金百利克拉克 (KMB) 2011 Q3 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 that 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'd like to ask a question.

It is now my pleasure to introduce Mr.

Paul Alexander.

Thank you, David, and good morning, everyone.

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

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

Here is the agenda for the call.

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

Tom will then provide his perspectives on our results, and also the full-year outlook.

We'll finish with Q&A.

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

Before we begin, let me remind you we'll be making forward-looking statements 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 Factor section of our latest annual report on Form 10-K for further discussion of forward-looking statements.

We'll also 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.

With that, I'll turn it over to Mark.

Thanks, Paul, and good morning.

Let's start with the headlines.

First, we delivered organic sales growth of 4%, highlighted by 11% growth in K-C International.

Second, adjusted earnings per share were $1.26, an 11% increase compared to last year.

And third, cash flow remains strong, as we generated approximately $750 million in cash provided by operations.

Now, let's cover the details of the quarter.

Overall sales increased 8% to an all-time record $5.4 billion.

Organic sales rose 4%, driven by higher net selling prices of 3%.

Product mix and sales volumes each improved slightly.

Volumes benefited from product innovation and targeted growth initiatives.

However, soft demand in portions of North America and Europe largely offset these gains.

Third quarter adjusted operating profit rose 8%, with an operating margin of 14.1%.

Benefits from top line growth and $90 million of FORCE cost savings, more than offset cost inflation of $150 million and higher than expected production curtailment to manage inventory levels.

As expected, FORCE savings picked up nicely from the first half of the year, and our teams continue to push aggressively to maximize savings.

Nonetheless, with year-to-date savings of $195 million, we could fall somewhat short of our target range of $300 million to $350 million of savings for the year.

Third quarter adjusted earnings per share were $1.26 compared to $1.14 last year.

The improvement was driven by higher operating profit, along with a lower share count and a lower effective tax rate.

Given our year-to-date adjusted tax rate of 30.1%, we now expect the full-year rate to be toward the low end of our target for the year of 30% to 32%.

Cash provided by operations increased slightly to $750 million in the third quarter.

I'm encouraged by our cash generation, and expect a strong finish to the year.

We repurchased 0.6 million shares of KMB stock in the quarter at a cost of $40 million.

As mentioned in our news release, we've decided to accelerate an additional $260 million of pension contributions into 2011, and reduce our full-year share repurchase target by the same amount.

This will improve our pension funded status nicely from current levels, and it will allow us to make much more modest contributions next year, while setting us up for a strong year of share repurchases in 2012.

Now, I'll highlight a few areas from our segment results for the quarter.

As usual, further details are in our news release.

In Personal Care, organic sales rose 5%, with volumes and net selling prices each advancing about 3%.

K-C International had a terrific quarter with 15% organic growth led by strong performance in Latin America, China, and South Korea.

In North America, we continue to generate high single-digit to low double-digit volume growth in adult care, feminine care, and baby wipes.

On the other hand, volumes were down in infant and child care.

The volume softness reflects category declines, competitive promotional activity, reductions in customer inventory levels in diapers, and some consumer trade-down in the child care category.

Personal Care operating margins of 16.6% remained below prior year.

Input cost inflation, production curtailment, and higher between-the-lines spending were partially offset by benefits from top line growth and cost savings.

Now, turning to Consumer Tissue, organic sales were off 1%.

Net selling prices rose 4% in response to cost inflation, and product mix was favorable by 1%.

On the other hand, volumes fell 6% reflecting sheet count reductions in North America, our focus on revenue realization, and strong promotion support for Cottonelle bath tissue in the third quarter last year.

Consumer Tissue operating margins improved to 12%.

It's our best performance in 2 years.

That was driven by sales growth, cost savings, and lower between-the-line spending.

Moving to K-C Professional and Other, organic sales rose 5%.

The increase was due to improved volumes of 3%, and higher net selling prices of 2%.

Volumes were up mid to high single digits in K-C International in Europe.

On the other hand, volumes were even with year-ago levels in North America, as high unemployment and office vacancy levels continue to impact market demand.

Operating margins of 14.7% were similar to last year.

And lastly, Health Care organic sales were up 8%, driven by higher sales volumes.

Medical supply volumes rose double digits, led by growth in surgical products and exam gloves, reflecting improved North American demand.

In addition, global medical device volumes increased high single digits, including strong growth in Europe and Asia.

Operating margins of 13.8% were somewhat above last year, driven by sales growth and cost savings.

So, that wraps up the review of the quarter.

To recap, we achieved solid organic sales growth led by K-C International.

We delivered strong growth in adjusted earnings per share, and we continue to generate significant cash flow.

Now I'll turn it over to Tom.

Thanks, Mark, and good morning, everyone.

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

Starting with the third quarter, I'm encouraged that we were able to deliver 4% growth in organic sales, and deliver double-digit growth in adjusted earnings per share.

We overcame significant cost inflation, and also softer than expected demand in parts of the developed markets.

Some of the keys to this performance was our focus on our targeted growth initiatives, our focus on revenue realization, and our focus on delivering cost reduction.

Let me share a few of the highlights with you in each of these 3 areas.

First, we made excellent progress with our targeted growth initiatives.

In North America, that's particularly true in our adult care, feminine care, and baby wipes businesses.

Our global healthcare medical device business also achieved solid volume growth in the quarter.

And K-C international delivered outstanding results, led by our teams in China, South Korea, and Latin America.

Turning to revenue realization, we delivered 3 points of favorable net selling price in the third quarter.

That's up nicely from the 1% benefit we realized in the first half of this year.

Our progress in the third quarter was highlighted by success in K-C international, K-C Professional, and in our North American consumer tissue business.

So overall, our pricing initiatives are on track with our expectations for the year.

In terms of cost reduction, in addition to the FORCE savings that Mark already mentioned, we continued to make good progress controlling our overhead spending.

Through the first 9 months, our total between-the-lines spending is up 2%, while our sales are up 7%.

So we're on track to achieve our target to gross spending slower than sales this year in this category.

Let me give you now a brief update on our market positions, which remain solid overall.

In the US, our third quarter market shares were ahead of, or even with, the year-ago period in about half of our consumer businesses.

On a year-to-date basis, we can make the same statement for 6 of 8 of our consumer businesses.

Third quarter private label market shares were stable overall versus last year, although they did pick up modestly from second quarter levels in some categories.

And while we believe this reflects a generally cautious consumer, and in some cases we've had branded price increases that occurred ahead of private label.

Outside the US, we continue to grow ahead of category rates in a number of markets in K-C international, including China and Latin America.

In Europe, our market shares are flat to down slightly, as the environment worsened modestly there over the last 3 months.

Before moving to the outlook, let me touch on a few of the innovations we launched in the third quarter.

Our Huggies Little Movers Slip-On diapers are off to a solid start in North America.

Our distribution levels continue to build, and Slip-On achieved 4 points of market share in the most recent 4-week time period.

This innovation is also performing well in a number of markets in K-C International.

Our new Poise hourglass shape pads are also performing well.

And they achieved 3 points of market share in the quarter in the light end of the US adult care category.

And we're excited about the prospects for Kleenex Cool Touch facial tissue, which started shipping toward the end of the quarter.

Now, let me turn to the outlook.

We expect our momentum with revenue realization and targeted growth initiatives to continue, led by K-C international.

We'll also continue to operate with financial discipline, focusing on cost savings, control of overhead spending, and cash generation.

Key changes to our full-year planning assumptions are included in this morning's news release, but here are the highlights.

In terms of sales, we've taken our volume growth assumption to the low end of our 1% to 2% target range.

This reflects somewhat lower expectations for portions of the developed markets, particularly in the North American infant and child care categories.

In addition, as a result of the recent strengthening of the US dollar, we expect less benefit from changes in currency rates than our previous plan.

The weaker Mexican peso has also caused us to lower our expectations from our equity income from K-C to Mexico.

On the other hand, because commodity costs have moderated some from the peak levels that we experienced this summer, we now expect about $100 million less cost inflation in 2011 than we previously estimated.

So putting it all together, we're now targeting our 2011 adjusted earnings per share to be in the range of $4.80 to $4.90 per share.

That's essentially consistent with our previous guidance in July, which was that earnings were more likely to be in the lower half of our target range of $4.80 to $5.05 per share.

So, to summarize, despite the challenging near-term environment, our businesses continue to be fundamentally strong.

We continue to deploy our strategies for the long-term success of Kimberly-Clark.

And while we're not on track with all of our goals this year, we are convinced that our global business plan will improve shareholder value.

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

(Operator Instructions) Gail Glazerman with UBS.

Can you talk a little bit about the overall demand environment, with some of the weakness you saw in the quarter, and developed markets more weighted towards inventory destocking that might have played out?

Or are you seeing changes in overall consumption patterns?

I wouldn't say consumption patterns.

We still see, derived from the birth rates, the diaper and training pant category is where we saw the biggest category decline relative to our expectations.

And so it's partly the birth rate's been down for 3 years.

That's starting to flow into the child care category, as you've got 3 years of low birth rate now, and toilet training.

So that one probably had the biggest volume hit relative to expectations.

A little bit of inventory destocking was a part of it.

And I think that's just customers trying to run their working capital tight, as you would expect in this environment.

And can you talk a little bit about the improvement you saw in US paper towels?

Is that basically back to where you think it should be, or is there incremental recovery yet to come?

I think we're executing better.

We got some of the distribution back, and both Viva and Scott Towels had decent volume growth there.

So I think we're overall happy with the progress we're seeing, and bouncing back from what were historic low share periods for us.

And just on inflation, your resin costs, have they flattened out sequentially?

Or would you expect to see some relief in the fourth quarter, or are they still increasing?

No, we think they peaked in the early third quarter.

So we would expect to see a little bit of benefit in the fourth quarter.

But I will say that they are stickier coming down, it seems, than you would expect, given how oil has performed.

And Gayle, this is Paul.

I would just add, even though they are coming down sequentially, they still will be up year on year in the fourth quarter.

Ali Dibadj with Sanford Bernstein.

Just a couple things.

One, you started to answer the question, I think, last.

But we were struck by how volumes were really quite tough in the developed markets.

And of course there are some birth rate issues and sheet reduction and inventory reduction, et cetera.

But there does seem to be this -- intentional or not, I don't know -- but a little bit more subdued view of demand in the release.

I'm just trying to get a sense from you about, are you seeing that flatten, get worse, see things getting a little bit better?

And I ask that on also in the context of you raising prices relatively significantly if there was any risk to some of those price increases you go for, given the volume response.

A couple things.

We took the overall volume number in our guidance down to the low end of the range.

So we said we were 1% to 2%.

It's going to be closer to 1% for the year, which is really where we think it's playing out.

I would say that the desheeting effect we expected.

Our shares are fine in bath tissue, which is where most of the desheeting occurred.

And trends in facial tissue are positive there.

So that one is playing out about as we would have expected.

I would say the diaper and training pant category is 1 that just continues to be a little softer.

Our insight is that we're not seeing it in terms of diaper usage per day.

It's really just in some cases moms delaying toilet training or even training out of diapers, is hurting the child care category.

The birth rate continues to be lower than what was forecast earlier in the year, and so you're just not having as many new moms enter the category.

The second part of the question in terms of, are you still comfortable with taking the pricing you're taking, you're planning to take, have taken, given the volume response that you've seen?

In the diaper category, there really hasn't been any pricing in the category.

In fact, pricing was negative in the quarter.

So, I would say the weakness in the category is not related to price change.

And in consumer tissue, the pricing is beginning to be put in place in the marketplace and I think the volume response is about what you would expect.

But in PC, you'd plan to take pricing, gets pushed off, pushed off, now it's supposed to be October.

Is that happening?

Yes.

It is happening.

A lot of it is by count.

So the count changes will start to roll out to the shelf in the fourth quarter.

So maybe more volume hit on that business, or not?

I think that potentially you'll see some, some volume softness just because customers typically order a consistent number of cases.

And if there was a count change, you're going to have fewer diapers per case.

So you typically have a little bit of an inventory impact when a count change goes into the marketplace.

But the category tends to be a little softer than we're expecting and that's factored into our adjusted guidance.

Then one question that is a recurring theme, zeroing in on Europe and consumer tissue specifically.

Can you talk about that business specifically and how it strategically fits in your portfolio at this point?

Yes, we've got leading brand shares in Europe in bath tissue.

We've got a strong facial tissue business in Europe, as well.

It's got margins that are probably a little below the segment average.

But consistently profitable.

The challenge in Europe has been the growth in private label.

And actually, encouragingly, our shares were relatively stable this quarter, and private label was stable, as well.

I think the challenge has been getting any real price recovery there with the run-up in fiber costs has not been easy.

Our next question comes from Caroline Levy with CLSA.

I was wondering if you could take a longer-term view on what this decline in birth rates means in the western countries as you look out to 2012 through 2015.

How much do you know about the volume impact, just from pure demographics?

And there's a flip side of it in countries like throughout Latin America or Asia.

How much do you know, again, about the tail wind from birth rates?

Yes, I would say a couple of things.

If you look at a global trend, birth rates have been coming down for a while.

Europe has probably been the lowest.

But even in China, with the Golden Baby policies there.

You've had a fairly low birth rate in Korea.

Probably some of the highest birth rates in the world would tend to be in Africa and in parts of Latin America.

And so obviously our business in Latin America has benefited from that.

In the US, we would say the things that typically are going to drive birth rate are household formation, employment, those kinds of things.

And obviously with a weaker economy in the near term, I would say the category is probably going to be a little softer in 2012 than our prior long-range forecast would have indicated.

And are there ways to counter that?

How much innovation are you looking at that can target that?

Does it come with lower priced product?

Does it come with break-through products?

How are you thinking about that declining global rate?

Absolutely.

As you go into emerging markets, you're still seeing huge category penetration.

So you saw that in our K-C International growth this year.

So for example, where we are today selling diapers, but we don't have a very well-developed life's business, we don't have a very well-developed little swimmers business, we've still got opportunities to launch diaper pants or training pants to move the category up, mix.

Those are all things we're looking at, as those consumer incomes develop, that they want the best for their baby and they will buy a broader range of those products.

Those categories are more fully penetrated in North America, so it's looking for what other things we can do, like launch Huggies Slip-On diapers that we did in the third quarter to, again, move mom to a better mix and a better-performing product.

I think you said China, Latin America and Korea were the highlights internationally, is that correct?

Yes.

And what happened in Mexico, though?

That seems a little different from the rest of Latin.

Mexico had I think, mid single-digit volume growth, stable shares.

Really, they got hit more with commodity costs and some foreign exchange issues, as their US dollar payables, they suffered a loss on that as the peso devalued at the end of the quarter.

But their fundamental volumes and shares are solid in Mexico.

Our next question comes from Jason Gere with RBC Capital.

Just a question on the growth in KCI.

It looked like a good chunk of that was on the pricing side.

In regards to the Personal Care business the pricing that you took, how much of that was for commodity, how much for currency?

And just with some of the major currencies, such as the peso and the real obviously starting to turn, just your comfort level as you go into 2012, that that pricing can hold?

Yes, I think each of our countries has a strategy to maximize their local currency net income.

So they are looking at their business from the perspective of a local currency point of view.

So if their commodity costs and local currency terms are going up, they will look at pricing to pass that through.

They are not necessarily trying to deliver a dollar result, that they take pricing because of translation.

So as you think about it, really most of the pricing was a result of commodity inputs going up.

And then just thinking about gross margin, it's a two-part question.

One, obviously it's good to see the inflation, especially in the pulp side coming down.

The first question is, as you exit the year, do you expect to see any gross margins to be flat?

Obviously I think the production curtailment had a bigger impact in the third quarter that weighed down on your prior guidance.

But the first part is, as you look for a nice, modest increase in gross margins exiting the year.

And then secondly, when you think about 2012, it has the same dynamics as 2009, where FX has turned the other way, commodities are improving, pension is going to be a little bit of a head wind and you have some good cost savings.

The magnitude that you saw back in '09 was tremendous, but of course pulp was down 20% plus year over year.

I was just wondering if you could give a little bit of color about 2012 and how you see just the gross margin progression going fourth quarter and maybe into next year.

Thanks.

Okay.

Good questions.

If you think about the sequential changes in gross margin in the fourth quarter, pricing should be a positive because we'll get more pricing flowing through from our North American baby child care businesses.

Commodities should be a positive sequentially.

There'll still be pressure year on year in many areas.

Currency will be a drag, because you'll have some exchange rates that have gone the wrong direction.

And down time sequentially should be similar to slightly positive.

And so I think that that one we'll have to see where the volumes actually come out.

So on balance, I'd say should be more positives than negatives moving from third quarter to fourth quarter.

As we look at 2012, and there's a lot of moving parts, it seems like more than ever.

Looking at what's the trade-off of currency head winds versus commodity tail winds and how's that going to play out.

But we'll give you more color in January, but our goal is to deliver a 2012 plan that achieves our global business plan goals and has the top line and operating improvement and earnings per share improvement that we're looking for.

But directionally, am I on the right path in terms of, that you should see gross margins start to sequentially improve in 2012?

Yes, you're right.

I think it's a little premature to talk about the --.

I don't think it's going to be the'09 kind of windfall, though.

But yes, directionally, they should improve.

Okay, and then just one last question.

I was just wondering, just on FORCE, and just thinking about that you're saying it's gooding to be shy of the $300 million to $350 million.

So does that mean it's going to be below $300 million or it's going to be the low end?

And the question is, last quarter you guys raised it, so what delayed some of those savings that you thought you would have gotten this year?

Or is this just planned to have more in store for next year and just not rush it?

It's not like FORCE is a bank account that we can take it out as easily.

I think it really has more to do with, there's a little bit more down time than we thought.

When you're not running your process as full, you can't push as many cost savings through that pipe that go along with it.

So that's probably the biggest single effect.

And so I think we got $195 million in the bank through 3 quarters.

So we would need an all-time record fourth quarter to get to the low end of the range.

So there's a risk that we'll be below the low end of the range.

But we would certainly expect to keep our foot on the gas of delivering as many cost savings, because when we deliver those, usually you've got benefits that spill into 2012, as well.

So our team is focused on delivering as much as they can this year.

Chris Ferrara with Bank of America.

The FX translation for next year, for 2012, even Q4, can you just talk about what you expect the impact to be on the bottom line relative to the top line?

Obviously you guys have transaction drag in some markets, but can you just talk about what that effect might be?

If you see a couple of points on the top line, what would the bottom line coincident effect be?

Yes, from a translation standpoint, it's fairly linear so you'll see that same kind of drag on the bottom line.

Transactions were partially hedged.

We usually hedge about 50% of our transaction exposure, so there's more of a lag before that flows through earnings.

But you would expect the bottom line impact to be bigger than the top line impact, right?

When you put it all together, not just translation?

Yes.

And any order of magnitude that you can talk about?

I know what we've seen in the past, it's been pretty variable.

Is there any a relationship that you guys can talk to?

No, it's such a complicated question, because it really depends on where the exchange rate happens.

And you're seeing such wild swings in the last 4 weeks of the quarter.

I think we'll give you a better outlook when we get to 2012.

Typically the big currencies for us, the Euro's important, the Mexican peso's important, the A dollar is important, Korean won is important.

The Brazilian real is becoming increasingly important.

Most of those have weakened at least mid single digits to double digits in the last 4 weeks.

And we'll see what happens between now and the end of the year.

And on marketing research, general and administrative, I know you guys have talked about cutting costs out of there.

It's been a little bit volatile the last couple of years as a percentage of sales.

But can you just talk a little bit about what you think that relationship should be like going forward, or what the year on year change can be as you think about next year?

Are we going to see leverage to the SG&A line essentially as you move into 2012?

Yes, I think as you look at how we think about it, we want to be able to invest more in strategic marketing to fund innovation.

So you're going to see that part of it with upward pressure.

And us wanting to invest more where we can to go faster and deliver more growth to the market.

In our KCP and Health Care business, the selling line is their advertising promotion lever.

So we're going to be investing more sellers and driving our safety business, driving our medical device business.

The G&A line is where we're trying to get efficiency and so we're trying to run that and grow that at a slower rate than sales.

So, if you looked at just SG&A and not include strategic marketing, our goal would be for that overall to grow a little slower than sales.

But you would have more upward pressure on sales and downward pressure on G&A, if that makes sense.

Bill Schmitz with Kimberly-Clark.

I don't work for Kimberly-Clark.

Just in the Personal Care margin front, can you disaggregate what's driving that?

How much of it is a slowdown in the training pants business, which is much higher margin?

And how much of that is just a geographic business mix where some of the lower margin markets are growing faster?

No, it's a couple things.

A, we're still seeing higher commodity costs.

So Personal Care took more of the brunt of inflation this quarter, as really pulp was actually slightly positive for the family care segment.

And all of the fiber cost increases in the quarter fell on K-C Professional, which was really secondary fiber.

And so Personal Care had the brunt of the inflation this quarter and really had no positive price to speak of in the developed markets.

We got some in the emerging markets, but not as much in the developed markets.

And then the weaker volume in North American diapers and training pants was obviously higher than segment average, so that was a drag on the margins, as well, in the quarter.

So it sounds like 1 is temporary and 1 is just contingent on what volume growth does, is that fair?

Yes.

You will start to get price in the fourth quarter, so that will help.

You'll get a little bit of commodity improvement sequentially in the fourth quarter, which will help.

And then obviously you need to look for stronger volume growth in those categories over time.

And then how correlated are FORCE savings to commodity costs?

Meaning that when commodities are higher, is FORCE easier to generate than when commodities are rolling over?

I would say we look at, our procurement team, for example, looks at savings in 4 buckets.

They look at year on year cost savings.

They look at cost avoidance, where everyone else in the industry got an increase and we didn't.

They look at working capital savings, and then savings on capital spending.

And so in rising price environments, you tend to find more cost avoidance and a little bit less year on year.

And so in falling price environments or neutral price environments, you tend to find more year on year cost savings.

But I think that's at the margin, you're still looking for lots of year on year cost savings from that team.

I think for us for this year, we've gotten more FORCE out of our lean activity, where we're driving waste and efficiency and productivity growth.

And that's been a positive for us, as well.

And one last one, if I could.

You said there was some trade destocking on the Personal Care side.

It's unusual to see destocking ahead of a price increase.

Can you just give us a little more color on what's going on there?

Yes, the price increase is via a count.

I think you're just finding at the end of every month, retailers are managing their balance sheet.

Everybody's got working capital objectives, just like we do, and you're seeing a little tighter working capital phenomena from a couple of key retailers.

And we saw that more pronounced this quarter than we had seen in a while.

Is that a category thing, or is it a brand thing?

I think we saw it more in Personal Care this particular quarter than we did in tissue.

But is it the Personal Care category, or is it Huggies versus Pampers?

It wasn't discreet to Kimberly?

No, no, it was the category.

John Faucher with JPMorgan.

Just a quick question.

Obviously you said this isn't 2009 and we're not looking at the type of sequential fall-off in commodity costs that we saw back then.

But there's always a question of, when does the sequential fall-off in commodities turn into risk to pricing?

And so can you talk a little bit about that conceptually in terms of the rational behavior in the category, how you see the competitors thinking about things?

And where does it get to the point where we should say the sequential fall-off could lead to higher levels of discounting in terms of people looking to give some of that back?

Good questions.

If you go back 6 months, which is about where we were when we made a lot of the pricing announcements, commodities have run up quite a ways past where we were then.

And so I think, as we would look at it, we would say yes, commodities have come back a little bit, but they are still at higher levels than they were when we announced the price increases.

So we would say the price increases in the marketplace that we've announced are still appropriate and justified by the commodity input costs.

We'll still have year on year cost increases in the fourth quarter, for example, and would play that through.

So I assume our other competitors in the marketplace are seeing the same things.

And so at this point, we'll see how it plays out in the marketplace and whether private label moves and all those kinds of things.

So it sounds like we almost probably need to look at this in terms of the rationality of pricing, not just on a sequential or even year over year basis, but more like a peak to trough level.

That makes sense.

Is that the right way to look at it?

Yes.

I think at this point based on the level we see, it's hard to imagine commodities falling enough that you would have an impact on market pricing.

But it's a pretty volatile world we live in some days.

Chip Dillon with Vertical Research Partners.

First question is on the pension situation.

Could you just let us know, you're upping the amount you're putting into it.

How much of the $680 million to $760 million have you done through the 9 months?

And it looks like you're not going to buy back stock in the fourth quarter.

Would you have an early look as to how you think about that next year?

Yes.

Our thinking on that, and maybe Mark can add a little color too, the big issue on the pension plan for us is more as you look at what's happened to the discount rate.

We've made actually good progress this year.

We've put a little over $400 million in the plans already.

We've actually had better than our benchmark performance.

But when you compare that to what's happened to the liability because of the drop in long-term interest rates, we have basically gone backwards on our funded status.

And so we've got some internal goals that we want to hit in terms of funded status.

So we made the call that we would go ahead and accelerate some of our 2012 pension contribution into this year.

And we'll probably then do a little bit heavier than normal stock buyback next year and flip-flop those.

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

I think directionally, that's right.

We knew coming into this year we were going to be heavier on share repurchases, maybe, than we had typically been.

They were going to be more front end loaded.

We've accomplished that.

We're generating plenty of cash flow, which gives us some options.

And just given where pension funded status was relative to our target, decided to shift that a little bit.

You should think about it as an acceleration of next year's, and that just frees up cash to buy back shares in 2012.

One of the down sides of low interest rates is that everybody's pension plan sprung a leak.

So it's got to be filled up with more cash.

And let's say rates stay roughly where they are and your assets stay where they are now in the plans.

I know last year you ended the year about $1.1 billion and your plan's under funded.

Would you be in that neighborhood with this or might you improve on that?

Secondly, I know in 2010, your pension expense, I'm not sure what it's been this year, was $133 million, looking at your K.

Do you see a big change from '11 to '12, given that you're putting this funding in?

Yes, I would guess that putting this additional funding in, our funded status would improve slightly on the plan.

Think of it as $260 million relative to that $1.1 billion chip, it's about 25% of our global gap.

So while our funded status has fallen off, this will top that up and then some.

And then one of the things that we did by freezing our DB plan, we're less sensitive now to volatility in our pension expense going forward because we'll be amortizing any actuarial gains and losses over the remaining physical life of employees, not their service life.

So we'll see less volatility next year.

We'll give you more color on what our pension expense assumptions are in 2012.

But I don't think it's going to be as big a swing as you might have seen in prior years.

Okay, and then couple small items.

One is, it looks like, you talked about your ad spend going up this quarter.

Can you just give us a flavor as to, will this level be maintained?

And then on a different note, if you just would talk a little bit about the other income line.

$17 million positive is certainly bigger than normal.

Is that something that's new, or was it a one-time just puts and takes, happened to end up there, and it should go back more or less to $0 in the future?

Yes.

On the ad spend, we're up a little bit year over year, but as a percent of sales, we're not, we're down.

So our expectation is that over the long-term, I think you would still want to see us growing that line a little faster than sales growth.

And so that's still an opportunity area for us, as you look at 2012 and longer forecasting.

We tend to want to invest more there if we could.

So I would say, that one's got more upward pressure.

On the other income and expense, we had currencies, some small currency transaction gains this time versus losses last year.

And then we had a sale of a small asset in South America that had a gain on it.

That was the other factor, but that would not be something that you would repeat.

And then lastly, the FORCE issue this year being a challenge, and it looks like it picked up a bit, at least in the third quarter from the first half pace.

Would you say that's mostly due to the volume challenges and you can't run as well?

Or was it that you don't feel you'll be able to tackle all the programs you might have had earlier in the year?

No, I think it's more the former.

That as you take curtailment and you're not running your process as much, you don't get the benefits of the cost savings that were inherent in the cost savings program.

So our team's aggressively looking at delivering another very solid year from a FORCE standpoint.

But because of the weaker volume, we're not going to get quite as much through the pipe as we would have thought.

Lauren Lieberman with Barclays Capital.

Just in the consumer tissue, I know you mentioned a couple times that the desheeting you would expect -- the volume decline seemed in line.

When we look from here, though, can you just remind me how long the lag is to where volume or just normal consumption catches up with that desheeting activity?

I think that until you analyze the desheeting activity, you'll have a volume drag from desheeting relative to your comp.

So we look at dollar share, and we would say on a dollar share basis, we're essentially on track with where we thought we would be.

We're probably watching more competitive promotion pricing across multiple outlets and it's a little choppy right now.

Some places it's moved up.

Some places it hasn't.

So that's probably the biggest thing we're watching in the marketplace right now.

Because the 4 points of pricing was a 6-point volume drag, does actually seem a lot more severe in terms of the volume impact than was the case at any time in the last 6, 7 years when you priced.

So should pricing accelerate from here and the volume, your expectations of volume remains similarly challenged and pricing accelerates?

Or does it, in fact, feel like the elasticity is worse than it was this time around 3 years ago?

I think in some cases the desheeting was a little bigger than maybe we've done in prior years, in part because of some of the commodity cost run-up.

But I think we've got most of the price in the marketplace, as we speak, on consumer tissue.

There might be a little bit more that comes internationally, but there's not going to be any more plans at this point in time in North America.

So it feels like maybe the missing piece of the puzzle then is adding in the margin improvement.

That it's not just about the top line, it's the profitability of every roll sold is that much better right now?

That's right.

And then on curtailment, is there a way for you guys to manage curtailment better, with better forecasting?

So it's tissue demand in Europe, but it's North America birth rate challenges continue.

Should that really be much of a surprise at this point, that we're still looking at curtailment being a 50-basis point drag in a given quarter?

It just feels like to me it's maybe something where you should be adjusting your production well in advance of needing to make this adjustment.

Yes, I would interpret it we're more disciplined about hitting target inventory levels and not, not running up inventory.

So inventory historically is the slack variable and if you missed your sales forecast, you just ran your inventory up.

We're more disciplined now about taking the downtime in the quarter.

As you realize you're off-track from a sales forecast, you shut the process and don't build the inventory.

And so as a result, you're seeing more realtime impact from curtailment than maybe we would have seen several years ago.

I think you're seeing that throughout the extended supply chain.

I think you're seeing retailers adjust inventory levels quicker, if they are not seeing foot traffic, than they would.

And the reality is, in most cases, you own the asset at this point, so you can't do anything else other than curtail it, if you've got a demand shortfall.

But is there room as you look over the next 12 to 24 months, to be more anticipatory in terms of demand levels in child care and infant care in North America?

We haven't added a diaper machine or a training pant machine in North America in a long time.

So we have what we have.

And we think we will need it as we drive innovation and continue to grow the business.

What's probably had a bigger impact on us is, as we move internationally and have had more productivity growth, we've been able to actually sequence our capital better, and probably do a better job of planning our international production capacity to a larger extent than we've maybe done previously.

Okay, because the margins in Personal Care, I know you've walked through the Personal Care feeling the brunt of the cost inflation this quarter and the timing on pricing.

But the margin performance in that business this year has been pretty notable.

And going back to the first quarter, you guys talked about some one-time items in the quarter, in addition to lack of pricing, commodity cost inflation, and expecting to get better as the year progressed.

So is there anything else?

It feels a little bit like something's missing, to be looking at 16.5% margins in a business that typically runs 20% to 21%.

It's just had a very sudden change in profitability profile in the last 9 months.

Yes, there's no question.

You say notable.

We've noticed it, as well.

So no one's satisfied with where the Personal Care margins are and so we are going to get more price in North America in the fourth quarter.

That will help.

We should see some sequential commodity improvement.

That will help.

And in the meantime, we're going to keep the innovation coming to continue to drive the business forward.

So we've had good success in lots of areas like adult care, feminine care, that are positives.

But we've got to show it with growth in margin over time.

And the Slip-On diaper, how far does that need to go in terms of share for it to be a mix positive strong enough that it offsets some of the negative mix dynamics from child care?

Or is child care just such a big business that that's probably going to win for a while?

No, I think the drag on the child care category is going to be a bigger impact than Slip-On can overcome.

That's for sure.

Javier Escalante with Consumer Edge Research.

I think that the question probably would be better for Mark.

It has to do with the gross margin progression that you are guiding to for the fourth quarter versus the lack of improvement in gross margin in the third quarter.

What I see is that we didn't see a sequential improvement in the third quarter in spite that commodities improve.

You have $150 million pressure versus $180 million in the last quarter.

You have 3 points of pricing in the third quarter versus 1 point of pricing in the second quarter.

And you have $90 million in FORCE savings in the third quarter versus $50 million in the second quarter.

So all these 3 items should add up to margin progression to see some improvement in gross margin.

And yet something held back these improvements.

So could you tell us what held back the gross margin progression in the third quarter that is going to be changing in the fourth quarter so we will see these items benefiting the gross margin line?

Yes, I'll start and then I'll let Mark give you the color commentary.

If you look at sequentially, you would say, okay, pricing's going to be better in fourth quarter versus third quarter.

Commodity costs will be a little better fourth quarter versus third quarter.

Still higher than last year, but should be sequentially better.

Currency will be a drag, and so that will partially offset those.

And then down time, at this point, our guidance would say that it should be slightly positive.

So not as negative as third quarter.

And in part, last year's fourth quarter had a bigger drag from down time, so we'll be lapping that from a comp standpoint.

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

No, Javier, I think third quarter volumes were a little lighter than we expected.

Other than that, Tom's review of the bidding is about right.

Better pricing, slightly better commodities, currency will go the other way, downtime will be about the same.

So just to clarify, we had all those improvements already in the third quarter relative to the second quarter.

So basically we didn't see the margin improvement.

So my understanding, then, is that the swing factor for us to see the margin improvement that you are guiding to is volume either curtailment or whatever have you, is going to be better than it was in the third quarter.

That is going to make the difference for us to see the sequential improvement that you are guiding to.

I would say, Javier, in some cases commodity costs peaked in the third quarter.

So for example, secondary fiber was at its peak in the third quarter.

And the Personal Care pricing in baby/child care is going to come in the fourth quarter.

So we'll have more price in the fourth quarter than the third from some of those businesses.

So I do think that the story for the fourth quarter is a little different than the third quarter.

Yes, but not to beat this horse to death, but you have $30 million lower commodities.

You have around $100 million better in revenues because of pricing.

And you have $40 million better in FORCE savings in the third quarter.

And yet gross margins were similar to what we saw in the second quarter.

So the question is, what is holding back the improvement in the third quarter relative to the second quarter that is going to change in the fourth quarter relative to the third quarter?

And I think, Javier, we've tried to explain the key moving pieces, both in the news release and the remarks.

And Tom's color about the fourth quarter of the key changes sequentially are just what he said, which is commodity costs coming down somewhat, a bit more pricing, and a fair amount of those 2 things are offset by currency.

So we do believe that sequentially that our gross margins will pick up from third quarter levels and we'll come back to you at the end of the year and tell you how we did.

And of the $100 million lower raw material costs that you are forecasting for 2011, how much of it was already accretive in the third quarter?

And if you can tell us what kind of pulp prices you are assuming for the Q4?

And that will be my last question.

Yes, most of the $100 million change in inflation will come in the fourth quarter.

And in terms of pulp pricing for the fourth quarter, we are assuming between $935 and $950 for Northern soft wood.

Connie Maneaty with BMO Capital Markets.

I just have a few questions.

Thank you for giving such complete answers on the call.

Given the downtime and the curtailment you've taken and slowing birth rates almost worldwide, what is your capacity utilization in diapers and training pants?

And do you think that your plants and your production lines are in the right location, as you look 3 to 5 years out, for where growth is slowing and for where it's really picking up?

As you saw in the quarter from K-C International, we've still got a huge growth story.

So you've got a great category penetration opportunity in the international markets that's far outweighing the impact of a slow birth rate.

And so it's taking a mom from using 1 diaper per day to using 5 diapers a day as they would in developed markets as a big deal.

And so we're still adding capacity for both diapers and pants, as well as femme care, as well as adult care, in our international markets consistently.

So that trend will play out for a number of years to come.

In North America I'd say we've got some additional capacity, but we've also got a pretty aggressive innovation agenda.

So I think we've got some slight additional capacity, but nothing that I would say that I'm particularly worried about at this point in time.

What's the outlook for the Santa diaper and how would you compare it to the blue Jean diaper?

Fashion is something we continue to believe is a big idea.

Being first, being innovative, being different, being relevant is key.

So we're excited about it and we'll see what mom feels about it when it gets into the marketplace.

Karen Lamark with Federated Investors.

I just wanted to follow up on Lauren's question about the production curtailment.

And the first thing I wanted to know is how much of it is a function of your own forecasting versus, say, retailer actions?

They are related.

So we can certainly do a better job of forecasting, and so that's part of it.

But it's also sometimes when a retailer decides they are going to bring inventories down at the end of a quarter, you can only react to that.

So you wish you knew about it earlier, you could have planned better, you would have forecasted better.

But I think that's the challenge for our teams, that we can do a better job of forecasting the business so that we can run our supply chains efficiently with as low an inventory as possible.

I think the good news is we've got better capabilities to do that than we ever had before.

And what you're seeing is inventories continued across the enterprise to come down, and faster reaction time on our part when we do miss a demand plan.

And then also, are the curtailments meaningful beyond the Baby Personal Care category?

Are there any other categories that are showing signs of the need for some production cuts?

Thanks.

I would say it was predominantly concentrated in Personal Care and Consumer Tissue.

Basically Health Care and K-C Professional, there wasn't much curtailment in the quarter.

So we were a little light on Scott Tissue relative to expectations and took some time out of the schedule from that standpoint.

But nothing out of the ordinary from how we would run it quarter to quarter.

Ali Dibadj with Sanford Bernstein.

Just a question about how we should be thinking about marketing investment in CT in particular.

It looks like obviously in this quarter it was down.

Obviously we've, even on this call, have had debates about the ROI on marketing investments in Consumer Tissue specifically.

Has your thought process changed at all about that, the ROI you're getting by marketing spend there in this environment or even broader, longer term?

I think we continue to get better at measuring ROI and allocating spend.

I would tell you actually some of our highest ROI events in the Company have been in Kleenex facial tissue.

So, we measure it.

We look at it across the portfolio and look to see what's the right vehicle.

We're doing a better job of being creative and channel agnostic in terms of how we bring those to market.

But we would say particularly for the premium end of the category, things that we've done with the micro campaign on Viva has responded positively to the sales growth you've seen in our towel business.

Our Kleenex facial tissue activities that we've had going have had a high return.

And Cottonelle is a pretty high-margin category, so there's some responsiveness.

We do track it and make intelligent investment decisions.

But we should expect on CT, particularly marketing spending to continue to go up as a percentage of sales?

I would say yes, but we look probably for more opportunities to drive adult care, drive femme care, drive baby/child care around the world.

If you look at the big picture, consumer tissue's probably going to be more North American story.

As I think the other markets around the world it's going to be a little bit spottier in terms of where those opportunities are.

So given that, though, and the benefits you're getting, shouldn't we be concerned that it was down this quarter?

I think that it's more a function of what your cycle of investment is.

And so the fact that we launched Cool Touch at the end of the quarter, you're going to see a little heavier push on that in the fourth quarter.

As we were going through a pricing cycle, you tend to wind up not as much on promotion with some retailers until you get your new prices established.

And so you often want to couple strategic investment with trade execution.

And if you're not going to get the trade execution you'd pull back a little.

So I wouldn't read too much into it.

It's more a function of timing of innovation than anything else.

Chip Dillon with Vertical Research Partners.

As you all have grown overseas, I just wanted to get an update on your exposure to 2 raw materials.

One would be waste paper and the other one pulp.

The last I had was $2.5 million for pulp and $900,000 for waste paper annually.

I think the pulp number's pretty close.

The waste paper number's more like $1.2 million.

And basically all you're buying would be the pulp substitute type grades, the bleached collections?

Yes, you're looking for a higher quality waste paper, if that's not an oxymoron.

It's an office waste grade as opposed to the really cheap stuff.

And then just another quick one.

On the charge in the third quarter for the pulp and tissue, I would assume about $80 million of it was in depreciation.

I don't know if you gave that somewhere, but is that about right?

I don't know that we gave that level of detail, but the team's looking through that.

It's basically, that thing's tracking with our plans.

They are giving me smiley faces, so it sounds like you're in the ball park with the $80 million.

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

All right, thanks, David.

We appreciate the questions and we'll just finish with our closing comment from Tom.

Once again, we are tracking and executing our global business plan.

We're pleased with the progress we made in the quarter, but not satisfied.

And we appreciate your support of Kimberly-Clark.

Thanks very much.

Ladies and gentlemen, that concludes today's presentation.

You may disconnect at this time.