金百利克拉克 (KMB) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding, we now have your speakers in conference.

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

At the conclusion of today's presentation we will open the floor for your questions.

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

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

Thank you, David and good morning, everyone.

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

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

Here is the agenda for our call.

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

Tom will then provide his perspectives on our results and our full-year outlook and we'll finish as usual with Q&A.

As usual we have a presentation of today's materials in the Investor section of our website.

Now 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 last 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, 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 now 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 6%, it was highlighted by 13% growth in K-C International.

Second we generated strong improvements in both our adjusted gross and operating margins as well as double-digit growth in adjusted earnings per share.

And third, we reinvested significantly behind our brands with higher levels of strategic marketing and R&D investment.

Now let's cover the details of the quarter.

Overall, sales increased 4% to $5.2 billion.

Organic sales rose 6% driven by higher net selling prices of 3%, increased sales volumes of 2% and favorable mix of 1%.

On the other hand lost sales in connection with our pulp and tissue restructuring as well as changes in foreign currency rates each reduced sales by 1%.

Moving down the P&L, adjusted gross margin was 33.2%, that's up 250 basis points year on year.

The improvement was driven by organic sales growth and $60 million of forced cost savings.

On an adjusted basis, first-quarter operating profit rose 12% with an operating margin of 14%, that's up 90 basis points compared to the prior year.

Between the lines, spending increased versus last year including a $45 million step up in strategic marketing to support our product innovations and targeted growth initiatives.

Additionally, administrative and research spending increased as we continue to build capabilities to support future growth.

First-quarter adjusted earnings per share were $1.24 as compared to $1.09 last year.

The improvement came despite lower net income from equity companies.

And in terms of the tax rate, our adjusted effective rate for the quarter was 29.3%, that was similar to the year ago quarter.

We continue to expect our full year rate to be in the range of 30% to 32%.

Cash provided by operations in the first quarter was solid at $585 million, that's up nicely from $250 million in the prior year.

The increase was driven by lower pension contributions and higher cash earnings.

So our balance sheet and cash generation remains strong and we continue to allocate our capital in shareholder friendly ways.

In February, we announced our 40th consecutive annual increase in the dividend.

The 6% increase should help us maintain our top tier dividend payout ratio in the CPG space.

In addition, during the first quarter we repurchased 6.3 million shares of KMB stock at a cost of $460 million.

We continue to expect full-year share repurchases of $900 million to $1.1 billion.

Altogether, full-year share repurchases plus dividend payments should total at least $2 billion returned to shareholders for the second consecutive year.

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

In Personal Care, organic sales rose 9% with volumes up 6% and net selling prices advancing 3%.

Volume performance benefited from strong growth in K-C International, including double-digit growth in each of our major regions.

In addition, our European business delivered broad based growth in the quarter.

The increase in net selling prices was driven by K-C International as well as our infant care and baby wipes businesses in North America.

I'm encouraged by the price realization in our North American diaper business which as you know is a key focus for us this year.

First-quarter Personal Care operating margins of 16.9% were 90 basis points below the prior year.

Nonetheless our margins did improve 150 basis points sequentially compared to the fourth quarter of 2011.

So this bodes well for our expectation that full year 2012 Personal Care margins will be similar to the 2011 full year average.

Turning to Consumer Tissue.

Organic sales were up more than 2%.

Net selling prices rose 4% and product mix was favorable by a point while organic volumes fell about 2%.

Price realization was excellent in both North America and across K-C International.

Consumer Tissue operating margins rose 410 basis points versus last year, and I was really pleased to see that our global tissue teams continue to capture the benefits from our strategies to improve revenue realization and drive cost savings.

Moving to K-C Professional & Other, organic sales were up about 5%.

The increase was driven by improved volumes of 3%, higher net selling prices of 2% and slightly favorable mix.

Volumes were up high-single digits in K-C International while North American and European volumes were up low-single digits.

Operating margins of 15.7% were up 220 basis points versus last year, that was driven by benefits from sales growth and cost savings.

And last year, our Health Care organic sales were up 4% driven by volume growth.

Medical supply volumes rose mid-single digits lead by growth in exam gloves and surgical products.

In addition, medical device volumes advanced low-single digits with solid growth in our airway management business.

Operating margins of 13.1% were in line with last year.

So that wraps up my comments.

To recap, we achieved solid organic sales growth that was lead by K-C International.

We delivered improved margins and earnings per share and we're reinvesting in the business to support our growth strategies.

Now I'll turn it over to Tom.

Thanks, Mark, and good morning, everyone.

I'll share my perspectives on our first quarter and I'll focus in on K-C International and then I'll briefly recap our outlook for the year.

So let's start with the first quarter.

Our results were very good.

We're off to somewhat of a better start to the year than we planned three months ago and that's mostly due to better top line growth in K-C International.

Mark's already reviewed the key financials for the quarter, so let me just add that I'm encouraged by our top line growth, by our gross margin improvement, and by the investments we are able to make behind our brands, and then finally we had a terrific bottom line performance.

So we got more work to do and the comparisons will get tougher as the year progresses, but I'm very optimistic about the state of our business coming out of the first quarter.

Since K-C International is a key part of our overall growth strategy, I thought it'd be helpful on this call to share some of the details about the actions that we're taking and the results that we're delivering in this business.

So first-quarter organic sales growth in K-C International was 13%, and that was highlighted by an 18% organic growth in Personal Care.

Now some of you may know this business is now larger than our Personal Care business in North America, so we've got scale and we've got terrific growth prospects in this business.

We continue to deliver strong results in our key geographic priorities.

In China, for example, organic sales grew more than 45% in the first quarter and Huggies diapers have now expanded into nearly 80 cities and we're in the process of launching a new diaper-pant in this market.

In Russia, our organic Personal Care sales were up about 25% and that included benefits from the Huggies diaper upgrade we began supporting in the first quarter.

In Latin America, our organic sales increased by nearly 25%, and that included 20% growth in Brazil where we're launching Intimates Explosion which is a premium feminine care line extension that's very similar to the U by Kotex launch that we've had going in the US.

From a product standpoint, we continue to drive strong growth in our biggest Personal Care businesses in K-C International.

In fact in the first quarter organic sales were up 20% in infant care and more than 10% in feminine care.

But I think it's also important to note that we're making good progress with some of our smaller investment businesses in K-C International.

For example, we had organic sales in adult care grew 25% in the quarter and baby wipes were up about 20% in the quarter.

In the past, these two businesses were largely North American and now we're starting to make them truly global and we're leveraging our strong brands, the favorable demographic trends and the investments that we've made behind these areas over time.

If you looked elsewhere in KCI, we saw good growth in our KC Professional business in the emerging markets.

In first quarter, organic sales for KCP increased 10%, within KCI, and that included 20% growth in Latin America.

And so we expect KCP's momentum in emerging markets to continue as we make strategic investments or you see industrialization and economic development occur.

And lastly our Consumer Tissue business in K-C International continues to drive revenue realization, improved mix and cost savings.

Our teams delivered a solid step up in margins in the first quarter and that further built on the progress that they made in 2011.

So that's just a little bit of a deep dive into our K-C International business.

Overall our strategies are working.

Our categories are healthy and we continue to be very optimistic about our prospects for this business.

Now before turning to the outlook, let me just touch briefly on our market positions in the US.

While the US market is very competitive, we're in solid shape overall from a share standpoint.

Our market shares are up or even with the year ago period in five of our eight consumer categories, and that's true in seven of eight if you look at it sequentially compared to last quarter.

So our businesses in the US remain fundamentally strong and we've got more innovation coming to further improve the health of our brands.

So now let's move to the outlook.

Regarding the global economy, our views are similar to or perhaps slightly better than what we talked to you about in January.

We continue to expect that conditions will remain healthy in emerging markets overall and we're not seeing any slowdown in our categories at this point.

In Venezuela where we had a solid first quarter, results are likely to soften a little bit going forward given the price controls that recently have gone into effect.

In the US, the economic environment seems to be improving rather modestly.

As a result we aren't planning for a big pick up in market demand in the near term and we expect the baby and child care categories to remain soft.

And finally in Europe, we expect the marketplace to remain challenging although through the first quarter our European team is off to a solid start and executing its 2012 plan.

So in this environment we'll continue to pursue our targeted growth initiatives.

We'll leverage our strong brands and we'll continue to bring innovation to the marketplace.

In K-C International we'll continue to expand diaper-pants, premium fem care and adult care offerings into more markets.

In North America, we have several launches currently under way or that will happen in the near term, and that includes our super premium Depend briefs, the latest fashion execution on Huggies diapers, new U by Kotex products, some Health Care pain management offerings and several new KC Professional innovations.

To support our brands and growth initiatives, we'll continue to increase strategic marketing and research and development spending at a faster rate than sales will grow this year.

As we mentioned in this morning's news release, we've reconfirmed our key planning assumptions from January.

In terms of cost inflation, our total expectation for the year is unchanged.

Although most oil based costs are tracking a little higher than we expected, that will be likely offset by somewhat more favorable pulp costs.

Nonetheless, most commodity costs are expected to rise sequentially from first-quarter levels, so we'll continue to focus on cost savings and revenue realization strategies.

In short we're executing the plan we laid out three months ago and we're continuing to target full-year adjusted earnings in the range of $5 to $5.15 per share.

So to summarize, our first-quarter performance was encouraging.

We're well positioned to deliver on our full year 2012 plan and we remain convinced that our Global Business Plan will continue to drive improved shareholder value.

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

(Operator Instructions) Ali Dibadj with Sanford Bernstein.

A few questions.

It was actually helpful that you spent some time on the KCI business and particularly in Personal Care, I am wanting to get a sense from you guys of how much of the growth is distribution growth or driven by distributive gains versus sort of same-store sales, because that will tell us a little bit about the sustainability of that growth rate.

And I guess a sub part of that question is just around the margin impact of that growth in the emerging market, I know it used to be that your margins there were pretty darn close in the developed world, so I'd love to get a sense of that as well, please.

Yes, good questions.

I'd say --- well, we would say we took share in most of the emerging markets at the kind of growth levels that we saw.

In a market like Latin America for example, where we're up 25% in Personal Care, I mean we've got most of the distribution in place that we need there.

So there're some places in Brazil that we're expanding, in the Northeast that's sort of new territory for us, but other than that we're pretty fully penetrated.

Russia, we've got great distribution in and around the Moscow region but we're expanding more to the East and into the balance of the country, but we also would say that we had some share gains behind innovation there.

China was the one that was a big number and I think -- we went from I think 72 cities at the end of last year to 80 cities now, so part of it is distribution related.

But we also have moved into tier 3 so we're expanding our offering and we're just in the process of launching diaper-pants, so there's probably a little bit of pipeline fill there.

So yes, some share growth but a lot of innovation and some distribution expansion.

And it's just tough to break those down but I'd say probably in China in particular was more -- we're expanding into new categories of new markets and Latin America was probably more share growth.

So to just -- if I get to the follow up on the margins part, so if you were to say kind of the Personal Care business 19% I think is your organic growth number, you'd say two-thirds same-store sales-ish, one-third distribution gain, is that the fair gut check?

I'd be guessing, I would say that doesn't sound wildly out of bounds, but we don't have good data to really track it at that level of detail.

Okay, okay and then I had a second part of that question.

On the margin front, we saw some good margin improvement from KCP as well so we saw double-digit profit growth in many of these markets as well.

So good cost savings performance, good price realization.

Probably nearly half of the price realization in dollar terms from a total corporate standpoint was in K-C International.

So yes, they're off to a good start this year on top line and bottom line.

Okay, switching gears a little bit to free cash flow, and I've asked this question before, but I just want to continue to get comfortable, maybe I'm just too old fashion about this stuff.

But your free cash flow is again less than the dividend and stock repurchase or basically the payment to shareholders.

I'm just trying to get a sense of how I can feel comfortable with that especially when you're not getting -- we're not being hit as much by restructuring charges turning into cash, so how can we feel about that?

Yes, I'll let Mark talk to that one.

Ali, we look at it on an annual basis, so our cash flow isn't going to be consistent.

It'll -- our operating cash flow will grow over the year.

We knew we were going to come out of the gate strong with share repurchases.

We were out of the market in the fourth quarter so we wanted to start strong.

We've got about half of the low end of our share repurchases in the bank already in the first quarter.

Built a little bit of debt but that'll come down as the year progresses.

For the full year, I think you'll see probably $3 billion of operating cash flow with about one-third going to capital spending, one-third going to dividends and one-third going to share repurchases.

So for the full year we're not looking to increase significantly our debt.

To get back up strategically, over the last 10 years I think in '07 and then last year we made a choice to increase our debt.

But other than that we're funding share repurchases and our goal is to fund them out of available operating cash flow.

Okay, and then just my last question, if you would, is around the increased marketing spend, the $45 million this quarter for example.

Can you give us a sense of how you prioritize that?

So I guess what I'm getting at is how much of that is spent in the emerging markets to grow the brand, to grow education, et cetera, versus new innovations in the US versus competing in Western Europe, because it looked like it was somewhat competitive?

How do you break that up?

I know you mentioned your innovation and other projects, but how do you prioritize that spend?

Yes, each of our teams around the world, we really own the P&Ls on a geographic basis.

So they put together a plan, they work with our global brand teams to make sure we're resourcing the plan in the right way and that we're looking at the relative ROI in each of these markets and the opportunity there.

We have a series of global planning sessions where we work through and say, yes, this one makes sense, this one you need to go do a little bit more work and rinse through that as first part of our ongoing business planning process.

And so as you can imagine, it's a mixture of some center view of the market and some local view of the opportunity and those usually come together in a business plan that we then go execute.

So I understand the process but when you roll it all up obviously you kind of look through and say are we tackling the right stuff.

So again how much of that can you tell or do you not maybe do this in the end, these emerging markets versus developed world versus defending, those kind of buckets?

Yes, we do do it at that level but there isn't a big calculator at corporate that's got that level of scientific view.

So you look at China and say the opportunity is huge, and so the question is how can we go even faster.

And you know that you don't look at a one year payback and compare that around the world.

It's what's your relative competitive position, what's the strength of innovation, what's it going to take to communicate that message to the consumer.

And you look at those opportunities and decide which of the opportunity set that you have balances against your strategy and attack those.

Okay, thanks guys.

Thanks.

Alice Longley with Buckingham Research.

Can you comment on why you're holding to your guidance and what kind of deceleration your guidance assumes in the second quarter as opposed to the second half?

I mean, you beat so much and I know that the gross margin, you've already said that the gross margin will be up less in the second half than the first, but I think you indicated that the first quarter was an upside surprise to you too, so why hold to this guidance?

Yes, I think we're three months into the year, so it's relatively early in the plan.

There're still lots of things to worry about and lots of competitive activity happening in the marketplace.

You look at the earnings beat, $0.03 of it was really related to a little lower effective rate, that was in our guidance for the full year just that the individual settlement happened in the first quarter.

So if you looked at it from that standpoint on a normalized tax rate, we're not that far ahead of what we said and so I still think it's the right level of guidance.

If we're sitting here three months from now and things -- momentum continues, we'll take another look at that and give you an update at that point.

You just cited or said that there was a lot of competitive activity out there, could you tell us which category and which region you think competition will be heating up?

Yes, well surely in fem care, P&Gs got a major relaunch coming in the US, in diapers they've got a relaunch coming mid-year and they've got a big Olympic program in the third quarter, they're going to drive that globally.

So yes, there're plenty of stuff to react to and we're off to a good start, we're encouraged by that.

We're certainly going to keep -- I mean my goal, Alice, is to deliver terrific results and not necessarily be the most accurate forecaster that you've ever had.

Okay and then my last question is to circle back to the emerging regions, what percentage of your revenues in emerging regions comes from baby care roughly?

Paul, have you got the split of that?

Yes, we don't break out precisely but if you added up, infant care and child care it would be at least half.

Okay, super.

Thank you very much.

Thanks, Alice.

Caroline Levy with CLSA.

Hi, incredible acceleration in growth, fourth to the first quarter.

I'm just sort of looking at my notes from K-C International and the fourth quarter was only up 7%.

And so again just trying to get behind what Alice was getting at, do you think this was an anomaly this kind of 19% growth in those markets?

And then also just to understand because I think Europe was very, very soft in the fourth quarter, so can you tell us what programs are working to turn that around?

And I think price was down 5% in Europe but your volume growth of 11% more than offset that.

So just helping us understand if any of this is one-off and why it wouldn't be sustainable?

Yes, sure.

No I think the first quarter is probably a little easier comp for us so we were -- the growth rate looked a little bit better from that standpoint, but we had a little lighter first quarter last year, so that's probably part of it.

I'd say in emerging markets the momentum has been pretty good and so we're seeing that continue and even accelerate a bit.

We've got more investment behind it, more innovation happening in the first quarter than we had in the fourth quarter and we'd expect that pace to continue as the year rolls out.

It's also encouraging to see some of our investment businesses like adult care and baby wipes that really have been predominantly North American businesses, we're investing in those, we're putting the right resources behind them and we're seeing those really start to take off in emerging markets and I think we're still very early days on that front.

In Europe what we're seeing right now is it's a very competitive market and Tesco's had some challenges in our home market in the UK.

They're wanting to promote and drive foot traffic heavily.

That's part of what helped our business in the diaper side, in particular in the first quarter.

Tissue was a little soft in Europe and as we were trying to take a little bit of price increase and the category wasn't moving so we lost a little bit of momentum on Andrex in the first quarter but are looking to get that back.

Southern Europe, particularly Italy, you've got retailers advertising private label pricing right now and really talking about the economic crisis and how consumers have to be cautious, so there's a lot more promotion spending in the marketplace and that's showing up in some of the negative price.

And we're getting some positive volume lift from that which is good but it comes at a cost.

Right, and you mentioned your non-branded business in Europe.

Do you supply some of that private label?

We had some.

A small amount of our sales -- less than 10% of our sales in Europe is private label and we picked up a couple of additional contracts and you saw that in some of the volume numbers in the quarter, but not a big factor in our overall effort at this stage.

So the bigger question for me just taking a longer term view is the birth rate declined in US and Europe, and is there any chance that you see that volume actually picks up in these markets without the birth rate recovering?

I think that if the birth rate doesn't recover, I think that'll be tough because consumers are pretty much using five diapers a day and if they don't have babies being born, that's going to fall off.

I think as we look at the US birth rate at least and look at some of the underlying causals being employment rate, household formation.

You're even seeing it in some of the housing data that's starting to emerge.

There are some reasons to believe that the birth rate will turn from being slightly negative to slightly positive later this year.

The category in the US will still be down a couple of percent just because of the fact that over the last several years, the birth rate has been down and so as those children are still in diapers this year, we won't have the benefit of their participation in the category.

But we would think going forward, the birth rate starts to turn neutral or slightly positive.

Again, the big growth story is going to be K-C International where the category penetration is quite low and there's a big opportunity there as the category builds out.

Absolutely.

Just the last question, in the US, did you gain share then in all of your major categories this quarter?

We were up in five out of eight -- up or flat in five out of eight year over year, and if you look sequentially, we were up or flat in seven out of eight.

And so in diapers in particular, we were relatively flat sequentially and year over year.

Thank you very much.

Thank you.

Bill Schmitz with Deutsche Bank.

So the first question is who thought it was a good idea to name a fem care product Explosion?

Bill, they don't let accountants like me name anything.

We have a whole army of marketing people that do a fantastic job of that and I'm sure in Portuguese, it's a fantastic expression that consumers love.

Okay.

Was there any help from the Leap Year this year in the quarter?

No, not that I know of.

Somebody pointed it out to me and I said oh yes, it was Leap Year this year.

We probably had an extra shipping day somewhere, but I don't think that was a big enough factor to drive anything significant.

Okay, great thanks.

And then just the last one, on the Personal Care business, is there any way to sort of disaggregate the margin softness between just a mix shift both between emerging markets and US markets and the slowdown in training pants and then just commodity inflation?

So is there like just a rough metric to kind of see what's driving that margin contraction?

Yes, well you look at it sequentially and the margin was up nicely.

And so a good chunk of the sequential improvement was price realization, particularly in North America.

And a good chunk of the commodity costs -- the oil-based inflation did hit Personal Care a good -- a fair amount of that in emerging markets, so they were able to get price to offset some of that, so --

Okay, so I mean it's not -- it doesn't sound like it's that material, the geographic mix shift and then the training pants mix shift?

No, I would say there was very modest, if any, impact from a geographic mix shift.

Yes, commodities is the driver.

Yes, commodities and price realization were the big factors.

In fact, Bill our margins in K-C International were up significantly year over year.

Oh, okay that's really helpful.

Thanks guys.

You're welcome.

Thanks, Bill.

Gail Glazerman with UBS.

Sticking with international for a second, it looked like K-C International Tissue volumes, even excluding restructuring, were pretty weak.

Is there anything one off there or is there something that we should be looking at or thinking about?

Yes, what you saw there was positive price, really positive mix and negative volume.

And part of that is how we count unit volumes, so as we desheet, put shelves -- is one way we get price, we show that as positive price and negative volume.

And so we've been driving that business to drive mix shift and sell more premium products and move from one ply commodity to two ply premium around the world and you really saw that come through in the numbers.

So it really sort of belies the progress we're making in terms of consumer share by those statistics, but we've been doing it that way consistently and so we just try to be transparent on what's actually happening.

Okay, great and kind of sticking on demand and volumes, you mentioned in the release wash -- seeing some improvement in your washroom business in North America.

Can you give a little bit more color and did that -- was that trend consistent through the quarter getting stronger or weaker as you exited the quarter?

Yes, I mean I think KCP usually starts out a little slow just because some distributors will take a little bit more inventory before the end of the year just so they've got -- to tide them over.

And so -- but I'd say things have been picking up throughout the quarter.

And we had some distributors in recently and they were pretty bullish on their outlook this year in the US market.

So they were talking about high single digit, low double-digit growth, pretty broad geographic distribution in the US.

You're starting to see it in office buildings and lodging and some of the occupancy rates are ticking up a bit.

I'd say manufacturing is an area that's been a little slow that's starting to pick up as you're seeing more employment there but still some room to go there.

And we've had some innovation that we're all talking about as well, so part of it has been positive as we're out talking about a healthy workplace and with some new dispenser programs and things like that in that market.

So we're feeling pretty good about KCP.

Okay, and then just a couple quick questions on inflation.

Can you give a sense of what you're looking at for natural gas, I guess is it $3 to $3.50 last quarter and I'm assuming that's changed?

Yes, I mean our outlook for it is in the what two and change?

$2.25 (multiple speakers).

$2.25, and we're partly hedged.

As you know, we were probably 60% hedged last quarter and we've got hedges in place on a rolling basis for the next several quarters.

So we don't get the full benefit of that, but for every full $1 per MMBtu that gas changes that's about $16 million in operating profit in North America and -- just from a rule of thumb standpoint.

Before any impact from hedging.

Right, before hedging, just on a raw number.

Okay, and I guess your real inflation was coming from kind of other raw materials.

Can you talk about kind of -- I know you said you expect inflation to be up quarter on -- sequentially but just what that trend was, is that just recognizing increases through the quarter and things have stabilized or are you still seeing inputs within that category still rising?

Yes, I mean most of (inaudible) stuff is polymer and you're seeing it in some of the shortages of things that are popping up.

You saw it in the gasoline market in the first quarter, and it's just been real volatile.

And I think if you look at a lot of the resin pricing that we buy, that's probably been the biggest single driver and expect that to tick up a bit in the second quarter.

Pulp is expected to move up.

We've seen a couple of moves already.

That will probably be the biggest dollar impact on some of the sequential changes.

And there's a question, well there's some expected pulp capacity in Brazil supposed to start up later this year, whether or not that happens is still I think weighing on the market.

Okay, and but pulp and we're starting to see Asia kind of roll out right now, that there's certainly a lot of capacity coming on over a six-month period starting later this year.

Reports indicate that discounts are up and your forecast continues to be even down significantly above where we are year to date.

I mean is there really anything you're seeing in terms of securing supply that --?

Well, we saw -- we've seen eucalyptus price went up I think it was $70 a ton in the market last month and they're talking about another price increase coming up in May or June, so there is some upward movement on pulp price.

On the other hand we'd say secondary fiber price has been a little softer than we expected, so we'll see.

A lot of it depends on Asian buying and what happens there and if the Chinese are not in the market you could see a little sloppier pulp market in the second quarter, we'll see.

Okay, thank you.

Thanks.

Jason Gere with RBC Capital Markets.

I guess just talking about the diaper business in the US and last quarter we saw a lot more promotional spending out there and it didn't really kind of drive the volumes.

I guess can you just put a little color around what you saw the last three months on the competitive side even from on the retail side as well?

I know the trends don't look all that great, but I'm just wondering if this kind of came in line with your expectation and do you see more of the focus on price realization going forward as opposed to a little bit more price investment coming back as we saw in the fourth quarter?

Yes, well I think as we talked on the last call, some of the activity in the fourth quarter we believe was related to our launch of diaper-pants and that our competitors were responding to protect as they would typically do in a major launch situation, as we would do if it was the other way around.

So some of that rolled off in the first quarter and we were pleased to see where we got really no price realization in North America in the fourth quarter.

We had a couple of points of price realization in the first quarter, so that's a positive sign.

The price increase appears to be in place across all the major retail channels in North America.

There's still a fair amount of promotional activity out there but it is a reduced rate from where it was in the fourth quarter.

So we feel pretty optimistic about how it moves from here.

And there's lots -- we've got innovative products in the marketplace with our main line Huggies, we've got more innovation coming, so does P&G.

So the good news for CEO mom is that there'll be lots of news in the diaper category over the next couple of quarters and that makes it that much more challenging for private label and others in the category.

Okay.

And then what about training pants?

I mean that seems to be one of the categories that's kind of taken a hit over the last couple of years, how do you reengage the consumer?

I know we're probably not there yet, we have to wait until birth rates go up, but how do you kind of manage that business right now?

And what do retailers talk to you about the shelf space that you have?

Well, I mean it's a terrific category still and it's a very good category for the retailer.

Now what the reality of it is is we have three years of a declining birth rate that totaled close to 8% decline in live births in the US, that's essentially piled up in the training pant category because that's about where toilet training occurs is around age between 2.5 and 3.5.

And so we've gotten good visibility in that with our retail customers.

We're driving lots of innovation.

We're launching some new products around that space.

We've got a terrific GoodNites business that's in that space in the aisle.

We're launching a new GoodNites bed mat that'll be out there for overnight use for children in that space.

And so I think while everybody would like it to grow faster they also understand the reality of what's happened in the demographics for the near term.

Okay, and then just on Consumer Tissue with the US, just given where pulp prices have been, have you seen any changes from your competitors out there in terms of trying to take down price or get a little bit more promotional there?

Not really.

I mean I think the pricing has gone in and as high as pulp got, we never really even fully recovered the highest level of pulp price in the finished product selling prices.

And so I think there's a sense that we're still probably behind from where we were, so I think so far again that market has been relatively rational as well in the near term.

Okay, and then just a last question as a clarification.

I think, Mark, you were talking about the Personal Care margins, did you say they were going to be equal to kind of 2011 levels?

Equal to 2011 full year.

Full year, so you're talking just -- so it would be a slight decline from where you ended the first quarter which I think you were --

Yes, I'd say ballpark.

We were around 17% for the full year.

I would think we'll be around 17% as the right target for 2012.

We would say we're in that ballpark.

Okay, all right, great.

Thank you very much, guys.

Thanks.

Lauren Lieberman with Barclays Capital.

I want to follow up on Jason's pricing questions actually.

So pricing in US facial tissues remember in Q4 private label kind of hasn't come around, are they now there so pricing is in line in that category?

Yes, I mean I think so.

I'm not -- we took price in facial tissue through sheet count change and so it is kind of a complicated question, so I'm not sure you'd see it at every account but we have seen it in some accounts.

Okay, and then the other piece also following up from Q4 was the pack count change in diapers in North America I think hurt volumes and you'd expected kind of the household like the pantry inventories to recover in Q1.

So was that a little bit of a benefit because the volume sequentially in North America it sounded like Personal Care's were a little bit better.

Yes, that's probably right.

We had -- we talked about that in the last call where we had -- we took the full hit of the pantry low and we usually don't even see that much of the pantry destocking effect of lower count.

And so probably our volume was more reflective of what's actually happening in the category in the first quarter.

Or is it better maybe to look at sort of an average of Q4 and Q1 or not really?

It really is more Q1 you think is reflective of the category?

Yes, I would think that most of the pantry and retailer ordering patterns and stuff should be flushed through by now.

Okay, okay, and then the final thing was just paper towels you mentioned distribution gains.

So was that Viva in particular regaining some distribution or is it Scott?

A little bit of both.

Actually both brands had a pretty solid first quarter, so that was encouraging to see.

And what do you think is driving it, because I feel like Viva, there was when you go back it was a bit like you guys were pushing on the revenue realization this great high margin high price product you have at the time when unfortunately consumers were going other directions, so do you think regaining shelf space there is any sign of kind of confidence on the retailers?

Well I think shelf space, I think as you know, many of the retailers, some large ones in particular had gone to a much more streamlined shelf set.

I think much of that has been rolled back as the consumers wanted to have a bit more selection.

We've had a terrific creative campaign with Mike Rowe behind Viva and that's really resonated well and driven a lot of interest in the brand.

We've had some innovation in news as well and that all of the collection of that has lead to better volume and results.

Okay, great.

And then my final question was just on KC Professional because you did mention on -- that growing in international was a big focus.

So about -- to the degree you can talk about it like ballpark how big or small is that business today?

How do you really go about expanding that business?

Is it kind of the high margin, very big city focused and how much do you expect that to play into the growth story over the next couple of years for that business?

Yes, I mean we're already in a lot of markets already but I'd say if you looked at Russia, China would be the -- and maybe India would be the new growth platforms over time that we'd be looking at where we're maybe not as well represented.

Latin America we've got a pretty good sized business but we're really putting more dedicated resource against it and driving it.

I don't know, Paul, if you've got a geographic split of that in terms of emerging markets versus developed markets, but --?

Yes, Lauren if you look at total KC Professional about 25% to 30% is in KCI.

Yes and so that would compare to 37% of the total Company, so it's a little underweight.

And on Health Care it would be even more underweight, so that gives you some sort of perspective on it.

And the bulk of it sounds like then is in Latin America at this point?

Well Latin America will be the biggest piece reflecting the strong footprint we have in Latin America.

We've got a lot more tissue in Latin America and that tends to be a good host to get some of our KCP business started.

But we've got a terrific line up of safety, products and wipers that we're taking to global manufactures around the world.

So we can go to four or we can go to any other big company and say we can give you the exact same wiper solution to drive a consistent manufacturing process in every one of your facilities around the world.

There is really no other company in this space that can do that today.

Okay, that's helpful.

Thank you so much.

Thank you, Lauren.

Wendy Nicholson with Citi Research.

I have a couple quick ones.

First of all the $45 million in incremental marketing spending, can you break that out international versus US?

Yes, if you look at -- let me see if I've got that here handy.

It was roughly about one-third in KCI and another --

Yes, it's pretty proportional to the size of their business.

So you'd say, yes, KCI got its -- at least its fair share.

And probably Personal Care was a little heavier than tissue which would reflect the launch of innovation both in North America and in emerging markets.

Okay, okay, and then the 1% hit on the top line from the lost sales, the -- whatever product line exits you're doing, is there any way to quantify the impact on the tissue margins that came from that initiative specifically as opposed to commodity prices or other things?

Well I think the total cost savings from all of our restructuring in the quarter was about $5 million.

And so within that, I think some of the advantage of that would be reflected, so not big and it was about a 1 point drag overall for the lost sales.

Okay, fine.

And then my last question, and I don't mean to sort of beat a dead horse here, but just going back to the diaper market in the US and looking at sort of pricing trends and the market share trends and that's the only category where it seems that fairly consistently, but particularly here in the first quarter 2012, private label is gaining I think 200 basis points of market share.

And so I'm wondering if the spending that you're doing, the innovations you're trying to bring to market, I mean I look at Proctor shares and even with Dry Max and (inaudible) it was poorly executed whatever, but all the innovation that both of you guys are bringing to the market, both of your shares are still way off their peak and yet private label is way up.

So is there --?

Yes, I think you might be looking at --- are you looking at three outlet data, because when we look at all outlet data, I'd say private label shares were down 1.1 points sequentially and they're down 0.6 of a point year over year in infant care, and this would be diapers.

Okay.

And that may do it because I'm just looking at the Nielsen data so it's a different -- data is different in Wal-Mart, that's good to know.

Well that would reflect Wal-Mart, Club, Dollar which wouldn't be all in your database and so --

This category in particular is far over-indexed to non-measured outlets.

Yes, I think probably the Nielsen database may only be one-third or less of the total category.

So the risk of any price pull back or anything like that or increased promotional spending on the diaper business not in the future for you?

Well, I think we would like to -- we watch the relative price gaps versus private label.

Usually there's about a six-month lag between when price goes in on branded products and when private labeled pricing takes place, so that's something that we will be watching to see what happens in the second quarter, if there is price movement in private label or not.

And so -- but I think it looks like at this point across the branded players, the price increase has gone in across all of the major retail outlets.

Perfect.

Okay, terrific.

Thank you so much.

Thank you.

Chris Ferrara with Banc of America.

I wanted to go back just to make sure I understand on the EM Personal Care discussion.

It sounds like you're suggesting that that level of growth in Personal Care in KCI is sustainable, am I getting that right?

Well I mean, I tell you, it was a very good quarter, so it has been above where we've been but I also think we've got an aggressive plan put together and it was a little ahead of plan but it wasn't a lot ahead of our expectation.

Great, that's helpful.

And then I guess the marketing spending, I was wondering if you could try to just break out a little bit the cadence or the pace of what the year-on-year incremental investment is going to look like and if you can layer that into what the innovation pace looks like?

Because I understand that Q1 has been a big innovation quarter, that's obviously going to continue through the year, but how do we think about the year-on-year change in marketing as we go through?

Yes, if I look at strategic A&P relative to sales, we -- if you go back to like 2010, we were at a higher rate than we were in 2011.

And if you look at our first-quarter numbers, we're kind of coming back up close to those 2010 levels.

And so I'd say that's probably the right more medium term aspiration is how do we get back on the trend line to have a P&L where we're delivering innovative margin accretive growth and are able to reinvest in strategic A&P to build brands around the world.

And so I'd expect to see, as we said on our January call, a faster level of growth in A&P this year than in sales growth, and the first quarter was certainly representative of that.

But you will have a pretty strong first-half spend rate and then we'll see how things progress in the second half and give you a better look at that in July.

Thanks and one last one.

I actually caught a piece of your interview on CNBC this morning and I know you mentioned it a little in the presentation here, but you sounded reasonably optimistic about the channel.

And I think you might have said something to the order of sales got better over the last month or the retailers look more optimistic over the last month.

Can you -- did you say that?

Yes, they were asking about the US economy and we had been with some KCP distributors recently that were North American based and these are folks that would solve -- to medium sized businesses, would be in the lodging, office supply, even some manufacturing space.

And these are some of our best customers, so these are folks that are really doing great things.

And they're expecting high-single digit, double-digit growth, had a solid start to the year and so they were more optimistic.

And I think the question was related to are you concerned about the US economy and then certainly, there're plenty of things to worry about but there's also some signs of growth that are happening here.

Right.

That's helpful, thanks a lot.

Thanks.

Linda Bolton-Weiser with Caris & Company.

I know you had said something earlier in your comments about Venezuela and I didn't quite catch what you said, can you comment again whether you're affected by the price controls there?

And also can you remind us what your percentage of revenue and profit is in Venezuela and just the philosophy about what do you do in this situation?

Do you just kind of suffer a lower profitability or just what's the philosophy going forward?

Thanks.

Yes, that's great, thanks.

And yes, Venezuela is a very low single-digit percentage of our sales and profits.

So I think last year, we announced it was 1% of sales and it was 3% of profit, so we're in that ballpark kind of range as our expectation as to where that can be.

And pricing controls went in, we were on the list.

We've worked through with our customers and with the government on how that's going to be executed in the marketplace and our team is in the process of -- or it's in place, it was effective April 1. And so our primary concern is to make sure that we can serve our consumers and our customers.

So we want to make sure moms have diapers and our consumers have fem care products and bath tissue and facial tissue and all the things that they need to take care of their family.

And we want to do that in a way that complies with the rules that the Venezuelan Government has passed down.

So I think we said in my remarks that the first quarter was a little bit more positive than we're going to see in the remaining three quarters, but it's still going to be a profitable business for us and it's one that we're managing carefully.

Obviously getting foreign exchange to be able to pay the bills for imported raw materials and for imported finished product is key.

And that supply of foreign exchange has been uneven at times and so that'll be a key to our back-half plan so that we can continue to operate the business successfully.

Okay, thanks.

Thank you, Linda.

Connie Maneaty with BMO Capital Markets.

Just to follow up on Venezuela.

What is the average price decline you have to absorb?

And how strictly do you think the authorities are going to enforce the regulations?

I think the price change varied by category.

In some cases it was double digits, in some cases it was less than that.

And I think like anywhere else we operate, Connie, I mean our goal is to fully comply with whatever the rules are in the country, and if we can't operate there and make money, then we'll reevaluate why we're there.

But we want to make sure that we're complying.

We assume that the government will put compliance measures in place, but I think we're -- our goal is to make sure we're in compliance.

And then we'll let somebody else worry about if they can get away with playing games with the price list.

Okay, thank you very much.

Thank you.

John Faucher with JP Morgan Chase.

So two questions here.

The first is if I look at your raw material guidance, it's dollar based as opposed to unit based, so the volume appears to be coming in better, you seem to be relatively optimistic.

Can we read into it that better volumes with the same level of cost inflation implies a little bit more gross margin upside?

So that's the first question.

And then the second is to sort of follow up on Wendy's question which is it seems as though the diaper business in particular is better suited to this channel fragmentation particularly in terms of online.

So I guess as we look at something like diapers.com which has a lower level of private label presence, should we expect the branded competitors to take more share as the business moves to that channel?

And then secondly, it would seem as though if you don't get the consumer before she buys her first set of diapers, you run the risk of losing her because you have fewer opportunities to switch her brand preference.

And I guess I'm looking for some thoughts you have in terms of that channel dynamic.

Thanks.

Yes, that's great.

Yes, on your first question, I'd say our growth isn't that much higher in our outlook than planned that I think we'd attribute the same level of overall inflation assumption to a significant change in margin.

I mean it would probably be 10 basis points or less kind of thing.

So broadly, I'd say we're a little bit ahead of volume, that should give us leverage on the operating side.

Obviously if you're putting more high cost materials through, you'd have potentially more inflation, but our inflation guidance for the year was plus or minus $50 million so we're pretty close to a neutral cost perspective from an inflation standpoint.

So I don't see a big gross margin impact relative to inflation materials related to our higher volumes, so on that side.

On the second question, on the channel fragmentation issue and the growth of eCommerce, and clearly I mean point of market entry is a key strategic entry point for the category so we want to own that in every channel.

And then obviously the subscription services for moms that are on diapers.com and Amazon and others, you absolutely want to be a part of that.

You want to -- that's from a marketing standpoint a key strategy is to make sure you have the consumers signed up and you make it just an easy choice for her to want to buy your brand.

And so we're making sure we're focused on that and getting at least our fair share of consumers in that space.

And we're putting more resources against eCommerce both with our pure play eCommerce customers as well as with our bricks and mortar retailers that also have eCommerce activities to make sure we're getting our fair share of that growing channel.

I think there're also key events in a consumer's diapering experience around size change where they'll sometimes will try a competitive product and so we want to make sure we're relevant and have the right offer in place at those key moments as well.

Is -- just to follow up on that, I mean is that a channel where you'd say the quality of sales goes higher again because it seems as though it's going to be less about the discounts and more about sort of being able to leverage your marketing spend.

So even if you have to spend more money online to attract her, you'll spend less in terms of price promotion going forward.

Is that --?

Yes, absolutely.

You want to look at the total ROI of the whole channel, including trade funding.

And so I think everybody is looking at it that way and making sure that-- and quite honestly moms are pretty savvy shoppers and you're finding more consumers than ever that are taking their Smartphone to the store and scanning the bar code and finding out what the price is online relative to in the store.

And so there's greater price transparency of that on every category these days including ours.

Great.

Thanks.

Thanks, John.

Javier Escalante with Consumer Edge Research.

Good morning, everyone.

I actually would like to go back to the three emerging markets, China, Brazil and Russia that you've highlighted.

You provided the growth rate in this quarter, I wonder whether you have the growth rate for the fourth quarter?

I'm trying to assess the inflection point in growth?

And also if you don't have it, basically I would like to understand even if you -- the horizontal growth versus the pipeline feel, right?

Because it seems like you increased the number of cities in China by 10%.

And I understand that this 45% growth includes this pipeline fill, but at the same time you're going to have much greater -- 10% greater points of distribution theoretically.

So that would be the case of China.

In the case of Brazil, you are mentioning that you already have an infrastructure, but we also know that there was a wage increase in January, to what extent this wage increase is boosting the underlying category growth and that would be an explanation.

And also if you can help us understand also Russia, you didn't say how many more distribution cities or distribution points you gained in Russia.

I'm just trying to understand again, what is the new underlying growth in these three key emerging markets if you can help us with that, that would be great.

Yes, I can give you a little bit of color about that, Javier, and I'd say the growth in all three is going to be a step up from where we were in the fourth quarter.

Paul may have more precise data, but--

Yes, I mean at a minimum they were all up double digits in the fourth quarter.

Yes, so-- but it's up another gear from that.

And if I looked at the three of them I'd say in China it's probably more driven by new distribution but also going into new segments of the category.

So going-- adding a tier 3 diaper, which is the biggest segment in China, we were really only there in the super premium area.

We've now gone into the main line part of the category, so that's not so much the new cities, it's that we're now swimming in the widest part of the river here and so we've got more growth from that on top of the new cities, and then having innovation like diaper-pants.

So China is probably more we're expanding in other parts of the category and expanding geographically.

In Russia, we had an improved diaper product improvement going in place and so that's probably more innovation driven than new distribution driven, I would say.

And Brazil would probably be a similar story to Russia.

We've had some good innovation coming on fem care and diapers.

We are expanding into the Northeast part of the country which is more new geography for us but I think the bigger part of the growth in Brazil is going to come from innovation than from geographic expansion.

All this initiative seems to me that they were none basically when you provided guidance at the beginning of the year and it seemed kind of like the growth rates to at least double in your largest key markets was surprising to us, so is this-- I'm just trying to see if there is any other improvement in the underlying growth rate of the market?

Because Brazil has been accelerated for awhile, China too, so I wonder whether in addition to these initiatives that I would imagine you knew about them when you provided guidance, is there something else happening in the underlying market?

Is this that the consumer in emerging-- are emerging markets back after the slowdown in the past two quarters?

Yes, I think it's probably too early for us to really have enough good data and analytics to give you an accurate answer to that.

But I would also say the rise in consumerism across emerging markets has been an ongoing trend.

And despite what you might read about if China is slowing down from 10% to 8%, that's still a pretty aggressive growth rate and our incomes are improving and they're lining more and more of the types of products that we make and sell in those markets.

Yes, but Brazil decelerated to 1% GDP growth and China is China, but Brazil which is larger for you decelerated to 1% GDP growth in the fourth quarter, that's why the question.

Finally the clarification on-- one clarification on the US, and I know that everybody has been asking on this, but and it seems unclear to me, you basically said that your market share in the US is flat and at the same time, you are growing your volume growth is mid-to-high single digits, so does it mean that the category volumes are declining 7.5%?

Is that what-- shall we understand it?

No, our volume was down mid-single digits in the US and we realized price to offset part of that.

And our share I think was up 0.3 of a point sequentially and it was down 0.2 of a point year over year by our all outlet measures, so pretty flat overall.

So that would be infant care, but you said that child care was down high-single digits.

Yes, child care as a category is down and our volume was down high-single digits.

Our shares in child care were up 0.7 sequentially and down a couple of points year over year.

Okay, thank you very much.

Okay.

Chip Dillon with Vertical Research Partners.

I just wanted to ask you about the higher marketing spend, you mentioned the $45 million in the first quarter, and is that sort of a pace we should annualize to $180 million as being an increase that we should see for the full year?

Yes, I think that would probably be a little higher than expectation, but we said it would grow faster than sales and we want to get it back on the trend line that we've been on through the 2010 numbers, we took a little step back in 2011.

So you'll see a nice uptick at a faster pace than sales, but maybe not quite to the level of multiplying by four.

Got you, that's helpful.

And are there any special strategies or at least indications of what you plan to do as we get these six or seven new private label machines starting up later this year and especially next year that are largely new people in the industry and just your thoughts on how you are preparing for that?

Yes well I mean I think we're actually more optimistic about the overall Tissue operating rate.

I mean there's been a lot of capacity that's gone out of the market including our Everett Mill is now down and that was 175,000 tons that's out of the market.

We will be taking some capacity out of Chester, some of the other competitors have done so as well.

So we actually have seen the Tissue operating rate be pretty high and in the high 80s, low 90s and would expect that to continue for a while.

And as we see the continued growth in the category as the ability to absorb a couple of new tissue machines a year and we haven't had that for a while, so we're not as concerned about it.

I think we've got a-- in Cottonelle, we've got a differentiated branded offering with a good innovation plan and it's a lot tougher to make a product like that even as you bring on through air dry capacity than you'd think.

Scott Tissue was also a differentiated sheet with a unique position and a strong loyal brand following, and so we believe that one's well positioned as well.

So we've got good strategies in place to continue to execute our plan and focus on driving that for the benefit of our consumers and our customers.

Got you, and just two quick additional follow ons.

Tom, if you could, I know that the Everett closure was quite substantial like a couple hundred thousand tons close to that, could you give us a feel for how much more it will be coming out this order of magnitude in tons in Chester?

And then switching gears, you noted in the slides that your volumes in diapers in China were up 45%, I believe that must be a year-over-year number which is phenomenal, and could you talk a little bit about how much of that was the market and how much of that could have been market share?

Yes, on the first question, we'll probably take one machine out of Chester and it'll be a smaller number by far than what was done at Everett, so you can probably get the ballpark on that.

In China, we talked about that a couple times on the call, where I mean I'd say a good chunk of it was us expanding into new segments of the category going into the more main line part of the diaper category in China.

We've also expanded from probably 72 to 80 cities, 72 at the end of last year to 80 at the end of the first quarter.

And my guess is we also picked up some share, but it's probably-- we're still a relatively small player in China overall.

We're getting to scale in the major cities that we've been in for a while and with a fuller line up of products we'd expect to continue to drive that.

So we're enthusiastic about the progress so far.

Thanks very much.

Good luck in the quarter.

Thanks, Chip.

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

All right, thanks, David.

We'll wrap up with our closing comment from Tom.

Well once again we're off to a great start and we're making the right investments to support the initiatives that we've talked about in our Global Business Plan and we want to make sure that translates into terrific value for our shareholders.

So thank you for listening today.

Thank you.

Ladies and gentlemen, that concludes today's presentation.

You may disconnect your lines at this time.