金百利克拉克 (KMB) 2002 Q1 法說會逐字稿

Excuse me, everyone. We know have Mr. Mike Masseth in conference.

Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question.

I would know like to turn the conference over to Mr. Mike Masseth.

Sir, you may begin.

Thanks,

, and good morning, everyone, and we appreciate your interest in Kimberly-Clark.

With us today, we have the -- your normal Kimberly-Clark team: Tom Falk, President and Chief Operating Officer, Jack Donehower, Senior Vice President and CFO, Randy Vest, Vice President and Controller, and Tina Barry, Senior Vice President and head of corporate communications.

I hope you had a chance to review this morning's news release with all the details of our 2002 first quarter results. To reiterate, first quarter earnings, before unusual items, were 87 cents per share, compared with 84 cents last year.

We're off to a good start in 2002, and, importantly, cash flow continues to be strong.

Here's the agenda for today's call. Jack will start, as usual, with a financial overview. Then Tom will provide some additional insight about our growth strategies. I'll come back with some final details, and we'll finish up with Q&A, as usual.

In the interest of fair disclosure, we encourage you to get your questions answered during this public forum. And as usual, before we begin, let me give you the forward-looking statement.

Certain matters to be discussed during this conference call concerning the business outlook, anticipated financial and operating results, strategies, contingencies and contemplated transactions of the company constitute forward-looking statements and are based upon management's expectations and beliefs concerning future events impacting the company.

There can be no assurance that these events will occur as anticipated or that the company's results will be as estimated.

For a description of certain factors that could cause the company's future results to differ materially from those expressed in any such forward-looking statements, see the section of part one, item one, of the company's annual report on Form 10-K for the year ended December 31, 2001, entitled "Factors that May Affect Future Results."

Now I'll turn it over to Jack.

Thanks Mike. Good morning everyone.

Today I will briefly review our financial results for the quarter. Earnings before unusual items of 87 cents per share were up nearly four percent versus the first quarter of last year. The increase came from a solid gain in operating profit of our consumer tissue business as fewer shares outstanding because of our ongoing repurchase program.

As expected, lower earnings in personal care partially offset those improvements. As you know, the accounting rules for good will have changed. Beginning this year, companies are no longer required to amortize good will. On a pro forma basis, this would have increased net income in the first quarter of 2001 by four cents per share.

Despite the challenging business environment, our first quarter results show that we continue to have -- or continue to be in good shape competitively and financially. Here are the highlights. Sales volumes grew 4.5 percent. Operating profit margin before unusual items was a strong 20.2 percent and operating cash flow remains strong, up 14 percent versus the first quarter of last year.

So let's review the results beginning with the top line. Sales are more than $3.3 billion, up slightly versus the first quarter of last year. I should point out that sales are now reduced by the cost of trade promotion and consumer coupons. That's based on the new

pronouncement.

On the old accounting basis, sales would have been up more than two percent. Meanwhile, currency continues to be a factor, reducing sales by two percent. On a regional basis, currency effects were split about evenly among Europe, Latin America and the rest of the world. Except for the Argentine peso, exchange rates for key currencies were generally in line with our planned assumption.

We expect that year over year comparisons should moderate over the balance of the year and as mentioned, sales volumes were up 4.5 percent in the quarter. About half of this growth came from good volume increases in our personal care and consumer tissue businesses in North America.

Outside North America, the growth was driven by consolidation of Kimberly-Australia, which as you know, began on July 1 of last year. Here's the big picture. In the

markets, our businesses are generally doing well. It's the less developed markets that are more of a challenge. In Argentina, Brazil and Taiwan, for example, weak economies have adversely affected sales of consumer-packaged goods for all competitors, including Kimberly-Clark.

Overall, competitive pricing, including promotional activities, reduced sales by about two percent. This is not surprising in light of the heavy competitive spending in diapers and training pants and given lower pulp costs.

This morning's news release contains details on the key factors affecting sales in each of our three business segments, but let me mention just a few of the highlights.

In Consumer Tissue, sales, excluding currency effects, increased almost four percent. That was driven by volume gains of almost five percent. Half of the volume growth came from North America, led by strong increases in Cottonelle and Scott bathroom tissue and Scott household towels.

Our proprietary technology continues to drive volume and share growth. The other contributor to growth in tissue volumes was the consolidation of K-C Australia.

Now, I would like to shift to Personal Care. First quarter sales were flat, despite sharp declines in Argentina and Brazil. Excluding currency effects, sales were more than three percent higher on volume growth of six percent. More than half of the volume increase came from North America, where total volume was up about six percent.

Volumes increased across all of our businesses and were especially strong in infant, child and adult care. The balance of volume growth came from K-C Australia were more than offset -- which more than offset the declines in Latin America.

In the business-to-Business segment, sales volumes rose two percent, and selling prices were four percent lower, resulting in a sales decline of about three percent. Our healthcare business continues to experience good volume growth, with sales volumes up more than five percent in the quarter.

In addition, our K-C Professional business in North America began to show signs of recovery from the weakness experienced last year. Sales volumes increased one percent in the first quarter, and that's a good performance in contrast to the eight percent decline in the fourth quarter.

In summary, company sales volumes grew 4.5 percent in the quarter, and that's despite weakness in Brazil and Argentina and continued challenges facing some of our B-to-B operations.

Let's now turn to margins and operating profit for the quarter. For purposes of this discussion, I will exclude unusual items for the comparisons. These items are described in our news release and are also summarized by P&L line item and by segment in the tables in the news release.

But for the quarter, gross margin was up 70 basis points to 36.6 percent. Lower pulp costs of more than $70 million, drove year-over-year improvement, more than offsetting the stepped-up levels of competitive pricing.

Moving down to P&L, marketing, research and general expenses were 17 percent of sales in the quarter, up from 15.3 percent a year ago, but slightly less in the fourth quarter of last year. The increase was mainly attributable to higher advertising, consumer promotion and employee benefits cost. That increase was mitigated by the elimination of good will amortization.

As you can see in our news release, two-thirds of last year's good will amortization expense of $22 million was in the B-to-B segment with a balance split evenly between consumer tissue and personal care. Finally, other income expense in the first quarter includes currency gain from Australian dollar forward contracts, equivalent to approximately two cents per share.

I would point out that on an overall basis, the net impact of changes and foreign currency rates on the first quarter -- on the first quarter earnings, were minimal. The gains and other income and expense were offset by translation and other currency effects.

That brings us to operating profit and operating margins for the quarter. Before unusual items, operating profit increased 2.2 percent to $674 million, and first quarter operating profit as percent of sales was 20.2 percent versus 19.8 percent last year.

Now let's look at operating profit by segments. In consumer tissue, operating profit for the quarter was $249 million, up a solid six percent from year ago levels. And operating profit margins for the quarter was an excellent 19.9 percent of sales, up from 19.1 percent last year. Higher sales volume and lower

costs drove the operating profit improvement. These benefits more than offset the impact of promotional activity in higher advertising spending.

From a regional perspective, we had a very balanced quarter with strong consumer tissue results in North America and double digit improvement in both Europe and Asia, adjusting for K-C Australia. Importantly, the improvement came despite negative currency effects on the top lines.

Let's turn to personal care. Operating profits for the quarter was $258 million, down six percent from last year. Operating margins for the first quarter was 21.3 percent, down from 22.6 percent last year, but up from 20.1 percent in the fourth quarter. About 40 percent of the decline was attributable to Argentina and Brazil. In addition, results were constrained by strategic actions to counter aggressive, competitive competition in diapers and training pant markets in the U.S. and Europe.

Despite the competitive activity, our fundamentals remain strong. Our market shares have held up well and first quarter sales volumes of diapers and training pants were five percent higher in North America and slightly higher in Europe. Furthermore, we introduced some new and improved products that will enhance our competitive position.

In the B-to-B segment, operating profit was $161 million, up three percent from the prior year, but down six percent, excluding goodwill amortization. Operating margin was 18.9 percent of sales for the quarter, down from 19.4 percent last year, excluding goodwill. Healthcare volumes, in the beginning of recovery in our North American K-C Professional business, were not sufficient to overcome lower prices across the segment.

Now turning to our equity companies. In the first quarter, our share of net income of equity companies decreased to $32.4 million from $39.5 million a year ago. The consolidation of K-C Australia was responsible for the majority of the decline.

In addition, earnings were down somewhat for K-C de Mexico. K-C de Mexico posted solid sales and operating profit gains in the first quarter, but these improvements were more than offset by a higher tax rate, due to tax law changes.

And finally, switching to cash flow and our financial position, cash provided by operations in the quarter was $521 million, an increase of 14 percent. This was despite cash payments of more than $50 million in February, under the terms of two previously-announced arbitration rulings. The strong cash flow provides tremendous financial flexibility and helps fund our growth.

During the quarter, we continued to repurchase shares of our stock. We bought 2.5 million shares at a cost of $155 million. Meanwhile, our balance sheet remains rock solid. Net debt and preferred securities at the end of March were $3.8 billion, the same as at the end of 2001. In addition, our leverage ratio for net debt and preferred securities to capital was 38.4 percent, down slightly from 38.9 percent at the end of 2001.

You may recall that in February, we increased our quarterly dividend seven percent. We also said we expected to continue our active share repurchase program in 2002. In conjunction with those plans, we reviewed our financial position with our board, and we concluded that, given today's low inflation and low interest rates, it makes sense to raise our leverage target.

The new range is 35 to 45 percent, a modest increase from our previous range of 30 to 40 percent. Our strategy is to maintain a conservative capital structure and to maximize shareholder value by returning excess cash to investors.

That wraps up our financial review of the first quarter. To summarize, we're off to a good start in 2002, despite very competitive market conditions. We increased sales volumes; our profitability and market positions remain strong; and we continue to generate excellent cash flow.

Now, I'm pleased to turn it over to Tom, who will share some strategic and operating highlights with you.

Thanks Jack and good morning everyone. I'd like to add just a few brief comments to give you my perspective about our first quarter results.

First of all, I'm encouraged by our performance and by the strength of our profit margins in a tough, overall economic and competitive environment. Sales volumes were up in each of our business segments and we had solid increases in consumer tissue and personal care in North America and also in our health care business.

I also am very encouraged to see sales of K-C professional products in North America, which is our away-from-home tissue business, are beginning to recover from the weakness of that experience in late 2001. I am also pleased with the increase in cash flow in the first quarter. As we told you many times, our strong cash flow provides the funds to allow us to invest in growth and repurchase shares of our common stock. All in all, we're off to a very good start in 2002 and we're very much in line with the planning assumptions that we laid out for you in our conference call last November.

Our growth investments are beginning to pay off, and we have plenty of opportunity for further improvements. Now I know

annual reports due and many of you have probably a dozen or more annual reports stacked on your desk and you may not have already gotten to the Kimberly Clark report, but if you haven't done so already, I would encourage you to take a look at our annual report.

And in our 2001 annual report, we describe five keys to our global growth, which are our strong global brands, brands like Kleenex, Huggies, Kotex, Depend and Scott, the global markets that we operate. They give us ample opportunity to grow our sales of K-C products worldwide.

The global investments that we've been making that will drive our future top and bottom line growth, our global customers that we've got great relationships with that will play a vital role on our growth in the future, and finally, the global businesses that we're in, they give us the scale and technology to take our understanding of consumers as well as our away-from-home in health care customers, and develop the right products to satisfy their needs.

So rather than taking you through all the details of the annual report today, I would like to concentrate on a couple of key points out of that list. First, I want to talk about product innovation and second, I want to cover our financial strength.

I also want to share a quick overview with you about our tissue businesses and then before we wrap up, I'll make a few brief comments about the outlook for the balance of the year. So let's begin with product innovation, which is as all of you know, is a key element behind our competitive advantage in most of our categories.

One of our most recent product innovations in improved Pull-Ups training pants is now making its way to store shelves as we speak. This is a -- this is a great category and parents have told us that they wanted a product that's more like real underwear. And over the years, we've been making Pull-Ups more and more like real underwear, so that children can better understand the difference between diapers and toilet training.

And our expertise in absorbency has helped us create an improved Pull-Ups training pants, which is nearly 30 percent thinner than the previous product, and yet, just as absorbent. And this makes them more like underwear than any other training pant product on the market.

Now, as all of you know, because we've told you many times, we invented the training pants category in 1989, and our continual innovations in this category have driven rapid growth. We expect retail sales of training, youth and swim pants in North America will reach nearly $1 billion this year. That's right -- $1 billion. And there aren't that many $1 billion-categories in the grocery store, especially that have just been around since 1989.

And thanks to our innovations, today we have about a 75-percent share of these markets. Improved Pull-Ups training pants are significantly preferred by consumers over our current product, and we are very optimistic that this product improvement will help solidify our competitive advantage in this category.

So look for great news about Pull-Ups coming to store shelves near you.

Now let's switch to tissue and talk a little bit about our consumer-preferred products there as well, thanks in part to our uncreped through-air dried, or UCTAD, tissue technology. We've talked to you a lot about this in the past as well, and this is a proprietary K-C technology.

During the past year, we have aggressively expanded our UCTAD technology. We've added three new tissue machines, two of those in the U.S. and one in Europe. And the benefits can be seen in the sales and market share gains that we have achieved for Scott towels and Cottonelle bathroom tissue in the U.S., as well as for Scottex bathroom tissue in Europe and Kleenex Scottfold hand towels, which is K-C Professional's away-from-home entry in the hand towel market in both North American and Europe.

In fact, since last June when we rolled out improved Scott towels in the consumer market, nationally in the U.S., our sales volumes for this product have grown more than 15 percent, which is a great result. And our new Cottonelle bathroom tissue with Aloe and vitamin E has also been a big success.

This is a high-margin line extension and has boosted our share in the super-premium bathroom tissue segment by nearly a full share point. Retail sales for this product are tracking at an annual rate of $100 million, and that's just nine months after launch. So the UCTAD technology is providing real value to our consumer businesses around the world.

Looking forward, we'll continue to ramp up the UCTAD technology to support the continued growth of our consumer tissue and K-C Professional businesses. So, in summary, we have the proprietary technologies and a consumer understanding we need to fuel our long-term growth. And we have a very full new product pipeline with product improvements on the way this year in every category.

Now, let's turn to the second area of focus that I mentioned, financial strength. Our healthy balance sheet and strong cash flow combines to give us flexibility and competitive advantage. Jack gave you the details of our current financial position. The bottom line is that our strong cash flow not only provides the funds for growth through acquisition, and a constant flow of new and improved products, it also lets us continue repurchasing our common stock.

In 2001, cash provided by operations increased by six percent to a record $2.3 billion. And as we have noted, cash flow in the first quarter of 2002 increased by 14 percent. We will continue to focus on improving our cash flow with investments and information technology, which will help make this possible. Though our largest computer systems upgraded our history, we're driving down our administrative or back office costs worldwide. Systems upgrades also are accelerating a series of initiatives that we call go-to-market, that are squeezing costs out of every part of our supply chain.

I'd like to emphasize that we are committed to investing our cash flow wisely and to improving our return on invested capital. In fact, through the first quarter, our capital spending was approximately $165 million. Although it's still early, we're tracking below our earlier forecast of approximately one billion for the full year.

Now I'd like to focus your attention for a moment on our tissue businesses and review a few numbers with you. I thought this would be a helpful perspective about both our consumer tissue and our K-C professional or away-from-home tissue operations. The timing as we review these numbers is also appropriate because of the sales reclassifications that we've made under EIPS 01-9.

Beginning with consumer tissue, if you look back from 1999 through 2001, sales increased 11 percent over that period to more than $4.7 billion. Over that same period, operating profit before unusual items climbed by 24 percent from approximately $728 million to $903 million. At the same time, the assets that we've deployed in those -- in that business went up by only 20 percent. And that includes a ramp up in gross investments in the past two years.

The result is that consumer tissues returns have improved very nicely over the last three years. Our operating profit margins before unusual items, which began the period at 17.1 percent of sales in 1999, increased steadily to 18.6 percent in 2000 and 19 percent even last year.

Now during this same period of time, we went through a complete pulp cycle, where pulp started out low, went up to a peak and has dropped back off. So we made steady, consistent progress in improving our profitability over the complete range of pulp prices.

In the first quarter of this year, this trend continued with a further rise in our operating profit margin for our consumer tissue business to 19.9 percent. The investments that we made in 2000 and 2001, including the UCTAD expansions I mentioned a moment ago, are beginning to pay off. So, clearly, this is a very profitable business for us, and our teams have been doing a great job of growing the top line as well.

Now, we've gotten a lot of questions -- I met with Alice -- particularly in the last few months, about what's going on with K-C Professional, which is our away-from-home tissue business, so I thought I would give you an update on that subject as well.

Our K-C professional business has much in common with our consumer tissue business. We've got great brands based on proprietary technologies. We have excellent marketing and leading market shares. We've got a global presence within this business with global customers, and we have excellent profitability. It's the largest component of our Business-to-Business segment, and annual global sales of our K-C Professional business are about $1.9 billion.

Our strategy in this business is to provide a value-added, low cost in use, bundle of products for use in office buildings, manufacturing facilities, lodging, food service and other public locations away from home. These markets are somewhat susceptible to changes in economic activity, and we've all lived through that in the past several months or in the past year.

But again, let's look at some numbers for K-C Professional over that same time period of 1999 to 2001. Our sales for K-C Professional in that period grew by about 10 percent, and operating profit, before unusual items, matched that growth. As a result, K-C Professional maintained its operating profit margin in the high teens, despite the difficult conditions it faced in the second half of last year, particularly in North America.

In the fourth quarter of 2001, sales volumes for K-C Professional were down about eight percent in North America, but as I mentioned at the beginning of this call, I'm very encouraged to see early signs of recovery in their sales, with first quarter volumes up one percent.

Meanwhile, K-C Professional is continuing to lead the way in innovation in its markets, introducing differentiated new products like Scottfold M, the M-Fold towel, which is based on UCTAD technology, and our MEGACartridge napkin system.

We launched Scottfold M in January, and sales levels of that new product are exceeding our expectations. We've also gotten some good press about our MEGACartridge napkin. There was a recent "Boston Globe" story about it, but for those of you that are regular customers at McDonald's Restaurants, you may find the napkin dispensing system has changed and sometimes, you know, you may wonder where the new napkins are.

But there's a lovely dispenser hanging near where the straws and salt and pepper are that actually cuts napkin consumption by 30, 40 percent and provides a great value for our customer and a good return for us.

Shipments of another innovative new product began professional this month. Our proprietary All-In-One cartridge soap system is aimed at the fast-growing segment of the $1 billion U.S. and European skin care markets. Initial reaction on the marketplace for this next generation soap product has been very positive. So as you can see, K-C Professional is a very profitable part of our business and its teams have remained focused on growth in the face of a challenging business environment.

And that's why I'm confident that this business is well-positioned to benefit and grow as the economies continue to improve.

Before wrapping up, I wanted to comment briefly on our outlook. As I mentioned earlier, the first quarter played out in total in a fairly similar fashion with the expectations we discussed with you last November. And we remain cautiously optimistic about the outlook for the balance of 2002. As you would expect, there are some changes, both positive and negative, compared with our planning assumptions from last November.

Jack covered currency in his remarks, except for the Argentine peso. Exchange rates for key currencies around the world are about in line with what we expected in our budget and we covered those with you in November. On the positive side, our pension costs will be somewhat lower this year than we originally estimated. Expense for our defined benefit plan should total about $40 million this year and that's $20 million better than our earlier projection that we provided you with in November.

Bulk costs are also lower than we had anticipated. As you may remember, we had assumed the average cost of around $550 per metric ton for the Benchmark Northern Soft Wood grade of fiber. Bulk prices actually went down in the first quarter instead of trending higher and current prices are in the $460 to $470 per ton range.

On the other hand, promotional spending is higher in a cost-competitive environment. Again, that's not too surprising given competitive activity in diapers and training pants and the lower fiber prices which usually result in higher promotional spending.

In the near term, we expect that competition will remain intense, particularly in the diaper and training pant categories in North America and Europe. So as you add it all up, we see the results for the year as being very consistent with our previous expectations. And we're confident about our future prospects. We have excellent market positions and a full product pipeline that will drive our sales growth.

And our costs should continue to go down as a result of our investments to expand our proprietary manufacturing technologies and to roll out information technology that will support or go-to-market efforts and further streamline our administrative functions. And, finally, we expect our cash flow to remain strong, which will allow us to continue to invest in growth and to repurchase our common stock on an ongoing basis.

So in closing, I want to leave you with three thoughts. First, we're doing the right thing, strategically, to build competitive advantage. We're focusing on superior product performance, our strong global brands and technology-driven innovation.

Second, we're strong financially. We've got a solid balance sheet, healthy profit margins and excellent cash flow. And third, our team is committed to growing our sales and earnings and increasing shareholder value.

I'm glad you could join us today, and I appreciate your interest in Kimberly-Clark. And now Mike has a few details to review with you before we begin to take your questions.

Thanks, I'll -- excuse me. First, I'll just go through a brief summary of market share progress, and there is good progress to report there for us, as shares are up in seven of the eight major categories that we track in the U.S. The lone exception is in the training pants category, which you should not be surprised at, with the introduction that Proctor & Gamble is making in that category.

As Tom and Jack mentioned, our sales in training pants actually were up in the first quarter, although our dollar share is down about three points. In the other categories, our adult care market share is about flat, and that's at -- that's nicely over 50 percent. Other market shares in diapers, feminine care, facial tissue and baby wipes -- all of those shares are up about a point. And I'm comparing our most recent 12 weeks with the average for all of last year.

So good solid performance in those categories. And Tom also talked about the success we're having with Scott towels, and that's resulted in market share that's about two points from last year's average. So good progress there.

In diapers, in Europe we're at about a 21 share. Last year we tracked at a 22 -- 23 rate. And then I will also give you the regional sales summaries.

I think our news release has lots of details on the sales for each of the businesses and how it breaks down. Looking at Europe overall, sales were down five percent, down one percent before currency though, and in Latin America, sales were down 11 percent. Currency was more of a factor with the weakness in the -- in the Argentine peso and the

, so sales were down two percent before currency. And most of that is in the personal care area.

In Asia, sales were down five percent, again due primarily to currency, down one percent before currency. Now a few pieces on the balance sheet. Accounts receivable, a billion 787, and that's up from a billion 672, at the end of the year. What you see here really is the timing issue as the quarter ended on a weekend. We had that exact same situation at the end of 2000, as you may remember.

On the other hand, inventories are down at a billion 460, versus a billion 494, at year end. And shareholder's equity finished the quarter at five billion 737. That's up from five billion 647, at the end of last year. Finally, just a note on our effective tax rate, on the earnings before unusual items, it was 29.7 percent and if anybody needs a dollar amount of that, it's $187.2 million.

So that concludes our remarks for today. We're happy to open up the call for 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 on your touch-tone 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, press star two.

Our first question is from

. Please go ahead.

Hi. A couple of things. First of all, just a really easy one, can you break out for us the marketing research and general expenses like you historically have done?

, those are combined now that we've done the EITF reclassifications and they include our research expenses, which are normally in the sort of two percent of sales area, and general expenses, which are in the five-to-six percent area, and also advertising and consumer promotion, which is typically in the eight-to-nine percent of sales area.

So you won't be breaking that out anymore?

No ma'am.

OK. Just a big picture question. The sales came in below what I had expected. Gross margin was about in line, so the operating margin was substantially higher. Can you give me, kind of, big picture, what was driving that? Is this, you know, cost savings from the go-to-market program, benefits from, kind of, plant restructuring, that type of thing? Can you walk us through that?

Which piece, Amy? The gross margin piece?

Well -- no, the operating margin piece.

Yeah, I mean, I guess operating margin was about where we thought it would come in. You know, the promotional spending environment is the one that's a little different to forecast from what we've done in the past, given that we'd had much higher promotional spending.

And that now depresses the sales number. And, you know, we got a lot of that back in fiber price, which benefited cost of sales, and the result is, with a lower sale base, we had a higher operating margin than you might have predicted under the old accounting rules for promotion accounting.

OK, but was there any -- you talked in your -- in your remarks, Tom, about your go-to-market program and investments you're making in technology. Can you help quantify for us what kind of savings you're seeing from that, and what your expectations are for the full year?

Well, we have -- we've talked about that in past. I think we had said the savings we expected in North America were in the order of 75 million, and we achieved that. I would expect that we would see a similar amount this year.

You know, I don't think that that was, individually, a big factor in the margin change in the quarter. It was more a function of some of the macro changes on promotion and fiber price.

OK, so just -- I'm sorry. On the -- so basically what you're saying is that because of the accounting change, it made the operating margin look better. Is that what you're saying?

Well, I think that places where you would have typically seen an increase in trade promotion in the past would have depressed operating margin. It won't do that as much in the future, because it's going to be reducing dales at the same time.

OK. So there -- OK. I understand.

OK.

And then just lastly, pricing was very negative in the quarter. Was this also just due to the accounting change, or has the rate of promotion really gone up relative to what you had anticipated and relative to what we see in recent quarters?

Promotion spending was higher in the quarter, but we also had some negative price, particularly in the B-to-B arena, where healthcare prices were down -- were down about five percent, and K-C Professional pricing was down about one percent.

And you expect both of those to continue?

Well, many of those were annualized carry-overs from price changes that came in, in 2001. There wasn't a lot of new price reduction; it was more a carry-over of decreases that occurred during 2001.

OK. And just -- can you make those similar comments for the other two segments, since pricing was down in those areas as well?

In Personal Care, the biggest factor was a price reduction that we took in Pull-Ups last year, which was a count increase, and I think that was a price change of about five percent. Beyond that, list pricing in North America was relatively stable. In consumer tissue, it was mostly all trade promotion.

OK. Are you seeing more competition from P&Gs just across the board than you have in some time?

I would say, you know, we've always felt Proctor was a pretty strong competitor. They are -- they are following a pattern that we've seen before where they have some product news and they're going to make some noise in the marketplace, particularly in infant care and child care or in the Pull-Ups area, so they're spending money to get distribution, they're spending money to get trial, and we're spending back to be competitive and protect our share.

And that happens pretty regularly in this business and in the end, the best product wins and the thing that makes us confident and feel good is that we've got a very strong product plan and we've got great products on the shelf.

You mentioned I think a new product in diapers. Are you alluded to it? Can you talk about timing and what that is?

No, other than I would say we're confident that, you know, we will continue to retain product superiority in infant care and child care.

And what would be the timing of something like that?

Well, the child care product is shipping now and you know, the infant care product will ship later this year.

OK. Thank you.

Thanks

.

Our next question is from

.

Yeah Tom, just on the comment that you were increasing your debt to capital target. Could you go through that in a little more detail? Does that imply that you may be more aggressive going forward in share repurchase?

Well, it certainly gives us the flexibility to do that and you know,

, as you -- as we do share repurchases at the level that we're at, it does kind of suppress the equity line artificially and so that gives us the flexibility to buy shares back at the high end of the range that we talked about and still have a meaningful target that we can use to measure ourselves with.

And I don't know, Jack, if you want to add anything to that response?

No,

, I wouldn't see this as a major change. We announced in November that we expect to be buying the two-to-three percent of outstanding shares and as Tom said, that does cause the net to debt and preferred securities ratio to creep up.

But in this environment of low interest and low inflation, we're really basically just using the leverage that we have within our current ratings span to return some of the money to shareholders. We don't expect the ratings to change or anything like that from this action. And it's really not a major change in leverage course.

All right. Just on the areas that were clearly a drag on your profits, you mentioned, you know, in terms of regional areas -- Brazil, Argentina and Taiwan. Is there a way you could quantify the impact -- the decline of those areas -- had on your bottom line in the quarter?

No, I don't think we've got that added up. I mean, I think, you know, what you saw -- and none of those individually are material, but collectively, you know, you've got three pretty weak economies right now, and, you know, Argentina is one.

I think we had quantified that if we -- if we hit our budget, that one would be about two cents a share, and, you know, we are profitable and expect it to continue to be profitable, but we probably won't achieve our budget in this environment. And Brazil and Taiwan are slightly larger, but they're also not in as bad a shape as Argentina is in.

So, in total, you know, they were probably the weakest economies we've seen anywhere in the world for some time, but we've got good teams in place and are managing, under those difficult conditions, to deliver as good a result as we can under the circumstances.

So going forward, Argentina will probably be a little more difficult than you expected, while the other two may be pretty much in line?

Well, I think that, you know, we'll see what happens with those economies. You know, the challenge in Brazil has been that, you know, with the devaluation that they occurred -- that occurred there, there was -- there was no real price increases. In fact, prices in many categories went down, and it was a lot of components for our products and others priced in U.S. dollars, like fiber and polymer and other things, that's made making money there a challenge.

And so I think everyone in Brazil is trying to figure out how to make money at the -- at the current price levels. In Taiwan, what you've seen more is, you know, an economy that had its first recession in -- since the history of recorded economics statistics. And while it's not -- in and of itself, you wouldn't think that was a big deal, it's a pretty big psychological shock.

I was just in Taiwan in early April, and if you look at the non-food grocery categories, they're down 10 to 12 percent across the board, and we're no exception in the categories that we're in. So I think that we'll rebound as their economy improves, but it's hard to tell when that's going to happen.

You had mentioned the move to increase your exposure -- or increase the amount of UCTAD capacity that you have. Do you have any announcements or views on adding new UCTAD machines in the next couple of years?

You want to know if I'm going to build one every two years, Rich, or anything like that? No, we will add capacity to support the growth of our business, as we've done in the past. And, you know, this year we're looking at a couple of rebuilds, but no new machines that would be starting up, so I mean, I think that we continue to get value out of that and you know, we'll add capacity. We're in the roll, we think we've got a good business proposition to fill it up and make money doing it.

And the rebuilds are taking conventional technology and moving it to

?

Yes.

OK. Then on European buy-in, you had a drop in tissue volume in the quarter and yet, you know, the press release indicates that European prices were higher. That seems to be a bit at odds with the drop in volume and higher pricing. Could you reconcile that?

Yeah. That's just basically de-sheeting, is that, you know, the way we measure volume is not in rolls, it's in -- it's in thousands of sheets and so if we reduce sheet count, that shows up in our analysis of the price increase and the volume decrease and so, you know, we've done that consistently and would expect to continue to do so.

And typically, when we go in, we'd like to have one of the opportunities we have because that technology generates so much bulk that we're able to de-sheet and still hold role diameter and a perception of quality and utility in the mind of the consumer, and we in effect get a price increase.

And just lastly, you mentioned, you know, the 580 pulp forecast that you had going into this year is obviously ...

I think we said 550.

OK. 550. Now what kind of forecast would you be using with prices as you mentioned around the 460 level?

I don't know. I'm not any good at this as I've proven over many years, but I mean, to me, it's going to be somewhere between where we are now and what we were forecasting. That's not a very scientific answer, but you know, the markets are all expecting an increase but it's going to be a downtime

increase as the mills are going through their annual maintenance down, that will bring inventories down, that will allow the producers to probably take an increase and it's a question really in the back half of the year as to whether that holds or not and it will depend on underlying demand for pulp.

And at this point, there hasn't been a huge up tick in demand for pulp, and to me, that's the key signal to a sustainable recovering pulp market. And so, you know, it may bounce around in the 470 to 500 range if the economies pick up and demand is stronger in the back half. You could see exiting the year closer to our forecast, but it will obviously average lower for the year.

So right now you're not seeing a lot of pressure upward on its pricing?

No. You're seeing the spot

dry up. I've been in Europe and Asia in the last couple of months and you know, the Italians are buying more fiber, which is usually a sign of a market bottom, and, you know, the

market in China has seemed to have dried up quite a bit. So that's usually a sign that inventories are tightening a little bit.

OK, thanks a lot.

Thanks, Rich.

Our next question is from Jim Gingrich.

Good morning. On the SG&A increase year-over-year, was that primarily -- did you say that was primarily

spend?

SG&A -- that was primarily marketing spending, which would be a combination of advertising and then the -- a portion of the consumer promotion is down there, as well, which is the, you know, the costs to produce and print coupons and FSIs. The coupon value is shown as a sales reduction, but the production costs are shown in that SG&A line.

OK, and what was the rough split-out between the two of those? Do you know?

I don't have that handy. I don't know if Jack or Mike has got it handy.

I think it was roughly even, Jim.

OK. OK. And then I was wondering -- I know that fiber contributed to the margin improvement in the current quarter, but didn't you also have favorable comparisons in energy and polymer as well?

Yeah, energy was down, which reflected the peak that we had last year in the first quarter. And we had hedged most of our gas requirements in the U.S. at a higher rate than what the market turned out to be, but at a lower rate than what we experienced last year in the first quarter, so we didn't get the full benefit of what you might have expected in the market pricing.

Polymer prices were also down year-over-year, and I don't know if I've got the numbers for those or if Mike's got the details.

They weren't all that significant.

Yeah.

OK. OK. So net-net, the most significant issue is fiber, and the rest, you'd argue, is not material.

Right.

Right.

OK. And then, just so that I understand guidance, Tom, I mean, are you basically saying that you remain comfortable with where estimates are for the balance of the year?

Well, I guess, Jim, what we're trying to do is, rather than play the focusing on a single estimate point, we're trying to give you the data and allow you to make your own judgments. And we're very optimistic about the year, and we, you know, we expect it to turn out about like we told you in November. And there are going to be pluses and minuses, but we'll let you guys do the analysis.

Well, that's a lot more work, but I guess we'll have to, you know, suffer.

We have great confidence in you, Jim, so we're ...

OK, thanks.

Thanks.

Our next question is from Chip Dillon.

Hi.

Hi, Chip.

Good morning. Hi there.

Not to belabor this point, but just to be clear. When you're saying you're comfortable with where you had us go, or where you were leading us in November, overall, that would, by definition, mean that we would expect the rest of the year to be lower than what the Street has, because you beat the Street by three cents in the first quarter. I just want to make sure I understand that. Or are you saying what's in first call for the balance of the year you're pretty comfortable with, which means that we are -- we're probably a little low for the year.

No, I'm not going to play that game

. I mean, I don't want to comment on what's been specifically in first call. We're not -- what we're trying to do, we gave you the currency rates, gave you the fiber prices, we talked about buying, we talked about pension expense, talked about good will, and you know, we told you that if you were not in the right ball park, that we would, you know, we would provide additional guidance.

And you know, we haven't felt the need to do that. Now we're at this opportunity and we're taking the opportunity to tell you that pension is going to be a little better than we thought, fiber is a little better than we thought, promotions a little worse than we thought, and balance, we think we're about where we were in November. And you guys can figure out how to slice and dice it.

OK. That's fair. Let me ask you a couple of questions about the income statement. There was a -- the other income line was certainly more generous than normal, 18.7 million, and then I guess on the segments, that caused the expense for corporate or other to be pretty low. Was there anything in there you could tell us that caused that to be a positive number?

Yeah. That's a big factor. I think we talked about it in the earnings release, was the Australian dollar hedge gain. In total, currency was about a push for us when you figure in translation and other transaction activity, but that Australian hedge was almost two cents and that's sitting in the other income line. And we also have a small gain, actually, on the Argentina translations, which showed up in that line as well. So most of that is currency that showed up in that line is good news and total currency was about a push when you factor in translation everywhere else.

OK. And then on the EITF -- you know, adoption, which of course changed the revenues. There was still a charge of two cents and if you could just help us understand that because I understood that this 01-9 just dealt with allocating expenses and revenues that pretty much washed each other out.

Well, I'll try to explain this and then I'll let Jack and company correct me if I'm wrong, but basically, it has to do with timing of one consumer coupons are dropped. And then under our prior practice, and any coupon that was dropped in the last two weeks of a calendar year, three weeks of a calendar year, someone's holding up three fingers for me here. I'm trainable, so three weeks of a calendar year or charged as expense in the subsequent calendar year.

Under the new rules, you're required to record the expense when the coupon is actually dropped so that required us to book an additional three weeks of consumer promotion expense into the period in which these new accounting rules were adopted, which is 2002 per quarter. So that's what that was related to and I will now defer to my accounting colleagues to give a better explanation.

You nailed it Tom. That's ...

Yeah, I think we all got it. That makes perfect sense. So, in a sense, instead of having a perpetual three-week lag, it's concurrent.

Yes.

Now, when you look ...

This is just a catch-up adjustment, Chip, which is why it's called the cumulative effect.

OK. Now looking at K-C Professional, I think you said the revenue number was about 1.9 billion. Is that correct?

a little.

Exactly. And yet the margins being in the upper teens -- I know we've seen pretty good glimpses of this business and how it operates in other venues and -- although they're different. But it would seem to me that you're probably, you know, well above that in the U.S. -- maybe 30 percent plus -- and probably, you know, around the low double digit range elsewhere. Is that -- is that a fair guess in terms of ...

No, actually, I would say that that business has got pretty consistent margins around the world.

Really?

You'd be a little bit lower in Europe, but we've got very solid margins in Asia and Latin America for this business, albeit the business is smaller there -- but pretty consistent margin performance around the world.

And would that probably be because the competitor I'm thinking of, who gave us pretty clear numbers through 1997 -- Fort Howard -- probably was more on the lower end of the market, and, therefore, they probably had better margins here -- not higher returns, just better margins on the lower-priced product versus you, who tends to be more high-end?

That could be. I mean, certainly, in global markets where we start is without a lot of our global customers, so we want the Marriott business; we want the -- all the class one office buildings; we want all the five-star hotels; we want, you know, all the global manufacturing business, so we want to be in the General Motors plants and, you know, all the other opportunities like that that we have. So that -- you know we certainly sell a lot of one and two-ply bathroom tissue, but we try to lead with our differentiated products that we have got more value-added.

OK. And looking at the apples-to-apples comparison in Personal Care -- in other words, applying the goodwill back into the number for a year ago. It was about a $21 million drop, and I think you said about eight of that would have been in Argentina and Brazil, leaving you with 12.

I would guess most of that was probably Pull-Ups related, and because of the, I guess, share that you've seen private label eat up and your price cut. But how much of that could have been tied, if any, to the new product introduction you have? And can you give us the timing of when that's going to get to the Northeast?

I guess I would say that relatively little of the change was due to the new product introduction. I would say that most of it was due to competitive activity, and both infant car and child care were competitive spending levels in both the U.S. and Europe. And the new Pull-Ups are starting to ship nationally now, so we'll be there as soon as we can

.

Well, we need them because my five-year-old won't put them on. We have to put them on after he goes to sleep, so it'll be great if we can convince him they're underwear.

Well, thank you so for sharing that with us today and we'll keep making more products for you.

Well, I tell you, you've got a big fan here. Last question dealing with diapers is do you see as time goes on a big shift in the amount of fluff pulp being used or should I say, it's been shifting. Do you see that proportion dropping substantially in the next couple of years in favor of more SAP or other raw materials?

Well, there has been a lot of interest in other absorbent structures other than a fluff super-absorbent composite and we've tested lots of those. We haven't found any that provide the same value and performance of the current version that we're using.

So we continue to look, as I'm sure many of our competitors do, and we'll, you know, we'll see what happens, but you know, it's hard to predict beyond a couple of years, but in that time frame, I would still expect to see a strong fluff based diaper platform.

And basically, when you look at the new Pull-Ups, they're basically using roughly the same proportions of each of the raw materials you have been using, but just in a common -- I guess effectively, they work good the same amount?

Yeah, we will. Actually, there's less flop, more super-absorbent.

OK.

It's more like -- it's more of taking it to an ultrathin diaper chassis.

Got you. Thanks a lot.

Thanks

.

Our next question is from

.

Hi. Can you just talk a little more specifically about the outlook for personal care sales and margins? When you had talked about what had changed, you know, you highlighted personal care on the

side. Do you -- I mean, could we see a situation where products in that business are down 10 percent? You know, in your view, you know, where do you -- where do you see things panning out over the next couple of quarters?

Well, I guess I would see, you know, we're in the middle of Proctor's launch on infant and child care, in both the U.S. and Europe, and they're going to spend a, you know, amount of money to get distribution, to get trial. They're going to have heavy up advertising and other activities behind that. We will spend to be competitive.

You know, typically, what you see, and we've been through these cycles before, is you know, you go through that share stabilized and you know, we all bounce back and continue to make money as we have before. So you know, I would expect that, you know, we'll spend through this period to be competitive. We'll launch our new and improved products and in the end, the best product wins.

We'll defend our share and, you know, we'll return to a level of profitability and growth that we're -- that we're all comfortable with.

OK. And then, separately, you know, I know you continue to target six to eight percent sales growth. You know, if you look at the core volumes of two percent in the quarter, and then the price mix canceling that out, how do you -- you know, and I'm trying to think longer term. How do you go from, you know, sort of, the zero organic growth that we're seeing now to the high end of your range, or the low end of your range, longer term? You know, what is it that's really going to drive that acceleration?

Well, I think as you break down the pieces that we've done in the past, we've -- you know, we've typically said we expect to see, you know, three to four percent core volume growth -- one to two percent from acquisitions, one to two percent from price, and that gets you into that six to eight kind of a range.

Where we're missing is, we're getting the core volume growth in most of our developed markets. We're not getting it as much in the developing markets, and we talked about Brazil, Argentina, Taiwan, you know, where the -- where the category growth is not only not growing, it's shrunk dramatically. And so that has had an impact.

The other impact has been, you know, with negligible inflation, and now it's including promotion in this line. And in this period, with the fiber price swing, you're seeing not only no positive price, but, in fact, negative price. And so I think that those are still the right long-term objectives.

We're at a moment in time here where the -- it's a combination of competitive factor and some economic weakness, where we are not achieving those at this point in time. I think, you know, we still have plans in place that we believe that those are the right objectives for us.

OK, great. And then just a quick one -- wet toilet paper. Is there any way to leverage some of the capital investment in that business? In other words, I'm thinking, you know, maybe convert some lines from wet toilet paper into adult wipes or baby wipes. So if you can just give us an update on that.

Yeah, I mean, I would say that in every capital investment that we've ever made, we found ways to leverage the technology into other areas, if we didn't fill it up with the business that we thought we were going to fill it up.

Now, we try not to a do a whole of "build it and they will come," but, you know, a great example would have been -- not to bring up all of our past new products failures, but we launched menstrual pants, which wasn't as big a hit as a consumer product as we thought. And that machine became, you know, the prototype for our re-fastenable incontinence pants, which have been a big hit.

So, you know, we will absolutely find way to get value for the assets that we've invested -- as much as possible.

OK, thank you very much.

Again, we're not giving up on this product either. I mean, it's certainly going slower than we -- than we thought, but I still think there's a meaningful consumer idea here, and it may just take longer for this category to develop.

Terrific. Thanks.

Our next question is from

.

Thanks. Just a quick follow-up question when you were talking about where the core volume growth is missing and it's in the emerging market. Your personal care volume and your consumer tissue volume were down in Europe in the quarter. Do you see that as more of a, just a near-term issue for the year, or do you expect it to be up in those developed markets?

Well, in Europe, in personal care, it was really more of a function of Proctor's launch activity has had a bigger impact on us there than it has in the U.S. They're starting from a much stronger competitive position there than they are here. In tissue, it's been more of an impact of de-sheeting that we talked about earlier.

So as those annualize, I would expect to see the volume growth improve. As we look at dollar share and tissue in Europe, that's been making steady progress. So I would expect that to translate into unit share.

And it was mentioned during the earlier part of the call that the new training pant was preferred by consumers over your existing one. Did you test it against Proctor's training pant?

Yes.

And can you just share with us what you found?

Well, our current products beat Proctor's easy-ups product, so you know, given that we're a 60/40 win versus our new product, it was a better than a 60/40 win versus Pampers easy-ups.

Then why do you think they were gaining share in that?

Well, this is a category where, you know, the consumer's only in it for three-to-six months. So if they buy one bag, you know, you can get 10 shares just from trial generations, so you know, it is one where you've got to have the best product on the shelf to defend your share, but it's also one that you can pick up some share quickly just from generating trial.

And they got distribution and they got promotional support. They're spending a lot of money on advertising. You know, they'll get some level of trial and we would expect as our improved product shifts, we make some noise, we'll have those consumers back in our franchise.

You know, it's one we've -- this is the third time we've gone through this, and now they want Pamper trainers and then Love's trainers and now we have easy-ups, and we never take them for granted, but we feel good about our product positions.

Could you comment on your competitive response on the couponing front to their whole launch as to baby

is. I understand you've been sending out some pretty significant coupons. Is that correct? And how long will that continue? I guess, is there going to be a big gap between -- from when you get your -- not the child, but the infant new products out there?

No. I mean, I would say that we typically respond with a fraction of what our competitor spends in these categories. So, you know, we are spending to defend our share and the reaction to the competitive spending levels that we see in the marketplace. And, you know, that's also something that is not -- is not news either. I mean, that's typically been the way these competitive battles have worked over the years.

And just on a completely different topic -- the inventories were up eight percent year-over-year. Could you just comment on that increase?

Inventories, I think, were down slightly.

Year-over-year or from year-end?

Down from year-end.

Right, but year-over-year, they were up eight percent, so I was just curious.

Up year-over-year -- probably the biggest component of that would be K-C Australia.

Which was consolidated in mid-year last year.

OK. Can I ask one other question? I'm sorry. Mike, when you were giving the diaper shares, you mentioned Europe diapers were down, you know, one to two points. Are you expecting to recoup that share as you go through this year?

Yes.

And what's going to drive that?

Well, I think, you know, we've been through Proctor's major spending blitz. You know, we've got product improvements and other activity coming in Europe, as we have in the U.S. And, you know, part of it will be that we would expect that their competitive spending typically tails off after they complete their launch and get their distribution in trial.

Because they, I mean -- the European loss was last summer, correct?

Well, it's been continuing. You know, they've had a lot of activity supporting the launch since the initial shipments began.

Thanks.

Our next question is from Sally Dessloch.

Yes, good morning. I wondered if you could elaborate a little bit on the competitive dynamics in the European tissue market -- the consumer market. If you could lay out for us, you know, where you see your competitors making inroads, if they are, and what the promotional spending looks like in that particular market.

As you look at the market, as you know, it's a very diverse market, and there's a lot of activity and a lot of competitive news. Market by market, in the U.K., Andrex is continuing to do very well behind a product improvement, and you know, we're very pleased with what we're seeing there.

Charmin is basically down to a single code but sold pretty heavily promotionally. Bounty towels is in pretty much the same boat. So the U.K. is still a competitive environment, but not as competitive as it was a year ago, where Proctor was spending a lot of launch money behind their products.

Italy -- we're launching with our new

bath tissue product. That's gone very well so far. I guess the big competitive news there is that

is buying into the marketplace and buying one of the private label producers. And we'll -- you know, we'll see what happens as they enter the marketplace.

France has been relatively quiet. It's a very strong market for Georgia Pacific and both - Proctor's not there and we're relatively a small player in France. In Spain, it's us and Georgia Pacific. Both have reasonably strong positions. Both have product news. It's a reasonably competitive marketplace, but nothing out of the ordinary.

Germany is one where Proctor is just now entering their Charmin launch, and are spending to get distribution and to get trial and we're seeing probably, that's probably the most intense competitive activity right now is in Germany. We're obviously spending to defend our

brand and that has product innovation and other activity going there.

Interestingly, in that market, you know, that's a very strong private label market and private labels probably are doing better than anybody right now in Germany. So that's one that we're watching carefully as the year progresses.

OK. And then now that we've anniversaried the purchase of Linostar in Italy, could you give us an update on how the Italian market is shaping up for you in diapers?

Well, our shares have been very stable and even improved slightly from where we took over in Italy. We executed the acquisition I think flawlessly. We were able to come in and transition the brand from Lines to Huggies in the last 12 months and have maintained our distribution, improved the product and I think really created a sustainable market position for ourselves and a good building block for our personal care business in southern Europe.

And then finally, I guess we didn't hear very much about feminine care today. Could you just give us an update on any new products that are going on there, anything that stands out in your mind in terms of competitive activity?

The feminine care business continues to be competitive. We've been focusing a lot on improving our cost structure and making our products work better, so we have improved our pad offerings and driven our manufacturing costs down in that business in North America. Shares have been relatively stable. I think we're up slightly from a year ago. It's still a competitive market with J&J and Proctor and us all competing for promotional activity and for the minds of the consumer.

I read that advertising continues to do very well and I think is building our Kotex brand image around the world. So I think on a global basis, it's probably the category we've got that's got the most competitors in it and so that's a challenge. But it continues to go very well.

OK. Great. Thanks Tom.

Thanks.

Our next question is from

.

Hi. Thanks. I just have two -- maybe one question at this point.

I'm just curious, now that you've seen Proctor with their Pull-Ups product, first in Europe and now they're launching it here. One of the things that strikes me as different is, I guess, they have a pull-up product for a younger toddler -- somebody 30 pound and up, I think, in the U.S. Your Pull-Ups product starts a little bit older. And Mike and I have talked about this in depth in a while.

Now that you've watched Proctor launch this in Europe and launch in the U.S., what do you think about the possibility of you guys going down-age a little bit, or do you think that's really just not a viable market at the end of the day?

Well, I think that as you look at the whole dynamics of toilet training and diapering, you are seeing that children stay in diapers longer, so we've added a size six diapers over the last several years, which recognizes that children are staying in the product a little longer.

You know, interestingly, the weakest selling code in Pull-Ups -- we used to have a size small. That was always the weakest selling code because of the trend toward children staying in diapering longer. Proctor -- as they've done their launch, they positioned the Easy-Ups as a diaper in Europe and as a training pant in the U.S. So there is somewhat of a difference that they're looking at.

There really, at this point, is only one market in the world that has had a successful diaper pant business and that's in Japan. And, you know, all the research has indicated that that's really because of the relative lack of space in a lot of facilities or public areas where children have their diapers changed. They like to have them go up and down as opposed to laying the child down and changing him.

So we'll continue to watch that, and if we think there's an opportunity there, you know, we'll absolutely go after it.

OK, and if I could ask one more question. You mention that there's no new UCTAD capacity coming in this year. You didn't mention anything about diaper capacity.

And also, another question -- you used to tell us at least roughly, what your healthcare margins were or at least what direction they were going at. Can you give us that information?

Yeah, in terms of diaper machine expansions, we haven't -- you know, we haven't done any additions in the U.S. for a long time, but we routinely add diaper machines outside the U.S. to support growth. And we've done that annually and would expect that to continue.

And I don't think we've ever provided the number, for competitive reasons, but you know that's a much less capital-intensive venture to add diaper machines somewhere than to build a UCTAD machine.

Your second question was -- I don't know. Jack or Mike -- you guys have the number he was looking for?

With regard to the healthcare margin,

, it was up in the quarter, but it was about flat, I think, if you adjust for the good will amortization.

OK. You used to have a target margin -- I'm not going to guess what the number was at this point, but I know it was ...

Three percent margins in health care, you know, when that was when it was really a stand-alone segment. Now that we've made it into the B-to-B segment, and we've got new good will accounting. You know, if you look at all three of our segments, they're within shooting distance of a 20 percent goal and in case of personal care, they've been above that and we've expected that to continue. So you know, that's still a reasonable target for our overall B-to-B segment to be shooting for.

OK. Great. All right. Thank you.

Again, if you would like to ask a question, please press the star key followed by the one key on your touch-tone phone now.

Our next question is from

.

Guys, I just have a quick follow-up. Have you all given up on your plans to try to sell the

facility?

Well, we haven't officially given up, but it's been for sale for a long time and we haven't gotten any offers. I'm embarrassed to admit that the last potential buyer was Enron and we didn't get very far in the discussions with them and it's probably a good thing for all of us.

All right. Are you going to -- so, I guess, what does that mean strategically? Are you going to basically stay at, you know, 60 percent integration in North America and kind of take it off the market or are you still looking to sell it?

No, I think if we had the right, you know, if we had the opportunity to sell that mill, we would still take advantage of it. But I think the reality of it is, as we've said before, it's not damaged goods. You know, it's goal is to be cash positive, even in a weak pulp market and it provides high quality fiber. It's got competitive global or North American costs and you know, we're not going to give it away either.

You know, last time we were towards the top of the pulp cycle, it seems like it would have been a great time for you to do it and yet I think the response from management at that time was we don't want to sell it because we'd have to go out into the market and pay a higher cost for pulp.

Nope. Not so. We were out actively marketing it at the peak of the cycle and we had no takers.

OK. Thank you.

OK.

Again, if you would like to ask a question, please press star one now.

Is there a queue up

?

At this time, there are no further questions.

All right. I think we will bring the call to a close then. Thank you everybody for joining us. Tom, do you have any final thoughts you'd like to share?

No. I think we're pleased with our start for the first quarter. We're off to a good start from an earning standpoint. Our cash continues to be strong and we're cautiously optimistic about the balance of the year. Thanks for your support and your interest in Kimberly-Clark.

Goodbye everyone.

Ladies and gentlemen, thank you for participating in today's teleconference. You may all disconnect your lines now.