Kimberly-Clark Corporation

Q2 2021 Earnings Conference Call

7/23/2020

spk02: 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 short remarks, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question. It is now my pleasure to introduce today's first presenter, Taryn Miller, VP of Finance and Interim Head of Investor Relations.
spk12: Thank you, and good morning, everyone. Welcome to Kimberly Clark's second quarter earnings conference call. On the call with me today are Mike Hsu, our chairman and CEO, and Maria Henry, our CFO. Earlier this morning, we issued our earnings news release, and we also published prepared management remarks from Mike and Maria that summarize our second quarter results and full year 2021 outlook. Both documents are available in the investor section of our website. We hope you find it valuable to have prepared remarks ahead of this call. In just a moment, Mike will share a few opening comments, and then we'll take your questions. During this call, we will make forward-looking statements. Please see the risk factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements. We may also refer to adjusted results and outlooks. Both exclude certain items described in this morning's news release. The release has further information about these adjustments and reconciliations to compare both GAAP financial measures. Now, I'll turn it over to Mike.
spk09: Okay, thank you, Taryn. Good morning, everyone. Before we get into the Q&A, I'd like to offer some additional perspective on our performance. Clearly, our results did not turn out as we expected, and we knew it was a tough comp given our strong growth and record profitability in the year-ago quarter. Now, while we expected volatility this year, the external environment has proven to be even more volatile than our expectation at the beginning of the year and versus our April update. Since we spoke in April, commodity inflation has spiked higher and our supply chain has been challenged. These dynamics are impacting us and, more broadly, the industry. We're also navigating historic levels of demand volatility in consumer tissue. Last year, we worked really hard to support our consumers and our customers as demand increased at a record pace. While we expected the category to retract this year, that decline has meaningfully outpaced our expectations. This has been driven by reduced at-home consumption due to increased mobility and destocking of both consumer pantries and retailer inventory. Consumer tissue has historically been very stable, and we expect demand to normalize over time. We remain confident in our brand fundamentals, even as we acknowledge that the short-term tissue outlook has been difficult to call. We've taken decisive action to offset the impact of raw material inflation. We've announced pricing in key markets around the world. Our pricing actions are on track, and we expect to fully offset the effects of input cost inflation over time, as we've done in previous cycles. We've also taken prudent steps to control and reduce discretionary spend across the business. We expect this to be reflected in our results as we continue to implement these actions. We view this level of input cost inflation and the COVID-driven demand volatility to be discrete issues. We will continue to take appropriate action to reduce the impact of volatility over time. At the same time, we remain confident and committed to our approach to building brands. Despite near-term challenges, we have plenty of bright spots in our business Our strategy to invest in our brands is working. You can see this in our second quarter results broadly across personal care and especially in D&E markets. Excluding North American consumer tissue, our organic sales were up 4%. Personal care organic sales were up 6% globally, driven by a 4% volume increase. In D&E markets, personal care organic sales were up 8%, with very strong market share performance, including in China, Brazil, throughout Eastern Europe, India, Peru, and South Africa. We've recently captured number one diaper share positions in China and Brazil, which reflects the strength of our brand fundamentals with consumers. Importantly, we're starting to see green shoots in KC Professional. The business grew year over year and sequentially as we saw strength in international markets and positive trends in washroom products. As more companies transition back to in-person environments, we expect KCP momentum to improve in the back half. We're encouraged by our underlying brand performance and have made significant progress in addressing the supply challenges we faced earlier this year in our North American personal care business. Looking forward to the second half, we are expecting better results across the business. We believe the major factors impacting this quarter do not reflect the fundamental health of our business. We remain committed to our strategy to deliver balanced and sustainable growth for the long term. We'll continue to execute KC Strategy 2022, and we'll invest in our business for the future. This includes investments in innovation, commercial capabilities, and technology. Importantly, I also want to emphasize that we are acutely aware of the impact that this pandemic continues to have on our employees, our consumers, and our partners and the world. We will continue to prioritize the health and safety of our people and all that interact with Kimberly-Clark. Now with that, we'd like to address your questions.
spk02: Thank you. At this time, we will open the floor for questions. If you would like to ask a question, please press the star key followed by the one key that is star one on your touchtone phone now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, please press star two. Thank you. Our first question comes from Lauren Lieberman with Barclays.
spk09: Good morning, Lauren.
spk11: Good morning. Thanks for letting me jump in first. Wanted to first just start with, I think, the biggest question, which is relatively short-term, but is the guidance reduction for this year. And I think it'd be helpful for everyone to just hear a bit about, you know, your degree of confidence that, like, this is it, right? The environment's been incredibly volatile lately. But as you look forward from here, you know, to what degree have you built in flexibility for things to perhaps worsen? I think that's sort of an important starting point. And along with that, within the inflation basket, what has been the biggest delta versus, you know, when you last communicated an outlook to the guidance to the street back in April? Thanks.
spk09: Got it. Thanks, Lauren. Yeah, a couple of things. I'll start with the outlook and then I'll ask Maria. to provide a little more color. But first of all, I'll just say overall my view on the outlook is it reflects certainly, as I mentioned in my prepared remarks, significant changes in that external environment that we here view as being discrete issues and that really that we're managing and fully managing. I would say that the two issues that we're talking about are, one, raw material inflation and then the consumer tissue demand changes, particularly in North America. And if you add it up, Lauren, year on year, If you add those two, it's well over $3 of EPS, you know, on a year-over-year basis. So, it's a pretty significant increase. Obviously, given that amount and given our outlook, you know, we are covering a significant portion of that, but we can't practically cover all of that this year. All right? And so, what I would say is, part one, our pricing implementation is largely on track, and we expect to fully offset inflation over time. Not all this year, but over time. And then the North American consumer tissue volatility is COVID-driven, and, you know, I view that as more epistotic in nature or temporary in nature, and I think the team is doing a very good job navigating it. But certainly, you know, Lauren, it's a little tougher managing shortfalls in the category, you know, versus some of the gains that we went up against last year. And so those are, I think, two that I would say are discrete issues. The big delta on the commodities category perhaps that's less visible to all of you is the polymer or resin side of the business, right? So you can see the – you can track the eucalyptus prices, which have kind of remained in the space that we've called. But what's really escalated is resin, which I think for the full year, our estimate, it'll be up almost 100% at certainly historic highs for us. And, you know, that should have made it at some point, but, you know, I think it's – Initially, we thought that was going to come down some in the back half, but it looks like the highs are staying high longer, and so that does reflect some of the pricing that we've taken. So overall, I think those are really the two big issues. I do really want to point out, Lauren, that our brands are fundamentally very healthy, and we continue to see really robust growth around the world in both organic and in share. And even we're really, really pleased with our North American personal care recovery. Although we are a little light on share, I would say almost all of that is related to supply issues. We still undershift orders significantly in the quarter, despite being positive on organic growth in the quarter. And so we feel good about where the business is and where our brand fundamentals are, and we're expecting a stronger Q3 in our personal care business. But maybe, Maria, do you want to add some color?
spk10: Yeah, sure. I'll, on your first question, learn about the full-year outlook. We've been wrong twice now, and so it's an incredibly challenging dynamic environment that we're operating in and the changes versus our expectations are clearly on the input cost side as well as how the consumer tissue category in North America has unfolded here. So, you know, when I think about the guidance range that we've provided, we have six months left to go in the year and there's 25 cents still in the range and I don't like to take guidance down ever, and since we've done it twice, you can rest assured that the guidance that we've provided is both thoughtful and based on the trends that we see, allowing for some ranges, given how dynamic this current environment is. And then on the outlook, for operating margin compared to three months ago. A couple of the things that I'd call out, higher commodity costs, lower volumes in consumer tissue, and along with those lower volumes, there's associated fixed cost absorption. The tissue business generally runs at very high utilization rates and has high fixed costs, and the actions that we've taken to offset that also go into our outlook, which include higher cost savings and reduced between-the-lines spending. Okay, great.
spk11: And Maria, when I look forward, I mean, it feels maybe a bit early, but to look forward into next year as I think about the headwinds that you've faced year-to-date from those higher manufacturing costs, be it a combination of the storm impacts in Q1 and really more materially, the negative operating leverage, like you said, the absorption on tissue. I mean, as we look into 22, simply the absence of those factors, if you just go back to a more normalized demand environment for tissue, right, those should be, you know, they should just go away next year. I mean, is there anything I'm missing as I think about that kind of impact to profitability from operating leverage and higher manufacturing costs looking into next year and as we start to compare against these periods?
spk10: Yeah, I'll say two things. It's very tempting to talk about 2022, given where we are with this year and the very unusual dynamics that we're facing. I'm going to resist that temptation as the environment's been quite dynamic. I think we're best off waiting to see another six months before we call 2022, given that the macro factors are moving so much. But that said, Lauren, the way you're thinking about it is correct.
spk11: Okay. Thanks a lot. I'll pass it along. I appreciate it.
spk03: Thanks, Lauren.
spk02: Thank you. Our next question comes from Dara Masunian with Morgan Stanley.
spk01: Morning, Dara. Hey, guys. Good morning. So, Mike, you mentioned you expect to be able to fully offset the cost pressures with pricing over time. Is that with just pricing alone, to be clear? Does that include other areas like cost savings? And just given the inflation's unprecedented this year, do you think you have pricing in place by year-end to fully offset those cost pressures, or might it take a longer time? period of time to realize the pricing necessary and sort of a couple rounds of price increases. How do you think about that? And, you know, I'm particularly focused on how you think about pricing, just given the magnitude of that inflation is much worse than it typically is when you take pricing.
spk09: Yeah, great question. I would say yes and yes. I'm not trying to be flip, but I would say, you know, one, generally we've taken really broad based pricing action. Globally. I wouldn't say all markets, but in nearly all key markets. And pretty expensive. And the pricing ranges from mid-single digit to high-single digit. In some cases, double digits. So pretty extensive pricing. Obviously, we couldn't recover all of that given timing because we announced in March, generally implemented in June or in the beginning of the third quarter. So we'll get a half-year run on the pricing and then a full year as we get into next year. That said, you know, commodities have continued to move, but even as we announced our pricing, you know, part two of pricing is, you know, we remain committed to leveraging our revenue growth management capability, and there's a lot of other levers that we can pull beyond the list to continue to manage pricing in our environment, and we're committed to doing that. So that's part one. I do think, kind of given where we are, and I think it's normal and reasonable to expect that we're also going to leverage our cost savings program. I mean, we have a very strong program, as you're well aware, on force. and we've kind of beefed that up over the course of the past year or so, and we feel good about that, and so we'll continue to leverage that. So overall, again, I think the answer is yes on both. The bigger thing, Sar, is we do recognize the impact of raw material inflation over time. In our categories, they tend to be a little more volatile, and we're a fundamental underpinning of our strategy is margin improvement. So because of that, we believe we really have to, on an ongoing basis, offset the effect of inflation over time.
spk01: Okay. And just one follow-up on the pricing front. Where you have implemented pricing so far, what's the retailer reaction and receptivity been like? And it'd be early to judge consumer receptivity, but obviously some pretty large price increases in your portfolio. So Just any thoughts on the ability of consumers to handle that higher pricing and impact on market share, and any thoughts there on what we might see going forward be helpful.
spk09: Yeah. You know, look, we never take pricing actions lightly, and we know they can be stressful for both the retailer and our consumers and their shoppers. So we think hard about that. I will say, you know, we believe our pricing actions globally are are generally on track. And I think broadly the retailer conversations, though never easy, I would say have been largely constructive. And certainly they understand what's happening in the cost environment, and so we're working through that. And then I think from an execution perspective, our teams have done a phenomenal job executing rapidly around the world. I would say In terms of other brands, I would say generally we've seen a lot of the other brands move in a similar direction. I wouldn't say, you know, identical, but directionally in that same place. But, you know, the execution of other brands and private label tends to vary market by market. And so some will lag a bit more. But, you know, I would say generally we feel like our pricing actions are on track.
spk01: Great. Thanks.
spk09: Great. Thank you, Dara.
spk02: Thank you. Our next question comes from Kevin Grundy with Jefferies.
spk06: Hello, Kevin. Great. Hey, good morning, Mike. Question for you, Mike, on advertising and marketing. So it looks like you did decide to defer some investments, which is unsurprising in the current environment. The intention was clearly not to do that. Maybe, Mike, just spend a moment on where you decided to pull back and why. And then, you know, I know this is difficult. We can appreciate that in the current environment. But balancing appropriate levels of investment behind your best and highest return ideas with the current commodity cost environment. Then I have a follow-up.
spk09: Yeah. So, overall, the thing about it, and when I say, you know, our challenges are kind of discreet. You know, the challenges, you know, for my knowledge, I'm sure you remember, Kevin, is like the inflation in North American tissue. In the balance of our markets, our businesses are performing very well and generally above plan. And so I would say maybe the thing I'll land with you is despite our near-term challenges, we're really focused on improving our long-term growth profile. We're really confident that our balanced, sustainable approach to building brands is working and that the brand fundamentals globally are very healthy and that we're improving our market positions. We were up in share recently. by our tracking, about two-thirds of our market category combinations in the quarter, and so we feel good about that. And the brands continue to respond well to strong investment. I mean, we had multi-sharepoint gains in infant and child care across China, South Korea, Australia, New Zealand, India, Indonesia, Eastern Europe, Argentina, Peru, pretty much double-digit growth in Brazil. So we feel good about the overall performance of the business. So because of that, We're really maintaining investment where that's working and where the businesses are on plan. We have dialed back in some markets. You can assume, for example, in North American fat tissue, given the fluctuation in the category, we have chosen to pull back a little bit on the spending, and we're going to continue to do that. We're going to operate with discipline. I think we talked about it in prior quarters, but You know, there is as much a math component to our advertising program as there is a creative component, and we're pretty disciplined. It's kind of how we manage all of our consumer investments, whether that's trade or marketing. And so we're pretty disciplined on the ROI, and so our teams are reacting as you would probably hope that they would. Maria, you got anything to add? Definitely.
spk10: Yeah, the only thing I'd add is if you look at our full-year outlook, the thought on advertising is that it's down somewhat to 2020 for the reasons Mike just discussed, but it's well ahead of 2019 on the dollar basis.
spk06: Got it. Thanks, Maria. One quick follow-up for both of you. Just on capital allocation and M&A, we saw that the buyback outlook came down with the lower earnings outlook. But when you're going through the type of environment you're going through now, you can't say pricing fast enough and even sort of leaning in and getting the organization behind productivity, it's still not enough to offset the sort of commodity cost pressure. Does it sort of give you pause with respect to the M&A strategy over time and the school of thought that the company should look to diversify the portfolio away from some of these commodity-sensitive categories? and do that in a disciplined and a creative way. Your thoughts there would be helpful, and then I'll pass it on. Thanks.
spk09: Yeah, you know, we're always looking at acquisition or, you know, M&A opportunities, right, and whether that means additions to the portfolio or subtractions to the portfolio. You know, certainly you saw that last year with SoftTech, which continues to be a really exciting opportunity for us, and that business is performing very, very well. By the way, up in the teens, up multiple share points in the quarter. So we're super excited about that. Given where you are, I think we'll continue to look for opportunity to enhance the portfolio and certainly on both the plus, whether it's attractive markets or attractive categories, but also we're going to continue to look hard at our performance of our existing categories and businesses that don't add to our overall growth profile or aren't going to be ongoingly accretive to our business, you know, we're going to take a hard look at. And so, again, we manage capital with incredible rigor and discipline. And, you know, hopefully that's what our investors will appreciate about our approach.
spk10: Yeah, and on the buyback specifically, you know, at the midpoint of our guidance, our operating profit is now expected to be down $450 million year over year. And you'll recall that in January when we were coming into the year and set our target for buybacks, we were expecting operating profit to be up slightly. So with the reduced cash flow coming into the business, that's really what's behind the reduction of $250 to $300 million on the share buybacks. And then in terms of capital allocation, we also trimmed our CapEx plans for the year by $100 million. And we remain committed to the single A credit rating and to make all of that work after having leaned into it with the restructuring as well as the acquisition of soft tax. That's how we make all of that math work.
spk06: Very good. Thank you both. Good luck. Thank you, Kevin.
spk02: Thank you. Our next question comes from Chris Carey with Wells Fargo Securities.
spk05: Good morning, Chris. Hi. Good morning. I just want to actually touch on the consumer tissue outlook for the back half of the year. It seems to me that's kind of the important part to making the outlook work, but at the same time, you had noted that that's an area that's been a little tougher to call. And I guess I'm trying to understand maybe just a little bit of the confidence around the normalization, which you had noted in your prepared remarks. It seems to me that market share has really peaked during COVID, maybe some capacity benefits, and that you've seen some reversion in market share back to death over levels. And so if you kind of run it flat to two, three years ago, it's sort of unchanged. And I guess what I'm getting at is just, you know, what exactly you think is occurring in that business and just maybe specifically, you know, the types of things that you're seeing that give you confidence in this reacceleration in that business in the back half, which, again, to me seems to be, you know, kind of the important factor in making the full-year outlook work.
spk09: Okay. Yeah, great question, Chris. And I'll try to unpack it, and we can go back and forth on this a little bit. You know, first, let me just say I remain very confident in our North American tissue business, and we've got great brands. performed very well last year. I do think we have given back some share this year. What happened last year when the category spiked, and at this point last year, I think the category was up about 30% or so, consumers were looking for tissue and our customers were looking for tissue. And so our organization really moved aggressively to try to serve our customers and consumers at a point where we felt like they needed us the most. And so we really pulled out all the stops We probably did gain a little bit of share, particularly on a brand like Continental, where we had a little more availability than maybe some of the other brands in the marketplace. And so it looks like, you know, to us, you know, while our share is down a bit this year, you know, I do think it's kind of, you know, reverted maybe to the prior year levels to some degree. And we'll continue to go forward and earn, you know, our share growth over time on that business. But, you know, we feel like our brands are healthy. But, you know, we are navigating what I would say is like, the most volatile part of the demand curve that we experienced last year. The front half is where all the spikes in demand, and so there were really two effects. There was the spike in consumer demand, and then there was a corollary effect on retailer supply, and so maybe the one disconnect that you might not have visibility to the data are, you know, the category in the quarter in North America, and I'm talking bat tissue specifically, was down 12% in consumption, okay, and then our shipments were down about 27%, and so The difference between the 12th and the 27th is really, for us, we estimate as retailer inventory changes. And what happened last year on the inventory side was, I think exiting Q1 where there was the big spike, retailer inventories as a percent, if I index it to historical levels or 2019 levels, had dropped down to below 40% of what I would say the traditional turn inventories. And so retailers worked really hard to get back into supply. And so by the end of the year or toward the back half of the year, they were well north of 100% of overall levels. And so as we entered into this year, our estimate would be retail inventories were probably in the 130, 140% range. And so that's dialed back in the first and second quarter this year. And so it explains kind of a big chunk of the delta here on demand. Looking forward, you know, again, I'll stand by it. I mean, I've looked at this category for a long time, and it's one of the biggest categories. Obviously, if you think about bat tissue in particular, it's a very stable category. And so the logic for me is, you know, in a post-COVID world, I think there will be more people at home on an ongoing basis than there were pre-COVID. I don't think, you know, the office environment or the work environment is ever going back to 100% every day. And so... So logic would say consumption should be a little higher than the base level of 19. Now, year-to-date, we're below 19 levels for the category, but we think, you know, I would say logic would say that that should kind of normalize over time. And, you know, I won't estimate whether that's at what point, you know, but over the long term, this category has proven to be very stable, and our brands have proven to be very stable and very healthy.
spk10: The other comment that... that I add if I can.
spk05: No, please go ahead.
spk10: Yeah, it's just you were asking specifically on consumer tissue, which certainly has a big first half, second half effect. If I look overall at first half, second half, in the first half our organic sales are down 5% and our operating profits down 26%. If you take the midpoint of our ranges, you get to a second half that looks something like plus three on organic and plus five on operating profit growth. And so if you think about our second half outlook and the key drivers there, we'll have easier comps. We will have step-ups and benefit from volume growth and price realization in the second half. You know, the majority of the consumer tissue destocked We are assuming it occurred in the first half. We won't have the winter storm effects that we had in the first half. KCP washroom is expected to continue to see sequential improvements. The pricing actions are now fully in the market. We'll see some build on our cost savings, as we typically do. It's usually second-half weighted. And our other manufacturing cost headwinds should be lower. And then offsetting that, will be the higher commodity cost headwinds. If you take the 485 year-to-date and our guidance, it implies year-to-go is 765 at the midpoint. So those are the drivers for the second half, and certainly the dynamics in consumer tissue are a key part of that.
spk09: All right, Chris, we threw a lot at you, and I threw a lot at you on tissue. I don't know if that answered all your questions, or I'm happy to take a follow-up.
spk05: Yeah, that was extremely helpful. The only, you know, quick follow-up would be just on the level of inventory, retail inventory in tissue as you enter Q3. You're given some percentages. Where do you see it today? And then, you know... If I might, I would just sneak in a question on how you're thinking about birth rates and medium-term impact on volumes, and then I'll get back to you.
spk09: Yeah, all right. And just a disclaimer on my inventory. Those are our estimates, and so I'll – you know, that's kind of how we look at it and think about it. I would say close to historical levels. The caveat I'll say on Chris O is, you know, we're – you know, we're not exactly sure, and I'm not sure the retailer is actually sure how they want to handle it, you know, at this point, right? And so I think kind of given the category volatility, you know, and on a retailer by retailer basis included, I think it's going to continue to bounce around a little bit, right? And so, you know, because, you know, and the example I'll give you is, you know, we were building up inventories, but there, you know, there was another spike kind of in the fall period and then the winter period, you know, as well. And so, You know, I do think consumers largely understand that there is plenty of tissue availability. But that said, you know, I've seen a lot of new things over the last 18 months. And so, you know, we won't be surprised if behaviors continue to shift around a little bit. So that's on the tissue side. And the other part of it is certainly there was a consumer, we think consumer pantry destocking as well. I will tell you, The team in North America has done a phenomenal job conducting research to try to estimate that. I will say it's probably as accurate as trying to estimate share from panel data, right? And so you're asking consumers how much they're carrying. But we do believe consumers have taken a lot of their stock out as they have more confidence that tissue is available. But that remains to be proven out. So that's on the tissue. And then on the birth rate, yeah, our estimate for this year, you know, first of all, is probably down about mid-single, low to mid-single digit, you know. And, you know, that's probably a little worse than the last, the prior two years. I think the prior couple years were down about 1% to 2%, depending on the year. And then, you know, given COVID, I think it feels like, you know, some families have decided to defer family formation. And so, you know, kind of in that range. I will say, You know, we feel really good about the recovery of our infant and child care business and the fact that, you know, we're really recovering from a supply perspective. Our brand propositions, you know, we feel very strongly about. And so we feel like, you know, in the third quarter, you know, we should be back, you know, to being on track in our infant and child care business. Thanks for all that. Okay. Thanks, Chris.
spk02: Thank you. Our next question comes from Steve Powers with Doce Bank.
spk07: Morning, Steve. Morning, morning. You did throw a lot at us on that consumer tissue conversation, but I guess I have just a clarification coming out of the back and forth you just had with Chris and the commentator this morning. I guess I'm still trying to ascertain whether you see a change in consumer takeaway expectations on the balance of the year. Because what I read in the prepared remarks is that the consumer pantry and retailer inventory rebalancing occurred faster than you previously assumed as it was to 2Q. And you just kind of reaffirmed that. But I didn't really hear anything about a net reduction in consumer takeaway. So I guess were you not assuming any rebalancing in the course of 21 before? It just happened in 21 where you thought it would happen later downstream, or is there – because I guess I can understand the pull forward in the rebalancing for the first half, which is more spread out, not hurt to cue, but there's still a net negative impact on the full year that I can't pinpoint. So can you just help me there?
spk09: Yeah, there's a couple different ways for me to answer that question. I'll say let me anchor it versus our original plan or our plan expectations for tissues at the beginning of the year. You know, we walked in the year – and just think back to December, Steve – you know, where the vaccines were really not rolled out. And so our going in was that the category would be lower than 2020 overall. But, you know, in some ways, probably a mid-single-digit decline, right, because, you know, we thought, you know, at that point in time, you know, consumers, people would still be at home generally, right? Now, coming out of that, and as we entered our April update, you know, it was clear that the vaccines rolled out much faster than anybody anticipated, and mobility increased. the data that we tracked showed that we were returning to maybe 80% or 85% of historical levels. That was faster than we had anticipated. Our expectations for the category actually were down a little bit further. I think coming out of the second quarter, I would say our category expectations, which were up about 22% in BAP last year, probably you know, we would say are going to be down at least in the mid-teens or so, mid to high teens. And so overall, I think our expectations for the category are going to be worse than they were at the beginning of the year. That said, you know, at that level, I would say that's still, you know, I still believe it should be above a base year of 2019, right, if you take the two years together. That remains to be seen. It feels like kind of a sticking my neck out there call on that just because of what we experienced in the front half. But again, I'm working from logic that says there are likely to be more people at home than there were in 2019. And if people are home more often, then the consumption of at-home bath tissue should be higher. But that remains to be proven out. Yeah, okay. Okay, that helps.
spk07: And I guess that segues into the next question, which you sound pretty satisfied and happy and kind of upbeat with the trajectory of the professional business, probably in part because of that vaccination reopening trend. I guess, so that resonates with me, but I guess I was expecting a bit more, you know, just as it relates to 2Q, given the dynamics you said as an offset to consumer tissue. And so just maybe a little bit more color as to how you see that business trending and kind of what your expectations are in the back half.
spk09: Yeah, on KCPC, I wouldn't convey happy. You know, I would say, you know, certainly proud of our team, and how they've responded to all these challenges. You know, I'm cautiously optimistic about where that category is, and I do see some green shoots. I mean, a couple things kind of going on. You know, organic was up, too, right, which is a sequential improvement versus where we've been for the past several quarters. You know, that was predicated on really strong growth internationally, which had a really soft comp from a year ago. But importantly, sequential improvement in the North American washroom business, which is a big business for us and really, really important. I wouldn't say it's taken off yet, but we are seeing the impact of more people returning to work, whether it's in the office environment or a factory environment. And so I think those are all positives there. There are some offsets because You know, we did grow significantly in our wipers and PPE or safety business last year due to, you know, additional COVID demand. That's probably cycling down a little bit this year, and that's a bit of an offset. So, you know, we feel good about the KCP business. I think the team, even throughout last year, was working hard. I think somebody mentioned on the call last year around jet air dryer conversions, and we've got better offerings now. in our washroom business, great towel products, great dispenser products. And so we are winning conversions. But I think I said on prior calls, we won't see the share until the products flow through the dispensers. So we feel good about what the team is doing and looking forward to, you know, I'm cautiously optimistic.
spk07: Okay. Thank you for that, Mike. If I could just, Maria, you mentioned that $770,000. or so at the midpoint of inflation to come over the back half. Is there any, I guess, color you can offer in terms of how you see that flowing, 3Q versus 4Q, if it's weighted significantly one versus the other, or if it's more evenly spread? Just some help with the cadence there would be helpful.
spk10: Thank you. Yeah, I think the expectations are that... the commodities will reach peak in the third quarter and then start to ease a bit as we get into the fourth quarter. So I'd use that as the kind of phasing guidance.
spk07: Perfect. Thank you both. Okay. Thank you, Steve.
spk02: Thank you. Our next question comes from Peter Grom with UBS.
spk09: Good morning, Peter.
spk00: Hey, good morning, everyone. So you mentioned in your prepared remarks, and I was also pretty encouraged by the performance and commentary around DNA. And so obviously you have pockets of strength, you know, pockets of weakness, and you mentioned strong share performance there. But, you know, I was just curious, has the consumer been more resilient in those markets than you would have anticipated, you know, kind of given the COVID environment, or is this strength really just, you know, Kimberly specific?
spk09: Well, that's really hard for me to generalize because I think it varies. You know, I think certainly there's a lot of markets that were less impacted by COVID, and I would say a lot of that is in Asia, although I caution when I say that because it's starting to pop up again now more significantly, particularly in big markets for us like Indonesia. So I think there is some aspect of resiliency, but the other aspect is, and maybe... you know, underlying is the strategy that we're on, which is to elevate the category and expand our markets. And I think the teams are really concentrated, particularly in infant and child care with the Huggies brand, really great product offerings. I mean, I think the big thing that's happened over the last, I would say, two years is globally our teams on diapers have really aligned around kind of a set of consumer benefits that we're going to win on and really have aligned on kind of the product technology platforms that are global platforms that they're launching, uh, for reference, you know, we're up four share points in Australia, New Zealand and diapers. We're already obviously the market leaders there, but that, that diaper, uh, has specific lineage that that's linked to our China diaper. I wouldn't say they're identical, but they're, they're highly related. Right. And so, so that's, that's kind of, you know, the work that we've been on, you know, we've taken share leadership positions in Argentina and Brazil. Um, and, uh, Again, the diaper there is related to the diaper that we're making in North America. They're not twins, but they're related, right? And so I think, again, you know, the teams are really focused on, I would say, a major shift from product features to consumer benefits that we're focused on delivering. And I think that's really shown in the shares. And, you know, again, I say, you know, in China, we're up about three share points in the quarter, as we were last quarter. I mentioned four SharePoints in Australia and New Zealand, four in Korea, four SharePoints in Peru. We're seeing pretty broad-based share gains, but we feel like they're earned. We're certainly not promoting our way to those share gains because we don't really believe in renting share. I think it's basically great products, great digital execution, and then really hard sales execution and great partnership with customers.
spk00: No, thanks. That's super helpful. And then I just wanted to ask a couple of follow-up questions in regards to the commentary on second half organic sales growth. So first, I just want to make sure I heard the comment on volume growth correctly. Is that a total company comment or was that something specific to consumer tissue? I thought total company, but I just wanted to be sure because I think Chris's question was on consumer tissue. And then just like anything you can share on phasing of that 3% growth between Q3 and versus Q4 given the cycling of the accrual trip on Q4 would be really helpful. Thanks.
spk10: Sure. I was making the comments. I was bridging from the question on consumer tissue to the total company because consumer tissue is certainly part of the story in the second half when we look at the total company outlook. So, to clarify, I was talking about total company in my remarks about first half, second half. And, you know, the phasing of the quarters, I'm going to stay away from quarterly guidance here. I think the things to consider are the year-over-year comps. I did make some commentary around phasing on the commodity headwinds. And beyond that, I think I'm going to stay away from the quarters.
spk00: Okay, great. Well, thank you so much and best of luck. Okay, thank you, Peter. Thank you.
spk02: Thank you. Our next question comes from Jason English with Goldman Sachs.
spk09: Hey, good morning, Jason.
spk08: Hey, good morning, folks. Thanks for slotting me in. Appreciate it. So a couple of questions. I guess I really want to focus in on tissue and pricing. You guys had phenomenal price growth in the fourth quarter 20 in North American tissue. And I believe it was because you had under accrued or over accrued, excuse me, over accrued for trade spend throughout the course of the year and had the true up. So we're lapping a period where you had over accrued for trade spend suggesting that, well, I know list prices take time to get in that I think I was expecting. Many of us were expecting you to at least get some pricing benefit from a, from lower trade. Yet on a two-year stack basis in North America, prices eroded in developed markets. Outside of North America, prices are deflationary. In developing and emerging markets, your prices are deflationary. And you just achieved the worst price-cost deficit that I can find on record. So it begs the question of what's happening? What's really impeding your pricing power right now, particularly in an environment where, as you're saying, you'd expect demand to be above base case 2019? Why aren't we seeing more responsiveness of sort of net price benefits flowing through the P&L?
spk09: Yeah, you know, I will start, you know, Jason. So, you know, part one is, you know, we have announced pricing in consumer tissue in many markets and most of our tissue markets around the world, including in North America. I wouldn't say we've taken it across every product line. And so, you know, Scott 1000 is kind of a key product that we have. And so that's one area. Certainly, we did benefit, as you mentioned, from accrual differences at the end of last year. And the other thing that we benefited throughout last year was given the amount of demand in the marketplace, we reduced our promotional spending overall. And so we kind of earned maybe the same or higher volume levels without having to spend the trade. So that was a benefit last year that we are cycling this year. And so we are we are putting some investment back in trade. For reference, I would say the category promotional intensity in a market like North America is still below historical levels, but moving its way back to what I would say are more normalized levels, and so we recognize the need to do that. The thing that I will tell you is, I think your point is on, which is we've got to get better price realization. I will say You know, we don't necessarily view the additional spending of trade to be a negative profit driver in the sense of, you know, we've invested in a lot of tools in revenue management. We expect our teams to be able to use those tools to drive volume and growth profitably. And so we're going to hold ourselves accountable to that. But with that, you know, again, we recognize that. the need to get additional price realization. And there's many ways for us to do that in addition to the list pricing that we've taken. And there's also ways for us to do that through revenue management, through trade efficiency, price pack, and other things that we'll continue to look at. Maria, do you have anything?
spk10: No, that's right.
spk08: Okay. So there's other mechanisms. We're just not going to see them yet. They're going to take time to see. Last time we had inflation in tissue, you guys ran a price-cost deficit for eight consecutive quarters before you flipped positive. Is there any reason to think you could close the gap faster, or given the environment that you're mentioning with promotional activity actually picking up in the face of rising costs, could it actually even be more prolonged this time?
spk09: Well, again, I think we've actioned generally our pricing in the marketplace. And so, you know, I would think that, you know, hopefully the duration of that gap would be shorter. You know, certainly we didn't like the gap, you know, through the first half of this year. And so that's one part. Second, you know, again, you know, we're going to continue to review, you know, kind of all the levers that we have on revenue management, you know, and make sure that we make the appropriate adjustments to our plans. you know, on a market-by-market basis.
spk08: Got it. All right. Thanks, guys. I'll pass it on.
spk09: Okay. Thanks, Jason.
spk02: Thank you. Our next question comes from Andrea Texera with J.P. Morgan. Good morning, Andrea. Thank you for taking my questions. Good morning.
spk03: So I wanted to go back to pricing. I'm sorry to beat a dead horse here, but what is your read on the consumer elasticity, not only in the U.S., but also internationally? as you're obviously competing with players that oftentimes are private. But specific to the U.S., the dollar share that we're looking, not only in tissue, in tract channels, as you explained well through Chris' question before, but also in diapers. Are you seeing that the same decline across all channels? And is that an indication that consumers are probably down trading now that they see private label, for example, Scots $100, is the one that competes more neck-to-neck with private labels. So are you seeing any issue there? Or perhaps you're going to tweak a little bit of your price increase now that you know what you know about tissue, and then perhaps do more RGM where you barbell a little bit of this price increases. So any update on embedding your guidance if you are changing some of your pricing or any second rounds in North America that, you know, we may not be aware or you embedded in there. So any caller there would be great. Thank you.
spk09: Yeah, great question, Andrea. You know, maybe the short answer for me is I don't know yet. You know, I think for reference, we took about a high single-digit price increase across our personal care businesses last and then some selective price increases, for example, on Scott Tissue in North America. And I would say those went into effect at the end of June, and so it's a little early for us to gauge that. If I go off of history, though, I will say the last list price increase we took on these businesses, actually, in personal care was not list. It was more count, okay? But that said... I would say the consumer elasticity at that point back in 2018 was probably, in my mind, a little lower than what we modeled in terms of elasticity. So, you know, what that implies, I think there's a couple different factors. If I would say more price-sensitive factors would be that I think consumers are facing, you know, broader inflation, you know, in this environment across all categories, right, beyond consumer packaged goods. So that may be one factor, right, that makes it, you know, a little more challenging. The other factor that I know talking to people in other industries is there have been reductions in other spending, consumer spending, which create a little more wallet for some of the more consumables. And so that's an offset. So for me, the answer is at this point a little theoretical ambiguous. And so it remains to be seen. But we'll know as we work through this quarter.
spk03: And now that's super helpful for tissue. And then diapers, like I felt that you don't have as much of this channel stuffing that we saw or even I'm assuming retail inventory. I think you spoke mostly from a consumer tissue perspective and not so much on the diaper. So what is happening there? Do you see that changing also? The elasticity is moving around as a moving target for you?
spk09: You know, again, I don't see any change, but, again, it's still early for us to tell. Yeah, I think you're right, Andrea. The dynamics in personal care were very different than tissue last year. And so there was a bit of, I would say, a consumer buy-in in the first quarter last year, but it was, I would say, a mid-single-digit kind of number, maybe mid to high single-digit, whereas, you know, the first quarter last year, you know, consumer tissue was, like, up 30%. And so very, very different behavior. And then we unwound that. almost all of that in Q2 of last year. And so I think the consumer, the personal care North America behavior has perhaps been a little bit normalized. And, again, I think the same thing holds for what I was talking about with tissue, which is, you know, our pricing has been kind of in the market for about three weeks now. It's a little bit earlier for us to get a read. You know, but, again, I think we feel cautiously optimistic about it.
spk03: Okay. Thank you.
spk09: Thank you, Andrea.
spk02: Thank you. Next, we have a follow-up from Lauren Lieberman with Barclays. Oh, great. Thank you.
spk11: Sorry, I was taken off guard. Wanted to ask about, let me just find my final question, just the category growth in personal care in D&E markets. I know you talked a bit about, very much so, about market share gains. But one of the things that's definitely been out there is, like, the resilience of some of the categories in D&E markets. So just anything you can offer in terms of perspective on why, you know, the categories have kind of held in as well as they have. Because even, again, with your share growth, it still implies the categories are in a pretty good spot, too.
spk09: Yeah. And maybe I'll go around the horn because it varies so much because of a couple things. You know, one – probably the biggest one being COVID. I would say we were really positively encouraged by our performance across Latin America. I thought it was terrific performance in a really, really challenging COVID environment. I'm sure you're kind of reading all about it. But, I mean, in a market like Brazil, our personal care organic was up over 20% behind volume and price, and we did take pretty significant pricing actions there. You know, overall, we maintain our share there. We're already in the leadership position. And I think what's happening in Latin America broadly and why we're winning is the team is doing an excellent job adding value by premiumizing the category, but also pivoting in some ways back and forth, even within the same year between value and premium. You know, so the big thing is we have very strong leadership positions throughout Latin America. You know, for example, in Argentina, we're the leaders in value tier and we're the leaders in premium tier. And we're the number one overall. And so the team, depending on kind of what's happening in the local environment, kind of makes the pivot as to what products they're going to maybe drive and emphasize a little harder. And certainly, I think, you know, in Latin America, maybe this year more than maybe even two years ago, value is very important. Consumers are stretching out their consumption. But, you know, we flow through a lot of our great product innovation to our value tier as well. and I think that's working. So that's kind of one set of things. I would say China is different. Lauren, we were up three share points in the quarter. We're proud at least for now we're in the number one share position, which we feel great about, and we feel really great about our products. And so I think the consumer continues to really respond to product superiority and innovation. I will say the category conditions are pressurized because I don't know how much you're seeing, but the birth rates are coming down fairly significantly, and so we recognize that's going to be an issue for us to work through. But in the near term, our team feels great about their ability to grow the business, to grow share, and work with the big e-commerce partners. And then in some of the other markets, Eastern Europe, I mean, I think we were multiple share points up in almost every market across Eastern Europe, somewhere in the range, one to seven points of share in the quarter there. And, again, I think great offering. They're all related. The China diaper, the U.S. diaper, the result, they're kind of all related to each other and very good. And I think the teams are recognizing how to drive those. So I think it varies. The one watch out area that we're very kind of paying close attention to because of COVID is ASEAN, Indonesia, Vietnam, India as well. Again, those environments right now. are really pressured with the, you know, with the pandemic. And so we're really, you know, keeping a close eye on that. So I don't know if I answered what you were looking for. There's something else.
spk11: Yeah, no, absolutely. Thank you, Mike. I really appreciate it.
spk09: Okay. Thanks, Lauren.
spk02: Thank you. Next, we have a follow-up from Jason English with Goldman Sachs.
spk04: Hey, Jason.
spk08: Hey, super quick follow-up question. Real tactical on your response to Lauren there. I think you said China growth for you, my personal affair, was up maybe mid-single digits, but you just said you captured 300 basis points a share in the quarter. It implies a pretty sharp market decline in the market. So can you drill down a little bit deeper there? Like what is the rate of decline you're seeing? I think you mentioned birth rates down. As we know, birth rates down, that has a prolonged drag on the infant population. So is what we're seeing today likely to persist for a protracted period of time?
spk09: Yeah, sorry, my bad. I was a little unclear. China overall personal care was up mid-single digit. Our diaper business was up double digits. But that said, I think your question still holds. Yeah, there are expected to be some birth rate challenges in China, so it will slow down as a market. I still believe, and I think our team believes, there's still significant opportunity to premiumize our categories. And, you know, we're still a low double-digit share, and so there's still plenty of share opportunities. That said, I do think there will be a slowdown on the diaper side of the business. Our femcare business has been growing strong double digits. In the quarter, it was down a bit because we were cycling a promotion, a big promotion that we decided to get out of this year. But we feel great about our femcare business. That's grown strong double digits for, I think, three or four years in a row now. And so... we expect continued growth in China, although I think on the diaper side, you know, the category will be challenged somewhat. It also kind of points out, you know, our emphasis on diversifying our growth across developing and emerging markets. So, you know, one of the things, you know, I'm excited about, you know, Jason, is, you know, I think we grew significantly in India. I don't Strong double digits in the quarter. And I would say, you know, Indonesia, you know, I'm really glad we made the acquisition of Softex. It's a great business. I think the business is up in the teens, even though they are cycling or working through some pretty good COVID challenges, pretty significant COVID challenges. But, you know, it's a great business and a great team. And, again, you know, with Indonesia and India, you know, I think the growth in those markets is going to be very significant for us over the next several years.
spk08: Thanks for the clarification. Really appreciate it. Thanks.
spk02: Thank you. There are no more questions at this time.
spk09: Okay. All right. Thank you all very much. You know, we're certainly navigating some high volatility in the external environment, but we're taking decisive action, and we're continuing to improve our brand fundamentals to sustain long-term sustainable growth. All right. So, for that, thank you.
spk02: Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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