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

(Operator Instructions).

It is now my pleasure to introduce today's first speaker, Mr.

Paul Alexander.

Thanks, David, and good morning, everyone.

Welcome to Kimberly-Clark's second-quarter earnings conference call.

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

Here's the agenda for our call.

Mark will begin with a review of our second-quarter results; tom will then provide his perspectives on our results and discuss our full-year 2011 outlook and we'll 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.

Now before we begin, let me remind you that 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.

Please see the Risk Factors section of our latest annual report on Form 10-K for a further discussion of forward-looking statements.

I'd also like to point out that we will be referring to adjusted results and outlook today, both of which exclude certain items described in this morning's news release.

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

Now, I'll turn it over to Mark.

Thanks, Paul, and good morning.

Let's start with a few headlines.

First, we delivered organic sales growth of 3% highlighted by 8% growth in K-C International.

Second, cash flow was strong and improved both year over year and sequentially from the first quarter.

And third, we continue to focus on the right near-term actions to offset cost inflation -- raising selling prices, delivering strong cost savings and reducing our overhead spending.

Now let's cover the details of the quarter.

Overall sales increased 8% to an all-time record $5.3 billion.

Organic sales rose 3%, on track with our full year plan.

Sales volumes improved 2% while net selling prices were up a point.

Volumes benefited from innovation and our targeted growth initiatives, although category demand remained soft in parts of North America.

Second-quarter adjusted operating profit rose 1% with an operating margin of 13.6%.

Performance benefited from top-line growth and $45 million of FORCE cost savings, but was negatively impacted by input cost inflation of $180 million.

That brings year-to-date cost inflation to $375 million which is significantly higher than our previous plans.

Let me spend a few minutes on the cost environment.

Costs for many of our oil-based materials have continued to rise even though oil prices have moderated over the last three months.

That's true for polymer resin, super-absorbent, adhesives and other packaging materials.

Costs have been impacted by tight supply for raw materials used in their production and strong global demand, particularly in China.

As a result, we've raised our cost inflation assumption for the second consecutive quarter.

For the full year we now expect cost inflation of $650 million to $750 million, which is higher than our previous plan by $200 million.

That's an incremental headwind of about $0.35 per share.

Nonetheless, despite the pickup in cost inflation we're maintaining our previous guidance for adjusted earnings for the year.

Tom will talk more about that in a few minutes.

We're also encouraged that market pulp prices are decreasing in July by $20 to $30 per metric ton, that is included in our plan.

Now, turning back to our second-quarter results.

Second-quarter adjusted earnings per share were $1.18 compared to $1.20 last year and benefited from a lower share count.

Meanwhile, a higher adjusted effective tax rate reduced our earnings by $0.07 per share in the quarter.

Cash provided by operations increased 31% to $771 million driven by lower working capital.

As expected, cash generation also improved significantly versus the first quarter.

I expect our cash flow in the second half of the year to be up nicely compared to the first half as our earnings grow and nearly all of our pension plan contributions are behind us.

We repurchased 5.3 million shares up of KMB stock in the quarter at a cost of about $350 million.

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

Now, I'll 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 rose 3%.

Sales volumes improved 2% and net selling prices were up 1%.

We delivered high-single-digit volume growth at K-C International outside of Venezuela and in adult care and baby wipes in North America.

On the other hand, volumes fell significantly in Venezuela and baby and child care volumes in North America reflect continued soft category demand along with a modest decline in market share compared to strong year-ago levels.

Personal Care operating margins of 17.1% were below prior year as price increases at K-C International and cost savings were more than offset by input cost inflation.

Turning to Consumer Tissue, organic sales grew 4% and selling prices were up 2% led by cost driven price increases in K-C International and our mix improved slightly.

Sales volumes increased 1% as gains in bathroom tissue and Kleenex facial tissue in North America, fueled by innovation and share gains, were partially offset by declines elsewhere.

Operating margins of 10.4% improved both sequentially and versus the prior year.

Moving to K-C Professional & Other, organic sales increased 1%.

Net selling prices were up 2% in response to commodity cost increases while sales volumes fell 1%.

Volumes in North American safety and total KCP in Europe both declined compared to double-digit increases in the prior year.

On the other hand, volumes were up mid-single-digits in K-C International and high margin wipers in North America.

Operating margins of 15.2% were down year on year but remained solid and picked up nicely sequentially.

Lastly, healthcare organic sales were up 11% driven by higher sales volumes of 10%.

Volumes of high-margin medical devices were up high single digits in North America including strong growth from I-Flow.

Supply volumes grew double-digits and benefited from improved category demand in North America along with some distributor and end-user inventory reductions in the year-ago period.

Operating margins were above prior-year levels as sales growth and cost savings more than offset cost inflation.

So that wraps up the review of the quarter.

To recap, we achieved organic sales growth consistent with our plan led by K-C International.

Delivered strong cash flow and we continue to take aggressive actions to offset commodity inflation.

Now I'll turn it over to Tom.

Thanks, Mark, and good morning, everyone.

I'll share my perspectives on our second-quarter results and our full-year outlook and then we'll get to your questions.

In short, we continue to execute our global business plan strategies and we continue to target top- and bottom-line results for 2011 the that are in line with our previous guidance.

So, let's start with our second-quarter results.

Although adjusted earnings per share were down slightly versus last year, we delivered sequential improvements in most areas.

Organic sales growth, margins, earnings per share and cash provided by operations all improved versus first-quarter levels.

This gives us confidence in our ability to deliver improved results in the second half of this year.

Let's look more closely at a few areas of performance in the quarter.

Our organic sales growth of 3% was on track with our full-year plan.

I'm encouraged with our 2% volume growth, which we achieved despite continued weakness in the baby/child care and K-C Professional washroom categories in North America.

As you heard from Mark, we continue to make good progress with our targeted growth initiatives.

In North America, that was particularly true in adult care, K-C Professional wipers and Health Care medical devices.

And K-C International had a very strong quarter highlighted by great volume performance in Personal Care in a number of markets including China, most of Latin America and the Eastern Europe/Middle East and Africa region.

We're gaining market share in a number of our businesses.

In the US we held or increased market share in six of our eight key consumer categories.

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

And through the first half of the year our shares or even with or ahead of last year in seven out of the eight categories.

At K-C International we're also growing ahead of category rates in a number of markets including Brazil and China.

We have a number of innovations coming to market in the near term, that includes Huggies Little Movers Slip-On Diapers, which launches in just a few weeks and we are excited about this first of a kind innovation in North America and we are also introducing it in some markets in K-C International.

We also have exciting innovations coming soon in Kleenex facial tissue and Poise pads.

Let's shift now to cost reduction.

I'm encouraged by our progress delivering FORCE cost savings and overhead spending reductions.

Our efforts in these areas helped us improve gross and operating margins 50 basis points sequentially from first-quarter levels even though our input costs increased further.

I'm also pleased with our cash generation in the second quarter.

Our strong cash flow enables business reinvestment and shareholder friendly capital allocation.

On that front, second-quarter dividends and share repurchases totaled $630 million and full-year amounts should be around $2.6 billion.

Last quarter we shared with you the three areas that we're focused on to offset cost inflation -- improving revenue realization; delivering FORCE cost savings; and reducing overhead spending.

For the full year, we're now ahead of or on track with our previous plans in each of these areas, which is very important since the commodity cost environment has worsened again over the last three months.

Let me give you a short update on each of these areas.

First, on the revenue front we're getting good traction with a number of our pricing initiatives in K-C Professional and in K-C International and we expect full-year benefits to be somewhat higher than we previously estimated.

Elsewhere, price increases have started to go into effect for our North American bathroom tissue business.

While it's still relatively early, we're cautiously optimistic that these increases will be realized in the marketplace.

While implementation of our diaper price increase in North America has been delayed slightly, we continue to expect that overall price mix improvements will benefit our top line by 1% to 2% for the full year.

Second, we continue to identify and implement incremental FORCE cost savings program and we're raising our savings target for the second consecutive quarter.

Our new target is $300 million to $350 million, that's $50 million more than our previous plan.

And third, our teams are making excellent progress reducing overhead and discretionary spending.

As a result, we've reduced our full-year SG&A spending plan significantly and now expect that total between the lines expenses will grow at a much slower rate than sales growth.

Altogether we expect these actions, along with stronger currency exchange rates, to essentially offset the incremental inflationary headwinds we're now expecting compared to our previous plans.

So we continue to target full-year adjusted earnings in the range of $4.80 to $5.05 per share for 2011.

Nonetheless without some moderation in commodity costs it's more likely that 2011 results will be in the lower half of that range.

So to summarize, we're continuing to execute our strategies for the long-term success of Kimberly-Clark.

We're making excellent progress managing those factors we control to deliver solid results in the short term.

And we're firmly convinced that successful execution of our global business plan will continue to improve shareholder value.

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

(Operator Instructions).

Wendy Nicholson, Citi Investment Research.

Hi, good morning.

Two questions.

First of all, can you talk about sort of the early receptivity, if you will, of the pricing that you've put into the marketplace?

Are you getting pushback from the retailers that you need to increase your level of promotional spending or anything like that to defray some of that impact?

And then my second question is on the Health Care side.

That business looks like it's kind of come roaring back from a volume perspective.

Is there a fair degree of visibility that in the back half those kind of higher levels of volumes will continue?

Because I know you face pretty easy comps there.

Thanks.

Yes, sure.

Good questions.

On the pricing front I would say it's progressing about as you would normally expect.

And so I think most retailers want to make sure they're not going to be disadvantaged.

But I think they also see pricing going up in lots of categories across the store.

And so ours are no different as we feel the pressure of commodity costs.

So you're starting to see retails go up and hopefully we'll be able to sustain that through the second half.

On the Health Care volume front we did have really easy comps.

And you may recall last year at about this time we had actually some distributors returning products that were bought in prior periods for the H1N1 crisis.

So we would guess probably about half of the 10 point volume increase was related to the easy comp and the more normal underlying growth rate is more in the mid-single-digits which is what we'd expect going forward.

Okay, fair enough and then on the pricing side just for a minute.

Even though we've seen -- whatever -- a lot of volatility in pulp prices maybe starting to roll over, net-net the pricing that you've put in place -- the probability that that could be rescinded or anything like that, we'd have to see a pretty substantial further change in pulp before you backed off any of the price increases you've put through?

Isn't that fair to say?

Yes, we've got a long way to go just to get back to even here, so --

Okay, good.

Sorry.

Sounds good.

Gail Glazerman, UBS.

Hi, good morning.

Just looking on the pulp for a moment, I just want to understand your guidance a little bit further.

You mentioned the July increase -- decrease was in line with your estimates.

First-half pricing seemed to be kind of in-line with the low end of your guidance.

There's another decrease in the market for August.

I mean does that imply that you're looking for some sort of rebound later in the year?

I'm just curious what you're seeing there?

Yes, well we typically look at the three industry forecasters and average those.

And if you look at where we -- we were at $970 in the first quarter, we were at $1,030 for the second quarter, so for the first six months we're averaging about $1000 a ton.

Our guidance for the full year is $1,000 to $1,020 and that would say that there's the risk that there will be some pickup in the back half which is what the forecasters are saying.

There may be a little bit of upside on that; we'll have to see.

Okay and can you just talk generally about what you're seeing with the consumer?

Have you seen any changes in buying behavior with the soft patch that we've seen in the broader macro data?

No, not yet.

In fact, one encouraging sign was that private label shares were really down across-the-board in virtually every category, both sequentially and year-over-year.

So I think behind the innovation that we're driving and others are driving in the marketplace the categories are looking a little healthier.

We would like to see a little quicker uptick in the birth rate which that's probably the other side of economic confidence; that's been weak for longer than we would have guessed.

But we're starting to see some early signs that that may be improving, although the category will still be down more than we would have expected for the year.

Okay, thank you.

And just a last question on feminine care.

Your volumes were I guess relatively flat year on year.

You're obviously comping the launch of U by Kotex.

And I'm just wondering, are you seeing increased competition there and any issues I guess sequentially in terms of share?

Yes, I think our shares were down a half a point or something sequentially, but the U by Kotex shares hang in there at about 5.

And so I would say at this point we're not seeing anything major from a competitive front that's happening in the marketplace.

And we've got good product improvements yet coming this year, so expect to hear more from that space.

Okay and actually just one last question.

In terms of resins, so your third-quarter prices or your July prices are up from what they were in June?

Is there any sort of contractual lag that you would expect to see some benefit from lower oil prices?

You know what's actually happening is that -- and this is probably a more complicated explanation than maybe you're looking for, is because of the relative price of oil versus natural gas a lot of the refineries are using natural gas more in their steam crackers.

And as a result they're producing less of the polymer byproducts that go into many of the things that we use like polypropylene or adhesives or packaging materials.

And so there are still some relative shortages of the monomers that go into our supply chain.

And so you're seeing still pretty firm pricing for polymers and adhesives and super absorbents and things like that.

Okay, thank you.

Alice Longley, Buckingham Research.

Hi, good morning.

Could you talk about the baby business in the US?

I think you said your share was down a little bit.

Is that expected to improve later?

Why is your share down and why should it improve?

Yes, I mean I would say our share has been bouncing around between 36 and 37 and we're more on the 36 side of that this quarter.

So it's down about a point or so, but last year was kind of a high watermark so it was a little tougher comp.

We've got a lot of innovation coming in the second half with Huggies slip-on diapers as well as some product improvements to our mainline.

So I think innovation typically drives share in this category and we'd expect to see some uptick due to the innovation that we've got coming.

All right, and -- is the share loss in this quarter tied to your comment?

You said that diaper pricing was delayed a little bit.

No, I mean the pricing is going to -- really doesn't have that much impact on share.

We thought prices were going to go up in July; it's looking more like it's going to be October at this point.

And why the delay.

It's where the competitive activity shook out in one key packing in the category which has typically been merchandise and cardboard boxes, the industry is shifting to poly bags and it takes a little longer to convert the assets to that new format.

Okay, so it's not that your major competitor is causing a delay in pricing going through?

We don't believe so.

Okay and then one final question.

Can you just sort of remind us why Personal Care margins overall are down year-over-year, while consumer tissues are up?

Why the difference indirection?

Is it just easier comps for tissue?

Yes, I'd say more of the pulp hit tissue last year and Personal Care is really being hit by all the secondary materials cost.

So polymer adhesives, packaging, super absorbent are all up double-digits this year.

The other thing, Alice, is that more of the pricing has already been taken in Consumer Tissue and Personal Care pricing comes more later in the year.

Okay.

That helps.

Thanks a lot.

Per Ostlund, Jefferies & Co.

Thanks.

Good morning, everybody.

Want to talk a little bit about the paper research restructuring since you are accelerating that activity here.

As we get through that restructuring can you help us understand just a little bit how the commodity cost sensitivity changes, or actually does it change?

Is the sensitivity still there and it just won't be as capital intensive?

Or will you truly have a better control over your costs and then the inflation expectations that go with that?

Yes, I guess I would say -- it probably makes our sensitivity to pulp price slightly worse.

We were about 10% integrated with these two pulp facilities.

On the other hand, they're relatively high cost pulp mills so they didn't provide an enormous economic hedge benefit.

They did provide some volatility benefit.

And so we'll be slightly more exposed to swings in pulp price without these mills.

Yes, I would say the other thing is the nature of the products that are produced at those mills are more value or private label oriented which tend to be lower margins.

So there will be a slight mix improvement.

We'll have a better mix, that's right.

Excellent.

Thank you.

Linda Bolton Weiser, Caris & Co.

I was just curious on the Consumer Tissue segment, the mix had been trending sort of positive up 1% or so and now it was sort of flattish.

Is there a particular reason for that that you can explain?

No, I think Scott tissue had a good quarter, but so did Cottonelle.

We picked up share overall in bath tissue.

And so there's nothing major that I'd say there.

We've got more innovation coming on Kleenex in the back half and second quarter is typically a weak facial tissue quarter because you don't have as much of the cold and flu or back-to-school impact, so that probably also affects it a little bit.

Okay, and just on your inventory, I guess it was a little improved.

It was up 13% year-over-year I think, it was up maybe 14% last quarter, so maybe a little improved but it's still up quite a bit.

Are you feeling comfortable with that?

And was there any curtailment effect in the quarter?

Yes, I mean I'll let Mark comment on the inventory.

Curtailment was negligible; I think it was about a $10 million hit.

And if we look at days of inventory in our supply chain it was maybe up under a day first quarter to second quarter, but there's some opportunity in the back half.

Mark, maybe you can comment on that if you've got any other color on it?

Yes, the improvement of -- inventories is right in line.

We have a lot of innovation coming to the market, so the businesses are wanting to make sure they can support product launches with the right levels of inventory.

So we feel good overall about our management of inventory.

The benefit in working capital for the quarter was extension of payables was the principal driver which our global procurement organization is doing a great job of managing.

So overall we feel pretty good about working capital.

Okay, and can I just ask, there's been a lot of speculation over Carl Icahn's involvement with Clorox and he has listed Kimberly Clark as being one of the companies that should be looking at acquiring Clorox and you sort of have this health and hygiene kind of strategic thrust both in your company and in Clorox.

Can you just comment on do you think there's any kind of a strategic fit and if there are certain areas that would be or certain areas that wouldn't be?

Is there anything you can say?

Yes, I guess I'd say we typically don't comment on rumors of M&A.

I guess I would say this is that our plan, as we've said too many investors, doesn't call for big transformational M&A.

And so I don't think any of the announcements related to Clorox change that point of view and we would consider Clorox to be a well-managed company.

So as we look at it, it's hard to see how you come in and do a whole lot better job of it.

Great.

Thanks a lot.

Javier Escalante, Weeden & Co.

Good morning, everyone.

I have a question with regards to whether you think that you need to increase prices higher or in more places given that, number one, your cost inflation has worsened by $200 million while your estimate [alone] for savings is up by only $50 million.

And I have another question after that.

Yes, absolutely, Javier.

One of our key strategies for this year is to get a price wherever we can.

So we have been aggressive in many markets around the world in looking at revenue realization.

In some cases we're doing that through list price, some places through mix, some places through innovation and so that's a key strategy for us this year.

And then the second question has to do with SG&A that came down more than I would have thought.

Number one, FORCE savings were only $45 million versus $60 million in the first quarter, so what drove the SG&A reduction?

Has marketing spending been dialed back in the quarter?

And if so, by how much?

Yes, a couple things there.

We probably don't do a very good job of tracking SG&A savings in FORCE.

Most of the FORCE savings tend to be cost of sales oriented and so that's probably part of it.

The second part of it is that marketing spending was down versus prior year in the quarter, which last year was the launch of U by Kotex as well as Poise.

And so that was -- so marketing year-over-year was down probably $20 million to $25 million, but sequentially it was up $10 million.

So (multiple speakers) we spent in the second quarter about the same level or a little bit higher than we did in the first quarter.

And on the savings, basically you were up in the savings FORCE savings to $300 million to $350 million.

If I am calculating correctly, you basically have $105 million in savings accrued in the first two quarters, so that means that you need to ramp up the savings to $245 million.

Could you explain the kind of activities and what is going to drive these accelerated savings given that it's been a little bit on the low end at the beginning of the year?

I'm thinking that will be my last question.

Yes, absolutely.

No, good question.

It is back-end loaded.

We've got an aggressive plan really principally around our global procurement program has got substantial benefits yet to come and there's a lot of programs underway that will be delivering value for us in the second half.

We're also continuing to drive our lean manufacturing process throughout our plants and we'd expect to see additional savings from that.

In addition, we have our usual material cost savings programs that will continue to deliver in the back half.

So the plan is back-end loaded, but we've got enough visibility of it that we're confident we'll be able to get there this year.

Thank you very much.

Jason Gere, RBC Capital Markets.

Good morning.

I was wondering if you could just talk a little bit about the European market.

Clearly it sounds like three months from your last conference call the North American market is a little bit more status quo.

KCI is a little bit better, but Europe still seems to be kind of the swing factor in terms of how the year may play out.

Can you just talk a little bit both from a Consumer Tissue and from a Personal Care side?

Yes, I mean I was just in Europe a couple of weeks ago and that team is committed to delivering their plan for the year and they've got actions in place to do just that.

They've got lots of cost savings coming to help offset cost inflation.

They also are planning on getting some pricing in some of their key categories.

We probably had a softer start on diaper volume at the beginning of the year, but they've got a number of things underway to help turn that around in the second half.

So I came away feeling encouraged that the European team, while their plan is back-end loaded, they've got plans in place to make sure they can deliver.

And within your guidance, obviously if you look at the market growth versus the innovation, obviously you've talked about some of the innovation.

What type of expectations are you building into Europe?

Are you looking for a nice sequential improvement or can you just put a little color around that?

In terms of top-line or product?

Top-line -- yes, I'm just focusing on top-line.

Yes, I think Europe's -- top-line probably isn't going to change all that much.

I think you'll see a much better bottom line as some of the cost savings come through.

Okay, just a clarification question.

When you talked about the diaper pricing in October, was that just on the pack change or was that also where I think there was some list price changes as well with some of the categories?

Yes, there will be some implementation of the list price changes, but there's also a fair amount of promotion protection that will take place in the third quarter.

So I would say we're probably not going to get a lot of price realization in the third quarter and more of it will come in the fourth quarter.

And Jason, most of the pricing action at the end of the day is tied to the count reductions.

Only a minority portion of it is coming through list price changes.

It's a big part of the category these days.

Okay and then just the last thing.

Can you talk to me or sell me in on the slip-on diapers, just in terms of -- I guess the consumer testing that you've done out there, why it took so long to come up with this idea, sounds a lot like training pants.

So I'm just wondering if you can just talk to me about it.

You know, I have a baby so maybe I'll be in the market for it.

No, I think it's a big ID around the world.

If you went and looked at the Japanese market it's a significant amount of the category and we've launched it in Korea as well and it's done very, very well.

And so it's really another option for mom diapering an active baby.

And so it gives her additional flexibility.

And so we do think -- it's priced from a value standpoint; it's going to be very similar to the price for a training pant.

We know we need to continue to drive value around our training pant business but we do think it's going to be a good option for mom and so research has tested very favorably.

We've been at this idea a number of different ways for a number of years.

We launched a product -- I don't know, it's probably been five years ago now, called Huggies Convertibles that we were aimed at this and didn't quite get the execution right.

We thought it was a big idea then and we're going to go back at it.

We think we've got a much better execution this time.

But do you -- and I know part of launching is obviously the competitive advantage, but just can you talk about training pants then in terms of the growth, or lack of growth maybe, you're seeing there and just the timing of coming out with a product here that I assume would be at a premium to diapers and especially when the category is still seeing some softness right now?

Well, the category is really soft because of the birth rate, but mom still wants the very best for her baby.

And part of what's happening in the training pant category is, as we've seen category weakness for several years, it's finally -- those children are migrating into training pants and that's having an impact on the category.

But, we believe we're going to continue to bring innovation to the category.

Even if the category is down the moms that are want the very best for their babies.

Okay, thanks.

Ali Dibadj, Sanford Bernstein.

Hey, guys.

A few questions.

One is if you could just talk a little bit more about the dichotomy of growth that you're seeing.

So KCI 8%, all-in 3, and I think the way you guys define KCI is about a third of your business.

So you're really not seeing much growth, I mean maybe down roughly to zero in the rest of the business.

Can you talk about that difference?

Can you talk how that's driven by price versus volume between those two groups, kind of KCI and non-KCI?

And also how you think about the outlook for especially the non-KCI part over the next little while?

Yes, I guess I'd say if you looked at the various categories in the US you'd see a mixed bag here as well.

You'd see the diaper categories down and so that's obviously been a drag across diapers and pants, but wipes it up.

And so we continue to do very well there.

And then if you looked at Poise and Depend, those are on trend with aging and you're seeing still strong mid-single-digit category growth and we've done even better than that over the last couple of quarters.

Fem Care we've had consistent strong growth behind some of the innovation launch, so we're seeing better results on that standpoint.

If you looked at Europe you'd see more ex currency negative organic growth, which really is something that's not too surprising given what's going on in that marketplace.

And then KCP, you're still seeing a relatively weak economic outlook, which hurts our washroom business, relatively better results in safety and wipers.

And Health Care, obviously in the quarter it had unusually large volume growth; we'd expect that to be more mid-single-digits going forward.

And so if you have the current situation particularly outside KCI, it doesn't sound like you're, again, planning a lot of price elasticity when you start thinking about the PC price increases later in the year.

So if you could talk about that.

And then also for the emerging markets, you mentioned over the past few quarters it's been difficult to take pricing in the emerging markets to offset currencies or to offset commodities basically because of the competitive environment.

Has that curtailed a little bit or is that still an issue?

We've gotten more price in emerging markets, particularly in the last quarter.

I don't know, Paul, if you've got the details of that.

Yes, Ali, our total price was up 4% in K-C International and we also had a point of mix as well.

So we've been doing a good job getting revenue both in personal care primarily in Latin America and then in Consumer Tissue really in all regions of the world.

And on the price elasticity question, the first part?

You know, I think if you look at from a diaper standpoint, we've really tried to do a better job of understanding how the consumer shops and are bringing price in a way that will cause less sticker shock than maybe we have in the past.

So doing it via count change across the big part of the category we think will have a reduced elasticity impact versus a straight list price change.

Okay and just one last clarification on the marketing research and general expenses number that's down 125 bps.

Can you just aggregate that in terms of percent of spend in advertising versus overhead reduction?

I think I answered in your earlier question marketing, which would be advertising and promotion, is down about $25 million year on year.

It's up about $10 million sequentially and then the balance is SG&A.

Okay, thanks.

Connie Maneaty, BMO Capital Markets.

Morning.

My questions have been answered.

Thank you.

John Faucher, JPMorgan Chase.

Good morning.

[Fauchy], that's a new one.

Well, you know.

You know, it's Monday.

A quick question in -- I'm trying to figure out (multiple speakers).

(multiple speakers), everyone.

If we take a look at your raw material inflation, the key input cost increase of $375 million year to date, your total COGS is up it looks like just over $700 million, so roughly half of your COGS increase is represented by the raw material inflation.

If we take your outlook for the balance of the year, which I think works out to like $275 million to $375 million and sort of went and doubled that and added that to COGS, I think we'd end up with a gross margin over the back half that's probably roughly in line with the second-quarter gross margin.

But, given sort of the comp there where you had much higher input inflation in the back half and also the pricing, any thoughts in terms of sort of sequentially how we should see the gross margin play out over the back half of the year?

Yes.

I mean I guess we'd say for the year we'd expect gross margin to be down somewhat more than operating margin.

We're saying operating margin is going to be down 50 basis points to 70 basis points for the year.

And so just given where we're at and what we have yet to go, I think we'll maybe close the gap a little bit in the back half, but we'll guess that we'll be down a little bit more in gross margin than we will in operating margin.

Yes, John, you should see both gross and operating margin sequentially improve in the back half of the year, consistent with our expectation for earnings to ramp up.

Okay, got it.

That's what I was looking for.

I mean -- but in order to get to sort of closing that gap you would need sequentially a decent sized uptick.

And I guess the issue really resolves sort of if it comes in at the lower end of the raw materials range and then better leverage from pricing.

Is that kind of the way to look at it?

I'd say pricing is part of it.

We've got much more cost savings coming in the back half.

Okay, great.

Thank you very much.

Chris Ferrara, Bank of America.

Hey, how are you?

I just want to go back to the diaper pricing delay for a second.

Can you just talk I guess about what changed incrementally?

Like why did it get delayed?

I mean I get that we already knew it was going to be -- some of it was going to be down cap, but what changed from last time to now?

Yes, I think the big shift was deciding to take the big box to poly bags.

And so that was a discussion that happened among us and our principal customers in terms of how we wanted to present the category to the shopper.

I assume that our primary competitor was also having some discussions with their primary customers.

And so primary customers were pushing hard to take the category to poly bags which makes more sense.

We've been talking about doing that for a while.

It actually is a much better environmental solution.

And so we decided to go ahead and make that change, which will actually give us some more economic benefit in 2012 because the cost of poly is less than the cost of the cardboard boxes that we were putting it in.

So in discussions with key customers that was a decision that was made in the last quarter.

Okay, thanks.

And I guess on the overhead savings, can you talk a little bit about what the specifics are there?

Obviously you guys have sourced a lot of savings from overhead this quarter.

It looks like it's going to continue.

Can you just touch on some of the specific items that are getting cut in addition to marketing?

Thanks.

Yes, I mean it's just being disciplined about the things that we can control, and so -- in fact I'll be going on to a call with our top 1000 leaders after this to talk about we need to do an even better job of controlling our controllables.

So it's G&A, it's travel, it's headcount, it's how do we use fewer consultants and how do we use less contract labor.

So we're really trying to manage all those details very tightly to make sure that we control the things that we can control in a difficult economic environment.

I guess how much of it relates to that difficult economic environment versus how much is stuff you should be doing anyway?

Because it just strikes me it's a pretty big number.

And then you think about marketing and you guys have been a company that's been pretty consistent in the last couple of years at least with pushing marketing higher even though the cost environment has been tough.

And now marketing might be down as much as 15% this quarter.

So I guess the question is can you talk about marketing and the rest of the overhead and how much of this is a reaction to what's going on versus how much is sustainable?

Well I mean again, marketing was up about $10 million sequentially and so last year you had the launch of U by Kotex and some new Poise things that happened in the second quarter.

So that was probably the biggest quarter from a marketing spending standpoint we've had in a while.

We've got more of our innovation coming in the back half so with the Huggies Little Movers Slip-On Diapers coming and some new Kleenex products and new Poise products coming we'll have a little bit heavier spend in the back half this year than we did last year.

Yes, and I think the other two drivers, as we drive lean we're more advanced in supply chain.

But as we drive lean through the back-office we're finding opportunities to streamline the way that work gets done and get more work out of the talent that we have, provide better opportunities for them to have an impact on the business.

And the other thing is mix.

I think we're getting better and more sophisticated both at our research investments, our innovation investments and our marketing investments.

So we're getting more bang for each dollar that we spend.

Got it.

Thanks a lot, guys.

Chip Dillon, Vertical Research Partners.

Hey, Tom.

Good morning.

You know, first question is I noticed, and maybe this has been addressed before, but the depreciation charges this year are much higher than what they've been in the past and, of course, you're still making earnings, so that's terrific for cash flow.

Could you talk a little bit about why they are higher and what we should expect going forward?

Should they stay at this like -- between $1.1 billion and $1.2 billion rate?

Yes, most of that is the restructuring charge for -- the tissue restructuring has really spiked up depreciation and so that's a good chunk of it.

Ongoing depreciation is $800 million, $850 million.

Yes.

So, obviously that's got the charge in there, and that starts to come down really next year because you're accelerating that program, correct?

Yes, we should be through it by the end of 2012, but we'll have a lot of it in this year, I think.

Got you.

And then you did mention, by the way, that a lot of -- that there will be some cash costs, significant, involved with this.

Will that also be incurred this year or does that bleed more into next year?

In other words, do you take more of an earnings hit this year, although it's not ongoing, and actually spend the money next year?

You know, I think that the timing of that is probably still hard to call at this point in time because of where we are in the various processes.

We had some cash costs already in the second quarter, I think it was about $15 million, and we may have more later this year but some of it could spill into 2012.

Got you.

And then as we look at 2012 -- and obviously strategic opportunities can come up, but barring that, it looks like -- is there any reason why we would not see your share buyback pace stay -- I know it's quite elevated, but stay at $1 billion or higher next year or do you think it's more likely to settle back down?

This year was unusual.

We really -- we roughly doubled what we would normally buy back.

And so we'll give you more specific guidance on 2012 in January, but if our strong cash flow continues expect to see us put it to good use for our shareholders through dividends and share repurchases.

Okay.

And then lastly, as we look at China, you mentioned you're having good growth there above the market rate.

And my understanding is that you are mostly involved, disproportionately perhaps versus the population, in the northern half.

Is there any movement to broaden your base there or make it more proportional?

Yes, absolutely.

The eastern seaboard of China is where lots of the GDP is today.

And so for Huggies, for example, at the end of the year we were in 50 or so cities.

Today we're probably in 65 cities and so we're just continuing to expand our distribution base for our key products in China and expect that to continue for quite a while.

Terrific.

Okay.

Thanks, guys.

Bill Schmitz, Deutsche Bank.

Hey, guys.

Good morning.

Did you say what the local currency operating profit growth was in the quarter?

I don't think we did.

No, but from a translation standpoint, Bill, currency benefited the top line by about 5%.

The same would be true on operating profit.

Okay, so it's pretty linear there?

Yes.

Okay, got you.

And then can you just give us a little bit more granularity on where some of the SG&A costs are coming from?

I know you talked about advertising which looks like it's going to tick up a little bit in the back half of the year.

But what was like the big revelation this year that's going to drive such robust cost savings?

And if you could give like line item by line item as much as you can?

Yes, I think we've got everybody focused on controlling the things that they can control.

So we're doing a good job, as Mark mentioned, in driving lean into our various processes.

We're trying to manage our headcount tight and where we need to deploy talent to build some new capability, we're trying to source that by efficiency in other areas.

We're managing travel and consultancy costs tightly and everybody is very conscious of, particularly with the cost inflation that we got this year, that we've got no excuses.

We're going to control the things we can control to try to deliver our objectives this year.

Okay, great.

And then just on pricing again, it sounds like K-C de Mexico had some challenges to be nice on some of their price increases.

Is that just discrete to Mexico or is there any risk in the US and the rest of Latin America on that front?

Yes, I think that they had a little tougher quarter in pushing some of the price increases through and we'll see how that plays out.

So far I'd say I'm encouraged about what we see happening in the US and we've had pretty good success in a number of other international markets in taking price.

And I think we're not alone relative to lots of other CPGs that are needing to get price with this kind of commodity cost environment.

Okay, and then just lastly, did the delay of the diaper price -- does it have anything to do with Luvs not taking the pricing?

Was that the original plan?

Does the delay have anything to do with that?

No, I mean really, Luvs tends to line up more with private label, so we'll watch that space to see what happens.

If private label goes up I would expect you might see Luvs follow that.

Okay, but is (inaudible) not going to do the pack count change?

You know, we don't have good visibility of what they're up to.

So, what typically happens is there's a little bit of a lag generally, at least 90 days and sometimes a bit longer, before private label lines up.

But I'm sure they're under the same cost pressures that we are and I'd expect to see some pricing action happen there over time.

Okay, great.

Thanks very much.

Connie Maneaty, BMO Capital Markets.

Hi, Connie.

You're back.

But my question was still answered.

Thanks.

Okay.

Caroline Levy, CLSA.

Good morning.

This is Michael Lavery in for Caroline at CLSA.

Just was wondering on the overhead, it looks like your corporate costs are down double-digits about six quarters in a row.

Obviously that's all the efficiencies you've been referring to, but how long can you keep that up?

That seems high relative to or expectations.

What numbers are you looking at there, Michael?

Well, I think -- well, so I guess the difference there (multiple speakers).

We're just trying to keep them from going up.

I don't think they're down double-digits.

Maybe looking at unallocated segment costs or something?

Well, I think in '09 that excludes some of the items that you had called out as extraordinary because of the one-year timing of them, but it looks like on sort of an ongoing run rate there are some good declines.

Is that something you can keep up?

I mean I would say broadly our goal is to try to grow SG&A at a slower rate than sales.

And so certainly in some of our businesses like Europe you're seeing them not grow.

But if you went back and looked at like '09, we had a large severance program and that may have spiked that up in '09 and then we got the savings from it in 2010, so we got a lot of benefit.

If you looked at that SG&A line between '09 and '10, but those were more kind of related to those unusual factors.

And so I said going forward it would be better to model it growing at a slower rate than our sales growth.

Michael, this is Paul.

Sorry.

On a year-to-date basis those unallocated costs are very similar to year ago levels, so we're tracking in line with what Tom suggested.

Okay, yes.

So I'm talking about just for the corporate line, sorry, not the SG&A, right?

Right.

Right.

And so that would be around the pace that it should keep up?

Yes.

And then for the pricing, obviously in KCI you've mentioned some benefits like in Lat Am.

But when you get the pricing coming from the recent increases in US, what would that look like on the segment basis like in Personal Care or tissue?

How much acceleration would we likely see there?

Yes, I'd say the price increase on diapers is about 7%.

That's the biggest chunk of the Personal Care segment.

But there isn't any price in the marketplace at this point in time on feminine care and adult care.

I think baby wipes price increase is about 5%.

So you'd probably see a low- to mid-single-digit price impact just from the US market in that segment.

In tissue the price increases are more mid-single-digit.

And so some of that is going to come through sheet count, some is coming through lifts.

So you'll see kind of a mix there, but I guess you'd see probably mid-single-digit pricing in tissue sequentially going forward.

And with that kind of magnitude is there -- how much of the volume would you expect you might see like if the sheet counts and count reductions are a part of that?

Is that a direct volume hit just because of the smaller pack size?

Yes, you'll typically see a volume drag particularly from sheet count which you're essentially reducing the household inventory for a period of time.

You'll see a bit of a blip on diapers as well.

Although consumers tend to use about the same number of diapers per day.

And so, we've also got a lot of innovation coming in the second half.

And so as you look at the balance of those two it's a little tougher to call.

Okay, great.

Thank you very much.

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

Okay, then we'll wrap up with a quick closing comment from Tom.

Well, once again we continue to execute our global business plan well in a very challenging environment and we thank you for your support of Kimberly-Clark.

Thank you.