金百利克拉克 (KMB) 2010 Q1 法說會逐字稿

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

Instructions for asking questions will be given at that time.

I would now like to turn the call over to Mr.

Paul Alexander.

Thanks, David, and good morning everyone.

Welcome to our first 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 is the agenda for the call.

Mark will begin with review of our first quarter results.

Tom will then provide his perspective on the results and discuss our 2010 outlook.

And we'll finish with Q&A.

For those wishing to follow along we 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 will be making forward-looking statements during the call.

There can be no assurance that future events will occur as anticipated or that our results will be as estimated.

Please refer to the risk factors 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'd also like to point out that we will be referring to adjusted 2010 results and outlook.

Both of which exclude a one-time loss in the first quarter of 2010 for the remeasurement of the local currency balance sheet in Venezuela, as a result of the move to highly inflationary accounting.

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

For information on 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'll turn it over to Mark.

Thanks, Paul.

Good morning.

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

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

First, organic sales growth was 2% including continued strong results for KC international and our Healthcare business.

Second, adjusted gross and operating margins each improved about 200 basis points leading to a 16% increase in adjusted earnings per share.

Third, we continue to be focused on managing those factors we control.

Delivering strong cost savings, holding down working capital, and increasing investment behind our brands.

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

Sales increased about 8% to $4.8 billion, including a 5 point benefit from currency and 1 point of growth from acquisitions.

Organic sales rose 2%, as higher net selling prices and improved sales volumes each contributed 1 point of growth.

Now, let me turn to the top line for each of our segments.

And for this purpose I'm going to focus my comments on organic sales, setting aside the impacts of currency and acquisitions, which are included in our news release.

In Personal Care organic sales increased approximately 3%.

Sales volumes were up 3% and higher net selling prices contributed 1 point of growth while product mix was off 1%.

In North America, organic sales increased nearly 3%.

Sales volumes were up about 2% and higher net selling prices driven by the timing of promotional activity contributed an additional point of growth.

Feminine care volumes increased double digits due to the strong initial shipments of our U by Kotex innovation.

In addition, baby wipes and child care volumes rose mid single digits.

Adult care volumes advanced 3%.

Huggies diaper volumes were down about 5% including the impact of a lower level of promotion activity compared to last year.

Now, moving to Europe, Personal Care organic sales were down about 3%.

Net selling prices fell approximately 2%.

While product mix and sales volumes were down slightly.

For KC international Personal Care organic sales rose about 6%.

Sales volumes were up 7% while product mix lowered sales by about a percentage point.

We delivered broad based volume growth in these markets, highlighted by strong performance in China, Turkey, south Asia and Latin America.

Turning to consumer tissue.

Organic sales were down about 3%, driven by lower sales volumes.

In North America, organic sales were down about 4%.

Net selling prices increased more than 2%, mostly from the sheet count reductions we took on Cottonelle in the first quarter, to improve net realized revenue.

While volumes declined nearly 6%.

Volumes were impacted by sheet count reductions, a mild cold and flu season for Kleenex and consumer trade down in paper towels.

Switching to Europe, consumer tissue organic sales were down more than 5% in a continued competitive environment.

Net selling prices fell approximately 3% and sales volumes were down about 2%.

For KC international consumer tissue organic sales increased 2% driven by higher sales volumes.

Moving to KC Professional and Other.

Organic sales were up 4%.

Net selling prices rose 2%, mostly in North America, Latin America, and south Asia.

And product mix improved 1% as our global KCP team continues to execute strategies to improve revenue realization.

In addition, organic sales volumes were up 1 point in the quarter, reflecting a mostly stable environment in KCP's categories.

Lastly, Healthcare organic sales were up 8% coming entirely from higher sales volumes.

Healthcare organic volumes were up in several product categories including double-digit growth in medical devices and exam gloves.

In addition, approximately 4 points of volume growth came from increased global demand for face masks as a result of the H1N1 flu virus.

Now, let's shift to profit, margin and cost savings.

Adjusted gross March ws under 34.5%, that's up 210 basis points compared to a year ago.

That's the sixth consecutive quarter of year on year improvement.

The benefits from top line growth, cost savings, less production curtailment than last year and lower pension expense allowed us to overcome about $70 million of input cost inflation in the quarter.

First quarter adjusted operating profit rose 21%, and adjusted margin increased 180 basis points to 15.8%.

This was achieved despite a $60 million increase in strategic marketing investment.

In addition, selling, research and administrative expenses were up in the first quarter driven by increases to support future growth in KC international and the I-Flow acquisition.

Results also included a lower level of currency translation loss -- transaction losses in other income and expense.

Now, turning to cost savings.

We're off to a great start for the year with total FORCE savings of approximately $80 million.

We continue to deliver improvements in sourcing and supply chain activities, and our European business is doing a terrific job and they had a great quarter in terms of cost reduction.

Given first quarter performance, and the need to reduce costs further as a result of the input cost environment, we now expect to deliver savings of $200 million to $250 million for the year, that's an increase of $50 million compared to our previous target.

We also realized benefits of about $35 million from the organization optimization initiative we completed last year.

Now, let's take a quick look at first quarter segment operating margins.

Personal Care margins remained very strong at just over 22%.

Consumer tissue margins were back up into the double-digit range, although down from last year, mostly from cost inflation.

KCP margins of nearly 15% improved nicely year on year driven by higher selling prices and cost savings.

Lastly, Healthcare margins remain healthy, in the mid-teens.

Now, switching to taxes.

The adjusted effective tax rate in the first quarter was 34.4%.

That's above our full year target range of 29 to 31%.

That was driven by a one-time non-cash charge equivalent to $0.05 per share for the change in the Medicare part D subsidy in conjunction with recent US Healthcare reform.

As a result, our full year 2010 adjusted tax rate is now more likely to be in the upper half of our guidance range.

Now, moving to cash flow.

Cash provided by operations was $464 million, compared to $692 million in the year-ago period.

The decline was driven by a lower level of improvement in working capital, higher pension plan contributions, partially offset by higher cash earnings.

Our primary working capital position remains strong.

Our cash conversion cycle was about 51 days in the first quarter, that's down more than seven days compared to 2009's full year average of 58 days.

Contributions to our defined benefit pension plans in the first quarter totaled about $175 million, compared to $90 million last year.

We continue to target full year contributions of about $240 million.

Looking forward, I expect our cash generation to build as the year progresses.

Regarding share repurchases, we bought 2.5 million shares of our stock in the quarter, at a cost of about $150 million, that's in line with our plan to repurchase $500 million to $600 million of stock this year.

So that wraps up the financial review.

To recap the quarter.

We achieved strong organic sales growth in KC international and Healthcare.

We're off to a strong start with our cost savings.

We invested to support our brands and innovation and we delivered strong improvements in adjusted margins and adjusted earnings per share.

Now I'll turn it over to Tom.

Thanks, Mark, and good morning everyone.

I'll give you my perspective on our first quarter results and then I'll review the outlook for the rest of the year and then as usual we'll move on to get to your Q&A.

So in short, we had a solid start to the year in the first quarter and we're maintaining the right focus on our long-term success.

So let me begin and cover our first quarter results.

Looking at the headline numbers our organic sales were up about 2%, volume growth was a little below our full year target.

We still expect that performance to improve later in the year, as our innovation and growth initiatives get further traction, and the economic environment continues to slowly improve.

On the bottom line, we delivered a 16% increase in adjusted earnings per share, and that was spurred by a 210 basis point improvement in adjusted gross margin.

As Mark just mentioned our focus on cost savings and the benefits from last year's organization initiative were important contributors to our improved bottom line results.

We also made progress in a number of other important areas in the quarter.

So we're off to a very good start with our plans to continue to strengthen our brands.

We launched some great new innovation including U by Kotex, Kleenex hand towels, some new Depend undergarments and Poise thin comfort liners and pads.

So it's early for all of these.

The launches are going well and we're encouraged by what we're seeing so far.

We also supported our brands and our product initiatives with a very healthy $60 million increase in strategic marketing spending.

And that puts us right on track with our plan to raise strategic marketing spending at a faster rate than sales growth.

Second, we continue to deliver on our targeted growth initiatives.

Our Healthcare organic volume growth was very good and that included double-digit growth in medical devices.

As many of you know, that's a very high margin, high growth space that our team continues to focus on expanding.

In addition, volumes increased 5% in Kimberly-Clark international and that's our best volume growth performance in nearly two years.

We also had excellent growth in key areas like Personal Care in China and in Latin America.

Then third, we continue to deploy our cash flow in shareholder friendly ways.

In February we raised our dividend by 10% which helped us maintain our top tier payout and we repurchased a meaningful amount of Kimberly-Clark stock in the first quarter.

So all in all, we made progress on a number of fronts and I'm encouraged by our execution in the quarter.

So now let me turn to the outlook for the year.

Overall, though input costs are increasing, we are committed to the long-term success of Kimberly-Clark and to delivering solid results in the short-term as well.

While some of our key planning assumptions for 2010 have changed in the last three months, we are maintaining our previous guidance for adjusted earnings per share for the year.

As we said at our Investor Day last month, we'll continue to further strengthen our brands, pursue our targeted growth initiatives, and reinvest for future growth.

We've got a number of near term innovations coming including the Huggies jeans diapers, improved GoodNites underwear, a new ChemTech wiper and KC Professional and several innovations in KC international including an upgrade to our Huggies diapers in China.

We'll support our brands, innovations and growth initiatives with strong marketing programs and we continue to expect that strategic marketing spending will rise at a significantly faster rate than sales this year.

We'll also invest to further improve our research and customer development capabilities, both of which are key to delivering sustainable growth.

Now, in terms of the external environment, given input cost changes in the first quarter and expectations for additional near term increases, particularly with pulp, we're now expecting significantly higher cost inflation in 2010 than we previously estimated.

As we mentioned in this morning's news release we're now planning for cost inflation to be $600 million to $700 million this year.

That's about $300 million higher than our assumption that we made in January.

So as a result, we're aggressively looking for ways to improve our revenue realization.

Mark mentioned that we've already implemented sheet count reductions on our tissue business in North America consumer.

In addition, KC professional will be initiating a price increase in the second quarter in North America and in the third quarter in Europe.

Finally, we're raising prices in consumer tissue in most major geographies around the world.

So all told, we now expect that higher net selling prices and improved mix will benefit sales by about 1% and operating profit by about $100 million.

In addition, as Mark shared with you we raised our forced cost savings target by $50 million for the year.

And will continue to tightly control our discretionary spending.

These actions combined with the flexibility we built into our original 2010 plan will help offset the higher than expected input costs.

Putting it all together, we continue to target adjusted earnings per share in 2010 in a range of $4.80 to $5 a share.

With what we know now it's more likely that adjusted earnings per share will be toward the low end of that range.

All in all, we're managing well those factors we control in the near term while focusing on doing what's right for the long-term.

To summarize, we're off to a solid start to the year.

We're continuing to invest for our future growth.

We're confident that successful execution of our global business plan strategies will drive sustainable growth and shareholder value for many years to come.

That wraps up our prepared remarks.

And we'll 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 Jason Gere with RBC.

Good morning.

Good morning, Jason.

Can you talk a little about some of the pricing that you're taking in consumer tissue, you said around the world.

Can you talk about what pertains to domestic markets right now?

And then just the bigger context I guess is you guys are still talking about volume growth of 2 to 3% for the year and in the past taking pricing or desheeting, the focus on revenue realization actually led to more volume decline.

I guess maybe talk in context about the strength of the consumer with some of the new initiatives coming out now and when do you see that kind of playing through?

Thanks.

Sure.

On the tissue front, I'd say broadly every one of our tissue businesses, both consumer and professional, are looking at different ways to improve revenue realization.

So whether it's through changing promotional price points, whether it's through list price changes in the KCP world, contract price increases, so all of those levers are being looked at in each individual market to determine how to get the best revenue realization, and so list price is one option.

But there are -- we're looking at the full range of the pricing menu to decide what's the most effective way to hit a strategic price point and minimize the volume loss that you'd have in that kind of a scenario.

And then on the volume going forward, I'd say in the first quarter we had a lot of innovation launched.

There's a lot more yet to come.

Much of it was launched late in the year so things like Kleenex hand towels really started to be on shelf in March.

U by Kotex shipped at the end of the quarter.

So I feel like we're just kind of getting started and so far, early days, that seems pretty good and we would expect to see the momentum build on the volume front as we get into the year a little farther.

Just talking about on the emerging markets, I think on your Analyst Day you were talking about exceeding the market growth 5 to 7.

I know there are some tough comps.

I think they do continue as the year progresses.

So I was just wondering how should we look at that going forward?

Are you seeing acceleration of market shave, improving category growth, market sentiment, et cetera?

Can you put some color around that?

Yes, with the volume growth in the first quarter of 5%, we'd say that broadly that's at least as fast as the market's growing, so we'd say we at least held share, maybe picked up a little bit of share in some markets.

Continuing to see pretty strong growth in China and Russia was a little slower this quarter as the competitive environment picked up a little bit.

Latin America had another solid quarter for us.

So markets like Brazil, the region continued to do well.

So I'd say broadly China and Latin America were real strong points for us this quarter.

Okay.

And then just last question, I'll jump off.

Can you just talk about the initial consumer reaction to U by Kotex.

Obviously the sell-in was good.

And what's going on in the competitive front.

I think one of your competitors was looking to restage one of their brands.

Just wondering about the category in particular and what we're seeing.

Yes, I was in some stores a couple of weeks ago and the product looks great on shelf.

So we're getting the distribution that we were looking for.

And so lot of the marketing support just now is getting turned on.

I will tell you, though, walking down the aisle, I think everyone else in the category was running a buy one, get one free to try to make sure that they hang on to their loyal consumers.

We don't expect that we're going to walk in and just take huge chunks of share but it's great innovation, it's great product and packaging and we're going to do a fantastic job of marketing it.

So but again, this is a category that's got very loyal consumers and we know we're going to have to earn every share point we get here.

Next question comes from William Schmitz with Deutsche Bank.

Are you on allocation at all in diapers.

We've heard some rumblings that the super absorbent polymers are pretty much unavailable now.

No.

We're no on allocation.

Super absorbent is tight so we sent a letter to customers that have said super absorbent's tight.

We expect to be able to support our business plan for the year but because of it's really acrylic acid.

There was an explosion at an acrylic acid plant late last year and ten a unplanned outage at another supplier.

That's the base monomer that goes into the production of super absorbent.

We expect that to be -- it's global and to be with us for most of the year.

But at this point, we've got what we need contracted to be able to support our business plan for the year.

Have you quantified how much of the sort of softness in the US Huggies business is related to that?

I imagine you pulled the promotion because there's just not enough product to sell.

It really didn't have anything to do with the super absorbent issue in the first quarter.

It had more to do with timing of innovation and launches.

We had more stuff that happened in the first quarter last year and we've got more with the jeans diaper and other things rolling in second quarter.

We've got more activity coming on the second quarter.

That also lines up a little bit better with where we expect competitive activity to be occurring.

Okay.

Great.

And then just on Venezuela, are you translating at the parallel rate or the official rate now?

We're translating at the parallel rate now.

Okay.

And that was an option, right?

You could have done it at the official rate.

Why did you choose the parallel rate?

We look at where we think we're actually processing transactions and there hasn't been any exchange at the official rate for at least a quarter or two.

And so we think basically the business is being run at the parallel rate.

Okay.

Great.

Then one last one, if I could.

How are are you looking at sort of the difference between sort of working capital and maximizing capacity utilization?

Because obviously the working capital's a little bit worse than we thought this year.

A lot of it had to do with building up inventory and running the factories.

So how is that going to play out as the year progresses?

As we look versus our target for the year, we're actually on track or even slightly ahead.

We've done a better job on payables as we progressed through the quarter.

Receivables are basically in control and inventories are just a touch higher but some of that related to some inventory builds for some innovation launches and so at this point I'd say we're broadly on track for our working capital plans.

I don't know, Mark, if you want to give any additional color.

I would agree with that.

We're off to a good start for the year and on track for the balance.

Okay.

Great.

Thanks, guys.

Thanks, Bill.

Our next question comes from Ali Dibadj with Sanford Bernstein.

Hey, guys.

Good morning, Ali.

Wanted to push a little bit on pricing, broadly, if I could and kind of the strategic decision you're making it sounds like on really prioritizing price realization versus maybe more volume growth and potentially some share growth and I guess I'm trying to get a sense of how you're thinking about when price realization is being pushed too hard.

Kind of beyond that, kind of that efficiency frontier or some sort of marginal return given the operational leverage you get by getting more volume to the system.

Kind of that balancing act.

I think Ali, the thing about pricing, we're starting with the consumer to see how they buy the category, how they shop the category, what they're shopping, roll price, package price, do they do the sheet count math and looking at that by category across the spectrum.

And then assessing what's the right way to structure the category to get the revenue that you're looking for and clearly in the case of Cottonelle with our ability to build bulk with our Octet technology, we've got more flexible to do things with desheeting and generate revenue that way and still hold the strategic price points in the category.

That doesn't mean that we won't take list but it's one that you really start with the consumer to see how they shop the category.

Well, but so you say they're shopping the category kind of across but if you look -- I guess I'm trying to get a sense as well in that context of where you expect to deliver the price realization.

You mentioned consumer tissue.

A moment ago you mentioned KC Professional.

If you look at some of the at least US consumer businesses would suggest, you didn't have a Huggies promo and volumes were down 5%.

You mentioned there's some innovation drag on the compares from last quarter but it doesn't feel like you'll be able to take pricing in Huggies.

Consumer tissue remains under pressure.

I don't know if you're going to be able to take pricing list, or reduce promotions, you may be able to desheet.

So it feels like it's a lot of non-US perhaps, nonconsumer and a lot of desheeting which is where you're getting your pricing.

I don't know if that's the right conclusion but that's where I'm ending up.

Yes, I'm not sure that you're in the wrong spot there.

I'd say certainly where you've got strong shares, you're going to be more aggressive on price, and can be more aggressive on price in markets like Mexico, for example, they've done a great job of driving revenue realization.

Markets like Korea where we've got strong market shares across the board, you can be a little bit more aggressive on price.

I think tissue will be the area where you'll see more price because that's where quite frankly most of the cost impact is occurring.

From a Personal Care standpoint, even though inflation's higher, it's not probably yet to the point that you'd see industry-wide price increases.

You'd see it probably happening more with trimming of promotional activity in some markets.

So I'd say tissue is probably the place we're going to look closest from a list price standpoint, really across both consumer and professional this year.

And so does this assume that competitors follow and maybe in that context some update on competitive would be helpful.

Yes, I'd say that you've generally seen -- KC Professional would be a good example.

I think all of the major competitors in KC Professional have led or followed price increases this year, and so -- and did the same thing last year.

And so it's not clear who is leading, who's following but it's happening pretty broadly across the marketplace.

There was a January price increase, a February price increase, now there's one we're going into effect in May in KC Professional.

So the market's been pretty orderly about as secondary fiber's gone up, you've seen list price taken in the marketplace at the contract level, in addition to at the list level.

Consumer tissue, you've seen some desheeting, that's happened both on the premium brands and I think everybody's participated in that to pretty similar percentage extent and there's recent news in the marketplace of list price increase by one of the competitors and that's obviously information that we're analyzing and we'll decide what our response is in the near term.

Doesn't sound like Personal Care is a hot priority.

Yes, we're not seeing a lot of Personal Care price increases at this point and I think, again, most of the cost pain is focused on the tissue side of the equation.

Okay.

Thanks very much.

Thanks, Ali.

Next question comes from Chris Ferrara with Bank of America.

Hey, guys, I just wanted to ask about the $60 million in increased strategic marketing, right, I guess a lot of the media probably hasn't yet started for many of your innovations.

If that's right, where is the incremental $60 million going?

Especially since Huggies seems like it had a pullback.

Could you give a little more detail on that?

Yes, I mean, about a third of it is in the international markets, which is roughly what our percent of sales.

So it's being spent kind of proportionately there.

And then in the US, you'd see more being spent on Personal Care and part preparing for the U by Kotex as well as some of the Depend and Poise activity, and tissue was -- we shifted the mix a little bit, did a little bit more advertising and a little bit less couponing in the first quarter.

So how does that play out as the year goes on?

I mean, I guess the media end of it will probably pick up as your initiatives -- as we get further into them and I guess do you think the run rate -- how fast you're pushing strategic marketing to sales, does that accelerate as we move further through these launches?

Well, if you compare to last year actually, our total media spend in the first quarter was pretty similar to what it was in the third and fourth quarters last year.

There was a step-up that occurred that's continuing.

So I think for the -- for the year, we'll still invest in strategic A&P at a faster rate than sales but probably the rate of increase will be a little slower as the year progresses.

That's helpful.

And I guess just the other one.

You guys cited higher selling research and admin to increase and support future growth in KC international.

You talked about research and customer development capabilities.

Can you give a little more detail there as far as maybe what specific countries, regions, businesses you guys are looking at where you're making specific growth investments?

China would certainly be one.

We're adding sales capabilities.

We're going to more cities.

Russia would be the same kind of thing.

Another impact on our SG&A was the I-Flow acquisition as well where we brought in a heavier SG&A load which we knew that, very high gross margins but a very high selling expense effort that caused some of the comparisons to be a little different as well.

Thanks a lot.

Thanks.

Next question comes from Cheryl Glazerman with UBS.

Hi, it's Gail Glazerman.

Can you talk a little bit about what you're seeing in terms of consumer behavior.

Over the past few quarters you've talked about things about buying big multi-packs at the beginning of the month and smaller packs later in the month.

Are you seeing any sort of normalization or has that trend continued?

We look at consumer surveys every month and I'd say CEO mom is pretty stable at this point.

She hasn't gotten a lot more confident but it's not getting worse.

So if you compare to first quarter last year, people were a lot more worried about their jobs, they were a lot more worried about losing their house so that got sequentially better as the year progressed.

I'd say it's pretty stable at this point in time.

You look at private label shares as a proxy for example, they're not -- they're flat to down from where they had been in most categories, sequentially, but they're still higher versus year-ago.

So again, we're not seeing further shifting but we're seeing the consumer still pretty cautious out there.

Okay.

And how does that translate into your outlook for the paper towel markets?

I guess that's been one area that's been hit pretty hard.

Towels is probably the category where we've seen the biggest shift in private label.

I think private label shares are up about 3.5 points year-over-year and so that's one that obviously we've got to focus on showing the value to the consumer and why buying a better paper towel will actually cause you to use less over time.

And so we've got some activity around that for both our Viva brand as well as our Scott towel brand.

Can you talk a little about what your outlook is for birth rates?

I guess we've seen maybe some changes given the recession and just how you see that playing out over the next few years.

In the US, the birth rate had dipped a bit last year.

We're seeing some early signs that it may be improving a bit, so we're always happy to celebrate new babies with our Huggies team and we hope that that's a trend that continues.

Okay.

And I mean, looking at diapers, the U by Kotex is looking at trying to kind of get in early and capture new users.

Is there anything that you could do or change in your behavior in marketing Huggies that might help you get in earlier with some of the new moms.

Yes, actually that's a great point.

We are spending a lot more time and attention on capturing mom prenatally and really -- and strengthening our newborn program so we can capture that consumer right at the start and then hold her all the way through her child raising experience.

So yes, we're doing a lot more work around the world at the point of market entry with Huggies to make sure we've got a very good newborn product, that we've got good marketing programs and are able to get access to moms so that the nursery is stocked with Huggies right from the start.

Okay.

Just one last question.

Anything you can say about PG's diaper roll-out and how much that might have played in the Huggies volume during the quarter?

Didn't really get to start to shipping that until late in the quarter so I don't think it had much of an impact.

The impact was probably more promotional timing year-over-year and we would expect that to normalize as the year progresses.

Okay.

And any early feedback in the first -- in the second quarter?

I mean, pretty early days yet.

So I mean, I'm confident proctor will execute it well and will spend aggressively.

We've got a very good innovation plan out there as well.

We feel good about our relative product performance and I think the good news for moms is that you have both major brands driving lots of innovation and that will make it tougher on the private label guys.

I guess this is more of a question for them than you.

The new product is much more dependent on SAPs than Huggies at this point; correct?

My guess it that it would be but you're probably right, they would know more about what their suppliers are telling them than I would.

Okay.

Thank you very much.

Thanks.

Next question comes from Wendy Nicholson with Citi Investment Research.

Hi.

Hi, Wendy.

My first question has to do with the quarterly flow of earnings this year.

I guess I'm a little worried that the second quarter could be particularly light, given that you did a bunch of the pipeline fill in the first quarter on the Kotex launch and I assume some of the pricing stuff you're doing isn't going to show up until a little bit later in the year.

So is it right to think that the second quarter both from a top and bottom line perspective is probably going to be the weakest of the year?

We're not going to give quarterly guidance.

We're really just going to give annual guidance but I think you're focusing on the right factors.

I'd say that you're directionally headed in the right place.

Got it.

Thanks.

Wendy, this is Paul.

The only thing I would add there, remember we did have a $0.05 hit on the tax rate in the first quarter and we wouldn't expect that to continue.

Good point.

Totally fair.

That's fine.

My second question has to do looking at the tissue business and I feel like whatever we talked a lot about this, but I mean I guess the good news is that the tissue business as a percentage of your operating profits has gone down a lot over the last few years and just by virtue of the fact that that's less of an emerging market business than Personal Care and you've got all this good stuff going on in Healthcare.

Just by its very nature that will continue to decline as a percentage of your operating profits.

Given just how tough that category is and seems to be increasingly difficult from an innovation perspective and private label seems to have structurally changed its position in US.

I know you made the decision in the US to exit the lower end segment of paper towels a while back but would you think about doing anything bigger when it comes to the tissue business i.e.

it looks like P&G made a good decision in getting out of Western Europe.

Do you think without that as a gosh tissue is just an increasingly difficult business to add value to and to make money in?

Is that going too far or being too hopeful, maybe?

I'd say in the near term our challenge is to make sure our tissue business earns the cost of capital and that we're driving innovation that enhances gross margins in that segment versus where we're at today.

I'd say broadly we're doing that as we're shifting the mix of tissue to higher margin options.

But it is a challenging category, particularly with pulp at $1,000 a ton.

But it's also one that is a core for a lot of our business and other markets.

So as we go into a customer in Brazil, the fact that we've got a strong tissue business and a strong Personal Care business helps us in a lot of other ways from an efficiency standpoint.

So at this point, we're comfortable with consumer tissue in the portfolio and we're focused on how do we get even more value out of it than we're getting today.

But is it fair to say that in the newer markets like China, correct me if I'm wrong but China is basically exclusively a diaper and a fem care market that tissue is not something that you're going to promote there and that's not as much of a priority for the truly emerging markets?

That's fair.

Tissue has got more of a local competitive structure where you've got local players.

In China this a player like APP and [Haingon] that really are already there and have got strong positions.

We're actually there with a profitable facial tissue business that actually provides some cash and margin to help fund growth in our personal care businesses.

So it is paying a role in many of the markets while we're there to provide cash and margin tools, to support growth in some of our other categories.

Next question comes from Alice Longley with Buckingham Research.

Good morning, Alice.

Good morning.

One of my questions is a follow up to Wendy's about the different quarters of the year and again I know you don't give quarterly guidance so much.

Wouldn't the raw material cost pressure be worse in the second half than the first half including the second quarter?

Well, we're expecting pulp to peak in the second quarter and to ease a little bit into the balance of the year.

So I think that's probably the biggest driver of the cost sequencing.

And that's true even more what you pay, as opposed to what the spot prices are?

That's correct.

Okay.

So the costs are worse for the year the in the second quarter.

Okay.

And then on volume expectations for the year, are you still holding to 2% to 3%?

Yes, I think that's a very reasonable expectation.

We're seeing the uptick in KC international in the 5% range in the quarter.

We expect KC Professional to get a little better as the economy improves a bit later in the year.

Healthcare continues to be doing well and obviously diaper volumes were a little light in the first quarter.

We would expect that to turn around later in the year.

So I think there's lots of factors that we would see that would say achieving that 2 to 3% volume growth for the full year is a reasonable objective for us.

Okay.

So in Healthcare you don't see any falloff in volume in the tough comps with concerns about swine flu less?

Yes, I'd say -- well, we had some good volume growth last year from H1N1.

That likely is not going to repeat.

But we are also seeing very solid growth in our medical devices business and would expect that to continue.

So certainly won't be probably as strong as the first quarter but I think some of the other positives will help offset that.

Okay.

And the Huggies down 5% here and 4% in Europe, so your idea is those numbers will look better for the year, despite what Proctor's doing?

Yes.

Okay.

And the same for North American tissue, down 6.

Do you think that number will look better for the year?

Yes, I mean, clearly we had a bigger impact of desheeting in the first quarter and so some of that will be -- that comparison will be with us for the year but we've also got some innovation launching and we would expect to see some of those things kick in and help volumes improve a bit as the year progresses.

Okay.

And then my last question on KC international where your volume overall was up 5, what was your price mix for international overall in the quarter?

Paul, have you got that handy?

Yes.

Price was up about 1% and mix was flat.

For international?

Yes.

Okay.

Thanks.

Thanks, Alice.

Your next question comes from Andrew Sawyer with Goldman Sachs.

Hey, guys.

I was wondering, Tom, you alluded to evaluating the mid single digit price increase that Georgia Pacific flowed out there mid year.

Is the evaluation process geared more around getting more visibility around what pulp will do in the second half or does it relate to what private label or Proctor & Gamble does from a pricing perspective?

How are you guys thinking about the various factors in evaluating that?

First of all it's to try to get clarity on what's actually happening at almost a by code level and what's going to happen to promoted price points in the category and so part of that is really understanding what's going on in the marketplace.

And then developing from that what's our strategy going to be, what do we have coming from innovation standpoint, what strategic price points do we look at from our consumer research and then taking all those factors and deciding what's the right course of action to take.

On the pulp side, I guess you're expecting retreat across the second half of the year.

What's the kind of thinking in terms of where it could be year-end and heading into 2011?

Our forecast has it ending the year at around $900 a ton.

Peaks at a little over $1,000 in the second quarter.

Obviously, when pulp moves if often doesn't move in small amounts, there's lots of reasons to believe if more capacity comes online and Chinese buying slows down that it could go down faster than that but at this point we take the outside forecasts and look at three or four different external views of the pulp market and basically more or less average those in our thinking and try not to outsmart the market.

That makes sense.

Then just completely switching gears, on the Rest of World growth rate kind of being in the mid single digits organically, a bit of a slowdown from the double digits.

I know you talked about China and Turkey be stronger.

Were there markets where things were a bit weaker or was there something going on in Korea or Australia that impacted that number?

The encouraging thing, there was a lot more volume and a lot less price.

The big shift has been that we spent last year really driving a lot of price in those markets and seeing 5% volume growth I think is a pretty healthy sign.

The one soft spot we said was probably Russia was a little softer than we had seen but there's some reasons for that and so we're focused on getting those on track.

But overall, I was pretty happy with the volume performance in the first quarter.

So more a function of just having relatively low elasticities?

In terms of--.

The price elasticities.

Yes.

Thanks a lot for the time, guys.

Thanks.

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

Hi.

I was wondering if you could comment on the mix element in Personal Care and tissue.

Personal Care, it's been negative, slightly negative mix for about three quarters now and it had been running pretty positive.

Is that just the high growth of international?

And then also, why would tissue have actually a little bit better mix performance than Personal Care?

Yes, I mean, in some cases the mix can be shift to larger format packs.

As you see the shift to mass and club you're going to see a mix drag which would be probably what you're seeing showing up in the Personal Care numbers.

And in the tissue mix, it's really more we're continuing to focus on driving some of our premium price variance, but I think, I don't know, Paul, if you've got any more color on that.

No, that's right, especially in international, Linda, which is I think is what you were getting at.

Mix was up about 1% in tissue in the first quarter.

If you look over the long term, it's generally been running at least at a point positive, maybe even two points positive.

So that's the strategy.

And markets like Latin America we've been trying to shift from one ply to two ply where you can charge a much higher premium.

You're seeing that drive a lot of our margin improvement in tissue international markets.

Great.

That's helpful.

And then can you just on the desheeting, clearly I mean the consumer isn't fooled by this desheeting because your volume still gets pretty impacted when you do it.

So why do you do it because it's more costly to desheet than just take less price increases.

It's really trying to understand how the consumer buys the category and actually consumers they do focus more on absolute cash outlay and less on price per sheet in many categories.

And they're also buying on perception of volume as to how does the roll feel and how big is it.

And so I think that's the way the categories run for many, many years and it's really no different today.

Okay.

And then just on the corporate expense, I guess excluding the Venezuela charge, it was down about, I don't know, $20 million, $30 million year-over-year.

Is that due to the lower pension expense or is there something else in there?

No, that's just general corporate items that happen to be lower than last year.

Actually, we ran fairly heavy last year in corporate expense, but it's not the pension piece.

Where would the pension piece show up?

Pensions are in the segments.

Okay.

Thanks very much.

70% cost of sales, 30% G&A, probably.

Yes.

Okay.

Thanks a lot.

Thanks.

Our next question comes from [Karen Lamark] with Federated Investors.

Want to go back to strategic marketing and I think you said in response to Chris that you had shifted the marketing mix in the quarter a little bit more advertising and less couponing.

And just to start with, why did you do that and is there any way to sort of quantify the relative benefit of each?

Yes, I mean, that was in the consumer tissue category in North America.

There was more of a shift from couponing to other advertising type vehicles and each of our brand teams follows what they would call an integrated marketing approach.

So they have a brand idea.

Then they try to decide what's the best way to communicate that to the consumer and is it through sampling, is it through television advertising, is it through Internet based activity and so they really kind of start out media agnostic and then look to see which of those channels is going to drive the idea the fastest and so you're seeing based on what they're trying to do, there might be more shifts in the future as they continue to drive that.

And so I think in this quarter, there just was -- they were seeing more responsiveness to some of the advertising and sampling activity they were doing and a little bit less to couponing so they shifted the mix in that direction.

Is it fair to say then that you're flexible as we go through the rest of the year in the marketing mix, especially in the consumer businesses, in light of your expectations for still the continued volume increase but heightened price action.

Yes, but I also think you shouldn't expect to see them using coupons to drive short-term volume pops.

They're really trying to build strategic relationships with consumers and if you're going to drop a coupon it's going to be to get trial on some innovation and that's what you're trying to do to build your franchise over time.

Okay.

Thank you.

Thanks.

Our next question comes from John Faucher with JPMorgan.

Good morning.

Quick question.

So you're talking a lot about there's obviously been a lot of discussion on the call about pricing and a little bit about mix, what have you.

Sort of sequentially, you're taking up the price mix forecast.

I get that.

And I guess just -- and I understand your confidence in a volume rebound but I guess why no change in sort of the outlook from a volume standpoint, given the elasticities that you've seen over the past couple of years?

I guess the question, why the sequential improvement in price mix with no change in the volume.

Why not be a little more cautious on the volume outlook.

Thanks.

I think that we'll see how it plays out.

I mean, overall we think these are relatively modest shifts so I think the consumer's already kind of taken the economic adjustment into effect and we're seeing that consumer confidence relatively stable.

So I think given the range of price change that we're talking about, we're not going to see a big further shifts in category consumption rate and the fact that it's happening broadly across most of the competitors in an industry, we don't see a huge risk from a volume standpoint at this stage.

Okay.

So it's basically just the order of magnitude of the changes on the price mix side?

Yes.

Is what you're saying.

Okay.

Thank you.

Thanks.

Next question comes from Lauren Lieberman with Barclays.

Thanks.

First I wanted to know if on Venezuela there's going to be any further inventory charge in the second quarter or if we saw it all this quarter?

Well, the way that works, Lauren, is that basically you mark your monetary assets to market at the parallel rate every month.

So if there's further swings in the parallel rate, there will be further charges that will flow through other income and expense as you remeasure your local currency cash, your local currency receivables and your local currency payables, the net of that, at whatever the parallel rate is every month.

So I think by far we've taken the big hit as you saw, the rate go from 2 to 7 or 2 to 6 in the first quarter, and so we'll just have to watch it and see what happens.

We'll be transparent with you on what that impact is.

Sorry, I meant specifically on inventory, so nonmonetary assets right.

Because this quarter there was a piece of flowing through inventory which is at a different value, right.

You can't revalue the inventory.

So I'm trying to ask is if you've now worked through the existing inventory in Venezuela that was there predevaluation or not?

We took a lower cost for market charge on inventory in the first quarter and again I think that we've got that at the right level and we shouldn't see a big change going forward.

You should -- maybe the way to think about it Lauren is we're going to manage the business at the parallel rate and inventories is a part of that.

Okay.

Another question on sheet count reductions.

So I know the sheet count reductions shows up in the way you report numbers both as a reduction to volume and increase in price mix.

Right.

Does it tend to be sort of one for one.

If it was minus one on volume it's plus one on price?

Is it sort of net neutral?

Yes, I mean, in theory, yes.

You know.

I think, yes, I would say, Lauren, for a while that's probably a reasonable way to think about it and then eventually the consumer is at the end of the day buying sheets.

But it takes a while for that.

To work through.

To work through.

Yes.

Okay.

And then the final thing was just I know there's been a number of questions already about sort of the outlook for volume.

But one thing really specifically I did have is that in emerging markets I get that there's been a bit of a shift between price back to volume but the Personal Care numbers, there was a significant deceleration in organic growth from sort of high teens to high single digits or mid to high single digits and in Healthcare, while yes, 8% is very strong, 4 points of it was still H1N1.

So you've got tougher comps coming up in Healthcare, even with the strength in medical devices continuing.

It feels like in both of those businesses which were points of strength this quarter, you need to be assuming a pretty significant acceleration in those businesses for them to continue to matter enough or is it a matter of they kind of flow from here and then it's the innovation everywhere else picks up and that sort of takes over?

Yes, I think it's the latter case.

We're just getting started with a lot of innovation and expect that to continue to flow through.

Obviously I still think Personal Care had a solid volume quarter, broadly, and even with relatively weak diaper volumes in the US and Europe, as that turns around I think you see that continuing.

Healthcare, again, had a great start to the year.

We've got a lot of good activity going.

We're picking up additional business in that marketplace and yes, the comps will get tougher but I feel like our momentum is pretty good in that space.

KCP actually had a weaker volume start than you'd think just because last year's first quarter was so weak but we would expect that to pick up as the year progresses, assuming the economy comes back a bit.

Okay.

And then the final thing was just -- this may be a better conversation for another forum.

Wendy talked about sort of your long-term strategic view of the tissue business.

But I mean, should we start thinking about this from organic growth standpoint, thinking about it volume wise as kind of being a minus 2 to plus 2 business over time, ideally with stable margins once they've kind of recovered to whatever it is you think the realistic run rate is?

Yes, I think seeing tissue as a more stable part of the portfolio that's probably not -- the categories are more fully penetrated.

You're going to see probably 0 to 2% category growth in most of the major markets and that consistently generates cash and earns the cost of capital is a good role to think about for that business.

Just on margins, where do you -- do you think this business ends up being or can be a mid-teens margin again or is sort of a 12, 13 more of a realistic long-term in.

I think mid-teens long-term is certainly our aspiration.

So we've got obviously with $1,000 a ton pulp it's going to be challenge to get there this year but we feel like that's the right direction for us to head.

Okay.

Great.

Thank you.

Thanks.

Our next question comes from Connie Maneaty with BMO.

Good morning.

If we assume that FX stays where it is and plug in your assumptions for pulp, how should we view the gross margin going forward?

I'd like you to address not only the cost pressure as you see it, but also the impact of translation and transactions which are so hard to figure from the outside on the margin, and should we expect the gross margin to be up or down for the next three quarters?

Well, as we've said, our goal for the year, if you look back at our global business plan, is to see operating margins improve by 20 to 40 basis points a year, and gross margin to improve more than that to allow us to invest in strategic advertising and promotions.

So obviously in the first quarter we're well ahead of that, being up a couple hundred basis points in both those areas.

So I would guess that the rate of margin improvement in the last three quarters will not be as great as it was in the first quarter and also our comparisons are going to get tougher as we saw margin improvement later in the year.

So I think, again, our goal would be to continue to execute the plan and see some gross and operating margin improvement this year.

That would allow us to invest in strategic A&P at a faster rate than sales.

Even with the change in pulp, you think the gross margin will be -- expansion will be higher than operating margin?

That's our plan.

That's the plan.

Okay.

Yes.

Also, with the increase in media cost, are you locked in for what you need for this year, or as costs go up, will your media -- will your expense still be within budget as costs go up this year?

Well, one of the things we're really focusing on and Tony Palmer and his team have done a great job on identifying cost saving opportunities on that line of our P&L just as we have in other lines.

So we've actually gotten quite a bit of efficiency out of our media buying, that is offsetting the media inflation and giving us some real additional exposure and additional value there.

So up to this point, we're still seeing some leverage from that area that we're taking advantage of.

I would say, just to add, more and more of our marketing mix is focused on sort of nontraditional network advertising.

So a bigger and bigger piece of our marketing mix is going to the Internet, for example.

If you think about the U by Kotex launch, it's a great way to connect with the consumer.

We're a little less influenced by media buying rates maybe than we would have been a few years ago.

Thank you very much.

Next question comes from Chris Ferrara with Bank of America.

Thanks for taking a follow-up.

Just back to Huggies and I know obviously we saw the 5% pullback, decline in spending.

I know we have the jeans diaper coming out.

It sounds like you're saying there's more coming in the back half.

You're pretty comfortable with your plans for Huggies this year.

Is there bigger innovation than what we've seen right now coming in that business in the back half of the year?

Yes, you expect to see additional product improvements across both our premium and main line Huggies, as you would in a normal year.

So jeans diaper is really a nice innovation that's going to be fun and moms will enjoy it but expect to see some meaningful product improvement in both the main line and premium variance.

But I guess what you just said about the fact that as you would normally expect in a normal year, does that mean that it's no more -- it's no different than what we would expect in a normal year or am I misreading that comment?

If you look back over time, we're making the diaper better every year.

We've got some exciting things coming in diapers really around the world.

And we feel good about the product line that we've got relative to what's happening in the competitive environment.

Got it.

Thanks.

Thanks.

At this time, we have no further questions.

All right.

Thanks, David.

We'll turn it back to Tom for quick closing comments.

Once again we had a solid start to the year and look forward to continuing to execute our global business plan and doing the right things to create long-term shareholder value.

Thank you again for your support or Kimberly-Clark.

Thank you.