金百利克拉克 (KMB) 2011 Q1 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 today's presentation we will open the floor for your questions.

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

It is now my pleasure to introduce Mr.

Paul Alexander.

Thanks, David, and good morning, everyone.

Welcome to our first-quarter earnings conference call.

Here with me in Dallas 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 a review of our first-quarter results followed by a brief overview of our full-year outlook.

Then Tom will provide his perspectives and we will finish with Q&A.

As usual, we have a presentation of today's materials in the Investors section of our website, which is www.Kimberly-Clark.com.

Before we begin, let me remind you we will be making forward-looking statements today.

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

And I would refer you to the risk factors section of our latest annual report on Form 10-K for a further discussion of forward-looking statements.

I would also like to point out that we will be referring to adjusted results and outlook.

For 2010 adjusted results exclude a loss related to the move to highly inflationary accounting in Venezuela.

For 2011 adjusted results and outlook exclude costs for the pulp and tissue restructuring and a nondeductible business tax charge in the first quarter related to a law change in Colombia.

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.

And now I will turn it over to Mark.

Thanks, Paul, and good morning.

Let me start with three key headlines for the quarter.

First, we delivered organic sales growth of more than 2% and made good progress with our targeted growth initiatives.

Second, we returned a significant amount of capital to shareholders.

And third, while cost inflation is weighing on our near-term profitability, we are taking a number of actions to ensure we deliver on our commitments for the year.

Now let's cover the details of the quarter.

Overall sales increased 4% to $5 billion.

Organic sales rose more than 2%, on track with our full-year plan.

Sales volumes improved 2% while the combined impact of changes in net selling prices and product mix was slightly positive.

Volumes benefited from innovation and targeted growth initiatives.

On the other hand, we experience lower volumes in Venezuela and category demand remained soft in parts of North America.

First-quarter adjusted operating profit fell 14% with an operating margin of 13.1%.

Benefits from top-line growth and $60 million of forced cost savings were more than offset by input cost inflation of $195 million.

First-quarter adjusted earnings per share were $1.09 compared to $1.14 last year and included benefits from a decline in the tax rate and a lower share count.

Cash provided by operations for the quarter was $250 million compared to $464 million in the prior year.

Looking forward, I expect our cash generation to build throughout the year as earnings grow and we complete nearly all of our pension plan contributions in the first half of the year.

First-quarter capital spending was $234 million compared to $184 million last year.

We are off to a strong start supporting our growth, innovation, and cost reduction programs.

We repurchased 13.1 million shares of KMB stock at a cost of about $850 million in the quarter and we are on track to execute our $1.5 billion (technical difficulty)

Ladies and gentlemen, we apologize for any inconvenience.

It is now my pleasure to reintroduce Mr.

Paul Alexander.

Thanks, David, and we apologize we had some technical challenges with the conference call so (technical difficulty)

(audio in progress) back with our full-year plan.

Sales volumes improved 2% while the combined impact of changes in bet selling prices and product mix was slightly positive.

Volumes benefited from innovation and targeted growth initiatives.

On the other hand, we experienced our volumes in Venezuela and category demand remained soft in parts of North America.

First-quarter adjusted operating profit fell 14% with an operating margin of 13.1%.

Benefits from top-line growth and $60 million of FORCE cost savings were more than offset by input cost inflation of $195 million in the quarter.

First-quarter adjusted earnings per share were $1.09 compared with $1.14 last year and included benefits from a decline in the tax rate and a lower share count.

Cash provided by operations for the quarter was $250 million compared to $464 million in the prior year.

Looking forward, I expect our cash generation to build throughout the year as earnings grow and we complete nearly all of our pension plan contributions in the first half of the year.

First-quarter capital spending was $234 million, that is compared to $184 million last year.

We are off to a strong start supporting our growth, innovation, and cost reduction programs.

We repurchased 13.1 million shares the KMB stock at a cost of about $850 million in the quarter.

We are on track to execute our $1.5 billion share repurchase plan for 2011.

In total, we allocated more than $1.1 billion to share repurchases and dividends in the first quarter as we continue to allocate capital in shareholder-friendly ways.

Now I will highlight a few areas of our segment results for the quarter and, as usual, further details are in this morning's news release.

In Personal Care, organic sales were even with last year.

Sales volumes improved 2%, offset by changes in net selling prices and product mix.

In North America we delivered double-digit volume growth in feminine care for the fifth consecutive quarter and high single-digit growth in adult care.

Momentum also remained strong in our targeted growth initiatives across KC International.

On the other hand, volumes fell significantly in Venezuela and the baby and child care categories in North America remain relatively soft.

Personal Care operating margins of 17.8% were impacted by cost inflation, primarily for oil-based materials, and a higher level of promotional activity in North America.

There were also a few smaller items, including some machine start-ups and supply chain disruptions which I wouldn't expect to recur going forward.

Now turning to Consumer Tissue, organic sales grew 3%.

Net selling prices were up 2% lead by cost-driven price increases in K-C International and Europe.

Changes in product mix improved sales 1%.

Sales volumes were even with last year as gains in bathroom tissue and Kleenex facial tissue in North America where offset by declines elsewhere.

Operating margins of 9% were below prior-year levels as higher net selling prices and cost savings were more than offset by cost inflation, mostly fiber costs.

Moving to K-C Professional and Other, organic sales increased 4%.

Sales volumes grew 3%, including double-digit growth in our safety business in North America and a mid single-digit gain overall in K-C International.

On the other hand, relatively soft market demand continued to impact our washroom sales in North America.

Operating margins of 13.5% were down slightly, but remained solid despite the challenging environment.

Lastly, Health Care organic sales were up 5%, driven by higher sales volumes of 6%.

Volumes of high-margin medical devices were up high single-digit paced by I-Flow and our airway management business.

Supply volumes grew mid-single digits and benefited from a modest improvement in category demand in the North American market.

Operating margins were down somewhat compared to last year and it's mostly due to cost inflation and ongoing litigation expenses related to the I-Flow acquisition.

So that wraps up the review of the quarter.

Before I hand it over to Tom I would like to briefly comment on the updated outlook that was provided in this morning's news release.

We have widened our estimate for 2011 adjusted earnings per share, which we now expect to be between $4.80 and $5.05 a share.

There has been no change to the top end of our previous guidance range, but we had lowered the bottom end by $0.10 a share.

The wider range reflects a significantly higher cost inflation assumption of $450 million to $550 million for the year.

That is more than double our previous assumption and represents and incremental headwind of more than $0.45 per share compared to our previous plan.

We are responding to the significant pickup in cost inflation in three primary ways.

First, we are raising selling prices across a number of our businesses.

Second, we are accelerating or implementing additional FORCE cost savings programs.

And third, we are focused on managing our overhead spending aggressively.

Now Tom will talk more about our specific plans in each of these areas.

All-in-all we expect these actions, along with other modest changes to our plan, to offset most, if not all, of the incremental inflationary headwinds we are now anticipating compared to our previous plan.

So that wraps up my review.

To recap, we achieved top-line growth in line with our plan for the year with further progress on targeted growth initiatives.

We delivered on our commitment to return significant capital to shareholders and we are taking actions to combat the inflationary headwinds facing our business.

Now I will turn it over to Tom.

Thanks, Mark, and good morning, everyone.

I will share my perspectives on the state of our business after the first three months of 2011 and, more importantly, what we are doing to overcome the headwinds we face.

And then we will get to your questions.

In short, we are executing our global business plan strategies and we are taking aggressive actions in a challenging near-term environment.

Looking at our organic sales growth and our market positions, we are on track with our plan in the first quarter.

Our volume growth was the best we have delivered since 2009.

As you heard from Mark, we continue to make good progress with our targeted growth initiatives, particularly in K-C International, our K-C Professional Safety business, and our Health Care medical device business.

We are also getting good returns on our innovation and marketing investments.

This is especially true in feminine care and adult care in North America where the initiatives we began last year on U by Kotex, Poise, and Depend continue to deliver volume and share growth.

Looking more broadly at our share positions, we held or increased market share in 7 of our 8 key consumer categories in the US.

That includes share gains of 4 points in feminine care, 3 points in adult care, 2 points in baby wipes, and 1 point in both child care and facial tissue.

And we are growing ahead of category rates in a number of markets in K-C International such as Brazil.

In terms of overall market demand, portions of the North American market are still relatively soft but there are early signs that conditions are starting to improve.

And most importantly, we have a number of innovations coming to market in the next few quarters to further improve our brands.

We are launching an improved Huggies diaper in North America in the second quarter and jeans diapers will be hitting the stores shelves in the near future.

We will also be introducing an exciting Huggies diaper line extension later this summer.

Outside of diapers we will be launching improved Pull-Ups training pants, new and improved U by Kotex and Poise products, some upgraded Cottonelle bathroom tissue offerings, and new Kleenex facial tissue offerings.

And we have plenty of innovation coming in K-C International as well.

So our innovation pipeline is healthy.

We are executing strong marketing programs and we are continuing to do what is right for the long-term success and health of our brands.

Now turning to the cost environment and what we are doing to improve our profitability.

Clearly, the environment is much more challenging since we talked to you last at the beginning of this year.

Market pulp cost did not fall in the first quarter like we, and most others, had assumed.

Instead costs rose in March and over the next few months are likely to hit or potentially even exceed the peak levels that occurred last summer.

In addition, as we all know, oil prices have risen rapidly to over $100 a barrel.

This is well above what we planned for and it has caused prices for many of our oil-based cost inputs to increase considerably.

For example, polymer costs are up about 20%, both year over a year and sequentially, from the fourth quarter of 2010.

Similarly super-absorbent costs are up 15% and costs for both of these key materials are expected to increase further in the near term.

Now it's our job to manage through these headwinds and that is what we are working very hard to do.

As Mark mentioned, we are focused on increasing net realized revenue, implementing additional FORCE cost savings programs, and reducing overhead spending compared to our previous plans.

Let me share some more details on each of these areas.

First, on the revenue front, many of our businesses are increasing selling prices.

Last month we announced increases for most of our North American consumer products businesses that will go into effect over the summer.

We are also in the process of raising prices in many areas of K-C International, particularly in Latin America.

And our B2B businesses are also taking pricing action, including a North American K-C Professional price increase that we announced last week.

So as a result, we now anticipate that price and mix improvements will deliver 1 to 2 points of revenue growth in 2011.

That is up from our original assumption of about 1%.

Second, we are aggressively identifying and implementing incremental FORCE cost savings programs.

Our global procurement organization and our lean continuous improvement capabilities will help us deliver even more savings in the current environment.

So altogether we now expect FORCE cost savings of $250 million to $300 million in 2011, and that is $50 million more than our original planning assumption.

Third, we will be reducing overhead spending compared to our original plans.

We are using lean continuous improvement to reduce the costs of our back-office operations and we are closely managing our spending on discretionary items.

As a result of our control of SG&A spending, we are now targeting for total between-the-lines expenses to grow in line with or potentially slower than the rate of sales growth in 2011.

So all-in-all the benefits from our actions to improve revenue realization and reduce costs will be more visible in our results in the back half of the year.

I also expect our innovation and growth initiatives to build momentum as the year progresses.

All of these actions require strong focus and discipline, and I am confident in our team's ability to execute these plans while we continue to build an even brighter future for our company.

So to summarize, we are continuing to execute our global business plan strategies for the long-term success of Kimberly-Clark.

We are aggressively managing those factors we can control to deliver solid results in the near term.

And we are firmly convinced that successful execution of our global business plan will improve shareholder value over time.

So that wraps up our prepared remarks and now we will begin to take your questions.

(Operator Instructions) Ali Dibadj, Sanford Bernstein.

Just want to question -- if you could talk a little bit about what is different this time versus last time from commodity -- in the environmental commodity increases.

If you look at Personal Care, for example, last time, 2007, 2008, the margins held in pretty well.

This time it sounded like -- Mark, you mentioned there were some one-off things -- but 17.8% operating margins were, as far as I could tell, the worst you have seen in at least a decade as I look at the model.

What is different now versus last time on that metric, in that segment, along a number of dimensions, whether it be competitive environment, whether it be just these one-time really driving that, etc.?

And then on Consumer Tissue, similarly I guess high-single digits of what one would expect at these levels.

How do you describe that environment right now as well from a competitive environment and what is different versus the last time?

The reasons why the commodity costs are higher are different, so I think that is part of it, but we had a pretty big hit on margins on tissue when pulp spiked over $1,000 the last time as well.

So I would say, yes, we are a little below where our low-water mark was for Personal Care margins and some of that was the one time.

Some of it was the pricing environment globally was a little bit more aggressive so we had a little bit bigger trade spend in the first quarter.

So that is probably part of it.

So timing and promotion activity is part of it.

We certainly expect our margins to improve from where they are over the back half of the year.

Yes, I would say also the makeup of cost inflation is probably, if you think about it, is two-thirds oil and oil-related costs, one-third fiber.

That is a little different mix than we have experienced in the past, and oil and oil-related costs tend to impact Personal Care a little bit more than you would see in tissue.

I also think some of the underlying commodities are adjusting quicker now than they may be used to.

So polymer is reacting more quickly as well as super absorbent.

And by the same token, you are, it sounds like, trying to react more quickly as well?

Yes, absolutely.

Okay.

In that context, I guess, how do we think about your guidance?

How much confidence do you have in your guidance, why should we kind of believe in your guidance in a sense?

And it was kind of that you went through the incremental $275 million in commodities roughly and how that sort of breaks out in terms of pricing in FORCE and overhead.

But could you put a few more numbers behind some of that and let us know your confidence in each one of them, particularly around the competitive environment going forward?

Ali, I think you know us well enough; we try to tell you how we really think it's going to turn out every time we do this call.

So our guidance -- our confidence level around guidance is always pretty high or we wouldn't guide it to this level.

Now, we are not always right and sometimes things happen that we didn't expect.

So certainly based on the assumptions that are in there that we share with you in terms of input costs and cost savings, we are pretty confident we can deliver in all of those areas.

Okay.

Last one is something you generally do have control about; it's buybacks.

Can you give a sense of the pace of that as you go forward?

Yes, as we said in the January call, and Mark can give a little bit more color, but we expect to have most of our planned buybacks done for the year in the first half of the year.

Yes, I think that is fair to say.

We will have some to do in the back half, but we have got a significant amount out the first quarter.

We will take that pace down just a little bit in the second quarter, but the majority will be done by the time we finish with June.

And nothing incremental planned at this point?

No, we already had a pretty big step up in this year's planned buyback activity.

So we will see how cash flow looks later in the year, but at this point we are pretty comfortable with the plan.

Okay.

Thanks very much, guys.

Chris Ferrara, Bank of America.

So I guess I just wanted to follow on a little bit more specifically on that first line of questioning.

I guess the specifics are Consumer Tissue North America, Personal Care globally; it seems that pricing is a little bit more challenged, right?

You have deeper levels of promotional spending in Personal Care yet you are turning around today and saying that pricing realization is going to be a little bit better.

And your volume assumptions aren't changing much, I guess.

So what gives you the confidence that volume won't drop off more, particularly in Personal Care I guess, now that the competitive environment is already difficult.

Now you are going to price on top of that difficult competitive environment and you don't see a lot of volume fall off?

Or maybe you do and it's just embedded in a bigger number.

Like I said, if you can give a little color around that it would be very helpful.

Sure.

Well, on tissue in particular, last year in the first quarter we were on allocation on Scott tissue so we had constrained promotional spending somewhat and it returned to more normal levels late in the year.

So it's not as big of a jump if you look at the average for 2010 versus where we spent in the first quarter.

So we would say part of it's the comparison -- a different set of issues but a similar story on Personal Care where last year's first quarter was a little lighter promotional calendar.

We had jeans diaper come in the second quarter and spent a little bit more aggressively on that, and so we had a little bit more promotion in the first quarter.

We also had some competitive activity in the first quarter that we were matching up to that ramped up in the latter part of last year, particularly in K-C International.

So from that standpoint some of it's in the quarterly comparison; it was probably the toughest in the first quarter.

If you looked at it versus the year average, it wouldn't be up by as much.

And then to the second question about demand, in baby care it's really more of a function of the birthrate than consumers deciding to constrain purchases of diapers.

And so we have seen a relatively depressed birthrate really since the economic downturn began in 2008 and 2009, and have actually seen probably a 5% decline in the total number of annual live births over that cumulative period.

So we are expecting that to start to tick up in the second half of the year and to kind of level off in the first half.

And so we will see how the data progresses but we don't think industry price changes will have a big impact on that.

We will obviously watch private-label share and pricing gaps to see what happens in that standpoint to see there is any category down trade.

But with all the innovation we have coming with an improved Huggies diaper that starts to ship, with jeans diapers in the second quarter, we have got some exciting news on Huggies that we will be talking about later this year.

All those factors we feel pretty good about our innovation plan for the year.

And Tissue you would see a similar story.

We have got pretty good momentum going on Cottonelle.

As we see pricing take hold in the market, we don't expect to see a big hit there.

So it sounds like -- if I could just characterize it, you are saying that the higher levels of promo that you guys cited and then back to pricing, I think in North America pricing decelerated sequentially in a couple of the categories.

You are saying that is a comp issue; you don't feel like the competitive environment is particularly more heated right now than it was over the last six months.

Is that right?

Yes, with the caveats that in some markets where we talked about principal competitors, and baby and child care in particular, that heated up last year.

That has abated somewhat but not substantially; but not as much in the US.

Okay, that is helpful.

Then just I guess on pricing geographically, North America obviously you have already maybe the big announcement.

Can you just talk about elsewhere?

I mean nothing -- we haven't heard anything on Europe.

In China is there any chance of taking -- what about Asia in general?

Is there any chance of taking pricing in Europe, I guess, also?

Yes, I think what you would want to look for is where you have had very strong currencies you are probably not going to see much opportunity for price, because you are not going to actually have the same impact on their local currency cost structure.

So in markets like Latin America, we will probably be getting more price where their currencies haven't appreciated that much relative to the dollar so we will be aggressive there.

And other markets like Australia, which has had a very strong move against the US dollar, probably not a big move on price there because it's not really going to be justified in a local currency market.

Other markets, like Vietnam, have been very high inflation so obviously you see pretty high price realization there.

China there is a lot of launch activity going on so it's a pretty competitive market, so probably not as much of an opportunity to gain pricing in China.

But that is one we will continue to watch and try to drive mix and innovation there to get revenue realization.

Thanks a lot for the time.

Gail Glazerman, UBS.

Good morning.

Can you talk a little bit more about the Personal Care volume in international markets?

I know you said Venezuela was a big impact on that.

Is that something you can quantify, and are you seeing any sense of pressure and resistance to price increases in those markets?

Yes, Venezuela was -- Paul, what -- was it a couple of points of drag in the Personal Care numbers overall?

Correct, it took about 0.5 point out of our total consolidated volumes and it more skewed to Personal Care obviously.

So we saw broadly good results across most of the international markets, probably not as rapidly growing as in prior quarters.

It was a little slower for us in Eastern Europe, but still had double-digit gains in China and high single-digit growth across Latin America, ex Venezuela.

Okay, great.

Is it possible to break out and quantify some of the operating and one-off costs that you had in Personal Care in the quarter?

No, it was -- we had several start-ups and some of them didn't go as well as planned, and so it wasn't any one thing that was as big of a deal.

The bigger factor driving the margin was cost inflation and higher trade spending.

Okay.

Tom, you had mentioned I guess some early signs of economic recovery.

Is that something you can elaborate on, where are you seeing it and the change in buying patterns?

Is it in K-C Professional?

Yes, a couple of areas.

Obviously we expect the birthrate to stabilize and start to tick up in the US in the back half of the year.

We look at lots of long-range forecasts on that.

A lot of it's related to consumer confidence and so forth, so we are seeing small positive signs there.

In our KCP business we have double-digit volume growth in safety in the quarter, which is good, that manufacturing-related stuff is starting to move again.

On the other hand, office vacancies are still bumping along the bottom so not a lot of improvement in that segment.

Lodging as well is at near historic lows.

So it's kind of a mixed bag, but in some of the manufacturing segments we are starting to see decent growth.

Actually have decent volume growth in KCP in Europe, which Germany is heating up and recovering nicely.

And then in the emerging markets we saw still pretty solid volume growth in KCP.

On Health Care as well had decent volume growth this quarter, which has been a pretty stable performer.

So we are past the H1N1 comps and are back to more normal growth in Health Care which was positive.

Okay.

And just one last question.

You have touched on some of this, but in terms of price increases that you have announced, mainly for the North American market, can you give any sense of color to both the competitive and the customer response to that?

Any areas that you would be particularly concerned about risk of trade down?

Markets like paper towel seem to be still pretty weak for you.

Are you concerned that this will just make that issue -- aggravate that issue I guess?

Yes, I think our announced price increases were in bathroom tissue, diapers, baby wipes, and so I think there has been some competitive announcement on paper towels that we will obviously be evaluating.

But I think that, like anything else in these things, you announce your price increase -- I don't think I have ever seen a customer yet that has said thank you for that.

And so -- just as we don't want our suppliers hand us cost increases.

And so it's a competitive environment and we will see what happens in the marketplace.

It was -- I think recently we had confirmation that one of our principal competitors is going to follow and the KCP front actually a couple of other competitors led price increases that we recently followed.

So, yes, I think what -- it's not surprising when you look almost across every category out there you are seeing the impact of higher commodity costs show up and higher selling prices for everything.

Okay, thank you.

Wendy Nicholson, Citigroup.

Good morning.

Two questions.

First, I know you don't like to give specific quarterly guidance, but I wanted to get a feel -- I hope I didn't miss it -- for any of the moving pieces in the second quarter.

If most of the pricing isn't going to go into effect kind of until the summer months, I assume the second quarter is going to feel more gross margin pressure but maybe you are going to get a volume bump as some retailers take inventory in prior to the price increase.

So can you comment on that sort of generally?

Yes, we don't give any quarterly color on that, but I would say you are thinking about the right variables.

So in the second quarter we will not have much benefit from any selling price moves, at least certainly not in North America.

We do try to manage the amount that customers forward by on pricing, because it just screws up everybody's supply chain.

So I wouldn't be looking for too big of a volume move there.

Okay.

Wendy, the other thing I would add is, in the near term, costs are going up sequentially.

Although, with the amount of shares that we bought back in the first quarter, that should start to benefit the bottom-line number more going forward.

But fair to say most of the FORCE savings will be probably back half loaded as well?

Yes, I think we are pretty steady implementers of those programs so I think you should start to see those build as the quarters go.

Okay, fine.

And then on currency, I know you sort of shifted the expectation there of 1-point benefit to a 2-point benefit on the top line, but I am surprised you didn't call that out in terms of something that was going to insulate your earnings maybe a little bit more than expected.

And can you remind us kind of what the translation is or if there is a multiplier effect in terms of, if currency is going to benefit the top line by 2 points, what is the impact on your operating margin or your operating profits?

Is it that same 2 points or is it a little bit more?

It's roughly about that.

It always depends on what currencies are moving, but essentially the change from the 1-point benefit to 2 points of benefit on the top line translation to the bottom line is about $25 million or $30 million of operating profit.

So it is one of those other items that is a bit better than we planned originally.

Perfect.

Okay, thank you very much.

Chip Dillon, Credit Suisse.

Good morning.

First question is sort of just dive in a little bit into the higher costs.

It looks like the midpoint of your expectations are up about $275 million, but FORCE will offset $50 million of that so I get to $225 million.

And I hate to go so fast with the math, but that looks like about $0.35 to $0.40 a share after tax.

And I suppose you will get also some benefit from currency.

But all added in it looks like to offset that you need about 2% higher average pricing over the second half of the year, which certainly seems reasonable given your announcements if you can get them.

Am I on the right track there?

I think you are a little high on the price front.

Basically our cost inflation, we went up from $200 million to $250 million to around $450 million I think, and so it was about a couple hundred million move.

If you get on average about 0.5 point more price, that is $100 million.

Some additional FORCE cost savings is another $50 million, and then some benefits from currency and between-the-line spending and those kind of things is roughly how you get there.

Okay.

I am sorry, I meant 2% for the half so that would be about 1% for the year I see.

And of course, currency helps you as well.

Now since you have come out both in the US market on disposable diapers and on retail tissue have you seen anything in the marketplace, any movement from other competitors so far?

I believe that one of our principal competitors has confirmed that they are going up on diaper pricing and on roll tissue.

Got you, okay.

You will be able to ask them questions later this week.

Got you.

Okay, that is pretty good.

So it's the one that actually does answer your questions, that is good to know.

And the last question, this is more for Mark, not to put you on the spot.

I just wanted to get an update on -- this is a Note 2 from the K, but when you look at the timber notes you all got back years and years ago, I think you have been carrying about $615 million, give or take, on your balance sheet which kind of overstates your debt and your assets.

Is that number still about right and do you see that changing much in the next year or two?

No, I think we have got -- I think the disclosure sort of speaks for itself.

We have got a financing out there that is a secured financing around the timber that we sold and --.

This is more of a tax planning strategy, Chip, so nothing has really changed on that.

Remains in force and we haven't had to pay the tax yet, based on how it has been structured.

Yes, there is two notes in there, Chip, and we paid one of those off.

That may be the movement that you are seeing.

Yes.

So is it now below $617 million or is that --?

Yes, it's about $400 million.

And was that paid off in the first quarter?

No, it was last year.

Last year, got you.

And last question, again I understand how --?

Chip, you are really getting into the 10-K, that is good.

You know, we try to do our homework.

But, listen, the last question is I know that a lot of these structures allow you to kind of -- obviously, the longer you can push this out the better it is.

Is this something that you believe you can keep pushing out, say, for more than five years?

I don't think we are going to go there on this one, Chip.

We are pretty deep in the dirt here so I think the disclosure sort of stands for itself.

Got you.

I totally understand.

Thank you very much.

Lauren Lieberman, Barclays.

Good morning.

I just wanted to ask a question or two about marketing spending, because there was sort of no specific mention in the press release and I know coming into the year the plan was for strategic marketing to increase faster than sales.

Is that still the plan or should we think about it as being more of an in-line with sales kind of year or even below?

No, I would expect to see absolute spending go up this year, but probably by about the same or slightly less than sales.

And so we are getting pretty good returns on our innovation spend we have got a lot of innovation coming and we are also getting some efficiency in how we spend the money.

So we think we are adequately funding the innovation which is our near-term strategy.

Okay.

And then on paper towels, do you guys -- I know you notably did not initiate pricing there in North America, but as we think through the fact that the volumes have been challenged for quite a while now, both category and your shares, what is the plan?

Is there innovation coming in towels?

Is their efforts to regain some shelf space for Scott towels?

How are you guys thinking about the strategic outlook for that business?

No, we continue to drive innovation and gain distribution back on both Viva and Scott towels.

We are back on air with Viva this year with Mike Rowe, our celebrity spokesperson for Viva, so we have actually -- that is out and the team is making some headway with that.

So, yes, expect to see us continue to support both those brands.

Okay.

And then finally just on curtailment.

So there was some curtailment expense in the quarter, where did that leave you at the end of the quarter?

Is there an expectation of further curtailment in tissue in Q2 or 3, or you think you are pretty clean from here?

Well, I think the way you should think about it is that we are really focusing on managing two variables -- customer service levels and days inventory outstanding.

And so we are taking curtailment as we need to to hit those variables.

And so I think part of the comparison to last year is that, because we were on allocation, our customer service wasn't where we wanted it to be.

So we ran everything we had, in tissue particularly, flat out in the first quarter last year, and this one was probably more normal, sequentially, to where we were in the fourth quarter.

Lauren, so for the full year curtailment really shouldn't be a positive or a negative.

It should be pretty neutral.

Okay.

So I am sorry, so did the $25 million in this quarter, did that sort of work its way through the system so it actually ends up being a positive from here or is it just there is no further impact after this quarter?

Yes, it could be a small positive.

Okay, great.

I will leave it there.

Thank you so much.

Bill Schmitz, Deutsche Bank.

A couple things; one is kind of housekeeping.

But if you look at your cost of goods sold breakdown and you kind of disclosed pulp and polypropylene and some other things, that is only about a third of your total cost of goods sold.

So kind of what is going on with the other two-thirds that we really can't track as closely?

That should be more than two-thirds.

Our costs are going up, Bill, on packaging, materials, adhesives -- really just about everything that is going into our products are going up.

Individually they may be smaller so we don't disclose them, but they all add up.

Okay.

And so you assume similar inflation as some of the oil-based stuff and the pulp?

Yes.

Okay, got you.

Basically if you look at everything from polymer, packaging material, adhesives, super absorbent, they all use the petroleum molecule in some fashion and so they are related to that.

Okay, great.

That is really helpful.

And then again, I know Wendy asked the question about the second quarter.

But if a look at some of the variances, like I think last year you had $105 million of FORCE savings in the quarter; you had a big restructuring benefit.

How do you lap all that stuff?

Again, we are more focused on hitting the full-year guidance at this point and so -- than trying to manage any one individual quarter to have quarterly comparison that is favorable or unfavorable.

Last year, FORCE was pretty consistent across the years so the big restructuring benefit we got was in the third quarter of 2009.

So year-on-year we don't have the same comparison issue that maybe we wrestled with in the third quarter of last year.

Okay, I got you.

And then (inaudible) in terms of elasticity on some of this pricing, are you seeing historical trends prevailing or has it gotten worse?

How has it been trending?

Well, the other thing, when you look out there at every category you are seeing this kind of pricing popping up.

So it's certainly happening in food, it's happening in other non-food categories; it's happening at the gas pump.

And so I suspect what you are seeing is the consumer potentially is less sensitive.

I think we are also getting more sophisticated in our pricing ability in terms of targeting price points and understanding consumer shopper behavior.

So where we are doing it with count versus list is more sophisticated as well, so we are intentionally trying to avoid having big elasticity challenges.

Okay, great.

Thanks very much.

Doug Lane, Jefferies.

Good morning.

Just looking at the gross margin trends last year, you saw the commodities went up, you saw sequential deterioration in the second quarter and the third quarter, and then in the fourth quarter it really evened out.

And, frankly, if I remember right, it was pretty substantially better than what I was looking for and then it looks like that has kind of reversed in the first quarter.

So I am wondering what is the main difference in the gross margin landscape, which looked like it was, at least on the margin, improving in the December quarter and now looks like it's going the other way in the March quarter?

Yes, sequentially our gross margin was down about 170 basis points from Q4.

A lot of that is going to be pulp and polymer, in particular, are up year on year.

But I don't know if Paul can add any color on that.

Yes.

Doug, the two main factors are first, as Tom mentioned, inflation especially in the oil-based materials.

They moved up quickly in Q1.

And then the other thing is promotion activity; we had more trade promotion in the first quarter.

So are we going to see that sort of promotional give and take as prices go up, so that we really won't get the full benefit of the price increase maybe, adjusted for promotions, until we get really into the third or even fourth quarter?

Yes, I think we have got some activity in K-C International that you will start to see in Q2, but the reality is the big price increase in North America doesn't start to go into effect until the end of Q2.

Okay, thank you.

Erin Lash, Morningstar.

Good morning.

Thanks for taking my question.

I wanted -- obviously cost pressures aren't unique to Kimberly-Clark, but I was wondering if you could discuss or provide some additional details on your conversations with retailers, both domestically and abroad, in terms of the cost pressures and the pricing actions that you have been taking.

Yes, I think retailers certainly understand what is going on because they are hearing it from every supplier.

So whether you are selling cornflakes or Kleenex you are seeing the impact of higher commodity costs show up in pricing discussions.

And so retailers understand it, but they also want to understand how are you going to help them drive their business overall and how are you going to make it relevant to the consumer and handle it in the shopping environment?

So I think every one of those discussions goes a little differently, but that is basically the nature of it.

Switching gears.

Beyond your share repurchase program that you have already announced, could you talk about your priorities for cash use and what your appetite for potential acquisitions are in this environment?

Yes, sure.

We continue -- the dividend is important.

We have increased our dividend at a rate faster than earnings for the last several years and have a top-tier dividend payout, so that is important to us.

And then, obviously, providing enough capital to invest in our business to continue the innovation growth and top-line growth in emerging markets that we have seen.

So we'll spend close to $1 billion on capital spending this year.

So that is obviously a key priority.

And then where we see tuck-in M&A opportunities, we would obviously look for those.

We are disciplined and approach it in that fashion, but I don't see anything substantial that is on the horizon at this stage.

All right, thank you.

John San Marco, Janney.

Could you drill down into the quarter's KC International volume growth?

Specifically, did it disappoint you at all?

And I know there is both inelasticity and some Venezuela issues in those numbers, but presumably neither of those are going away.

So I'm looking for a reason to believe we will get a recovery there as the year progresses and get something back to normal volume-wise.

Yes, I would say you've have seen a little bit slower category growth.

China, for example, we have been growing last year in the 25% to 30% range in Personal Care.

We were double-digit this quarter but lower double-digit.

We have a lot of aggressive expansion going on there and expect that to continue, but these are all competitive environments as well.

So if the Chinese economy slows a bit, you could see a little slower rate of category penetration in some of these markets.

Latin America continued to be pretty solid, so we had -- ex-Venezuela had volume growth in Personal Care that was high-single digits.

That is pretty consistent with where it has been with good category penetration.

Eastern Europe is probably the one that has been more of a challenge for us, and some of that has just been it's a more competitive environment and more competitive pricing pressure.

So that market actually dipped in volume in the quarter.

And we would expect that to turn around and return to growth with some of the activity that we have planned there for the balance of the year.

Got it.

So were you pricing ahead of your category in Eastern Europe, I take it?

It was more a competitive activity pricing below us, and we were probably a little slow to come down.

Okay, and just one last question.

You commented I think in your prepared remarks that you are expecting live birth growth starting in the second half of this year, from what has been a pretty severe decline.

I guess my first question is, is that a global expectation and how does that sort of add up geographically?

And then secondly, can you share what data you are basing that expectation on?

Yes, that comment was really related to the US market.

And we look at various consumer confidence surveys to get a projection on that and use the same types of sources.

And we can get you the specific details if you are interested.

I would love to.

Thank you very much for taking my questions.

Javier Escalante, Weeden & Co.

Good morning, everyone.

A couple of questions, actually.

One is clarification or if you could please revisit what is happening North America diapers.

Huggies prices were down in the first quarter I understand because of [trade spending], right?

And now you expect to put a price increase in place in the 3% to 7% range in the third quarter.

But is this change in pricing has to do with pre-existing promotional plans you had in place, meaning that it was sort of self-inflicted, or was it in response to consumer trade down to Luvs, to the mid-tier pricing from Procter & Gamble?

No, I think two things.

One is that there was a principal competitor had made a count change to an affected bonus pack to add some diapers to the pack.

Rather than do that we decided to match on a price per diaper basis through higher trade spend, and so you saw that impact in the first quarter.

Probably the other impact was looking at it versus first quarter last year.

We had relatively fewer events scheduled as we were getting ready for the jeans diaper launch that happened in the second quarter of last year.

So there was more of a normal event calendar in the first quarter of this year.

I see because -- my question relates to the price increase that Proctor announced -- is announcing to the retailers, my understanding is it limits only to Pampers not to Luvs.

So the fact that the price increase is only in Pampers does it in any way change your [setting] ability of the price increase for Huggies in the summertime?

Well, I think a couple of things.

First of all, we announce what we are going to do on price and then we see what shakes out in the marketplace.

And so I think the information on competition is emerging at this point in time and we will see what happens in the marketplace.

Obviously what private label does or other competitors do.

And the second thing is we have got a very strong innovation plan coming with an improved mainline Huggies that is beginning to roll out as we speak, jeans diaper coming in the second quarter, and then some strong infant care category innovation in the last half of the year.

And so I think when you are coupling pricing moves with better innovation that typically has a smaller impact on the category.

Understood.

Finally, more strategic.

In terms of your global pricing strategy, by raising pricing in North America but less so in Europe -- which is understandable because the strength of private label there, you have sort of a disadvantage market share position -- wouldn't you be pushing growth?

By leaving prices flat in Europe, wouldn't you be pushing growth in a business that is lower margin at expense of the North America business and, therefore, hurting shareholder value?

Is this like North America certainly is higher pricing, you have a better competitive position, but at the same time, if you can revisit the whole European strategy there because in the end if there is no growth in North America there is even less growth in Europe?

So is there a question in there, Javier, somewhere?

The question basically -- yes, there is a question.

The question basically is why don't you just exit Europe?

Okay.

Well, that is a different question than I thought you were going to ask.

I think the way the pricing strategies play out is that in every individual market you look at the dynamics of cost and competition, and you try to get as much net revenue realization as you can.

And you do that through a multiple of ways -- some involve innovation, some involve list price, some involve promotion strategy.

So we did some price realization in the UK on Andrex last year where we have a very strong brand, really by just adjusting our promotional depth and frequency.

Didn't do anything with list price and were able to improve our revenue realization by reducing the depth and reducing the frequency.

So every one of our teams around the world is trying to improve their margins as much as they can by using all the tools that they have available to them.

And so sort of a separate question long term is where is Europe from an attractiveness standpoint?

Overall Europe generates a substantial amount of cash.

They have delivered on their plan fully in 2010 and we know they are working hard to deliver on their commitments in 2011 as well.

But you understand what I am saying is that basically you are subsidizing Europe by taking prices in North America and leaving Europe prices flat.

And, therefore, you are basically pushing growth in the market that has lower operating margins and therefore you are basically destroying shareholder value by doing that.

No, no, you really look at it market by market.

So we are taking price in the US because of the innovation strength, the competitive dynamics, and the cost dynamics.

In some markets in Europe where we can get price, we will take price there as well.

But it's really more about optimizing each individual market as opposed to a global pricing strategy.

Okay, thank you.

Linda Bolton Weiser, Caris.

Just kind of a big picture question about -- you have had commodity cost pressures pretty on and off for several years now.

You have been really good about finding cost savings and increasing your cost savings, and you are talking about more overhead cost reductions now.

How does that affect your employees and morale?

I mean they are just constantly in a cost-cutting, cut this cut that type of environment.

Can you just kind of address that question about morale and the idea -- giving them the idea that there is growth and not just cutting?

Yes, absolutely.

And I will be going from this call on to a call with our top 1,000 leaders.

We are going to talk about our innovation plans for the back half of the year and the exciting things that we have coming in Huggies and U by Kotex and Poise and Depends, and the great opportunity we have to continue to drive our KCP wiper and safety business and all of the exciting things coming in Health Care and how rapidly we are growing international markets.

So it's not about cutting for the sake of cost cutting.

It's managing those things that we can control so that we can invest in the long-term future growth options for our business.

We are also them; hey, we are not going to be victims here.

This is the way the world is everywhere; everybody has got to be good on -- sharp on cost.

We have got to be good at pricing, we have got to be good at innovation, and so we are going to make those tough trade-offs to do the most important things and the nice-to-have stuff isn't going to get done.

So you see, you get a little warm-up of my speech that is going to come to the employees in a few minutes.

Okay, thanks.

John Faucher, JPMorgan.

So want to talk -- I know you talked a little bit about potentially the prices of the inputs continuing to move up a little bit sequentially from here.

It has been mentioned before on the call that the gross margin performance year over year last year was a little bit volatile.

So my math would say you guys had roughly 6% cost of goods sold per unit inflation, basically taking the 10% COGS inflation, subtracting that unit growth, subtracting that FX.

Should we assume a similar level for the second quarter?

And then, since the comps change year over year in the back half, the lesser level of COGS per unit inflation in the back half on an FX-neutral basis, if that makes sense?

Yes, I think directionally, without doing all the math in my head, that sounds right.

But if you look at -- pulp is likely to go up again in April, polymer is going up in April from where it was in the first quarter.

So I think we will probably have more -- relatively more cost pressure in the second quarter and the comps get a little easier in the back half of the year.

Especially on pulp.

Yes.

Okay, great.

Then, not to pick at this, but I thought it was interesting you guys simply lowered the bottom end of the range of the guidance.

And given the level of pessimism surrounding the numbers today, can you talk a little bit about if you were to sort of hit the midpoint or above from that standpoint, what do you think would need to go right in order to have a more positive outlook relative towards getting close to the higher end of your guidance?

Yes.

Well, part of the reason for widening the range was when you think about it our -- just our cost estimate alone swung by $0.45 a share from our last guidance to you and today.

We were operating with a $0.15 annual guidance range, so widening it seemed appropriate.

So how would you get to the top end of the range?

If cost wind up being a little bit more positive in the back half of the year, if things settle down in the Middle East in oil.

It wasn't that long ago it was $85 a barrel.

We are not predicting that, but if you saw some break in commodity costs in the second half that would be a plus.

Obviously, full realization of price and innovation, particularly in the back half of the year, would get you north of the top end of the range.

And then delivering the kind of cost savings and SG&A that we talked about.

And so we are aimed at doing all that, at least on the things that we can control, and think we have still got a shot at the guidance range this year.

Okay, great.

Thanks.

Alice Longley, Buckingham Research.

Good morning.

I have some follow-up questions on the promotional activity for diapers in the US and bath tissue in the US.

I think those are highlighted in your press release too.

Your net selling prices in the US were -- or North America were a negative 3% and then selling negative 2% for bath tissue.

Was that about in line with the industry or would you say that that net selling number, in both cases, was a deeper negative than the industry?

Well, I think because of the factors that I talked a little bit about it's probably a little worse for us from a comp standpoint.

In the tissue front, as I said, in some areas we had some supply challenges in the first quarter of last year, so we had basically pulled back on promotions.

And so now that we are back to more of a normal promotion environment on tissue that is a bigger negative for us than it would be for some other competitors.

On the diaper front, part of our increase in trade was, again, getting back to more normal or more robust promotional calendar, so that is probably going to be more our issue.

And then we are matching up with some competitive activity with trade spending versus with other tools.

One in the US where you put a bonus pack in that shows up as a different -- that shows up as volume growth not as higher trade spend.

All right, but on a price per unit basis would you say that in diaper/childcare, if you were to look at the numbers that way, would net selling prices be going down similarly throughout the industry?

Again, I think, because of the timing of promotions, we are probably going to be a little higher drag than the industry.

You would see competitive pricing on shelf, just -- so it's more of a comparison issue.

All right.

And then should we expect the same sorts of numbers in both cases in the second quarter because the price increases won't come through yet?

No, I think, in the case of tissue, our supply issues were stabilized by the second quarter of last year so it shouldn't be as big of a drag.

Okay.

But in childcare it might be similar?

I would say, because we were launching the jeans diaper last year; we will be doing that again this year.

So again the comparison should be a little easier in the second quarter.

Okay.

And then once we get to the second half and we get these price increases, but maybe you will also have incremental trade spend more than you did a year ago?

Are we going to see those price increases you set actually come through in the net selling prices that we see?

Or are they going to be -- are the announced price increases going to be offset with incremental trade spending?

That is obviously our focus is to make sure that those announced list price increases do translate into higher net realized revenue in the back half of the year.

If you take your list up and spend it all back, you won't have accomplished anything.

And so we will see what happens in the marketplace.

But we certainly believe that pricing is justified based on the costs.

If you look at other categories, it's happening in lots of other categories around the grocery store.

Okay.

And then the final piece of that is just to circle back to a former question.

You are not assuming much elasticity so you are going to take this pricing and you don't think volume is going to be hurt?

Yes.

You can see some short-term volume impacts.

Particularly if there is some consumer loading ahead of the price change or trade loading ahead of the price change, you can see some volume swings but we are not assuming any major volume drag at this point in time.

So the only volume impact would be retailers loading up or not, not the consumer responding?

At this stage that is our expectation.

Okay, super.

Thanks a lot.

Jason Gere, RBC.

Good morning.

Just couple of questions.

I guess the first one just talking about fem care and adult care.

So while the diaper business, and I hate this, has been sagging can you just -- and I know you are starting to lap some of the innovation.

How come there hasn't really been any pricing here?

Can you talk about that and just your expectations in North America, for volume growth that is?

Pricing in some adult -- in some cases the U by Kotex stuff was already premium priced.

And so as we have seen our share growth, we have been getting the benefit of mix on feminine care and really have seen good momentum.

Again, with much higher gross margin categories the cost impacts have a lower relative impact on the overall cost structure, so we are really focused on driving our growth and return based on our innovation there.

Adult care, similar story with both Poise and Depends.

Categories are growing rapidly; that is probably our most sensitive consumer from a price elasticity standpoint.

The primary competitor is private-label where we know that there will be a lag on pricing.

And so we have got strong innovation and mix-accretive innovation coming, and are really going to get our net realized revenue improvements there through mix and volume.

Okay.

And just I guess going back to one of the earlier questions, just on the cost inflation assumptions, I know you guys have confidence with what you are forecasting but can you just lay out the worst-case scenario?

What if pulp goes much higher than what you are anticipating?

Can you -- similar to what happened a few years ago, will you be more aggressive?

Again, leading the charge, taking more price.

Can you lean more on FORCE this year or are you borrowing from next year's FORCE savings?

I was just wondering if you could put -- lay out hypothetically a worst-case scenario for us.

I think pricing is always set based on expectations, so we are looking at the forwards for oil.

We are looking at all the industry forecasts for pulp.

If we saw that there was a much bigger spike coming, we wouldn't be shy about taking pricing where we need to to recover that.

I think the challenge has been that the commodity costs have not performed as forecasted.

No one expected the Middle East to melt down here in the first quarter which has driven oil up at a much more rapid pace.

And so I think we are looking at all the same forecast that we have in the past and that most of our principal competitors are, and as we see those expectations changing we won't be shy about adjusting price going forward.

Okay.

Just the last question.

I know you guys have given all your color on volume staying intact and not seeing consumers responding.

I was just wondering about -- just on the KCP side, obviously it seems like it's doing better than maybe what we anticipated.

So just wondering how much of the volume is better expectations just on the B2B business to kind of help out along the way.

Health Care obviously lapping some of that H1N1.

Can you just put a little context around that?

Thanks.

Yes, certainly both B2B businesses were strong volume performers in the quarter.

Probably have easier comps because both of the economic downturn impact on KCP last year and then the H1N1 impact on Health Care last year, so that will help, I think, our overall volume performance.

And I do think that you are seeing signs in some segments of the economy that things are starting to get marginally better.

So we will look for that to be a volume boost for us this year.

Okay, great.

Thanks.

Good luck, guys.

Chip Dillon, Credit Suisse.

Chip, did you find something else in the 10-K you want to talk about or you got another question?

We have done enough 10-Ks for one morning, Tom.

But on the retail tissue side, we have seen a lot of activity from your competitors, your two big ones, and even private label on adding basically newer variants Thru-Air Dried technology.

I was just wondering if there is something you can give us, some insight in terms of how you think about that and what maybe Kimberly might be doing going forward, especially as you realign your retail tissue footprint?

Yes, there is more TAD capacity out there, but it's also a lot more difficult to make a high-quality premium Thru-Air Drying sheet than just buying the machine and starting it up.

So I would say both us and P&G have substantial experience in both the fabrics on those machines, as well as the chemistry to deliver an advantage base sheet performance.

You will expect to see some improvements in Cottonelle that we think will be a step change in performance improvement on Cottonelle, which will continue to make it be the premium product that deserves the market pricing that we are going to have on it this year.

And do you think you have enough capacity to handle growth in the next, say, two or three years or will you need to address that?

Well, I think in the near term we are getting good productivity growth through our lean continuous improvement.

And so certainly for North America we should be in pretty good shape from a capacity standpoint.

Thank you.

At this time, we have no further questioners in the queue.

All right.

Thanks, David.

We will turn it back to Tom for our closing comment.

Okay.

Once again, it's a challenging environment but we have laid out a plan that we think is aggressive but will help us stay on track with our global business plan.

Thank you for your support of Kimberly-Clark.

Thank you.