金百利克拉克 (KMB) 2002 Q2 法說會逐字稿

Excuse me, everyone. We now have

Mr. Mike [Massive] 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 now like to turn the conference over to

Mr. Mike [Massive]. Sir, you may begin.

Thanks, Tish, and good morning

everyone. We appreciate your interest in

Kimberly-Clark.

Again, with you all today is the normal

Kimberly-Clark team: Tom Falk, our president and

chief operating officer, Jack Donehower, senior VP

and CFO, who will be our presenters. We have

Randy Vest, controller, Mark [Fuseman],

vice president, and Tina

Barry, our senior vice president of corporate

communications here as well.

I hope you had a chance to review this morning's

news release with all the details of our

second-quarter results. Second-quarter earnings

before unusual items were 86 cents per share,

compared with 81 cents per share last year. We

delivered improved top and bottom-line results in

the second quarter, despite highly competitive

market conditions.

Cash flow also continues to be outstanding.

Here's the agenda for today's call. Jack will

start with a financial overview, and 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 and A as usual.

In the interest of fair disclosure, we encourage

you to get your questions answered during this

public forum.

Now, before we begin, I need to advise you that

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 1, Item 1, of the company's annual report on

form 10-K for the year ended December 31st, 2001,

entitled "Factors that may have affect future

results."

Now, I'll turn it over to Jack.

Thanks, Mike, and good morning,

everyone. Today, I will briefly review our

financial results for the quarter.

Earnings before unusual items of 86 cents per

share were more than 6% - were up more than 6%

versus second quarter of last year. The increase

came from higher operating profit in all three

business segments, including a strong double-digit

gain in consumer tissue and fewer shares

outstanding because of our ongoing repurchase

program.

The improvement in operating profit was partially

offset at the net income level by lower earnings

from our equity affiliates in [inaudible] Mexico.

Here's my perspective on the key take-aways for

the quarter.

We're in good shape competitively and financially.

Sales grew 5% paced by volume growth of 8%.

Operating margins before unusual items was a

strong 19.5%. And to top it off, we had terrific

increases in operating cash flows, up 47% versus

the second quarter of last year.

So let's review the results beginning with the top

line.

Sales of $3.4 billion were up 5% versus the second

quarter of last year, and were an all-time record.

As I mentioned, sales volumes were up 8% in the

quarter. Organic volume growth was almost 5%, led

by good performance from our consumer tissue and

personal care businesses.

The balance of the volume growth was driven by the

consolidation of K-C Australia which, as you know,

occurred on July 1st of last year.

Overall, competitive pricing, including

promotional activity, reduced sales by about 2%.

This is not surprising, in light of the heavy

competitive spending in diapers and training pants

and given lower pulp costs.

Meanwhile, currency reduced sales by 1%. This is

mostly caused by the continued decline in the

Argentine peso, which more than offset

improvements in the Euro and the British pound.

This morning's news release contains details on

the key factors affecting sales in each of our

three business segments, so let me just begin by

mentioning a few of the highlights.

In consumer tissue, sales excluding currency

effects increased more than 9%. That was driven

by terrific volume growth of almost 13%, with

volumes up in every region of the world. Half of

the volume growth came from North America, led by

strong increases in Cottonelle and Scott bathroom

tissue, Scott towels, and Huggies baby wipes. In

fact, our family care business in North America

set a second-quarter record for sales. Our

proprietary [inaudible] technology continues to

drive volume and share growth.

Outside North America, our European and Latin

American tissue businesses had good volume growth,

6 and 11% respectively. The other contributor to

growth in tissue volumes was the consolidation of

K-C Australia.

Now I'd like to shift to personal care.

Second-quarter sales were up almost 4%, despite

the sharp decline in Argentina. Excluding

currency effects, sales were up 6% on volume

growth of 8%. More than half of the volume

increase came from North America, where total

volume was up more than 7%. Volumes increased

across all our businesses and were especially

strong in our infant, child, and adult-care

businesses. Both child care and adult care had

double-digit volume growth and set all-time

quarterly volume records.

We are successfully defending our market-leading

position in infant and child care, despite

extremely aggressive competitive activity.

Outside North America, European personal care also

had good volume growth of 8% in highly competitive

market conditions. The balance of the volume

growth in personal care came from K-C Australia,

which more than offset the decline in Latin

America.

In the business to business segment, sales volumes

rose 2%, while prices fell almost 2%. As a

result, segment sales were up a half a percent.

Our K-C professional business in North America

continues to show improvement from the weakness

experienced last year. Sales volumes increased 2%

in the quarter, compared to a 1% increase in the

first quarter.

In addition, our healthcare business continued to

grow, with sales up approximately 5% in the

quarter. These improvements were partially offset

by lower sales of other B to B operations as

demand in many end user market segments remained

soft.

In summary, our overall sales momentum is good.

Sales volumes grew 8% in the quarter, despite the

weakness in Argentina and the tough competitive

environment.

Let's now turn to margins and operating profits.

For the purposes of this discussion, I will

exclude unusual items from the comparison. These

items are described in our news release, and are

also summarized by P and L line item and business

segment in the tables to the news release.

So for the quarter, gross margin was up 90 basis

points to 36.7%. The greatest benefits came from

increased sales volumes and lower law materials

costs, including more than $35 million for pulp.

We also improved productivity and lowered our

manufacturing costs. These items more than offset

the stepped-up level of competitive pricing.

Moving down the P and L, marketing, research, and

general expense were 17% of sales in the quarter,

up from 15.8% a year ago, but even with the first

quarter.

The increase was mainly attributable to higher

advertising and consumer promotions costs. That

increase was mitigated by the elimination of

goodwill amortization, and on a pro forma basis,

this would have increased net income in the second

quarter of 2001 by 4 cents per share. That brings

us to operating profit and operating margins for

the quarter.

Before unusual items, operating profit increased

7.6% to $666 million, and second-quarter operating

profit as a percent of sales was 19.5% versus

19.1% last year.

Now, let's look at operating profit by segment.

In consumer tissue, operating profit for the

quarter was $228 million, up an outstanding 15%

from year-ago levels, and operating margins for

the quarter was an excellent 18.8% of sales, up

from 18.0 last year.

Higher sales volumes and lower pulp prices drove

the operating profit improvement. These benefits

were more than offset - these benefits more than

offset the impact of promotional activities and

higher advertising spending.

From a regional perspective, our North American

tissue business led the way with a strong

double-digit improvement in operating profits.

European tissue also delivered a nice increase in

operating profit in the quarter.

Let's turn to personal care. Operating profit for

the quarter was $298 million, up 6% from last

year. Operating margins for the second quarter

were 22.4%, up from 22.0% last year, and also up

nicely from 21.3% in the first quarter.

I'm really encouraged by the increase in margins

in spite of the competitive activity. Clearly,

our fundamentals remain very strong.

Higher sales volumes and lower manufacturing

costs, including raw materials prices, drove the

operating profit improvement. These benefits more

than offset the impacts of strategic actions to

counter aggressive competition in the diaper and

training pants markets in the U.S. and Europe.

Our Asia-Pacific personal care business had

operating profit growth of more than 15%,

adjusting for K-C Australia, and Latin America had

higher profit versus a soft quarter last year.

In the B to B segment, operating profit was

$174 million, up 5% from the prior year, but down

about 3%, excluding goodwill amortization.

Operating margins were 19.4% of sales for the

quarter, down from 20.2% last year excluding

goodwill, but up from 18.9% in the first quarter.

Higher K-C professional and healthcare volumes

were not sufficient to overcome the lower prices

across the segment.

Now let's turn to the equity companies. In the

second quarter, our share of net income of equity

companies decreased to $21.5 million from

$52.6 million last year. The decline was mainly

due to lower net income at K-C de Mexico.

Consolidation of K-C Australia was also

responsible for a portion of the decrease.

Let me give you a little more detail about K-C de

Mexico. Versus the second quarter of last year,

our share of K-C de Mexico's earnings was down

approximately 5 cents per share. The most

significant factors were non-operating in nature,

currency effects, and higher tax rates, which

together accounted for 4 cents of the reduction.

By way of background, K-C de Mexico finances a

portion of its operations with U.S. dollar

denominated debt. Accounting rules require this

debt to be marked to market each month as the

value of the peso changes. In the second quarter,

the peso declined in value almost 10%, and K-C de

Mexico recorded a charge equivalent to two cents

per share. That compares to a benefit of 1 cent

per share in 2001, for a total swing of 3 cents

per share, due to currency.

A higher tax rate due to changes in the Mexican

tax law accounted for almost another penny of the

earnings. Of the lower earnings.

K-C de Mexico's sales and operating profit were

down only 8% versus a record second quarter in

2001, despite a highly competitive marketplace and

the depreciation of the peso.

Meanwhile, K-C de Mexico's market shares have

remained strong and it's maintained a terrific

operating margin of more than 30%.

Finally, switching to cash flow and our financial

position, cash provided by operations in the

quarter were $797 million, an increase of 47%.

Lower tax payments of about 70 million contributed

to the improvement. This tremendous cash flow

provides financial flexibility and helps fund our

growth. And year-to-date, free cash flow is

$633 million, about four times greater than the

$157 million we had last year.

Capital spending for the first six months of the

year was $382 million, so we are clearly tracking

below our previous guidance of $1 billion for the

full year.

Given the trends in our current plans, capital

spending is more likely to be around $900 million

for the year 2002.

During the second quarter, we continued to

repurchase shares of our stock, buying 2.5 million

shares at a cost of $162 million. All told, we

have invested $317 million in the first six months

of the year to repurchase 5 million shares of our

stock.

Also, as we announced on June 28th, we completed

the purchase of the remaining 45% stake in K-C

Australia for $390 million. We expect this

transaction to be accretive to earnings in the

second half of the year by about 1 cent per share.

Meanwhile, our balance sheet remains rock solid.

Net debt and preferred securities at the end of

June were $3.9 billion, up only slightly from the

$3.8 billion at the end of 2001. In addition, our

leverage ratio for net debt and preferred

securities to capital was 38.3%. This is down

from 38.9% at the end of 2001, and well within our

target range of 35 to 45%.

That wraps up our financial review for the second

quarter, and just to summarize, we delivered

improved results despite very competitive market

conditions. We increased sales volumes nicely.

Our profit margins and market positions remain

strong. And we continue to generate excellent

cash flow.

Now, I'll turn it over to Tom who will share of

the strategic and operating highlights with you

for the quarter.

Thanks, Jack, and good morning

everyone. I'd like to add a few comments to give

you my perspective about our second-quarter

results.

First of all, as you can see, from some of Jack's

comments, our businesses are very healthy and

growing nicely. I'm encouraged by our sales

growth and by the strength of our profit margins.

Our consumer tissue business continues to have

solid momentum on both top and bottom line in

every region of the world. Sales volumes were up

behind consumer preferred products and our costs

were down, and that's a winning combination. Our

personal care results were excellent and were

highlighted about a 6% increase in sales before

currency effects and our highest profit margin in

more than a year. This was no small

accomplishment, especially considering the tough

competitive environment, particularly for diapers

and training pants.

As for our business to business operations,

healthcare remains on track with another quarter

of improved sales and earnings. In addition, our

sales volume trends for our K-C professional

business in North America shows that we are

continuing to improve as the economy recovers.

Secondly, we're continuing to build competitive

advantage. We are benefitting from new and

improved products. Technology-driven innovation

helps us bring superior performing products to

market. Products like Cottonelle bathroom tissue

with aloe and Vitamin E, our new 30% thinner

Pull-Ups training pants, our Huggies Supreme

diapers with the all-over stretch, and our Scott

fold hand towels in our K-C professional business,

and there's more to come.

I've recently reviewed our new product pipeline

with each of our businesses and I'm very excited

about what we've got in store for the future.

Cost reductions are also contributing to our

competitive advantage. During the quarter, we had

good productivity gains and savings in our

manufacturing operations, and our go to market and

administrative teams are moving forward with

programs that will continue to drive costs out of

our supply chain and our back office operations.

And finally, I'm very pleased with the strength of

our cash flow. It means that we're doing a lot of

things right, and those things are showing up in

positive cash flow.

So all in all, we're making very good progress in

2002, very much in line with the planning

assumptions that we described for you last

November. Our growth investments are beginning to

pay off, and we have plenty of opportunity for

further improvements.

Today, I also want to talk to you about an area

that's of considerable interest, and that's what's

going on in the diaper and training pant markets

in the U.S. And then before I wrap up, I'll make

a few comments about the outlook for the balance

of the year.

Let's look at the competitive environment in

diapers and training pants. The market for these

products have always been very competitive, and

that's certainly no different today.

Next year, we will celebrate the 25th anniversary

of the launch of Huggies diapers, and for the past

10 years, Huggies has been the leading diaper

brand in the United States. This Huggies brand

has been the foundation of a highly profitable 3

and a half billion dollar global diaper business.

Now, we also invented the training pants category

in 1989, with the introduction of Pull-Ups

training pants. Today, we hold more than a 70%

share of the U.S. pants category. This category

will likely reach $1 billion in retail sales this

year, so these are big businesses and we've got

successful leading brands in both of these

categories.

So what's our formula for success?

We have combined a thorough understanding of what

the consumer wants and needs with technical

innovation to continually improve our products.

Having a consistently superior performing product

is very important in these categories, because our

consumer base essentially turns over every two to

three years, as - as babies move through diapers

and toilet training.

Our leadership in single-use non-wovens and our

expertise in absorbency have been the primary

sources of competitive advantage for us over the

years. These technologies are also involved in

their two recent product innovations that I've

just mentioned, our new Pull-Ups training pants

and Huggies Supreme diapers. Improved versions of

both of these products are now showing up on store

shelves everywhere.

New Pull-Ups training pants are nearly 30%

thinner, and that makes them more like underwear

than any other product on the market. And our new

Huggies Supreme diaper is the first of a kind,

with all-around stretch for a more secure and

comfortable fit. Which, according to consumers,

parents consider this to be one of the most

important diaper features. And really, a proper

fit is an important feature in diaper leakage as

well. So both of these improved products are

significant Winners versus our competition in

consumer use tests. And stay tuned for more

product improvements over the coming year in our

diaper and pant categories.

In the meantime, we're taking other steps to drive

category growth. We recently announced reductions

in package counts and prices for all of our diaper

and pant products in North America that will be

effective in mid-October. The net effect of these

changes is a price increase of approximately 5%

that should begin to benefit us late in the fourth

quarter or early next year.

These changes are the result of continuing product

improvements that give us differentiated products

in every segment, and provide additional

performance benefits to consumers.

The changes also reflect recent increases in pulp

and polymer costs and a continuing shift in mix to

larger pack sizes.

Retailers will now be able to feature our entire

lineup of jumbo, mega, and super mega back sizes

at more attractive price points. So between now

and mid-October when these changes occur, we will

increase promotions on Huggies Supreme diapers and

Pull-Ups training pants. This is a short-term

tactic to deal with competitive moves in these

segments.

To summarize, we expect the diaper and training

pant categories will continue to be competitive,

but you can expect that as a category leader, we

will continue to do the right thing strategically

to drive growth and profitability in these

businesses.

So before I wrap up and get to your questions, let

me comment on the outlook.

As I mentioned earlier, the first half of the year

has basically played out in fairly similar fashion

in total with the overall expectations we

discussed with you last November. We are on track

to deliver improved earnings for the full year.

On the positive side, we have good sales momentum,

with excellent market positions and a full product

pipeline that should continue to drive sales

growth and really volume growth is an important

part of our strategy, as you know.

And additionally, our B to B operations in North

America should benefit as the economy improves.

Now, compared with our November planning

assumptions, as we mentioned in the first quarter,

the increase in pension costs will be somewhat

less, and pulp costs, although moving up recently,

are still lower than what we had assumed when we

talked about this with you in November.

Now, on the other hand, on the negatives to our

planning assumptions, promotion spending is higher

and will likely remain higher than we had planned

in the near term, and again, that's not surprising

given the competitive activity in diapers and

training pants and the lower pulp costs which

usually results in higher promotions spending.

We also expect the business environments in

Argentina and Brazil will continue to be more

challenging than we had assumed for the year and

that's certainly what we expect to be true in the

second half of this year with all the things that

are happening in that part of the world.

The currency picture is mixed, as we compare back

to our November planning assumptions. We've seen

improvements in the Euro, the British pound, the

Korean wan, and Australian dollar, versus what we

had anticipated but these have been offset so far

this year by weakness in Latin America,

particularly in Argentina and Mexico. And the

recent strengthening of the Euro and the Sterling

should give us some benefit in the second half of

the year, and all in all, absent a major

devaluation, currency effects for the year should

be in line with our previous expectations of a

negative of 2 to 4 cents per share for the full

year.

As for K-C de Mexico, you should expect them to

maintain strong market positions and a high level

of profitability in a highly competitive

marketplace.

Assuming the Mexican peso doesn't weaken further

from the end of June level, which was - I think

it was 9.95 to the dollar at the end of June -

K-C de Mexico's earnings in the second half of the

year should improve versus the first half. Now,

remember as Jack mentioned, K-C de Mexico's

results in the second quarter were penalized by

two cents per share to reflect the impact of the

depreciation of the peso on its U.S. dollar

denominated debt.

We will continue to focus on investments to expand

our proprietary manufacturing technologies and the

roll-out information technology that will support

our go to market efforts and further streamline

our administrative functions.

And finally, we expect our cash flow to remain

strong. That will allow us to continue to invest

in growth and to repurchase our common stock on a

ongoing basis.

So as we add it all up, all the pluses and

minuses, at this point we would see our results

for the full year in total as being consistent

with the November planning assumptions and

previous expectations we've talked to you about.

So in summary, 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 our technology-driven innovation.

Second, we're strong financially with solid

balance sheet, healthy profit margins, and

excellent cash flow. That certainly was the case

this quarter, in particular.

And third, our team is committed to growing our

sales and earnings and increasing shareholder

value.

We're glad you could join us today, and we

appreciate your interest in Kimberly-Clark, and

now Mike has a few details to review with you

before we start to take questions.

Thanks, Tom. Just to go over a

couple of the balance sheet details first,

accounts receivable at the end of the second

quarter were a billion 807, and that equates to

about 47.7 delays, which is down about six-tenths

from the first quarter of this year.

Inventories, a billion 473. That is, in terms of

days, also down about eight-tenths at 61.4 versus

62.2. So as a part of the overall balance sheet

and cash flow story, working capital continues to

be well controlled.

Shareholders' equity was 5,000,000,990.6, and the

income tax results for the quarter on income

before unusual items was 28.3%. Now, that brings

the year average to 29.0, and that's at the low

end of the range that we've been talking about

since last November of 29.0 to 29.5. The decrease

to the low end was due to some favorable

settlements with tax authorities.

Looking at market shares as we usually do on a

quarterly basis, and I think you've seen reports

on market shares throughout the quarter, from the

Nielson and IRI data that is reported upon, our

market shares overall are very good. Really, the

only category that's down when we look at the

second quarter dollars versus the full year of

last year, is training pants, as you would expect,

and that's down about 8-and-a-half points.

Other categories, we have facial tissue down

slightly and both adult care and feminine care up

about a half a share point. Baby wipes, bathroom

tissue, and diapers are all up over a share point,

and paper towels are up about two-and-a-half share

points.

It's interesting when you look at the combination

of diapers and training pants, that's sort of a

combined category or we call it the mega category,

our market share is up about a point from last

year when you combine diapers and training pants.

Our diaper share in Europe was 21%, and that

was - that was very consistent with the first

quarter, which I think was also at 21%.

Just a couple other details on the sales

comparisons, where you would not have seen the

numbers in the - in the news release or in -

heard them from Jack in his comments.

Pricing in K-C professional compared to last year

was down 1% and that would put it pretty flat with

the first quarter levels. And then looking at it

on an overall basis, in Europe our sales were up

6% and would have been up 3% in constant currency.

In Latin America, our sales were down 9%, but

would have been up 8% in currency, and that's

where you see the impact of what - what's going

on with the Argentine peso and, to a lesser

extent, the Brazilian real. And then in Asia,

including K-C Australia, our sales were down 4%,

and down 5% before a small currency positive

there.

Well, that wraps up the details of our

presentation for you this morning on the

conference call. We're happy to take your 00:34:12 questions now.

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 1 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 2.

Our first question is from Amy Chaffin, Goldman

Sachs.

Good morning. A couple things.

First of all, Tom, can you just talk in a little

bit more detail - I'm a little bit confused about

one thing on the U.S. diapers. You're taking a de

facto price increase and yet I think you said that

you were going to be increasing promotions

spending, so why not just, you know, not take the

price increase?

Well, I think what we're trying to

do is we're spending competitively in the third

quarter to be competitive with what's out there in

the marketplace, but we're leading a price

increase effective in the fourth quarter. So what

we're seeing is promotion levels have picked up in

what we've seen planned for the third quarter.

We're responding to that to be competitive and

we're announcing a price increase via a count

reduction in the fourth quarter.

But if the market is so promotional,

what makes you comfortable that you can

actually - that the market can handle a price

increase?

Well, essentially what we're trying

to do is restate the category from a price point

standpoint so that we get the jumbo price point

down below $10. We've also got significant

product news that - that we think is bringing

significant additional value to the consumer. And

as you look at this category over time, there's

actually been net price erosion as more of the mix

has migrated to the larger count packs.

So in a way, we're really attempting to recover

some of the - the erosion that we've seen through

mix.

And are you hearing that P and G is going

to follow that?

We haven't heard yet, and this is

fairly recent news, so I think that, you know, we

haven't heard any response from a customer

standpoint yet.

Okay. Can you also comment - I know

it's a little bit early Dave, but you took an away

from home price increase, I think, about 10%

starting in July. Can you give us some idea of

how that's playing out?

Yeah. That - as you know, pricing

in that environment is pretty complex. GP and SCA

took list price increases. We actually didn't

change list price. We took contract pricing up on

the lowest priced contracts, and what we're seeing

so far in the marketplace is kind of a mixed bag.

In some cases, we've seen distributors that have

actually seen a list price change from our

competition. In some cases they have not seen it

yet so they have been price protected for some

period of time. We've seen contract pricing

essentially level off, so we're not seeing the

level of erosion that we had seen previously, and

you could - you saw that in the overall pricing

numbers for the quarter. They were fairly flat,

first quarter to second quarter.

And so I think at this point in time, we're more

focusing on trying to make sure we're raising our

contract prices, where we need to, and not driving

the difference between the list price and the

contract price to be any wider than it is already.

I guess when all is said and done, do

you expect over the next several quarters to get a

pricing benefit in that business?

Well, I think that certainly as

fiber goes up, that will - that will help drive

that, because it will force the competitive

behavior to be more disciplined. And at this

point, we're - we're stopping the erosion and,

you know, as we - as we see fiber come through,

we'll expect that to start to push prices to be a

net positive. But it probably won't happen till

later this year, at the earliest.

Okay. And then just two last

questions. Can you talk a little bit about in

Europe the benefit that you're getting from the

weaker dollar and the fact that pulp is a

dollar-based commodity in Europe?

Yeah. I mean that's certainly -

our European team is thrilled to say Euro parity

with the dollar. I mean, you know, after - after

watching it open at $1.06 or whatever it was and

ride it down to 82 cents or whatever the bottom

was, that was pretty depressing experience for

them to go through and I think masked some of the

improvements that we've seen in Europe. In the

quarter, we really haven't seen much of that

because most of the run-up in Europe happened

pretty late in June and into July. But as we -

as we go to the balance of the year, obviously we

would expect that to continue.

You're seeing pulp prices in Europe that had been

traditionally lower than the U.S. That gap has

narrowed as the European producers in particular

have - as the Euro has strengthened and their

revenues in dollars have tried to raise their

dollar prices more aggressively to narrow the gap

between Europe and the U.S.

So I think, you know, they're seeing some price

increasing - price increases on fiber in Europe

that are more dramatic than we've seen in North

America to this point.

And so is the competitive environment

then getting more - becoming more conducive for

you guys relative to competition?

Yeah, I think so. I mean, and our

tissue business in Europe had a very solid

quarter, had good volume growth and, you know, our

product improvements are taking hold and showing

up in share improvements. So we're - we're

pretty happy with where we're positioned on the

European tissue business.

Okay. Great. And then just my last

question is on diapers in Europe. I believe that

you said your market share was about 21%. Correct

me if I'm wrong, but weren't you as high as 23%

maybe about six to 12 months ago? And if so, you

know, what's happening there, and do you expect

that you would take a similar price increase in

Europe like what you're doing in the U.S.?

Well, first of all, in Europe, we

don't sell Huggies Supreme, as so there's some -

there's some differences in mix and what's

available out there. And the pricing environment

is really completely separate from what's -

what's typically happened in the U.S.

You're correct that our share in Europe was at one

time - I think our high watermark was about a 23

share. We drifted down a little bit over the last

several quarters to about a 21 share. As we

continue to implement our product plan - and we

will have a - some similar product improvements

in Europe - we would expect to see our share

rebound as it typically has done elsewhere in the

world.

And so again, just on the price

increase over there, I understand that you don't

have Huggies Supreme, but would you - are you

still going to effect this same change?

Not necessarily, no.

Okay. Great. Thank you.

It's a different environment,

country to country, in some places, so . . .

Okay. Thank you.

Okay.

Our next question is from chip

Dillon with Salomon Smith Barney.

Yes. Good morning.

Good morning, Chip.

A question just to clarify on the

diaper and training pants share issue. You

mentioned, I believe, that your - as would be

expected, your training pants share, I think you

said were down, what, 6, 7%, but on a combined

basis, it was up 1%.

Could you - that would suggest, I guess, that

your diaper share alone went up quite a bit, or

did I misunderstand you?

Well, I mean, first of all, training

pants is a pretty small percentage of the total

category.

Uh-huh.

So, yeah, I think our diaper share

Mike said was up about a point-and-a-half on a

three outlet basis or on a dollar basis. Our

training pant share was down about 8-and-a-half

points on a dollar basis. And in total, as you

look at the mega category, we were up about a

point. So, you know, that - you can do the math

and figure out the percentage. I think the

training pant category is about - less than 10%

of the diaper category.

Uh-huh. You mentioned that you had

some very strong volumes, particularly in North

America, in the second quarter.

Are you concerned that you might have taken some

business from the third quarter or are you pretty

comfortable that the volume trends will continue

throughout the rest of the year, particularly in

North America?

Yeah. I mean, just as a point, I

mean we - as we run our business, so much of our

business is tied in to our customer supply chain

that, you know, our volume tracks pretty closely

with consumer take-away. So as you saw, the share

increases that Mike talked about, you know,

that - that really pretty fully explains the kind

of volume movement that we saw. And so we - you

know, we don't - we don't load customers. We -

you know, we operate with CPFR and advanced supply

chain tools, so that we're not putting excess

inventory anywhere in the supply chain.

Okay. So there's less of that than

maybe five years ago, where you would have seen a

lot of shifting between quarters?

Yeah. I mean I don't think that we

ever did a lot of that, but there's certainly less

opportunity for anybody to play those games

because we're - you know, we're linked up with

our - with our big customers from a supply chain

standpoint, and quite honestly, you know, we want

our customers to make money selling products, not

buying products.

Now, shifting a little bit to the

fiber situation, I notice that - let's take away

from home, for example. We had a pretty big pop

in at least the grade of waste paper that we were

always encouraged to look at, coated book stock,

in July. And it was mentioned in an earlier

question about pulp being in dollars, but I know

in Europe, you mostly buy hardwood and that's

priced in Euros and that seems to have also moved

up, although it seems to have stabilized but moved

up really late in the quarter, and with the lags

that you're likely to see both in waste paper here

and away from home, and in Europe and the

virgin-based tissue, are you expecting some

squeeze in margin in the third quarter, or do you

think you'll - you've got - you're out in front

enough on pricing to avert that?

Well, I guess a couple of comments.

You mentioned some things in Europe about the kind

of fiber we buy. I mean in Europe, I mean the mix

of fiber we buy there is fairly similar to what we

buy in North America. So we buy soft wood and a

lot of eucalyptus and actually euc - Brazilian

euc prices moved up somewhat more aggressively in

Europe in the quarter than anything else did.

So from a consumer standpoint, that mix of fiber

will be pretty similar to what we would buy in

North America.

From a margin standpoint, I mean I wouldn't expect

the same kind of pop that we saw in the second

quarter, but we expect to continue to have

stronger volumes. We typically have stronger

volumes in the third quarter than just about any

other quarter of the year, so we - we would

expect that to continue. We're seeing some cost

pressure in fiber, but we may see, you know, a

little bit of improvement in the tissue side and

the promotion environment. We will probably see

promotion levels increase on the diaper side in

the third quarter.

Uh-huh. And last question is just so

we're - touch base on this. On the pension

expense income issue, I know that you all made

some big changes last November in terms of the

assumptions there, and with the equity markets

having come under pressure, to state it lightly,

do you sense the need to make any further changes,

or I know the rules allow for quite a bit of

smoothing. Do you think that you're covered so

far?

Well, I mean we actually didn't make

any changes and last fall I think we probably did

a better job of communicating them or were more

clear about it than maybe we had been in the past.

But we've - we've followed the same pension

accounting basically since the Scott merger, and

at this point in time we're not planning to make

any changes, and we'll be - well, as we get

closer to year end, we'll be evaluating where the

market - equity markets are and where our pension

plan is, and we'll provide you with more update on

what to expect for 2003 at that point in time.

Okay. Thank you.

Thanks, Chip.

Our next question is from Carol

Wilkey with Merrill Lynch.

Thanks.

Good morning, Carol.

Hi, how are you.

Very well. How are you?

I'm just fine. Actually, I wanted to

ask a couple questions about price and promotion

in the non-personal care business. You mentioned

about the price increase for October on the diaper

side. You know, with pulp going up, are there any

plans on the consumer tissue side? It looks like

that's been even, you know, more hit by price

promotion. At least in this quarter, with a minus

4%. Can you just talk about the dynamics of those

categories, and which category maybe is being hit

more than others? In the outlook?

I guess I would expect that as pulp

prices move up - and I think there's still an

open question about what the outlook for pulp is

going to be as we get into the fall and we get

past all the mill shuts that have taken a lot of

the capacity out this summer. But if the market

continues to firm up, what typically happens is

that you will see promotion pulled back before you

see list price increases. And at this point, most

everyone's got their promotional dates and price

points set for the third quarter. You may see

some juggling of those, if - if pulp spikes up a

little bit more. And then, you know, if the pulp

market looks like it's going to have a sustained

rally here, you'll start to see promotion prices

adjust probably in the fourth quarter.

So as of this point, there's not a

whole lot that's going to change in the third

quarter, but the real question would be Q4,

depending on prices?

Yeah. I mean with our largest

customers, we're at least six months out in

promotional planning, and for even the smallest

customers, you're usually out 90 days.

Is there any category more than

others where the promotion is higher?

Well, I mean towels and bathroom

tissue are probably the two that we compete in

that you see the most of that. Facial tissue, the

promotion tends to be focused, as it has been in

the past, around the key facial tissue consumption

seasons, you know, back-to-school, winter cold and

flu, and then spring and fall allergy.

And just on the category growth, your

volumes were very strong in that whole - in that

whole business. Can you give us an idea of the

whole business, because I know at IRI we've got a

lot of the channels. What sort of category growth

are you seeing in consumer tissue in general?

Yeah. I mean, in general - I don't

know if Mike's got any more recent data of IRI. I

haven't looked at the categories in the last

couple of months. You know, you tend to see

facial tissue has been relatively flat to down

slightly, so, you know, you're not seeing a lot of

improvement there. And some of these - this data

is probably less useful than it has been in the

past because it doesn't include some of the other

big outlets where a lot of these products are

starting to move, like Wal-Mart and Costco and

Sam's.

And then in the roll products area, you're seeing

bath and towel growth that roughly tracks

population growth. In the low single digits.

So the fact that your volumes were

up, excluding acquisitions, 9%, is most of that

coming from the non-U.S. business?

No. I mean the U.S. business had a

very, very strong quarter. And it's because of

the launch of products like aloe and Cottonelle

and Cottonelle rebounded from a pretty weak

quarter last year and Scott towels is doing very

well and, you know, we, as we added capacity last

year, relaunched Scott towels on a consistent

platform nationally and we're seeing good share

growth. It's a great performing towel, and we're

taking share.

And just if I can ask one other

question. On the - on the training pant

business, you mentioned your shares in the U.S.

were down about 8 points. But in - it sounded

like in the discussion that your volume was up in

that business in North America. Is that true?

That's correct.

So that means the category growth

must have been pretty significant.

Yeah. And training pants is one of

the categories in North America where the

penetration - and by that, I would mean the -

you know, the potential training pant usage

occasions that are out there are only penetrated

by disposable training pants to about a 30% level.

So I think the - the Proctor's launch of Easy-Ups

has held the category growth, so while we've lost

share, we've continued to gain volume and I think

we've got other products that we've got even

stronger competitive position behind the Little

Swimmers and our Good Nights and incontinent youth

pants and those are continuing to do very well.

Thanks a lot. That's very helpful.

Thanks, Carol.

Our next question is from Sally

[inaudible] with J. P. Morgan.

Yes. Good morning. Actually, I have

a question for Jack. Jack, I wondered if you

could elaborate a little bit on the Latin American

tax credit issue that was described in the press

release. Tell us a little bit about how you

learned about it, and what actions have been

taken, what countries it happened in, just so we

can understand it a little better.

Yeah. First off, Carol, the

investigation is still in progress, so I'm - I'm

going to be a little bit - I can't disclose

answers to all of your questions there. But let

me just give you a little bit of background.

Basically in Latin America, one company -

actually two companies, we had local management

purchase tax credits, which is a valid process in

those countries. I mean, it's not very common -

we used to do this, actually, in the United States

back in the '70s but most everybody on the phone

call probably is not aware of that. But it is a

valid process, but it is a valid process, but you

have to do very careful due diligence when you buy

them to be sure that the credits are valid and

that they're usable to offset taxes within your

own company.

There were two issues. One is the credits which

we purchased were misrepresented to us, and in

fact they were invalid. And secondly, our local

management did not follow our controls and

approval processes in acquiring them, and as a

result, as we've come to investigate the

situation, the credits are, we've come to learn,

essentially invalid, and that's what's caused us

to write them off in the second quarter.

And how did you learn about this?

We actually learned about it

initially through the audit process.

And what countries did this occur in?

I'd rather not do that

right - tell you that right now. We can disclose

that later, but at the moment, we're in the middle

of some sensitive investigation. I'd prefer not

to disclose that.

Okay. And, you know, have you done

anything in terms of reprimanding local

management? Have there been any changes there?

They no longer work for us,

and that's - that's been done.

Right. And have you considered

changing any of your controls or practices to try

to highlight transgressions earlier in the

process?

Yes. It's a good question.

In fact, we had good controls in the countries,

but they were not followed by the management, and

secondly, the second part of your question, we are

definitely strengthening the procedures to

identify anything like this in the future, and

hopefully this will not occur based on what's

been - what we've learned on this - you know,

through this experience.

Okay. Could you be more specific as

to what changes you've made?

We're making some changes in

the way - in our reporting relationships and in

the frequency with which we do audits in high-risk

environments are two of the most - probably the

biggest things we're doing.

We also have, in Latin America now, we've changed

auditors. We have a - all of our countries in

Latin America are audited by our independent

auditor, Deloitte and Touche.

Who was auditing it before?

At the time of the issue, it

was PricewaterhouseCoopers.

Okay.

That - just - let me make a

statement on that to tell you they were not -

they did a good job in the audit. The change was

more of a strategic direction.

Okay.

So just building on your question,

Sally, we've taken the painful learning from this

experience and made sure we've transferred it to

other parts of Kimberly-Clark so that all of our

line managers everywhere in the world are aware of

what can happen when individuals collude to not

follow the appropriate control procedures.

Our next question comes from

Katherine Lewis of Morgan Stanley.

Good morning. On the - some of the

product [inaudible] trends, you know, they were

clearly very encouraging. In the personal care

business specifically, is there any specific

cost-cutting projects in the second half that give

you confidence that you can sustain margins in

that business going forward?

Yeah. That's a great question.

Actually, all of our personal care businesses

around the world, we've had a long track record of

cost savings going back many, many years.

Obviously, this year with the competitive

environment and the additional launch of some of

the products that Proctor has launched, we've

really dialed up our cost savings initiatives to

be able to generate the funds to help support our

business. And many of those as - you know, as

you get started at the beginning of the year, you

don't have a lot of cost savings to bring to the

bottom line, but they tend to ramp up as the year

progresses. So we would expect to see an increase

in some of the cost savings programs coming in the

back half of the year.

Now, at the same time, we're also seeing polymer

price increases start to show up related to some

of the oil price changes and other things, so we

will have some mitigating factors, but

particularly in infant care and child care, we've

had - you know, we should have some additional

cost savings coming in the second half of the

year.

In our adult care and feminine care business, you

know, adult care, we've talked a lot about the

great volume growth, but both adult care and

feminine care have really committed themselves to

an ongoing cost improvement program and they've

made a lot of progress on that, and we've seen

some - quite a bit of that already, but there's

more to come still in the second half.

And is it sourcing related or is it,

you know - specifically, what's driving the cost

saving program.

No. I think it's they are

meticulously taking apart every line item of the

P and L and looking at opportunities to do it better,

so it's labor efficiency, it's labor productivity,

it's sourcing, it's material substitution, it's -

you know, they've kicked off a number of different

projects to try and engage the best ideas of our

teams, and generate ideas that can help us save

money.

Okay. And then, you know, the -

with respect to the Mexican [inaudible], and in

light of some of the contraction in that business,

is that business starting to focus a little bit

more aggressively on costs going forward.

Well, when you look at the margins

K-C de Mexico's had for years, you know, they were

already outstanding in many areas and were the

benchmark on costs, so Claudio and his team have

done a phenomenon job over the years and you don't

get 30% operating margins in those businesses

without really fundamentally doing a great job of

that.

So I think a couple of things. You know, they're

focusing on revenue realization and a lot of the

supply chain best practices and they're one of the

most aggressive adopters of every best practice

that we find anywhere in the world in those areas.

We're seeing, you know, their paper business

improve somewhat, and the outlook Claudio believes

will be better in the second half than it has been

last year, certainly. So I think, you know,

there's a lot of things that the Mexican team is

doing to adapt to the situation that they're in,

and if the peso stays about where it is, we should

see improved results in the second half.

Okay. Great. Thank you very much.

Thank you, Katherine.

Our next question is from Rich

Schneider with UBS Warburg.

Yeah. Just following up on the

equity contribution, how much did Australia take

out of the results as you consolidated it?

It's - Rich, the K-C de

Mexico was equivalent to about 5 cents a share.

Australia moving up into the rest - other part of

the P and L was equivalent to about a one cent per

share reduction in the equity - in our share of

the equity earnings.

And you also mentioned that the tax

rate in Mexico contributed a - or took away about

a penny year over year. Is that tax rate, the

higher tax rate going to continue at that level in

the second half of the year?

Yes, we expect that to

continue in the second half of the year. This

is - this is a part of the Mexican tax law that

is - that's tied to GDP in Mexico, and the

current thinking is this is a provision that will

be in place for this year only, and it goes away

next year.

Okay. When you discussed the B to B

operations, it was indicated, you know, some of

the areas were soft. I imagine that included the

paper products. Could you go through those areas

that were soft in the B to B operations?

Yeah. I mean, I think there are -

I mean the paper business, as you would have

expected, was down slightly in volume versus last

year and versus the first quarter. Our technical

paper business, though, we shut a mill down at the

end of the year, as you may recall, and so while

we've got some volume decline there, primarily

because we shed some marginal business, we've

actually seen profitability improve in that part

of the operation. So that - that plan is

delivering the benefits we'd hoped for.

And where do you stand on healthcare

in terms of - the kinds of margins I think you

were trying to achieve 20% margins in healthcare.

Where are you right now, and could you update us

on your views on acquisitions at this point in

that area?

Yeah. Well, the healthcare, you

know, we were at - we had a 20% goal. That was

under the old accounting, with goodwill involved.

With goodwill now added back, their margins are

substantially above 20%. And we - they've made

excellent progress and they're on track with the

plans that we had laid out previously from a cost

savings standpoint.

And so the whole B to B area, I think, has got

opportunity for acquisition for us, to look at

either products that are in adjacent areas or

other low-cost disposable products that could be

sold directly in the B to B market, and at this

point in time, you know, we're - we're just

watching for the right opportunities and there

haven't been a lot that have come up that are

interesting or at a value that is compelling.

Even with the stock market having,

you know, come down as much as it has?

Even - even at that level.

And in terms of your tissue

operations, obviously things are going very well.

Have you filled up the new machines you started up

last year?

Yeah. Well, typically if we start

up a new advantage technology machine, we're going

to run it full and if we've got any excess

capacity, we'll idle other less cost competitive

technologies. But basically, we're running both

other consumer and our K-C professional operations

essentially full.

So what does that say about the

possibility of looking to add new machines in the

not to distant future.

Well, I think we've - you know,

we've got - we just started up a rebuilt machine

in Mobile, Alabama, so you know, that's coming up.

We'll have a rebuilt machine in Everett,

Washington that will start up later this year.

You know, these machines have a fairly long

startup curve, so as they start up, you know,

we'll get some additional capacity from them,

making progress against the startup curve, as the

next couple of years progress, and, you know, this

is one that we've - you know, we've not been shy

about. As we grow our business and need

additional capacity, we'll invest to add it.

And these have been retrofitted to

the new technology?

To the [inaudible] technology

rebuilds, yeah.

Okay. Thanks a lot.

Thanks, Rich.

Our next question is from Michael

Ellman with GMO.

Good morning.

Good morning.

Three financial questions and I hope

you haven't touched on this. I had to, you know,

join the call late.

First, could you comment on your capital spending

outlook for the year? You talked about a billion

dollars last November. You're only at 382 for the

first six months.

Yeah. I think in our remarks we

said that, you know, we're probably going to be

closer coming to 900 million.

Okay. Thanks.

You know, we're tracking below the

billion dollar estimate.

And did you account for the, you

know, superb, you know, operating cash flow

performance in the quarter?

I think we said it was brilliant

leadership, but -

That goes without saying.

No, we had very strong operating

results, obviously, that helped. We had - we had

some differences in timing of tax payments that

also helped. And then I'll let Jack or Randy

extrapolate that any more if they would like to.

No, I think that - a part of

it, as we tried to allude to in the comments on

tax, part of it will be timing, so that you should

see a little tapering off in the second half. You

should definitely not multiply the first half by

two, because we will have higher tax payments,

particularly in December. So - but all in all,

it was - it was a good half. We also expect to

have strong cash in the second half, but not -

obviously, not at the same rate.

Okay. And -

Mike, just to add one comment, it

came from both an improvement in cash earnings as

well as an improvement in working capital, so it

was - it was an across-the-board improvement.

I guess, you know, I - my puzzlement

about the working capital improvement is that

according to my numbers, accounts receivable and

inventories were both up sequentially, so where

else in working capital did you achieve the

improvement?

Well, in some cases, we - you know,

we had higher promotion spending so we had higher

trade promotion accruals, which are, in a way,

offset the receivable number. That was part of

it. The tax payment differences would have also

shown up in the accrued liabilities. And I think

those are probably two of the bigger factors.

Okay. And finally, could you please,

you know, review share repurchases in the quarter,

if you - if you hadn't done that.

Sure.

And what accounted for the uptick in

diluted shares outstanding sequentially.

Diluted shares outstanding

were down sequentially, Mike.

Is that my mistake?

Uh-huh. We repurchased - we

repurchased two-and-a-half million shares during

the quarter, and the share count, the average

share count, went from 523.7 in the first quarter

to 522.6.

Oh, okay. My apologies. Okay.

Okay. You say two-and-a-half million shares for

how much?

$162 million, I think it was.

Great. Thank you.

You're welcome. Thanks, Mike.

As a reminder, if you would like to

ask a question, please press the star key followed

by the 1 key on your touch-tone phone now.

Our next question is from Michael rose with

Sanford Bernstein.

Oh, hi, this is actually Jim Gingrich

of Bernstein.

Oh, Jim, I was hoping to hear from

you.

Jack, what are you expecting on tax

rate then for the back half?

Well, we - Jim, where we

expect to be for the full year, as Mike said, is

between the range of 29.0 to 29.5. That's about

as close as I can do it right now.

Okay.

We're at 29.0 now and it will

be somewhere in that range, we expect.

All right, all right. So the current

quarter, this was just really a onetime issue?

Well, as Mike said, we

actually had progress towards a number of large

settlements that allowed us to basically have a

lower tax rate for the quarter. It really was -

we've just about completed some larger

settlements, and that would allow us to book that.

Okay.

Not allow it.

Require.

It requires us to book them

once you know that you don't need the reserves.

Okay. Fair enough. And then where

do you expect now pension to come in, you know,

versus last year? I think you'd originally talked

about it being a $90 million swing.

Well, pension basically when we -

when we set the year up, you lock in your

actuarial assumptions and those are what your -

what you live with for the year, so I think that

we updated you in the first quarter as to where we

thought we were going to be, and I think the swing

is a little less than -

Yeah, I think the way to think

about it, Jim, is we - just to go back to the

beginning, in November we said we thought it was

going to be around 12 cents negative for the year.

Okay.

This year. But then what

happened, after November - this is right after

the September 11th, and as we went through the

balance of the year, returns improved dramatically

in the pension from that point.

Right.

So the 12 cents, instead of

being at 3 cents a share negative, it's closer to

2 cents a share negative.

A quarter?

A quarter, yeah.

Okay, okay. And then the last

question I had was just on the competitive

activity again on diapers. I'm - at this point,

Tom, is - I mean, is this - you know, my

impression was, at least in part, we kind of got

into this situation because of the gains that were

being made by private label. Can you kind of

update us as to, you know, your sense as to what,

you know, the dynamic is here behind the

competitive activity because I'm still a little

bit confused as to how, you know, we're going to

get price increases when - you know, in this type

of environment.

Well, I think the, you know, private

label had picked up some share. I think the more

important competitive dynamic was that Proctor had

lost a lot of share to everybody, and they were,

you know, determined to get quite a bit of it back

and put a lot of product activity and money behind

some new product launches, particularly easy-ups.

Right.

And I think they've - you know,

they've had their initial launch is pretty much

behind them, and their shares have pretty well

stabilized in most categories, and what usually

happens in this environment is that you return to

a more normative competitive environment once that

happens. You know, you've always got the

situation now where the biggest private label

producer is owned by Tyco, and there's probably

more uncertainty on that side of the equation than

there perhaps has been in past years.

But for example, in Europe, you know,

I mean it strikes me that the competitive

situation there really hasn't backed off despite

the fact that P and G, you know, introduced their new

diaper there in the last, you know, late

August/September -

- well, I would say the competitive

activity has been pretty high. The interesting

thing as we look at Europe now is, you know, since

the beginning of the year, the pricing in Europe

has come a lot closer to the U.S. level just

because of the.

Euro.

- improvement in the currency.

Yeah. Okay. All right. Thanks,

Tom.

Thanks.

Again, if you would like to ask a

question, please press the star key followed by

the 1 key on your touch-tone phone now.

Is your queue empty, Tish?

At this time, there are no further

questions.

Well, let's end the call at this

point, then. As usual, I'll be available for

additional questions that anyone might have. Tom,

do you have any wrap-up comments for the group?

Yeah, we're very pleased with the

quarter and very solid performance, excellent

volume improvements really across the board, good

margin improvement in all of our key businesses,

and we're very pleased with the cash flow, and as

we said, we're on track with our expectations for

the full year. Thanks very much.

Thanks, everyone, and good-bye.

Ladies and gentlemen, thank you for

participating in today's teleconference. You may 01:13:29 all disconnect your lines at this time.