金百利克拉克 (KMB) 2013 Q3 法說會逐字稿

Ladies and gentlemen, please be aware that each of your lines is in a listen-only mode.

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

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

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

Thank you, and good morning, everyone.

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

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

Here's the agenda for our call.

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

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

We'll finish with Q&A.

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

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.

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.

Good morning.

Let's start with the headlines.

First, we achieved organic sales growth of 5% in the third quarter, highlighted by 10% growth in K-C International.

Second, we increased adjusted earnings per share 7%, including benefits from organic sales growth and strong cost savings.

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

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

Starting with the top line, third-quarter sales were $5.3 billion, even with last year.

Underlying organic sales rose 5%.

That included higher volumes of 3% and 1 point of growth from both higher net selling prices and improved product mix while sales in conjunction with our restructuring activities and unfavorable currency rates each reduced net sales by more than 2%.

I'm encouraged by the pickup in organic sales growth in the quarter, which Tom will talk more about in a few minutes.

Third-quarter adjusted gross margin was 34.4%, up 20 basis points from last year.

Adjusted operating profit rose 1 point with an operating margin of 15.6%.

That's up 10 basis points compared to prior year.

Results benefited from our organic sales growth and $70 million of forced cost savings.

On the other hand, we absorbed $55 million of cost inflation and $25 million of negative currency translation effects -- currency transaction effects also hurt the comparisons.

Total spending between the lines was down 10 basis points as a percent of sales as slightly lower marketing costs were mostly offset by higher administrative and research spending.

Third-quarter adjusted effective tax rate was 30.2%.

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

Equity income was up 14%, as K-C de Mexico had another solid quarter.

Finally, a lower diluted share count added $0.04 of EPS compared to last year.

Putting it all together, third-quarter adjusted earnings per share were $1.44.

That's up 7% year on year.

Now, turning to cash flow, our cash provided by operations in the third quarter was $912 million, up 8% compared to $844 million last year.

The increase included benefits from working capital and lower pension contributions, partially offset by payments related to the changes we're making in Europe.

We continue to manage primary working capital well.

Our year-to-date cash conversion cycle is down four days compared to full-year 2012, so we're on track to exceed our original one-day improvement target.

In terms of capital allocation, third-quarter dividend payments and share repurchases totaled more than $450 million.

We repurchased $150 million of KMB stock in the quarter, and we continue to expect full-year share repurchases of $1.2 billion.

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

In personal care, organic sales rose more than 5%, driven by volume growth of 5%.

Performance was led by K-C International, where organic sales were up 10%.

Third-quarter personal care operating margins were solid at 17.9%, although down just slightly year on year.

Moving to consumer tissue, organic sales were up 5%.

Net selling prices increased 3%, with higher volumes and favorable mix each adding 1 point of growth.

The organic growth was driven by a 10% increase in K-C International and a 4% improvement in North America.

Consumer tissue operating margins of 14.3% were up 80 basis points versus last year.

Our margins continue to benefit from revenue realization strategies, cost savings, and disciplined management of our between-the-lines spending.

Turning to K-C Professional, organic sales were up 5%.

Net selling prices and volumes each increased 2%.

Product mix was favorable by 1 point.

Performance was led by K-C International with 11% organic growth.

Organic sales were up low single digits in both North America and Europe.

Our KCP team continues to deliver strong margins.

This quarter, margins were 18.4%, up 90 basis points year on year.

Lastly, healthcare organic sales were up 4% driven by higher volumes in our medical device business.

Healthcare operating margins of 17.4% improved nicely, both sequentially and compared to prior year, with benefits from organic sales growth, cost savings, and below-average spending between the lines.

So, that wraps up my comments.

To recap, we generated solid organic sales growth.

We 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 comment on our third-quarter results.

I'll mostly focus on our top line, and then I'll address our full-year outlook.

Let's start with the third quarter.

As Mark just mentioned, we had a good performance in a number of areas, including organic sales growth, cost savings, cash flow, and bottom line growth.

I'm particularly encouraged with our organic top line growth of 5% in the quarter.

That's a solid improvement compared to the 3% growth that we delivered in the first half of the year.

As I mentioned on our July earnings call, we're focused on driving better top line growth by taking full advantage of our innovation and marketing programs and our sales capabilities.

Our top line performance was strong in K-C International in the third quarter.

We had 10% organic sales growth there overall, and we had excellent progress behind our targeted growth initiatives in that part of the world.

For example, in our diaper business, organic sales were up 45% in China, 35% in Russia, and 20% in Brazil in the third quarter.

Our growth initiatives and product innovations continue to perform very well in these markets.

Elsewhere in K-C International, we delivered double-digit organic sales growth in our adult care business, our baby wipes business, and in K-C Professional.

And, organic sales were up high single digits in our feminine care business.

So, our underlying growth in K-C International remains very healthy.

Our teams are also improving mix and implementing price increases where we can in response to currency headwinds.

Outside of K-C International, our top line performance in the third quarter picked up somewhat in several of our high-margin businesses.

That includes our North American Huggies diapers business, K-C Professional, and healthcare.

Our Huggies volumes were up 4%, with benefits from improved Snug N Dry diapers supported by effective marketing communications and competitive promotion activity.

Looking ahead in the first quarter of 2014, we'll be reducing package counts on the majority of our Huggies business in North America in conjunction with product innovation, and these moves will help fund the innovation in the right price points across our lineup.

In North American K-C Professional, our organic sales were up 3% in the third quarter.

That compares to a 1-point decline in the second quarter and reflects somewhat better volume performance sequentially in most categories.

And healthcare, medical device volumes rose 8% after a disappointing first half of the year when these volumes were only up slightly.

And finally, we continue to drive solid top line growth in our Poise, Depends, U by Kotex, and Cottonelle brands in North America.

And, all of these brands are benefiting from product innovations and effective marketing campaigns.

So, overall, I'm encouraged by our third-quarter results, particularly on the top line.

Now, let me move to the outlook.

We'll continue to execute our global business plan strategies for long-term success.

That means we'll pursue targeted growth initiatives.

We'll bring innovation to the market.

We'll drive cost savings programs, and we'll allocate capital in shareholder-friendly ways.

At the same time, we expect to deliver very good financial performance this year, in 2013, with solid organic sales growth and strong improvements in adjusted earnings per share.

On the top line, year-to-date organic sales are up about 4%, so we expect our full year to be right in line with our 3% to 5% target.

On the bottom line, we're narrowing our full-year outlook by raising the low end of our previous guidance range by $0.05 a share.

We now expect to deliver adjusted earnings in a range of $5.65 to $5.75 per share.

That represents year-on-year growth of 8% to 10%, which is toward the high end of, or even slightly above, our long-term global business plan objective.

In terms of commodities and currencies, our expectations for the full year are both generally tracking with our previous plan.

In terms of cost inflation, total pulp costs are similar to our prior expectation, while polymer costs have moved slightly higher recently.

Overall, we expect total cost inflation for the year to be toward the middle of, or perhaps in the upper half of the $150 million to $250 million range we had previously assumed.

Regarding currency rates, we continue to expect about a 1- to 2-point drag from currency on our full-year sales.

Through the first nine months of the year, the impact has been about 1.5%.

If recent spot currency rates hold for the balance of the year, the full-year impact should be slightly similar to or slightly worse than the year-to-date drag from currency.

We're offsetting the currency and commodity cost headwinds through strong focus on driving profitable volume growth, improving net realized revenue, delivering on our forced cost savings, and closely managing discretionary spending.

The environment that we operate in continues to be challenging, but I'm encouraged by our execution so far this year.

So, to summarize, we had another good quarter of financial performance.

We expect strong overall results for the year.

And, we remain optimistic about our prospects to deliver attractive returns to our shareholders.

So, that wraps up our prepared remarks.

And, we'd now be happy to take your questions.

(Operator Instructions)

Our first question comes from Ali Dibadj with Sanford Bernstein.

Hello.

How are you?

Good, Ali.

Good morning.

Hey, so I guess we included -- continue to be pleasantly surprised by the KCI progress, especially in personal care.

You mentioned 45% growth in China, 35% in Russia, 25% in Brazil.

Can you help us just aggregate that a little bit more in terms of distribution gain, share gain, category growth, to give us a look at the sustainability of some of those growth rates?

I would say if you looked at the category in both those markets, it's probably growing high single digits, in China and Russia in particular, probably not quite as much in Brazil.

And, in both cases, in Russia, had a lot of product innovation, launched boy/girl diaper pants, really doing very well in markets, a premium price, so that also helps us on the mix front.

Some distribution in Russia, probably a little bit more in China, as we continue to expand into more cities.

But, in China, we've launched some tier 6 products, which we would call, or super-premium above the norm in the market, and so that's also helping us from a mix and new category penetration.

So, clearly, outperforming the category and taking some share in all those markets, but doing it with innovation and a little bit of geographic expansion.

But, it sounds like the way you ordered that, it sounds like it's more kind of same-store expansion as opposed to geographic expansion driving some of this growth.

Is that a fair assessment?

Yes, I would say that's probably more the case this year than last, where it was probably the opposite case last year.

I wouldn't predict that we're going to grow in China for 45% forever.

The compounding gets pretty scary.

But, they are definitely on a good footing over there, and they have got lots of growth opportunities ahead.

Okay, and then given some of your experiences with SCA, whether it be when they bought [Kopamex] in Mexico or when they bought the P&G tissue business in Europe, given the potential SCA deal in China with [Bindo], what should you expect?

What do you think you're going to see if that actually goes through from them as such a good competitor?

Ali, we don't have much of a tissue business in China.

Our business there -- we've got a little bit of facial tissue, but we're really mostly focused on driving diapers and feminine care, and we have things like baby wipes and other as we've built out first.

China is a fairly tough competitive tissue market with Bindo, [Hangon], APP, all there with substantial investments.

So, we have chosen not to play as aggressively in that space.

No; understood totally.

What about leveraging that distribution for SCA's non-wovens' introductions into that geography?

Yes, haven't seen that yet.

Again, they are not going to be a controlling shareholder for a while.

Right, right.

And, there's plenty of folks in China between [Unacharm], [Kowl], Procter, us that it's a little -- as well as Hangon, it is going to be a little different competitive set than they would have run into elsewhere in the world.

Okay, cool.

Then, my last quick question.

Also surprised about personal care -- Europe growth numbers, understanding that that's going through transformation.

It's a smaller business.

But, can you give us a sense about the strategies there, both short-term with, I guess, 7% it was, I think, and then going forward?

Well, really, this was the strategy all along, where we said the diaper business was consuming resources and was probably starving the good-performing businesses that we had in Europe.

And so, we put more emphasis on wipes, our dry nights business in Europe, which is going great -- and pull-ups, and we've seen all those businesses take off.

We've picked up some additional distribution as we've created some shelf space, and we've been able to take advantage of some of that.

And, some of it has obviously gone to private label or other competitors.

But, the additional emphasis, a little bit of additional marketing spend, some innovation, and some additional distribution has helped those businesses pick up a little bit.

So, I'd say, baby wipes was probably the star of that show in the quarter.

But, dry nights and training pants in Europe also had a solid quarter.

Okay.

Thanks very much.

Thanks, Ali.

Our next question comes from Wendy Nicholson with Citi Research.

Hi, good morning.

Hi, Wendy.

Just to follow on his questions.

With regard to KCI and the profitability there, it sounds like you're doing a lot of innovation at the premium end, but I'm still surprised with everything we hear about the level of competitive activity in those markets -- I'm hugely, pleasantly surprised that your margins are hanging in there.

So, this year it looks like you're going to have a healthy bump in your KCI profit margins.

Is that sustainable?

Do you think the KCI business can continue to expand its margins, kind of as we look out into 2014?

Or, is that a business that's just going to need more reinvestment, do you think?

The strategy there is to grow and improve margin, particularly as we get to scale in some of the markets where we've been investment spending, I think the challenge in KCI this year has been -- currency has been probably the biggest headwind from a margin standpoint.

We've had both currency issues and higher commodity costs in some markets, and so that's probably been the biggest challenge.

That team has done a great job of delivering cost savings and finding ways to fund their growth out of their own P&L and doing it by basically holding their margins.

I think they are slightly higher year to date.

I think they were down slightly sequentially.

And -- but if we could disaggregate underlying that margin improvement, is your marketing spending up significantly year-over-year?

And, is it just because, hey, now you've got local manufacturing, I think in China, that's helping to offset that?

I'm trying to get a feel for, hey, have there been one-time cost savings initiatives that are going to run out?

And, is it going to be harder for you to continue to up the ante in terms of investment spending?

Or, this a just -- hey, positive mix is going to keep the ball rolling?

If you look at -- marketing spending in KCI is probably pretty flat in dollar terms year-over-year, but would be up in local currency because the exchange rate hit.

We kind of look at it market by market and see is our share of voice where we want it to be in each of the markets where we're trying to drive growth, and we're pretty comfortable with the investment spend levels.

I think, like anything else, teams would always like to spend more, and we're trying to balance that with still delivering a result and hitting a target for the year.

Got it.

Okay.

And then, just second question.

On the restructuring, the 2-point headwind to revenues, when does that come to an end?

When are you going to be fully done with that?

Should roll off in first quarter of 2014 would be the last big one.

We had a little bit still in second quarter of this year.

So, it should be fully rolled off by mid-next year.

Got it.

Terrific.

Thank you so much.

Thanks, Wendy.

Our next question comes from Gail Glazerman with UBS.

Hi, good morning.

Good morning, Gail.

Can you talk a little bit more about some of the product volume changes in North American personal care, the growth in Huggies, which I think is the first that we've seen in a while, the continued weakness in Little Swimmers and also kind of the snapback in feminine care?

Is there any more color you can offer?

Sure.

Yes, sure.

In diapers, you know, we were really not strategically where we wanted to be on price in second quarter, so we had to adjust a couple of price points on key packings.

You saw a little bit of that and about a 1-point drag on price in North American diapers.

We also tuned our marketing messages a little bit.

We had lost innovation in the second quarter.

It wasn't hitting as hard as we wanted, so we've changed the ad campaign in third quarter and saw that pick up nicely.

So, great product performance.

We're -- we've got the right messages on shelf, and we're -- it's one of those where you wished you would have done it in the second quarter.

But, we didn't, and we've checked and adjusted and saw the results in the third quarter.

In the child care business, it was the toughest comp of the year.

Last year, third quarter, they were up double digits, and it had more to do with timing of a promotion that shipped in the third quarter last year; that shipped in the second quarter of this year.

And so, if you look at our child care business year to date, I think the volume's down about a point.

Share is pretty flat.

And so, that's reflective of the category overall.

We continue to have, as you know, a pretty high share in that space.

Feminine care saw good, high single-digit growth.

Had a little bit weaker second quarter.

Some of that is stuff that will show up in share more in fourth quarter.

It shipped a little later in the quarter.

So, overall, we feel pretty good about the momentum in U by Kotex, and you're seeing that play out in the marketplace.

And, then, in the adult care business, just continued good innovation and execution, really solid share performance.

I think we hit a record share for both Depend and Poise in the quarter.

And, retailers are happy with the movement as well.

Okay, and in terms of healthcare, the pickup, I guess there was some reference in the release about better surgical activity.

Is that something you see as sustainable, given the problems that you've had over the last few quarters?

Is that coming back, and getting stronger, or --?

Yes, I would say, the data is a little less immediately available, so we've kind of got visibility now of second-quarter surgeries, and I would say it was getting less negative in the second quarter.

So that's a positive.

And, I think in some cases, some of the improvement in devices was additional penetration where we were able to use our pain pumps on more procedures, and our sales teams had some wins in the marketplace with the device products that we're selling.

And so, it was probably a function of a little bit better surgical environment and a little bit better category penetration that drove it in the quarter.

Okay, and just one last question.

Given everything that was going on in DC over the last few weeks, kind of as you exited the third quarter into the fourth quarter, do you see any shift in volume patterns in the US or not so much?

Not really.

Mostly, people need diapers and bathroom tissue every day no matter what's going on in Washington, and that was the case.

We don't have a very big direct government business, so that was not a factor for us to any large extent.

And, we'll see when we start to get some consumer confidence data if it had an effect from that standpoint, but it's probably a little early to read that.

I know talking to some of our retail partners, they did see a dip in stores that were near US military bases, but that didn't overall for us play out in much from a category standpoint.

Thank you.

Thank you.

Our next question comes from Chip Dillon with Vertical Research.

Good morning.

Hey, as you look into next year, it looks like -- well, first of all, looking at '12 and '13, you've been able to hit $300 million plus in the FORCE savings and you've done so much restructuring now with the European initiative, I guess, toward the end.

Should we still expect that kind of rate of FORCE savings?

And, maybe it's early days, but could you give us an idea of what you're thinking about capital-wise next year, noting that you haven't really done much in the North American tissue area that I know of in terms of your plant and equipment there?

Yes, sure.

On the FORCE savings front, we're pretty happy.

We've taken that up from several years ago.

We were around $150 million a year to solidly above $250 million now for the last couple of years.

And, that's certainly our aspiration is to stay there and to continue to drive that.

As I look at our teams around the world that are doing more than we've ever done to drive transformations of our cost structure, we've really got a very robust pipeline of cost savings coming.

And so, that's been great to help us this year overcome some of the currency headwinds and higher commodity costs.

And so, certainly, we would expect a healthy level of FORCE savings to continue in 2014 and beyond.

And, on the capital front, I would expect CapEx to be consistent with our global business plan and that -- a 4% to 5% of sales kind of range is about where we're going to be.

And so, give or take around $1 billion, $1.1 billion, something like that.

We'll give you more specific guidance in January, but that's about where it will roll up.

From a capacity standpoint, with all the restructuring we've done in the North American family care arena, and all the good productivity gains we've gotten from our Lean and FORCE savings, we've actually freed up quite a bit of capacity out of our own asset base just by getting more productive and efficient with our existing footprint, which is really free capacity for us.

Got you.

And, moving on, as you look at China, I know in past calls you've talked about how your penetration has progressed in terms of number of cities.

Have you -- can you tell us where that stands maybe today versus a year or two ago?

And, is it now more of an issue of you've accomplished the geographic penetration, now it's just getting more shelf space in the cities you currently are in?

Yes, I think our plan was to end this year at around 90 cities.

We're on track to hit that.

I think we started the year at 70, and two or three years ago, it was 45 or 50, something like that.

Probably -- there are different measures you can look at, but there's a couple hundred cities in China with over one million people, I think, so the next city gets decreasing in size and scope.

So -- but I would say, we've gotten a good, good build-out in the major areas, and we're continuing to make sure we're on the map.

We're starting to get to the point where we've got enough scale that we can do national advertising, and it's cost-effective now where that probably wasn't the case two or three years ago.

So, I think we are at a critical mass now and certainly are planning on keeping growing that.

Got you.

And then, just the last question.

You mentioned the initiative in the first quarter on the diaper front in terms of the package counts.

Can you give us an idea of what sort of the net effect of that will be kind of on a unit price basis, and -- on average?

And then, secondly, as you look at 2014 -- you came into '13 obviously with a real head of steam and had tremendous growth early in the year.

And, just looking at your guidance, if you hit the midpoint of your range, it would be basically flat at $1.37.

As you look at '14, besides the diaper count and obviously the -- or the ongoing organic growth, are there other initiatives that you could maybe point us to in terms of staying on that -- on your plan, mid- to upper single-digit growth rate?

Yes.

Again, we'll give you more color on '14 on the January call.

If you look at the diaper question, it's essentially going to be matching up with competitive counts in the marketplace broadly.

And, on average, about a 7% count change.

Now, some of that will be spent back, and I would say the yield will be -- will probably be less than 50% of that in terms of what we'll have to work with in terms of P&L.

But, we'll see how that plays out as it rolls out in late first quarter of next year.

And, for 2014, a big question will obviously be currency rates.

And so, you look at the kind of drag the currency had on this quarter, if you look at the combination of translation and transaction, it was about 3.5 points.

And, at the peak it was more like a 5-point drag when you looked at where rates had peaked.

So, that will be the big bet for 2014.

If we still see a big currency drag in '14, it will be tough to get to the high end of the range, but we still think that's the right range for us long-term to develop a plan around.

Thank you very much.

Thanks, Chip.

Our next question comes from Caroline Levy with CLSA.

Good morning, everybody.

Couple of questions.

The first is around North American pricing environment in general because I think one of your large competitors has signaled clearly a big focus on the North American market.

So just, is there any specific change in behavior that you've noticed?

Any fear that there will be more discounting?

I think you mentioned, in diapers, there had been some discounting.

If you could just talk to that.

Yes, I think that in the second quarter, we saw some discounting in some packs and some outlets, and we didn't match up to that as quickly as we could have.

We corrected that in the third quarter.

I would say that's more the normal competitive behavior.

We had a major launch underway, and competitors typically are more active to protect their business when there's major launch activity.

Much like we would do if the situation were reversed.

I think some of the leadership on price count activity in the marketplace would signal that there's some behavior happening on that front that would indicate that there's some innovation happening and a desire to price for that, which is rational behavior.

So, I wouldn't say we've seen anything that's unusual in the North American market at this point in time.

That's very good news.

And, just moving to Latin America, a lot of companies -- maybe not HPC in particular, but have experienced a big slowdown in Brazil.

Is everything you see suggesting that even though the consumer is stretched, your business doesn't get impacted?

We've got a phenomenal team in Brazil, and they have done a great job of delivering in a challenging environment.

And so, while they are -- have the last couple of years have missed their top line target in dollars, they have grown much faster than planned in local currency and have hit or come very close to their dollar profit target.

So, they have done it with driving a lot of innovation rapidly into the marketplace and pulled things forward to get them in the category.

We've also been expanding into the northeastern part of Brazil and just opened a new facility in Bahia state this year, and so that has given us more capacity to serve that big part of the market.

And so, we've had a little bit of geographic expansion even in a market like Brazil where we've been for a while, and that certainly helped.

Great.

And then, the last one is, over time, if -- I think one of the things, the pushbacks investors often use on Kimberly is that it's a very commodity-reliant company.

And, if you could maybe articulate why things have changed over the last four to five years enough that you probably are able to manipulate price and SG&A spend around fluctuations in input costs?

Or, do you think that your -- you really are indeed vulnerable to big gross margin swings?

Well, I think that's one that we haven't had in the last couple of years, a big -- a big commodity push.

I've been around long enough I remember times when we did.

We went for about three years where commodities were double what we thought, and that definitely put pressure on margins for a while.

We've flipped that around and have a more robust cost savings program, and I think driving innovation is giving us a better margin profile.

But, we also -- that's something that we're watching for and trying to do a better job of predicting and getting ahead of where we can.

So, we would tell you the third quarter trend where you get both commodity and currency going against you a little bit was a challenge.

But, the fact that we overcame that gives us confidence going forward.

Thank you so much.

Thank you, Caroline.

Our next question comes from Chris Ferrara with Wells Fargo.

Good morning, Chris.

Good morning.

Hey, I wanted to go -- just to the B-to-B businesses.

So, healthcare and K-C Professional both got better this quarter after, I guess, four straight that weren't so good.

Can you just kind of characterize that?

Is this a change in trend?

Do you think these businesses are better or some of the drags that were hitting them are over for now?

Or, do you just think this is one quarter?

Well, no.

If I start with KCP, they have had, really, pretty good execution and have delivered terrific profit margins.

Our innovation has been successful in the marketplace while we've probably lost a bit of business in our -- in the part of the portfolio that we weren't selling the new innovation to.

And so, they have kind of gone back and tried to make sure we're picking up any of those opportunities that we might have lost.

And, I thought --- seen the Northern American business for KCP turnaround in the quarter was encouraging.

So, that would be one example of that.

They would still -- our KCP team would still say they see a lot of international opportunity, as we see in KCI generally.

And so, I would think we're in very early days in China in that business, and there's a huge opportunity as that market industrializes for our types of products.

So, I do see a pretty robust pipeline coming for KCP in particular.

Healthcare, as you know, there are some different economic factors at work.

In the past, we've had pandemics.

You've seen huge volume spikes, and then it falls off where you have to lap it the next year, so there's a little bit more volatility.

I think we're all trying to figure out, in North America in particular, what's going to happen from a healthcare spend overall.

What's going to happen with procedures, and so there's probably a little bit more variability around our outlook for that business going forward.

But, it was great to see solid execution in the third quarter and good profit performance.

Yes, and I guess profit was up 19%.

I think in the release you talked about lower marketing and R&D.

What's going on there?

Is that a sustainable reduction?

Or, is there something quirky --?

I would say that healthcare, if you kind of looked at the year-to-date average as a better predictor of the profitability of the business, we had some unusual things that hit the second quarter that made it a little lower than normal.

Probably some of those things reversed and benefited the third quarter that made it a little higher than normal.

But, I would say, if you looked at the year-to-date number, that's probably a pretty good proxy for a run rate for that business.

Great.

Thank you.

And, just last thing.

Could you just remind me, from the down count in diapers in North America, I think I hear you that the yield on that is probably going to be 50% of what the 7% down count is.

What do you expect in terms of volume?

Assuming you and Procter both do the same sorts of things.

Do you expect that volume, your unit volume, will take a little bit of a hit?

Even though you're trying to kind of pad it in with promotional spending?

And then, you recover that in six months?

Or, do you expect really not a blip to category volume?

Historically, every time we've done this -- and I've been around long enough I've done a few of these.

You do see a little bit of household inventory destocking because the packages have less diapers, and the consumers have about the same average number of packages, then they are holding slightly fewer diapers.

So there is usually a -- their usage per day doesn't change just as a result of the pack count.

But they -- but their average inventory level drops by roughly 50% of the count decline.

If you're an economist, that would probably be the right answer, and we've typically seen that for a period of time.

So, I would expect that will be a drag in the first half of next year, and eventually, it kind of stabilizes.

Got it.

Thanks a lot.

Okay.

The next question comes from Bill Schmitz with Deutsche Bank.

Hi.

Good morning.

Good morning, Bill.

Hey, can you just tell us now that you've sort of sold off a decent chunk of the European business, what percentage of total sales are KCI now?

I know you put it in the 10-K, but I was hoping to get, like, a sneak peek?

Yes, KCI in the third quarter was 39%, and year-to-date, it is probably high 30%, 37%, 38%, would be my guess.

Okay, and will sort of KCI outside the Americas always be predominantly a personal care business?

Are there any sort of plans to build out the consumer tissue piece of that business outside of the Americas?

Bill, at this point, we've got so many opportunities we're chasing in personal care that are not fully exploited.

If you looked at the KCI business, it's still heavily overweight, diapers, and feminine care.

And so, it's underweight baby wipes.

It's underweight adult care -- both Depends and Poise.

Child care, Little Swimmers, Good Nights are all still very small businesses.

So, we would say we've got a lot of opportunity to build out KCI across the broad personal care portfolio.

That's a much higher return, faster-growing category.

There is already a lot of bath tissue in emerging markets.

The category is more fully penetrated, so there may be some areas around household towels or facial tissue that as we get some innovation we can bring to market, but we probably would do it in a more capital-efficient way than maybe we would have the footprint built out in the Americas.

Got you.

Is there any more incremental room to take pricing down to lower tiers in a lot of the emerging markets?

I know you had a big initiative about two years ago to get into tier 3 and tier 4 diapers in China.

But, how far along are you?

And, is the business still sort of predominantly tier 5 and even tier 6 diapers?

No, I would say in most emerging markets, we're in multi-tier, and it's more of a tier 3-4.

China was sort of the outlier that we started in tier 5, basically when we relaunched Huggies several years ago.

And then, built down into the mid-tier, so we're in tier 3, 4, 5, and 6 in China, basically.

We just sort of created tier 6. We're the only ones in it.

But, in other markets -- if you looked at a market like Mexico, we would be present in all tiers.

Brazil would be probably a combination of tiers 2, 3, and 4. Russia is mostly 3 and 4. So, it -- we're really trying to figure out what -- where is the market today, and then how do we make sure we can bring a differentiated product that delivers a good experience for mom.

Got you.

And lastly, on the sort of commodity side.

It seems like you guys are sort of fairly unconcerned about the inflation, but it seems like MBFK was up $25 in October.

It looks like polyprop is starting to creep up.

Why are you kind of less concerned than some of the spot prices might suggest?

Yes, MBFK is up, but eucalyptus, which we use a lot more of, is down.

So, we averaged -- our outlook for that is $790 for the fourth quarter, and we gave you that outlook in July -- it was more like $805.

And, October, it's below $770.

So, we're picking it up on other fiber sources.

Recycled fiber is another one that we buy about one million tons of recycled fiber each year, and our outlook in July was for that to average $245, and now we're saying it's going to average $214.

So, we're seeing benefits in other fiber sources that you might not have as much visibility to that's helping us on that front.

Oil is certainly one that -- that $30 million of other cost inflation in the quarter was mostly polymer.

That's oil-related.

Okay, and if you look at the Bloomberg numbers -- and maybe I'm getting too far in the weeds here -- but it looks like eucalyptus pulp prices are going up.

So am I just looking at the wrong data set?

Or, are you buying it differently or better because you have such a big business in Brazil?

We've got a market-based contract in Brazil.

But, you're seeing more capacity come online, and at least the stuff we're -- the average forecast we're seeing has been headed down this year rather than up.

So, I haven't looked at Bloomberg, but -- that may be a futures price or something like that.

Okay.

50% of our mix I think is now eucalyptus.

About 25% is northern soft wood, so the mix of fiber we use is really important.

Got you.

And then, just one last one, I promise.

Just on capital allocation, have you changed your view?

Because it seems like you're starting to get very under-levered.

This year, it seems like you're going to pay out more than 100% of your net income in dividends and share repurchase.

Is that going to be the MO going forward?

Well, as you know, we want to be solidly in the middle of the A range.

And so, if we drift up to the upper end of the A range, we may increase our debt just a little bit to dial that back.

You may notice that Mark and his team borrowed about $800 million in May, I think, to fund a $500 million debt retirement in August, and so we increased our debt by about $300 million and then that extra amount went into share repurchases versus our plan for the year.

Great.

Thanks so much.

All right.

Thanks, Bill.

Our next question comes from Jason English with Goldman Sachs.

Good morning, folks.

Good morning, Jason.

Congratulations on another great quarter.

Thank you.

A question just in terms of maybe what has changed.

I think you sounded a slightly more cautious tone last time you reported earnings, cautioning that you could come in at the lower end if FX rates stayed about where they are today.

So, what has changed?

Well, I'd say a couple of things.

We had a weaker volume quarter, and we told you we weren't happy about our second-quarter organic top line.

We expected to do better in the back half of the year, and we saw that show up in the third quarter.

And so, that obviously gives you a little bit more confidence when the volume and innovation is working.

I also would say, at the time of the call, it was probably the height of the currency mania, and that seems to have pulled back a little bit as the Fed tapering has been pushed out a little bit.

And so, that has probably given us a little bit of relief on that end.

It's not quite as bad of a currency drag as we would have thought late in July.

One area that surprised us this quarter was the strength in North America tissue, the 4% organic sales growth.

Really good momentum all throughout this year.

It's surprising because it stands in pretty stark contrast to the Nielsen data where we aggregate your tissue business, and trends that have been decelerating are now solidly in the red.

What's the differential that's driving the out-performance for this business versus the Nielsen data?

Yes, I haven't analyzed it versus Nielsen.

We look at our all outlet shares.

And, our shares sequentially in tissue were slightly negative.

We did take price across facial and Cottonelle via sheet count.

And so, of the organic top line in North America, it was positive price, negative volume, as we would track it.

So, that may be a bit of what you're seeing if you're looking at unit volume trends.

But, broadly, we've had a very strong year in our family care business so we're pretty happy with the results.

But, no concern that there's too much inventory out there?

Nothing to be concerned about?

These are very high Q, low value-businesses, so retailers really don't want these in their warehouse.

So, we've -- pretty aggressive on helping them with inventory turns.

Makes sense.

Thanks.

I'll pass it on.

Thanks, Jason.

Our next question comes from Javier Escalante with ConsumerEdge Research.

Hi, good morning.

Good morning, Javier.

Good morning.

A couple of questions, actually.

It's a little bit of a follow-up on Jason's questions with regards to the disconnect of track data and shipment data.

Essentially, the read is this is the non-track channel, basically, which is essentially Costco, you may be growing very strong double digits.

Is that a fair assessment?

I guess, Javier, we won't give specific customer data on a call like this.

We're doing well with Costco this year.

We do well with Dollar Stores.

There are other e-com channels that aren't tracked that are typically growing.

I would say broadly we tend to look more at our all-outlet share and try and make sure we're fully participating in the category growth.

And, Nielsen is one set of data points that we would look at, but we tend to look at the broad data set more than anything else.

But, we use [ROI], and we got the same weak volumes.

But, in any event, moving into the decision of removing sheets out of facial tissue, and what is the other category that you mentioned that you are de-sheeting in tissue?

Cottonelle bath tissue.

Cottonelle.

Bath tissue.

Yes.

Basically, at least in track channel data, we see increases of private label volume share -- significant increases.

And, considering that I would imagine that [cost] disruption in the US should be by now over, do you think that given that you have pricing -- private label gain in share and cost coming back to probably regain some of the shares that they lost in the past nine months.

Do you think there is a volume risk going forward?

Or a pricing risk going forward?

Or you don't see that happening?

Yes, if you look at a lot of the private label share gains this year was I think in at least partly response to GP's service issues where they actually lost some shelf space to private label.

We picked up a little bit, as did our other primary competitor.

And, I think as we see GP coming back into full customer service, I would say at this point, we're seeing a more normal level of competitive activity in the marketplace, but we're pretty comfortable with our overall performance in tissue.

But, we'll still be competitive as we need to in the marketplace.

But, with generally rising pulp prices, that's also typically what the big driver is of long-term tissue price.

So, we would say, in the near term, that's feeling more positive than not.

Understood.

And, finally, on Huggies, the rebound in the quarter, which also we didn't see any track channel data.

To what extent do you think that the fact that Procter lowered their own diaper count in the second half of September could have been a benefit this quarter in personal care in North America?

I think our Huggies business is pretty solid throughout the quarter, and so there may have been some changeover late in the quarter that was some small advantage.

But, I would say it was pretty consistent growth throughout the quarter.

Okay.

Thank you very much.

Thank you, Javier.

Our next question comes from Lauren Lieberman with Barclays.

Good morning, Lauren.

Good morning.

First thing I wanted to ask you about was just with marketing spending, and sometimes you discuss advertising incentives as strategic marketing.

So, I realize I might be kind of mixing the conversation.

But, having it down slightly this quarter, and I believe earlier in the year to a slightly different than what you'd last talked about, I think I was -- you made it sound like it was going to increase in the back half of the year.

So if -- first thing is, let me know if that's incorrect.

And, secondly, why not be increasing the spending when top line is coming in strongly, and you've frankly got sort of somewhat excess profitability to work with?

Yes -- no, it's a good question.

And, as we look at strategic marketing, it's a combination of advertising and promotion.

It's down about $20 million in the quarter.

About 50% of that is the exit of diapers from Europe and currency.

So, the fact that the rates have dropped.

So, the other 50% of it was an actual decline in program spending.

Advertising itself is flat year on year.

So, all of that decline was really in what we call consumer promotion, which would be a combination of things that would flow through that line and the P&L.

Generally, a little bit less activity.

What we look at is are we spending at the right level and getting the kind of top line performance for the spending that we're making, and overall, we're pretty happy with the organic top line in the quarter.

And, as we look at the key markets that we are investing in, we feel like we're investing at about the right level.

And so, it's really about the ROI on the next dollar of spend, is that worth chasing?

Or do you bring it to the bottom line?

So, I think each of our teams around the world look at that, and, then, our global brand teams are also challenging that to make sure that we're making smart investments if we've got some flexibility in the P&L to do that.

Okay.

That's particularly interesting, given that sales growth -- organic did accelerate nicely, though it wasn't with a step-up in spend.

Yes, in local currency, though, just being flat is a pretty big increase in spend in those markets.

So, we would look at KCI and say, yes, we're actually spending more in local currency in those markets.

Okay.

Understood.

I know it's not a terribly large business, but I just was curious about the really strong performance in K-C Professional in Europe because I think it was 5% price, and then you also had 3%-ish positive mix.

And, volume -- maybe I got my numbers mixed.

But, long and short, all three pieces were very strongly positive.

So, could you talk a little bit about that?

That was sort of a dramatic acceleration.

I think that might have been our overall Europe business.

Paul, have you got -- is that --?

Yes, Lauren, we were up double digits in K-C Professional and KCI if that's what you're referring to.

And, all three pieces were up nicely in terms of volume.

Yes, that's it.

That's it, and that was still an acceleration.

That was really led by -- yes, that was really led by Latin America, broadly, was the strongest of those where that business has done well.

European business and KCI was okay during the quarter.

It looked a lot more like North America, though, and that's a -- Europe -- the UK is probably coming back a little bit.

And, you've seen that in some of the economic statistics, and Germany was okay.

And, Southern Europe is a challenge.

And then, with that -- like, you corrected me, thank you.

The Latin America -- ending in this press [release], you said that Latin America is being particularly responsible for that acceleration.

Was there any kind of change in sales resources?

Did you increase the sales force?

Or broaden the footprint you were able to reach?

It was a big number.

Yes, our K-C Professional team is really driving the global strategy.

In fact, we would say, overall, we did well in Latin America.

We're not satisfied with what we're doing in China.

We're putting more resource behind KCP in a lot of markets around the world and investing behind that.

Unlike consumer, it doesn't show up in strategic A&P.

It probably shows up more in selling expense and G&A than in the traditional strategic marketing bucket.

Okay, great.

Thank you so much.

Thanks, Lauren.

Our next question comes from Olivia Tong with Bank of America Merrill Lynch.

Thank you.

Wanted to touch a little bit on KCI margins.

Clearly, you've done quite well in terms of international sales.

How do you think about margins going forward?

Do you expect them to progress faster than the corporate average?

Or is there more spending to come specific to KCI?

Yes, it's a balance.

We're really tracking KCI to continue to narrow the margin gap versus the rest of the Company.

And so, they have made some progress this year, although currency headwinds have held them back from some of the progress that they had hoped to make.

And so, we're trying to balance investing for growth in the places where we've got great opportunity, and then looking for opportunities to take costs out to help fund our margin improvement.

And so, we're satisfied with the progress, but we expect them to continue to do more.

Got it.

Thanks.

And then, on the diaper -- on North American diapers, obviously you've had some promotion and price adjustments this quarter, which I would expect was probably going to continue.

And then, you've got the diaper down count on the new products.

So, what's the -- what do you think the net impact of both price and mix will be going forward in North America?

Are we still looking at a positive price mix from that 7%-plus, even though it goes down to 3%-plus?

Or does the promotion offset that?

No, you should see some positive.

But, it won't start to happen until probably late first quarter 2014.

So, for the next couple of quarters, you'll still see some drag from price promotion activity.

Got it.

And then, just lastly, can you talk about trends month by month, both in developing markets and emerging markets?

Did you see -- you mentioned Huggies diapers in North America.

Did you see any difference in trends coming from July through August through September?

No, it was a pretty solid, consistent quarter throughout.

I don't want to get in the habit of giving out monthly data.

But, I would say broadly, it was a pretty solid quarter, month by month.

Got it.

Thank you so much.

All right.

Thanks, Olivia.

Our next question comes from Chip Dillon with Vertical Research.

Just have one last one.

Hi, Chip.

Hi, there.

Just one last one here.

I noticed the equity line really is trending very positively this year.

It looks like 26% up through the first nine months.

And so, as you look at the future, do you -- could you talk a little bit about what's really happening in Mexico?

Especially now that, for example, you have a different competitor down there.

And, do you see that kind of growth rate continuing?

Or, is there something else going on on that line?

Yes, with K-C de Mexico, I think they announced late last week and had their call with their outlook, so I don't want to trump whatever Pablo might have told you on the call.

But, we've been very happy with the year they've put together.

It's a tougher economic environment than they thought.

The Mexican economy was expected to grow 4% or 5%.

And, the last data I saw, it was just a little under 1%.

And so, lots of exciting change happening in that marketplace, but that has probably also created some challenges in the short-term.

There's lots of competition down there, so CMPC is pretty aggressive.

SCA is pretty aggressive.

So, there's plenty of people that want to eat our lunch in Mexico.

But, the K-C de Mexico team is doing a great job of delivering, as they have for many, many years.

And, I would expect that to continue going forward.

Probably not at that same kind of growth rate, but they are going to be a solid, consistent top and bottom line performer for us.

Got you.

Thanks.

Thanks, Chip.

Our next question comes from Ali Dibadj with Sanford Bernstein.

Yes, thanks for the follow-up.

Just want to get your view, Tom, on the North American consumer paper, consumer tissue business.

Your largest retailer said explicitly that they are going to double down on investments in pricing and paper products.

There's discussion about a lot more capacity coming online, both private label and kind of lower-end brands.

Just want to get a sense of what you make of all of that, and if it's too much about nothing really in your view.

I was just there to see those guys not long ago, and they want to grow their business in lots of categories.

And so, I think they will -- Simon and his team are aggressively out doing that, as is all of our other retail customers.

And so, we're doing well with our key customers in our family care categories, and Wal-Mart would be one of those, and we want to make sure that we make it easy for consumers to find Kleenex and Cottonelle and Scott wherever they choose to shop.

But --?

I wouldn't say it has been a big change -- we haven't seen a big change in behavior at this point in time.

I'm just trying to connect the point specifically that they were making about pricing in particular being a driver and the point about capacity coming online.

On the capacity front, I think the industry operating rate is still in the -- around 90%.

So, there has been a lot of capacity that has exited as much as has come on.

And, where you have seen a little bit of private label share pickup, it hasn't been in the [through or dried] variant that some had been concerned about.

And so, overall, there is a little bit of additional capacity, but it hasn't been destabilizing the market pricing at this point in time.

And so, you don't see anything going forward that would change the dynamics in consumer tissue in the US?

Not at this stage.

We're focused on driving innovation with better performing Kleenex.

We've had some Cottonelle upgrades.

We've got some great Viva and Scott towel products out there.

And a good pipeline of innovation coming that will give us some news we can talk about in 2014 and beyond.

Thanks very much.

Thanks, Ali.

Mr. Falk, at this time, we have no further questions in the queue.

Thank you for the questions.

Thanks, David.

We'll wrap up with a quick closing comment from Tom.

So once again, we were pleased with our organic top line performance and our continued execution of our global business plan, and that we continue to make those benefits be available to our shareholders through dividends and share repurchases.

So, thank you, again, 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 day.