金百利克拉克 (KMB) 2010 Q2 法說會逐字稿

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

We now have your speakers in conference.

Please be aware each of your lines is in a listen only mode.

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

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

It is now my pleasure to introduce Mr.

Paul Alexander.

Mr.

Alexander, you may begin, sir.

Thanks, David and good morning everyone.

Welcome to Kimberly-Clark's second 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 this mornings call.

Mark will begin with a review of our second quarter results and then Tom will 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.

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

There can be no assurance future events will occur as anticipated or that the Company's results will be 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 our adjusted 2010 outlook.

That excludes a one-time loss from the first quarter 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 further information 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 and good morning.

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

Let's start with a few headlines.

First, organic sales growth was 2% including continued strong results for K-C International.

Second, operating margin improved 170 basis points leading to a 24% increase in earnings per share, and third, we continued to be focused on driving 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.

Overall, sales increased about 3% to $4.9 billion including one point of growth from acquisitions.

Organic sales rose 2% driven by higher net selling prices while sales volumes were essentially even with prior year.

Before I get into further details on the top line, I'd like to briefly touch on Venezuela.

Given recent limitations on the availability of foreign exchange, we're closely managing finished product imports and net realized revenue.

While this hasn't impacted bottom line results in a material way, it is influencing the component of our top line.

In the second quarter, the overall impact from Venezuela in our total sales was roughly a point negative on sales volumes and one point positive on net selling prices.

These impacts were more significant than our previous expectations.

Going forward, in the near term, we're assuming a continued challenging environment and so Venezuela is a factor that's contributing to our updated organic growth assumptions, which are included in our news release.

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

I'll focus my comments on organic sales, setting aside the impacts of currency and acquisitions.

In Personal Care, organic sales increased approximately 4%.

Sales volumes were up more than 2% and higher net selling prices contributed an additional point of growth.

In North America, organic sales increased about 6%.

Sales volumes were up 3% and higher net selling prices driven by a lower level of promotional activity on Huggies diapers contributed two points of growth.

Improved product mix generated an additional point of growth.

Feminine care volumes increased double digits for the second consecutive quarter as a result of the You Buy Kotex innovation, adult care volumes were also up double digits with benefits from recent innovations and supporting Marketing campaigns.

Lastly Huggies diaper volumes were down slightly in the quarter.

Moving to Europe, Personal Care organic sales were down 3%.

Sales volumes were down 1% compared to a double digit increase last year, while product mix and net selling prices were each down slightly.

For K-C International, Personal Care organic sales rose about 6%.

Sales volumes were up 5% with strong volume growth in a number of markets including Australia, China, and throughout most of Latin America.

Overall net selling prices advanced 1% as increases in Venezuela were mostly offset by modest declines elsewhere.

Turning to consumer tissue.

Organic sales were down about 2%.

Higher net selling prices of 2% and one point of improved product mix were more than offset by lower volumes of 5%.

In North America, organic sales were off approximately 5%.

At selling prices increased 2%, mostly from sheet count reductions on Cottonelle bath tissue in the first quarter to improve net realized revenue.

Product mix was also up two points in the quarter.

Sales volumes declined 9% were impacted by the sheet count reductions on Cottonelle, consumer trade down in paper towels, and competitive promotional activity.

We expect better volume performance in the back half of the year taking into account the timing of marketing and promotional activity and the fact that the volume impact of count reduction should fade over time.

Switching to Europe.

Consumer tissue organic sales were down about 3% in a continued difficult environment.

Sales volumes were down 2% an product mix was off an additional point.

For K-C International consumer tissue organic sales increased more than 4% driven by higher net selling prices.

Shifting to K-C Professional and other, organic sales were up nearly 5%, net selling prices rose 4%, mostly in North America and K-C International and mix was up slightly.

Organic sales volumes were similar to a year ago.

High unemployment and office vacancy rates continue to impact the North American washroom category.

On the other hand volumes continue to advance in high margin wipers and throughout K-C International.

Lastly, Health care organic sales were down 9%, as volumes fell 6% and net selling prices declined 3%.

Increased demand for face masks in 2009 as you might recall as a result of the H1N1 flu virus adversely affected volume comparison by about 5%.

On a related note we experienced some inventory reductions in our distributors and end-users that we hadn't anticipated and we believe that dynamic is mostly behind us.

Meanwhile, organic sales volumes of high margin medical devices were up 9%.

Now, moving to profit, margin and cost savings.

Gross margin was 33.8%, that's up 50 basis points compared to a year ago and that's the seventh consecutive quarter of year on year improvement.

Second quarter operating profit rose 17% with margin of 14.6% up 170 basis points compared to the prior year.

The positives affecting comparison included organic sales growth, ongoing cost savings, last years severance charge to streamline the organization and the related current year savings from that initiative.

In addition we benefited from lower pension expense, increased manufacturing volumes, and a lower level of other expense.

These factors allowed us to overcome $235 million of input cost inflation and a $40 million increase in strategic marketing investment in the quarter.

Turning to cost savings.

Our momentum with FORCE programs continues to build.

Second quarter savings were an all-time record $105 million with strong broad based results across the organization.

I'm really pleased with the efforts of our global sourcing and supply chain teams and our European business has done a terrific job eliminating waste and reducing cost.

In fact for our European business in total, margins and profits are up nicely year on year, even setting aside the impact of last year's severance charge.

So, given our strong performance, we're now raising our full year FORCE target to at least $300 million, that compares to our previous estimate of $200 million to $250 million for the year.

Now taking a look at second quarter segment operating margins.

Personal Care margins remain strong at over 20%.

Consumer tissue margins of about 10% were down from last year driven by all-time high pulp costs.

ACP margins of nearly 17% continued to improve versus 2009 driven by higher selling prices and cost savings and lastly, Health care margins at about 12% were below last year driven by lower organic sales, the iFlow acquisition and cost inflation.

Now, moving to cash flow.

Cash provided by operations was $587 million.

That compares to $997 million a year ago which was an all-time record for the second quarter.

Decline was driven by a significant improvement in working capital last year, partially offset by a lower level of pension plan contributions in 2010.

Our businesses continue to aggressively manage primary working capital.

Year-to-date, our cash conversion cycle is about 50 days down eight days compared to the full year average for 2009.

We now expect to exceed our original plan to reduce cash conversion cycle by three to five days this year.

I'm encouraged that cash provided by operations improved from the first quarter and I expect cash generation to build further in the second half of the year.

In terms of capital spending, second quarter spending was $179 million.

It was mentioned in our news release, we now expect full year spending will be at the low end or potentially slightly less than our target range of $1 billion to $1.1 billion for the year.

Regarding share repurchases, we bought 5.7 million shares of KMB stock in the quarter at a cost of about $350 million.

We've repurchased $500 million worth of our stock in the first half of the year with expectations for continued strong cash flow, we're raising our full year repurchase target to $700 million to $800 million.

That's up $200 million from our April plan.

So that wraps up the financial review.

To recap the quarter, we achieved strong organic sales growth in K-C International.

We generated significant cost savings.

We invested to support our brands and innovation and we delivered strong improvements in margins and 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 results and then I'll cover the outlook for the rest of the year, and then as usual we'll move on and get to your questions.

So in short, we're delivering solid results in the near term while we maintain our strong focus on the long term, so let me begin with our second quarter results.

Looking at the overall numbers, our organic sales were up about 2%.

That was driven all by higher net selling prices and our sales volumes were about even with year ago, so based on the plans that we have in place and taking into account some of the factors that Mark talked about, we now expect organic sales volumes in the back half of the year to pick up somewhat from second quarter levels.

On the bottom line, we delivered a 24% increase in earnings per share and that obviously delivered a very strong margin improvement.

While comparison were aided by last year's severance charge, I'd also point out that the headwind we face this quarter from cost inflation was more than double the impact of the charge that we took for severance last year, so cost savings and revenue realization strategies have been very important to our bottom line results.

I'm also pleased that despite the high commodity costs our gross margins are tracking ahead of our full year 2009 levels and that's true for the second quarter and it's also true for the first half of this year.

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

First, we continued to further strengthen our brands.

Several innovations we've brought to market in 2010 including You Buy Kotex, some new Depend and Poise products and the Huggies Jeans diaper in North America performed very well in the quarter.

Our second quarter market share has improved sequentially from the first quarter and several of our categories in North America including diapers and half way through the year, I'm encouraged by the results I'm seeing from our innovation activities.

Second, we continue to pursue our targeted growth initiatives in K-C International volume growth has been healthy in those markets and we're taking additional steps to further enhance our position.

For example, in China, our Personal Care sales volumes are up more than 25% this year.

We've introduced an improved premium tier Huggies diaper and we're just now launching the value tier Huggies diaper to reach more consumers and drive our growth in this important category.

In Russia, toward the end of the quarter, we officially opened our first manufacturing facility there and started shipping an improved Huggies diaper.

And Mark and I and several other K-C executives were there for the grand opening and it was a very important milestone for us in this market.

We celebrated it by having a young Russian mom press the start button on the first diaper machine so it was a terrific event but we're really excited about this being able to help us further improve our ability to drive top and bottom line growth in this important market.

In Latin America, Personal Care volumes outside of Venezuela are growing double digits we're introducing a number of improvements to our diaper and feminine care line up.

Elsewhere our higher margin K-C Professional wiper volumes were up high single digits in North America in the quarter.

We're launching a new anti-microbial wiper and our best ever WypAll wiper in the KCP space.

And in Health care, I'm very pleased to see the continued growth of our higher margin medical devices.

In addition, the integration of iFlow is on track and iFlow sales in the first half of the year were nicely above pre-acquisition levels as you'd expect in the kind of high growth business they're in.

And third, we continue to focus on generating cash flow and deploying it in shareholder friendly ways.

As Mark mentioned, we're aggressively managing capital spending and working capital and we've raised our share repurchase plan for the year.

So, all in all we made progress on a number of fronts in a difficult and challenging environment and through the first six months of 2010 we're generally on track with our full year plan.

So now let me turn to the outlook.

We remain committed to the long term success of Kimberly-Clark in delivering solid results in the short-term as well despite the near term headwinds we're facing.

We'll continue to further strengthens our brands, pursue our targeted growth initiatives and invest for future growth.

We'll bring more innovation to market in the back half of the year including improved Huggies Little Snugglers diapers and Depend products in North America, new wipers in K-C Professional and several innovations in many markets in K-C International.

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 faster rate than sales this year.

Key changes to our full year 2010 planning assumptions were included in this mornings news release, so here are the highlights.

We've widened our organic sales growth range to a range of 2% to 4%.

That compares to our previous range of 3% to 4% on average we expect to generate more price and mix benefits than our previous plans while we reduced our volume assumption slightly.

Second, cost inflation is projected to be $700 million to $800 million this year, that's up $100 million from our April estimate.

That said, we continue to expect that pulp costs will start to fall sequentially in the second half of the year which should start to benefit our results primarily in the fourth quarter.

And third, as Mark mentioned, we've raised our FORCE cost savings target to be at least $300 million this year.

Putting it all together we're continuing to target adjusted earnings per share in a range of $4.80 to $5 per share for 2010 and consistent with our previous guidance with what we know now, it's more likely that adjusted earnings per share will be toward the low end of that range.

So 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 health of our business.

So to summarize, we're essentially on track with our plan for the year, we're continuing to invest for future growth and we're confident that successful execution of our global business plan will drive sustainable growth and shareholder value for many years to come.

That wraps up our prepared remarks and now we'll be happy to begin to take your questions.

(Operator Instructions).

Our first question comes from Ali Dibadj with Sanford Bernstein.

Hi guys.

Hi, Ali.

A few things.

One is you've clearly over the past several quarters made a decision towards price over volume and I guess I can certainly understand why you'd do that to keep your pricing level that you fought for such a long time still where they are longer term but I guess I'm trying to get underneath that a little bit.

Why have you assumed that you strategically misguided or silly to go after volume particularly in this environment especially as your competitors have decided differently on that strategic matter?

Yes, I guess I'd say if you look at the volume miss in the quarter, Ali, I'd say more of it had to do with Venezuela than versus what you were expecting so Venezuela by itself was a 1 point drag on volume in the quarter and there was 1 point positive on price but as we've really stopped or slowed down our import level there that you're starting to see category contraction, on the consumer tissue front a lot of this is carryover price so a lot of the desheeting on Cottonelle, it's really a tradeoff between sheet count and price and if you look at rolls sold you wouldn't see much sling there and I think if you looked at our sequential shares, bath our share is down three times, towels it's up three times, facial is always sequentially soft in the second quarter and really most of our Personal Care area, you're seeing shares are positive in the second quarter so I wouldn't accept that we're trading off volume for price broadly at all.

Okay so on that let's talk about your volume shares then.

I think those numbers are probably more driving of our value shares.

I mean, you're not, I think gaining volume share, is that the case?

I mean those numbers I think are value share; correct?

Yes, those are all dollar shares.

I don't think you'd see a big swing because we line up pretty competitively with what everybody else has done in the marketplace so I don't think you'd see a big divergence in trend there from what we're seeing and if you look at it broadly internationally I think as Mark said in the Personal Care front, you generally saw negative price comps in Personal Care in most markets, it was kind of dwarfed by the impact of pricing increases in Venezuela so we are spending competitively.

We talked about the 25% volume growth so far this year in China, so I think we're driving the business in strategic ways where it makes sense to do that and we're not generally trading off volume for price in most cases.

Okay, I guess it's tough for me to jive given that your working capital, particularly your inventories were up so much, so it sounds, unless it's all Venezuela to your point a moment ago?

I'd say inventories we probably hit a cyclical low last year.

We've rebuilt them just a little bit this year, but I'd say broadly our cash conversion cycle is better than we had expected year-over-year, so I think inventories are, they aren't out of line with where we would expect them to be at this point.

Okay and maybe if I can squeeze in one last one.

As you look at your EPS guidance it looks like a much faster deceleration in the back half of this year.

Clearly commodities is in there.

It sounds like competitive actions don't bother you or pricing doesn't bother you but want to get underneath the deceleration that we should expect certainly year-over-year in the back half of the year.

Is it all commodities or is there other stuff going on?

Some of the commodity costs will be -- in our guidance will be higher in the second half of the year than they were in the first half and because of the strong third quarter we had last year where you really had the low point of the commodity swing, we were always going to have tough second half comparison so I don't think anything has changed from that standpoint.

I'd say you -- we'd expect to have a slightly better earnings second half than the first half, that's implied in our guidance despite the fact that commodity costs will be a little higher in the second half than the first half so we would expect volume to be a little bit better in the second half than the first half.

We would expect our cost savings to be a little bit better second half to first half and the combination of that will deliver the guidance that we're giving you today.

Okay, as usual, thanks.

Thanks, Ali.

Our next question comes from William Schmitz with Deutsche Bank.

Hi guys, good morning.

Morning, Bill.

Can you just talk about US diaper category trends broadly and also in all outlet terms?

Because I don't think we're going back to split pants here in this country but it seems like some of the trends are pretty awful especially if you look at the Wal-Mart panel data which may or may not be right but some of these numbers have it down 10%, 15% in the quarter so there's clearly a share shift, so is there anything driving that and when do you think it starts to accelerate again?

Well, in our business, we had a pretty solid second quarter.

We saw good healthy growth in the super premium segment with the Jeans Diaper launch as well as in our Little Walkers area, so we actually saw decent improvement in terms of a mix standpoint in diapers.

What you are seeing though is with the recession and the decline in the birth rate, that's still affecting the overall category in the first half.

We're seeing signs that birth rates should pick up and you should start to see a little healthier category from a volume standpoint in the second half, so I'd say if you looked at P&G share numbers and you all have a chance to ask them more questions about it they actually probably had a little bit more of their share shift from their top performing product into their mid performing product.

Yes, some of these declines in sales are a lot more than just population trends.

I mean are people changing their usage habits also so are they using less diapers?

No, I wouldn't say that.

I think as we looked at the overall category it was down like a percent or something like that.

It wasn't huge.

Okay, and then--?

Sometimes panel data on diapers in particular is difficult to interpret because they don't have enough diapering households in the panel to make it really be relevant.

Okay, got you and this might be nit picking but wasn't there this big step change innovation that Kleenex was supposed to drive volume?

I know it's a soft quarter but it was a soft quarter last year also so are you surprised that Kleenex didn't get a bigger lift from the innovation change?

I mean, well it's the softest Kleenex ever and we are driving that.

You're seeing more promotion activity generally on it but in the second quarter is typically the seasonal low point.

We've had the big cold and flu season in the first quarter and we got big back-to-school plans coming in the third quarter, so you tended to see private label share tick up both Kleenex and Puffs were down year-over-year in the second quarter.

That category was a little bit soft in the second quarter as well, Bill, and that's probably carryover from a pretty light cold and flu season.

I would also add this is a pretty big technology change, so the transition at bay sheet continues to rollout over the line up so it continues, we're not quite fully national yet but further along, so as that gets fully national I think you'll see some benefit.

Great guys.

Thanks, that's very helpful.

Next question comes from Chris Ferrara with Banc of America.

Hi.

I just wanted to understand a little bit better the increase in marketing and research and general administrative.

So I guess it was up $90 million year on year ex the severance charge in a year ago.

I'm just having a hard time getting to why that increase was so big.

I know iFlow was running at a loss when you got it and I know marketing was up $40 million but even excluding those it still seems like you had somewhat of a bump up in there.

Can you give a little bit of a color on that?

The acquisitions both iFlow and Jackson are a part of that and iFlow has got a pretty big SG&A load because they've got a very significant sales organization but those are probably the two bigger factors.

I don't know Paul if there's anything else?

Those are definitely the two biggest factors, Chris, and then on top of that we did have higher R&D spending in the quarter and then also continued increases to support K-C International growth which I think we talked about last quarter also.

Underlying G&A Management, Chris, continues to be very tight given the environment we're in.

Okay, great.

And then just on CapEx, I guess at Analyst Day you lowered the CapEx assumption by 50 basis points and now you're taking the 2010 target down.

Did you not lower the long term target enough at Analyst Day?

No, I mean I think that it continues to trend below our expectations honestly so we felt like sitting here in the beginning of the year, we're spending at about a $750 million rate and we had $1 billion to $1.1 billion guidance out there.

I think we have enough projects in the pipeline we will accelerate in the second half of the year but we still won't get to the upper limit so we're just trying to be transparent on that.

And volume growth in K-C International has been strong enough where we're starting to have to -- it's been a few years since we've added incremental capacity particularly in Personal Care, so it's just going to, our CapEx is going to follow the trends of the business which are pretty good.

Even in North America if you look at our adult care and feminine care business those things grew double digit again in the quarter so we're actually looking at some capacity expansions there as well.

So you think it's more timing than anything that the 2010 number is lower than you thought?

Yes.

Great and then finally just on FORCE, I mean look, obviously that's a great result, right, and raising the number by a third is pretty impressive but where do you find that?

I mean over a course of three months, you raised that target by a third, should we think of that as pulling some of that forward or maybe you were being a little bit conservative originally.

How do I think about that big an increase?

Yes, I think part of it was easier comps.

We talked a lot about this.

We had a lot of down time in the first half of last year and while we stripped down time out separately but when your machines are down you also tend to do more maintenance spending which we count against our FORCE so the fact that we had less down time in the first half helps us a bit there, so in the other cost of sales area was positive.

We also talked about we put a global procurement team in so we're pushing more aggressively on that front.

We're also driving a lean continuous improvement process.

We're at the very front end of that and so we've got programs running in North America and our international markets and those are delivering quite frankly, more faster than we would have expected and we've still got a long ways to go to really build that into our culture but the combination of all of those things have delivered that.

We still think there is a huge opportunity to continue to deliver going forward but we're pleased we're ahead in this tough commodity cost environment.

Thanks a lot guys.

Appreciate it.

Thanks.

Our next question comes from Lauren Lieberman with Barclays Capital.

Hi Lauren.

Thanks, good morning.

I just wanted to see if you could talk a little bit about the role of volume growth in your tissue margins and profitability?

Obviously, pulp is an enormous challenge but when you contrast what you've been able to do with margins in K-C Professional and I know there's a lot of stuff that's not pure tissue, there it seems like the revenue realization strategy has worked, is working and in tissue, it feels a little bit like we're going in circles, so can you talk a little bit about that and how you're thinking about that over the next year or two exclusive of what happens with pulp?

So Lauren was there some kind of a tissue joke in there with bathroom tissue and towels being on a roll that we're going in circles?

I don't mean it but it just keeps happening.

I keep doing that.

So, I think if you compare it to K-C Professional we have done a better job actually of diversifying the K-C Professional portfolio and getting more of our business into the higher margin wipers and safety products that are less pulp price dependent and tissue primarily the business in consumer tissue is still bathroom tissue, towels, and facial tissue, and those are still heavily affected by the price of pulp, so I'd say we aren't happy with shares being down in those categories and want to at least hold share and grow with the category.

Some of it was affected by desheeting.

Some of it was affected by sequential weakness but other cases it's private label and towels in particular has been growing at everybody's expense, and so we got to make sure we're showing the right value equation in that market, and so obviously we are continuing to focus on earning the cost of capital in our tissue business and believe with -- we've seen the worst of it and as pulp prices start to ease particularly in the fourth quarter we'll start to see a little bit better volume trends and see a little bit better margins as pulp prices come down.

Are you anywhere near being able to think about taking out capacity, because volumes in tissue have been -- consumer tissue have now been down for nine quarters now.

No, I mean, we still, we had a forecast review with our tissue team and we talked about that exact subject and we would expect to be pretty fully loaded.

Now, in some cases we had actually been outside buying in tissue to supplement our manufacturing base and we've used that over a number of years as a way to make sure that we ran full, so we've been able to pull back a little bit on some of those outside commitments which actually helps us from a cost standpoint and allows us to continue to run our assets full.

Okay, and then just one other thing was just on Personal Care in the D&E market.

Your rate of volume growth, is it your sense that today you're growing in line with the market or is 5% or 7% volume I guess it's the last two quarters numbers there, is that enough to be gaining share or is it sort of in line with the markets?

I think it's a very diverse pool of markets, as you'd look at i, China I'd say with a 25% growth we're seeing we're probably still growing ahead of the market because we're building distribution in those markets.

Latin America, we've seen solid Personal Care growth there.

I'd say we're probably picking up a little bit of share, particularly in Feminine Care and diapers.

Russia has a more competitive battle so there I'd say we're battling it out with Proctor and it's a share battle every day there, and so it is a mixed bag but I'd say in most markets we're holding share and some of them we're picking up a bit.

Okay, great.

Thanks a lot.

Our next question comes from Gail Glazerman with UBS.

Hi, good morning.

Good morning, Gail.

Can you give a little more color on what's going on with U By Kotex?

If I remember correctly the strong growth last quarter was really kind of volumes ahead of the rollout.

Is what you saw in the second quarter something more sustainable or is that still related to the rollout?

Yes, I mean, the launch has gone very very well, has exceeded our expectations and we had pretty high expectations for it.

This really seems to resonate very well with young women.

Quarter average picked up about 4 share points in U By Kotex.

Our overall Feminine Care business in total was up about 2.5 share points so most of it has been incremental.

We continue to see strong interest and have got an aggressive plan to continue to drive it and bring innovation to that brand and that consumer space, so we're pretty enthusiastic about what we're seeing so far.

So obviously our competitors had a lot of activity ahead of our launch and we assume that they're going to continue to be competitive so we're not expecting it's going to be easy going forward either.

Okay, and then on the diaper front, is there anything you can say about I guess the trends in the competitive activity moving forward given the issues that P&G has had with the Dry Max rollout?

Is that getting more intense, less intense?

Well, I'd say broadly, P&G has executed a lot of their plan on Dry Max.

They've gotten the distribution they wanted.

They've gotten the promotion space that they wanted.

They are going to stick with it and continue to drive it.

I think they're through most of the PR issues they were facing and so I think obviously we feel pretty good about our innovation plan in diapers so we had a very good quarter with Jeans Diapers.

We've got more improvements on Huggies coming in the back half of the year, so I think the great news for mom is that both the premium brands Huggies and Pampers are driving a lot of innovation and that's good for moms and for branded diapers generally.

Okay, and can you just give some color, looking at your away from home business I guess you're kind of saying relatively flat underlying trends.

The economy has started to turn off of the low base.

Have you been holding share or do you think that maybe the markets been recovering a bit and you've given up some share and just broadly speaking when you think of your more economically sensitive businesses what are you seeing?

It's really an interesting map as you look around the world of K-C Professional.

In the US, I'd say certain segments like lodging are still kind of depressed.

You're not seeing those come back.

Office buildings is another area we've got particular strength with the vacancy rates, you can see those kind of numbers not coming back.

Manufacturing, starting to come back.

We're seeing that in our safety business and some of our wiper business so you're talking about the volume growth there but you're not seeing a lot of net employment increase so we don't see it as much in our washroom side of our business, so broadly that's kind of the US market but if you go to Europe on the other hand we had double digit volume growth in Europe and good improvements in markets like Germany where you actually are starting to see a pretty good pick up in industrial output and so that was a positive for us in the quarter and then internationally, we had solid double digit volume growth in the international markets for K-C Professional, mostly in Asia.

There was about 5 points of volume and about 13 points of price roughly in that price and mix and so again, pretty good volume growth starting to show up in those markets as well.

Okay, and just last question.

Are you seeing any changes in consumer buying patterns?

Is it still kind of hand to mouth by the end of the month or is there any sense of strength there?

All of the consumer survey information we've seen would say consumer confidence is not getting better at this point in time.

It's kind of going sideways and so you're still seeing some up ticks in some categories in private label shares, not as much as you saw at the beginning of last year and then some categories it's actually started to trend down a little bit but things like paper towels and facial tissue we still see consumers trying private label and if you talk to key accounts, they would say that moms are still pretty squeezed percentage of consumers that are using food stamps continues to increase and so the consumer generally is feeling pressure out there in the US in particular.

Okay, thank you.

Thanks.

Our next question comes from Alice Longley with Buckingham Research.

Hi, good morning.

Good morning, Alice.

Could you tell us how much in the US Huggies were up in dollar terms both for diapers and then separately for child care?

Dollar shares up sequentially or year-over-year you're looking for?

Year-over-year.

Well, I mean, year-over-year our Huggies share was down slightly versus Q2 last year.

I think we were almost 38 share which was a recent high watermark and this quarter we are right around 37, so we were up from 35 and change in the first quarter so we were up about nearly 1 point or a little over 1 point sequentially and down about 1 point year-over-year.

Pull-Ups would be up sequentially and over prior year, up about almost 3 points over prior year.

And really what I was asking but I wanted to hear that too is your shipments, so were your Huggies diaper shipments down and your child care shipments up in dollar terms?

Yes, I think Huggies was down slightly in volume for the quarter year-over-year and Pull-Ups was up a couple of percent year-over-year, so pretty much tracking share trends I guess.

So just to repeat, your child care volume shipments were up 2% and your Huggies diaper shipments were maybe down 2% volume?

That's ballpark, yes.

Okay but then pricing was positive I guess for both?

Yes.

Pricing had more to do with coupon -- levels of coupon drops that were spent against it in prior year versus this year as well.

And how much did that add?

So Huggies diapers sales in dollars were up how much?

Well, they were up.

We don't get to that level of detail but for the total North American Personal Care business, price was up about 2% and that was primarily coming from Huggies.

So overall, you should think about Huggies diaper sales being up and the same would be true for child care.

And up in the mid single digits putting them both together?

Yes, low to mid singles would be fair.

Okay, and then looking at your emerging market organic sales up 6%.

Can you break that down into volume and price?

Yes, it was about split evenly between volume and price.

Okay, and then obviously if I take out Venezuela, it was more volume, right?

Correct.

Yes.

How much was emerging markets up if you take Venezuela out?

Well, what you should think about is that Venezuela had 1 point impact on volume for the Company negative and 1 point positive on price and emerging markets is about a third of the Company.

So you could roughly multiply those by 3.

So since Venezuela had 1 point negative on volume and 1 point positive on price, I guess emerging markets excluding Venezuela were also up 6?

That's right.

Okay, and then the last piece is US sales overall once I throw in health care I'm going to assume your shipments were flattish in the quarter?

We don't really look at geographic lens at this point, so I'd be guessing.

Okay, thanks.

That's all.

Thanks, Alice.

Our next question comes from Wendy Nicholson with Citigroup.

Hi, good morning.

First question on the diaper category, I was actually surprised the press release said that your promotional spending was down year-over-year because I would have thought it would have been up with the Jeans Diaper but is that just a function of timing and maybe more advertising?

So overall investment spending I assume is still strong in diapers?

Yes, absolutely.

We were launching Pure & Natural last year in the second quarter so part of it is the comp to that and Jeans Diaper was really an in and out so it was one that you didn't need to spend quite as much on and it also had such obvious appeal and was such great support from our retailers that actually it was a good vehicle to be able to drive that in a very efficient way.

And to your point about it being in and out, it goes off the shelf in September or whatever, is that right?

Actually probably a little earlier than that.

Some customers blew through it very quickly, so it will probably give us a little bit of boost still in the third quarter but I'd guess late July, early August most retailers are going to have worked through the inventory.

But you're just replacing that spot on the shelf with regular pull-ups, right?

It's not like a shift in the number of facings you have or anything like that?

This is a Huggies diaper promotion, but yes, it will absolutely be tied in with our regular Huggies business, so a lot of the stuff was promoted off either end cap displays or other in store floor displays so that it wasn't all cut into the shelf either.

Okay, and then my second question on the Health Care business, the sharp decline in the profits and the 12% operating margin, how much of that do you think is associated with just the sort of negative operating leverage from the weak top line?

In other words if the top line was kind of a one-time event, is a 12% operating margin a one-time event?

Are we confident that's going to go back up?

Look at our first half average margin in that business which is more in the 13% to 14% range that's probably a good average to look at for the year at this point given that we've got some of the one-time costs from iFlow coming through and then would expect to see a nice sequential pick up in 2011 as you work through some of that stuff.

Okay, fine and then last question, just guidance on tax rate for the year?

Hasn't really changed so Mark's going to give you a little more color on it.

29% to 31% at this point.

It looks like we might be in the upper half of that.

Terrific.

Thanks so much.

Bye.

Our next question comes from Andrew Sawyer with Goldman Sachs.

Good morning, Andrew.

Hi, guys.

I've got a quick one on this lower tiered diaper launch you talked about in China and I was wondering if you could scope that out strategically.

We haven't seen you guys as aggressive in the lower priced tiers as Proctor in the US and Europe and I was wondering if this is something that we're more likely to see more of in emerging markets or if something you'd consider in the developed markets as well?

Actually across many of the emerging markets we participate in tier 3 very broadly which is kind of the mid segment of the category and in some markets we actually compete in tier 2 and down even into the very lowest tiers depending on the market makeup.

Depends on the competitive set obviously and what you're trying to accomplish there and what your scale is, so in China, we just felt that as we've had success with Huggies in the super premium by adding the value tier was a logical next step and so as we continue to build out our portfolio there, that's the place to go, but again I'd look at it more country by country, what's the category structure, what's the competitive set, and where are you going to make your mark.

This is a tier 3 offering then?

Yes.

Okay, and then just quickly following up on Wendy's question on the promo spending, framing it differently, I would have thought you would have been a little more aggressive with promo spending to counter what Proctor was doing this quarter.

Is that just not something that was ever in the planning?

Well, we felt -- all of this strategy is a part of how good do you feel about your innovation and what do you need to do to deliver on your volume objectives and we felt strongly enough with what we had planned that we were spending as an appropriate level.

We've got some great advertising spending behind our Huggies brand and if I look at our share trends sequentially, it looked like it worked reasonably well, so I think we would rather do it with innovation and great marketing and continue to drive it that way than doing it with price off coupons if you can avoid that.

All right and then just if I could ask one last quick one.

Thinking about the pulp curve potentially going down, what is your assumption for the pulp price exiting the year and then secondarily how should we think about industry pricing and promotional activity as that happens?

Yes, I think our forecast as pulp gets down around $900 a ton something like that, it exits the year and which is down a little from our, I guess our previous expectation but it also got a little higher than our previous expectation in the second quarter so the average for the year is probably going to be a little bit higher than we were overall.

I think the other thing to remember, if you look at price realization and our consumer tissue business overall, just this quarter we've only recovered about a third of the fiber price increase in the form of net realized revenue, so pulp could fall by a lot and you wouldn't really feel the need to do something different from a price promotion standpoint, and if you even look back to the last price increase that was taken at the end of 2008, a fair amount of that has been spent back already in terms of higher promotion spending, so I guess our expectation is that you won't see as much softness in promoted prices in the back half of the year but we'll have to wait and see what happens.

All right, well thanks a lot Tom.

Thanks.

Our next question comes from Chip Dillon with Credit Suisse.

Hi, good morning.

Just one quick clarification on the tax rate.

It would seem like just to make sure I'm on the right page Mark about 28% to 28.5% is what we should use in the back half to get to that upper end of the 29% to 31%?

That's about right.

That's probably about right and we would expect it to be a little bit favorable in the back half of the year relative to the first half.

Got you and one thing that I was interested is you mentioned in the K-C International area that the tissue volumes overall were flat and as you think about that part of the business consumer tissue versus Personal Care, it would seem to me that that may be a sign of things to come where you're basically going to get the lion's share of your growth in Personal Care just given some of the dynamics in some of those countries.

Can you talk about that?

Yes, I think that's probably right.

We're in Personal Care in a lot more countries in a bigger way and so in many cases there's a big opportunity to drive category penetration to a greater extent in Personal Care because the categories are much less penetrated than for example, bathroom tissue which would be pretty highly penetrated everywhere, so yes, you'll tend to see more innovation and growth opportunities but I'd also tell you there are things like facial tissue which there may be category growth opportunities.

We've got some things we're launching in Australia around some household cleaning wipes that is a way to expand our tissue brands into some new spaces, we're doing some of the same things in markets like Israel, so there will be some selected growth opportunities with our tissue brands and our international markets that we'll take advantage of as well.

And then I guess lastly just sticking on tissue, SCA said the either day that they were getting 4 or 5 percentish type price increases in the back half in European consumer tissue and it seems like just about everywhere you're seeing pricing except here, you just basically saw some sheet count help in the first quarter as you mentioned and I'm just wondering to what extent is some of the aggressive behavior on the part of the private label producers, especially some new ones to try to add through air dried technology, what -- to what extent do you think that's holding down pricing in the marketplace here?

Well, I think there's a lot of other levers that you pull in tissue besides list price so list price is one of them but promotional depth and frequency is another and sheet size, sheet count is another, package count, so with how you bundle it is it 24 rolls or 20 rolls, there's a lot of different ways to get at price realization and tissue and we're using all of those tools and I think we're far more sophisticated in our outlook and approach to pricing around the world than maybe it would have been even several years ago so understanding the consumer dynamics and how they buy the category and how they react to strategic price points all plays into it and so our channel just to optimize net realizable revenue and still be competitive in the local market.

Got you, and I think it's just almost unbelievable how well you've done in this pulp environment.

Congratulations, and then that's basically it, thank you.

Almost unbelievable, Chip, come on, you're killing me here.

Well, you're doing a great job.

Our next question comes from Jason Gere with RBC Capital Markets.

Hi Jason.

Hi, good morning, guys.

I guess just a couple of questions.

One, thinking about the volume acceleration in the back half.

Can you kind of just summarize, is it that one you I guess are leaning a little bit more on the emerging markets that you'll see a little bit more of an acceleration there because obviously it sounds like you're doing a lot of great things there and that's more macro driven or two is it more the innovation that you've launched, the spending behind it that you do think I know you had some comments that the consumer is kind of sideways right now, so I guess I'm just thinking about the back half of the year.

Is it the former or the latter or is it just really a mix of the two that you think will kind of accelerate the back half?

Yes, I think it's in lots of spots, so certainly innovation is working so we'll have a full six months of U By Kotex, and some of the incontinence products where we only had really a quarter or so of those in the first half so we would expect to see continued volume growth there and that's very solid.

We've got great innovation coming with our Huggies brands and we would expect to see continued strong share results behind Pull Ups and Goodnights so that will be positive.

Our tissue we should be past some of the desheeting impact and start to annualize some of that in the second half so we would expect to see stronger volume comparison on tissue.

We've also got more promotional activity which was our plan behind some of the innovation coming in tissue, we would expect to see that, help our tissue volumes particularly in North America in the second half, but I'd also say in Health Care, we think we're past all the inventory adjustments by our distributors and end use customers related to H1N1 so we should be back with more of our normal growth trajectory there so I'd say lots of those areas that would add up to a stronger second half than first half.

Okay, and then I think in the press release you talked about and hopefully you didn't answer this already but there was some issues that were kind of one quarter with KCP that affected volumes.

How much was that and how do we I know you kind of quantified Venezuela as kind of a 1% hit to volume.

I was wondering if the KCP how that materialized what the impact was there.

For KCP, Venezuela impact was across the whole Corporation.

KCP actually broadly had pretty decent volume results in the quarter from a volume standpoint I think we got the number here.

It was roughly I guess it was flat for the second quarter but it was up double digit in Europe, it was up about mid single digits in the rest of international including Asia.

The US was down just a little bit but we still saw decent growth in our wiper business and safety products.

Health Care had--.

Health Care was the biggest drag from H1N1.

Okay, and then it seems like the biggest pushback on the stock has been on pulp and I know you're talking about it seems like hopefully these pulp prices just don't go any higher but can you just give a little bit of context what you're seeing from a supply side out there, where around the world you're seeing actually capacity being expanded, kind of put into shape the demand has been a little bit softer globally but the supply seems to be picking up.

Can you talk about what you're seeing in China, what happened in Chile, Canada, some of that context that can actually put a little bit more context around that, pulp seems to be peaking and it should start to come down?

Yes, I think there were a lot of factors in the first half that led to a tight supply situation so there was some strikes in Scandinavia that wound up with either closed ports or closed mills that constrained supply, the Chilean earthquake took a good chunk of the world pulp capacity offline for a period of time while really all of Chile was idled for six weeks or so, and then Chinese buying was at a pretty high level in the first half, so as we head into the second half, Chinese buying at least in the last couple of months seems to have slowed down quite a bit.

The Chilean capacity is now back online.

The Scandinavian capacity is back online.

The US dollar is a little bit stronger than it was in the first half which helped some of the European and Canadian producers a little bit and so I would say those factors would tend to point to a little bit weaker pulp market in the back half but we'll have to wait and see how that plays out.

And there's early signs that prices are indeed going down in China in July, nothing in the US market at this point but it would seem that it wouldn't be surprising if it would follow into North America as early as August.

Okay, great.

And then just last question, more I think for Mark.

If you could just think about or talk about the back half of the year and then how should we think about the gross margin outlook for the year?

I think initially after the first quarter maybe gross margins would be up about 50 basis points and still grow a little bit faster than operating margins.

Can you just give us a little bit more color on that?

Thanks, guys.

Yes, I think the cost savings are going to continue to ramp up through the back half.

Price realization will continue to grow.

At this point our expectation, we're pretty pleased with the gross margin performance in the second quarter.

Our outlook continues to be that it will grow faster than operating margin.

Operating margin we're kind of maintaining our 10 to 70 basis point guidance.

It's likely year on year that we're going to end up at the lower end of that range so we feel good about the results in the quarter and sort of support for our expectation for the balance of the year.

Yes, we've had seven consecutive quarters of gross margin improvement and we would like to deliver an improved gross margin overall for the full year.

Our next question comes from Connie Maneaty with BMO Capital Markets.

Hello, Connie.

Hi, good morning.

Just a follow-up on that last question.

Looking at last year's third quarter gross margin which expanded about 590 basis points, is it reasonable to expect that the third quarter 2010 margin should decline while peak prices are as high as they are or do the FORCE savings upset that?

Well, I'm not going to give you a quarterly gross margin forecast.

All I would tell you is last year's third quarter I think the gross margin was 35.2 and that would be a pretty tough comp from where we are going to be averaging in the first half, so I think I'd be better to look at the full year average and we would expect to see improved gross margins on that basis.

Okay.

You gave us some indication of what business is like in Venezuela with pricing up but you're reducing imports and it cost the Company a point on volume.

Could you just frame it a little bit and describe what business conditions are like, what the demand, what local currency demand is like and how you see the situation there unfolding over the next 6 to 12 months?

I wish I had a better crystal ball on that one.

I think obviously everyone that we've talked to that does business down there has got some of the same issues, that if you import any kind of a product or a raw material, it's difficult to get foreign exchange.

We are all getting some foreign exchange so you're able to pay some of your bills for imported materials but my sense is that the more local production that you have, the easier it tends to be to get foreign exchange but that's just anecdotal from our view, and so there will start to be shortages and there are already big empty spots and shelves on the stores down there, and so I think how the government and policy makers work through that is yet to be seen and there isn't a lot of clear guidance coming out of Venezuela as to how it's going to resolve itself.

But obviously if they continue to have shortages on key items like diapers and Feminine Care where there really isn't a lot of local production, that will be a challenge for that country and so our goal is to do the best job we can to take care of moms and families in Venezuela and make sure they have the bathroom tissue and diapers and feminine care products that they need and we'll do the best job of that we can in the environment that we're operating in.

Are you accessing the governments, the federal bank floating rate or have you had to go to the new parallel market, and what's the rate on that market?

Well, there is no new parallel market at this point in time.

The government has decided that any transactions that would occur in a market like that are illegal so there is no parallel market that we're aware of, and yes, we have gotten some exchange at the government official rate but it's not enough to be able to fund all of the needs that we would have to bring in imported products.

We make a lot of tissue in Venezuela so we've got good manufacturing capability, we've also got some capacity to make Personal Care products like Feminine Care and diapers so there we're buying raw materials in dollars but we're also using some local materials and then we also bring in finished product like diapers and Feminine Care from countries like Peru, like Costa Rica, some from Columbia, and so making sure we can pay those bills with a currency other than the Bolivar is the challenge.

Okay.

When would you expect consumer tissue volumes to increase?

Do your comments today suggest a volume increase in the second half or declines that are not as severe as they've been?

I'd expect to see some positive comparison in the second half and some positive volume results from consumer tissue so that's what we would be based on our planning that's what we would be looking for in the second half.

Okay, thank you.

Thanks, Connie.

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

Good morning, Linda.

Hi how are you?

Pretty well.

I just was wondering if in the same way you talked about pulp if you could comment on polymer, the plastic resin and that seems to have come off its peak as well.

Do you have a forecast for that and will that help the fourth quarter as well?

Well, it's still a lot higher than it was a year ago and so that was another part of our up tick in the inflation assumption for the year.

I don't know if Paul you've got any other color on that?

Yes, it did move up pretty rapidly in the second quarter.

We would expect it to be a bit lower in the back half of the year, so that would start to help sequentially later in the year.

Okay, and then can you just comment, I know a lot of companies have talked about sort of cutbacks they made or freezing and salaries and compensation and other measures when things were pretty bad a year ago.

Is there anything that you did like that that might come back that you have to start increasing compensation or are there any costs like that that could creep back up on you that would offset some of the FORCE savings?

Well, in 2010, we had more of a normal comp year where we benchmark what other companies are doing but having said that, it's still pretty low inflation environment so you'd see fairly low percentage increases everywhere.

We're continuing to encourage all of our teams to be disciplined about how they spend money so whether that's filling vacant positions because we're using a lot of our lean approach to avoid hiring where we can and continue to be disciplined about that.

We're staying focused on controlling our travel costs and our other discretionary G&A to make sure that we don't go back and increase our spending at a higher rate.

We're budgeting our G&A to be flat in most of our business areas or to grow at a slower rate than sales and so we don't want to take our foot off the brake on costs and make sure then that we've got the money to invest in our innovation and strategic brand building so it's been working so far and our teams are doing a great job of delivering that as you saw with our FORCE cost savings.

Okay, thank you very much.

Thank you.

Our next question comes from Chip Dillon with Credit Suisse.

I just had a quick follow-up.

Actually, just as a tag along to that FORCE question, you are getting a big number this year.

Would it be however reasonable to expect it to be more of a normal type FORCE goal for 2011 down in the $200 range?

Well, I mean we'll give you more guidance on 2011 probably early next year but I would probably tell you in some ways we had some favorable comps on FORCE to last year because we had so much down time we probably did a little bit more on the maintenance front last year so that could be a part of why this year is a little better than we would have expected but I also think we've got good momentum going with our lean and continuous improvement activity and we should see continuing momentum from that into 2011.

Got you and I didn't know if you all saw but two of the big pulp players (inaudible) and West Frasier did officially lower in North America $30 for August in pulp, so that should help you.

We heard that.

We weren't sure what was public and what wasn't at this point, but thanks for sharing that.

Take care.

Our next question comes from [Andy Feinman] with Meridian Asset Management.

Hi, Andy and with Oridian I think.

Good to talk to you.

Thanks.

I just wanted to ask you if -- I think one of your preferred issues is coming due or you have the once in seven year opportunity to pay it, so I was wondering if you could tell us what your plans are there, and then I also wanted to ask, you probably won't answer it but this year you said the pension expense was 160 and the funding was 240 so I was wondering if you could give us any guidance for those two numbers for next year.

I'll let Mark probably take both of those but I think on the preferred issue, we really treat that as debt and I'd expect that to stay in place at this point even though it does have a maturity date.

Mark, I don't know if you have anything else you want to add to that.

Andy, that's been on the horizon.

It's part of our normal funding plan.

We are going to go to the market at the end of this month in fact next week with a debt issue.

It's not related to that particular item but I would guess -- my expectation is we'll be back in the market and we'll fund that in the normal course.

It's not an outsized amount so we should be fully able to fund that either with a long term debt issue or commercial paper.

Pension funding?

Pension funding again, it's too early to predict.

I think we've said over time you're going to have, we probably got funding of $200 million to $250 million.

We'll have to see how the equity markets and our returns play out and what the discount rate looks like.

The biggest single variable is what's the AA corporate bond rate going to be December 31.

That triggers what your funding requirement will be.

I will tell you this though, we have now frozen our defined benefit plan in the US, and so we hadn't let any new entrants into the plant since 1997 and then we froze all remaining participants balances as of the end of 2009 and have shifted them all into a defined contribution plan so we're doing everything that we can to try to manage that liability and yet still provide a competitive benefit program to our employees.

I think it's fair to say if you think about the next five years you should see less volatility, can't eliminate it but you'll see less volatility than you might have experienced in the past.

Great.

Thank you very much.

You're welcome.

At this time we have no further questions.

All right, thanks, David.

We'll finish with our closing comment by Tom.

Well, once again, we feel good about the innovation that we've delivered this quarter and we're pleased to be able to deliver on our global business plan objectives and thank you again for your support of Kimberly-Clark.

Ladies and gentlemen that concludes today's conference.

You may now disconnect.