金百利克拉克 (KMB) 2013 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 the presentation, we will open the floor for your questions.

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

It is now my pleasure to introduce Mr. Paul Alexander.

Thank you, David, and good morning, everyone.

Welcome to our second quarter earnings conference call.

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

Here's the agenda for our call.

Mark will begin with a review of second quarter results.

Tom will then provide his perspective on our results and the outlook for the year.

We'll finish with Q&A.

We have a presentation of today's materials in the investor section of our website, which is www.kimberly-clark.com.

As a reminder, we will be making forward-looking statements today.

Please see the risk factor 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.

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

The release has further information on these adjustments and 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 3%, led by 9% growth in K-C International.

Second, we increased adjusted earnings per share 8%, it's driven by organic sales growth and strong cost savings.

And third, we're on track with our overall capital plan, including working capital, capital spending, and returning cash flow to shareholders.

Now, some details for the quarter.

Second quarter sales were $5.3 billion.

It was even with last year.

Underlying organic sales rose 3%, with increased volumes of 2% and higher net selling prices of 1 point.

While sales in connection with our restructuring activities reduced sales by 2% and unfavorable currency rates reduced sales by 1 point.

Second quarter adjusted gross margin was 34.5%.

That's up 90 basis points from last year.

The increase was driven by organic sales growth and $80 million of FORCE cost savings, partially offset by $30 million of input cost inflation.

I'm really pleased with our continued momentum with FORCE.

We've delivered at least $80 million of savings in each of the last four quarters and we're now raising our full-year target to $300 million to $350 million of savings for the year.

That range is $50 million higher than our previous expectation and will help offset additional currency headwinds that Tom will talk about in a minute.

Moving down the P&L, adjusted operating profit rose 6% with an operating margin of 15.5%.

That's up 80 basis points compared to last year.

Strategic marketing spending was down $20 million and that comparison was impacted by a high level of innovation-related spending in the second quarter last year and also some lower spending in Europe this year, given the strategic changes we're making there.

Foreign currency translation effects reduced operating profit by $15 million and transaction effects further negatively impacted that comparison.

The second quarter adjusted effective tax rate was 31.8%.

That's up from last year, but in line with our full-year target of 30% to 32%.

Equity income was up 28%, as K-C de Mexico had another quarter of excellent performance.

Putting it all together, second quarter adjusted earnings per share was $1.41.

That's up 8% year on year.

Now, turning to cash flow.

Cash provided by operations in the second quarter was $576 million compared to $740 million last year.

The decrease was driven by higher tax payments, pension contributions, and severance costs in Europe.

So, halfway through the year, we're on track with our plan and I expect our cash generation to improve sequentially in the back half of the year.

In terms of capital allocation, second quarter dividend payments and share repurchases totaled more than $600 million.

We repurchased $300 million shares worth of KMB stock in the quarter.

We now expect full-year share repurchases of $1.2 billion.

That's at the high end of our target range of $1 billion to $1.2 billion for share buybacks for the year.

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

In Personal Care organic sales rose 3%, driven by volume growth.

K-C International had another good quarter with organic sales up 8%, continue to make excellent progress with our targeted growth initiatives across K-C International.

Tom will provide some more details in a minute.

Elsewhere in Personal Care, organic sales were down low single digits in North America, but up high single digits in Europe.

Second quarter Personal Care operating margins of 18.1% rose 130 basis points.

The improvement was driven by organic sales growth and cost savings, partially offset by cost inflation and unfavorable effects of currency.

Now, before we leave Personal Care, let me give a brief update on the strategic changes we have under way in Europe.

We've now stopped selling HUGGIES diapers in all markets except Italy and we closed our Spanish production facility in May.

In terms of organization changes, we're about halfway through the total expected work force reductions.

So in total, our European team continues to make good progress with the changes and they are on track to deliver their full-year operating plan.

Moving to Consumer Tissue.

Organic sales were up about 5%, with volume growth of 3% and higher net selling prices of 1%.

Volumes improved in North America in K-C International, but were down slightly in Europe.

Consumer Tissue operating margins were solid, although they were down 30 basis points versus last year.

Turning to K-C Professional, organic sales were up 2%, driven by higher net selling prices.

Despite flat sales volumes, our K-C Professional team continues to drive profitability.

Second quarter operating margins of 19.1% were up 270 basis points year on year, with strong cost savings and the benefits of pricing actions.

Lastly, healthcare organic sales were down 1% driven by lower surgical and infection prevention volumes, helped our operating margins of 13.5%, were essentially even with the year-ago period.

And while we've got more work to do, healthcare profitability did pick up nicely from the first quarter.

So, that wraps up my comments.

To recap, we generated solid organic sales growth.

We delivered strong margins and improved adjusted earnings per share, and we continue to allocate capital in shareholder-friendly ways.

Now I'll turn it over to Tom.

Thanks, Mark, and good morning, everyone.

I'll briefly comment on our second quarter results and then I'll address our full-year outlook.

So, starting with the second quarter.

I'm encouraged by our strong cost savings, by our margin improvement, and by our bottom line growth.

As you can tell from Mark's discussion, we continue to perform well in these areas.

Our organic sales growth is the one part of our results that I was not totally satisfied with.

As you heard from Mark, our performance was strong in K-C International, with 9% growth overall and excellent progress against our targeted growth initiatives.

For example, in our diaper business in K-C International, our volumes were up 45% in China and 10% in both Russia and Brazil.

An improved net realized revenue brought total organic sales growth to about 20% in Brazil.

Elsewhere in K-C International, we delivered double-digit organic sales growth in feminine care, adult care, and baby wipes, and organic sales were up 8% in K-C Professional, within the K-C International space.

So, our K-C International team delivered an excellent quarter of broad-based top line growth.

They also improved their operating profit margins, despite headwinds from currency and the conditions in Venezuela.

On the other hand, volume was below my expectations for some of our other businesses in developed markets, including K-C Professional, Health Care and HUGGIES diapers in North America.

Some of that shortfall was related to fairly sluggish category demand.

I want you to know that our team is focused on driving better top line growth by fully taking advantage of our innovation and marketing programs and our sales capabilities.

Our year on year comparisons also get somewhat easier in the back half of this year.

So, overall, even with the more fixed top line performance in the quarter, there were a number of positives in our second quarter results.

And halfway through the year, I'm encouraged with our overall progress.

Now, let me move to the outlook.

As we have all observed, the macro environment has become more volatile in the last few months, with rapid changes in currency rates, interest rates, financial markets, economic growth rates, and most recently the price of oil.

Despite this volatility, we will continue to execute our global business plan.

And that means pursuing targeted growth initiatives, launching innovation, reducing costs, and returning capital to shareholders.

We have made excellent progress with these strategies over time and I expect that to continue going forward.

On the innovation front, we'll continue to roll out new and improved products in K-C International, particularly in diapers, premium feminine care and adult care, and in North America we launched a number of innovations in the second quarter that will be fully supporting in the back half of this year.

We'll also be introducing innovations in our U by Kotex employees' brands in the third quarter.

In terms of our financial targets for 2013, on the top line, we continue to expect full-year organic sales growth of 3% to 5%.

Performance should be led by K-C International, which continues to target high single-digit growth.

We now expect that currency will be a 1 to 2-point drag on the top line, with recent spot rates implying a drag of about 2 points.

Our previous assumption was for an impact of 0 to minus 1% on the top line.

The 1 to 2-point top line drag from currency should cause a similar negative translation impact on the bottom line, along with additional negative transaction effects.

Despite the more negative currency environment, we're also reconfirming our full-year adjusted earnings target of $5.60 to $5.75 per share.

We expect to overcome the additional currency headwinds primarily from higher FORCE cost savings, as Mark mentioned.

In terms of selling prices in this environment in K-C International, we'll be opportunistic in improving our net realized revenue wherever we're able to.

While we aren't planning any significant new price increases in the near term, if spot currency rates are maintained, I would expect that some increases would occur in some markets.

As usual, our earnings guidance is based on foreign exchange rates expected over the balance of the year.

If currencies hold at recent spot rates for the balance of the year, it's less likely that our adjusted earnings per share will reach the upper half of our guidance range.

In the past few years, if currency rates have moved in one direction, we've also seen commodity costs that have generally moved in the other direction.

And right now, we're not seeing that traditional pattern occur.

So, even though we expect currency rates to be more negative than our previous plan, our full-year outlook for cost inflation continues to be $150 million to $250 million.

In fact, if oil prices hold at over $100 per barrel, that could push cost inflation into the upper half of our estimated range.

As I'm sure you will, we'll also continue to closely watch the relationship between currency rates and commodity costs going forward.

So, to summarize, we've had a strong first half of the year.

We're reconfirming our full-year top and bottom line growth objectives, and while the environment has become more volatile recently, we remain optimistic about our prospects to drive profitable growth and to deliver strong returns to shareholders.

So, that wraps up our prepared remarks.

And now we'll begin to take your questions.

(Operator Instructions)

Ali Dibadj with Sanford Bernstein.

A couple questions -- one is around KCI.

So, it clearly looks like it is accelerated sequentially, but still kind of lower than historical levels.

I want to get a sense from you guys whether that's driven by macro or an anomalous high growth rate [before] given distribution gains you had or competition.

Kind of what's driving the slowdown?

Then, as part of that, if you can give us a sense of Consumer Tissue clearly being the driver recently of KCI growth; is that -- over Personal Care, is that intentional, is that serendipity?

What are the implications there around capacity margins, the way you run your business, et cetera?

So all about KCI first.

Yes, good questions, Ali.

A couple of quick headlines.

I would say, overall, we hit on some of the key growth markets.

We talked about how things are going in China, which continues to go very well -- is not really slowing down.

Strong growth in Brazil, which, despite some of the economic challenges in Brazil, our team there is actually hitting very well and you're seeing good growth there.

Lot of innovation coming in the back half on personal care.

Some of that launched in the second quarter in places like Russia.

You started to see that pick up.

I would say where we've seen a little bit of maybe slowdown in the quarter was probably the more developed end of the developing markets.

So, places like Australia and Korea were a little slower in the quarter.

Those are also big businesses for us, so they have a disproportionate impact.

If you look at the segment split, you still saw a strong Personal Care growth.

But one of the swings in the quarter that maybe wasn't as obvious was that Venezuela did very well on tissue, and slowed down on Personal Care.

It was really more of a question on what kinds of things did the Venezuelan government want to support in terms of providing foreign exchange.

So, they really wanted to emphasize bringing bathroom tissue in, and improving their in-stock position on that.

So, we had a very strong bath tissue quarter in Venezuela, and not as much on the diaper front.

Just to put that in perspective, just that Venezuela swing was about one-third of the volume growth in the KCI tissue numbers in the quarter.

Okay.

So Venezuela really being the driving factor of that CT versus PC numbers --

As to margin, I would say that was the biggest swing factor that hit us.

It wasn't really a fundamental shift in strategy.

Okay.

And then another question, which would touch on KCI a little bit, but really around the price mix, which, at least for us, was a little bit less than we had hoped broadly.

And a couple things we noticed.

One is obviously KCI pricing or price mix wasn't great.

Want to get a sense of where you are versus inflation on that.

And is there a competitive atmosphere that's not allowing you take prices as much as you would like to?

And then secondly, the North America mix number was negative in both segments.

So if you can give us a sense of why that is?

I guess the overarching piece of this is -- when commodities aren't going up, do you guys have pricing power?

Is it really just always tied to commodity prices?

Yes, I would say broadly where we'll try to get more price benefit is through mix coupled with innovation.

I mean, I would say most of our businesses around the world are not assuming that you're going to get routine list price increases.

You'll get it when it's driven by commodities.

That's probably why you didn't see as much in KCI in the quarter.

I mean, KCI had -- if you look at price and promotion together, they had 2 points of improvement in Q2 versus 3 points in Q1.

And so it wasn't markedly different than what we were expecting going in.

We're probably more focused on using our trade funds more effectively in KCI.

That will be a place that we will count that as some price improvement as we roll forward.

Beyond that, we'll get some price, whether it is big currency swings in KCI, and we saw some of that in Brazil in the first half, and that will play out.

If you see big currency swings, eventually you'll see some price that moves there as well.

On a North American front, we typically have some negative mix built in, as more of the categories move to the larger format packs.

But beyond that, there wasn't anything else that was going on there that was a big driver.

Okay.

So, no extra competition really driving any of this from a pricing/mix perspective?

No, I wouldn't say so.

Okay.

Thanks very much, guys.

Thanks, Ali.

Gail Glazerman with UBS.

Hi, good morning.

Good morning, Gail.

Just in Personal Care in terms of volumes, can you talk a little bit about what's going on in femcare, and is that a trend that you would expect to continue?

The femcare volume in the US was a tougher comp.

Last year we had double-digit growth; we had some pipeline fill with some new innovation that was launched, and so that was more the comparison.

Our shares were pretty stable sequentially, so we didn't see much change.

And so, we're still seeing good growth on U by Kotex and a little bit of weakness on our traditional Kotex, but we have got some good innovation coming across both those platforms in the coming quarters.

So, we do feel good about our femcare plan overall.

Okay.

In terms of Europe, can you just remind me -- there was reference to solid performance and contribution from non-branded business.

Is that something that rolls off as we enter the second half?

Or at what point would you expect to see that business go away, if at all?

No, we have picked up some private label contracts a year ago.

And so, we are still seeing the favorable comp of those.

And those will roll off in the second half of the year.

We will keep some in Italy, but broadly, we'll shed some of that business, as we've exited facilities.

Okay.

In terms of North America, with the pricing benefit you saw in bath tissue in the quarter, how much of that would have benefited the quarter versus what you would expect to see in the second half?

Well, we took some desheeting in the quarter that will roll into the second half.

And what you will see is probably more positive price in the second half in tissue in North America, and less volume because we count volume in thousands of sheets.

So, you'll see a volume drag and a positive price, which net-net for us works out to be a positive.

Okay.

Just one last question, sticking on North American tissue.

Last quarter you talked about seeing some benefit as a competitor was struggling to put stock on the shelves.

Has that started to reverse yet, or is that something that you're able to maintain?

I think we've heard, and again, this is more anecdotal, that they have returned to normal service and promotion levels by the end of the second quarter, albeit they are at a lower market share.

And so we were pleased that we picked up share in this environment, private label business as well, and we'll be watching the competitive environment in the second half.

In the meantime, we've got some great innovation coming with some improved Cottonelle variance.

We have got a big launch of our Cottonelle moist.

Some improvements on Kleenex.

And so, actually a lot of news in the tissue category coming in the second half that we feel pretty good about.

Okay.

Just one last question on inflation.

You mentioned oil.

I was just wondering if you would talk a little bit about pulp?

It seems like there is starting to be mounting pressure.

Is that something that you would expect in your second-half forecast?

Our northern softwood guidance for the year really didn't change in the quarter.

We would still call it $890 to $910 on average for the year.

It will be above that in the third quarter.

But we buy a lot more eucalyptus than northern softwood, and we're actually seeing eucalyptus trend down just a bit sequentially.

And we do think that there's -- with the weaker Brazilian currency, given that all the eucalypt producers sell in dollars, there's less a need for them to get a price increase in this kind of environment.

I think the other offsetting factor that we don't talk as much about is recycled fiber.

We buy about 1.2 million tons of recycled fiber a year.

And that has actually been a softer market.

So, overall, fiber is tracking pretty close to our expectations.

Okay, thank you very much.

Connie Maneaty with BMO Capital.

Good morning.

Could you talk a little bit about the organic sales growth pickup you expect in the second half?

Given that KCI sales growth has trended about 9% for the last six quarters, this really suggests a pickup in developed markets.

So, where's it coming from?

What are the new products you're especially focused on?

And I hate to ask, but what is Cottonelle Moist?

So, if you look at the Cottonelle, we've got a new tub design that would be a moist bathroom tissue product.

And it's a great product, great category, growing rapidly, and we'll have to get you some, Connie, to try.

That would be one area that we think would be a good growth opportunity.

We've got our new Snug & Dry diaper in market.

We're going to put even more muscle to be competitive behind that in the second half.

And we would expect to see a better baby and childcare result overall in the second half than we had certainly in the second quarter.

We've got some new Poise light bladder leakage products out as well.

We've got a new Depend campaign that we're launching.

For those of you that were watching the British Open this weekend, got to watch Tony Siragusa pitching protect your manhood with some new Depend guards.

So, we'll have those products that are going to start going.

Shifting to some of the B to B businesses, we also would expect to see an uptick in KCP in the second half.

We really weren't satisfied with our growth in North America in KCP in the second quarter.

Some of that's the category with manufacturing being a little weak, and some of the laboratory services area that we have a nice business was a little weak.

But we still expect to see a better performance there in the second half.

Okay.

And also, could you comment on the uptick in FORCE savings, what are the projects that are kicking in to contribute that $50 million extra.

And then also, just very generally, how do you manage to take out hundreds of millions of dollars of costs every year without hitting some sort of institutional fatigue?

Really, Connie, our teams are energized about the cost savings initiatives.

And each of our teams around the world is looking at that as a way to fund their future growth.

And so, by identifying and delivering cost savings in areas that our consumers and customers don't care about, we're able to invest more in R&D, invest more in strategic brand building, and help grow our Business overall.

So, we really view that as part of a healthy growth model for our Business going forward.

The big areas that we continue to work on -- we started up a global procurement organization several years ago.

We're continuing to build capability in that function around the world, and sharing information better, doing more cost structure modeling of our suppliers to understand where are we adding costs, and if we change our specification, we can deliver a better value overall.

So, that's a big bucket for us.

We're doing a lot on productivity and best practice sharing.

So, we measure productivity in the same way around the world, and are sharing best practices.

And the great news is that our best-performing facilities are getting even better, and so, we still see a healthy gap for us to attack between our best-performing facilities and our worst-performing facilities.

And then the third area is product specification changes.

Looking at the design of our products -- how do we design for value, where we're taking things out that the consumer isn't concerned about.

So, all three of those areas contributed again in the second quarter, and we've got a pretty robust pipeline of ideas for the future that we're going to go chase that give us confidence in our ability to deliver at that level.

Great.

Thanks so much.

Thank you, Connie.

Lauren Lieberman with Barclays.

Thanks, good morning.

Hi, Lauren.

Specific question about the strategic spending.

So, first off, if the down $20 million in the quarter, that was kind of how you had planned things out, and if you're expecting that to ramp up in the second half as the innovation activity picks up?

Yes, absolutely.

We were a little heavy last year in the second quarter with the Fem Wellness launch in the US, and then obviously exiting some categories in Europe, categories in markets, we didn't spend as much in Europe as we would have last year.

So, those are the two big drivers of the change in the quarter.

But we've also had quite a bit of innovation coming in the second half, and I would expect us to spend more on strategic A&P sequentially than we did in the first half.

We will get a little bit of a currency benefit in some markets, if you look at it from a dollar standpoint, but we still think for the full year we'll spend at least as much as a percent of sales, and maybe even a bit higher on strategic A&P this year.

Okay, great.

And that -- the Poise Wellness launch -- so it's now been a year.

So where does that stand in terms of distribution, what trial and repeat has been like, and so on?

You guys certainly have a track record of trying to cover new ground in some of your categories.

And [those] it takes a bit longer to take hold.

Yes, I think that we've seen, all over the world, kind of mixed results.

In some markets it's gone great, and in some markets it's one of the leading SKUs in category.

In North America it's been a little slower than we would have expected, and so, we're regrouping and trying to make sure we know what the next steps are for us there.

But we do think there's a big inside here, and a great consumer need, and we'll keep working at it.

In the meantime, we've got some great growth stories around the world to continue to drive.

Okay, great.

And my final thing was just Viva and shelf space.

I think last quarter you guys had said you were just about back up to historic levels.

Is that still true, or was there more to go?

I think Viva's about on track with our expectations, so far this year in the US.

And again, we would continue to see that opportunity there for innovation and growth going forward, but right now we're managing that at about at the level that we can support.

Okay, great.

Thanks so much.

Thanks, Lauren.

John Faucher with JPMorgan.

Hi, John

Good morning.

So, taking a look at the -- you guys talked about the adults and the adult market in the US growing sort of high-single digits there.

And I guess, as we look out over the next couple of years, what do you think is a more sustainable growth rate for that?

Can you talk about sort of category penetration versus overall size of the category, and how you're really thinking about that longer term from a growth standpoint?

Thanks.

Yes, you know, John, that is a great question.

Even today that's a relatively underpenetrated category in the US.

And so we think relative to the possible need states, we may be something like 40% penetrated in the US.

Now, they may be using other products or an institutional format, but there's other ways that we really think we can drive growth in this category.

And then broadly, as you look outside the US, the birth rate in many parts of the world is even lower than it is in the US, and the populations are aging and people are living longer.

So, that's why we're so excited about the global growth prospects for our Depend business and our Poise business.

So, we think there's lots and lots of growth ahead for those brands as we move forward.

Caroline Levy with CLSA.

Hi, Caroline.

Good morning.

Hi.

I wonder if you could talk about whether your China plant opened?

Yes, I was there and cut the ribbon.

I think it was in April.

And so, yes, the China plant in Nanjing has done well.

Had a great startup with a lot of support from our Korean team.

Was over to help with training and startup support, and had one of the best startups in the history of Kimberly-Clark.

So they are off to -- off and running, and built a great capability, and is going to support the growth in China.

They kept reminding me -- we are going to need even more capacity at the rate our Business is growing.

So, I think that will be a trip we'll be making pretty regularly here in the future.

That's great.

I'm trying to understand whether this is transformational for margins and growth opportunities, or whether this is just a step in the right direction?

Well, I think getting to local manufacturing will certainly help the margin picture in China.

On the other hand, when you're growing at 45%, they are still going to be importing some product to keep up with that growth rate.

And so, it's a balance, but China is hitting its expectations for our plan this year.

I think we're in 85 cities now with HUGGIES versus 80 last quarter, and still expect to get to 90 by the end of the year.

The team over there is executing at a very high level.

And I know that you have gone to a more mainstream product from super premium, but I'm just trying to understand if the opening of local production offsets any potential margin hit from selling more mainstream versus premium?

And also, if you're taking a lot of market share, just given your growth rate seems really high?

Yes, I think we've picked up a couple of share points in China over the last year.

It's a big market.

And so, we're coming off a smaller base.

So, as we're moving in to participate in a broader segment of the category, that's part of it.

And I'll also tell you we're launching a super super premium product to come out the very top end of the market.

We'll actually be creating a new tier for those consumers that want the very best for their baby.

So we've got a lot of action in China, and are really trying to make sure we're available in all the formats that mom might want.

That's very helpful.

Thank you.

Just on Brazil -- there was some categories in consumer, more beverage related, that seemed to have taken a big hit.

Did you have any reaction from consumers that you had noticed in Brazil?

Aside from currency issues, were there any delivery problems -- was there any change in the take-away trends in your Business?

Really nothing to speak of.

And we're still expanding and growing in Brazil as well.

Actually, we had our -- our Board was in Brazil for a week in June, and we cut the ribbon on a new plant in the northeastern part of Brazil.

So, we're expanding our capability in that market as well, and seeing the growth result from that.

And able to take some price to offset currency there?

Yes, we took some price in the first quarter, really following some of the currency change that ran up in 2012.

And we were able to go put that into the market.

The encouraging thing was you saw the double-digit volume growth in diapers, even with the double-digit price increase.

So it was a good result -- good execution by the team there.

Last one, thank you so much -- and this is North America.

It looks like you did lose some share, and you may have touched on this, in diapers to Proctor.

Is there enough innovation coming in the back half you think that could shift?

Do you see any hope for the market itself to be a little better in the back half?

Yes, in diapers in our share calculation we were flat sequentially and down about 0.5 points year on year.

And Luvs was the big share gainer.

Actually, Luvs took share from Pampers and from HUGGIES in the quarter.

There was some hot promotional price points in certain channels that drove that.

And so, we are going to make sure we are competitive and responsive to what is happening in the marketplace, and we've got some terrific innovations that's launching that we're going to make more noise about in the back half.

So, we would hope to recover some of those share impacts in the back half of the year.

Thanks so much.

Thank you, Caroline.

Olivia Tong with Merrill Lynch.

Thanks.

Just want to touch a little bit more on organic sales growth.

For your 3% to 5% target, what gets you to the 5% end of the range as opposed to the 3% end of the range?

Well, I think this year, quite frankly, it will be a bit of a challenge given that half the year is already in the books at the 3% end of the range.

But if you looked at it broadly and said -- our categories are growing 3% to 4%.

So, to get to 5%, you've got to take some share or you got to have some innovation beyond your core category growth.

And so, we think that's doable, but we also would say 3% to 5% is probably the right range to plan for, and we want to deliver that consistently over a long period of time.

Got it, thanks.

And then, you typically run through how many categories where you gain share, flat versus down.

Can you run through that quickly?

Yes, maybe I'll turn that one over to Paul.

But I mean, in the US, we were -- I think we were flat or up year over year in five of eight, or something like that.

Paul, is that about right?

Yes, that's right.

And we were down in three categories, and those three were diapers, as Tom has mentioned, down about 0.5 points.

Also down about 0.5 points in facial tissue, and about 1 point in child care.

Child care is off a very high share base.

We've gotten to nearly mid-60%s kind of a share there.

Got it.

And then just on child -- just following up on child care, what drove the volume decline?

Is that related to weather, since you called out the Little Swimmers, or is there something more systemic there?

Yes, I mean, I really hate blaming anything on the weather because it sounds kind of lame.

But we did have a cooler, wetter Spring this year, and we had a hotter, drier Spring last year, and I think that's part of it.

So, Little Swimmers was a little softer this period of time.

We don't -- think we're still digging into that to understand what's going on there, and will we see that business come back over the summer months?

So, that's part of it.

I think we've -- the diaper category, overall, the birth rate was lower than we expected for longer than we expected.

That's kind of piling up a little bit in the child care category.

So, that's a little weaker.

So, those were some of the factors that drove it.

And so, that's one that we're going to dig into a little bit in the second half as well.

Got it.

Thanks a bunch.

Thank you.

Alice Longley with Buckingham Research.

Hi, good morning.

Did I catch you saying earlier in the call that your categories in North America were sluggish in the second quarter?

If that's the case, did you mean they were slower than in the first quarter, and if so, why would that be?

Yes, I think in KC Professional, in particular, where you see things -- manufacturing was particularly -- seemed a little bit slower.

We have a small scientific business that sells a lot into laboratories that do research.

And that one segment seems to have been a little bit more affected by the sequester, where any government-funded research is more discretionary has been closed down.

So, that was a little weaker.

Things that are related to welding in general, where we sell a fair amount of supplies into that space, were a bit slower.

Other segments like lodging were okay.

So, you saw that was pretty stable.

Healthcare, which affects both our healthcare business and our KCP business, was less negative in the second quarter, but was still negative in terms of overall surgeries.

I think year to date, the best data we've seen that surgeries are down about 3%, is more like more of that in the first quarter than the second, but still a drag year on year.

Okay.

So, there wasn't any particular weakening in the categories for tissue or personal care?

Not so much tissue and personal care.

Probably the child care segment was weaker than we had expected, and it's a bit of a seasonal business because of the impact of Little Swimmers.

So, it's not always fair to compare that sequentially because you would probably say -- yes, we sold more at Little Swimmers in the second quarter than the first quarter, but that's not necessarily a valid comparison.

And so, that would probably be weather, so that wouldn't persist into the second half?

Yes.

Is that correct?

Okay.

Thank you.

Thank you.

Javier Escalante with Consumer Edge Research.

Good morning, everyone.

I have a question with regards to tissue margins.

The negative leverage that you have in the quarter, considering that you have better savings, you have the volume benefit from Georgia Pacific, you have positive pricing, and the commodity impact seems to be coming on the lower end of your forecast.

So why is it that margins [baked] in the last quarter, and we have this margin contraction in this quarter?

Yes, good question, Javier.

Two key drivers of that.

One is facial tissue is our weakest in the second quarter.

And that's a higher margin item than the overall basket in Consumer Tissue.

So, obviously, we do pretty well in the fourth quarter and first quarter with cold and flu.

Second quarter you got spring allergy, but it's usually a light facial tissue quarter.

So that affects your margin mix in that segment.

The second driver was -- in Europe, we had quite a bit of startup activity around some new Andrex product improvements that we're preparing that was a drag on margin in the second quarter versus the first.

That asset went down in the second quarter, and I was in Europe in late June, and went to the plant to see the new process, and we're excited about the new products they are going to be making in the balance of the year.

But it did cost us some margin in the second quarter.

Thank you.

And changing businesses, on healthcare, it has been negative for the past four quarters.

Could you explain us what part of the business -- I know that it's kind of like a conglomerate of different businesses, but what is happening there?

Why we have four quarters in a row of negative sales growth?

Thank you.

Yes, it's a couple things.

I mean, the underlying category trends we've talked a little bit about, that the number of surgeries has been less than we thought.

I think everybody in the healthcare space is trying to figure that out.

I think the best guess we've heard is that it's more and more consumers are in high-deductible consumer-directed healthcare plans, and that that's part of it.

I think the other part is that you're seeing more of a push to alternate therapies before surgery.

So, rather than getting your knee scoped, go do PT for a couple of months and see how that goes before we put you in the hospital and cut your knee open.

So, that's part of it.

I think the other part that -- we -- as synthetic nitrile prices ran up last year, we were pretty aggressive on pricing on disposable exam gloves.

And as a result we've shed some volume in that process, but it was lower-margin volume, and while it hurts your top line comparison, it's the right thing to do to get that business moving in the right direction.

Understood.

And finally, on China, if you can tell us what is the organic sales growth, not just the volume, just to understand what is the impact on price mix from the roll out of the mid-tier diaper, if you could, please.

Yes.

I mean, there's not much price mix in that number.

It's a pretty clean number.

I'll ask Paul if he wants to give you a more precise estimate.

Yes, Javier, on a rounded basis, the 45% volume growth for diapers would have been 40%-plus on total organics.

So, as Tom said, not much difference there.

Okay.

Thank you very, very much.

Thank you, Javier.

Jason English with Goldman Sachs.

Hey, good morning, folks.

Thanks for the question.

We closed on China, so I guess I'll kind of pick that back up.

You've been having tremendous success in the diaper market in China.

We're hearing of new competitors or existing competitors plan to get more aggressive -- [Cal], LG, Pigeon, and even Biostime, who has had good success in formula, trying to come at diapers as well.

Should we be concerned about this, or is this just more noise, and par for the course?

I can tell you -- everybody wants a piece of China.

So, when you go over there, you'll find every company you've ever heard of is trying to build a business there.

And so, I think we're competing pretty well, but it's a big market, and there's room for lots of competitors, but we also expect at some point it will rationalize.

There's still hundreds of diaper brands that are local in the Chinese market.

There's probably thousands of femcare brands, as you add them up all across China.

In the meantime, we're aiming at mom.

We are doing well in the digital space in China, which is an increasingly important channel.

So, we actually would have a higher share in eComm in China than we would in the measured outlets.

And so, we really feel like we've got strong underpinnings with great products, great brands, and a team that's executing pretty well in the field right now.

Thanks.

Back to US real quick -- tissues -- the facial tissue business, we saw the effect of desheeting in the Nielsen data this past period.

We also saw your market share take a pretty substantial step back.

Is that just temporary on your transition here to the new sheet count?

Or is there reason to be worried about price gaps going forward?

Well, we usually see a dip in second quarter from first quarter, because there's a lot of promotion around cold and flu.

We don't promote as heavily in the Spring because the consumer need state isn't as great.

So, we typically see a dip in second quarter from first quarter.

It's a little deeper than last year, so you're down year on year, but we would expect that to come back from a dollar share standpoint in the back half.

Great.

Thanks a lot, guys.

I'll pass it on.

Thanks, Jason.

Bill Schmitz with Deutsche Bank.

Hi, guys.

Good morning.

Hi, Bill.

When are we going to start seeing the margin benefits from the European divestitures?

Because, obviously, you're exiting zero-margin businesses.

And then I just -- looking at the SG&A costs from the year, they were down year over year in dollars.

Is that a trend that might continue throughout the year, as the European thing starts to get some more traction?

Yes, you're starting to see some of the margin improvement year on year in Personal Care from the European exit.

So, that's part of the year-on-year increase from that standpoint.

We're well through the overhead savings.

We should see a bit more of that flow in, in the back half, but I don't know that it will be big enough that we'll call it out in the G&A numbers.

But we'll expect to see the overall margin improvement from Europe will be a part of the story this year, for sure.

Okay, great.

And then maybe I'm looking at the wrong data, but the eucalyptus pulp numbers that I have show it's up quite a bit year over year.

Am I just looking at the wrong stuff, or are you guys kind of looking at the forward curve?

No, I mean, I think the stuff we see -- I don't know, Paul, if you've got the specific data on your end?

We're still calling it about an $800 average for the year.

I think the July price was $815 or something like that.

So, we're in the ballpark on that.

It's up a bit.

I think last year's average was $795.

Yes, that's about right.

I think, Bill, in the first half of the year it is up year over year.

And Tom's comments earlier were referring that, from here forward, we're starting to see prices come back down in July and August.

Okay, got you.

Thanks so much, guys.

I appreciate it.

Thanks, Bill.

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

All right.

Thank you, David.

We'll wrap up with a comment from Tom.

Very good.

Well, once again, we're pleased with the execution in the first half, not satisfied with the top line, and expect to see us continue to execute our global business plan and deliver value for shareholders.

Thank you very much for your interest and support of Kimberly-Clark.

Thank you.