金百利克拉克 (KMB) 2003 Q1 法說會逐字稿

Thank you for holding.

We now have Mr. Mike Masseth in conference.

Please be aware 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 to as to the procedure to follow if you would like to ask a question.

I will turn the call over to Mike Masseth.

Thank you, and good morning, everyone.

We appreciate your interest in Kimberly-Clark and with us today our normal team, Tom Falk, Chairman and CEO, Mark Buthman, Senior VP and CFO, Randy Vest, Vice President and Controller, and Tina Barry, Vice President and Head of Corporate Communications.

Here's the agenda for today's conference call.

Mark will start with a financial overview, next Tom will provide some perspective on the business and discuss our 2003 outlook.

Then, I'll provide some details and we'll finish one a Q&A session.

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 these events will occur as anticipated or 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, 2002, entitled Factors That May Affect Future Results.

In our call today, we will discuss certain financial measures for our first quarter of 2003 and 2002 results before unusual items.

In this morning's news release we noted the reasons management believes that reporting results before unusual items is useful to understanding our performance.

Reconciliations of the results discussed with comparable financial measures determined in accordance with GAAP are included in the news release or in supplemental reconciling information posted to our web site.

A copy of the news release and the supplemental reconciling information can be found in the news press section of our web site at www.kimberlyclark.com.

Now I'll turn it over to Mark.

Thank you, and good morning everyone.

I hope you had a chance to review the news release with the details of our first quarter results.

We made good progress against our priorities for 2003.

Sales volumes grew 2% despite intense competition and cost savings were substantial more than $40m in the quarter.

Earnings per share before unusual items of $.80 down 8% versus last year were somewhat better than guidance from January.

In addition, cash flow from operations continues to be strong.

We have accelerated our planned contribution of $100m dollars to our U.S. pension plan into March and were still able to generated operating cash flow $521m for the quarter, equal to last year.

Now let me review the top line.

Sales were up nearly 4% versus last year to $3.5b.

Currently exchange rates benefited sales by 3% as a stronger euro, British pound and Aussie dollar more that offset weakness in several Latin American currencies.

Each of our business segments delivered growth and sales were up 2%.

Net selling prices declined 1%.

This morning's news release has details on key factors affecting sales in each business.

Let me cover a few highlights.

Consumer tissue sales increased approximately 6%, boosted by the currency benefit of almost 5%, and volume growth of more than 2%.

Net selling prices were down 1%.

North America had solid volume growth of 3%, led by continued growth in Cottonelle and Scott bathroom tissues and Huggies Baby Wipes.

European consumer tissue sales increased almost 19% mostly due to the stronger currencies; sales volumes grew 2%.

Meanwhile, consumer tissue sales rose slightly in both Latin America and Asia.

Shifting to go personal care, first quarter sales were up 2% as currency and higher volumes each contributed about 1.5$ to growth, net selling prices fell about 1%.

In North America, volumes were about even with last year, we set first quarter volume for Pull-Ups Training Pants and Good Night Youth Pants as well as Depend and Poise and incontinent care products.

Our diaper volumes were down 4%, despite overall decline we're encouraged by strong sales of super premium Huggies Supreme Diaper.

In addition, we continue to roll out our improved mainline Huggies Ultra Trim diapers across all sizes and package counts.

Tom will talk more about our diaper business in a minute.

Elsewhere, European personal cares were also 19% due primarily to favorable currency rates and 2% volume growth.

In Latin America, personal care sales fell 11%.

Importantly, we grew sales volumes 5%, we raised prices.

However, these actions couldn’t overcome widespread currency declines in the region.

Asia personal care sales rows 9%, as double-digit growth in Australia and Korea was partially offset by continued economic weakness in Philippines and Taiwan.

In the business to business segment, sales increased 4%.

The currency benefit was about 4% while sales volumes rows more than 2% and selling prices declined about the same amount.

Our global health care business continued to drive top line growth as volumes increased 4% in the quarter.

K-C Professional sales volumes up 2% overall as volumes grew at double-digit rate in Latin America and Asia.

Volumes were essentially flat in North America and Europe in line with category growth.

Now I'd like to move to margins and operating profit.

For this discussion, I'm going to exclude unusual items from the comparisons.

These items are described in our news release and summarized by P&L line item in business segment in the attached tables.

Our gross profit margin was 34.8%, versus 36.6% in 2002.

Our operating profit margin was 17.2%, versus 20.2% in the same quarter last year.

As operating profit fell 12% to $595m.

However, the margins improved sequentially from the fourth quarter when gross margin was 33.6% and our operating margin was 16.8%.

The year on year margin declines were primarily due to lower net pricing, our expected higher pension expense, and inflationary cost increases primarily for fiber and resin.

These items more than offset items more than offset the benefits of higher sales volumes, currency translation, and our progress on cost savings programs.

We generated cost savings in excess of $40m for the quarter putting us well on our way for delivering targeted savings of $175m to $200m.

Both consumer tissue and personal care each generated savings of more than $15m, with B-to-B delivering the balance of the savings.

In a minute, Tom will give you more civics on our cost savings efforts.

I'd like to point out a couple other items on the P&L.

As expected our total declined benefit pension expense was approximately $35m higher in the first quarter compared to a year ago.

In addition, other income and expense for the quarter included $20m of net expense, not counting an unusual item for the legal judgment related to a European government grant that dates back more than 15 years to 1987.

Most of the other expense in 2003 was for currency effects related to foreign currency and Latin America and Europe.

Where possible, we've taken steps to minimize or eliminate those exposures.

In contrast, first quarter 2002 other income and expense included pretax currency gains $20m primarily for Australian dollar forward contracts relate to the purchase of our long-term partners interest in K-C Australia.

Let me briefly comment on operating profit for each segment: in consumer tissue profit for the quarter was $234m, down 6% from year ago levels.

Our operating margin was 17.6% of sales versus 19.9% last year.

North American family care operating profit declined slightly despite higher sales volumes and significant cost savings.

These gains were more than offset by increased promotional spending and higher material cost.

Elsewhere, consumer tissue profit in Europe and Latin America was about even with last year, while profit in Asia declined due primarily due to difficult economic conditions in Taiwan.

Turning to personal care, our operating profit for the quarter was $260m, down 3% from last year.

Our operating margin was 20.3%, which was an improvement from the fourth quarter, but down from 21.3% in the first quarter last year.

North American operating profit declined due competitive price cuts and promotional activity in infant and child care.

In other regions of the world, European and Latin American personal care operating profit was up slightly.

Our personal care business in Asia grew nicely, led by Australia and Korea, which continued to deliver strong results.

In the B-to-B segment, operating profit was $145m, down about 10%.

Our operating margin was 16.3% versus 18.9% last year.

Health care operating profit increased due to higher sales volumes and cost savings.

However, profit decline in K-C professional and our other B-to-B operations primarily due to lower selling prices and higher fiber cost.

Let's review results from our equity companies.

In the first quarter, our share of net income of equity companies decreased to $26m from $32.4m last year.

The decline was primarily due to lower net income at K-C Mexico.

Sales and operating profit constant exchange rates, both improved 9%.

However, these improvements were not enough to overcome the impact of the peso depreciation, which reduced our share of K-C-M's net income by approximately $10m.

Switching to cash flow in our financial position.

I mentioned earlier cash provided by operations remains strong at $520m for the quarter that's the same level as last year, even though we made $100m cash contribution to our U.S. pension plan in March of this year.

By moving the payment up into the first quarter from late in the year, as we had originally planned, we were able to decrease our projected expense for the year by about $5m and also advance the timing of our tax benefit from the contribution.

If you remember when we laid out our planning assumptions for the year, we expected the year on year increase in pension expense to be $145m.

This contribution will reduce that to $140m increase year over year.

We're also managing our capital spending carefully and we're on track to spend $900m or less this year, our first quarter spending was $183m, about equal to depreciation.

Our strong cash flow allowed us to continue to buy back K-C stock with repurchases of 2.5m shares in the first quarter.

Our strong cash flow also allows us to pay our shareholders meaningful growing dividends.

As you know, we announced a 13% increase in our quarterly dividend for 2003, nearly double last year's increase.

Finally, and importantly, our BS is in terrific shape.

Our leverage ratio for net debt and preferred securities to capital at the end of the quarter was just under 40%, well within our target range of 35 to 45%.

That wraps up the financial review of the quarter, let me summarize by saying we're off to a solid start in 2003, we're doing what we set out to do.

Reducing costs, and increasing our sales volumes.

Highly focused on continuing to deliver strong cash flow.

Now I'll turn it over to Tom.

Thanks, Mark and good morning everyone.

I'd like to use my time this morning to update you on our priorities for 2003 and update you as well on the out look for the balance of the year.

Before I do that, I'd like to make a couple of points about our first quarter.

First, I'd like to just talk a little bit about the recovery we saw in our personal care margins.

First quarter margins are back up over 20%, after we slipped down below 18% in the fourth quarter of last year and I think one of the questions on last quarter's conference call was will the personal care be the first business to be back to the 20% level and we were confident they would be able to do that.

We're pleased with that progress in the first quarter, and moreover, our team there accomplished this despite continued intense competition in diapers and training pants as well as higher pension costs that showed up in the first quarter.

So our teams deserve a lot of credit for getting their business back on track in particular for bringing the cost savings that Mark talked about to the bottom line.

For a second, I want to talk a little about cash flow.

That clearly remains one of our strengths.

We realize how important it is to continue to generate strong cash flow and it's the key to funding our future growth.

So overall, I'm encouraged by the progress that we've made in the first quarter.

Now let's talk a little about some perspectives on our priorities for 2003.

We are taking decisive action this year to deliver volume growth and aggressively reduce costs.

And this will help us offset the impact of competitive activity and higher pension expense.

As you know, our targets are to drive sales volumes higher by 3% to 5% with strong product plans, and to reduce costs by $175m to $200m.

Our volume growth in the first quarter was slightly below that 3% to 5% target in the face of continued intense competition.

Still, we had volumes up in each of our three global businesses and I think we're off to a reasonable start.

But what's more, we have lots of new products and improvements on the way to help drive sales volume growth over the balance of the year.

Mark mentioned that sales of Huggies Supreme in North America were strong.

In fact, sales volumes for Huggies Supreme were up double digits as new all over stretch product improvement is in full distribution.

I think that gives me good reason to be optimistic that sales of our main line Huggies Ultra Trim diapers will improve as the stretchy waistband feature becomes available across the size range and as package counts and price per diaper of our major competitors' products return to parity with ours.

The story is similar for Pull-Ups training pants as we continue to roll out easy open size product improvement and as marketing programs behind that product improvement starts to kick in this year.

Last week's announcement about the introduction of Huggies Convertible Diaper Pants and Huggies Baby Wipes in North America and Europe should also contribute to our momentum from a volume standpoint this year.

Huggies Convertible Diaper Pants is yet another example of how we continue to lead invasion in the dip examiner training pant categories.

Other recent examples of new and improved products include the launch of Restates Feminine Pads in Europe.

Our Poise Extra Coverage Panty Liners in North America, our new Wipe All Wipers made with our uptad(ph) tissue technology for K-C Professional in Europe.

And a new state skin surgical glove that will be launched for health care customers.

As I mentioned a moment ago, there's more to come this year from our new product pipeline and that's across all of our businesses.

Now let's talk about the cost side of the equation.

And as I said in January, we expected to deliver a good level of cost savings in the first quarter, and that's exactly what we've done, with savings of more than $40m.

So I think we're right on track to deliver on our savings target for the year.

I'd like to just briefly share some of our success stories with you.

As I mentioned in January, our infant and child care teams are focused on rebuilding margins in their businesses, they realize savings of more than $11m in the first quarter through product specification changes.

Because of our continual product improvements this is something we've done quite well over time, we optimize product performance, get it to work better for the consumer, but also get it to cost less.

In our North American family care or consumer tissue business, productivity gains, particularly in bathroom tissue manufacturing resulted in savings of $5m and furthermore we eliminated $3m in copacking(ph) costs for special display units other promotional putups(ph) so we're trying to be much more efficient as how we get those promotional displays to key customers.

Speaking of productivity, our health care business had an outstanding quarter with improvements across most of its manufacturing operations.

Productivity gains for surgical drapes and gowns, gloves and respiratory products totaled about $4m.

We're also off to a good start with negotiated material price savings.

Infant and child care businesses in North America and Europe, costs for super absorbent materials, adhesives, bags and other materials, were about 9m lower in the first quarter.

Shift to go K-C Professional, they took a comprehensive approach to cost management and our K-C professional team in Europe, for example, saved about $4m in the first quarter in more than a dozen separate categories.

Things like greater efficiency and reliability in tissue manufacturing processes, to improvements in (inaudible) operations to changes in material sourcing, and then controlling their fixed costs.

And there are many, many examples of cost reductions that all of our business teams achieved in the first quarter to deliver that $40m cost savings number.

So I believe that our employees have clearly responded to our call to action to drive volume and cut costs this year.

The bottom line, as I've said at the beginning of my remarks, is that I believe we're well on our way to achieve our $175m to $200m in cost savings target for this year.

Now let me say a few words about the outlook.

Based on the progress we've made to date and our priorities for 2003, we remain comfortable with our previous guidance.

As we reiterated in January we expect earnings before unusual items in 2003 will be about $3.36 per share or better and your current external estimates are generally in line with this guidance.

Looking to the second quarter specifically, given some recent cost increases, particularly in things like fiber, energy and oil or oil-related products, and the current competitive environment, I'd expect earnings per share for the quarter will be similar to first quarter before unusual items.

Although, inflationary pressures will be greater in the second quarter, due to high era material and energy costs, we're taking extra measures to mitigate any effect on the year as a whole.

Our teams are looking at all areas from price to go promotional activities to additional cost and expense reductions.

We've already implemented some price increases in our K-C professional business in both North America and Europe, and for the majority of our consumer tissue products in Europe.

The increases that we've put in place average about 3% for K-C Professional, and about mid single digits for consumer tissue in Europe.

Then finally, we'll focus on further strengthening our cash flow in 2003.

Our cash flow will fund our growth investments and the recently announced 13% increase in our quarterly dividend, it also enables us to continue share repurchases in 2003.

And as we told you in our previous guidance, we plan to buy back approximately 2% of our outstanding common stock this year, depending on market conditions.

So, with that let me wrap up by saying that I'm encouraged by the progress we've made in the first quarter, but I also know that we can do better.

Our focused approach to our top priorities in 2003, which is driving our volume growth and cutting costs, has we begun to pay off and show up in our results.

Our employees and our teams at all levels and all locations in the company are aware of these priorities, they're focused on them, they understand the urgency and are doing everything possible to deliver in these areas.

That gives me confidence that our teams will continue to deliver on our commitments over the balance of the year.

At the same time, it's our job to build a successful future for Kimberly-Clark.

We have the necessary strengths, some of the world's most trusted and recognized consumer brands, things like Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, we've got great leading edge technologies and we've got 131-year-old heritage of delivering continuous product improvements and new invasions and we will make sure that we take the right decisive actions to win in the markets we serve, which should in turn lead a superior financial performance and greater shareholder returns.

Now we'll take your questions.

Thank you.

At this time we will open the floor for questions.

If you would like to ask a question, please press the star key, followed by the 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 question queue, please press star-2.

Our first question is from Chip Dillon, Salomon Smith Barney.

Please go ahead

Yes, good morning, gentlemen.

First question.

I notice that even though you beat your and the street's expectations, the corporate expense and the other expense number were quite high, even when you take out the $.16 unusual item.

Were there other things in there that we should not expect as we go forward in that line?

The biggest swing year over year is currency-related issues, and I'll give you kinds of a quick answer and then let mark or Mike elaborate on it.

You may recall last year we had about a $.02 a share benefit and that other income expense related, a Australian dollar hedge in the purchase of our affiliate in Australia and this year we had other currency transaction that is moved the other way, and swung it back to a more of a negative, but I don't know, Mark or Mike, do you want to add anything to that?

For example, in Argentina, where we have U.S. dollar denominated assets, I think as Tom said a year ago that was to our favor.

This year as the peso strengthened it went the other way, I think all things equal.

We're happy having dollars on the ground in Argentina.

Was one example of the impact on that line.

Okay and –

It's going to be a little hard tore predict going forward but I would expect that you should plan for it to be, you know, small level of expense on an ongoing basis.

Gotcha and probably this quarter was a little outside compared to what normal is.

I would expect, so yes

Then, when you look at the future for the year, and, you know, if you say you do around $.80 in the second quarter, to get to the full year $3.36 you would have to average $.88 in the second half and when you analyze your cost savings, so far you're almost there, let's say you're $42m, that's $170m, so you're almost there.

If could you talk a little bit about what you see jumping up in the second half that would otherwise get to you that point, and then maybe might also want to address First Call.

I know you don't tend to give forecasts but it's interesting new analyze that second half $1.72 you have to do to $3.52, that's about what first call is for next year, so it looks like the street is expecting you to have a nice jump in the second half and then just go nowhere, basically go to the movies next year.

Well, let's -- is there a question in there, chip?

Yeah, what's going to get from you the $.80 level to the $.88 in the second half and why would it stop at the end of the year?

I think a couple of things, you know, first of all the second quarter we expect to see a little bit of a oil price spike that I think is going to trail off in the back half of the year, you know, the polymer prices have picked up pretty substantially, effective April 1, those are mostly related to what was happening to oil in the first quarter as oil looks like it's come down and going to be more stable here as the situation in the Middle East has settled down.

You know, we're going to be pushing hard for polymer to go back the other direction.

That should he help us in the back half of the year.

Our volumes were below where we would expect them to be for the full year and we only do 2% growth in the first quarter we expect to get to 3% to 5% for the year.

Volume should give us a lift in the back half.

We also do expect to see our cost savings programs ramp up during the year.

We're not quite at the run rate, but I think there still is room for that to contribute in the back half of the year as well.

You know, with regard to 2004, we really haven't given a lot of guidance.

At this point we think it's important to demonstrate our credibility and hit the numbers we've committed to for 2003, and then we'll later in the year as we've done in the past, give you more guidance on where we think things are happening in 2004.

Okay, and last quick question.

Do you see any change in the tone of the U.S. diaper market today versus where we were, say, in October, November, December?

Has that already started to change, or not yet?

I think the big change is that, you know, we're now at pretty much at parity counts and pricing everywhere.

Whereas, really, I was out checking some retail stores in the last week of March, and if you go to the big mass merchandise accounts you would find the transition had occurred and the product was lined up at parity count and price, but a lot of smaller grocery accounts still had a mixture of high count competitive product and some low count product and obviously we were all at the low count level.

So the first quarter was still a pretty tough competitive battle from a price count and promotion standpoint.

You know, we've got a lot of product news coming behind our launches of -- improved Ultra Trim product as that rolls over and Pull-Ups as that rolls over.

Supreme, we have a nice growth trend going.

So we feel good about our competitive position, but, you know, on the other hand we're not happy with where our shares are or necessarily where our diaper volume was in the first quarter.

So we're looking for that to turn around in the back half of the year as well.

Okay, thank you.

Thanks, Chip.

Thank you.

Our next question is from Rich Schneider from UBS Warburg.

Hi, Tom.

I was wondering if you could discuss the input side of the equation.

You've touched on it, and when you came out with your plan at the end of last year and some of your assumptions were that resin costs were going to be up $.02 and that pulp was going to average something like $540 a ton, and energy was going to be flat, obviously a number of those are somewhat changed here.

I wonder if you can update us now what you're assuming on the input side versus what you had assumed back at the end of last year.

Yeah, from a pulp standpoint, you know, we're now expecting the average for year is going to be closer to the $5.75, $5.80 kind of range, although, there's a mix of forecasts out there, as you probably have seen, some expect it to tail back off again in the back half of the year now, because of the general economic weakness in paper demand.

So we'll see.

But we're taking some price action and looking for opportunities to cover the fiber price through either price increases or promotional cutbacks, wherever possible.

On the polymer side, that spiked up quite a bit more than we had expected and instead of the $.02 it's looking more than $.06 or $.07 in the second quarter, and you know, it we'll obviously wait and see how that plays out for the balance of the year.

But near term there's going to be a spike on polymer price going to hit us in the second quarter.

We think that we can identify other cost savings to still hit our $175m to $200m number, even with the higher polymer prices factored in.

In energy, it's kind of a mixed bag.

We were pretty hedged, pretty much hedged for or natural gas in the first quarter.

We don't have as much hedging in place for the balance of the year.

You know, about $1.00 per MMBTU costs us $4m or $5m dollars a quarter for a perspective, so if that helps you, you know, we were expecting energy to be relatively flat.

It looks like gas may cost us $1.00 more per MM-BTU, than we were thinking it would.

And you know, other energy costs, we don't use a lot of oil.

You see gasoline prices show up and diesel prices show up in our distribution cost, that hit us a little bit in the first quarter, looks like that's going to tail off a little in the second quarter, so I don't see a big impact from that on the year.

So, I think the bottom line is we're going to have to cover the polymer price with other cost savings and we're going to have to get the fiber price recovered through price increases or promotional cutbacks.

So when you put together your cost reduction plan, these are sort of net numbers, these are numbers that, for example, if you went into the year with polymer expecting it to be up $.02 and it's going to be up $.06 to $.07, you're going to have to cover that additional situation ask that would be in the $175m to $200m --

Included in the $175m to $200m, that was net of any increases we were aware of or were planning on.

And because we wanted it to be bottom line cost reduction, and help offset the pension impact that we were seeing.

And so -- now, typically fiber is one that we tend to carve out of that because its is -- it's so much of our pricing tends to be driven by the fiber on the tissue business.

So in other words, as these inputs go up, you become more aggressive on your cost reduction program?

That's our plan.

Okay.

And just on the Huggies volume here in the first quarter, how did that compare to the fourth quarter?

I know you said in the release that the volume was down, I think, 4% year over year.

Was that on total volume, was it about the same in the first quarter as in the fourth quarter?

I'll defer that question to Mike because it looks like he has the answer.

I don't have the exact answer, but it was a good improvement from the fourth quarter level.

Okay.

That's my expectation as well.

Okay.

And as you see it, just to clarify the last question, clarify the situation with package count reduction by P and G; that pretty much all in place as you see it, going into the second quarter, or is there still some count reductions still taking place at certain shelves?

Well, I think that you would find now, at this point, you know, it's been three or four weeks since I was out and last I talked with the diaper team, some of the Neilson they saw gives you broader coverage than one city that they were seeing that most of the major food accounts that the changeover had pretty much occurred.

You would still probably find in some smaller accounts some old product floating around the system, but I would expect that for most of the second quarter, we'll be at parity counts and pricing

Okay, one last thing.

Currency, does that have a positive or negative impact on your bottom line?

Or neutral?

Well, there is a, you know, big transaction impact swing that hit us this time that offset some of the translation benefits that you would have expected from the generally weaker dollar.

The comparisons we talked about, it's kinds of all happening in the other income, other expense line.

And if you net it all out, it was about $.03 negative for us in the quarter.

Okay.

Thanks a lot.

Thank you, our next question is from Carol Wilke, Merrill Lynch.

Please go ahead.

Thanks.

Two questions, on the pricing on the tissue business, you mentioned the 3% price increase on the professional side and the mid-single digit in Europe consumer tissue.

Can you comment on the environment in the U.S. and the expectations on pricing from there that expected even though, you know, the changes in pulp that's going to continue to be just as competitive?

Talking about the consumer side or –

The consumer side

In the consumer side, it's probably more likely to occur in the form of higher promotional price points and, you know, most promotional prices are locked in 90 days so there's not a lot that can happen quickly.

But is certainly our expectation is that we will try to bring promotional price points up to cover the pulp impact.

So, it's not out of the question that we could actually see it maybe be close to neutral as opposed to the negative that it's been for several quarters?

Overall consumer tissue price?

Well, we would hope that it would be close to neutral, yes.

And I know you talked about this a little bit on the diaper business, and you mentioned that the Supreme franchise was up double-digit.

Can you just more specifically talk about the timing of what's going on with Ultra Trim and what already happened with supreme and I know in the late summer you've got your new convertible.

Just remind us more specifically of the timing of all those and why Supreme is doing so much better than the Ultra Trim line.

Is it a timing of new product benefits?

I think a couple of things.

First of all, if you would go back and look at the premium per diaper that Supreme commanded at the beginning of last year, it was more like about a 25% premium per diaper versus Ultra Trim.

As we exited the year that was down to the 5% to 10% range.

That was mostly being driven by the count changes that Proctor was driving and they've narrowed the gap on Pull-Ups and Supreme versus the main line diaper.

So part of it, part of the reason for the volume improvement is it's become a relatively better value in terms of a lower price per diaper than the main line business.

And I think the other part is we've had the product news came on Supreme with all around stretch in the fourth quarter, we started the roll-out with the new waistband feature on ultra trim but only had it in a couple sizes.

That's continuing to roll out in the first quarter.

So there was a timing of product change that had an impact as well.

Do you expect a premium between the Huggies Supreme and Ultra Trim to stay in the 5 to 10% or would you expect it to go back up

Essentially, the counts are set at this point in time, and so barring, you know, a further count change or, you know, other change like that, that would be the only thing that would move.

Basically, the products are all line priced in the store, so the bag of supreme and bag of ultra trim costs the same shelf price to allow you to do common promotions around the same price point.

But the count is slightly different, which is what drives the revenue per diaper.

And my last question, total volume growth in the quarter for diapers and training pants for the company.

I'll defer to Mike and see if he's got answer to.

This we have it by region.

I don't know if we --

Or by region would be great, just to break out the total diapers and trainers.

Yeah, in the U.S. we were down slightly overall in diapers and training pants.

Diapers were down like 4%, training pants were up 5% in the U.S, and I don't remember what the European numbers were.

The numbers in Europe for personal care, I think Mark said was up 2%, so I think overall we were up slightly.

We had strong growth in training pants in Europe, and we were down a bit in diapers.

Latin America and Asia were both up, Latin America was up a little more than Asia.

Thanks a lot

Thanks Carol

Our next question is from Linda Bolten-Weiser with Fahnestock & Company.

Please go ahead.

Thank you.

Can you just talk a little bit more about the cost side of things.

I know you're targeting this $200m cost savings for the year but when you look at that on your entire cost base, that's really not a lot if you calculated like a productivity cost savings kind of number.

Can you just talk about the other things that you do on an ongoing basis that would be something like a productivity measure and if you're doing other additional things in other areas as well, in this year.

We're certainly looking to bring cost savings to the bottom line in every aspect of the business, and if you look at it from a broad productivity measurement, you know, we have gotten consistent measurements of our realized capacity and that's a function of the speed that we run the process, the waste and delay, other various metrics of managing the process.

We have benchmarking on material inputs around the world and are looking at opportunities for global purchases to leverage the total spend.

We're looking at opportunities for cross sourcing so we use our existing capacity more effectively to supply our businesses.

For example, our Scott tissue business in the U.S. is doing very well, and rather than build additional assets here, we're sourcing out of Mexico and even out of Brazil to be able to supply that demand.

And then it will work all the way through the supply chain, how do we manage our warehouses and inventories more effectively so we've got less square footage and more productivity of our employees in those facilities.

A lot of it is done with SAP systems we're in the process of rolling out in most regions of the world.

And I'd say we're, you know, probably about halfway through the process in getting the benefits of that type of approach.

So if you had to put a number on total productivity cost savings would you say it would be in the change of 3%?

To be honest with you, I hate to give you a number that we didn't -- that I didn't have more analysis behind.

I mean, I wouldn't debate that that's a reasonable number, but I don't have any empirical evidence to point to tell you that's the right number.

Okay.

And then just one follow-up.

When you give your guidance for the year of I guess you say flat or better, what's the or better, what's the scenario that would play out that would help you achieve the or better part of your guidance?

I think when we provided the guidance, we came off a very difficult quarter and we felt being flat over this year was 6 points of earnings growth eaten up by pension expense, you know, was the minimum we should shoot for.

And I think the ‘or better’ happens if you have better than expected volume growth, if you see some of your material inputs change, if the economy picks up, where our K-C Professional business comes back a little bit.

Those are I think the upsides that you might be looking for.

Okay, thank you very much.

Thank you.

Thank you.

Our next question is from Andrew Shore, Deutsche Banc.

Please go ahead

Good morning, Tom.

I think on the call you mentioned consumer tissue prices in Europe were up 5% but we know in the UK, you had a large price increase and you had problems with Samesberry(ph).

Can you fill us in to where you are now on that match?

The UK tissue price has been implemented and Samesberry pushed back but a lot of the UK retailers will resist price increases as do other retailers around the world, from the information that I've had that's been resolved and we're shipping Samesberries again, and that's about how these things usually work out.

Did you get delisted at all in Samesberry?

I don't know what the details are, I know there was a brief period of time we weren't shipping, but I don't know that it ever went to the stage of being delisted.

When you say it's been resolved, which way?

I mean, resolved with your 8% price increase?

The price increase was implemented.

All right, great, thank you.

Thank you.

Thank you.

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.

Our next question is from Amy Chasen, Goldman Sachs.

Hi, just want to follow up on the U.S. diaper training pants market.

You mentioned several times that you're now at parity price and count parity with P&G, but I didn't really hear you address the pace of promotional activity and what some of the external data shows rate of promotional spend is still accelerating whereas yours has been decelerating.

Can you just comment on that whether you've seen anything in the marketplace to suggest they're pulling back or what your plans are for the rest of the year?

Well, as I think the market is really hard to read right now, if you're looking at Neilson or IRI data because in some cases where they've had lower priced deals out there for an extended period of time, those are no longer counted as promoted prices.

They're counted as list price and there's been a lot of coupon activity by both of us as we've gone through our respective count transition.

So, you know, we're really looking for what is the normal feature price on each of the major pack counts, and we're not seeing anything there that's out of the ordinary.

It was a competitive quarter, as we were trying to make sure we were not disadvantaged from a price count standpoint, as they went through their changeover.

And, you know, as we look at the balance of the year, we have a lot of product news, so we have a normal promotion plan behind that, but we're not expecting the same levels that we had in the fourth quarter and the first quarter.

So I guess the question; are you seeing -- you're saying you're not expecting the same levels as in the fourth quarter or the first quarter.

Are you seeing that at retail yet?

I mean, are you seeing any of that pullback.

Part of that was that the fourth quarter had a, you know, a big hit just for the cost of implementing the price count change so you had to pay retailers essentially one month worth of inventory on the price count change which was 15%.

So that was a big hit that hit us in the fourth quarter.

And on top of that we were couponing and trying to make sure that we kept our package price or price per diaper comparable to what Proctor was with the high count, low price.

Now that we're both at, you know, low count low price, we don't have to continue that to the same extent and we're back in more of a normal promotional cycle.

And are they as well?

I would say that from what we've seen, that's the case so far, but it's pretty early, as I said we still, I was out in the stores in March, we still saw some high count product that was being promoted to move it through the system, and there was some of that that was going on, and we would expect that as we get into the second quarter that should pretty much be flushed through the system.

Okay, I have just two other quick questions.

The first is, can you just give us a little bit more color.

You went through it pretty quickly, on the personal care margin sequential improvement that we saw there.

What was driving that?

It sounds like that's mostly Asia and margins in North America are still down and what your expectations are for the remainder of the year in that margin?

Margins in North America will drive anything in any of our segments really because that's where the vast majority of the business is.

So, you know, the, you know, first of all, the fact that we had all the stock protection hit us in the fourth quarter and we didn't have to repeat that in the first quarter helped.

We had a lot of cost savings that came through in personal care, I talked about some of the material specification changes, I think the number we quoted was $9m in personal care in total, a lot of that was in North America.

So, no, we made good progress in North America, it was a combination of some of the hits we took to go through the count change in the fourth quarter that we didn't have to repeat, and then we had some good cost savings progress on top of that.

Our feminine business and adult care business had very solid volume growth and continued good cost savings programs as well, which helped the overall personal care margins perspective.

Okay, but I thought you said North American profit margins were down, and that Europe and Latin America were up slightly and Asia was up nicely.

Did I hear that wrong?

That's probably year over year, as opposed to fourth quarter.

Okay.

And do you expect the personal care margins sequentially to continue to improve throughout the year?

Well, I would say that if we're going to get to our overall objective, that margins in all three segments are going to have to improve throughout the year and the personal care group has got to 20% kind of margins, and I'd like to see progress like that from consumer tissue and B-to-B, and I think there's more opportunity there probably than further upside in personal care.

Okay, last question.

Are you guys still planning to have some sort of meeting and/or conference call mid-year to talk about your long-term goals and can you give us number one, the date and number two, any early read on sort of strategically what you plan to talk about?

Yeah, we're still planning on having a conference call sometime mid-year, it may be in conjunction with our second quarter earnings call, we're still working out the details on that and as soon as we have a date we'll let you know.

And just, will you talk -- I know you're going to talk about your long-term goals.

Are you going to talk about, you know, long-term strategy if it's any different than what we've seen thus far?

What are you are some of the things you're thinking about?

We would expect to lay out the five-year type of plan for you to give you perspective on where we're going, what our growth expectations are, top and bottom line, what our cash generation capability is and what we're going to do with the cash.

And try to give you that perspective on strategically and philosophically where we're going to go with the business.

Okay, great, thanks.

Thank you.

Thank you.

Again, if you would like to ask a question, please press star-1 now.

Our next question is from Linda Bolten-Weiser, Fahnestock, please go ahead.

Thank you.

Just a follow-up.

I know this is a pretty small piece of your business, but can you just comment on if your health care business is seeing any benefit from the SARS, outbreak, and if you would quantify it, that would be helpful.

I would say overall our health care business is doing very well, but I would say it has very minimal impact from SARS, at this point in time.

Obviously we sell a lot of face masks and right now we're selling every face mask we can make, so that's I guess a small benefit.

But more of our benefit and health care has come from just our traditional surgical products and continuing to build market share and grow volume in a number of our segments.

So I wouldn't attribute much, if any of it from a SARS perspective.

Okay, thank you.

Thank you.

Our next question is from Chip Dillon, Salomon Smith Barney.

Yes, just one quick question.

As you do look ahead, not that you would give us a preview, but you look at some of the demographics surprise us in the U.S, especially immigration and while we've seen the number of births stabilize and maybe even drop a little bit, it seems like now we're getting the echo generation married off and starting to have kids, and do you, as you look at the longer term and do your studies, do you see that the diaper business may actually reaccelerate sometime in the later this decade?

Is that something you're thinking about?

And secondly, do you think that we're anywhere close to saturation on the adult incontinence side?

Certainly, the birth rate is an important input to the long-range diaper plan, and it is very interesting, as you look at the world.

You're seeing, you know, some sharp declines in birth rate in some of the developing markets, places like China and Korea with the golden baby phenomena.

And you're actually seeing a pretty healthy birth rate in the U.S.

So those are all factors that we would look at, and consider.

And to the second question, our adult care business continues to do very well, and as you would expect, the aging trends in this country certainly have helped, but we've also had a lot of innovative new products with our Poise Extended Coverage Panty Liners and those types of things that are out there and trying to really make sure we're addressing every potential incontinence need with our range of products, so we have a great team doing a nice job of growing our share.

I think we hit a nice market share in the last four-week period.

I know Mike will give you the 12-week shares but we've had a positive trend in that business and seen our shares consistently pick up in the last year or so.

But again, looking at the market, Tom.

Changes in the next five or ten years?

Well, I think there is still a continued growth in that, and as you look at that business globally, especially, particularly on the light end, there's not a lot happening there, and I think that there could be.

So that will be an opportunity area for us.

Thanks.

Our next question is from Rich Schneider UBS Warburg.

Please go ahead.

Tom, just a quick follow-up, you look at your B-to-B business, operating profit declined by about 10% sequentially from the fourth quarter.

I'm assuming that's pretty much all in K-C Professional.

Could you go through what went into that decline and what's been going on in the K-C Professional Business.

Yeah, I guess I wouldn't say, first of all, that it wouldn't be correct to assume that that was all K-C Professional, because there is a seasonality to B-to-B overall for whatever reason.

They tend to have a stronger fourth quarter, they tend to have a little bit lighter first quarter, and so the health care business was down quarter to quarter even though the margins and volume growth, you know, versus year ago, were on track.

K-C (Professional) was down a little bit in North America, basically flat volume and most of the profit impact, you know, you had some negative fiber price, you had negative selling price and you had some positive cost savings that brought it back to a relatively flat down slightly from a profit standpoint.

There's some other things in B-to-B, you know, which we didn't talk about.

We wrote off a small amount of (inaudible) line that probably hurt the quarterly comparison and it wasn't big enough to rise to the level that normally would get talked about in this kind of event.

You had higher pension cost that affected that whole segment.

That was -- you know, of the $35m in pension cost increase in the quarter, B-to-B probably had a third of it, which is a little bit higher percentage than you might expect.

And in terms of the away from home price increase, I think some of your competitors went out in January.

What is the time frame now of your price -- price increase?

I think the list price increase is May 1, but as you know, in that business of relatively small percentage of the business is done at list, and so it's a question of when contracts renew and how quickly you can get contract changes to occur.

And you know, we'll see what happens.

But it takes a little longer to get pricing in that business.

And they went out earlier, you're going out in May, is the timing, do you believe better now than it was in the beginning of the year as to why you didn't go out earlier this year with the away from home increase?

Pulp has certainly moved up more aggressively in the last couple of months, and that's the biggest cost driver.

So I mean, it's more a function of that than anything else.

Okay, thanks.

Thanks.

Our next question is from Carol Wilke, Merrill Lynch.

Thanks.

I was just curious.

With the recent actions by S&P, about the negative credit watch, because of pension, would the contribution that you've made to pension and from the cash contribution, would you expect to get off the negative credit watch list pretty quickly, or what else can you do to have that, you know, to get off that list?

Well, quite honestly, being on that list kind of surprised us, because none of this stuff was news much it's a function of other post-employment benefits, which really nobody funds because there's no tax effective way of doing it.

And for us, that's about $700m of what they will now call debt.

And then, the pension number, they measure with the highest pension liability they could have picked, which is the projected benefit obligation, or what your pension liability will be at some point in time in the future, and our target all along had been to fund the EBO, which is the current liability.

And we're, I think, now about 90, a little over 90% funded on the ABO, and we want to get to 100% funded.

We have our meeting coming up in June with the S&P, and we'll express our position and why we still think we're a solid double A; and from our perspective this is a nonevent and nothing has really changed.

These are not immediate funding issues for the most part and we're still hitting our cash targets even with the contributions we've had to put into our pension plan last year and this year.

Thanks.

Thanks, Carol

If you would like to ask a question, press star-1 now.

Our next question is from Lamont Richardson, Pegg(ph) Capital Management

Am I on?

You're on.

You mentioned sharp increase in pulp costs in the last couple of months.

How does that affect your competitive position be, Proctor & Gamble across the whole spectrum of tissue, et cetera, and personal care products?

Sure.

We're about 40% integrated on our virgin fiber requirements, Lamont, and Proctor & Gamble has no internal pulp mills, so in a rising pulp market that would probably give us a little bit of a advantage.

On the other hand, our other competitor, Georgia Pacific is probably more than 100% integrated.

So we're right in between those two things.

On the personal care side, we buy all of our fluff pulp from third party manufacturers, so we don't have any integration there, although that is kinds of covered in that 40% integration number.

Is there any wood pulp in the fluff pulp that you buy from somebody else?

Tom Falk Yeah, fluff pulp is wood based.

Wood-based?

Yeah.

Okay.

Thank you.

Okay.

Thank you.

Again, if you would like to ask a question, please press star-1 on your Touch-Tone phone now.

Is our queue empty?

At this time there are no further questions.

Okay, then we'll wrap things up now, and of course I'll be available if anyone has any additional questions, and Tom, would you like to wrap up with any final thoughts?

Yeah, I think overall we made a reasonable start to the year with the first quarter, I'm pleased with the cost savings performance and, you know, we've got some more work to do from a volume standpoint but we're looking for better things in that area as our product improvement plans kick in over the balance of the year.

Thank you for your support of Kimberly-Clark.

Ladies and gentlemen, thank you for your participation in today's teleconference, you may all disconnect your lines at this time.