so generally, I would say there's been a flight to quality, at least in North America, and generally in developed markets, I think, given the tough economic times. But, you know, I think we find typically in times of uncertainty that consumers look to the big brands for reliability. And so I think we're seeing that reflected in some of the numbers. Yeah, the pricing environment, I think it's, It's no more than the typical, I would say, skirmishing that happens across channels and across retailers with price points. Some of that has been off, you know, less so this year overall because of extreme focus on supply and the reduction in promotions overall, but especially in tissue. I think it's been lower levels. But I think with personal care, you know, back kind of in stock positions across the industry, I'd say there's been more of a return to more normalized supply. levels of promotion, and so it's no more than that.

Fair enough. Thank you so much.

Thanks, Wendy. Speakers, at this time, we have no other questions in the queue.

Okay. Well, thank you very much, everyone. I'm encouraged by our ability to manage through challenging additions and deliver healthy business results, and so we thank you for attending our conference call this morning.

Thank you very much. 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.