Kimberly-Clark Corporation

Ladies and gentlemen, thank you for your patience and holding. We now have your presenters in conference. Please be aware that each of your line 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. Please go ahead.

Thank you, and good morning, everyone. Welcome to Kimberly Clark's second quarter earnings conference call. With me today are Mike Hsu, our chairman and CEO, and Nelson Urdaneta, our CFO. Earlier this morning, we issued our earnings news release and published prepared remarks from Mike and Nelson that summarized our second quarter results and 2022 outlook. Both documents are available in the investor section of our website. In just a moment, Mike will share opening comments, and then we'll take your questions. During this call, we may make forward-looking statements. Please see the risk factor section of our latest annual report on Form 10-K and the second quarter 10-Q for further discussion of forward-looking statements. We may also refer to adjusted results and outlook. Both exclude certain items described in this morning's news release. The release has further information about these adjustments and reconciliations to comparable GAAP financial measures. Now, I'll turn the call over to Mike.

Okay, thank you, Taryn. Good morning, everyone. I'm proud of our team's execution as we closed our first half with 9% organic sales growth in the second quarter. We delivered robust gains in all segments, our growth strategy is working, and our teams are executing with excellence. in what continues to be a volatile operating environment. Clearly, our results reflect this ongoing volatility. For the year, we're now anticipating $300 million of additional input cost inflation. We remain committed to recovering and eventually expanding our margins, and thus we've taken further action to realize additional pricing and cost savings to mitigate these headwinds. We continue to expect pricing and cost savings to fully offset the effects of inflation over time. Based on the strength of our top line, we're raising our full year organic sales outlook to increase 5% to 7%. We're maintaining our adjusted EPS guidance. However, based on current conditions, including our updated input cost outlook, we now expect to be in the lower end of that EPS range. We'll continue to manage our business with discipline as we navigate near-term headwinds. Based on the pace and breadth of our pricing actions, we anticipate some volume impact over the balance of the year. Still, we're encouraged by the overall health of our categories and our brands. Our brands remain essential. We also know consumers are seeking greater value and will continue to sharpen our offering to enhance our market position. We remain committed to delivering balanced and sustainable growth. In the near term, we're taking necessary action to recover margins. We're also continuing to invest in our brands to enable us to grow sustainably now and for the long term. Now we'd like to address your questions.

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. If at any time you would like to remove yourself from the questioning queue, please press star two. Our first question will come from Dara Mersinian with Morgan Stanley. Your line is now open.

Morning, Dara. Hi, Dara.

Hi, guys. Good morning. So, first, just a couple clarity questions. The increase in your full-year organic sales growth guidance for 2022, is that driven by higher pricing or a higher volume assumption here? And then second, with the $300 million in higher cost pressures now expected for the full year, you obviously mentioned a combination of pricing and cost savings to help offset that. Can you just be a bit more specific if you're planning additional price increases specifically in the back half of the year? Does that offset that? A good amount of the cost pressures, how should we sort of think about the pricing outlook changing in response to the cost outlook, specifically in the back half of the year?

Yeah, thanks, Dar. I'll start, and maybe Nelson can provide some additional color. But overall, I think the organic outlook and the increase in the outlook reflects both volume and price. You know, overall, we feel like our pricing execution is going very well. We are driving the realization. You can see it in the numbers. But the second part of it is also the volume is holding up a little bit better than we originally planned. And I think that reflects, one, what we said before, which is resilience in the consumer overall, but also the strength of our brands. And we feel really great about the commercial execution that we have around the world, and that includes launches of innovation, improvements in product quality, our digital marketing programs. think the execution we're driving at shelf and so overall that's still working despite you know the necessity for us to price our products to recover the cost and the margin so so overall I'd say it's a it's a pretty good balance of both volume and price on the on the organic outlook and then on the cost front yeah we're going to need it we have taken additional pricing actions and that's globally and We've taken a few actions since the beginning of the year. Actually, we announced another action in North America just last week. And so we continue to execute. And again, overall, philosophically, I've said in the past, Dara, that we expect pricing to generally offset the effects of inflation over time. It gets tougher as the increases come toward the middle or end of the year to kind of catch up to it. But again, we are expecting our teams to be able to offset inflation over the long term.

Great. Absolutely. And I would add, Dara, a couple of things there as well. I mean, one, as Mike said, pricing is one of the key levers as we're seeking to offset the pricing pressures that we're having. But also, we've got to keep in mind our cost savings force program, which will accelerate as we go into the second half. So the combination of those two will help us offset as we exit the year that bit.

Okay, that's helpful. And then maybe taking a step back and thinking about the broader pricing environment in general geographically. First, just in the U.S., there's obviously been some very public margin pressures that are playing out at some of your larger retailer partners. There's worries about consumer pressure points and macros. You mentioned internally the historical pricing has gone well, the volume has elasticity has been limited, but have you seen any change in retailers' receptivity in the U.S. to pricing given some of the dynamics I mentioned earlier? Does that sort of require a more judicious approach to pricing on your part in the U.S. specifically? And then second, Just in some of your key emerging markets, maybe you can give us an update on consumer demand elasticity there to higher pricing and what you're seeing from a competitive standpoint.

Yeah, great questions, Dara. A couple things, and you and I have talked about this in the past. I'd say that the retailer behavior, I know there's a lot being said out there. I find it to be consistent with what it's been historically over my 30 years of working in this industry. You know, and I think it starts with the fact that, you know, I think we've learned over time our interests are generally aligned. I mean, and what do I mean by that? And, you know, one is, you know, we're both after the long-term growth of our categories, right? We jointly run these categories together. For them, it's in their store, and for us, you know, it is our business overall. But we're after kind of long-term sustainable growth, and that's one big thing. Second big thing we're after is delivering consumers a great value. And that comes in many different ways. In some ways, that comes with solid price points that reflect the value consumers are seeking. In a lot of ways, especially in our categories, it reflects or it means the right kind of innovation and product quality that delivers to consumers the benefits that they're seeking. And so I think with those two foundational points, we are sensitive to the pricing. But we also do both, I'd say on both sides understand that we need to be able to profitably grow for the long term. And so again, we're sensitive to the pressure that's out there. We read the similar news reports. We've had the discussions with our customers. And we have been taking price, but we are doing it, I would say, thoughtfully and planfully. So maybe that's part one. And then on the D&E question, Yeah, I think overall price, the pricing and volume strength really reflects the consumer resilience and the essential nature of our categories overall. I would say, Dara, that consumers appear to be somewhat more resilient in developed markets. Our performance, high single, low double-digit growth across all of our developed markets, multiple share point growth, multi-point share growth in most of our developed markets. You know, I think we have seen some price lagging in D&E, you know, from competitors. And so our shares have softened a bit in D&E. And, you know, while we have been driving price, we recognize that we've advanced pricing maybe further and faster than some of the competition. So we're going to have to continue to monitor that situation closely. You know, the other thing that we're seeing a little bit more in D&E than we are in developed markets is a bit more trade-down. I wouldn't say significantly more, but there is a difference there. And I think I've talked about this in past calls. In Latin America, you know, we have a leading, the leading, you know, value offering and the leading premium offering. And we're really glad we have the breadth of that scope because that allows us to pivot our business appropriately, you know, when the consumer is looking for that. So overall, you know, we feel good about where we stand. We are watching price gaps in D&E a little bit in North America as well, and we're sensitive to that.

Great. Thanks, guys. Appreciate it. All right.

Thank you, Dara.

Thank you. Our next question will come from Lauren Lieberman with Barclays. Your line is now open.

Morning, Lauren.

Great.

Thanks. Hi.

Thanks so much. So just following actually on that thread around some sensitivity and watching for trade down and the mention of the portfolio breadth you have in Latin America, I was curious on what, if anything, you are doing in terms of shelf sets, merchandising, of the more value or mid-tier products in the portfolio versus the premium end. Are there things that you are doing proactively rather than reactively to shift the mix of what you are supporting? If not, why not? you know, because your categories do, over time, tend to feature on the higher end of the list, you know, of those that can see trade down and be more sensitive, not in terms of overall consumption, but the rather what is being, you know, what is being consumed. Thanks.

Yeah, hey, well, yeah, great, great point, Lauren, and it's a point we have discussed this in the past, and I'd say, yeah, particularly in D&E, you're seeing, you know, student bodies shift to the left, right, and we shifted to the right just a few years ago, and I think I A couple of years ago, we were a highly developed value business and a very small premium business. This was made about three or four years ago. We were down, and there was a big shift to premiumize. At that point, I think the market was receptive to it, so we made a lot of progress. All the things you talk about, the appropriate PAC counts, the improvements in product quality, the merchandising, and everything else, And so we made a huge shift in terms of our premium mix in a market like Brazil. That said, two years ago, when the economy started softening, we started shifting back. And we're glad we did. And that yielded us last year the leading position in both value and the leading position in premium. We felt great about that. And so... And those are all the tactics that play out for us, you know, not just in developing emerging markets, but we do that in developed markets as well. And you're absolutely right. And we think, again, our broad portfolio of premium through value offering enables us to flex with demand. You know, and as I point out, in the near term, we are prioritizing margin recovery, and so our pricing is advanced. And so we are watching the price gaps, and we'll make the appropriate adjustments as we go through the year.

Okay, great. And then on the cost savings, as Nelson, you mentioned, there's significant – it looks like there will be more forced savings in the back half of the year. And just knowing that not just for Kimberly Clark, but for many of your peers in the industry, getting at productivity has been pretty tough in this environment, whether it's asking suppliers for better pricing, whether it's getting into the plants and working on putting in place – you know, new cost savings mechanisms or projects. So it's curious, you know, frankly, degree of confidence in that acceleration. What is it that you expect to change that should allow for you to see greater force savings in the back half of the year?

Sure, Lauren. So, you know, I'd start by, you know, reminding us that, you know, force isn't necessarily a straight line. I mean, it tends to build throughout the year, and that's kind of our historical trend. In particular for H1 of this year, I mean, we continue to drive solid savings from our productivity initiatives on a gross basis. But these savings are somewhat offset by some of the cost headwinds that we've been facing, particularly in North America, you know, as we've been investing heavily over the last couple of quarters to improve overall service levels, which, you know, we're pretty pleased that we're getting back to more normal levels as we exit at Q2. So having said that, as we go into the second half, I'd say a couple of things. We're going to have some of these incremental expenses behind us or largely behind us. And then secondly, we're going to have the pipeline, which is pretty strong at this stage, come through. So overall, that gives us the confidence of seeing around a little over $200 million of delivery in force as we go into the second half.

Okay, great. Thanks so much.

I'll pass it on.

Thanks, Lauren.

Thank you. Our next question will come from Kevin Grundy with Jefferies. Your line is now open.

Morning, Kevin. Great. Thanks. Morning, everyone. First one for Nelson, just kind of taking a step back, I would be interested to get your early impressions and perhaps maybe your two to three biggest priorities over the course of the year to ensure a smooth transition. Maria was, of course, very well thought of, but a fresh perspective of can always bring to bear some new ideas and potentially some opportunities for shareholders. So I think your early observations would be helpful, and then I'd like to pivot to the cost outlook.

Sure. So, Kevin, I mean, overall, a few things I would highlight. I mean, I'm pretty impressed by the team and the resilience of the team and the focus and their priorities and the strategic imperatives. I've been able to see that as I've been getting out there in the field and working through all the difficulties and challenges that we've been seeing. I think it's a very resilient organization, and there's very strong capability and muscle that's been built, which has allowed us to deliver the kind of results we're delivering as of the first half of the year in Q2. Secondly, one of my key priorities working with the team is to continue to push forward on the margin recovery. This is something that is critical for us, and we're very focused on it from all angles, and we're going to do it in a smart way. We will continue to invest in the business. That is something that we've done in the first half of the year, and we've got to keep doing that because that's what will allow us to drive forward a sustainable, profitable growth as we progress. So overall, I'd say those are my key priorities at this moment in terms of capital allocation and other elements. I don't have a different opinion versus where we're at today. I believe those are the right buckets where I stand today. And as we progress over the plans and what we've got for the future years, I mean, we will come back with what we've got.

Got it. Thanks. The quick follow-up is maybe just sort of go through your commodity exposures around energy, packaging, etc. Walk through your updated assumptions for us. What's driving the worst outlook there from a commodity perspective? And then relatedly to that, just your view on level of conservativism in, in the guidance. I think we, you know, it's obviously been an extraordinary environment, so it's not necessarily critique as much as sort of an observation, just in terms of maybe a greater level of conservativism to offset what, what continues to be a volatile environment. So kind of two parts there on the guidance. I'll pass it on after that. Thank you.

Sure. So, so first, I mean, to cover the, the, to give you a, um, a walk through the commodity update that we've got right now and, um, So as we pointed out in the remarks, I mean, we are calling now for the year a range of, you know, 1.4 to 1.6. At the midpoint, it's $1.5 billion. This is an increase of $300 million. And what we're seeing is really, you know, first on fiber. Fiber, you know, we're hitting all-time highs in uke as we exited June. We saw sequential growth in prices for uke through the month of June, hit historical high in June. We're also seeing in other pulp grades elevated prices, and that's one of the key drivers behind what we're calling. Secondly, it's energy. If we think about energy and natural gas in particular, we've seen in Europe a 10x versus a year ago in prices. In our Western European UK business, which has a sizable tissue business, It is energy intensive, and that's bearing in kind of what we're projecting at this stage. And then the other one is distribution costs. Overall, we're seeing distribution costs also increase, and I'd say this is more largely on the international side of the house, and this is reflecting and bearing on what we're showing in terms of our expectations at the midpoint of our guidance for costs. A green shoot or a benefit we're beginning to see is in resins. I mean, that's probably the only big element within our cost bucket that we're beginning to see prices to come down on a sequential basis. And again, this is the one I'd highlight as I look at it. Overall, I'd like to, you know, I think it's also important to highlight that in a two-year stack, we're staring at a $3 billion overall incremental cost, which is north of 1,500 basis points of margin that we're taking a hit as a business in 24 months. So it's quite sizable that we're managing through. And then that takes me to your point around conservatism on the guidance. The first thing is we, overall in the bottom line in the EPS, we've made our best estimate based on what we're seeing today. and what's playing out in the market. We've also taken into account all of the cost-saving initiatives, as I just talked about before force, and that's embedded in what we have here. And then lastly, it's also our pricing. We were very encouraged by how our pricing came through. Our teams did pretty well in terms of executing the pricing in the second quarter, which sequentially was much better than what we had in the first quarter. And that's the other element that would bear in how we would see the second half playing out.

I'll just type in there, Kevin. You know, I'd say I'm a guy, you know, and it's tougher since Nelson's still brand new. He doesn't have a calibration of how we got at it or what kind of relative. But, you know, I'd probably say, you know, for the rest of our outlook, you know – You know, we feel confident that we're in that range. It is at the lower end of the range at this point, or we feel that it's more likely to be in the lower end of the range. I would say there's two probably big puts and takes, though. You know, on the one end, there's one wild card, which is additional input cost volatility. And so, you know, we're calling it based on what the input cost that Nelson just kind of talked about, right? So that's one big thing. And, you know, so that could shift up or down, right? And then the other wild card probably is the volume side. And again, I think we have said that the volumes have come in slightly better than our original expectation, given all the pricing that we've taken. We could do a touch better in the second half, but that remains to be seen. There's been a lot going on in our volumes with cycling a winter storm in North America and you know, COVID, in and out, lockdown, all that. And so it's a little bit tough to call. But, again, I'd say, you know, we feel like we're calling it down the middle here, and we feel confident we're in the range. Okay. Very good. Thanks for all the color, guys. I appreciate it. Best of luck. Thanks, Kevin. Thank you.

Thank you. Our next question will come from Chris Carey with Wells Fargo Securities. Your line is now open.

Hey, Chris. Hi, Chris. Hi, good morning, everyone. So, you know, Nelson, you commented on margins being a key focus of yours going forward. You know, in KCP, we saw some sequential deterioration there, again, despite the top line. I was wondering if you can give some insights on to what you think is your needed based on your early analysis of the business there, to return to historically what is more of a mid-to-high-teens margins, or whether that target even looks realistic anymore?

Sure, Chris. Yeah, absolutely. Our targets and the way I've been looking at it are positive. Mid-long-term target of margins for KCP remains unchanged at the high teens. I mean, we are aiming for that, and we will get back. The plans are in place. I think it's important to recall that our KCP business has been the most impacted by COVID, including the reduced travel, the shift to remote hybrid work, and that's been bearing on the business. The business has continued to recover, you know, with high single-digit top-line growth, and washroom sales are already over 90% of pre-pandemic levels. In fact, in North America, it's even at the very high end. We're almost there in full-time, you know, full recovery. However, margins, as you said, I mean, did slide for Q2 a bit, but this was really a combination of two factors. One, we had the acceleration in commodities, lots of it impacting tissue, which hit us in Q2. And then it's the timing of the pricing. I mean, we enacted pricing in Europe, North America, went into effect in May, late May. And I think it's important to highlight that on a sequential basis within the quarter, we actually saw an acceleration in gross margins in June. So this is really pointing to, as the pricing is landing, we're seeing that the margins are recovering already in the latter part of the quarter, and we expect this to continue as we head into Q3 and Q4. Also, as we go into the second half of the year, and based on our current assumptions and what we know, we do expect the impact from commodities to tone down in the second half of the year versus what we saw in the first half of the year, even with the incremental costs that we've put in place. The other bit is also important. I talked about it in productivity. The team has been focused... Very much in terms of right-sizing, managing the business, and doing it the right way, there's a strong pipeline of productivity that should be coming through. And, again, I remain encouraged by what the team is doing and our commitment to getting the business back to, you know, the high teens and where it's been in the past.

Yeah, I'll just tag on there, Chris. You know, KCP is a great business for us. and I believe it remains a great growth opportunity for us overall. You know, we are cycling the band volatility in the near term, but that professional market globally is big, it's fragmented, and it's got a lot of underserved segments. You know, there's been a lot of noise in our day, man, because we've got a couple things going on. Washroom is recovering, but because of COVID spikes and everything else, you know, we're lapping, you know, big increases in PPE and gloves in the year-ago period, and also... our other parts of our safety business and wipers, right? So there's a lot of things going on. But overall, we still think there's a great growth opportunity. I do think if you look at offices where we have a bit more exposure, that business is probably not going to come all the way back to where it is. I don't think everybody's going back to work full-time 100% in office. And so that's going to change. But our attitude is, well, that's the base. And You know, we've got to grow from there. And there's still a lot of opportunities for us to innovate and to serve our end users in a better way.

That's very helpful. I just have a couple questions on Europe, then I'll jump back in. You know, just in the personal care business, you know, it's the first quarter in a while, maybe five years, excluding the Texas storms where volumes have gone negative. but it looks to be happening all almost entirely in, um, in Eastern Europe, um, within the overall global personal care business. Um, can you just comment on what's going on in that market specifically and whether you think that headwind, um, you know, could persist here. And then, you know, just secondly, on the cost side in Western Europe, you know, Nelson mentioned, you know, um, tissue businesses being very energy intensive. Comment well taken. Just with natural gas availability looking like it could get even worse, given some news this week, can you maybe just talk about how you're framing or preparing for potential risk of force majeure because of lack of energy or paying any surcharges to procure low availability of natural gas? Just these types of situations seem to be coming ahead. So I'm just curious your thoughts there. So thanks for those.

Hey, Chris. Yeah, maybe I'll start on the personal care and then maybe Nelson can cover a little bit on the energy and supply side. But, you know, overall, you know, D&E, again, very strong price execution in the quarter, 8% organic. You know, I think we are paying a little bit closer attention to the volumes because they are a little softer. and our market shares across D&E, the majority or the bulk of the volume impact in D&E was Eastern Europe. Really, Chris, it's as straightforward as it's the effects of the war and the impact on Russia and the impact on Ukraine. We are still operating well under those circumstances, but as you can imagine, the circumstances are pretty challenging. We remain operational across the region. including in Ukraine and building our business back in Ukraine. Organic is down low double digits as we curtailed operations in Russia. And we're actively building the business back in Ukraine, but we are actively and proactively compliant with all the sanction activity, and that obviously has a bit of a volume impact on the business. So I don't know if that, Chris, addresses kind of what you're asking on the volume side.

Yeah, that was very helpful. Thanks.

Okay. Right. And then to, you know, address the energy question, Chris, I mean, a couple of things. I mean, one, as we all know, the energy situation in Europe is pretty dynamic. And, yes, you know, the whole natural gas situation is something we're staying on top, you know, and developing contingency plans as we speak. And the team is really, you know, working thoroughly through it. We don't have details to share today, but, you know, our teams are really on it. And, you know, it is a priority for us. I will highlight, I mean, in Germany, we only have one factory. So, again, it's not like we have a concentrated risk just in one of the key markets where this could be one of the biggest challenges at this point.

Yeah, the thing I'll tack on there, though, Chris, in Western Europe, again, the operating conditions remain very challenging and volatile today. You know, I would say our pricing and the volume and the organic was up low double digits, price up double digits, and volume up high single digits. So, again, that's a developed market. I think the consumer is proving to be resilient. Our teams are doing a terrific job executing what I'm sure you're familiar with being a very challenging environment. So, you know, again, we're paying close attention, and the team's doing a very good job running in a tough environment.

Okay, thanks so much.

Thank you. Our next question will come from Steve Powers with Dolce Bank. Your line is now open.

Hey, Steve. Hi, Steve. Hey, sorry. Thanks. I was on mute there. Hey, good morning. So I guess just maybe to build a little bit on the costs, just to clean it up a little bit. So given where we are in the year, natural timing lags in the supply chain, your hedge positions, I guess – My inclination is to say that your line of sight to the $1.4 to $1.6 billion in higher costs is now fairly well locked in. Is that the case? Or is it more that you still see realistic risk that that $1.4 to $1.6 could still shift around if we saw further cost volatility? And if so, is it the energy bucket that's the biggest swing factor or Or is it, you know, is it equal across energy and pulse and distribution?

Well, yeah, I might say, you know, locked in is an interesting term because, you know, some of our biggest commodities, there's not a traded market for.

Yeah.

That's the issue. Right. So, yeah. So the thing there is there's not, I mean, some of our key commodities are not as liquid as we'd have in, you know, the CME. Right. The reality is not all of this is locked in today. I think one of the important things to highlight is right now, based on where we're at and at the $1.5 billion midpoint, our forecast would call for $875 million already hit us in the first half, and then $625 million would hit us in the second half, based on what we know today, Steve. Again, there's moving pieces. I mean, we do expect, you know, fiber to remain elevated based on what's out there and what's public. You can see it in the indices. And we would expect, you know, some easing as we go into the back half Q4 of the year on the fiber side. That's what we're projecting at this moment. But, again, it's a moving situation overall.

Okay. Okay. And so just as you – well – I guess that means that as your contract, my impression is you contract, you know, for the next year on things like pulp and fiber, you know, disproportionately there's a contracting season. So at this point you're hoping for expecting some relief into that contracting season because I'm assuming that current prices are well above where you contracted, you know, in 21. Yeah.

Yes, Steven, maybe I'll jump in here. We have shared before that we have negotiated material prices. We don't reveal the specifics or disclose the specifics of those contracts. I think what's fair to say or reasonable to assume in the cost outlook, building on what Nelson said, is that, again, based on our current assumptions, the fiber prices we expect to remain elevated in in Q3 before easing somewhat, in the later part of Q4. I think energy and distribution, particularly international distribution, are the two that we're seeing some of the more volatility, and we'll look through the balance of the year.

Yeah, that's helpful, Collar. Thank you. If I could just have a different topic. We've talked a decent amount already at the start about consumers having or being expected to have a sharper focus on value going forward. And I guess you talked about how that manifests in your categories and how you're pivoting to meet the consumer intersection of enhanced value. I guess just to get underneath that a bit more, do you see that more in consumer tissue versus personal care? And as you're moving in that direction and theoretically competitors are moving in that direction, how do you balance the desire to kind of go where the puck's going versus pushing so hard on the value side? side of things that you actually entice, entice trade down and kind of create a problem that you might not have, you know, had if you had, you know, if you and the whole industry hadn't moved in that direction, just how you think about that, that balance of going where the consumer is going, but not necessarily enticing them to go there. Right.

Great, great push, Steve. I mean, that's exactly, that's exactly the issue. And I think if you, And when you listen to the earnings call from some of our big customers, I mean, I think they'll say the same thing, which is there is a segment of consumers, let's say in a developed market like the U.S., that is trading down, but it's not all consumers. There may be a few more consumers that are more price sensitive in a developing market where there is not the government subsidy in a tough time like COVID, let's say in Brazil, as much as there was in the U.S., So, you know, consumers are a little more affected there, but I think that's right. You know, we do see it across personal care and tissue. You know, typically, you know, in the U.S., in a market like the U.S., what you'll see is maybe the trade down means maybe not trading the brand out, but moving to a smaller count pack, right, to make it more affordable in the short term. And so, and Lauren mentioned it earlier, so there's a host of moves that You know, we make in partnership with our customers to kind of, you know, shift and merchandise, you know, what's appropriate for the consumer. But, again, I think we also want to be very cognizant that we don't want to move the whole market that way. And there are plenty of consumers that, you know, I'd say, you know, despite, you know, some of the impacts of the economy, you know, their affordability in our categories remains strong. And, again, they're still looking to trade up. And, you know, we're seeing the growth. It's kind of the old barbell description. You know, we're seeing great growth on the high end as well. And we're continuing to innovate and promote our brands and advertise our brands on the high end. And that's what's been driving China. I'd say, you know, again, super strong performance on mix, double-digit organic growth in the quarter against the category that's down, multiple SharePoint growth on diapers and And that's all driven by value-added consumer benefits. We've really upgraded our line over the last couple years and feel great about the technology that we have in all of our key markets. And I think that's reflected in the momentum that we're seeing, let's say, in diapers when you look at all developed markets. I mean, we have multi-point share gains in our biggest markets. U.S. was up, Huggies was up three points in the U.S. in the quarter last China was up almost two points, South Korea for us, which is our second largest market, was up four share points in the quarter. So again, I think we're skating, as you say, skating to where the puck is. We want to be able to meet the consumer where they need us to be, and some are still looking for better quality and premiumization, and others are looking for us to extend them a better value, and we're doing both.

Great. Thank you very much.

All right. Thank you, Steve.

Thank you. Our next question will come from Jason English with Goldman Sachs. Your line is now open.

Hey, Jason. Hi, Jason. Morning. Morning. Thanks for slotting me in. Congrats on that market share momentum that you just referenced in personal care.

Jason, I did want to note, though, it's a little more slugged. I mean, we're under our goal because our goal is to be growing share in more than half our markets. And the last couple of years, we're up in two-thirds of our markets. And so You know, we're a little bit under half, right, just a couple points under 50. And so, you know, we're watching it closely. While we're up and developed, you know, as I mentioned, we're seeing some pricing lagging, you know, across D&E. And so our price gaps have widened a little bit. And so we're keeping close attention to that.

Now, I appreciate that flag. Thank you. And so you're actually net lagging a little bit on that side of the business. It certainly seems like you're lagging on the pro business too, which I want to come back to. I know you referenced some choppiness in terms of like COVID costs, but even comparing to 2019, I think your volume is down now in the 20s versus high teens before. So we're kind of falling away and eroding versus 2019. I appreciate that offices are a component, but it seems like office occupancy sequentially has gotten better, not worse. Why is your volume sequentially getting worse? Can you help us understand what's happening within that business?

Yeah, a couple things going on. One, I would say professional demand overall is improving. And so, you know, for the quarter, and I don't know if you saw the facts, but the organic was up high single digits overall. You know, North America was up eight, and our D&E was up six. The washroom is recovering. I would say, though, there's a big component of pricing in that. So washroom sales were up 30% in the quarter. And if you add on a dollar basis at 98% of pre-pandemic levels, But I would say volumetrically, it's still lagging, right? And, you know, because, you know, we have significant pricing in the last couple years in professional. And so, you know, it reflects significant pricing, but the volume is still soft. And, again, I think, as I would say, you know, I don't think all that office demand is coming back in a minute. But that said, that's where we're, you know, that's where our mix has been. and we've got to grow from there. And so, you know, we have a great team. We have great innovation. You know, we have strong momentum. And our share is up across the washroom business. We have Icon Dispenser, which is a home run with end users. We have an improved towel offering. And so we're seeing strong momentum on the business. But, you know, I think you're right. You know, I think we've got to build our business back. The other thing that's amplifying maybe you know, the numbers that you're looking at, Jason, is we are cycling strong pandemic-related volume that was in wipers and PPE. I mean, you know, and gloves was a very significant seller for us in 2020 and 2021, and that's gone the other way this year. And so, you know, we have other effects going on as well.

For sure, for sure, which is why I'm trying just to, like, look at 2019 and look at the volume of that, because I appreciate the noise. And back to your comment on some areas where you've got some price gaps that you're trying to manage, are we at a point where you would expect to start to maybe give some of the pricing back to get a little more promotional juice into the market to try to manage those price gaps? Or is it not meaningful enough to have to start to do some of those activities?

I wouldn't say that yet. I mean, again, overall, the way I'll say it, Jason, is, you know, I'm prioritizing and Nelson is prioritizing margin recovery in the near term. And, you know, what I will tell the teams internally, the conversation is like, I'm not after renting hollow share. Right. And so, you know, and so, you know, I don't I don't really want to, you know, jerk our teams back and forth. You know, we're trying to deliver balance and sustainable growth for the long term. You know, we have to get pricing to improve the margins and restore our margins. That's part one. We want to grow our shares over a long term, sustainably, over a long term. And so we're going to monitor that. But, again, I'm not ready to, you know, shift back and forth, you know, quite yet.

Yeah, makes sense. Thanks a lot. I'll pass it on.

Okay. Thanks, Jason. Thanks.

Thank you. Our next question will come from Andrea Texera with J.P. Morgan. Your line is now open.

Good morning, Andrea. Hi, Andrea.

Good morning. Thank you. So first, one for my compricing, and I know we obviously spent a lot of time on this call on this, but can you provide the magnitude of the new pricing announced in the U.S. last week? And if you embedded also more pricing in G&E, or you took a pause now, given the loss is higher there. or even perhaps in Western Europe where the natural gas prices have been higher. And one for Nelson and Terry, a clarification on the cost outlook. Are you using mostly the contracted prices that Terry mentioned and then what's floating is based on spot prices because I think she also spoke and Nelson spoke about potentially using some declines ahead on the forward curve. So just making sure that we have the assumptions that you're working with. Thank you.

Okay. I'll start on the pricing, Andrea. If you track or go with the fact that we expect pricing to offset inflation over time, obviously we like to get as much of that as soon as possible. And so if you looked over the course of the year, some of the pricing or inflation impacts hit outside of the U.S. earlier this year. And then more recently, there have been more impacts in the U.S. And so I'd say our pricing around the world has kind of followed where the inflation has hit us around the world more directly. We did announce pricing in the U.S. last week. It was typical for what we've done in prior rounds, which is about a mid-single-digit increase. And again, we're still in the early stages of execution on that. And then we've announced similar actions at different times throughout the year in the rest of our markets.

A similar magnitude, I'm assuming, or a higher magnitude. I'm assuming that Sam was higher.

Yeah, I would say Latin America generally, you know, overall we're up double digits on price, and so, you know, significantly higher. That reflects, you know, what's going on in the local market there.

Okay.

Okay, and then on the question around what prices are we reflecting in terms of our outlook, I mean... We base it off industry forecast, Andrea. I mean, that's the best view we've got for whatever we haven't covered. So that's there. I mean, and that's what we're seeing and what we were reflecting the forecast at this stage.

And Nelson, how much is it covered now? Would you say it's covered in contract prices or how much is floating, how much is saved?

Yeah, Andrea, we don't disclose that bit. So I, you know, we don't get into disclosing that.

Right. And one last, if I can, on China. And sorry if I missed that. How much was the drag in the quarter for D&E? And what is, with the reopening, how much has been improving or hasn't been that big or continue to be able to service, given that you're more spread than a lot of other players?

I'm not sure if I'm understanding the question correctly, but I would say China was not a drag. It was a star in the quarter. It was up overall double digits. in the quarter, and that was based on great diaper technology, great digital execution. Our share was up a couple points. Organic was up in the mid-teens, and that's against the backdrop of a category that's been down high single digits over the last couple years. What's really driving it is robust balance of volume, mix, and price. We feel really great about our China business The team is doing an excellent job executing in a tough market. We were not impacted as much by the COVID lockdowns. I mean, everybody was impacted, but we have a very locally agile team that developed backup options for supply. Incidentally, our manufacturing operations were not in locations that were locked down, and so that may have been a little bit different for us than for others. But again, we felt great about our China performance in the quarter.

Yeah, congrats to the team. Thank you. I'll pass it on.

Thanks, Andrea.

Thank you. Our next question will come from Peter Grom with UBS. Your line is now open.

Hey, Peter. Hey, good morning, everyone. So, yeah, I just kind of wanted to understand, you know, how we should think about the phasing and margin in the back half of the year, or specifically how much of that remaining $625 million should hit in 3Q versus 4Q. I mean, I guess I just appreciate the commentary around margin improvement, but previously there seemed to be some sort of expectation that we could potentially get to margin expansion, you know, at some point in the back half of the year. And I know it will take time to fully recover margins, but, you know, based on where things stand today, you know, when do you expect to see kind of margin expansion? Thanks.

Maybe I'll start, Peter. You know, one, I would say, you know, right now we're prioritizing restoring our margins. I still remain confident that that we'll be able to restore our margins and eventually expand our margins over time. You know, I think I said that in January as well, you know, but that was before we had additional, I don't even know, 800 million of additional inflation, you know, in our forecast. And so, again, and I think that, you know, my confidence is still high that we'll be able to expand margins over time, but I guess I think the timetable shifts a little bit because there's a – a bigger nut to crack on that front.

Yeah. And adding to that, I mean, Peter, a couple of things. One, we did expand gross margins in Q2 by 40 basis points. I mean, we realized significant pricing already versus Q1. So we saw that sequential improvement in Q2. And You know, as we head into the back half, and we don't give guidance on quarterly margins, but we remain confident that based on what we know today, we will continue to expand margins. I mean, the plans are in place. As a reminder, we will continue to realize pricing, and based on what we've got today and what we saw in Q2, that will play out in the second half. Secondly, we've got our forced cost savings, which will accelerate in the back half versus what we saw in the first half, and that's a second component. And then, as you said, there is a more subdued year-over-year impact of the commodities in the back half. So we'll see, as you mentioned, $625 million, which I'm not going to give the breakdown between Q3 and Q4, but we'll see that in the back half versus the $875 that we saw in the first half. That gives us the confidence, based on what we see, that we will see progressive margin improvement in the second half.

Yeah, and I feel like, Peter, that our teams make great progress on pricing and margin recovery, even it may not show up on the operating number. But for the quarter, our pricing didn't offset inflation overall, and I think that was strong progress. Now, the additional work for us is, yeah, the inflation forecast got bigger for the balance of the year, and so we've got to solve that as well. But you know, overall, you know, we feel good about our progress. We know there's more work to do. We're still confident we'll be able to expand our margins over time. And then, in addition, we all know commodities are going to revert, and they always do. And when we do that, we're not going to rely on reversion for our margin expansion. But when it does do, it will accelerate our timeline.

So that's super helpful. And then I guess maybe following up on that, you know, I wanted to ask about how we should think about pricing and promotion should we actually reach in a deflationary environment and I know historically you've kind of held on to pricing as you don't typically price to peak inflation but I just would be curious just given the amount of pricing that's been taken you know over the past year year and a half and kind of layering in that retail pressure that Dara was alluding to earlier I mean what if anything do you think could be different this time around

Well, I think, Peter, the big thing is, you know, pricing or promotion, you know, there's a lot of things going on. But, you know, one, you know, you're using it to support the brands. And for me, typically, that would be to support great innovation that you're launching that I find tends to grow the category a little bit more effectively. And what we're really after is overall category growth. And that's what the retailers are after as well. And so I So for me, pricing and promotion is a component, you know, not an end-all. It's a component of an overall strategy or growth strategy for the business. You know, that said, you know, there are fixed costs in this industry, and so volume does matter, and so there's a tactical application of that. But, you know, if you look at the market, you know, I think the input cost levels are so high, while promotion is at, I would call it, a typical level. The depths are probably a little shallower than historically they've been, and I think that's reflective of the cost environment that the industry is working in. I don't know if that really addresses what you're asking.

No, that's helpful. I appreciate it. Thanks so much. Okay.

Thanks, Peter. Thanks, Peter.

Thank you. There are no further questions at this time. I'll turn the call back over for closing remarks.

Thank you. Great. Thank you, operator. And thank you, everyone, for joining us today on the call. And this will conclude our call for our second quarter earnings release.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.