金百利克拉克 (KMB) 2012 Q2 法說會逐字稿

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

We now have your presenters 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 presenter, Mr. Paul Alexander.

Thank you, David, and good morning, everyone.

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

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

Here is the agenda for our call.

Mark will begin with a review of second quarter results.

Tom will then provide his perspectives on results through the first half of the year, and also our full year outlook.

We'll finish with Q&A.

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

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

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

We will also be referring to adjusted results and outlook this morning, 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 this morning's news release.

Now, I'll turn it over to Mark.

Thanks, Paul.

Good morning.

Let's start with the headlines.

First, we delivered organic sales growth of 5%, as highlighted by 9% growth in K-C International.

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

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 of $5.3 billion were even with the year ago period.

Underlying organic sales rose a healthy 5%, driven by higher net selling prices of more than 2%, and increased sales volumes of 2%.

On the other hand, changes in foreign currency rates decreased sales by more than 3%, and lost sales in conjunction with our pulp and tissue restructuring reduced sales by an additional 1%.

Moving down the P&L, adjusted gross margin was 33.6%.

That's up 240 basis points year on year.

The improvement was driven by organic sales growth and $70 million of forced cost savings.

While we benefited from input cost deflation of $30 million, this was mostly offset by unfavorable currency translation effects.

Let me spend a minute on our FORCE program.

Our teams around the world have been working hard to identify and implement additional savings programs so that we can fund reinvestment and improve our margins.

They've made excellent progress in the first half of the year, in particular by leveraging our global procurement organization and continuous improvement capabilities.

As a result, we are increasing our 2012 full year savings target to at least $250 million, up from our previous estimate of $150 million to $200 million.

This new guidance, our 2011 and 2012 combined total savings are now projected to be at least $515 million, so we'll exceed our existing three-year target of $400 million to $500 million after just two years.

Now, turning back to our results.

On an adjusted basis, second-quarter operating profit rose 8%, with an operating margin of 14.7%.

That's up 110 basis points compared to the prior year.

Our investment between the lines increased, including a $35 million step-up in strategic marketing, to support our product innovations and targeted growth initiatives.

Administrative and research spending also increased, as we continue to build capabilities to support future growth, particularly in K-C International.

Second quarter adjusted earnings per share were $1.30 compared to $1.18 last year.

While we benefited from a slightly lower adjusted effective tax rate, that effect was mostly offset by lower equity income.

Cash provided by operations in the second quarter was a solid $740 million.

That compares to a strong year-ago performance of $771 million.

In terms of primary working capital, I'm encouraged that we're on track with our plan to reduce our cash conversion cycle by at least two days this year.

We continue to allocate capital in shareholder friendly ways.

During the second quarter, we repurchased 2.5 million shares of KMB stock at a cost of $200 million.

We now anticipate full-year share repurchases of $1.3 billion, up from our previous target of $900 million to $1.1 billion for the year.

This reflects our expectation for additional excess cash flow, including proceeds from the exercise of stock options.

On the last, we are now expecting a more moderate year-on-year decline in our diluted share count than we previously anticipated.

That's mostly due to the accounting impact of option exercises.

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

In personal care, organic sales rose 7%, with volumes up 4%, and net selling prices advancing 3%.

We had another quarter of strong volume growth in K-C International, including high single-digit growth in each of our major regions.

The growth initiatives performed very well.

In fact, in the diaper category specifically, China volumes grew by more than 40%, and Brazil and Russia volumes were each up approximately 20%.

Elsewhere, our European business delivered solid volume growth in the quarter, while our North American volumes were down slightly.

The benefit of improved net selling prices in personal care was driven by K-C International, and our Huggies brand in North America.

Second quarter personal care operating margins of 16.8% were pretty similar to both last year and the first quarter this year.

Turning to consumer tissue, organic sales were up more than 1%.

Net selling prices rose 3%, while organic volumes fell about 1%.

We continue to deliver excellent price realization in both North America and across K-C International.

Consumer tissue operating margins rose 340 basis points versus last year, and I'm really pleased that our teams continue to capture the benefits from our strategies to improve revenue realization and drive cost savings.

Lower pulp costs also helped our tissue margins.

Moving to K-C Professional and other, organic sales were up 3%.

The increase was driven by improved volumes of 2%, and higher net selling prices of 1%.

Volumes were up 5% in K-C International, while North American and European volumes were up modestly.

Operating margins of 16.4% were up 120 basis points versus last year, driven by benefits from organic sales growth, cost savings, and lower import costs.

And lastly, health care organic sales were up 7%, as driven by volume growth.

Medical device volumes increased double digits, with strong growth in both our digestive health and airway management businesses.

In addition, surgical and infection prevention volumes rose mid-single digits, as led by growth in exam gloves and surgical products.

Operating margins in healthcare of 13.6% were in line with a year ago.

That wraps up my comments.

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

Since Mark has reviewed our second-quarter results, I'll just add that I'm encouraged by our overall performance, and by the execution of our global business plan strategies.

Halfway through the year, we've made excellent progress in a continued volatile environment, and our business fundamentals are strong.

Let me share some of the highlights of our results from the first half of the year.

On the top line, our organic sales were up 5%, and that's ahead of our original full year target for growth of 3% to 4%.

K-C International has been a key driver of that growth, and our organic sales there are up 11%.

That includes 15% growth in personal care, which is a significant pickup compared with 10% organic growth this business achieved last year.

And we're delivering strong results in several key priority businesses.

For example, in China our diaper volumes so far this year are up more than 45%, and that's driven by benefits from product innovation and distribution expansion.

Our diaper business in Russia is also performing very well.

We've got 20%-plus volume growth there.

An upgraded Huggies diaper has been key to our success in this market.

And in Brazil, where we've launched premium diaper pants, our diaper volumes there have increased by more than 15% so far this year.

And then finally, volumes in adult care and baby wipes across Kimberly-Clark International are each up about 15%, and we're making these businesses become truly global.

So I'm pleased with K-C International's performance so far this year.

Our categories are healthy, we're generating better than expected growth, and we're very optimistic about our future prospects for this part of our business.

It's good to know that K-C International has even more innovation coming in the second half of the year.

That includes the relaunch of premium adult care pants in Brazil, premium fem care offerings throughout Latin America, and a diaper upgrade in South K Korea.

Now, turning to North America.

We delivered mid-to-high single-digit volume growth in feminine care and adult care in the first half of this year, and both businesses are benefiting from strong marketing programs and product innovation.

And on the innovation front, we're optimistic about our Poise brand's recently announced entry into the feminine wellness category.

Our other businesses in North America are generally performing in line with our plans, although category demand in baby and childcare is tracking at the low end of our previous expectations.

We've also seen some modest trade-down in these categories, but nonetheless, our market shares are holding steady in these two businesses.

And looking more broadly at our market shares in North America, our positions remained solid overall, as we're up or even with year-ago market share levels in six of our eight consumer businesses.

And finally, in Europe, conditions remain challenging, particularly in southern Europe.

With that said, our market shares are generally stable overall, and our European team is on track to achieve its 2012 plan.

So, overall, organic top line growth has been very good through the first six months of 2012, and our brands are in great shape.

To drive this growth and support our brands, we've been investing significantly, including an $80 million increase so far this year in strategic marketing, and our research and development spending was also up at a double-digit rate in the first half of this year.

Turning to profitability, we've increased adjusted gross margin by 240 basis points in the first half of the year.

That's been driven by our focus on organic sales growth and cost savings.

Our adjusted operating profit has grown by 10% in the first half, and that has led to a 12% increase in adjusted earnings per share, and that's ahead of our original plan for the year.

We continue to run the business with financial discipline.

Our balance sheet remains strong.

Our cash provided by operations is up 30% through June.

So, while we're only halfway through the year, we've got more work to do, but we're tracking ahead of our previous expectations in a number of areas, and I'm encouraged by our progress.

So let me move to the outlook.

Our plan is to build on our momentum that we've had going in the first half of this year.

We'll continue to focus on our targeted growth initiatives; innovation, brand building, cost reduction, and shareholder-friendly capital allocation.

There are a number of updates to our full-year planning assumption in this morning's news release.

We are now targeting 2012 adjusted earnings per share to be in a range of $5.05 to $5.20 per share, and that range is about $0.05 per share higher at each end of the range than our previous estimates.

The key drivers for the increased outlook are higher organic sales growth and an increased FORCE cost savings.

While we've lowered our commodity cost estimates, we expect that those benefits will be largely offset by more unfavorable currency exchange rates, as commodity costs in the US dollar continue to generally move in the opposite directions.

We've also taken up our strategic marketing and G&A investment plans to support our growth initiatives.

I'm pleased that we're able to increase our near-term outlook and increase the level of investments we're making for our future success.

So to summarize, our performance in the first half of the year was excellent.

We've increased our expectations for our 2012 organic sales growth, cost savings, and adjusted earnings per share, and we remain convinced that our global business plan will continue to improve shareholder value.

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

(Operator Instructions)

Gail Glazerman, UBS.

I wanted to talk about volumes a little bit.

Specifically, the growth that you posted in European personal care, as well as North American tissue, is that just because of easy comps, or was there something else going on?

I think in Europe, personal care, a couple of things.

We had double-digit growth in our baby wipes business.

We had high single-digit growth in DryNites and Pull-Ups, and we had low single-digit growth in branded diapers.

And so it's good to see we've got good innovation and strong brands in some of those categories that are delivering growth.

We also picked up a couple of private label contracts, which also helped.

And then I think the comps were a little easier in second quarter of last year.

So lots going on there.

In consumer tissue, in Europe was your question?

North America.

In North America, you saw kind of a mix bag.

The second quarter, facial tissue volumes were down just a touch.

Shares were relatively stable overall.

Cottonelle volumes were down, but Viva and Scott towels volumes were up.

Most of the Cottonelle volume decline had more to do with promotional timing at a key customer last year.

We had a big promotion that didn't repeat this year.

So that would explain most of it.

But the shares overall in tissue look pretty decent.

Okay.

And just sticking with volume and demand a little bit.

Can you offer any incremental color?

You mentioned a little bit of the trade-down in baby care.

I'm just wondering, as you move through the second quarter, any changes, incremental changes reflective of the macro environment?

Or has it been kind of as you've been seeing for the last couple of years?

You probably saw private label shares ticked up in several categories 1 or 2 points sequentially.

And so diapers was one of those.

I think it was up a point sequentially.

Our shares were flat, but that's one that you probably would look to.

You have other ones, you look at our adult care shares, private label was down a couple points.

And so it's probably just one that we would watch sequentially.

But infant care was up, I think, 0.9 points.

Fem care private label shares was up just under 1 point.

Facial tissue, it always goes up sequentially, because it's the weakest quarter, so that one was fairly normal.

And then in the dry bath category, private label was up a couple of points.

So as we would say, we would look at modest category trade-down.

Those were areas we would probably focus on.

Okay.

And just a couple quick questions on commodity costs.

Looking at your forecast for NBSK, that's kind of in line with the first half average, yet prices seem to be falling in the second half.

Are you expecting some sort of pickup, or again, are you just basing this on forecasts that are out there?

We're basing it on forecasts that are out there.

We're down probably about $35 a ton, on average, for NBSK versus our last update for you.

In April, we talked about $915 to $930 a ton, we're now calling it $880 to $895 a ton on average for the year.

Current spot is about $880.

And so we think that we're in the ballpark, but we'll see what happens.

I think with Northern Softwood market has maybe gotten a little bit more slack in recent weeks, so there may be a little bit more downside there.

But the hardwood market, where we probably by more Eucalyptus than anything else, seems fairly firm at this point.

So I wouldn't see a lot of opportunity on that part of our fiber mix.

Okay.

Thank you very much.

Chris Ferrara, Bank of America.

So strategic marketing up about, I guess it looks like it's about 25% or so in the first half.

I guess I want to try to understand the need to continue that pace.

To what extent is this increased structural versus -- in response to heavy new product activity?

I guess could you talk about that, and the need for this pretty fast pace and increase to continue over the next couple of quarters?

I guess I would say, if you looked at it as a percent of sales, we're back pretty close to where we were in 2010.

So we had ramped up, and gotten up to a little over 5% of sales in 2011.

It flattened out, and we really had a better year of sales growth, and didn't increase strategic marketing.

In fact, it decreased a little bit.

So we're more back on the trend line, and kind of back to where we probably ought to be from a percent-of-sales basis.

We really look at it more market by market, and are we competitive with our share of voice and are we investing appropriately behind the innovation?

So most of the incremental funding is going to drive personal care growth in emerging markets.

And so you're seeing, with the kind of growth we're seeing in China, Russia, Latin America, you're seeing a significant uptick in spend there.

In North America, when we launch our new Poise and Depend products, we're doing that behind a full-up A&P program.

Same would be true from some of the new U by Kotex variance.

We had a relaunch of the main line Huggies diapers that we supported this year.

So we're investing behind innovation that we think will drive top line and margin, ultimately.

And that's showing up so far this year.

Got it.

And I guess on another note, this $20 million drag to operating profit this quarter on production downtime.

Can you talk about what the full year run rate would be in order to generate the two days of cash conversion cycle improvement you're talking about?

Are you already there, or do you think you're going to have incremental downtime for the rest of the year that will affect operating profit?

We still would say that the amount of downtime we're going to take is going to be pretty similar overall this year to last year.

Last year, it was probably more heavily back-end weighted.

So I think our comps are going to get easier on that score in the back half.

Pretty much all the downtime has been focused on North American baby and child care, where the category is softer than we thought.

So we're taking downtime to make sure we don't build inventory in that environment.

And maybe Mark, you can talk about cash conversion cycle.

But we're pretty close to running at the rate that we need to run at.

And I think we'll just have a little bit of opportunity in the back half, as we get past some of the launches that we've built some inventory for in the first half.

I would say, Chris, that the teams, as our rate of innovation has picked up, obviously, that throws a curve at the supply chain.

The teams are getting much better at planning for inventories, executing the launch, and then pushing inventories down.

So this has become more a normal cycle in our business now, but we're right on track to meet, or potentially exceed, our cash conversion cycle goal for the year.

Got it.

Thanks, guys.

Jason Gere, RBC Capital Markets.

Thinking about price as it comes through the sales composition.

Last quarter it was 3%, this quarter, I guess maybe a touch over 2%.

Just from the area of competitive activity that you're seeing in North America, and even to Europe to some degree, are you seeing any risk out there of price rollbacks?

Can you maybe talk about -- I know there's always the timing of when some of the pricing anniversaries, but I was wondering about the competitive landscape.

And should we expect that the pricing benefit that is built into this year's expectations starts to decelerate over the course of the year?

More than anniversarying it, but just because there might be a little bit more promotional element coming through?

That's always a risk, especially as you have a weaker commodity environment, that someone will spend it back.

I think our primary competitor has been pretty transparent on where their focal point is for pricing investments.

And so you guys have read all that, I'm sure.

So the areas that they highlighted, I'm sure we'll continue to see activity that will be focused on.

And from our standpoint, we're focused on driving the business with innovation, and driving a better mix overall.

We will anniversary a lot of the pricing in the back half of the year, particularly K-C International, but also in the US.

So the pricing comps will get tougher.

And in the meantime, if we can continue to drive innovation, we'll make it that much tougher for everybody to compete.

Okay.

So at this point, you're not -- even with pulp below the forecast -- I kind of feel that pulp is at the level, now, where you took pricing, maybe, or the last one on pricing.

So it feels like things are fine at retail, but maybe if you could provide a little color of any discussions with retailers, if they're looking for any incremental trade support, just obviously paying attention to how commodities are trending for you?

I don't think that we've seen a big enough commodity pullback in any area that that alone would drive a major pricing action.

And I think most retailers would like to be advantaged, as opposed to just seeing a broad industry decrease, so they would like a special offer that's lined up with their particular strategy and are more focused on that kind of a discussion than in trying to get you to roll back industry prices, which just takes dollars out of the category, and hurts their same-store sales.

Okay.

And just the last question would be, I think last quarter, we were hoping to see some stabilization in just North America child care.

Maybe some updated thoughts?

How prolonged do you think this will be that -- hopefully we won't see continued mid-single-digit declines year-over-year as you head into 2013.

But just your research, your intel, just a sense of where we are in the category, when do you think the category could stabilize?

Obviously, we're feeling the full effects of three years of low birth rate declines, and the birth rate looks like it's going to be fairly flat this year.

And so you'll start to see that roll into the child care category, as those children graduate from diapers and move in to Pull-Ups.

And so we expect you'll still see relatively soft category comps this year, but it should start to stabilize next year.

Great.

Thanks a lot, guys.

Linda Bolton-Weiser, Caris & Company.

Just another question on pricing.

I see that -- you said in personal care international, your pricing was up about 4%, I think, and you said driven by increases in Latin America.

Can you comment on how the pricing works in other emerging markets beside Latin America when you have these currency devaluations?

Do you take price, and how does that work, and is it harder or not harder?

I guess Russia would be an example, or maybe some of the Asian emerging markets, where there have been some currency devaluations.

Can you just kind of comment on the pricing in international outside Latin America?

Yes.

As you can imagine, it's a fairly complex question.

It depends on the amount of material that's imported in that particular market, versus what's produced in-country.

So if a good part of your cost base is in a foreign currency, and your home currency devalues, you're going to see pricing happen a lot quicker.

So for example, in Russia, as we've moved to producing in-country now, more of our cost space is in roubles, so you can handle swings in the rouble a lot easier than if you were importing all of the diapers from Europe, or from somewhere else.

And so in Russia, for example, there's been some price improvement, but not to the extent that you'd see in the rouble devaluation.

And so I think, broadly, you'll tend to see pricing changes when you have big swings in currency, when you've got a high level of imported content.

And beyond that, if it's mostly local, you won't typically see a lot of price swings at that point, just because the commodity costs are maybe offset -- commodity benefit may be offset by currency weakness.

Okay.

Thanks.

That's all I had.

Ali Dibadj, Sanford Bernstein.

Wanted to go back to emerging market growth in KCI, in particular.

And of course, the trends look pretty good this quarter.

But I'm trying to figure out the trajectory.

So last quarter, sequentially, you had personal care at 19% organic, or 18%, 19%.

Now, 12%.

Consumer tissue at 10%, I think now, it's about 4% organic, or thereabouts.

So there's a deceleration, and I want to get a sense of -- because it didn't look like the comps were much different -- I want to get a sense of how you think about that in the context of some of the distribution gains you had gotten in China, which drove some of the 40% growth this quarter.

But also, in the context of the overall macro environment that we're hearing about in emerging markets, if you had any thoughts about that, given the sequential deceleration, I think would be helpful.

I think we talked about last quarter where it was probably -- the comps are going to get tougher as the year progressed.

And so you saw a little bit of that in the second quarter.

If you look at our sales on a sequential basis, they were pretty similar in dollar terms.

And there wasn't a lot of new pricing, and so if you factor out the currency effect, you'd say you had some sequential volume improvement.

And so even though you had a deceleration on the rate of growth year-over-year, you still would see the size of the business growing broadly.

And so if you looked look at personal care volumes in KCI, they were up 12% in the first quarter.

They were up 8% in the second quarter.

There were some things that were a little softer.

Venezuela was a little softer in the second quarter, partly because of some of the price controls and things that went in caused a little bit of disruption there.

But I'd say, broadly, in the big markets like China, Russia, broadly across Latin America, we didn't see much change, Q1 to Q2, and the momentum still feels pretty good.

And obviously those comps will get tougher as the year progresses, but we're not seeing a big slowdown across the board yet at this stage.

Okay.

That's helpful.

And then in the context of cash conversion or working capital from before, how much -- what should we expect at the higher level of working capital?

And that's what we've seen over the past few quarters, because of the bigger entry into the emerging markets, [Chinese] distribution or wherever, is there kind of a step-up we should expect, or should we expect going back to historical levels of working capital going forward?

Ali, you mean absolute dollars invested?

No.

I guess ratio-wise.

We're close to -- we're not at the best all time, but we are under 13% of sales, and we think we can continue to improve off of that.

Our cash conversion cycle is about 46 days.

I'd love to see us closer to 42, and improving beyond that, but we're not planning on significant increments of working capital investment as our mix of business shifts overseas.

Supply chains get a little longer, but hopefully benefits from lean and better planning activities can offset that.

So significant increases is not part of the plan.

In fact, we would like to continue to drive -- we expect to continue to drive improvement.

The distribution chain in the emerging markets won't drive it too much higher it sounds like?

You can --

Hopefully our capabilities offset that.

Okay.

And then last question for me, at least, is around pricing and competition.

What are you seeing in the environment?

I think you've touched on it briefly in a couple geographies.

But broadly, are you seeing any changes?

Are you anticipating any changes from your retail discussions?

There was a question before about increased trade spend request, doesn't sound like that's happening.

But how are you planning for that going forward at all, if that were to change?

Retailers are trying to drive their business overall.

So I was walking stores of a major retailer earlier this week, and they're looking for, how do you get the right innovation in the store, with the right insight on the shopper to drive my category?

And so it's not just about an item price discussion with most of our strategic customers.

They want to talk about the insights about the shopper, and the total relationship that you're trying to build with the consumer.

And so that's really where we want to play, as well.

We're bringing innovation, things like the fem wellness category that we launched on Poise.

We're getting great support.

We want to bring totally new dollars to their category, that's very exciting for them.

If you're the fifth guy bringing an idea to them that's already on the shelf, then you wind up having the item price discussion.

But where you've got news and real innovation, they get excited about it and want to support you.

Okay.

Thanks very much.

Caroline Levy, CLSA.

I have a handful of brief questions.

Could you give us market share, or at least the direction in China, Russia, and Brazil?

I think, broadly, the shares would be up, given our out-performance, but I also would tell you that the market shares there are usually sample data.

And so like in diapers, I think if you looked at our national share, we're probably high single-digits, low double-digits, something like that.

But it would be up sequentially.

Russia, we're probably high 20%s diaper market share, which would be the key one that would be up slightly.

And Brazil, in diapers, we're probably what, Paul, mid-30%s?

Coming up on that.

Coming up on that.

But again, in most of those markets, we're actually looking as much at category penetration and category growth as much as share in those markets.

Because if we can take a mom who's using one diaper a day to using two diapers a day, we double our business.

And that's what's exciting about many of these markets.

I'm just mentioning this in the context of people being very worried about a slowdown in China, and a lack of ability for moms to buy diapers.

I just wondered, with your huge volume growth, if you think it's share, or you think the category really is expanding despite fears?

I think for us, we were in about 70 cities at the end of the year.

We're in 80 cities now, so part of it is we're just expanding geographically.

We were in the super premium tier, and we moved into the mainline segment last year.

So in the first half, we're getting better comparisons by participating in the broader part of the category.

And so those are probably two bigger factors that ultimately will translate into an improvement in our national share.

But it was more of, we're participating in more of the category, and that's driving our growth at this point in time in China.

That's great.

The second thing is, I don't think you did this, just give us a sense of how much currency, how much worse currency might be in the back half and for the full year?

I'll let Paul give you the highlights on that.

For the full year, Caroline, currency is going to be a drag of about 3% on the top line.

And previously we were expecting about a 2% drag for the year.

All of that is coming essentially in the back half.

And it skews to the third quarter, I'm guessing?

Currency rates adjusted pretty late in the second quarter, so yes, we're going to feel it pretty quickly in the third quarter, here.

Okay.

And at the bottom line, does it tend to have a more significant impact?

I think we said our commodity inflation was better about $50 million.

And the effective currency translation and transaction is probably worse about $50 million, so they roughly offset each other this time in our guidance for the back half of the year.

Okay.

Thank you.

That's helpful.

But obviously higher-quality, if it's currency that eating in there.

In your European volume growth, which was extraordinary, can you break out how much came from the non-branded?

Yes.

I think we said we had double-digit growth in branded wipes, and high single-digit growth in branded DryNites and Pull-Ups and then had low single-digit growth in branded diapers.

And if you look at the private label business in Europe, it's still only about 10% of our overall sales.

So we picked up some additional contracts, but we had solid growth in our branded portfolio.

And how do you explain that?

Because Europe has been so horrible for most people.

We've got a strong business in the UK, and that's doing well.

And actually, a lot of the innovation on wipes was pretty strong across Europe.

And I was just in Europe a couple of weeks ago with Mark and some of our other leaders, and southern Europe is tough, but there are other markets.

Our KCP business in Germany, for example, is doing quite well.

So there are other pockets where it's maybe not as bad as you might read in the newspaper.

That's great.

And two last questions.

Major launches for the third quarter, you did throw out a couple of ideas you're supporting.

And some companies have reported softness in the kind of grocery channel, the more traditional distribution channel.

And I'm wondering if you're seeing that, like there's certain areas of retail that are particularly weak and others that are strong?

I think you're still seeing growth in e-commerce.

You're still seeing growth in a lot of small format retail.

So I would not be surprised to see good numbers from dollar stores and drug stores.

And then obviously the big-box retailers, they'll be reporting their numbers soon, and you guys see those on a monthly basis.

So I think in many ways, traditional grocery winds up being the donor for a lot of that growth.

So we'll see how that plays out.

A lot of our categories have been shifting for many years out of grocery into other channels.

And I wouldn't say that's accelerating by any stretch, but it still occurring.

Thank you.

Just the product launches?

Product launches, we've got a lot of things going.

We launched some things in the second quarter on Depend and Poise, as well as under our U by Kotex brand.

Those will continue in the back half.

We've got a lot of activity coming on diaper pants around the world, where you'll see that hit in a number of markets.

And one of the things I'm excited about is we are getting to our international markets much faster with our innovation.

So things like the fem wellness platform will be in multiple markets.

And actually, it started in Chile, and is moving to other markets rapidly around the world, including the US.

So you'll see that show up.

Our U by Kotex approach to fem care category will be in more than 30 markets by the end of next year.

So we're getting out with our innovation around the world much faster, which is exciting.

Thanks so much.

Javier Escalante, Consumer Edge Research.

If you don't mind coming back to this issue with US pricing for tissue categories like bath tissue and paper towels, but hopefully from a different angle.

What are you seeing with private label, as all the data we have access to suggests that retailers may be using these categories as profit centers as opposed to loss leaders?

Have you seen that retailers have achieved enough stake in these categories in terms of market share as to be become supportive of a structurally more attractive margin profile for these categories?

Thank you.

No.

I think it's a true statement that many retailers use private label as a more consistent source of margin, because it can't be -- it doesn't have to be comparison priced.

Whereas some retailers, particularly on things like branded diapers, will want to have the best diaper price in a market.

And so as a result, their margin sometimes erodes because of competitive pricing comparisons.

They don't feel the same obligation to do that on private label, so it does, in a category management strategy, typically plays a more consistent margin generator.

But I also would tell you, talking to many retailers, they want brands that their shoppers want on shelf at a competitive price and at a good value.

And so it's just understanding, how do we make sure we make our brands and innovation so powerful that moms come in and want to buy us every day?

And that's our task as marketers and as brand builders.

Understood.

But what I meant, Tom, is whether you think that the pricing floor for private label is going up.

So therefore you are going to see a structurally more attractive category going forward, just simply because of these categories are key for them to manage their own profits?

And maybe using diapers, for instance, as loss leaders instead?

I think that we haven't seen much of that yet in any of the data.

The private label hasn't followed the last diaper increase that the branded players took.

And so sometimes it takes six months or more for that to take place.

We'll see if that happens this time.

It hasn't happened yet.

Okay.

Thank you.

Connie Maneaty, BMO Capital Markets.

Just two quick questions.

What's the split between your developed and developing markets business as a percent of total sales these days?

Our what we would call developing and emerging markets, which is everything except North America and Europe, is high 30%s, Paul?

It's between 36% and 37%.

Of our total sales.

Okay.

And then on the increased outlook in the second half, is it coming more from the change in commodities, or a pickup in sales growth?

And if it's coming from sales growth, why should there be greater momentum in the developed markets?

I guess a couple things.

We'd say there's a lot of moving parts in the guidance, so we'd say better volume overall was part of it.

A lot of that from emerging markets.

So we've factored in, we're doing better in emerging markets, but categories are a little weaker in some places in North America.

The net of that is about 1 point better volume growth, and we're on that track so far this year.

So six months in, we'd expect us to deliver that, so that's part of it.

Our cost savings number, we took it up from a range of $150 million to $200 million to be more than $250 million, so that, on average, is about a $75 million increase.

That's a good chunk of it.

And then two other factors that kind of offset each other were lower commodity costs and weaker foreign currency rates.

And then the final drag was we got our share count was slightly higher, because we are not buying back as many shares, due to the price being higher, as well as option exercises in the first half caused our diluted share count to go up.

So that's about $0.05 a share that was a drag.

So this may be more of an analysis then you were looking for, but those are kind of the big factors.

That's exactly right.

Thank you so much.

Thanks, Connie.

John San Marco, Janney Montgomery.

Did you say 10% of Europe personal care is private label for you, and then is that number just personal care?

And I guess the question is, are you picking up new contracts in the US, as well?

In Europe, about 10% of our personal care sales are private label.

And in the US, we have it will be a much smaller number than that, and we have very few private label contracts in personal care.

We just do a couple of things in training pants and in diapers.

Okay.

And so I guess then, how does the trade-down that you referenced in North American personal care, how does that change your strategy, or your way of thinking around private label, particularly in the context of the downtime costs that you've had apparently the last couple quarters?

In the US, the strategy has really been to drive our brand business.

So we delivered a product improvement in Huggies main line in the second quarter.

We are starting to see some momentum from that.

We've also got product news coming in the back half of the year.

We've actually seen some uptick in our super premium segment, behind some of the launch of diaper pants and other things.

So we're really focusing on driving our branded business with innovation, and across the spectrum.

And more of the issue is in the category weakness, generally, is probably more of the reason for the downtime.

And then at the margins, we're seeing growth in some private label, which is mostly coming out of our competitors' share at this point.

Okay.

That's helpful, and that's all I had.

Chip Dillon, Vertical Research Partners.

First question is on the consumer tissue segment.

You mentioned in North America the volumes overall were down 4%, but if you look at the individual components, none of them seemed to be down that much.

I just didn't know what the disconnect was.

And you did break out the loss in the restructuring, as well.

Probably the biggest one that was down was Cottonelle year-on-year, which is kind of mid-teens.

But a lot of that was promotional timing, whereas Viva was up mid teens, or high teens, actually, and Scott towels was actually up a bit more than that.

So I think probably the bigger sized business that drove the downturn was more the comp on Cottonelle, with the year-over-year promotion timing being a big part of that.

Okay.

And then looking at -- you mentioned that the share count probably will be a bit higher, despite the increased buyback, which of course is tied to options.

And what I think is interesting, it looks like you've been granting about $2 million to $3 million a year in options.

And yet, you ended last year with the amount that were exercisable sort of at about half what it was at the end of 2010 or 2009.

So I guess the question is, with the stock up and people exercising, it looks to me that after this year, you might have a very low number of unexercised options.

Is that fair?

And should we see an increase in grants, given the profitability this year?

I think the other thing is, we're granting a lot fewer options, Chip, than we have in the past.

So if you look at the structure and make-up of our long term incentive program, 75% of the value of grants now goes in performance based restricted stock.

So it would only vest based on performance for our three-year average sales growth and our three-year improvement in return on invested capital.

And then 25% of that mix is in the form of options.

So we're driving it more to pay for performance based restricted stock and less on options, which we think aligns us better with shareholders over time.

Got you.

And then last, as you look at the K-C Professional business over the last three to, say, five months or so, are you seeing any clue as to what you sense is happening in the broader economy, based on your customers in that business, maybe within certain segments?

I would say I was pleased with the volume performance in the last quarter.

So washroom was up 2%, and we were up 1% overall.

Safety and wipers were a little lower than that.

So I think I would say, anecdotally, that talking to distributors, they were more bullish early in the year on the outlook for the US economy than they are today.

And I just think that's natural, given all the things that have happened since the first of the year, that I think everyone's outlook for growth in the US has slowed a little bit.

And so you're seeing that.

And so at this point, I think they're all still projecting growth, but not as much as they were expecting at the beginning of the year.

Got you.

And one last quick one, Tom.

When you talk to your retailing client customers, as we see several players, First Quality, Clearwater, and others bring on capacity that's aimed at private label, do you sense that the customers are going to dedicate more shelf space to the tissue categories than they had in the past?

Or are they -- do you think they might be cutting back on some of what they carry in the brands -- the more national brands?

Or how do you think that's going to shake out?

If anything, I think it's going to opposite way, where we had a lot of retailers that did SKU reduction, and probably felt like they went too deep.

And ultimately, they want to carry on their shelves the products that their customers want to buy.

And so we are -- customers clearly have a strong preference in this country for brands.

They want to carry those brands in the right mix at the right value, and then find ways to differentiate themselves from how they bring that to life in the shopping experience.

And so we're probably doing more shopper research than we've ever done to bring those insights to our customers to be able to talk about the kind of events that we ought to have.

And how do we make sure we convert the shopper once she's in the store?

And so I think, just because somebody built a machine doesn't mean that a retailer is going to want to sell more private label.

I think it is more about they want to make sure they're hitting the sweet spot of what their shopper wants to buy.

Got you.

Thank you.

Lauren Lieberman, Barclays.

A couple follow-ups.

First just on the share repurchase.

So you definitely said in the release, you expected the share count to be down year-over-year.

But are we talking about a 1% decrease?

Is that sort of in the ballpark?

Yes.

I think that's about right.

Okay.

Great.

And then on the new private label contracts in Europe, I just wanted to check, you had mentioned that last quarter as well.

So I wanted to know if they were additional contracts this quarter, or if this is just a continued benefit of the wins from Q1?

That's a continued benefit of the wins in Q1.

Okay.

And then on SG&A, so outside of the increase in strategic marketing and R&D, like, I'd estimate maybe year-to-date, other SG&A is up probably $100 million.

And so I know, of course, there's a piece of that that rises with sales.

But that also suggests maybe some increase in other sort of admin and selling.

So if you could, if you're willing to talk a little bit about where some of those of extra dollars are going, that would be great.

We just talked about the incentive comp program.

So a good chunk of it is actually incentive comp increases year-over-year.

So as you update your outlook for your next two to three years, that swings your payout levels for your incentive comp programs.

And so that's probably, if you strip that out of our G&A in the second quarter, you would see an increase that was more like inflation.

You know?

So that's part of it, and not an insignificant amount.

We're having a better year this year, so that swings those numbers higher, and last year was swinging the other way a little bit.

Okay.

And would that true-up then have been taken care of this quarter?

Should I think about that also being higher year-over-year for the balance of the year?

I'd say it will be higher for the full year than 2011, but I don't think it's going to accelerate from here.

I think the other place you'd see we're investing in K-C International.

So you'd see faster growth in K-C International.

You'd see a relatively flat G&A profile on the direct front.

And in North America and Europe, what you'd expect.

Okay.

Great.

And then finally just on adult care, you mentioned globalizing that business.

And historically, I remember you talking about one of the challenges with globalizing adult care was it was largely an institutional business outside of the US.

Could you talk about how that has changed from a big picture standpoint, or how your approach to the business has changed so that you're overcoming that structural hurdle?

It's mostly an institutional business in Europe.

But it's not in the emerging markets.

Just the category hasn't been developed yet.

And so we're in the process of changing that.

So we've got dedicated resources in numerous markets around the world to launch Depend and Poise, and other brands that relate to those, and make sure we get that innovation out as quickly as we can.

Okay.

Perfect.

And one other thing would just be you mentioned Poise going into the female wellness admittedly?

If there was a release, I missed it, so if you wouldn't mind just quickly elaborating on what that really means.

It sounds like it's a new category almost.

As we are talking about it, a lot of times women talk about the first conversation that moms have with their daughters as they are entering puberty, and this is the second conversation, as women enter menopause, and no one has this conversation with them.

And yet women all over the world suffer from all kinds of menopausal symptoms.

And so this is a line of products that would help deal with that.

It could be a cooling wipe.

It could be vaginal moisturizers, things like that, that would be sold in that part of the store.

We've actually launched it in other markets around the world, and it's been a nice add to the Poise brand, and helped fuel our overall Poise brand growth in those markets.

And it's really aimed at having that second conversation with our consumers, so that they know that there is a brand out there that's taking care of them.

Okay, great.

Thank you so much.

Bill Schmitz, Deutsche Bank.

Was there any change in the tenor of growth throughout the quarter?

Because you're getting all these data points and things slowed towards the middle or end of June, so do you see that either in North America or globally?

I wouldn't say so.

It was pretty consistent from a top-line standpoint throughout the quarter.

No big swings anywhere that I would point to.

Got you.

And then was there -- is there a competitive response to the big diaper initiative that one of your competitors is maybe planning on launching in the back half of the year?

Is that going to be a big one, and will you change your promotional activity in response to it?

I think that we would say we always want to make sure we're competitive, but we also would say that we've got strong innovation plans of our own that we want to make sure we're going to execute against.

So you could argue, is their response in response to our Huggies main line improvement that launched in the second quarter?

And so there's lots of things going on back and forth.

They're in the middle of a radiant launch on fem care.

We've got improved U by Kotex products out there.

And I'd say, when both major brands are innovating, that's good for the consumer, right?

And that makes it tougher for private label.

Got you.

And then just as a broader longer-term question, if you look at your profit growth over the last four years, like 280% of that growth has come from the KCI business.

So how does that change over the next, call it, four years?

I think the exciting part is that we're getting scale in KCI and lots of markets.

And that's just building a franchise for us there that we think will continue to grow for the future.

And I think if you talk to our KCI leaders, in many ways they feel like we're just getting started.

We're still in growth mode in China, we're still in aggressive growth mode in Russia and Eastern Europe.

And I was in Moscow about a month ago, and that team is excited.

And they're going into all kinds of new geography in Eastern Europe, and are really just building businesses from the ground up.

And so I do still think there's a lot of room to run in our overall KCI size and scale of that business.

The question was more, how do you get the profits up in the US and Europe?

Because like I said, those two businesses had declining profits over the last four years, and if you look at your aggregate profit growth over the last four, 280% of it came from KCI.

Yes.

I'd say if you looked at Europe in particular, that one's going to be probably more of a stable cash generator for us.

I think in North America, we still have pockets of North America that have got decent growth.

If you look at fem care and healthcare, those categories are growing nicely, and we are seeing good responsiveness.

And there are pockets of growth in our consumer tissue business.

Some of the things that we're doing behind facial tissue, as well as moist perineal cleaning and bath tissue.

Those are growth pockets for us.

We've got a good portfolio of growth options in KCP and healthcare that will help in the US market.

So we still think there are pockets of growth that we can improve our profitability in North America over time as well.

I think, Bill, if you just look at the macro landscape since 2009, those geographies have been much slower growing, particularly in the diaper categories.

If you look at birth rates, you see it directly reflected and impacting kind of our largest profit contributors.

So there is a macro overlay here.

But we're doing -- within that, doing all that we can to drive both category growth and profitability.

Great.

Thanks, guys.

I'm glad Lauren asked that Poise question instead of me.

Thanks, Bill.

If you need anything, though --

I appreciate it.

Thank you.

At this time, we have no further questioners in conference.

All right.

We'll turn it back to Tom for our closing comment.

Once again, we're pleased with our execution in the first half.

We're off to a great start, and our global business plan is delivering the kind of shareholder value that we had expected.

Thanks for your support of Kimberly-Clark.

Thank you.