金百利克拉克 (KMB) 2012 Q4 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 presenter, Mr. Paul Alexander.

Thank you, David, and good morning, everyone.

Welcome to our year-end earnings conference call.

Here 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 fourth-quarter results.

Tom will then provide his perspectives on our full-year results and also our 2013 outlook.

We'll finish with Q&A.

There is a presentation of today's materials, including our key planning assumptions for 2013, in the Investor section of our website.

As a reminder, 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 today.

Both exclude certain items described in this morning's news release.

The news release has further information on these adjustments and also reconciliations to comparable GAAP financial measures.

Now, I'll turn it over to Mark.

Thanks, Paul, and good morning.

Let's start with the headlines.

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

Second, we delivered adjusted earnings per share of $1.37.

That's a 7% increase compared to the prior year.

And third, we generated an all-time quarterly record $1.1 billion in cash from operations.

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

Fourth quarter sales were $5.3 billion, up 3% versus last year.

Underlying organic sales rose 5%, driven by increased volumes of 3% and higher net selling prices of 2%.

Unfavorable currency rates and lost sales in conjunction with our pulp and tissue restructuring further reduced sales by 1% each.

Fourth quarter adjusted gross margin was 34.3%.

That's up 170 basis points from last year.

The increase was driven by organic sales growth and $80 million of FORCE cost savings.

For the full year, FORCE savings were $295 million.

That's well above our original target for savings of $150 million to $200 million for the year.

We also surpassed our three-year savings target of $400 million to $500 million after just two years.

We're making great progress leveraging our global procurement organization and deploying lean continuous improvement throughout our Company, and I expect that momentum to continue in 2013.

So moving down the P&L, adjusted operating profit rose 5%, with an operating margin of 15%.

That's up 30 basis points compared to last year.

We continued investment between the lines, including higher administrative and research spending to build capabilities and support future growth, particularly in K-C International.

In addition, strategic marketing rose $10 million in the quarter.

The fourth quarter adjusted effective tax rate was 30.6%.

That was in line with our full-year target of 30% to 32%.

All in all, fourth quarter adjusted earnings per share were $1.37.

That's up 7% versus last year.

As I said before, cash provided by operations in the fourth quarter was an all-time quarterly record of $1.1 billion.

That's more than double our year-ago performance, driven by improved working capital and lower pension contributions.

Cash provided by operations for the full year was $3.3 billion.

That's up $1 billion compared to the prior year.

Our working capital cash conversion cycle improved two days in 2012, to a record low 45 days for the year, and we expect to make further progress in 2013.

During the fourth quarter, we repurchased 3.8 million shares of KMB stock at a cost of $320 million.

For the year, we repurchased 16.4 million shares at a cost of $1.3 billion.

Altogether, we allocated $2.5 billion of cash to share repurchases and dividends in 2012.

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

In Personal Care, organic sales rose 9%, with volume growth of 6% and net selling prices up 3%.

K-C International had another strong quarter with organic sales up 12%.

Our key growth initiatives continue to perform very well.

In fact, in the Diaper category, volumes in China grew 50%, volumes in Russia rose 15%, and volumes in Brazil were up 10%.

Elsewhere in personal care, volumes were up mid-single digits in Europe and low-single digits in North America.

Fourth-quarter Personal Care operating margins of 17.6% rose 220 basis points, driven by the organic sales growth and our cost savings.

Now, moving to Consumer Tissue, organic sales were up 1%, driven by higher net selling prices and volumes.

Volume gains in North America were mostly offset by modest declines in Europe and in K-C International.

Consumer Tissue operating margins were down 30 basis points compared to a strong year-ago, although they were up 50 basis points sequentially versus the third quarter.

During the quarter, we also completed our pulp and tissue restructuring charges, on schedule, and in line with our expectations.

Our Consumer Tissue team did a terrific job executing a multi-year plan.

I'm pleased with the operating profit and margin benefits we've generated so far from these restructuring actions, and I expect benefits will continue to build over the next two years.

Turning to K-C Professional, organic sales were up 3%, driven by improved volumes and pricing.

Organic volumes were up high single digits in K-C International, down slightly elsewhere.

Operating margins of 16.7% were up 120 basis points, driven by organic sales growth, cost savings, and input cost deflation.

And lastly, Healthcare organic sales were down 2%, driven by slightly lower volumes in pricing.

Operating margins of 14.9% were up 60 basis points, driven by lower input costs, and between the line spending.

So that wraps up my comments on the quarter.

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

We delivered improved margins and earnings per share, and we generated terrific cash flow.

Now, I'll turn it over to Tom.

Thanks, Mark, and good morning, everyone.

Since Mark has reviewed our fourth-quarter results, I'll focus my comments on the full year and then I'll talk about our outlook for 2013.

So starting with 2012, overall results were very strong.

We had a great year.

On the top line, we delivered organic sales growth of 5%.

Just to put that in perspective, that's our best top line performance since 2008, and it was driven by targeted growth initiatives, innovation, and improved net realized revenue.

In terms of targeted growth initiatives, our K-C International team had an excellent year.

They had organic sales growth of 10% and a double-digit increase in operating profit.

KCI delivered strong personal care volume gains in key growth markets.

For example, our diaper volumes increased 45% in China, 20% in Russia, and 15% in Brazil.

Results in all three countries benefited from product innovation.

In addition, our Huggies business in China has now expanded into 80 cities.

That's up from about 70 at the end of 2011.

And we're targeting to be in at least 90 cities by the end of this year.

We also made good progress, making our adult care and baby wipes businesses truly global.

For the year, K-C International grew volumes in both of these categories at double-digit rates.

Elsewhere in KCI, our K-C Professional business grew organic sales high single digits in 2012, as we've been making strategic investments where industrialization and economic development are occurring.

In total, across all our businesses, K-C International now represents about 37% of our total Company sales, and we continue to be very optimistic about KCI's plans to deliver strong growth going forward.

Product innovation around the world was also a key contributor to our organic growth in 2012.

We introduced several innovations in North America, including super premium Depend briefs, new U by Kotex tampons and pads, and a number of new products in K-C Professional.

We also launched a number of innovations in K-C International.

That included the introduction of diaper pants, premium feminine care products and adult care offerings in several markets.

We supported our innovation and growth initiatives with a $115 million increase in strategic marketing.

Our spending there rose at a double-digit rate.

We also increased research and development spending double digits, as we continued to make investments for future growth.

Our success with targeted growth initiatives and innovation helped mitigate the impact of soft category demand in Infant and Child Care in the US and in Europe, overall.

Nonetheless, our European team executed well and delivered a solid increase in operating profit and margin in 2012.

They also initiated and are moving quickly to implement the strategic changes we announced last quarter.

Our market positions remained solid overall.

In the US, we improved or maintained market share in six of our eight consumer categories, and in K-C International, we're growing faster than the category in a number of markets.

In terms of profitability, we increased gross margin by 230 basis points and we increased our operating margin by 90 basis points.

Our FORCE cost savings program was a big reason for these improvements.

I'm also pleased that all four of our business segments delivered operating profit growth and improved their margins in 2012.

On the bottom line, earnings per share for the year were $5.25.

That's up 9% year-on-year, at the high end of our long-term objective.

It was also nicely above our original 2012 guidance for the year of $5.00 to $5.15.

Finally, as you heard from Mark, our balance sheet and cash generation remain strong.

We continue to allocate capital in shareholder-friendly ways, as we returned $2.5 billion to our shareholders through dividends and share repurchases.

So overall, we had a very good financial performance and I'm encouraged by the progress we made in 2012.

Now, let me turn to the outlook.

In 2013, we'll continue to pursue targeted growth initiatives.

We'll introduce new and improved products, and we'll support our brands with increased levels of strategic marketing.

We have several innovations launching at K-C International, particularly in the Infant Care, Feminine Care and Adult Care categories.

We've also got a number of new innovations coming in North America, including new Depend products for men, the best-ever Pull-Ups training pant, and improved Scott Extra Soft bath tissue.

And as the year progresses, we'll have more product news on many of our other brands.

We also expect to deliver strong cost savings again this year of $250 million to $300 million.

That will help us fund our brand investments and overcome moderate cost inflation, which we currently expect to be in a range of $150 million to $250 million.

Overall, we're targeting to grow organic sales by 3% to 5% and to increase adjusted earnings per share by 5% to 8%.

This latter earnings guidance assumes an approximate 1-point drag from Venezuela.

We're not sure exactly what the operating environment will be in Venezuela in 2013, so we thought it made sense to build some of that potential impact into our plan.

And finally, we'll continue to focus on generating strong cash flow and allocating capital in shareholder-friendly ways.

We expect to raise the dividend at a high single-digit rate.

That will be our 41st consecutive annual increase in the dividend.

We also plan to repurchase about $1 billion to $1.2 billion worth of Kimberly-Clark stock.

Together, dividends and share repurchases should total more than $2 billion for the third consecutive year.

So to summarize, we're encouraged by our performance in 2012.

We're optimistic about our plans for 2013 and beyond, and we remain convinced that our global business plan will continue to deliver value for our shareholders.

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

(Operator Instructions)

Our first question comes from Ali Dibadj with Sanford Bernstein.

Hello, guys.

A couple questions.

One is around the very strong KCI growth this year, 10% organic, as you mentioned.

But doing some algebra, the rest of the business being a little bit more subdued.

So if you think about the 3% to 5% organic sales growth target for this year, for 2013, can you help us with the composition of that by geography and by segment?

And maybe in answering that you can give us some sense about the distribution gain that you might continue to get.

You mentioned one example of that in your prepared remarks.

But any distribution gain you might be able to get on a continuous fashion, how much of a runway there is for that, and do you need that to get to your KCI current numbers?

That's the first question.

Yes, I'd say, Ali, the growth is again going to be heavily focused on KC-International, and within that, more focused on Personal Care, as it was this year, where you saw -- I think in KCI, Personal Care organic volume was up 9% for the year.

A part of that was distribution gain in China, certainly.

But it's also increasing our participation in the category, as we moved into the mid-tier segment of the category.

But in markets like Brazil, we're moving more aggressively into the northeastern part of Brazil.

So that's a big opportunity for us, where we're there, but we're not really fully represented.

So we've got additional capacity starting up there.

You know, in Russia and Eastern Europe, we've had a good presence in Moscow.

We're moving out into a broader distribution reach across Russia and some of the other Eastern European countries, and so that's an opportunity for us.

And so it's going to be a combination of innovation and a little bit of distribution gain and good execution to make that happen.

But in North America, the diaper category has kind of flattened out.

So the birth rate's low.

We expect diapers to be down about a point, year-on-year.

Child Care, which was down 5% this year, may only be down 1% next year.

From a category standpoint, we've got a lot of innovation coming.

So I think we'll have less of a drag from North America in 2013 than we had in 2012.

And we still have good momentum in Adult Care and Fem Care in North America that should carry over into 2013.

And let me ask the KCI question slightly differently, specifically on the 10% organic sales growth.

Can you help us figure out how much of that is comp store growth versus how much of it is distribution growth?

You know, I would say the analytics are probably not as precise there as you would like to think.

As you know, some of the Nielsen data doesn't get you that.

I would say the bigger factor is broader participation in the category.

So in China, for example, going into the mid-tier of the diaper segment across the geography that we're already in.

But going from 70 to 80 cities, you can do the math.

Now they don't all start up and contribute at the full level of your existing base.

And you're in the big cities to start and you're going to the next tier down, so each incremental city is not as big of a pop as what you originally got.

So I would say more of it is from the expansion of our participation in the category and the innovation that we're driving, and that the additional geography is a relatively smaller part of the boost.

Okay.

So second piece is just about the incremental strategic spending, $10 million, which seems lower than it's been all year.

Can you comment a little bit about that?

Is it launch timing, seasonality, how should we expect that to trend going forward for the rest of the year?

It's probably launch timing.

But I also would say, if you look back, we're ramping it up.

And so we've kind of hit more of a stable state.

So, you'll see it go up faster than sales in 2013, but it won't go up as much.

We were probably up more than double our rate of organic sales growth this year.

It won't be as big of a delta in 2013.

Okay.

And my last question, (inaudible), is just around competition broadly.

So what are you seeing?

And maybe more specific, US, but also -- and in the US, have you, for example in the consumer tissue business, tried to in your guidance take into account a new entrant in the US with TAD technology and private label?

And then in China, we keep hearing from local competitors there that they are going to get more aggressive.

They are not just going to give up their turf to folks like you who are coming into their cities.

Can you comment on that, as well?

Thank you.

Sure.

We have lots of tough competition everywhere.

And so in the Personal Care space, obviously, we've got P&G most places, but we're seeing Unicharm increasingly show up in markets around the world.

They're obviously strong in Asia, and they're now talking about expansion in Brazil and Mexico.

So, they make very good products and we run into them in large markets around the world.

Some of the local Chinese players, Handan and those folks tend to be at the lower end of the product spectrum, but they are trying to move their mix up.

You've got to execute well and have great innovation and great marketing to be successful in these markets.

And so that's what we're aiming at.

In the US, the private label, if you look at private label shares in tissue and bath, it was up a point or two year-over-year and towels was up about a point.

But our shares were pretty stable.

And so -- and actually we've got a pretty good innovation agenda for Cottonelle and Kleenex, and so I think we feel cautiously optimistic about our tissue business going into 2013, particularly in North America.

And the TAD technology entering in private label doesn't concern you?

Not at this stage.

I think there's good quality private label around, but we think that the branded products still are differentiated and offer consumers an attractive value.

And our Cottonelle business is showing that.

We had pretty strong share results in the fourth quarter and we're feeling good about that business going into 2013.

Great.

Thanks so much.

Thanks, Ali.

Our next question comes from Chris Ferrara with Bank of America.

Good morning, Chris.

Good morning, guys.

I wanted to try to better understand, now that I guess you probably had a better look at it, the P&L impact of the stranded overhead on the European exits.

So I understand you're committed to clearing that out and still delivering, obviously now, 5% to 8% growth.

But can you talk about what you think the gross drag will be from that stranded overhead?

You have to be finding offsets, right?

It's not that you're going to be able to clear all of those expenses out at the same rate that the sales are going away.

So I just want to understand the gross impact, if possible.

Chris, really, we are aiming to cut our overhead in Europe by at least as much as the sales rate.

So Kim Underhill and her team and Robert Abernathy were working on this for a good part of last year.

Mark Buthman's team is leaning in on it as well, in terms of the back office things.

And maybe Mark can chime in on that.

But we're aggressively going after the European structure.

And so we had probably over built that a bit, expecting Europe to grow and to be a bigger business.

So we've gone in and stripped a lot of the overhead out.

They have gone through the consultation process with most of the countries.

And most of our team in Europe now knows whether they have a permanent role, they have a temporary role, or their role has been eliminated.

And so, I don't know, Mark, you've sat in on those calls lately, so I'll let you add some color to that.

Chris, for us, if you think about it as an enterprise, it's a great opportunity for us to paint a picture of what our overhead structure might look even more broadly across the world.

They've got a real compelling business case to do it.

So we have -- it's on the top of our management agenda and we're watching it closely.

High degree of difficulty, but high degree of confidence in the plans they've put together.

So we know we have to execute it, and we'll be transparent about how we're doing on that as the quarters progress in 2013.

Thanks.

That's helpful.

And I guess moving over to KCI, obviously the growth has been there.

Can you try to dimensionalize where you think long-term margin improvement comes from?

Do you think the KCI margins will progress at a rate faster than the overall Company margins?

Well, the KCI team is aiming at being the most attractive investment opportunity for Kimberly-Clark.

So they know they have got to grow top line and they have got to grow bottom line.

So one of the things that was really pleasing about their results in 2012 is they had double-digit top line, but they also had strong double-digit operating profit growth, too.

And so, as you see cities and markets get to scale, the gross margin structure is pretty attractive.

And we've still got work to do, and we can do better in lots of places.

But they've got an aggressive program to continue to take out costs, to get more effective with our marketing investment and our trade spend investments; and as we do that, that should help our margins improve.

And we have individual markets in KCI that have got gross margins that are strongly accretive to the corporation.

So we know it's possible.

And one last follow-up on margins.

When you benchmark yourself versus peers, and normalizing for product mix, and you look at that 34% gross margin that you guys are at right now, what do you think the opportunity is there for that gross over the long-term?

Because obviously, you've accelerated your top line, KCI has accelerated; but what's the opportunity on gross margin when you think longer term?

Well, we've been higher in our own history.

And so if you go back before some of the commodity run-up, we were in high 30's and we're talking about scaring a 40% gross margin.

So that's certainly kind of a near-term goal that we're aiming at.

And I think we made a strong move toward it in 2012, and we'll have commodity challenges from time to time that will afford our progress there.

But we're certainly aiming at improving gross margin, being able to invest more of that in strategic marketing, and then delivering a part of that to the bottom line and operating margin improvement.

Thanks a lot.

Thanks, Chris.

Our next question comes from Caroline Levy with CLSA.

Hello, Caroline.

Good morning.

Hello.

I was wondering if you could help us put some numbers -- and maybe this is a longer-term question -- but around the adult diaper opportunity.

Because again, it may not be a huge contributor to earnings right now, but as you model out your company 5 and 10 years, how big do you think this can get and what do you see as your major opportunities, just given the number of older people in China and Japan, for example?

Well, it's exciting.

Even in North America, our adult care business grew volume 6% last year.

So we had strong innovation behind Poise and Depend, and saw that -- even that's an income -- a consumer that's maybe more sensitive to price change, they were still willing to invest in a better quality product.

And so we've still got lots of growth in the US and your developed markets.

In the emerging markets, the businesses are small, but they are growing fast and we're putting more resource against it in many markets.

We had multiple launches in 2012.

We've got more coming in 2013.

And so we think that Poise and Depend will someday be strong $1 billion businesses for us and each of those has the potential to be a $1 billion brand.

And that's what we're aiming at.

Is that margin dilutive as you grow Adult versus other parts of the business?

No.

Our Adult Care margins within Personal Care are competitive with the segment average, and in some markets, even a little bit better.

Obviously, as you launch in a market, you'll be investing to build the brand.

So in that particular market, it will be a little dilutive.

But the gross margin structure is quite attractive.

Thank you.

And then just moving to the growth of your markets, do you believe that you took market -- that you outgrew the market, not just in China, for example, but overall?

And what do you think the market growth rate will be in 2013, your markets?

Broadly, in the emerging markets, we would say you're probably looking at mid single-digit growth, and we grew high single, so we would say we probably took share in a number of places.

Obviously, some of the Nielsen data is a little tougher to get at, because there's so many points of distribution that aren't covered really well by Nielsen.

And it's getting better, but we've still got some room to grow there.

So if you look at our global business, we would say the categories are growing 3% to 4%, faster than that, probably mid-singles in emerging markets, slower than that in the developed markets.

And so our 3% to 5% top line, if we just hold share, we should be in the 3% to 4% range.

If we drive some innovation and a little bit more share growth, we can get to the high end of that range, as we did in 2012.

Thank you.

And then just lastly, is January off to a good start, the year off to a good start?

Yes, so far.

I have nothing to complain about yet.

We haven't closed the month yet, so we want to see the results.

But nothing unusual that we're seeing in the data so far.

Cold and flu is -- we're benefiting both probably in healthcare and facial tissue.

It was pretty flat in December, but it's kind of picked up pace in January.

Yes, that's a good point.

Well, I'm sort of sorry, but happy to hear that.

Good for us, bad for --

We're here for you if you need us.

Thank you.

Our next question comes from Connie Maneaty with BMO Capital Markets.

Hello, Connie.

Good morning.

Just two questions.

What do you think the impact will be on retail prices in the US from all the new tissue capacity that's coming on?

And do you think the branded companies would have to roll back prices to maintain an appropriate gap?

Connie, I'm not as worried about the US market from the additional capacity.

There's a lot of capacity that's going out of the US market.

And so as we shut down Everett and Chester, there's been some other -- some of the capacity that came out of Chester, you know the US market operating rate's probably in the high 80% range.

And actually, we're fully loaded and are running our capacity pretty full-up in 2012 and heading into 2013.

So probably more what's going to drive tissue pricing is whatever happens to pulp, and we're calling pulp to be up slightly in 2013.

So that should put a little bit of a positive spin on pricing.

You saw we had a little bit softer pricing in the third quarter, it came back a little bit in the fourth quarter.

That had more to do with timing of promotions year-over-year.

So there's nothing big happening on that front.

We'll have to wait and see.

But overall, again, we feel better about our branded tissue business position going into 2013.

I think the big place in the world, as you commented on tissue capacity expansion, was more in China.

We don't have a big Chinese tissue business.

We have a facial tissue business.

We don't do much in roll products in China.

Great.

Thanks.

And my second question is, what's included in your Venezuela impact?

You said you're starting to build in some of a potential impact.

So is it the effect of a 50% devaluation or the impact of continued price controls in the face of inflation?

So what's included in your -- what have you already assumed?

Yes, this has been a tough one to call, because it's difficult to predict from day to day what's going to happen.

So we have not included any of the balance sheet devaluation that would flow through the income statement.

So none of the financial asset translation of the new rate is in our guidance.

So that would be a one-time thing that we would have to call out.

We really looked at it and said it was very low single-digit percent of sales and operating profit in 2012, but something's probably going to happen.

Either there will be a deval, which will have a translation impact.

We didn't model it probably as deep as 50%, but we assumed there would be some reduction.

Or you could have a scenario where there's no deval, but it's tough to get foreign exchange, and so we wind up constraining our supply because we can't get dollars to pay our bills.

So you wind up with a drop in demand and a shrink in the size of the business.

And so it was very difficult to predict which of those would happen, but we said probably something's going to happen, so let's be a little bit conservative on that number going into the year.

Thank you.

Thanks, Connie.

Thanks.

Our next question comes from Jason Gere with RBC Capital.

Good morning.

Hello, Jason.

Just a couple of questions.

One, as you think about 2013, with all the changes going on with Europe and the tissue restructuring, is it going to be pretty smooth across the quarters, or should we see that maybe back half a little stronger than the front half?

I was wondering if you could provide a little bit of the cadence there.

Yes, in all the charges for the consumer tissue, the North American tissue restructuring have flown through the P&L now, so those are behind us.

And we took a good chunk of the European restructuring hit in the fourth quarter.

If you look at the sequencing of the year, I would expect actually a pretty consistent growth rate over the quarters, year- on-year, which would say that the back half is probably going to be a little better than the front half because that was the way it shaped up in 2012.

And so, you got some things that will help the first quarter.

We might have a little bit lower effective tax rate because of the way the tax bill got passed.

But all in all, I would say the growth rate's going to trend pretty close to consistent, year-on-year, across the quarters.

Okay.

Great.

And then just the next question.

I know that I think one of the earlier questions broke down the organic sales by geography, and I hope you can provide some color in terms of by the segments, tissue versus personal care versus the B-to-B segment and how you're looking at those trends, where you may see any tip of acceleration versus deceleration versus 2012 with getting in within that 3% to 5% range.

Yes.

And if you go through Personal Care, you would hope that North America will be a little better year-on-year, because the categories are not going to be down as much.

And so we should have, I think for the year, in Infant Care, we were down 5% and flat on Child Care.

Wipes was down a little bit.

So those should be better year-on-year.

In Fem and Adult, we're high singles, in total, for those.

I think Fem was up 6% and Adult was up 10%.

So I would say you would expect to see those collectively be in the high singles in '13.

And K-C International was 9%.

That was a terrific result.

We probably won't keep that 45% growth rate in China, but we still expect to have a strong growth rate in China in 2013.

So maybe a little slower in KCI.

In consumer tissue, that's one that is playing more of a grow margin role for us.

So we had relatively light volume growth.

North America was flat overall, Europe was down a little.

Even KCI was down 1%.

So I don't see huge growth coming into consumer tissue.

In K-C Professional, our wash room business was up a couple percent.

We think we actually grew a little bit more than the category in wash room in 2012.

We've got a lot of innovation coming in 2013.

And if we get a little bit of economic improvement, you could see a little bit better growth in KCP.

In KCP in emerging markets, we were up 6% on the organic volume line, and we've got actually lots of growth coming there.

So I would expect to see at least that in 2013.

Healthcare, our supplies were up a couple percent.

Devices were up 3%.

Probably expect supplies to be a little flatter and devices to be a little better in 2013.

We've got some more innovation coming to market and a little bit better push on some things in the device front in 2013.

So, I hope that's helpful for you.

Yes.

Thank you very much for all the color.

Thanks, guys.

Great.

Thanks, Jason.

Our next question comes from Lauren Lieberman with Barclays.

Hello, Lauren.

Hello.

Thanks.

Good morning.

Actually, the comment you just made about consumer tissue playing more of a grow margin role for you guys is exactly what I wanted to ask about, because in this quarter, margins were actually down in that business, which is rare to see when there's deflation.

And thinking that the majority of your incremental investments in strategic marketing would be more oriented towards personal care than tissue, I just was curious if you could talk a little bit about margin performance in that business this quarter.

We were up 50 sequentially, up 50 basis points sequentially.

And for the year, we were up 220 basis points in that business.

So there was some cost start-up issues and a couple things in the quarter that were a little bit more noise versus fourth quarter last year.

I think Europe also had a much stronger fourth quarter in 2011 that didn't repeat in 2012.

And so that was a part of it as well.

But overall, I would say the trends in consumer tissue, we're happy with.

It's back in 13.6% for the year, 14% for the quarter, and that's getting close to where we need it to be from being an investable business standpoint.

Okay.

Can you just explain, Tom, the start-up issues?

Is it downtime or what is that?

Actually downtime overall was a little better for the Company, year-on-year.

We had some broader -- in the fourth quarter broadly across a number of the segments, we had a little bit more start-up activity on new assets.

And when you have a start-up, typically you're writing off the old assets, so you had some higher start-ups and write-offs.

Probably more of it was in Personal Care, but consumer tissue had a little bit of it as well.

We also had some higher distribution expense, particularly in K-C International, as you're seeing carrier rates are up across the board around the world.

And consumer tissue probably feels that a little bit more than the other segments, because freight's a bigger percent of cost of sales.

Okay.

That's really helpful.

Thank you.

Our next question comes from James Armstrong with Vertical Research.

Good morning.

Good morning.

First question is on the pulp and tissue restructuring benefits.

You said that you're currently on a $60 million run rate in operating profit in the fourth quarter and expect $75 million in 2013 and more than $100 million in 2014.

Just to make sure, those are not incremental numbers, right?

So in 2013 from the Q4 run rate, it will be more like $15 million.

That's correct, yes.

Okay.

Each of those numbers was cumulative, so I think we had $20 million in '11, we had $40 million in '12, which gets you to $60 million cumulative; and there will be another $15 million in 2013, which gets you to $75 million, and so forth.

Okay.

And how was that weighted in 2012?

Should we see a little bit more than that $15 million number in 2012 -- I mean, in 2013 -- just because of the timing?

No, I think that's -- we'll obviously keep the cumulative $60 million that we've already got.

And the big chunk of that was the shutdown of the Everett mill.

And that's done and behind us.

And so, some of the additional things we decided to do at Chester, Pennsylvania started to benefit late 2012 and will carry forward into 2013 and 2014.

Perfect.

And then switching gears just a bit, with the recent innovation in Child Care, have you seen any things that have worked, any products that have worked in certain regions that you're really starting to expand into other regions?

And could you just give us a few examples?

We've been very happy with the Pull-Ups Nighttime launch.

And that's gone well.

We've also got a terrific Good Nights business that's in our Child Care segment.

And they actually introduced a line extension of bed mats last year that was a big success in North America.

In terms of the ideas that are working well around the world, our whole diaper pant approach is going very well.

We're going aggressive at both a value tier and a premium tier in many markets around the world.

That's gone well.

Our U by Kotex style leased feminine care positioning is one that we're launching in multiple markets around the world.

And then our upgraded Depend products, our adult care offering, we're offering that in many markets around the world.

So these are things that we're focused on and have got great solutions.

I think another example would be baby wipes.

We've done baby wipes in North America and Europe.

We really haven't been fully reflected and penetrated in other markets around the world.

And now we're trying to figure out, what would it take if we could sell one wipe for every diaper we sell around the world?

If we could do that, we would have a $1 billion baby wipe business.

So there's a big opportunity there for us.

That helps a lot.

Thank you very much.

Thanks.

Our next question comes from Bill Schmitz with the Deutsche Bank.

Hello, Bill.

Hello, guys.

Good morning.

Good morning.

Are you guys willing to call a bottom to the baby bust?

Because it seems like you're a little bit more upbeat on --

That sounds like a quote, Bill.

A bottom to the baby bust, I like it.

I think the birth rate has flattened out.

We expect it to be basically flat in 2013.

The category will probably still be down 1% on diapers in North America.

I would say for us, as we've modeled it, the three drivers that are more predictive are male unemployment, new home purchase or household formation, and consumer confidence.

And I think as you see those things stabilize, you would say, yes, all right, that kind of makes sense.

The birth rate would be flattening out.

It hasn't turned up yet, but I would say you haven't seen any of those three indicators really make a major positive move lately either.

Got you.

And then, was there not an impact from the flu season?

I know when you talked about the North American consumer tissue business, there was really no mention of facial tissue.

Yes, it wasn't much in the fourth quarter.

We're seeing it more in the start of the year.

And we're pretty good at looking flu index data, almost by zip code, and so are our retail partners.

And so they are very nimble about getting flu displays up as the flu moves into a particular part of the country.

And so both our healthcare business has been selling a lot of face masks and exam gloves in January.

And we've been selling a lot more facial tissue for cold and flu in January.

So we'll see how that progresses through the quarter.

Got you.

Are you concerned at all about, if you look at the business segments, three of the four had declines in sequential margins.

Was it that third quarter was kind of an anomaly and everything was so good?

This is a point we made earlier on the other cost of sales.

We probably had a little bit more start-ups in the fourth quarter and some asset write-offs that affected us versus the third quarter.

Then distribution expense started to tick up in a couple of markets, and so we're digging into that.

But I would say I'm pretty happy with the progress for the year.

We were up in all four segments year-on-year, and that's really what we're aiming to do consistently over time.

Is there a way to say, was the third quarter the anomaly or was the fourth quarter the anomaly, or is it not that simple?

I don't think I could be that precise with you.

If you look at Personal Care, and we had said coming into the year that if we could be flat with 2011, we would be happy.

And we ended the year 60 basis points higher.

So we probably were a little ahead in third quarter of where we expected, and it normalized a bit in the fourth quarter.

But broadly for the year, we're pleased with the progress we're making.

Great.

Thanks.

And then just one last one.

Did you say what the sales impact of the distribution sale for the mid-tier diapers in China was?

Was it material to the top line?

No, we didn't spell that out.

So the mid-tier in China is the biggest part of the category.

So going into that was a plus.

Now, we started that in mid-2011, so it wasn't a full year benefit.

But that was certainly part of the growth that we saw in China this year.

Okay.

We also picked up a couple of share points in China this year, which in a market that size is substantial, from a sales standpoint.

And maybe I missed this, but can you talk about your country penetration in mid-tier -- I'm sorry, your regional penetration in China?

Is it done, or is there still -- I think you said there's still some room to go?

No, we were in 70 cities at the beginning of 2012.

We were 80 by the end of 2012.

We hope to be in 90 by the end of 2013.

And so there's, as you know, there's many more cities with at least one million people in that we're really not present in yet.

So we've got a ways to go to really be fully penetrated.

And there's other geographies, as well.

We're moving more aggressively in the northeastern part of Brazil.

We've been present, but not really fully leveraging the opportunity there.

And so we're putting capacity up there and a little more dedicated sales effort.

So that will help.

In Russia, same kind of a thing, where we had a strong presence in the Moscow region, but we're moving into some of the other former Soviet Republics in the Central Asian countries and other Eastern European countries.

Got you.

And then I promise, one last one.

Do you think that advertising spending's going to track pulp costs?

Because it seems like that's the way it's played out this year, where it went 45, 35, and then 25, and then 10?

I think it more tracks our innovation pipeline.

We had more innovation that was front-end loaded this year.

And we're going to spend behind good ideas, and you saw more of that than trying to drive pulp.

A good chunk of the increased AMP is in Personal Care and in emerging markets where we were driving launch activity.

Great.

Thanks so much, guys.

Thanks, Bill.

Our next question comes from Javier Escalante with ConsumerEdge Research.

Hello.

Good morning, everyone.

I just would like to go back to your forecast for the year and the commentary that the diaper category you expect to go down about 1% and that your expectation is that the birth rates are, may improve.

We had done some analysis and we see basically the sales of newborn diapers being down 1% to 2% on top of minus 4% last year.

So we thought that that would be a leading indicator of whether newborns were picking up and we don't see that in the data.

And the contra part of that is that your business is more exposed to late stage diapering, training pants.

So how does that pan out in terms of your better outlook in the US if, number one, we don't see that in the data yet?

Number two, actually your business depends on later stage diapering.

Yes.

No, I guess that's a -- Javier, we're looking at predictive model for the birth rate.

So we're looking at male unemployment and consumer confidence and household formation as more of a leading indicator of where it's going.

And as we back tufted it, that has been the best fit model.

And so that model would say -- it's been predicting that the birth rate would get less negative all year.

That's pretty much what's happened.

You know, it's predicting for 2013, the birth rate flattens out where it is now.

And so when we talk about the diaper category being down about 1%, it is more that effect.

The babies haven't been born in the last two years, they are not in category now.

So they won't be there in 2013, either.

And certainly that has affected our child care business more significantly this year.

As you've had three or four years of birth rate decline that have totaled 8% or 9%, that's been showing up in our training pant business.

But we expect most of that is behind us.

And I expect a little bit better, or less negative category environment in 2013 than we had in 2012.

That is good.

And my second question also has to do with, what is your view of what's happening in tissue, consumer tissue business also in the US, I mean here bath tissue and paper towels?

You mentioned that private label picked up 1 to 2 points.

And a lot of it has come in from the competition from your main competitor, which has been innovating in the category, both in paper towels and bath tissue, and they are losing share.

You guys don't seem to be losing share.

Could you help us understand how you see the consumer dynamic and why you are not being as pressured by private label as your competitors have been?

Thank you.

Yes, I mean, we've had more innovation.

So if you look at the fourth quarter, our Kleenex volumes were up 1%.

Cottonelle was up 8%.

Scott bath was up 1%.

Our Viva towel business was down a couple percent, and Scott towels was up 11%.

So some of it was promotional timing.

Some of it -- we had good innovation on Cottonelle and it's a terrific product.

And so I think we just continued to try to make sure we get quality promotion.

We're doing great marketing.

We keep bringing innovation to the category and that makes it tougher for the private labels to fight against that.

So it's a pretty simple formula.

Okay.

Thank you.

Thanks.

Our next question comes from John Faucher with JPMorgan.

Hello, John.

Hello, guys.

Just wanted to follow up a little bit on Chris' question, but thinking about the margin structure in Europe longer term, how should we think about where you guys can go as you get through some of the stranded overhead issues?

What do you think is the long-term structural upside to margins there?

Thanks.

Yes, medium term, we would say double-digit operating margin is a reasonable goal, which would be a good improvement from where we've been.

But then as we also -- as Kim and the team look at that, they would say long-term, they would like Europe to be at least equal to the corporate average.

And so they have got some work to do to get there.

They don't have all the answers to figure that out, but we've got good businesses and categories that are growing in Europe.

And the whole point of this restructuring effort is to free up that team to focus on driving our baby wipes business, where we've got good, accretive margins, and driving our child care and dry nights businesses, where we've got strong margin opportunities, and making our Kleenex and Andrex and Scottex businesses successful in Europe.

And they're already great brands with great market positions, but we've got to put more innovation and investment behind them to make them produce the kind of returns that we're looking for.

So I think we've got to execute the plan in front of us and get to a stable, consistent place and then look how we can grow that from there.

Okay.

And so just to follow up on that, it sounds as though you feel like there's nothing structural to the categories themselves in Europe that would limit that.

It's a question of just your being able to go out and execute that.

I think in Europe, the big thing you worry about, particularly in tissue, is private label.

So the private label structure in Europe is very different from anywhere else in the world, where you're seeing in bath tissue in some markets, shares north of 70% for private label.

So you've got to be probably a little bit more cost conscious and your innovation's got to pop a little bit more to break through that.

Okay.

Great.

Thank you.

Thank you.

Next question comes from Linda Bolton-Weiser with Caris.

Hello, Linda.

Hello.

I was just wondering if on your projection for $150 million to $250 million of input cost inflation, is there any way to split it up roughly between second half and first half?

I would think quite a bit more in the second half.

About two-thirds of it is pulp and recycled fiber.

And you're probably right that in the first part of the year, at least the first quarter, that doesn't look like there's going to be as much of that showing up so far.

So that's probably a fair comment.

Okay.

That's actually all I had.

Thanks.

All right.

Thank you.

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

All right.

Thank you, David.

We will wrap up with a closing comment from Tom.

Once again, we had a strong performance in 2012 and we're looking forward to keeping the momentum going in 2013.

And thank you for your support of Kimberly-Clark.

Thank you.

Ladies and gentlemen, that concludes today's presentation.

You may disconnect your phone lines, and have a wonderful weekend.