金百利克拉克 (KMB) 2013 Q4 法說會逐字稿

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At the conclusion of this morning's presentation, we will open the lines for your questions.

(Operator Instructions)

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

Thank you, David, and good morning, everyone.

Welcome to Kimberly-Clark's year-end earnings conference call.

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

Here is the agenda for our call.

Mark will begin with a review of our 2013 results, focusing mostly on the full year.

Tom will then provide his perspectives on our results and also the outlook for 2014.

We'll finish with Q&A.

We have a presentation of today's materials in the investor section of our website.

That presentation and this morning's earnings news release both include our detailed planning assumptions for 2014.

As a reminder, we'll 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'll 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.

And now I'll turn it over to Mark.

Thanks, Paul, and good morning.

Let's start with some headlines for the full year.

First, we achieved organic sales growth of 4%.

It was highlighted by strength in K-C International.

Second, we increased adjusted earnings per share 10%, driven by organic sales growth and strong cost savings.

And third, we delivered a strong year of overall capital management.

Now let's cover the details of our results.

Fourth quarter sales were $5.3 billion, that was even with the prior year.

That brought full-year sales to $21.2 billion, also even with a year ago.

If you exclude currency and restructuring impacts, our organic sales were up 5% in the quarter and 4% for the full year.

Our momentum in K-C International continues to be strong as organic sales were up 11% in the fourth quarter and 9% for the full year.

Fourth quarter adjusted gross margin was 34.4% with the full year at 34.5%, that's up 70 basis points year-on-year.

Adjusted operating margin was 15.8% in the fourth quarter and 15.7% for the full year.

That's up 90 basis points compared to prior year.

We delivered $310 million of forced cost savings in 2013, the second highest amount we've ever achieved.

We expect to continue our momentum going forward and we're targeting to deliver at least $300 million of cost savings in 2014.

We absorbed $205 million of input cost inflation in 2013.

That was right in line with our expectations.

Currencies were also a drag on earnings.

Translation was a $70 million negative and transaction effects were also unfavorable.

Fourth quarter adjusted earnings per share were $1.44, operating our full year to $5.77.

That's up 10% year-on-year, slightly above the top end of our long-term target and well above our original guidance range for the year.

Our balance sheet and cash generation were healthy and we continue to allocate capital in shareholder friendly ways.

Cash from operations was more than $3 billion.

Now that's down somewhat year-on-year as we expected with higher tax payments and then cash costs associated with the strategic changes that we've implemented in Europe.

We had a great year driving down primary working capital.

Cash conversion cycle improved six days in 2013.

We expect a further one to two day improvement in 2014.

Return on invested capital also improved significantly, climbing 150 basis points to 17.5% for the year.

We're targeting a further 20 to 40 basis point improvement in 2014.

We returned $2.4 billion to shareholders through share repurchases and dividends.

For 2014, we expect to repurchase $1.3 billion to $1.5 billion of KMB stock.

Regarding the dividend, we expect an increase of 2% to 4% in 2014.

That will allow us to maintain an appropriate payout ratio following the expected spinoff of our healthcare business later this year.

In the future, after this year, we'd expect our dividend increases to return to being broadly in line with growth in our adjusted earnings per share.

Our credit metrics and financial position are strong and we're confident in our outlook.

As a result, we're planning for a modest increase in leverage in 2014.

Now I'll briefly recap segment results for the year.

In personal care, organic sales rose 5%.

Performance was led by K-C International with organic sales up 9%.

Full-year personal care operating margins were solid at 17.8%, that's an increase of 50 basis points year-on-year.

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

That was driven by a 9% increase in K-C International and a 3% improvement in North America.

Consumer tissue operating margins of 14.9% were up 130 basis points, building further on our progress over the last two years.

Turning to K-C Professional.

Organic sales increased 3%.

Organic sales improved 9% in K-C International and were up slightly in North America and Europe.

Our KCP team continues to deliver strong margins improvement despite relatively modest demand in our developed markets.

For the year, margins were 18.3%, that's up 170 basis points year-on-year.

And lastly, healthcare organic sales rose 1% for the year, driven by higher volumes in our medical device business.

Healthcare operating margins of 14.2% were up 10 basis points year-on-year.

Now speaking of healthcare, let me touch briefly on the potential spinoff of that business.

We're making good progress analyzing the implications of the spin.

We're preparing carve-out financial statements and plans for separation.

We expect to seek approval from our Board in the second quarter to proceed with the execution of the spinoff.

And we continue to expect the spinoff to be completed by the end of the third quarter of 2014, of course subject to market, regulatory and other conditions.

So that wraps up my comments.

To recap, we achieved solid organic sales growth in 2013.

We delivered strong bottom line growth and we allocated capital in shareholder-friendly ways.

Now I'll turn it over to Tom.

Thanks, Mark, and good morning, everyone.

I'll share my perspectives on our full-year results first and then I'll address our outlook for 2014.

So starting with 2013.

Overall, I'm very happy with the results that we delivered last year in a challenging environment.

As Mark just mentioned, we delivered organic sales growth of 4%, and that's right in line with our long-term target of 3% to 5%.

K-C International had another great year.

They had 9% organic sales growth.

They made excellent progress on their targeted growth initiatives.

For example, in diapers our organic sales were up more than 35% last year in China and about 20% in both Brazil and Russia.

And results in all three countries benefited from product innovation.

In China, our Huggies diapers are now being sold in about 90 cities and we're targeting to be in more than 100 cities by the end of 2014.

A couple of our growth initiatives in KCI were adult care and baby wipes and in both those areas organic sales grew at double-digit rates in KCI this year.

In feminine care, our organic sales rose high single-digits in KCI.

We had a very strong year in femcare in Latin America and we continue to benefit from the rollout of some of our premium product variations similar to U by Kotex in the US.

K-C Professional organic sales were up high single digits in K-C International and we're growing there as industrialization and economic development roll out across those regions.

So overall, I'm very encouraged by the progress we're making in K-C International.

And that part of the business now makes up 39% of our total Company sales.

In North America, we drove solid sales growth and we launched innovations on several brands including Depend, Poise, U by Kotex and Cottonelle.

On Huggies diapers, our innovation, marketing and promotion strategies led to some improved performance in the back half of the year and slightly higher volumes for the year in total.

Our North American brands are healthy overall.

We had market shares that were up or even with the prior year in seven of our eight major categories.

In terms of profitability and bottom line growth in 2013, we had margins improve in North America and Europe in K-C International and they also increased in all four business segments.

This broad-based improvement is a sign of a healthy business.

I'm pleased that we delivered 10% growth in adjusted earnings per share.

That's our best performance since we launched the Global Business Plan more 10 years ago.

Finally, as Mark has already highlighted, we continue to operate with financial discipline.

We delivered significant forced cost savings last year.

We improved our working capital and ROIC and we returned substantial cash to our shareholders.

So overall, we delivered on our commitments in 2013 and we've got good momentum going forward.

So let's move to our outlook for 2014.

We'll continue to focus on delivering a healthy growth model and leveraging our financial discipline.

That means we plan to drive the top line with growth initiatives and innovations to increase margins behind strong cost savings, to continue to invest in our brands, to improve our return on invested capital and to improve our cash flow.

And now in terms of our specific targets.

On the top line, we expect organic sales to grow by 3% to 5%, including another year of high single-digit growth -- organic growth in K-C International.

We'll launch a number of new innovations in KCI, including diaper and feminine care upgrades in Brazil, China and Russia.

We also expect to make further progress expanding our adult care, baby wipes and K-C Professional businesses internationally.

We've got a strong innovation pipeline coming in North America.

In the near term, that includes activity on Huggies diapers and baby wipes, our Good Nights Youth Pants, Depend Briefs and Viva Towels.

To support our brands and growth initiatives, we'll increase advertising and research and development spending faster than sales.

On the bottom line, we're targeting adjusted earnings per share in the range of $6 to $6.20.

That's up 4% to 7% year-on-year.

Our plan includes a 3 to 4 point drag from negative currency translation as a result of the stronger US dollar.

So taking that into account, our underlying growth is solidly in line with, or even slightly ahead of, our long-term objective.

As usual, our plan is based on forward currency exchange rates.

We've also assumed some bottom line negative impact in Venezuela from either a currency devaluation or ongoing market volatility.

We've assumed that commodity cost inflation this year will be similar to last year in a range of $150 million to $250 million.

We expect that adjusted earnings per share will be higher in the second half of 2014 as compared to the first half.

Recent spot currency exchange rates are already broadly consistent with what we expect for the full year and the benefits of price increases, our growth initiatives and our cost savings programs will layer in as the year progresses.

Finally, we'll continue to focus on cash generation and capital allocation in 2014.

Cash provided by operations should increase nicely year-on-year, driven by earnings growth and lower restructuring payments.

We'll allocate about $2.5 billion to dividends and share repurchases, which represents a cash return of about 6% based on our current market capitalization.

So to summarize, our financial performance was excellent in 2013.

Our business fundamentals are healthy and improving and we're optimistic about our plans for 2014 and the opportunities that we have to deliver attractive returns to our 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 few things to think about.

One is, in terms of competition, we heard, for example, from K-C Mexico yesterday and we'll actually probably hear it again about increased competition in Mexico.

We're hearing folks like Hengon relaunch more aggressively with Kumo in China.

The FCA Vinda is on the horizon.

Can you give us a sense of the competitive situation right now and what you anticipate both in personal care and consumer tissue, and if there are any particular hot spots to think about globally.

Yes, that's a fair question.

I think that there's every day somebody gets up and wants to eat our lunch, Ali.

So we know we have to be moving pretty fast on innovation and cost savings and other things to continue to deliver the kind of results that we posted this year.

Mark and I were just in Mexico on Tuesday and spent some time with Pablo and the team down there.

It was a tough competitive quarter.

A lot of price investment that didn't yield a lot of volume improvement for anybody.

And so I think they're -- they'll have a challenging start to 2014, but they've got a lot of innovation coming and, in the end, that's what usually drives on that front.

Globally from a competitive standpoint in personal care, we probably look at a Unicharm as one that's more aggressive and moving outside of Japan into other markets.

We know that they're going to be launching some new products in Brazil, or we believe they are.

And we're preparing for that with a lot of innovation and a lot of improvement in our business there to be ready for their launch.

So that's one that we watch is probably Unicharm in lots of places.

And they tend to play more in the premium end of the category, where we tend to play as well.

China has gotten more competitive broadly.

It's not just Hengon.

I mean I'd say in the personal care space.

Proctor's aggressive, Unicharm's aggressive, [Kawal's] in there through ecom.

It's a rapidly growing market and we're doing pretty well over there.

But we know we've got to continue to drive innovation in China to make sure we keep the momentum that we've got on that front.

Broadly in the US, that would be the typical player, so Proctor would be one that we see.

But on the other hand you've gone got Energizer just bought J&J femcare business and so we're watching to see what happens as they absorb that and do some things to change the trajectory of that business.

So lots of competition in personal care.

I'd say we feel like we've got good innovation coming to weather the storm.

On the tissue front, you have a lot of regional competitors, as well.

In the FCA Vinda deal in China, we're not a big tissue player in China.

So that one is really not one that I worry too much about.

CMPC, a Chilean company, is big in tissue in Chile in the southern cone but they're growing out of the southern cone and doing some things in Brazil.

They're part of the challenge that we've seen in Mexico, and so we watch those guys pretty closely as well.

In North America, it's us, Proctor, GP and Private Label, and Private Label was probably the most aggressive competitor last year.

GP had some challenges early in the year, which clearly benefited our start to 2013 in the North American tissue category, and they're now back in normal supply.

And so we won't have that tailwind and they'll be a tougher competitor going into the year.

But we've, again, got a lot of good things happening with improvements on Cottonelle, with some big news on Viva and a strong Kleenex lineup again.

So maybe more than you're looking for, Ali, but lots going on competitively around the world.

No, so more is good.

And if you bring it all together and it kind of corroborates on the stuff we've been hearing.

It doesn't sound like things are getting easier from a competitive perspective.

And if you would say yes or no to that.

And how do you -- are you modeling that in terms of how you think about 2014 that things aren't going to necessarily get easier?

Or are you factor modeling some dissipation of competitive fervor?

No, I guess I'd say two things.

One is we have a really strong innovation lineup coming.

So that makes me feel pretty good about how we'll fare versus competition.

We're actually seeing with some of the currency movement in some places, some competitors taking price up in some markets, which that's also things that typically happen in a normal competitive cycle.

So that would be a positive.

On the other hand, we know we've got lots of good companies that would like to take some of our market share.

And so we're not going to give that up easily and we're going to be competitive and make sure we get at least our fair share of the growth in these markets.

And to answer your question directly -- I mean I would say that this is not that different from what you normally see in a competitive environment, maybe a little bit more intense with a few more global players coming at you.

But I'd say I've also seen more aggressive periods in my career.

So it's not out of the line of reason here.

So one thing that is different, and we noticed in the way you guys reported and gave your commodity guidance is a switch from NDFK to eucalyptus in your explicit guidance.

And can you help us think through that?

Is that something you guys are uniquely capable of doing?

Is the range you've given on eucalyptus taking into account some of the increases we've seen in Latin America and Spain in December and January and where do you think that trajectory is?

So just a little bit more about that particular commodity.

Does it change things competitively too?

We've been talking about doing this internally for a while because Northern Softwood has not been -- has been a shrinking part of the our fiber mix for many years.

And now eucalyptus is the largest single grade that we buy.

So we actually thought it would be better disclosure for investors.

And now that that information is a little bit more readily available, then where Northern Softwood is kind of the benchmark, right, that everyone tracked.

And so we track both internally, obviously, and -- but euc is probably the one that's a bigger driver and is going to have more of an impact as you try to model our costs going forward.

And so we're calling euc in the 800 to 830 range.

It's at 860 right now.

So we'd say, yes, we're going to have a little bit of headwind to start the year.

But our guys look at the Rece forecast and think they've got it right, that you'll see euc weaken a little bit later in the year.

And we'll see what happens.

Obviously currency can have a role to play there if the Brazilian Real goes south in a hurry, you may not see as much downside there.

But we'll see what happens.

Thanks very much.

Gail Glazerman with UBS.

Maybe just sticking on pulp for a minute.

Do you have opportunities if the new capacity really pressures hardwood a lot to increase the share of eucalyptus that you're using or have you pretty much maxed out what you can?

Well we've been slowly increasing them.

And this is probably more detail than you want.

But the two grades of fiber perform a different role in making a sheet of tissue.

So Northern Softwood actually provides strength and eucalyptus provides softness.

And so we've been trying to do a better job of making tissue strong while using more eucalyptus to make it even softer.

So that's more the reason why we shifted.

It's been less of a price of fiber-driven grade.

It's more of we're trying to deliver soft tissue and still deliver enough strength so that it performs well.

And so that's more the function of it than anything else.

We keep driving it that way.

There's a limit as to how far you can go at some point.

You'll have to have some strength fiber in the mix.

Okay.

And appreciate the comments on the competitive environment, but maybe just taking a step back, could you give some comments in terms of what you're seeing in terms of just underlying demand in some of your core markets?

Are you any more optimistic about changes in China?

And are you finally seeing signs of a turn in birth rates in the US?

I'd say in China we've had the dragon year babies that all were born.

And that probably boosted the category the last 12 to 18 months or so.

That -- because Chinese train their babies quicker than they do in the US.

That will roll off.

So the category growth in 2014 probably won't be as robust.

We've got a lot of innovation coming.

We've still got a lot of category penetration opportunity and we'll be expanding our geography.

And so the 35% growth that we had on average last year in China, we slowed down in the fourth quarter.

I think it was low 20s%.

So you'll probably model a slightly lower growth rate in China, but still pretty healthy relative to everywhere else in the world.

In the US, the birth rate has been pretty stable.

It's not getting worse.

It's not getting hugely better.

So we're still right around that 1.7%, 1.8%-ish kind of a rate.

And we're not seeing much on a consumer confidence front that's pushing it hard.

I think we talked in the past, it's a bit related to consumer confidence and employment levels and those are getting slightly more positive but not enough that we're seeing it drive the birth rate significantly.

Okay.

And can you just -- I guess you mentioned negative pricing in the personal care segment in the US.

Can you just talk a little bit about what was driving that?

Yes.

We did kind of a switch in the marketing mix a bit in the quarter.

We started this, really, in the second half.

We essentially shifted some money from couponing to trade.

We wanted to be a bit more competitive on-shelf everyday and so you saw negative price, but then you also saw positives in between the lines on strategic marketing.

Really, that's more couponing related.

We spent about the same level of advertising broadly across the Company for the year.

I think advertising spend as a percent of sales was down 10 basis points.

Some of that was productivity related where we did better on media buying.

But in the fourth quarter on baby child care, it was more of a switch from consumer promotion to trade and we saw that in kind of mid single-digit volume growth for Huggies.

Okay.

Just last question.

Consumer tissue is pretty robust earnings in the quarter and I'm just wondering what you attribute that to.

There was some reference to lower spending in that category.

Was that the big driver, or was it the price benefits from the desheeting?

It was pretty good desheeting benefits that flowed through.

And so the way we show that, it shows a negative volume and positive price.

And that was part of it.

But good cost savings broadly and so I think they had a solid quarter.

Again, we're encouraged by the progress we made in consumer tissue over the last several years of consistent margin improvement to get it back to kind of the mid-teens levels.

Okay.

Thank you.

Javier Escalante with Consumer Edge Research.

I have a question -- actually you alluded earlier with Ali, but I would like to have kind of like a little bit more color on the US.

When you look at bath tissues --

I gave Ali all the color I have, you know.

Let's see if you can give me a little bit more contrast.

Okay, okay, Javier.

Is it specific with the Private Label growth, the volume growth that at least we see in the mid-teens in track channels, right?

And to what extent, given that each part of you and Proctor and Georgia-Pacific and Private Label pretty much have the same market share.

Is it a concern or not that the growth of the private label would -- may undermine the pricing architecture of the tissue category, to the extent that people are going into Private Label into the teens in terms of volume?

Yes, I would say Private Label growth at that level is always a concern, Javier.

And what you saw when GP had some of their problems early in the year, they actual ceded shelf space to Private Label in some retailers.

And so when you get more distribution in a lot of these accounts, that directly drives volume and velocity and share.

And so the good news is that our shares were pretty stable in this environment and so the -- but it's also one that you worry about from a category dynamics standpoint.

And we've got to make sure we're doing the right job of delivering value with our brands across Cottonelle and Scott and Viva and Kleenex to make sure that we -- that consumers know that we're going to take good care of them and their families.

And so we feel pretty good about the momentum that we've got overall with tissue and a lot of good things coming, but we are watching the Private Label situation carefully.

Thank you, Tom.

The other question has to do with the changing packaging that my understanding you're going to be implementing in diapers in the US.

Is it not that you are going to be reducing the number of diapers this quarter or have you already done that?

What is the initial reaction from the consumer standpoint if you can give us an update on that?

Yes.

I mean our primary competitor, as you probably know, did that change in the fourth quarter and it takes a little while to convert your lines over to the new counts.

And so, we'll be following that in the first quarter.

I think we start shipping those in February.

And again, not much consumer reaction that we can tell in the fourth quarter.

Usually what happens in this kind of a process, when you do a count reduction you wind up with a small household inventory decline because on average you're buying fewer diapers.

And so you typically see a little bit of a category dip for a while.

But we didn't actually see that in the fourth quarter.

Overall, the category was up a little bit more than normal.

So that's one thing we'll watch as we roll through that in the first quarter.

Finally -- thank you, Tom.

Finally, on China, I don't know whether I missed it or not, but it seems like you didn't mention, or at least I didn't heard it, for the expansion in Chinese cities.

I think that you mentioned the breadth that you now have.

But are you continue taking expansion further into these less developed cities or that is something that is behind you?

No, we're in about 90 cities now.

We'll be in more than 100 by the end of 2014.

Again, these are all pretty big cities too.

They're all over 1 million people.

So it's a pretty amazing place, as I'm sure you know.

So the great expansion coming on BCC, also we had a big femcare launch in China in the fourth quarter.

That's going well.

And so we'll be expanding not just our geographic representation, but also building our portfolio beyond baby child care as we've got lots of things we can do in feminine care, and ultimately adult care in China.

Thank you very much.

Bill Schmitz with Deutsche Bank.

Did I hear you say that you reflected some Venezuela impact in guidance?

Can you just talk about kind of what your assumptions were and maybe if there's any Argentina impact in there as well?

No, we did reflect some Venezuela income statement impact in guidance.

We did not try to predict what a deval would be or when it would happen.

We essentially said that something is probably going to happen in Venezuela, whether we can't get exchange at the level we got in 2013 if they don't devalue.

Or if they do devalue we'll have a translation hit.

It also depends what happens with price controls.

There's a number of different variables.

And so we assumed we would make less money in Venezuela in 2014 than we did in 2013.

We made a little less in 2013 than we did in 2012.

So that's -- we probably took a little bit of an adjustment for that.

And in Argentina, we look at forward exchange rates at the time we roll the guidance together and make a guess on where that's going to go.

So we have a prediction of some currency weakening in Argentina.

If you looked at current spot rates, I don't even know where they are this morning but as of yesterday that would be worse than what we have in our guidance.

But that's, again, a low single digit percentage of our overall business, and I don't think we have any adjustment for that in our outlook at this point in time.

Great.

Thanks so much.

Do you think you'll still be able to price down there?

Because last time we all kind of got hand wrung about what was going to go on in Argentina, Venezuela.

It seemed like everybody just kind of priced through it.

Is that still an option now or is that off the table?

We have an excellent team in Argentina.

And if you are able to launch innovation, you're often able to couple pricing with that.

And that team has been able to pull forward innovation and get some pricing to offset the impact of inflation in that market, at least partially.

And they've also been terrific about making sure they're adjusting pack sizes and having a relevant offer for the consumer that is a little squeezed on what they're able to spend.

And so we actually had a pretty good year overall in Argentina, and would, obviously, like even better margins and like to continue to grow even faster.

But in the environment that they're in, they executed at a pretty high level.

Great.

Thanks.

And then just to sort of follow up on the personal care stuff, the 16.5% operating margin in the quarter, sort of pulp neutral.

Is that the new level of operating margin for the business?

Because I always thought that personal care should always be structurally higher than personal care, all things being equal on a commodity neutral basis.

Just tell me if I'm wrong there.

I would look more at the full-year margins for all of the segments, Bill, as a better precursor.

Fourth quarter of the year, you have some asset write-offs and other things that you do, trade promotion accruals.

So there's a couple things that probably push personal care a little lower than the normal average and probably push tissue a little higher than the normal average.

But that's where I think the full-year number is more representative.

Then we'd look to build from there.

I still believe that if you look at 2014, we'll have a full year of our exit from Europe, which will be a margin improvement.

We've got some price coming in the first quarter in North America, which will help.

And so there's a lot of things that would indicate that we should get some margin improvement in personal care off the 2013 average in 2014.

Okay.

And then just one last quick one for Mark.

How do we think about the spinoff now in terms of the dividend that's coming back to Kimberly?

Because I know you're only growing the dividend 2% to 4% because of some of the lost cash flow from the healthcare spin.

It was my understanding there is an option there to put some extra debt on the businesses that spin.

Maybe that money comes back in.

You could buy back stock or pay out a special dividend.

Is that still within your consideration?

Yes.

I mean, that's all part of planning.

Typically on a spin, I think the way we framed our dividend is pretty typical.

You kind of reorient to the new size of your expected balance sheet.

And I would expect to capitalize the new Company in a way that's appropriate for its business.

And it's not unlikely that you'd have a one-time dividend to come back.

If you think about the way we think about cash flow --

That may be more of an accelerated share repurchase.

Yes.

I don't think we're going to do a special dividend, Bill.

No.

Okay.

Got you.

But you're going to use the money to give it back to shareholders when it comes back in.

Because it doesn't seem like there's like huge capital requirements or anything.

Absolutely.

We don't keep extra cash on the balance sheet.

So we'll behave as we always do.

Perfect.

Thanks for your time.

Olivia Tong with the Bank of America-Merrill Lynch.

Wanted to -- what -- within your 3% to 5% total growth rate for the Company that you plan for 2014, what are you expecting for developed versus developing market growth?

Similar to where we were this year.

Kind of high single-digit organic growth for K-C International and low single-digit organic growth in North America as you look at what's going on in that front.

So Europe will be relatively flat.

Maybe a little bit -- maybe similar to North America.

Got it.

And then on gross margin, you posted solid gross margin improvement this year despite obviously some raw material and FX headwinds.

With that backdrop, can you give some color on where you think the opportunity is for gross margin, not just for 2014 but also long-term?

How does it break out between savings and leverage versus mix from both a category and geographic perspective?

A lot of levers that we're looking at for gross margin.

Innovation and mix are two at the top-line level that are really rich opportunities for us as we continue to grow personal care, as we continue to grow into higher margin segments, things like in the adult care space, baby wipes, et cetera.

Those can provide a nice uplift to gross margin.

On the cost savings front, again, next year it would be a second year in a row that we're in the $300 million plus range and ahead of inflation.

So that's another boost from a gross margin standpoint.

We're still getting very good productivity growth.

We're still rolling out our global procurement capability.

We're still working on specification changes to make sure we're getting good value for all the components that go into the product and all those things should drive a robust cost savings culture going forward.

So we're pretty encouraged that we can continue to deliver that.

There's a little bit of a drag from geographic mix as K-C International's gross margins are on average lower than North America.

But if you look last year overall, I think on the operating margin standpoint K-C International's probably less than a 10 basis point drag.

So it really wasn't the big negative force for us overall.

Got it.

Thanks.

And then just lastly, appreciate the color on first half versus second half.

And fully understand that you don't provide quarterly guidance.

But given that you've got a pretty tough comp in Q1 with the flu, the flu comp and then also disruptions at GP last year that helped you.

Can you talk a little bit more about the cadence of quarterly earnings for 2014?

And do you continue to -- do you expect Q1 to post year-over-year EPS growth?

Yes, we're not going to give quarterly earnings guidance.

As we've said.

So I guess I think from what we told you, going into the first quarter we're going to have some headwinds and some tailwinds.

So clearly currency will be a headwind versus last year.

Pulp costs will be higher.

In fact, higher than our full-year average.

On the other hand, we're going to get some price in some categories.

So we had a very strong start last year and we know it's a tough comp to lap so I wouldn't be surprised if we were down a little bit in the first quarter.

But we would expect to see -- again, we're comfortable with the overall guidance for the year and the second half will probably be a little bit better than the first half.

Got it.

Thank you so much.

Chris Ferrara with Wells Fargo.

Can you help I guess reconcile some of the personal care emerging markets growth numbers that you're seeing with -- I guess what are the most readily available data points on what market growth rates and Kimberly growth rates look like?

I guess so the way to put it is, when you guys are putting up faster growth numbers in diapers in China than -- and everywhere else than Nielsen says.

And we're fully appreciating there are differences.

Can you help us reconcile that a little bit to alleviate the concern there are warehouses full of diapers stacked somewhere in China?

Can you just kind of address that?

Yes, I'm pretty sure that's not the case, Chip.

I'm pretty sure people don't want to take big positions in high cube items like this.

But, yes, a couple things.

First of all, the international market share data is not as well developed as North America.

Where in North America you have much more coverage and much more scanned outlets, there's still a good part of the emerging markets, that is, in the traditional trade, which is not well-covered -- really a sample at best.

And so we've even seen some disconnects in some markets where Russia -- we were up 20% in diapers this year.

If you looked at it, I think the Nielsen share would say we lost share and yet the category didn't grow 20%.

Category in Russia was probably up 12%.

So but they only cover maybe three quarters of the outlets at best.

And so emerging markets, it is a little tougher to get benchmarks on what's going on.

But generally I'd say in markets like Russia, China, Brazil, we're growing faster than the category.

In China, again, it's a geographic expansion.

It's a -- continue to drive innovation and grow in multiple tiers is a good part of it.

But we're also driving a lot in some of the untracked channels.

So ecom in China, for example, is a big driver of that category.

In Argentina, we are very big in the Panaleras, which are the small diaper stores.

And those aren't really a track Nielsen channel.

If you go to Brazil, we're doing pretty well in pharmacy.

And that's not a channel that's tracked as readily as some of the modern trade would be.

So I don't worry too much about that.

But it does make it a little tougher for outsiders to get a good benchmark on that.

That's really helpful.

I appreciate it.

Just one other on a totally different note.

You endured years and years of pretty nasty commodity inflation.

If we are really moving into a period where that sort of inflation is going to be more benign, I guess, one, how does it affect, if at all, how you think about managing your business and managing innovation for that matter?

Then I guess when you site innovation and new product development as a way to drive gross margins -- I guess is sounds sort of like structurally, from a benchmarking perspective, you don't view your gross margins as too low for the type of businesses you're in.

Is that right?

And do you see an opportunity for Kimberly to be significantly higher in gross margin over time, maybe even getting to 40% at some point?

Yes.

No, I think that Mark and I still have scars from those commodity battles.

So I wouldn't say that we've totally forgotten what that felt like.

The good news is, in past years if you had $250 million of commodity inflation, when we were a $100 million to $150 million cost savings kind of Company, you wound up with a big problem.

Now that we're delivering more consistently on the cost savings front, we're probably feeling a little bit more confident that we can handle some of the swings in commodity costs a bit easier.

We're also seeing as you get better innovation, you've got more opportunity for pricing power in many of these markets as well.

And so that is another lever that we can pull in some markets to be able to offset that.

And so given your question on gross margin, absolutely.

We would love to continue to build gross margin and we do think that gives you the franchise value that drives multiple over time and it is a metric that we're focused on internally, as well as operating margin.

Thank you.

Lauren Lieberman with Barclays.

Thanks.

Actually I had wanted to ask about FORCE.

That last question was a perfect lead-in.

The acceleration that you are delivering on FORCE savings overall and another big year expected in 2014, it would be great if you could tell us a little bit about what kinds of new programs or areas you've been diving into to drive these incremental savings, and how the numbers are getting bigger and bigger for a Company that's been at it for so long -- if anything you start to -- one would start to worry it gets tougher to find savings, not easier.

Thanks.

That's a great question, Lauren.

I think that's probably a traditional way of thinking about it.

We've actually tried to turn that around and really look for all the opportunity areas we have.

And we have still have big gaps between our best performing operations and our weakest performing operations.

That's gold that we can go turn into value.

We're doing a lot to build capability around lean, continuous improvement across the Company.

We're doing a much better job of benchmarking and understanding what the drivers are of performance at our best performing units and then transferring those best practices at a faster pace.

We talked about global procurement.

We're just getting better purchasing capability in-market and leveraging the scale of Kimberly-Clark better across the organization.

We're doing better in design for value so that we're putting the components in the product that the consumer cares about and that drives performance.

But those ones that don't move the needle, there's a way to substitute or use less.

We're getting better at that.

And I think the vision that our operators have now is much bigger than it ever was.

They've got a robust pipeline of areas to go look and they're even more confident that we can bring that value to the bottom line.

And that's exciting for us.

We also look at other companies out there like a Colgate who has been a phenomenal company at this.

And they're a smaller company than we are and I think they're delivering $400 million on a smaller cost base than we are.

And so while we pat ourselves on the back for getting to $300 million, we also know that there's other better benchmarks out there and we shouldn't be satisfied.

And that's the healthy way for us to approach it.

That's great.

Thank you.

And then also the commentary on increasing advertising spending next year, granted we'd all prefer to see advertising go up than down.

But I just thought it was interesting that that was something you specifically mentioned in the release, even when this year with advertising dollars flatter, I guess it was down as a percentage of sales, your sales were so strong.

So why the decision to put more money back in?

Do you think you really get an incremental lift?

Is it just the rising competitive environment or is it a -- we have pretty good visibility on cost savings and what else should we do with the money?

No, it really is more built up from the business unit innovation plans in terms of looking at what they need to spend, also looking at outlook for competitive activity.

So we talked a little bit about we know we've got Unicharm coming in Brazil.

So we've got additional investment there.

We're launching femcare in China so we've got additional investment there.

And so we really do look at it more strategically around what are our innovation plans, what are our competitive activity that's planned and build the plan that way.

I'd say this year we got a little bit more cost savings in the marketing area than we've gotten in the past.

So we did -- we turned our purchasing team loose on media buying and we freed up a lot more money than we had in the plan and that helped our overall cost savings number but it actually -- instead of showing up in cost of sales and gross margin, it showed -- some of it showed up in the strategic A&P line.

And so that was a -- helped us basically get more coverage for the same dollars this year.

Okay.

Great.

And then just finally following up on the femcare launch in China, how many cities were you targeting initially?

Is the strategy there to do as you've done with diapers, come in at the super premium end and then move down market?

If you could just tell us a little bit more that would be great.

We've been in China in femcare for a long, long time.

In fact, that was one of the first acquisitions there --

That's what I thought.

That's why I was confused by the language.

It's really a relaunch.

We have had some different brands that we got with acquisition.

So it's really a relaunching around the -- kind of the U by Kotex portfolio of aimed at the more up-market, young, stylista, we call her.

And so it really a major relaunch in the fourth quarter.

And it will be very similar to diapers where we start in a smaller geographic region that we can support, build momentum and then begin to roll it across the markets that we're in.

Obviously having the success we've had in diapers creates great credibility for our sales teams on the street as they come in with a new item in China.

Thank you so much.

Caroline Levy with CLSA.

A couple of short-term ones and then a longer term one.

In December P&G called out that their business had strengthened across categories and across geographies in December relative to October, November.

Did you see that?

I probably would say we saw that in some markets.

Are you talking in the US or anywhere else particularly?

I had the feeling it was a global comment.

I wasn't listening to their call this morning.

I was getting ready for this one.

I'll read their transcript a little later.

But I looked in our categories, our organic was probably a bit stronger than theirs.

But again, I probably would tell you I didn't dive into their numbers as deeply yet as you may have.

I would say, Caroline, that our December -- we typically finish the year strong and I would say this year was similar.

Similar, yes.

Okay.

And then if you could just tell us a little bit about why Mexico was weak.

I didn't get a chance to listen to the Kimberly to Mexico call yet.

There was a lot of competitive price investment in Mexico in the fourth quarter, including by us.

It did not move incremental volume as much as hoped for.

And so that led to -- basically I think sales were down 7% in the quarter, 6% organic, something like that.

Most of that was price loss and so that was a tougher comparison they've had.

Now overall Mexico had a pretty good year, but they had a weaker finish to the year.

And they'll probably have a tough start in the first quarter.

But I know -- as I said, Mark and I were just down there.

They've got an aggressive plan for 2014 and that's been a high performing team and a great operation for us over the years and I'm sure they will get it sorted.

Right.

And then moving to China, if you had the femcare launch and yet your volume growth slowed to about 20% in the quarter, you've been -- I think maybe that was just the diaper growth slowed to 20% in the quarter.

But do you think that the base --

(multiple speakers) Yes, that was just the diaper.

The diaper growth slowed -- (multiple speakers) Go ahead.

-- to 20%.

Do you think the base is such now that we should be looking more at low double-digit growth going forward?

Do you sense the competition really coming at you more aggressively in the mommy stores and online where you've had some big wins?

So the question on diaper growth, my comments were about diaper growth in the quarter.

We averaged 35% for the year.

We've been in the 40%s for the first three quarters.

We were at 22% in the fourth quarter.

And so femcare was just -- was in launch for part of the fourth quarter.

So I think we had a double-digit growth in femcare but it was lower than that number and we'd expect that to kind of build in the first quarter.

It's a little smaller business than the diaper business.

So it won't have as big of an impact.

China overall is a competitive market.

It's been a competitive market for a long time.

So there's a lot of -- every CPG in the world is over there trying to build their brand for the future.

And so we feel like we're holding our own and we're definitely in the game.

But we know Unitherm and Proctor and Kawal and Hengon and FCA and everybody else wants to play over there.

So we've got to deliver good innovation and good value to the consumer to be able to win there long-term.

Thank you.

And then just follow-on from that -- is really -- if you were to try to size up the 2020 opportunity of China, Brazil, Russia, if you think about the upside from per cap consumption growth and/or wealth creation or however you look at it, which do you think will be the best growth market through 2020 for you?

China.

We're already more developed in Brazil and the consumer's probably a bit more developed toward a middle class.

But there's so much opportunity in China just because of population that I would say of those three choices, that China will be the biggest growth driver.

I would expect the others to also be significant growers.

But if you force me to pick one, I would say China's going to be the biggest business of the three by 2020.

Right.

It seems to me that some of the increased competition will help drive usage, because diaper usage is still quite low in China, right?

Yes.

Absolutely.

One of the -- you never like to have more competition, I guess, but it does help penetrate categories if you've got a lot of people making noise about the product.

Thank you very much.

Chip Dillon with Vertical Research Partners.

First question is just if you could update us with the moving parts with the tissue moves in Europe, where do you stand in terms of your sort of pulp purchases?

If you could split it into three buckets, the hardwood, which I assume is almost all eucalyptus, and then soft wood for tissue and fluff.

In Europe we're not buying a ton of fluff.

We are buying a little bit, because we still are making some pant-type products.

So the biggest grade by far that we buy in Europe would be eucalyptus for the consumer tissue business.

And I'm sorry, Tom, I was looking more for the global overall for -- given that change over there.

What is your overall purchases as a Company?

Paul can give you the details.

Chip, we still consume about 2.4 million metric tons of virgin fiber.

About half would be eucalyptus/hardwood and the other half would be split pretty evenly between fluff pulp and Northern Softwood.

Got you.

Got you.

Okay.

Thank you.

And, Tom, looking -- I know you've -- a couple of questions have been asked but I just was noticing last year on the forced savings, I think you guys were looking for $250 million to $300 million, and on my numbers you were like at $320 million.

So you beat your midpoint by almost $50 million.

And I don't know if there's any -- if there are one or two specific areas you can point to and then will those areas be different in 2014, where you expect to get the bulk of your savings?

Yes.

I mean if you are adding in some of the tissue restructuring savings, Chip, you might have gotten up to a number that high.

But we try to break those out separately and not double count them.

But the three buckets that we focus on are negotiated material or negotiated purchases savings, so our procurement group.

Productivity: so how do we drive lean and lower waste, higher uptime and so all of our operations have clear metrics on those?

And then material specification changes: so how do we do a better job of designing for value?

And all three of those buckets contributed pretty evenly.

I mean I think negotiated material savings was probably $80 million or $90 million of the $300 million and change.

And so -- and the other two were over $100 million each.

And so we would expect those to continue to be strong in 2014.

Got you.

And then I guess the last question is on when you look at the -- your forecast for 2014 and some of the components, it looks like, at least on the numbers we saw a couple of weeks ago, that your expectation for eucalyptus in the US is about $50 a ton less than where it was -- at least it is this month.

And so that's a pretty healthy decline.

Are you looking for similar declines in -- or a similar decline in either fluff and/or soft wood?

Northern Softwood, we're basically using the Rece forecast.

So I think we're at a 950 to 975 range and which would be not as big of a drop as euc.

And that's driven more by the capacity that's expected to come on from a euc standpoint.

And I think fluff would be similar to Northern soft but that grade isn't going to be as affected by capacity additions.

Got you.

Thank you very much.

Connie Maneaty with BMO Capital.

I was just wondering when you might have the spinoff financials ready.

I think you talked about that on the last call.

And secondly, what was the order of magnitude impact on EPS from your Venezuela assumptions?

Thanks.

Yes, in the spin financials, we'll probably file the Form 10, Mark, what in early April I think?

Is that the plan?

And then on Venezuela, we essentially -- similar to our guidance last year -- gave a haircut from what we earned this year.

I don't know, Mark, if you've got the rough ballpark.

It's probably about a point of earnings growth, I guess.

In the ballpark.

That's in the ballpark.

Yes.

In that overall currency drag.

Yes.

Thanks.

At this time we have no other further questioners in the conference.

Great.

Well we appreciate everybody's questions today and we'll wrap up with a quick comment from Tom.

Well once again, we appreciate your support of Kimberly-Clark.

We've had good momentum in 2013 and we look forward to another year of executing our business plan in 2014.

Thank you again for spending some time with us this morning.

Thank you very much.

Ladies and gentlemen, that concludes today's presentation.

You may disconnect your phone lines and have a wonderful morning.