金百利克拉克 (KMB) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference.

(Operator Instructions)

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

Thank you, and good morning, everyone. Welcome to Kimberly-Clark's first-quarter earnings conference call. Here with me today are Tom Falk, Chairman and CEO; Mark Buthman, Senior VP and CFO; and Mike Azbell, VP and Controller.

Here is the agenda for our call this morning. Mark will begin with the review of our first-quarter results, and he will also give an update on the healthcare spinoff. Tom will then provide his perspectives on our results and the full-year outlook. We will finish with Q&A. As usual, we have a presentation of today's materials in the investors section of our website.

As a reminder, we will be making forward-looking statements today. Please see the risk factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements. We will also be referring to adjusted results and outlook. 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 will turn it over to Mark.

Thanks, Paul, and good morning. Let's start with the headlines. First, we achieved organic sales growth of 4%, and delivered $80 million of cost savings in the first quarter. Second, we continue to allocate capital in shareholder-friendly ways. We are on track with our capital spending plans to grow our business, and we returned $0.75 billion to shareholders in the first quarter through dividends and share repurchases. And third, we are making good progress with healthcare spinoff activities.

Now, let's cover the detail of our results. First-quarter sales were $5.3 billion. That's down 1% versus last year. Underlying organic sales rose 4%, led by strong growth in K-C International. Currency rates were a 3 point drag, and restructuring activities reduced sales by a further 2%. First-quarter adjusted gross margin was 34.7%, up 10 basis points year on year. Adjusted operating profit was even with year ago, with an operating margin of 16.2%. That's up 20 basis points compared to the prior year. Results benefited from organic sales growth, $70 million of FORCE cost savings, and $10 million of additional savings from pulp and tissue restructuring actions.

In addition, total between the lines spending was down 90 basis points as a percent of sales. That was mostly due to lower G&A spending, including incentive compensation. We absorbed $65 million of cost inflation, and significant currency headwinds in the quarter.

The total earnings drag from currency, including translation and transaction effects and losses in other income and expense, was approximately $0.15 per share. And while the adjusted effective tax rate was down slightly compared to last year, that was offset by lower equity income. Putting it all together, first-quarter adjusted earnings per share were $1.48. That's even with our all-time record performance last year.

Now, turning to cash flow. Cash provided by operations in the first quarter was $437 million. That's down compared to $607 million last year, mostly due to higher pension contributions and working capital. Given our normal pace of cash generation, and with most of our pension contributions for the year now behind us, going forward, I expect cash provided by operations to pick up significantly from first-quarter levels.

As I mentioned at the beginning of my remarks, first-quarter dividend payments and share repurchases totaled $0.75 billion. And as you know, in February, we announced our 42nd consecutive annual increase in the dividend. In terms of share repurchases, we bought back $465 million (sic-see press release "$464 million") of KMB stock in the first quarter, and we continue to expect full-year buybacks of $1.3 billion to $1.5 billion.

Now, before we move into our segment results, let me give you a brief update on Venezuela. We measure our results in Venezuela at the rate at which we transact our business in the country. Since March of last year, that's been at the official exchange rate of VEF6.3 per $1.

To date, we've not had access to US dollars through either the complementary currency exchange system, known as SICAD, or the recently announced SICAD II auction process. At this time, it's not clear if we will be able to access either of those systems going forward, or what amount of currency exchange we will transact through those mechanisms in the market as a whole. So, as a result, we continue to measure our operations in Venezuela at a VEF6.3 rate.

Now, in terms of bottom-line earnings, although it wasn't the case in the first quarter, our full-year plan continues to assume that we will have some year-on-year earnings decline from results in Venezuela, as a result of the ongoing uncertainty in that country. Like all multi-nationals that do business in Venezuela, we continue to closely monitor the currency market and the overall business environment there.

Now, I will highlight a few areas from our segment results for the quarter. In personal care, organic sales rose 7%. Performance was led by K-C International, with organic sales up 13%. First-quarter personal care operating margins were 19.2%. That's up 80 basis points year on year, led by gains in K-C International in Europe.

Moving to consumer tissue, organic sales were up 3%, driven by higher net selling prices and slightly favorable mix. Consumer tissue operating margins of 15.2% were healthy. They were up 10 basis points year on year.

Turning to K-C Professional, organic sales increased 4%, with volumes and net selling prices each up 2 points. Organic sales improved 16% in K-C International, but were off 2% in North America. KCP margins were solid at 17%, although down versus year ago, including the impacts from a slow start to the year on the top line in North America.

Lastly, health care organic sales rose 1%, driven by higher volumes in medical devices. Health care operating margins of 18.1% were up significantly versus soft performance last year. Although I don't expect full-year margins to be at first-quarter levels, I am really encouraged by the team's focus and execution while we work on preparing for the spinoff.

Now, speaking of the health care spinoff, let me give you a little update on our progress. Detailed separation planning in preparation to carve out financial statements are well under way and broadly on track. We will be seeking Board approval to file the spin Form 10 registration statement with the SEC in early May. Robert Abernathy, who will lead the new Company, has assembled his senior leadership team, including naming a Chief Operating Officer and his Chief Financial Officer.

We're continuing to assess the impact of the spinoff on the remainder of Kimberly-Clark's operations, and as you would expect, that includes analyzing potential actions to streamline our work and mitigate stranded costs. While this work continues to be in progress, we expect to incur some restructuring charges in order to mitigate our stranded costs. We will provide more specifics in connection with our second-quarter earnings communication in July. And finally, we expect the spinoff to be completed at the end of the third quarter, or potentially in the fourth quarter of 2014.

So that wraps up my comments. To recap, we achieved solid organic sales growth and cost savings. Our capital allocation plans are on track. And we're making good progress toward the spinoff of our health care business. Now, I will turn it over to Tom.

Thanks, Mark, and good morning, everyone. I'll share my perspectives on our first-quarter results, and then I will address our full-year outlook.

So starting with Q1, overall, we had a solid quarter, solid start to the year, particularly given the headwinds we faced and the difficult earnings comparison, with Q1 last year being our strongest quarter. Organic sales growth in the quarter was 4%. That's right in line with our 3% to 5% full-year target. At our targeted growth initiatives, K-C International had another strong quarter, with 12% organic sales growth.

In diapers, our organic sales increased about 30% in China, 25% in Russia, and 15% in Brazil in the first quarter. So our Huggies business has good momentum in these three markets, and broadly throughout Kimberly-Clark International, and we've got more innovation coming yet this year to help us drive additional growth.

We are also doing well in our other personal care businesses in K-C International. That includes feminine care, which our organic sales there grew double digits, our adult care business was up high single digits, and our baby wipes business, which was up mid-single digits. Our focus on premium innovation and developing these categories continues to generate great results in these business and markets around the world.

Elsewhere in K-C International, our KCP organic sales were up at a mid-teens rate. We had strong growth in Latin America and solid progress in KCP in Asia. On an annual basis, now, the K-C Professional portion of our KC International business is a $1 billion business for us, and with attractive margins. We are continuing to push hard to take advantage of opportunities where industrialization and economic development are occurring. Overall, we are executing well on K-C International, and we're very optimistic about our top and bottom line growth prospects in that part of the business.

In terms of top line growth in other parts of our business, we are broadly on track, except for K-C Professional in North America. There, we got off to a slow start in the year. There were some impacts from the severe weather that we had in the US in January and February, and conditions in that business have improved more recently. And we are expecting a better performance as we roll forward into the year.

On the innovation front, we are off to a good start to the year. In K-C International, we continue to launch innovations across our product lineup. We got a heavy focus on Huggies diapers and diaper pants, premium feminine care products, and adult care offerings coming to market this year.

In North America, we've launched innovations on Huggies diapers, Depend briefs and Viva towels. We have got more near-term activity happening, including improvements to Huggies diapers and baby wipes, new Poise microliners, and upgrades to our U by Kotex product lineup. Our brand positions in North America remain solid overall. Our first quarter market shares were up or even with year-ago levels in six of the eight US consumer categories that we track.

In terms of the bottom line, as Mark mentioned, we had headwinds from currency exchange rates and cost inflation. To offset these challenges, we've raised selling prices where we can. We are driving our cost savings programs, and we are controlling our overhead spending carefully.

And finally, as Mark already highlighted, we continue to allocate capital in shareholder-friendly ways, and that's a key part of our global business plan. Overall, we are executing well in a challenging environment.

Now, as we move to the outlook for 2014, we continue to be optimistic about our prospects to drive profitable and healthy growth. And that means we are focused on delivering solid organic sales growth, increasing our advertising and research and development spending, and generating healthy levels of cost savings and cash flow, and then allocating that capital that we generate in the business in shareholder-friendly ways.

In terms of our financial objectives, we are confirming our previous outlook for 2014 top and bottom line growth. On the top line, our organic sales growth target remains 3% to 5%. We've got solid top line momentum right now, and that's driven by our targeted growth initiatives and our innovation. And we expect that to continue going forward.

On the bottom line, we continue to expect full-year adjusted earnings per share to be in a range of $6 to $6.20. We are closely monitoring the external environment, including currency markets, commodity costs, and the overall competitive and economic environment.

As I'm sure most of you know, currency markets, in particular, have been more volatile since the beginning of the year, most notably in Latin America, Eastern Europe and the Middle East. Going forward, we are planning for currency rates to be broadly similar to spot rates that we've seen in the marketplace recently.

And in terms of input cost inflation, at this point in time it's more likely that our full-year input costs will be in the upper half of our previously estimated range of $150 million to $250 million, and that's mostly due to additional inflation in some international markets, particularly in Latin America.

So, regardless of the environment, we are staying focused on our strategies and our plans to improve our business. We are convinced that successful execution of our global business plan will continue to result in strong returns for our shareholders. That wraps up our prepared remarks, and now we will be happy to take your questions.

(Operator Instructions)

Ali Dibadj with Sanford Bernstein.

Just a few questions. Some short-term, some longer-term. More kind of short-, medium-term. It looks like your net price of only 1% is lower than currency, obviously. It's lower than what we would expect inflation to be, globally. And we've seen this for a lot of HPC categories.

Can you give us a sense of whether that is just a timing issue? Or do you believe some of your categories are secularly deflationary, here? And is your pricing any different than your competition? Are you closing or expanding price gaps? And that gap, in terms of net price versus currency, and what you expect from inflation seems to be pretty big, and not closing recently.

Yes, I guess I would say, Ali, if you look across our segments, the only one that had negative price in the quarter was health care. And that's probably one that is a carryover of adjusting some of the exam glove prices related to the falloff of synthetic nitrile. So as the commodity cost in that particular area has dropped, we've seen more price drop there.

Across the balance, I would say we have done a pretty good job in K-C International at getting price to -- wherever there has been major currency weakness, particularly in Latin America. In North America, broadly, there's been relatively little price.

We've gotten a little bit in tissue, through some de-sheeting, and you saw that in the quarter. We've got a little bit in diapers. Again, there, we got some -- so the count reduction is just starting to go into effect. We didn't get much of that in the first quarter, so you will get a little bit more in the second quarter. And I think, broadly, our strategy is to try to line up where we can, and be competitive in the marketplace, and then win on innovation. And that's a strategy that's worked pretty well for us over the long term.

But it doesn't sound like you see the gap between even just currencies in your vol net price closing anytime soon?

If you look at the amount of price that we got, it was roughly equal to the amount of cost inflation that we had in the quarter. I think it was, what, Paul? $60-ish million of price and about $65 million of cost inflation. So if you just looked at those two numbers, obviously, currency was a factor, as well. And there's a lot of other moving parts. But those two, more or less, lined up.

Okay. Two other broader questions. One is, if you just look at your representation online versus offline, in both diapers and consumer tissue, in North America, at least, it looks not to be the same between online and offline representation for you guys.

And I'm just trying to get a sense of how you guys think of that. That channel, whether you plan to close that gap, and what it's going to take to do so? So one is an online question.

And then the other one -- I might as well throw it in, here, is just, over the years, and decades, really, you guys have, as a Company, focused more and more on pruning some pieces of the business. Health care, most recently, but Western Europe before that.

Go back to Neenah, as far back as you want. Along the time frame that's been happening. Do you see, ever, a time where you are a separate personal care and consumer tissue business, just given the different trajectories those two businesses are on?

I guess on the first question, on the online versus off-line and diapers versus tissue, I would say the personal care stuff is probably a little bit more efficient to ship on an online environment. That's not to say that you won't see it in the offline, or in -- having tissue move into online, as well. But I do think personal care, diapers, in particular, is a bigger item. And I think many of the online retailers want diapers for a lot of the same reasons that other retailers have focused on that category. It's because they want to get the young family as a regular customer.

So I remember, not that many years ago, when Toys-R-Us was our largest diaper customer, because they were trying to capture the young family at that point. So I guess I would say, I don't expect that gap to close out. Expect diapers and personal care will probably be bigger online. But we will see. If we're all buying everything online, maybe that gap will eventually close.

On the portfolio shaping question, we've been around for 140 years, and our first product was newsprint. And so thankfully, it is people have been shaping our portfolio for a long, long time. And so, at this point, I don't see a path to what you described, that you would break them apart. There's a lot of efficiency in going to market together.

Tissue is a strong cash generator, but there are some markets in the world where we don't have a big tissue presence. Today, our business in China is predominantly personal care, although we've got a rapidly growing KCP business in China, which is, again, tissue-related in many areas.

So again, we think we are doing all the right things to shape the portfolio. We will continue to challenge and test that. And we are not afraid to make calls that we think are shareholder-friendly over the long-term.

Great. Appreciate the dialogue. Thanks, guys.

Bill Schmitz with Deutsche Bank.

Could you just talk about some of the SG&A leverage? Why, maybe, some of the incentive compensation -- I don't know if it got reversed or was always based on plan? And then what the advertising spending did in the quarter? And if the outlook for the year is still to grow it faster than sales?

Yes, I think on the incentive comp, last year's first quarter was a little high. And so, it was partly, as we're moving the accruals around for the three-year restricted shares. And as you start to have your performance level and plans up -- tick up, so we topped it up a bit last year in the first quarter.

This year, with some of the weakness in currency, it got reduced a little bit. So the net swing was probably a good chunk of the swing on the G&A front, but nothing fundamentally changing on the plans beyond that.

And then, on the advertising, we are basically down 10 basis points from last year, but up nicely sequentially. And so, when we'd say last year's first quarter was the highest quarter of the year. And so we were well above the other three quarters in the first quarter.

We've also got a little bit more backend-loaded innovation. So we feel pretty good about the level of spend in advertising. I think research spending was up 10 basis points in the quarter, so continue to invest in R&D and product development.

Got you. So the same -- the guidance, it still prevails for advertising spending growing faster than sales for the year, you think?

Yes.

Okay. Got you.

Yes, I think that's right.

Is it too early to ask you questions about the structure of the health care spin? When will we get a sense for how it is going to impact earnings? What kind of leverage you're going to put on the spin to dividend back to you guys to buy back stock? Is that still premature? Or can you guys give us a little bit of a hint?

Yes, I think it's probably a little early. We will give you more color in the second quarter. When the Form 10 comes out, you'll get a good look at the historical financials of the thing. And so, they'll have a chance to do that.

And we'll have more detail on what the impact is going to be. What -- Mark mentioned some restructuring activity, what stranded costs that we have that we are going to work to get rid of. So we are actively working on all that stuff, and we will have more to talk about that on the second-quarter call.

Okay, great. Thanks so much.

Gail Glazerman with UBS.

Can you talk a little bit, in detail, of what you are seeing in terms of the dynamics in the tissue market? Last quarter, you talked about, with GP regaining their stride, there was maybe a little bit of messiness with some of the private labels. Are you any more or less concerned with the capacity that has come on over the last year?

And then looking forward, we've had a couple of announcements of new supply coming on over the next couple of years. Any -- do you think the market will be able to absorb that? Or, do think there will -- some will want to take some action?

Yes, I would say I feel pretty good about the capacity balance in North American tissue, at this point. If I look at the volume weakness that we had in North America in the first quarter, it was more to do with weak cold and flu season and some -- the shortfall in facial tissue. Our Continental business was down a little bit, but we had a very strong first quarter last year because of some of the challenges that GP had had.

And so at this point, we feel pretty good about our innovation strategy. We launched Viva Vantage, which is a new paper towel, and that's off to a good start in the quarter. And so, again, I think we've got a pretty big innovation portfolio we're working on across all those brands, and I'd expect to continue to drive those businesses.

The growth rates were probably not going to be as high as the adult care business in North America, but we still think there's opportunity for innovation and mix accretion, there.

Okay, and just taking maybe a bigger macro view. You mentioned some of the weather weakness in K-C Professional. Looking through that, how confident are you on the underlying -- within North America, anyway, the underlying macro environment and demand environment?

Gail, I hate blaming weather for anything. And so -- because you'd like to think that our products are more essential. So I was really picking on our K-C Professional team when they were trying to explain this to me with weather.

But what we really did -- people that didn't come to work didn't use hand towels. People that weren't able to get to the welding jobsite didn't use our safety products. And so we really lost hours of work in the first quarter. That was a significant hit.

When you talk to our distributor customers, they would say they are seeing it in their numbers in the first quarter. And most of those guys are not public reporters, so you maybe not as able to see it as easily. And they are feeling -- they saw the -- March volumes picked up, and they are feeling like it's back to more of the underlying rate of growth in the economy.

So we will see. But we have got a pretty aggressive plan baked in to try to get as much of that back in the last nine months as we can. But some of those hours lost due to weather aren't going to be recovered.

Okay. And then just lastly, on the European restructuring. When do we comp the most of the change? And when will we start to see more of the steady-state trend?

Yes, really, I think April was about the end of the sales cutoff from when we exited most of the market. So it should be pretty well flushing through the sales decline in the second-quarter numbers. Paul, does that make sense?

Yes. I think, Gail, you should expect that the second quarter will look pretty similar to the first quarter. We had about two points of lost sales, or lower sales, from restructuring activities. That's likely to be about right in the second quarter, and then it should basically go away.

Roll up after that, yes.

Okay. Thanks very much.

Wendy Nicholson with Citigroup.

My question has to do with the fem care business. The tampon market shares that we are seeing in North America look terrific, but the pad market shares are not as strong. And I'm just wondering, what you think that is?

Are you literally switching Kotex consumers from one product to the next? Or is it something that you need more innovation, or different pricing in the pad market? Because shares have been down there fairly steadily for a while. Thanks.

Yes. And if you look at our fem care share overall, we have been -- launched a lot of innovation on tampons, and have got some really unique and terrific products that are out there and are doing well in the marketplace.

On the pad side, we have probably lost share on our Kotex Natural Balance, and have not gained it all back on U by Kotex. And so we do have some innovation coming on the pad business.

And the encouraging thing is, a lot of that innovation is already launching in other markets outside the US. And I mentioned in my remarks that we actually have seen double-digit growth in fem care outside the US, which is well faster than the category is growing in those markets. So we are encouraged, and we expect to see some better trajectory in the US later this year.

And can you remind us which is the stronger gross margin business -- the -- just in the US, specifically, tampons versus pads, for you?

Pads is historically a stronger gross margin business for us. But we are also doing some work on our cost structure to get that -- to get our tampon business more efficient going forward. And so we are hoping to close some of that gap.

Okay, terrific. And then my second question is just, on the international statistics that you give us, China, Russia and Brazil, the volume growth in diapers. They are just so volatile, quarter to quarter. And they are all strong, and they are all great, and sometimes they accelerate, and sometimes they decelerate. But they are just so lumpy.

So it's hard to tell, oh gosh, Brazil looks like it has slowed sequentially a lot, despite an easy comp. Can you explain why those numbers are so lumpy? Is it that your market shares bounce around? Or is it just a supply chain issue? Because just month to month or quarter to quarter, it seems really hard to predict.

Yes, I would say part of it has to do with cycle of innovation. So if you looked at China, we've been at -- growing at 40, and now we are -- I think in the first quarter, we were at 30. So it's probably -- we were at 70 cities, and then we got to 90 by the end of last year, we went from 90 to 95 in the first quarter. So the rate of new city expansion is probably slowing a little bit, which is why those numbers are coming down.

In Russia, it's more we launched a number of diaper pant codes last year in a boy/girl format that's really taken off. And so that market ramped up from high single digits to mid-20s. And so that's probably the face of it there in Brazil.

We also have launched diaper pants, and are expanding into the Northeast part of the country, which is a -- we've been represented there, but it's really, we're putting more feet on the ground and more capability there. And so I think each market has got its own story as to what's going on. But mostly, it's broader distribution, and timing of when innovation gets launched that can drive it from quarter to quarter.

But in each of those markets, you wouldn't say that either the pricing dynamic is changing -- we read a lot about lower price competition coming into China. But it seems like your volume growth is still strong in each of those markets, broadly speaking.

Yes. There's a lot of competition everywhere. In China, in particular, Procter, Unicharm, [Kawal], are all over the mid and premium tiers. Hengan is all over the lower part of the marketplace. And so we feel like we've got to have a winning product every day to be able to compete, and are really focused on that.

In Brazil, P&G is a big competitor in Brazil, and Unicharm is just building a plant to launch there later this year. And so we are really trying to make sure we are driving as much innovation to the market, and be prepared for that and have a very strong position in the marketplace before competition comes. And in Russia, we have run into P&G as well as some other local competitors. And so, yes. There's no shortage of people that want to eat our lunch every day.

Got it. Terrific. Thanks for all that color. I appreciate it.

Chris Ferrara with Wells Fargo.

On -- just back to pricing on FX, just curious. Do you expect there to be more FX-related pricing? Or have you taken about as much as you are comfortable with, given where the spot rates are today?

I think that, at this point, we feel like we've done a pretty good job of getting price into the marketplace. But there's also, then, been quite a bit of volatility. And if FX markets continue to move in particular markets, we won't be shy about taking additional price.

But I would say, at this point -- and again, some of it was taken during the quarter, so it may not have been fully reflected in the quarter. So you could have some rollout effect later in the year. But broadly, we've been pretty aggressive about trying to take price as these exchange markets have moved.

Okay, but it -- so it sounds like, based on -- I guess we've seen, very recently, a little bit more of a recovery in [EZM] currencies. You priced all that you are going to based on the recent moves, but maybe you haven't annualized all of that -- not annualized, but you haven't seen it all come through yet. So it's possible next quarter has a little bit better pricing line than this quarter? Is that basically right?

That's probably right. Yes.

Got it. And then, RISI is calling for, basically in the $80 to $90 per ton pulp decrease by the middle of 2014. On both -- it seems like on both eucalyptus and BSK. Is that in your numbers? Is that what you expect to happen, as well? Is that part of your commodity guidance?

Yes, I would say -- so if you look at northern softwood, which we are call it, our outlook as around $1,000 a ton, give or take. RISI is -- the March price is $1,030 at list. Eucalyptus, we are calling that for more $800 to $830, and the March price was $870. So we might -- not -- so on average for the year, we are probably not quite as aggressive on those.

It depends on when you assume the RISI thing happens. If you average that for the year, we are probably more in line.

Got it. And I just -- one last one on Venezuela. I get that you haven't had any transactions on SICAD or SICAD II. But I'm trying to understand the rationale for staying with the less conservative VEF6.3 rate.

Do you guys think that, on a sustainable basis, VEF6.3 is where you will transact and get the preponderance of it, or the majority of whatever cash you are able to get at in the market? Or do you actually believe that you will, at some point, see a devaluation? You just don't know what it is yet, so you are not going to take it?

I guess I would say this, Chris. I don't think I can remember, in my entire career, a situation like this in a significant currency market, where you've got a range from six at the CADIVI rate to, if you look at SICAD II, it's trading at 50.

And so, I do think that something is going to happen to close that gap at some point, because it's not sustainable to have that kind of a spread in a marketplace. And so that -- so I'm looking at this from two perspectives.

What do we need to do to operate in Venezuela? So how do we set pricing? How do we import product? How do we pay the bills and manage our exposure level? So that's one set of activities.

Today, we are getting all the funds related to import, at least in the first quarter, at the CADIVI rate. And we are not eligible even to apply for the SICAD I rate. And SICAD II just started to trade, and very little funds have flowed through that. And it's unclear whether anybody's gotten any money out of the country using that mechanism. So we are going to continue to watch this.

I would guess, at some point, something is probably going to happen to narrow that gap. And in the meantime, we feel like we've given enough transparency. We will also be filing our 10-Q today. It's the first time we filed the Q on the same day as the earnings call, with a little bit more disclosure. So everyone will be able to see what our balance sheet exposure is.

We've given enough information on -- about how big it is in the income statement, so that investors that want to apply a different rate to this have got the ability to do that.

And just following up to that. It looks like Proctor and Colgate, basically, generally, it seems like for every one point of exposure on the top line, it's been like a 1 point bottom line ongoing exposure to the P&L. So you guys are about 2%. That would make it look like an annualized 2% hit, if you were at the 11.8 or the 11, wherever it is today. Does that make sense?

It really depends on pricing. That's the other dimension, here, is that this is a price-controlled economy. You can make any exchange rate work if you get pricing, really.

It's a question of, what rate are you going to get funds at? And what at -- each of those individual exchange rates, can you price for it in the business, where there's enough margin to make sense to operate? So that's where you come back and say, we're running all the different scenarios. If we can only get money at this rate, what price level would we have to achieve to have an operation there that makes sense?

Got it. Thanks a lot for the time.

Olivia Tong with Bank of America Merrill Lynch.

First, on SG&A. It sounded like, in a response to a previous question, that a lot of this has to do -- a lot of the decline year over year for this quarter -- has to do with timing of when the incentive compensation hits the P&L.

So first, is a big decline in SG&A this margin, this quarter, just a matter of timing? Because it seems like, while health care was clearly a major driver, it seems like margins for both personal care and consumer tissue were also up. So maybe can you give a little bit more detail on what is sustainably lower in SG&A that's in the cards for 2014?

Yes, it's probably more that last year's first quarter was a little high. If you're going to look back, it was one of -- the high watermark, I think, in recent quarters, as a percent of sales. And so this year is -- this quarter is a little bit lower than average. But -- and part of that was related to -- incentive comp was the biggest swing.

And it was more about, every quarter, we are looking at our three-year forecast. Because we got the restricted shares that vest on three-year improvement in sales and ROIC, and looking at what our plan looks like, and making adjustments up or down. Last year's first quarter was a little higher increase in expense. This year's first quarter was a small decrease in expense, and that swing drove a good share of the difference.

Would you expect that, for Q2 through Q4, the rest of the year, still expect SG&A margins to be down year over year?

Yes. We would say that this year should be flat to down slightly for SG&A, is a good planning assumption.

Got it. Thanks. And then on the top line, clearly a plus 4% organic is very solid. But you just did the midpoint on your range of 3% to 5%, and the organic sales comps do get tougher as the year progresses.

So can you talk a little bit -- you mentioned some innovation. Can you talk about the cadence of innovation, as the year progresses?

Yes. We've got a pretty full calendar around the world of diaper and fem care, adult incontinence improvements coming to market. And so you will hear more about things happening on that front. And probably, a little bit back end-loaded this year, relative to maybe where we've been in the past, but still should see solid progress on that front. And feel like we've got pretty good momentum happening in the business right now.

Great. Thank you.

Connie Maneaty with BMO Capital Markets.

I was wondering if you'd noticed any change in the rate of sales in Russia and the Ukraine? I've seen some companies report strong sales in January and February, but declines in March because of the unrest. So could you just give us some indication of the tempo of your business?

Yes, no, we really didn't see a big impact on the business. Obviously, that's a part of the world we were watching very closely, and trying to make sure our people were safe, and that our supply chains were secure. And we really didn't have any product supply problems.

Some -- with some of the currency swing in Russia, we were able to get a little bit of price on personal care, as it reflected some of the import portion of the materials. And I think Ukraine is a relatively small business for us, but it didn't have any significant disruption there that was obvious in the numbers, anyway. So no, actually, it was a pretty solid quarter for that part of the world.

Okay, and that continues into April?

No bad news so far, Connie, anyway.

Okay. And since the Q is coming out today, could you just tell us if you quantified the impact of a move to SICAD II, and what that is?

(multiple speakers) No, basically, we just put the dollar exposure on the balance sheet in the Q, and then you can apply whatever rate to it that you would like.

And Connie, I will just jump in. This is Paul. As a reminder, in 2013, Venezuela was about 2% of our total consolidated sales, and about 3% of adjusted operating profit.

Okay, great. Thanks so much.

Javier Escalante with Consumer Edge Research.

I would like to come back to the competition pricing environment. In the US, Track Data shows share losses, I believe, to Procter. So what happened after you did the change in diaper count? Do you expect -- how, if you were losing share, when you have more diapers per pack, do you think that, what would be the impact of effectively increasing prices in the US, if you are losing share to Procter right now? And that would be question one.

Question two, you referred to Mexico last conference call, and [JV] income was down way beyond what the peso would suggest. So I would assume that the pricing environment in Mexico continues to be aggressive. So if you can give us an update on Mexico, as well? Thank you.

Sure. Javier, on the diaper question, in the US, and so basically, if you look year on year in the quarter, we're probably down a couple of share points on Huggies. Most of that is lost to Luvs. So Pampers has basically been about flat.

And so sequentially, our diaper shares were actually up just a tick, but relatively flat in this environment. And as we look at the price change, rolling into the marketplace, we are fully realizing it on the super premium part of the lineup that competes most with Pampers.

And we are only taking a part of the increase on the mainline to try to narrow the gap with Luvs, because Luvs did fully participate in the price count change that went in effect in the fourth quarter. So we are hoping we can actually narrow the price gap a bit with Luvs on the main line business, and line up on the premium business.

On the Mexico question, K-C Mexico is going to announce earnings later this week, and so I will let them give you a little bit more color on their call. I guess I would say, broadly, economic conditions in Mexico continue to be challenging, with less growth overall in the economy than forecasted.

And they had a fairly challenging fourth quarter, and I would say some of the same challenges that they had in the fourth quarter seemed to continue into the first quarter. But the team down there is committed to continue to improve their business, and that's -- they've got a solid track record. I know they will deliver improved results in the back half of the year.

And just -- thank you, Tom. One more thing would be this Venezuela situation. It seems like you flag it as a driver of top line growth this quarter. Could you tell us how -- why was it up? Is that, like Wendy said, it has to do with the volatility of the year ago?

If you can tell us what was the organic volume growth, or sales growth, in Venezuela? I imagine that you don't have any pricing. And if it is significant, why was it up so much, if you can explain that? Thank you.

Yes, it's pretty simple, Javier. If we get letters of credit to bring product, then we bring it in and sell it in the marketplace. If we don't, we don't. And so in the fourth quarter, we got quite a few letters of credit, we brought the product in in the first quarter, and sold it through in the marketplace. And it was probably more heavily oriented to bath tissue.

And so if you look at our international tissue growth in the consumer tissue category, it was probably more driven by Venezuela this quarter than it would have been in the past. If you looked at the total K-C International top line, it was probably a couple of points of extra boost to the K-C International top line in the quarter. But that would be more the nature of it.

But that -- what would that be? Like 30%, 40% growth in Venezuela?

I don't have the numbers in front of me. We can give you more detail. But I would say it's a couple of percent of our sales, and K-C International is 39% of our overall sales. So you can kind of figure out and get close enough to the math, I would guess.

Okay. Thank you.

Chip Dillon with Vertical Research Partners.

First question is, you did call out a pretty significantly sized charge tied to Middle East regulation, and maybe I missed it. But could you tell us what's going on there? And is this truly one-time? Or is there something going on that could impact how we should look at the business there?

Yes, I guess I would say, it's one-time in the sense that we hope it doesn't happen again. But it's also one of the things you're finding around the world is that governments can adopt unusual tax positions that you didn't expect, and maybe I'll have Mark give a little bit more color. But essentially, we put capital into a market, and a government decided to apply a value-added tax to that capital contribution. We obviously disagree, but we lost the court case, so we booked a nonrecurring charge.

(multiple speakers) You get an A.

Thank you. (laughter)

Yes, that's pretty straightforward. Okay, got you. And then -- I know this bounces around quite a bit. But anything else you can tell us about the other income expense line? As I look at it, the recurring component of that was about $18 million against you. And was there anything that you would call out that would have explained that being so high this quarter?

Yes, it was all currency transactional losses, and probably heavily oriented to the Ukraine, and I think -- what was the other market, Paul? Argentina. So wherever you saw big currency shifts, and we had a dollar-based payable, you wind up taking a hit on the transactional currency line. And so that was -- yes, you can't hedge some of these markets effectively, and so that flows through other income and expense.

Got you. (multiple speakers) And I know we are going to get more data on -- or detail on the health care business. But it certainly had a -- and I know it was probably down a bit last year. But it certainly was a great swing year over year.

Do you think you will see year-over-year profits go up every quarter this year? I know the third quarter is a tougher comparison, and I'm not trying to pin you down. But I just wanted to get an idea of how sustainable this improvement is?

They are off to a good start, no question. They had some one-timers that went against them the last year, in the first quarter. They probably had a couple of things that broke their way this year's first quarter. So I wouldn't necessarily apply this margin rate to the full year. They are probably a little ahead of expectation.

I think the good news is, is that while we are doing all this work to get ready for the spin, the business is continuing to operate and execute at a very effective level, and they had a solid first quarter, overall, top and bottom line.

Okay. And then lastly, I noticed that corporate expense, when you strip out the one-time items, was down quite a bit. And I'm imagining maybe pension is helping you there. But should we see that continue to be down, year over year, throughout the year on that line?

It was probably not so much pension helping us there, Chip, as the other incentive comp that was -- that we talked about earlier that was in there last year, and in there again. So it was high last year and down this year.

Got you. And so how should we think about that the rest of the year? I guess it's a function of the stock and the earnings?

Yes. I would say, broadly, it would be -- I would probably follow the similar G&A guidance that it's flat to down slightly.

Thank you.

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

All right. Thank you, David. We will wrap up with a comment from Tom.

Once again, solid first quarter. Lots of things going on in the business, and we appreciate your support of Kimberly-Clark. Thanks very much.

Thank you very much.

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines, and thank you for joining us this morning.