金百利克拉克 (KMB) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding.

(Operator Instructions).

At the conclusion of the presentation, the floor will be opened for your questions.

At that time instructions will be given as to the procedure to follow if you'd like to ask a question.

I would like to turn the conference over to Mr.

Paul Alexander.

Mr.

Alexander, you may begin, sir.

Thanks, David, and good morning, everyone.

Welcome to our third quarter earnings conference call.

With us today are Tom Falk, Chairman and CEO, Mark Buthman, Senior VP and CFO, and Mike Azbell, Vice President and Controller.

Here's the agenda for this morning's call.

Mark will begin with a review of our third quarter results.

Then Tom will provide his perspective on the results, and discuss the 2009 outlook.

And that will leave us plenty of time for Q&A.

For those wishing to follow along, we do have a presentation of today's materials in the investor section of our website, which is www.kimberly-clark.com.

Now before we begin, let me remind you that we'll be making forward-looking statements during the call today.

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

Please refer to the risk factor section of our latest annual report on Form 10-K for a description of factors that could cause our future results to differ materially from those expressed in any forward-looking statements.

I would also like to point out that when discussing 2009 results, we will be comparing to adjusted results in 2008, which exclude charges for the strategic cost reduction plan we completed last year, and an extraordinary loss.

Management believes that reporting in this manner enables investors to better understand and analyze our ongoing results of operations.

For additional information on why we made these adjustments and reconciliations to comparable financial measures determined in accordance with GAAP, please see today's news release and additional information on our website.

Now I will turn it over to Mark.

Thanks, Paul.

And good morning.

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

I'm going to briefly review the quarter, and I would like to start with a few headlines.

First, organic sales growth was about 3%, including double-digit growth in the developing and emerging markets, and very strong performance from our healthcare business.

Second, gross and operating margins both improved more than 500 basis points.

That led to record earnings per share of $1.40, up more than 35% compared to a year ago.

Third, cash provided by operations was up 23% to more than $790 million.

Now let's cover the details of the quarter, starting with sales.

Overall sales decreased about 2% to $4.9 billion.

A currency drag of approximately 5% more than offset underlying organic growth of 3%.

Our focus on net realized revenue led to an approximate three point gain in net selling prices, while sales volumes were essentially even with the prior year.

Turning to the top line for each of our segments, in Personal Care sales were down approximately 1%, including a six point currency headwind.

Organic growth of about 5% was driven by higher net selling prices of 5%.

And a one point improvement in sales volumes.

Meanwhile, product mix lowered sales by 1%.

In North America, organic sales were even with the prior year, as higher net selling prices of 2% were offset by lower volumes.

Sales volumes for Huggies diapers fell about 3%.

And child care volumes were down about 7%, reflecting softness in the training pants category.

Despite the lower volumes, our market shares in both categories were even with last year.

Elsewhere, adult care volumes were up at a double-digit rate, including benefits from new gender-specific Depend underwear, which we launched earlier in the year.

Moving to Europe, personal care organic sales increased approximately 4%.

Sales volumes were up nearly 7% with improved performance of Huggies diapers in Poland and our core markets in western Europe.

Meanwhile, net selling prices were down 2%, and product mix lowered sales by more than one point.

In developing and emerging markets, personal care organic sales rose about 13%.

Net selling prices increased 10%, and sales volumes were up 4%, while product mix was off slightly.

Volume highlights included double-digit growth in the fast growing BRICET countries and also in South Africa.

Turning to consumer tissue, sales were down 5%, which was equal to the negative impact from currency in the quarter.

Higher net selling prices and improved product mix each delivered one point of growth but were offset by lower volumes of approximately 2%.

Our volumes continue to be impacted by the effects of weakness in the economy and our focus on revenue realization.

In North America sales were down about 2%.

Higher net selling prices of 2% were more than offset by lower volumes of 4%, mostly in paper towels and facial tissue.

Net selling prices reflect the increases we took last year, partially offset by somewhat higher competitive promotional spending.

Switching to Europe, consumer tissue organic sales fell nearly 4% in a continued competitive environment.

Net selling prices declined 2%, while sales volumes were off more than 1%.

In the developing and emerging markets, consumer tissue organic sales increased 4%, driven by higher net selling prices.

Now moving to K-C Professional and other, sales decreased about 5%, including a four point drag from currency.

Higher net selling prices generated nearly four points of growth.

However, sales volumes were down about 4%, and that's net of an approximate three point benefit from the acquisition of Jackson Safety earlier in the year.

K-C Professional's volumes continue to reflect a challenging economic environment, particularly in North America and Europe.

Lastly, healthcare segment sales were up approximately 16%, with strong organic growth driven by volumes which jumped 18%.

One point of improved product mix was offset by lower net selling prices.

Healthcare volumes were up in several product categories, including double-digit growth in exam gloves for the sixth consecutive quarter.

Segment volumes particularly in medical supplies, were also benefiting from increased industry concerns regarding infection prevention.

In addition, approximately 40% of the total volume growth in the quarter came from increased global demand for face masks, as a result of the H1N1 flu virus.

Now moving to profit, margin and cost savings.

Gross margins improved significantly, up 570 basis points to 35.2%.

That's the fourth consecutive quarter of year-on-year gross margin improvement.

Key drivers were price realization, cost savings, and lower input costs of about $270 million.

Third quarter operating profit was up 39%, with an operating margin of 17.7%.

That's despite negative currency effects of about $75 million, and increased pension expense of approximately $25 million.

Meanwhile, we continue to invest in our brands, with strategic marketing up $50 million in local currency terms during the quarter.

Now turning to cost savings, we had another strong quarter with total savings of $61 million.

That brings our year to date savings to about $190 million.

In terms of the strategic cost reduction plan, we realized $14 million of benefit from activities completed in 2008.

Our ongoing force program generated savings of $47 million in the quarter, including strong benefits from sourcing and supply chain activities.

Given our strong cost savings momentum, we've raised our full-year target for the second consecutive quarter.

We now expect to deliver about $250 million in total savings, up $50 million compared to our previous target.

We also started to realize benefits from our organization optimization initiative, as severance and related costs of $12 million were more than offset by related savings of $24 million.

Now, looking briefly at third quarter segment operating margins, our margins were up strongly across all four business segments, both year on year and sequentially compared to the second quarter.

I'm really pleased to see the broad based improvement in our profitability, and I'm proud of the entire organization's hard work and focus on reducing costs, improving the way we work and delivering increased cash flow.

Speaking of cash flow, we had another excellent performance this quarter.

Cash provided by operations increased 23% to $791 million.

The growth was driven by higher cash earnings and further reductions in working capital, partially offset by increased contributions to our pension plans.

In terms of working capital, we improved our cash conversion cycle by a further five days compared to the second quarter.

That included benefits from extending payables terms and reducing inventory levels by two days.

Third quarter defined benefit pension plan contributions totaled $223 million, including a $200 million contribution to the US plan that was incremental to our previous forecast.

During the quarter we decided to take the additional contribution as a result of our strong cash flow.

So that wraps up the financial review.

To recap the quarter, we achieved 3% organic sales growth.

We delivered record earnings fueled by strong gross and operating margin improvement.

And cash flow performance was outstanding.

Now I will turn it over to Tom.

Thanks, Mark, and good morning, everyone.

I will give you my perspective on our third quarter results and then I'll review the outlook for the balance of the year, and then as usual we'll move on to your questions.

In short, we're executing very well, and we're making excellent progress managing the factors that we can control.

And that's led to a significant increase in our outlook for the year, while we continue to do what's right to sustain our long-term growth.

So let me start with our third quarter results.

As you heard from Mark, our performance was very strong in a number of areas in the quarter, including significant margin improvement, all-time record earnings per share and outstanding cash generation.

Our focus on revenue realization and cost reduction helped deliver gross margin and operating margin expansion of more than 500 basis points each.

We continue to manage net realized revenue well, and achieved third quarter selling price benefits of about 3%.

In addition, cost savings performance and management of overhead spending were excellent, and they reflect our Company-wide focus on driving efficiencies across the organization.

On the bottom line, earnings per share was a record $1.40, that's up 37% compared to adjusted earnings last year.

And that's despite a 15% headwind from currency, and a still relatively weak economic environment.

In terms of cash flow, I'm very pleased to see our continued momentum here.

Strong cash flow allows us to fund our growth initiatives, and gives us additional flexibility as we maintain our strong balance sheet.

Speaking of growth, we made additional progress with our targeted growth initiatives this quarter.

In developing and emerging markets, organic sales rose 10% primarily due to higher selling prices.

Volumes rose 3%, up somewhat from the first half of the year.

We continue to execute our growth plans in high potential markets like China, Russia and Latin America.

I'm very optimistic about our prospects in the D&E markets overall.

And they currently represent about one-third of Kimberly-Clark's total sales.

In addition, our healthcare team delivered a terrific quarter with strong sales and profit growth.

We also recently announced the acquisition of I-Flow Corporation and Baylis Medical's Pain Management business.

These transactions are consistent with our strategy to invest in the higher growth, higher margin medical device market.

And then finally, the integration of Jackson Safety into our K-C Professional business is progressing well, and we're introducing more innovation into our safety business.

We also continued to strengthen our brands in the third quarter.

Several recent innovations delivered solid performance in the quarter, including Huggies Pure and Natural Diapers, gender specific Depend products and our lavender nitrile exam gloves.

We also supported our brands with a significant increase in strategic marketing spending.

So all in all, it was a terrific third quarter.

And those results are spurring a significant improvement in our outlook for the year.

And I will turn to that now.

In terms of the economic environment, we're assuming that business conditions will remain stable for the balance of the year.

As we have all year, we'll continue to focus on our four priorities of improving margins, maximizing cash flow, pursuing targeted growth initiatives, and then further building our brands.

This morning's news release includes several updated planning assumptions for the year, and I won't repeat all the details, but the key changes are as follows.

First, our organic sales are now expected to grow about 3%, and that compares to our previous assumption for the growth in the 1% to 2% range.

The increase is coming from continued strong price realization, some volume growth in healthcare and the modest pickup in volume across the developing and emerging markets that we began to see in the third quarter.

Second, as Mark already mentioned, we've increased our cost savings targets for the year by $50 million.

And third, given the continued weakness of the US dollar, currency effects should be less negative than we previously estimated.

So in short, we're ahead of our plan for the year.

We're raising our earnings guidance for the second consecutive quarter.

We now expect earnings per share in 2009 will be in a range of $4.50 to $4.60 per share.

We expect the fourth quarter to be a strong finish to the year even though pulp and polymer costs are expected to increase sequentially from third quarter levels, and promotional activity is anticipated to rise modestly.

So based on our new outlook, we would now expect full-year earnings per share to grow from 9% to 11% compared to our adjusted earnings per share last year.

That's at the high end of, or even slightly above, our long-range global business plan objective of mid to high single-digit growth.

So longer term it's our objective to consistently deliver results that are at least in line with our global business plan, while we continue to invest for future growth.

So to summarize, although the current environment continues to be difficult, our worldwide teams are delivering excellent near-term results.

At the same time, we're investing for our long-term success.

We're building a leaner, stronger, and faster company, and we're confident we have the right strategies to drive sustainable growth and shareholder value for many years to come.

So that wraps up our prepared remarks, and now we'd be happy to begin to take your questions.

Ladies and gentlemen, at this time the floor is now open for your questions.

(Operator Instructions).

Our first question comes from Ali Dibadj from Sanford Bernstein.

Hi, guys, wanted to see if you could give a little bit more granularity on the emerging markets.

Looks like still a lot of pricing driving the growth there.

You mentioned, Tom, volume coming back a little bit it looks like, but there's still lower than anticipated, 4% for personal care and slightly down sounds like for consumer tissue.

So a little bit more granularity, maybe breaking it up even by region might be helpful, please.

If you look at the markets we've been driving, like China, Russia, Turkey, you saw a consistent, a solid volume growth going on there.

On the tissue front generally, you saw us more pushing for revenue realization.

We had a little bit of volume growth this quarter, but overall, continued to drive revenue growth.

Some of the bigger markets like Australia and Korea are still relatively slower growing, and so didn't see a huge volume up-tick in either of those locations.

But you had said you're seeing things to look a little bit better?

Well, sequentially.

It's still off if you look year over year from the kind of rates we were seeing in emerging markets a little over a year ago, but sequentially it seemed like things were picking up.

We had a terrific quarter in China, for example.

Okay, and it looks like both in the emerging markets, but also I've seen in the developed world, a lot of the growth driven by pricing.

I guess I'm a little surprised by that.

I thought the competitive environment might step up a little bit, given all the rhetoric that's out there, certainly given what's happened to commodities.

Doesn't seem like you're seeing that.

Are you anticipating more of that or am I just reading it wrong?

Emerging markets often you find pricing and currency are sort of mirror images of each other.

So, as the dollar was relatively strong, you saw a lot more price, particularly as many of the underlying commodities that go into these products are sold are priced in dollars.

So as the dollar has weakened over the last couple of months, and certainly heading into the fourth quarter, I'd expect to see that pricing improvement wane certainly.

And then in the developed world?

Developed world, really, we've basically hung on to most of the price increases, and as you've seen commodity costs move up pretty consistently this year, and now most of the price increases have annualized, the noise level has died down a little bit.

You're seeing some retailer price movement where they're taking price down on their own account to stimulate demand in some areas.

You're seeing a little bit of price point skirmishing around promotion prices in tissue, which we'll be responsive to in the fourth quarter, but broadly in personal care, the pricing dynamic has died down quite a bit.

Are you surprised by that at all or not really?

Well, I think what's happened, as the branded prices got established and oil has hung in where it has and a lot of the commodities have stayed up there all year, now private label has actually moved up on price broadly.

Probably six months after the branded guys did, you're seeing relative stability at this point in time.

And then sorry, last question just on consumer tissue.

Looks like that's still, you mentioned pretty tough on volumes for sure.

What's the plan of action going forward?

Is it around pricing, more pricing or more promotion, so we don't actually start seeing negative volumes going forward?

The area we probably had the biggest volume hits this quarter in the US in particular, were in towels and facial tissue.

Bath tissue overall is broadly okay.

We'd like to see a little bit better mix with Cottonelle, so we will be focusing primarily on Cottonelle and our facial tissue business to make sure we've got those on track.

And then we've got some targeted programs on towels, with some innovation happening on Viva and some other things that we'll roll out late this year and into next year to get those moving in the right direction.

Okay, thanks.

Thanks, Ali.

Next question comes from Chris Ferrara with Banc of America.

Hi, Chris.

Hey, guys, how are you?

Pretty good.

Just with things like production curtailment hitting you by I think $0.23 this year, restructuring $0.26, incremental pension $0.26, it obviously looks like you have somewhat of a head start in 2010, and I think that's kind of the debate around the stock.

So, what's your philosophical perspective on balancing reinvestment and delivering results that are in line with the global business plan versus letting some stuff drop to the bottom line?

How are you thinking about that?

For me, Chris, I'd like to be in a position to consistently deliver at the global business plan levels for a long period of time, and I think that that's the right way to create shareholder value.

So we were very aggressive on costs this year, and to really react to the economic environment, and hopefully that will set itself up to deliver on the global business plan, and be able to invest in innovation and the future of the business to the levels that we'd like.

Right, but it sort of seems like, given all of the drags that you've had in 2009, if you get into 2010, it seems like either one of two things has to happen.

Either some of the stuff drops to the bottom line or you're going to have plenty of room to reinvest at a greater rate than you've seen even this year.

Does that make sense?

You're also seeing the commodity costs acceleration that's happened in the fourth quarter, and we'll see how that plays out.

We'll give you more color on our 2010 planning assumptions in January.

Got it.

Thanks.

I guess one quick one, sort of a follow-up.

You guys had been saying that private label had seemed to settle down, lose some momentum, and I think you're still sort of saying that now.

The scanner data, and again, given we know all the shortcomings of scanner data, it seems to show that private label has picked up pretty dramatically in most of the paper categories, at least in the tract channel.

Are you seeing a further separation in private label trends in tracked versus non-tracked channels in tissue.

We haven't seen as big of a share of pickup in our overall data that we look at on a total market basis.

You've seen a little bit in towels, that's probably been the biggest area, and then maybe secondly would be facial tissue.

Bath tissue broadly, we're not seeing as big of a move.

Got it, thank you.

Thanks.

Our next question comes from Linda Bolton Weiser with Caris & Company.

Hi, you commented that commodities inputs would be up sequentially from third to fourth quarter, but I'm just wondering, and spot prices are up, for things like plastic resin in the fourth quarter, but will your costs actually be up or down generally in the fourth quarter of '09 for commodities?

Sequentially or versus prior year?

Versus prior year.

Year-over-year.

Versus prior year it's kind of a mixed bag.

You'd say Northern Softwood will actually be higher versus prior year.

Eucalyptus and fluff pulp used in the personal care business will actually still be lower.

A lot of the polymer costs, it's going to be pretty consistent with prior year, so it will be up sequentially but it's going to be pretty consistent with where we were last year.

And you may have some up sides, and things like super absorbent will be lower than prior year even though they may be up a little bit sequentially.

And so, be kind of a mixed bag versus prior year, but it will all be up sequentially fourth quarter versus third quarter.

Linda, this is Paul.

Our full-year guidance is for deflation of $600 million to $700 million.

And through nine months, we've got about $525 million.

So overall, as Tom described, we'll still be getting some benefits.

Okay.

But certainly I would think come first quarter 2010, you're going to be looking at an increase year-over-year.

Yes.

Okay, and then can you just comment on the strategic spending, the spending of increase of $50 million?

That's a pretty big number.

Usually it's $20 million, $25 million increase.

Is that kind of the right level, or is that based on certain launch schedules?

What can we kind of think about going forward?

It was $30 million in actual P&L numbers, on constant currency it was $50 million.

And so in terms of what actually hit the P&L, it's closer to the number that you had quoted.

So I'd say we're spending consistent with our marketing plan for the year pretty much across the board.

So our teams are executing the plan well, and using the opportunity to be able to drive some innovation behind our brands.

Okay.

And then can I ask about diaper pricing?

We saw in our recent store check a decline in shelf prices for both Pampers and Huggies of about 8% or so.

Is that accurate or is that just Wal-Mart, or is that promotion?

What is that that we're seeing?

I think you are seeing selected retailers take prices down in some categories that they're funding for the most part.

And so you've seen announcements by a number of major mass and grocery retailers that they're going to spend back to try and stimulate traffic in the fourth quarter.

And so that is -- some of it is funded by other promotions that we had scheduled, but that would only fund a portion of the reduction that you're seeing.

Okay, thank you very much.

Thanks.

Our next question comes from Lauren Lieberman with Barclays Capital.

Good morning, Lauren.

Hi, how are you?

Pretty good.

Good, so first thing I wanted to ask about was why you're looking for such a significant sequential deterioration in margins, because margins this quarter as you said across the board were actually the highest we've seen in years.

So what was unique about the third quarter, especially when you look by division, if sequentially you think margins should be down?

Well, I'd say if you look at -- our guidance sort of implies that our margins for the fourth quarter will be consistent with the average year to date for the year, roughly.

And so, you'd say we're going to have some higher commodity costs, it's probably going to be roughly $0.10 a share of drag just from what we're seeing happening in pulp and polymer and oil carrying us forward.

We've gotten all the price probably that we're going to get because most of those price increases went into effect in the third quarter, early fourth quarter of last year.

So we're annualized most of that.

And so you'll have some additional cost drag sequentially and not have any significant revenue uptick to help offset that.

Okay.

So is the pricing lap -- are you expecting an uptick in volume in the consumer businesses simply because of the absence of pricing, or is there something else you're seeing?

Because I'm just having trouble actually getting to the, at least 3% if I assume there's not much pricing in the fourth quarter for organic sales.

Yes, if you looked at our year to date price realization, it's probably at or slightly above what we expect to get for the full year in terms of the dollars that we've already realized.

Right.

I'm just trying to understand the volume outlook for the consumer businesses in Q4.

I'd say it would be pretty similar to Q3, maybe slightly better.

And remember, the fourth quarter of last year has easier comparisons as well.

Right.

Okay.

And then if I can just ask a bit about sort of the long-term, I guess what's the long-term plan when you think about the consumer tissue business, because margins are now fully recovered, so the revenue realization strategy has absolutely worked.

But now we're on to seven quarters of negative volume growth, then it's eight if you say flat or negative.

So what do you want this -- if you look into 2010 and beyond, what do you want this business to look like?

Is it low single-digit volume growth holding these margins?

Is it, we don't care about revenue growth too much as long as we've got a healthy profit out perspective?

I think what we're trying to do is really drive mix and innovation behind our strong brands in segments where we think we've got a right to win.

So looking at driving innovation behind Kleenex facial tissue, Cottonelle and Viva in the US.

We've got a strong position in Scott tissue with a very loyal consumer base, so we'll hold that and we'll drive more innovation and try and shift our mix more toward those value-added segments.

We're doing that in markets like Brazil where we had a lot of our business in the one-ply value tissue segment.

We've been able to shift that to the two-ply premium tissue segment.

And so you take sometimes a volume hit while you're going through that but you get a huge revenue advantage and a gross margin advantage.

And then you've got some room in the P&L to drive innovation and start to sell moist tissue and start to sell other value added things that would go with that.

So each of our tissue businesses around the world has a set of strategies around how do you do that, where have you got the permission to grow a premium segment and bring innovation, and how do you shift your existing capacity to that over time.

As opposed to saying, no, we're going to keep the low end value position, and we're going to go invest and add capacity to grow the premium segment.

We're really trying to play more of a mix game in tissue to reposition our business to a place where we can make more money.

Is it structurally the margins of that business should be higher going forward than they were at the 2000 to 2003 period?

We went through a huge spike in pulp.

Our challenge there is the more premium you can make it, the better you can insulate yourself from that.

Because if you've got really low gross margins, you've got nowhere to go once pulp moves.

Okay, thanks so much.

Thanks, Lauren.

Our next question comes from Jason Gere with RBC.

Good morning, guys.

Good morning, Jason.

Just a question, wondering if you could just talk about, I think right now you have ongoing conversations with some of your key retailers for the planograms for next year.

Kind of hearing a little bit more about some of these retailers pushing private label, so kind of adds on to a question asked earlier, how do you feel going into, I guess into early next year, maybe talking about the innovation bringing out, and in terms of shelf resets?

We've seen, up to this point, in all of our conversations with key retailers, they want innovation on the shelf, and so they're driving to get that.

But they also want a more efficient shelf.

So they may not want you to have four different pack size variants of the exact same product.

They're going to push you to say, can you do that with two, or can you do that with three, so I can make room for more innovation to be on the marketplace.

Then they look at private label as a margin game, and so they're trying to balance velocity and growth and innovation with margin, like so many of the suppliers are.

And I'd say broadly what we've found is we've gotten the distribution we're looking for, for our key innovations.

As you look at the things we've done this year with Scott Naturals, with Huggies Pure and Natural, with our Depend for men and Depend for women, the gender specific launches.

We've gotten all the distribution we've been seeking there, and so far those things are performing about like we would have hoped.

Okay, and then on that same note, clearly emerging markets is the strength right now in the portfolio, but that longer term, three to five, this year you should hit the low end of the range.

As price does roll off, and I guess it goes back to an earlier question, can you just talk about maybe in some of the developed markets, the acceleration that you're anticipating?

Is it really going to be more innovation driven?

Is it going to be a little bit more promotional driven?

Getting, I guess, back into that three to five swing.

The goal is to drive more innovation.

That's where we're really going to build a sustainable long-term advantage.

Promotion, usually you're just kind of renting your consumer.

And so with real innovation, you can build your brand and keep your business a lot longer.

Okay, great, thank you.

Thanks.

Our next question comes from Connie Maneaty with BMO Capital.

Good morning, Connie.

Good morning.

I also have questions about the volume declines in the US in consumer tissue and personal care.

When would you expect to see volumes increase?

Because if my reading of it was right, everything declined with the exception of Depends.

So when do you expect volumes to increase, and what do you think is a good long-term growth rate across the category?

We'll have easier comparisons in the fourth quarter for most of our North American consumer businesses, so we should start to see, particularly in personal care, better volume performance sequentially pretty much across the board.

I'd say in addition to Depend, our baby wipes business is performing pretty well.

You saw some better share performance there, and we'll see what happens in tissue.

We'd say within tissue, our bathroom tissue business was, performed okay in the quarter.

The big weak spots were facial tissue and towels.

So we'll have a better comparison sequentially as we start to head into the fourth quarter.

Okay.

The decline in inventory and days has been very consistent all year and pretty remarkable.

Is this a new level of -- I mean, are these days at 55, 57, are these good numbers for going forward?

Can you run your business with this sort of inventory level?

We hope so.

We're finding out as we speak.

A little bit of the volume soft spot in the third quarter was, we were very aggressive on bringing inventories down in the first half of the year as you noted.

And we were a little tight on customer service in a couple areas in the third quarter, and we're pretty much through that, as we speak.

But one of the things our teams are focused on is, how do we run the business with less inventory, and you've got to have good planning and forecasting processes.

You've got to have an efficient product lineup and you've got to have the right capability to be able to make a broad part of your product line at multiple facilities to be able to do that.

So we're working on all three of those things to ensure that we can sustain our working capital performance going forward.

Do you have specific targets for working capital?

Each business has a long-range target for working capital, looking at where should the receivables be based on their credit terms, looking at each element of inventory and how they can target to get to a certain days of inventory in their system, and then managing payables.

Maybe Mark can elaborate and add a little bit more color on that.

Connie, we've set both near and longer term targets for all the businesses around the world.

If you think about how we progressed this year, really the US and Europe provided most of the working capital jump in the first half of the year.

A lot of the third quarter benefit came from developing and emerging markets, and they've got some really aggressive plans.

You can imagine that their supply chains are a little longer, a little more complex.

We've got actually room to continue to improve in the developing and emerging markets.

And things like terms with suppliers in this environment.

We're not just looking at inventories, but we're looking at customer collections in terms of suppliers.

So each of the businesses in each of the geographies around the world have both near and long-term objectives that they are trying to drive.

Okay, and if I could ask one more question, how much of the third quarter upside would you attribute to things that are not likely to repeat next year?

You know, swine flu related sales.

We gave you kind of the dimension.

That was about 40% of the healthcare volume improvement, and -- but I'd say there are so many big moving parts with what's going on with commodity costs and currency, that it's a difficult question to answer.

I think if you look at the P&L and say, there wasn't anything that was really unusual that was in the numbers, it was a pretty clean quarter from that perspective.

We hope the economic environment is a little better by this time next year, so you'll see a little bit better underlying volume growth.

As to the costs and currency, it seems like it's tough to call that even one quarter out.

So we'll see what environment we're in when we get there.

Okay, many thanks.

Thanks.

Our next question comes from Karen LaMark with Federated Investors.

Good morning.

Going back to the swine flu, the strength in healthcare, do you have visibility to how sustained that volume might be?

How much is stocking up as opposed to using the products and reordering them?

It's hard to tell.

One of the things we've been doing though is working for months now with our key hospital partners to help them plan for what they think they're going to need to be ready for the kind of crisis that we're seeing now.

And many of the more progressive healthcare institutions have done just that.

I think everyone is sort of finding their way through this.

I would guess they'd all say the swine flu has spread faster and farther than maybe it was anticipated, and so we're having ongoing dialogue as to how we can continue to be there and supply our key partners.

So our guess is it will carry into early 2010 at this point in time, but probably begin to wane as we get into the latter part of the first quarter.

We'll just to have watch and see what happens.

Okay, and then separately, how much of the forced savings in your upward guidance to savings is kind of unsustainable if we assume that there's an economic recovery in volumes and proof.

I'm just coming at it with the assumption that some of the savings are volume related or depressed growth related, and therefore they may not be sustainable.

No, usually when we're taking downtime that actually hurts our force productivity numbers.

So we went very aggressive at our force program this year, and in this kind of a weak environment, we were very aggressive with our suppliers, and got probably better than expected negotiated cost savings.

I also think part of our force benefit this year is comparing to last year where we weren't very good on productivity.

We had a lot of unscheduled downtime and maintenance failures and things like that.

So just the comparisons have helped us a little bit this year.

But as we look at our long-range supply chain, we continue to believe we've got a very strong force program going forward for years to come.

Probably not at the same level that we saw this year, more on the range of $150 million a year that we've traditionally done, so we pushed it harder this year and we'll be at the very high end of our expectations.

But we've got a good robust pool of cost savings ahead of us.

Great, thanks very much.

Thank you.

Our next question comes from William Schmitz with Deutsche Bank.

Good morning, Bill.

Good morning.

I wanted to say this for a long time, but you guys are on a roll.

There's no extra charge for the comedy this morning.

So, Wal-Mart's meeting yesterday, talking about big price reinvestment.

What are the implications for you guys in the industry about some of this pretty aggressive commentary?

You're seeing it, not just with them.

Safeway is running ads with the same kind of program.

You're seeing multiple retailers really seeing their sales be a little stagnant, and they're spending price to go try to stimulate demand from a competitive standpoint.

Our focus is more on trying to drive innovation and differentiation, and not compete on price.

We're going to be competitive obviously where we need to be, but that's not a good way to differentiate yourself.

Gotcha.

Then, it seems like you are taking more of a premium tack now, so as an example with Scott towels.

I think Target pretty much de-listed out of Walgreens, dramatically taken back at CVS.

I think the ECB is down to 25%.

Is this a conscious decision by the Company to focus more on the premium tier?

I think what you're finding though is maybe more focus on distribution.

If you were in a Sam's Club you'd find a very good selection of Scott towels.

We've still got good distribution in Wal-Mart.

So what you are finding is that different outlets are deciding how they want to play and carrying fewer brands.

But then you're winning in some places, and you're gaining what you lost at other places.

So we still think there's a role for Scott towels to play in the segment.

It's a terrific towel, and it's in the value segment, and it's one that we're going to continue to sustain, but we're probably going to focus more of our innovation resources on how do we drive Viva, where there's more revenue opportunity, more opportunity to differentiate.

Okay.

So it is kind of a conscious decision because you also talked about driving Cottonelle as well.

So it seems like the whole portfolio is migrating closer to the premium side.

Is that fair?

That's not really a new phenomena.

You can get better margins, and that's where you want to drive more of your innovation and focus.

I would say around the world, too.

We've got a multi-tier diaper strategy in many of our developing and emerging markets, and make good money across those tiers.

Partly it's market driven as well as just our conscious portfolio choices.

Okay, great, thanks very much.

Thanks, Bill.

Next question comes from Alice Longley with Buckingham Research.

Morning, Alice.

Hi, good morning.

I have one housekeeping question, which is your organic growth was 3%.

Can we break that down by geographic region?

In other words, I think organic growth in North America, adjusting out currency and the acquisition, was maybe flat.

Is that true?

Paul can give you some of the details on geographic area.

I don't know if we've got it.

Yes, that sounds about right, Alice.

We can talk in detail separately.

We tend to look at it by segment, by geography.

Yes, I know.

And was it down 2% in Europe, and then up 10% in developing markets?

Yes, that's about right, it was up 10% in developing markets.

Okay, perfect.

And then I only have one other question, and that's on diapers and training pants.

You're saying that your volume was down 3% in -- for Huggies and down 7% for child care, and yet you held share.

Can you explain to me how consumer -- is it consumer purchasing is really down that much?

For those categories?

Or are your shipments worse than your sales at retail?

In other words, are retailers still de-stocking?

No, in training pants what you could also see, we've got Little Swimmers in there, so sequentially, going from second to third quarter, you always see a dip from that standpoint.

As you look at Pull-Ups overall the category is declining some, and so that's part of the phenomenon as moms are staying in diapers a little bit longer.

On diapers, our share was pretty flat year-over-year, and that volume swing could track retailer inventory or level of promotion.

If you shipped in a lot prior to the end of a quarter for a promotion, you could see a swing like that.

I would also say, dollar shares are flat year on year.

We may have, the value segment may have taken a few more -- a little bit more volume.

It could have mix effect, too.

So you may have lost share in volume terms but held it in dollar terms?

Perhaps, but if we did it would have been a very small -- .

Pretty minor.

It's hard to think that people are actually using less diapers in volume terms, particularly because people aren't using less --

I'd say the overall category is pretty flat for the year.

So within a quarter, though, you can see a couple of percent swing either way.

There have been quarters where we had better volume growth and our share was also flat.

And so you are going to see a little bit of noise from retailer inventory chains there in the data.

Okay, thank you.

Thanks.

Our next question comes from John Faucher with JP Morgan.

Hello, John.

Good morning.

Quick question for me.

Obviously, trends came in better than you anticipated over the course of the quarter.

Can you talk a little bit about that incremental $50 million in strategic marketing spending, where that came in relative to what you guys were thinking at the beginning of the quarter?

And I guess that highlights why you maybe didn't take the opportunity to spend a little bit more back.

And then the second question would be related to the gross margin, it's the first time I think in basically seven years you guys have had a 35% plus gross margin.

I realize you are going to see inflation coming back a little bit here, but can you talk to us about sort of an absolute gross margin number and how we should think about that over the next -- not the next quarter or two but really over the next two or three years?

On the gross margin front, we're -- we certainly feel good about being back close to where we were four or five years ago after having seen margins drop for almost five years straight, seeing a nice bounce-back felt good.

So obviously those sustaining gross margins at these kind of levels and even growing beyond that is our long-range goal.

It's a question of how long it will take to get there.

And I think getting -- our GDP would call for gross margin improvement in the 30 to 40 basis points a year and similar improvement in operating margin, and we think that's probably a realistic goal for us long-term to be thinking about.

So that's what we focus on.

In terms of the A&P front, we basically spent to our plan for the year, and so as the quarter unfolded, obviously things were turning out a little better than we thought.

The challenge is if you reinvest you want to reinvest with effect, and get good ROI from the spend and not just dump money into the marketplace.

And so we spent where we thought we had an impact where we could drive innovation and where we had the ability to support the business if we were able to drive volume.

So I'd say the team is executing the plan pretty well as the years unfolded.

Okay, thanks.

Thanks.

Our next question comes from Chip Dillon with Credit Suisse.

Morning, Chip.

Hi, good morning.

And great numbers.

According to my calculations, this was like your best, this will be your best year since 1999.

Hey, thanks, Chip.

Which means it's your best year, too, in your current seat.

Yes.

One thing that struck me was the K-C Professional sequential improvement in revenue, which was quite a jump when you consider the time of the year.

Usually you think of it -- I always think of the second being stronger than the third, but was there anything unusual there that you saw that might maybe be indicative of the economy, and why do you think the revenues jumped so much sequentially there.

We had the Jackson Safety acquisition, which has begun to be blended in there, and so that was a little bit of it.

We continue to see the year-over-year benefit of price, so we had some pretty big price in the fourth quarter of last year.

And so that's going to annualize coming up here, but we've been able to hang on to most of that.

If you look at the US and European businesses, you're still seeing volumes down pretty substantially.

I just was in Europe a few weeks ago with our team over there, and it's not that anybody is losing business to anybody, it's just that the customers don't need as much because of the unemployment level.

They don't have as many people in the workplace.

So I'd say that hasn't changed that much.

Emerging markets ticked up a bit in the quarter, so we saw a better performance in KCP outside the US and Europe this quarter from a volume standpoint.

That might be a bit of the uptick that you saw.

Gotcha.

I don't know if you mentioned this earlier, I got on a little bit late.

But on the pension, you all obviously put a lot of money in this year.

I would guess you've timed the market pretty fortuitously.

I know it's early days and you measure it at year end, and I know interest rates were up, and those all have impacts.

Interest rates are down actually.

I meant down, excuse me, which makes the liability go up, excuse me.

But as you take an early look at next year, can you give us a rough idea?

I would imagine that the level of contribution would -- things stay where they are today, would be substantially lower.

And any guess as to what the actual expensing change would be?

Yes, if we -- continuing at the kind of rate that we've earned this year and with the money that we've put into the plan and where we think the discount rate will fall, we would have substantially lower contributions to the US plan in 2010.

Remember, we've also decided to close the US plan at the end of this year, and so that further helps the liability a bit and all that has been disclosed in the Q.

And going forward, you can kind of do the math with what's in there.

You expect to see a drop in pension expense, and we'll give you more color on what that looks like in January.

Okay.

And then just finally, could you talk a little bit about how you see next year, if we froze things today, you gave us your sort of pulp outlook for the fourth quarter, and what you expect your costs to be.

If we assume the dollar stayed at these levels and didn't go up or down, do you think that the pulp fiber headwind is bigger than the currency tailwind?

Is it too early to tell?

How do you look at that for going into 2010?

Well, there's some -- again, as has been the case over the last number of quarters, big moving pieces.

So it seems like every day they are moving a bit more.

So we'll give you more specific guidance in 2010.

At this point in time, we think we've done the right things in 2009 to give us the momentum that we need to thrive in whatever environment we're going to face next year.

So we think we've got the organization where we want it to be, we're stepping up our innovation in key areas, and so we think we'll enter the year with a decent level of momentum.

Gotcha.

Thank you.

Thanks, Chip.

Our next question comes from Andrew Sawyer with Goldman Sachs.

Good morning, Andrew.

Good morning, guys.

Just wondering, since we touched a lot extensively on the tissue and personal care businesses, I was wondering if you could touch a bit on the healthcare deals that you guys have done.

We're starting to see you broaden beyond into low-end medical devices.

Is this a strategic shift?

Is this a place where we expect to see you guys invest more capital going forward.

I was wondering if you could just frame up what the thinking is on some of the deals that you're doing there, thanks.

Sure, the Baylis deal is one that, interestingly, we've been selling those products in the US as their exclusive distributor since 2001.

So we really acquired the US distribution part of Baylis with the Ballard acquisition back in 2001.

And so that license was going to expire at the end of this year.

Baylis wanted to sell the rest of their business, and so we looked at that as an opportunity to basically retain the value of what we had and even integrate it further into our business.

So that one was a very easy logical extension and should be a pretty straightforward integration.

On the I-Flow deal, because it's subject of a tender offer at the moment, I can't say too much about the integration, but it is consistent with our view to continue to extend our business in the medical devices.

We think there's substantial capacity in the I-Flow sales force that we can continue to bring a broader bundle of innovation to and should help us increase our scale and our call point access at the key physician call points.

So we're excited about both deals, and we think they're on trend and consistent with our healthcare strategy.

Just coming from a broader perspective, healthcare is only 6% or 7% of your revenues now.

Is this a business that's going to be 10% plus of your revenues in five years if you pursue a more aggressive acquisition strategy?

I think this is the first time in awhile that we've actually seen some deals that a strategic buyer can get near, because there aren't many private equity guys around.

So in this environment, we may see some opportunities.

Our healthcare team will be busy for awhile integrating these two deals, and then we'll see what else comes along.

I think 10% might be a stretch, but we're certainly looking to grow that as a percent of our mix a bit over time.

All right, thanks a lot, guys.

Thanks, Andrew.

Our next question comes from Lauren Lieberman with Barclays Capital.

Thanks.

I didn't expect to quite get back in.

Just quickly then on pricing dynamics and the away from home business.

So was that also under the halo where you said earlier the pricing sort of rolling off, you're lapping everything, but there was pulp going the wrong way?

Are you still going to be taking more pricing in that away from home business?

We have contracts that roll over every day in that business, and so we're still getting some price, but it's at a much lower level, and we'll see as, we have a lot of things that roll over in December, and we'll see how that plays out.

What I'd say at this point is that obviously the strength in secondary fiber helps us as we're going through this kind of a pricing discussion, and we'll see if it will help us get a little bit more price as we push through the rest of the year.

Okay.

And then just -- I don't know if you will share this, but what's the rough geographic mix of that business, US, Europe and then developing?

Paul can probably give you a broad -- most of it is in US and Europe.

The D&E is still a pretty small percentage but-- .

Yes, D&E is something like 15% or 20% of the total business.

And then is US and Europe split half and half the rest?

No, it's much more exposed to North America than Europe.

But Europe is bigger than D&E?

Yes.

Okay, thank you.

Our next question comes from Linda Bolton Weiser with Caris & Company.

Hi, Linda.

Hi, I was curious that your expected annualized savings from the organization optimization is just a little bit lower than originally stated.

Is that because the headcount reduction is less?

I can't remember what you said in terms of -- was it 1,600 positions before?

I think some of it, it's fine-tuning estimates, particularly in D&E, getting down to actual salaries and so forth of who is leaving.

So I would say that's about all I would read into it.

Basically we're executing the plan as we laid out.

Okay, thanks.

Okay.

Our next question comes from Connie Maneaty with BMO Capital.

Hi, just one follow-up.

In the fourth quarter you mentioned you were going to have specific initiative on consumer tissue.

Can you talk a little bit about what that is?

I mean, I don't think we said a specific initiative.

We continue to spend money promoting Cottonelle and driving that business forward.

We've got some innovation coming, probably be more like first quarter in some of our other tissue categories.

We're rolling out our facial tissue improvement as we speak across the main line of facial tissue, but other than that, I'm not aware of anything specific that we've talked about.

Okay, thanks.

Thanks.

At this time we have no further questions.

All right, thanks, David.

I'll turn it over to Tom for a quick closing comment.

Well, once again, we had a terrific quarter.

Our team is executing well.

We feel great about the earnings growth and cash flow and margin improvement, and we continue to appreciate your support of Kimberly-Clark.

Thank you.

Thank you.