金百利克拉克 (KMB) 2014 Q2 法說會逐字稿

(Operator Instructions)

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

Thank you, and good morning, everyone.

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

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

Here is the agenda for our call.

Mark will begin with a review of our second-quarter results and then give an update on the healthcare spinoff.

Tom will then provide his perspectives on our results and the outlook for the full-year, and we'll finish with Q&A.

As usual, we have a presentation of today's materials in the investor section of our website.

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

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'll turn it over to Mark.

Thanks, Paul, and good morning.

I'll start with the headlines.

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

Second, we increased adjusted earnings per share 6% driven by organic sales growth and cost savings.

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

Now, let's cover the details of our results.

Second-quarter sales were $5.3 billion up more than 1% versus last year.

Underlying organic sales rose 5% led by strong growth in K-C International.

Currency rates were a 2% drag, and restructuring activities reduced sales by 1 point.

Second-quarter adjusted gross margin was 34.8%.

That's up 30 basis points year on year.

Adjusted operating profit was up 5% versus year ago with an operating margin of 16.1%.

That's up 60 basis points compared to prior year.

Results benefited from organic sales growth, $75 million of forced cost savings, and $10 million of savings from pulp and tissue restructuring actions.

On the other hand, we absorbed significant currency headwinds.

The total earnings drag including translation and transaction effects and losses was approximately $0.11 per share in the quarter.

We also absorbed $60 million of input cost inflation.

We now expect that full-year inflation will be toward the high end of our previously estimated range of $150 million to $250 million.

That takes in account additional inflation in some International markets and a somewhat tighter virgin fiber market.

To support our brands and innovations, we increased advertising spending by $15 million in the quarter.

That's up 20 basis points as a percent of sales.

Now, moving down the P&L.

Equity income fell 27% driven by softness at K-C de Mexico.

K-C de Mexico's market positions remain strong.

In their primary markets of bathroom tissue and diapers, they have market shares well into the 60%.

However, given recent results and the challenging macroeconomic environment, we now expect that our full-year equity income will be down compared to last year and our original expectations for this year.

Putting it all together, second-quarter adjusted earnings per share were $1.49.

That's up 6% year on year.

Now, turning to cash flow.

Cash provided by operations in the second quarter was $842 million.

That's up 46% year on year, mostly due to working capital improvements and lower pension contributions.

We continue to manage primary working capital very well.

Our year-to-date cash conversion cycle is down two days compared to full-year 2013 so we're in great shape to meet or potentially exceed our one to two day improvement objective.

In terms of capital allocation, second-quarter dividend payments and share repurchases totaled nearly $800 million.

We repurchased $476 million of KMB stock in the quarter, and we continue to expect full-year share repurchases of $1.3 billion to $1.5 billion.

Now, I'll 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%.

Second-quarter personal care operating margins were 18.6%, and that's up 50 basis points year on year led by gains in K-C International and Europe.

Moving to consumer tissue, organic sales were up 3%.

Consumer tissue operating margins of 14.7% were up 120 basis points year on year driven by selling price increases and cost savings.

Turning to K-C Professional, organic sales increased 3%.

Performance was led by 13% growth in K-C International where organic sales were off slightly in North America.

Our KCP margins were solid at 17.9% although they were down versus a very strong year-ago performance.

And lastly, healthcare organic sales were off slightly with healthcare operating margins of 15.9% were up nicely versus a soft result last year, and I'm really encouraged by the team's execution as we prepare for the spinoff.

Now, let me turn to the planned spinoff of our healthcare business which will become Halyard Health.

We're making good progress overall.

Our initial Form 10 registration statement was filed with the SEC in May, and an amendment with first-quarter financial information was filed in June.

Halyard's Senior Management Team is in place, and selection of the Board of Directors is underway with the lead Director and the chair of the Audit Committee already named.

Separation planning is well underway, and we're targeting to complete the transaction at the end of October.

We're continuing to assess the impact of the spinoff on our remaining K-C operations.

Stranded costs are estimated to be about 2% to 3% of our annual adjusted operating profit.

In the near-term these costs will be partially offset by incremental share repurchases and transition services agreements which we'll have in place with Halyard.

As I mentioned in April, we expect to incur some restructuring charges in order to fully mitigate the impact of stranded overhead and to improve our overall organizational efficiency.

Our work in this area is ongoing, and we expect to share our plans in conjunction with our third-quarter earnings communications in October.

So, that wraps up my comments.

To recap, we achieved solid organic sales growth.

We delivered healthy cost savings and bottom line growth, and we continue to allocate capital in shareholder-friendly ways.

Now, I'll turn it over to Tom.

Thanks, Mark, and good morning, everyone.

I'll share my perspectives on our second-quarter, and then I'll address our full-year outlook.

So, starting with Q2, we delivered another quarter of good performance overall.

Organic sales growth in the quarter was 5%.

That's at the high-end of our 3% to 5% full-year target.

As you think about our targeted growth initiatives, K-C International had another strong quarter with 10% organic sales growth and improved margins.

In diapers, our organic sales increased approximately 30% in Russia and Eastern Europe, 20% in China, and 15% in Brazil.

Our Huggies business continues to generate excellent top line growth in these markets, and at the same time, we're making good progress in improving the bottom line.

We're also doing well in our other personal care businesses in K-C International.

Organic sales were up double digits in both feminine care and adult care and mid-single digits in baby wipes.

Our focus on premium innovation and category development continues to generate good results in these businesses.

Elsewhere in K-C International, KCP organic sales were up at a low teens rate.

That was led by growth in Latin America and solid progress in China.

We're continuing to push harder to further build this business where industrialization and economic development are occurring.

We've also implemented a number of selling price increases in K-C International in response to weaker currencies and cost inflation.

These have been executed well, and in general, have not impacted underlying demand.

So overall, we have good momentum in K-C International, and we remain very optimistic about our prospects there going forward.

In terms of top line growth in North America, volumes are on track or ahead of plan in our adult care business, in baby wipes, and in our feminine care business.

We're also largely on target in consumer tissue although we're responding to increased competitive promotion activity in the bathroom tissue category.

On the other hand, volumes were below expectations in diapers and in our K-C Professional washroom business, and our teams there are focused on improving performance by better leveraging our innovation, marketing, and selling capabilities.

Regarding innovation activities, we're making good progress overall.

In K-C International, our focus on innovation in diapers and diaper pants, premium feminine care and adult care continues to deliver strong growth for us.

In North America, I'm encouraged that innovations are helping grow our brands like Poise, Depend, U by Kotex, Viva, and Huggies baby wipes.

Our brand positions are solid overall and reflect our innovation launches and increased advertising spending.

Our market shares in the US improved or were even with year-ago in six of eight consumer categories that we track, and we're growing faster than the category in a number of our markets in KCI.

In terms of bottom line, I'm encouraged with our second-quarter improvement in margins and earnings despite the headwinds that Mark mentioned.

Some of that bottom line improvement was due to benefits from the strategic changes we've made in Europe.

We've also just started to more formally bring together our European and Middle East and Africa teams into one organization to streamline decision-making and improve efficiencies there.

While we've got more work to do, I'm encouraged by our progress in Europe.

Finally, as Mark has already highlighted, we continue to operate our Company with financial discipline by generating significant cost savings and cash flow on allocating Capital in shareholder-friendly ways.

So, in summary, we're executing our global business plan strategies well in a challenging environment, and we're essentially on track with our overall plans for the first half of the year.

Now, moving on to our outlook for the full year.

We continue to be optimistic about our prospects to drive profitable and healthy growth.

On the top line, we continue to target organic sales growth of 3% to 5%.

We've got good momentum in this area with 5% organic growth through the first half of the year.

While comparisons get more difficult in the back half of the year, we expect to make further progress with our targeted growth initiatives and innovation programs.

On the bottom line, we expect to deliver full-year adjusted earnings per share in a range of $6.00 to $6.15.

Compared to our previous guidance, we have narrowed the range modestly by bringing down the top end by $0.05 a share.

This recognizes a slightly more difficult external environment including the outlook for commodities and business conditions for K-C de Mexico, some of the consumer tissue promotion activity in North America, and overall competitive activity in general.

Regardless of the environment, we continue to be optimistic about our future.

We're staying focused on our strategies to protect and improve our brands and our business, and we remain convinced that successful execution of our global business plan will continue to result in strong returns to our shareholders.

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

(Operator Instructions)

Wendy Nicholson, Citi Research.

Two questions.

First, with regard to the contemplated restructuring program, are you expecting that to be bigger than just to address the stranded overhead costs associated with the spin?

Or, is that limited to specifically that transaction?

And, second of all, there has been a lot written and a lot of speculation about Proctor entering the adult incontinence market, and I'm just wondering, is there anything you are doing in anticipation of that?

Or, to better position yourself.

Obviously, you've got an incredible position already.

But, is there anything you'd do differently now if that is coming down the pike?

Thanks.

Good questions, Wendy.

On the first one on the restructuring, we will give you more color on that in the third-quarter call.

At the minimum, we're going to make sure we eliminate the stranded overhead, and Mark gave you a guidance on the range of that is 2% to 3% of our operating profit.

At the same time, we're asking our teams broadly to say are there other things that as we look at Kimberly-Clark post-healthcare spin that we could do to make ourselves even more efficient.

And so, we'll be evaluating those ideas over the next few months and give you more color on that in October.

On the Proctor front, we've been going hard to drive Depend and Poise pretty aggressively as you've probably seen over the last several years, and I think having a great innovation portfolio behind those brands is the best defense for any kind of competitive activity.

And so, we will continue to drive innovation and try to drive the category growth, and we think that will serve us well over the medium-term.

And then just two questions, follow-up.

On the restructuring side, are you contemplating any additional product line exits like you did with diapers in Western Europe?

Or, is it really just cost-related?

And then, secondarily, what's your confidence in the pricing dynamic in adult diapers?

They are obviously a very expensive product.

Do you feel like you've got a sufficient range of products?

Is there a chance that Proctor comes in and undercuts you, and there is negative pricing in the category?

How do you think about that?

Sure.

On the restructuring, I would say it's primarily going to be cost-related.

I wouldn't envision there's any product line exits going on there, and so it really is just more looking at our talent and where we've got it and do we have the right capability in the right places.

And, other things we can do better from a shared service or centrally that we're taking a look at as a chance to look at your overhead structuring when you have a transaction like this spin.

On the second question on the pricing dynamic, we obviously haven't seen full visibility of what Proctor is going to do, and so we'll make sure we're competitive in the marketplace.

But, behind a lot of innovation that we've brought, we brought Depend real fit for men and silhouette for women to the market last year.

That's probably our most income-challenged consumer.

Because those products work so much better, we've picked up 9 to 10 share points behind a more expensive product offering, and so we're not shy about pricing for the innovation where we've got real game-changing innovation to bring to market.

Terrific, thanks.

Thanks, Wendy.

Chris Ferrara, Wells Fargo.

I guess first on pricing, the plus 2% in the quarter was pretty strong.

I'd love your thoughts on what's driving that?

What the promotional environment like?

Obviously, we know there are some tissue skirmishes going on, but what would outlook be?

Do you think that plus 2% you put up -- when does that start to decelerate as you move through the year?

Or, in fact, do you think that some of this currency-driven pricing at a lag might keep it at that plus 2% rate for little while?

That's a great question, and I think if you look at where we got most of the price, it was in the markets that have had significant currency devaluation and local inflation as a result.

So, places like Brazil, Argentina, Russia, the Ukraine, other markets like that where you've seen pretty rough currency markets, you have seen everybody across all categories taking price pretty aggressively and a pretty good bit of inflation.

So again, I think a lot of that has happened, and we'll get some comp of that flowing through for the next several quarters.

But, I guess I wouldn't say that that's a long-term trend at this stage.

Got it.

That's helpful.

And then, I guess on top line, just a couple of quick things.

First on China, obviously plus 20% is a great growth rate this quarter, but it has gone from 45% to 35% to 30% to 20%.

So, one, is plus 20% is that where you think China settles out?

Or, might we even slip a little bit further given how robust the rate still is?

And then, overall -- Tom, you mentioned obviously the comps get tougher in the back half of the year for the Business as a whole.

You mentioned that the innovation pipeline picks up.

Do you think there is a chance that you don't see a year-on-year deceleration in the back of the year relative to what you saw in the first half of the year?

So, you're saying that you think we're going to be down in sales?

Or, just slower growth rate in the back half?

Sorry, just slower growth rate, yes.

I'd guess we have a lot tougher comps in the back half, and I'd say that we gave the 3% to 5% guidance -- we got 5% in already.

So, I'm highly confident we'll be in that range, but we could have a little slower growth rate in the back half than we did in the first half and in part because of the tougher comps.

In China in particular, we still think the -- I know the Nielsen data doesn't show this, but we still think the diaper category is growing high single digits.

And, there's a lot going on in e-Commerce that isn't tracked in the Nielsen data that we're seeing happen in those markets.

And so, we've still got a lot of innovation coming there, and really we're just getting started in FemCare with the relaunch there.

We've got a lot of additional product activity we can bring to those markets to continue to see growth.

And so, I'd say we continue to expect K-C International is going to have high single-digit growth for some time to come.

Got it, thanks.

Thanks.

Gail Glazerman, UBS.

I know you mentioned that you're able to pass through the prices in the emerging markets generally, but it seems like in KCI tissue volumes were a little bit weak?

I was wondering if you could give us some color there to start?

We probably took price a little bit more aggressively in a couple of markets and took some volume risk on that.

Brazil was one that would come to mind.

And, sometimes when you take price in tissue, you do it with de-sheeting, which shows up as negative volume and positive price, so you may be selling a similar number of rolls, but you're actually -- we measure volume in sheets not rolls.

So, that can be a part of it in some markets as well.

Okay, and in the US away-from-home market, I believe there was an effort to raise prices?

I was just wondering if you could give an update on how that has been accepted?

Several of the competitors took price.

We followed.

That's still rolling out as we speak.

As you know in that market, you've got lots and lots of individual contracts, and so it takes longer to have that price get bedded down in the marketplace.

But, so far that seems to be rolling out reasonably successfully.

And, just two last quick ones.

Can you give a little bit more color on the increased competition that you're seeing in the US bath tissue market?

As you probably recall, Georgia-Pacific had some production problems where they were on allocation at the beginning of last year, early first half of 2013.

So, they've come back with more promotion this year and are really trying to get their shelf space back and some of their market share back.

Some of the other competitors in the marketplace have followed that, and so we've tried to make sure that we're competitive with -- primarily on Cottonelle, Scott tissue has held a up pretty well in this environment.

Just last one on pulp.

You talked about maybe firmer than expected virgin fiber pricing.

I'm just wondering if you could break that down between the major grades -- soft wood, hardwood, and fluff pulp?

And, what you're seeing and expecting moving forward?

Northern softwood and fluff pulp has probably been the stickiest, and the list price hasn't come down much.

You are seeing some deals particularly on northern softwood below list price where tonnage is being bought off-contract because I think the producers are unwilling to bring the list down.

So, that's making the list price a little bit less relevant to the everyday transaction price that's happening in the marketplace.

Eucalyptus has probably been closer to what we were expecting, still maybe a little bit on the high end of the range.

But again, I'd say Eucalyptus, you see more supply still coming into the marketplace and more of a predictable behavior there.

And, on fluff are you seeing relief.

SCA last week talked about seeing fluff -- expecting fluff prices to come down.

Is that something you're expecting as well?

I think everybody is expecting it.

We're not seeing it yet.

Okay, thank you.

Yes.

Connie Maneaty, BMO Capital.

Good morning.

Could you talk about your business in Venezuela?

Kimberly is one of the few Companies not to move to a weaker exchange rate, so I'm wondering if the official rate is what you believe is the true reflection of your economics there?

And also, if you could talk about whether you've gotten any price relief?

That's a trick question, Connie, as to what the true exchange rate is in Venezuela at this point in time.

But, as we look at it, actually we just reviewed this with our Audit Committee the other a couple of days ago when we reviewed the 10-Q and the earnings release.

There's about one-third of the companies that we've been able to track down there that are still using the 6.3 rate.

There's about one-third that are either using some form of a blended rate, or the SICAD I rate.

And, there are about one-third that are using the SICAD II rate.

The choice as to which one they are using seems to have more to do with the type of business that they're in and which rate they qualify for.

So, if you're in the services arena, you're probably in SICAD II.

If you're in the essential consumer products area, you are in the original cadivi rate.

And so, essentially the only exchange that we're getting is at the 6.3 rate, and we've got more foreign exchange in the second quarter than we even did in the first quarter at that rate.

So, I think there has been some discussion by some Venezuelan government officials that they are considering aligning those at one rate, and I think that's probably the long-term trajectory.

At this point in time, it's something we review every quarter and talk about what's the right rate, but we're not even eligible to apply for the SICAD I or SICAD II rate at this point time.

In the meantime, we try to be completely transparent in the Q about what our balance sheet exposure is in Venezuela and so that investors if they believe there is a different rate that should be applied, they've got the information that they need to be able to do that.

And, are you getting any relief on pricing yet?

Given that we're still at the -- getting the exchange at the 6.3 rate, it's difficult to argue for pricing at that point.

So, if and when the rate changes, then that would be a discussion at that point in time.

In the meantime, we're more focused on getting enough foreign exchange to be able to continue to run the mill, to bring in raw materials, and to continue to bring in some finished product.

And so, we work with the Venezuelan government authorities on that on a daily basis.

Great, thank you.

Thanks, Connie.

Olivia Tong, Bank of America Merrill Lynch.

Good morning, thank you.

First question just back to incontinence.

It looks like P&G has started to test the waters a little bit in Europe.

So, do you have any early reads on their approach, and how you plan to respond to that?

And then, just on North American diapers.

Clearly, volume has been a little bit difficult in Huggies with the volume down low single digits.

So, can you talk a little bit about what your plan is to respond to that?

Thanks.

Sure.

On the incontinence, they just started shipping in the UK just in the last month or so, so we've picked up some product samples and those are being tested.

It's probably too early to tell.

I'd say at this point, we would never take a competitor lightly.

But, we feel pretty good that with the innovation program that we have and the things that we still have coming in -- behind our Depend and Poise business.

On the positive side, if you were going to be the optimist here, it's that the Poise category in particular, the light bladder leakage category, still underpenetrated.

So, having another competitor come in and talk about it from the consumer standpoint could benefit all of us if the category grows more rapidly.

On the North American diaper front.

As you mentioned, we're not satisfied with the share.

A lot of it has been Luvs, particularly at a couple of large-format retailers have been driven.

So, we're going to try to make sure were more competitive in the second half and have more innovation coming across our Huggies lineup to get that brand back in a healthier growth profile.

Got it, thanks.

And then, on Professional.

Last quarter, you attributed the decline in North America partly to unfavorable weather, but now pricing seems to be a bigger drag.

So, can you talk through how you think about professional developed markets given these dynamics?

I think the KCP business -- weather was certainly a challenge.

But, as we look at it, we would probably say we didn't execute as well as we needed to, and so we're in the process of realigning some of our sales capabilities.

And, that probably was more disruptive than we would have thought so we're focused on getting that business back on track.

Saw a little bit better performance overall in the second quarter so we had positive volume in North America which was a good sign.

We've probably spent a little bit on price to get some of that, which is where you saw the negative price, but we are aligning that team to have a stronger second half.

And, we should see that play out in the marketplace.

Got it, thank you.

Thanks, Olivia.

Erin Lash, Morningstar.

Thank you for taking the question.

I was wondering if you could speak to -- first off with the childcare volumes down mid-single digits?

And, just your expectations for that segment of the Business?

And, if that's reflective of Pull-Ups and what you're doing I guess to stem that loss?

What we're seeing with childcare is a couple of factors.

It is primarily Pull-Ups.

We are seeing growth in our size six diaper business which would say that moms are keeping babies in diapers a little longer.

Part of that -- there is an economic issue where Pull-ups are a more expensive per piece than a disposable diaper, and we're also looking at it to make sure that the Pull-Up is delivering on the product performance expectations.

Are we seeing a little bit more leakage in Pull-Ups, and is that why the consumer is deciding to stay in diapers a bit longer.

We've got initiatives behind both of those areas and would expect to see some improvement in our Pull-Ups business in the back half of the year and into early 2015.

That's helpful, thank you.

And then, if I could just follow up on Wendy's question from earlier about potential divestitures resulting from the restructuring.

Is that -- was your answer indicative of the fact that you, after the spinoff of the healthcare business, that you're content with your portfolio?

Or, are you constantly re-examining your portfolio to see if there are other areas that maybe are less core to the Business?

Erin, I can take a long-term view.

We've been around a little over 140 years, and our first product was newsprint, so our portfolio looks pretty different today than it did then.

I guess the answer is we're always continually challenging ourselves on what can we add to the portfolio to make us better.

And then, are there other properties in the portfolio that we maybe aren't the right owner of long-term, and we've been pretty disciplined about doing that over the years.

This is, I think, my third spinoff.

But, coming out of a big transaction like the spin, I'd probably say in the near-term, the medium-term, we're pretty happy with the portfolio.

Okay, thank you.

That's helpful.

Just finally, building off of that question.

With regards to potential acquisitions as a use of cash -- if you could speak to that?

And potentially, where you might see some holes in the portfolio that you would potentially look to fill by making acquisitions.

Whether from a product perspective or a geographic perspective?

Thank you.

We have not done a bunch of strategic M&A.

In fact, the only business that was probably doing some M&A was in our healthcare business, and then when the spin happens, I'm sure that that team will have some interest in continuing to look to add healthcare properties to their portfolio.

As I look at our core business, we've got enough organic growth opportunities in the emerging markets.

Today, a high percentage of our business in the emerging markets is in diapers and bath tissue.

We've got huge opportunities to continue to grow baby wipes and Pull-Ups and our adult care business as the global population ages.

So, our KCP business as the world industrializes is a great growth opportunity for us outside of North America and Europe.

And so, we see a lot of things that we can go chase with big opportunity that we already own, and so we're focused on those probably more than looking for the strategic acquisitions.

Thank you, that's very helpful.

Thanks, Erin.

Javier Escalante, Consumer Edge Research.

Hello.

Good morning, everyone.

Just to kind of wrap it up with Venezuela, if you can tell us how much your local currency sales growth was?

And, what percentage of the profits currently represent?

Because I understand that you are now getting access to cadivi rates which other companies in the same space seems not to be getting access to?

Javier, I wouldn't assume that other companies aren't getting the letters of credit at the 6.3 rate like we are.

So, I think that they may be in some categories and not others, the more essential you are.

So, diapers and bath tissue would be firmly in that area.

The more likely you are to get the 6.3 rate.

And, as you look at 2013 data, Venezuela was 2% of sales and a little bit more than that as a percent of profits.

It is probably a little bit higher than that in the first six months of the year so we've probably seen a little bit faster growth.

If you look at the second quarter, I think of the double-digit KCI growth, Venezuela was about 1 point of that so it's not way out of proportion with the role in the portfolio.

Understood, thank you.

The way that I understood your commentary with regards to pricing, you mentioned -- because 5 points had been both in tissue and personal care International.

It seems like not all of it is in place?

So, does it mean that we're going to see even higher pricing going into the third quarter?

I think most of it is in place.

It's just as you compare it to prior year, you'll have a positive comp for the next several quarters as that rolls through.

Okay.

And finally, on Mexico, right.

You attribute the decline on the joint venture profit mostly to macroeconomic dynamics, but is there a competitive aspect to it?

Is something happening to actual retail prices?

Could you elaborate more on what's happening with JV income in Mexico?

Yes, I think if you look at our shares in Mexico, they been very stable and so the team has defended successfully.

There is more competition in Mexico as both CMPC and Mabesa in particular have been aggressive in tissue and diapers.

You're also seeing a relatively weak economic environment and a more challenged consumer.

There has been some of the tax reform proposals that rolled some VAT through that took spending power out of the pockets of Mexican consumers.

That had an effect on category health broadly.

And, you're seeing that and some of the big retailers.

I think some of the large retailers have had negative same store comps for the last two quarters in a row which is the first time in my career I can remember that happening in Mexico.

And so, the expectation for growth down there was to grow 3.5%, 4%, and GDP has been growing more like 1%.

And, that is having a disproportionate income on -- impact on consumer confidence.

And so, we've got big shares.

We're defending them.

We've got good margins.

We're largely protecting those, but we're not getting as much growth out of that market as we would have hoped for this year.

Thank you, Tom.

Just one more.

It have been touched before on the weaker volumes in diapers in the US.

It seems to me that when you changed the diaper count earlier this year, volume has weakened.

So, to what extent it is an issue of pricing that after you reduced the number of diapers per package, you started losing share?

Whenever you do a count change, we always get a little bit of a drop in volume because if you think about it, the customers are ordering the same number of cases and the consumers are buying packages at the same rate.

And, everyone's inventory on average drops by the amount of the count change.

So, that's not that unusual.

We were probably six months later than our primary competitor in making the count change so we probably had a price advantage for six months.

Now, it's more of an even competition on that front.

So, I guess I would say that part of it I could understand.

What we're also seeing though is with the growth in Luvs and the feature promotion that they had in the second quarter, that's probably something that we will be more responsive to in the back half of the year -- both with innovation and making sure we're competitive in key areas.

Thank you very much, Tom.

Thanks, Javier.

Lauren Lieberman, Barclays.

Thanks, good morning.

First, just to follow up on that last comment on Luvs, and you'll respond with some news in the second half.

Might that imply more activity at the lower end of the market, right?

Because with Luvs they've got two distinctive brands -- one more catering to the lower end where Huggies is trying to be all things to all people?

So, is that something that you have contemplated, more of a mid-tier-priced brand or a sub-brand?

If you think about it, both us and our primary competitors do this a lot of different ways.

So, if you would go into China, for example, you would find Pampers across all product tiers.

You'd see the same thing for us in many markets.

It's not unusual to have the same parent brand, and you'll have a sub-brand.

So, Huggies snug and dry would be our tier 4 brand that we would be focused on competing more with Luvs, and it's trying to make sure on your right package price and the overall value equation, the product performance and price that delivers to the consumer in that segment.

Luvs is priced above private label and below the Huggies and Pampers tier 4. It's just trying to get that gap right for the value that you are delivering in the product.

Okay.

And then, on that private label segue, SCA on their call -- I guess late last week -- talked about the impact that they believe they are starting to see of the new higher grade capacity in consumer tissue in the US?

And, that's something I think that in the past as you've commented -- we don't think it will be a huge impact on the market.

Any change in that?

What are you currently seeing in terms of this higher-quality private label product coming to shelf?

We are seeing better quality private label.

It hasn't hit our shares at this point in time.

So, we see Cottonelle as a differentiated offer and Scott tissue has some of the most loyal consumers in the category.

And so, it has probably been a bigger factor for some of the other categories.

I think in this last quarter, private label bath was up about 1 share point year on year, and so that's not trivial but it's something that we're watching.

But, it hasn't had a big impact on our business at this stage.

Do you think that that's playing a role?

I know you can pretty specifically point to Georgia Pacific trying to regain its momentum given their problems last year.

But, do you think that this share gain from private label is also influencing competitor behavior?

And then, just the overall environment get more competitive?

The reasons may be varied, but the outcome is the same that everyone gets more promotional?

If you look at bath tissue and towels, you walk into every store in America and somebody's branded towel and bath tissue is on deal every week of the year.

And so, we all take turns with the promotions.

So, the question is, are you going deeper?

Are you even trying to be even more frequent?

But again, I think we've seen a little bit more depth of promotion from GP this year which is what both Proctor and us to some extent have responded to.

Okay, great.

And then finally, just on the healthcare spin.

Earlier in the call, you said that share repurchases would partially offset the 2% to 3% dilution from stranded overhead cost in year one.

So, does that mean ballpark figures at this point, we can think about -- should we think about 1% to 2% EPS dilution?

Or, is it not that high as a net number of the share repurchase?

That's probably in the ballpark, and we'll give you a more complete answer on the third quarter call when we give you the full scope of -- we figure out how much of the stranded cost we can take out.

If we can take all of it out, there's a scenario where you might not have any dilution.

But, I think for a working assumption for now, that's probably in the ballpark.

We'll be servicing Halyard in shared services and IT and things like that so we'll be getting some income to cover those stranded costs for at least a period of time next year.

Okay, and the thought is that the restructuring, you'll be able to move quickly enough so potentially some of that restructuring benefit or offset to the stranded -- it actually happens in year one of the spin?

Yes.

That's the idea.

Okay, great.

Thank you so much.

Thanks, Lauren.

Chip Dillon, Vertical Research Partners.

Good morning, gentlemen.

First question is, it looks like the tissue margins seem to be quite impressive I think in light of some of the competitive activity that you just mentioned.

I was just wondering if you could help us --.

Thank you, took that's very nice of you.

Well, give credit where credit is due, how about that?

You want to ask a question?

I thought you were just telling us we were doing a great job?

Well, you have got to take the good with the bad, I guess.

But seriously, when you look at the Business, are you continuing to de-sheet?

Is that one way you are able to offset some of the promotional inducements you're providing consumers?

Or, is it just totally on the cost side?

I think like the rest of our business, we're trying to do it with product innovation wherever we can.

So, continuing to drive premium variance, even launching flushable moist wipes in the bath tissue category around the world.

In many of our International markets, we're selling Kleenex moist wipes for hand and face cleanup, and so we're trying to really drive the higher-margin segments of those businesses around the world wherever we can to get the margins where they're investable and not dilutive to the corporate average.

We are, to be sure, focused on cost in that business because that is a key part of the P&L.

But, it says much around innovation and mix Management as it is a pure cost takeout play.

Got you.

Maybe not that you would know the minds of some of these folks, but we're kind of baffled or intrigued by the fact that there continues to be this onslaught of continued plans to build capacity by either new private label entrance or existing players.

And, I'm thinking of the Kruger announcement in the last week or two -- to add another machine at what I think was one of your plants in Memphis at a time.

And then also, Asia pulp and paper, through their St.

Croix division up in Maine.

Are they just at a completely different part of the market that this so far hasn't touched you?

And, therefore they're seeing success without it coming at the branded expense?

What do you think they are thinking?

Yes, if we look at the North American tissue supply-demand balance, there has been some new assets brought on.

There has also been a bunch of capacity taken out.

Typically in the branded -- in the premium arena, there hasn't been that much that has destabilized the market.

At the low-end when we look down at the away-from-home private label tissue market is the bottom end.

Even that pricing hasn't been way out of whack.

So far, we're not seeing anything crazy happening, and some of these guys may add capacity.

They may wind up taking out some older capacity at the same time.

So, just because somebody built a machine doesn't mean that more consumers are going to choose private label.

Got you, okay.

Thank you.

Thanks, Chip.

Ali Dibadj, Sanford Bernstein.

I did want to build on that question and some of the previous ones.

Because you're seeing all of a sudden it feels like a lot of moving parts in your competitive environment.

So, the new TAD machines that are coming up in private label, so that is higher quality.

It's supposed to be not for away-from-home use but in-home use so that might impact you in the next few years.

The P&G incontinence move, and who knows if either of those two things will be successful, but it certainly become more competitive.

You mentioned already more price competition from GP, and so I can understand how there's a, as you term it -- quote-unquote -- slightly more difficult environment right now.

But, how do you think about this not just as a short-term shift in the marketplace?

And, these changes being more of long-term bad change that you have to deal with?

I guess I would say this, Ali -- we would probably say -- we always have had Proctor as a tough competitor so we know that they are always going to be there.

And, we find we run up against them everywhere in the marketplace.

But, look at it and say globally there's more tough competition everywhere in the world.

And so, I look at SCA coming out of Europe, and they've been very aggressive growing their business in International markets.

We've got both Unicharm and Kao who are expanding out of Japan with terrific products in the personal care front.

We've got the CMPCs of the world in South America that are moving north into Mexico, and so there is no shortage of people that get up every day wanting to eat our lunch.

So, we use that within our own teams as a challenge for us to move even faster on the innovation front and to make sure we're getting there with the best ideas in market.

That we get the best marketing capability.

That we're sharp on cost and make sure that we can't be beat wherever we choose to operate, and so it is very much of a motivator for us to know you've got that much good competition coming after you every day.

I get the motivational angle on it, and that's a great way to manage folks for sure.

But, do people -- do you, do people internally really think that there's an acceleration in increased competition in so many of the areas that you're looking at?

Or, do you think it's status [quo-y] because it does feel like there is an acceleration at least from an outside observation perspective?

We are behaving like it is an acceleration.

So, we are spending a lot more time war-gaming possible competitive activity as we think about launch plans in individual markets for example.

Unicharm is about to launch in Brazil a diaper pant.

They have been building the plant there for two years, and we've been planning our defense strategy in Brazil for two years and have launched every pant we can think of in the marketplace to occupy all the key strategies.

So, we probably pulled ahead and accelerated innovation in that market to make sure we were positioned correctly when they did launch.

And so, we are monitoring competitive activity much more closely around the world and trying to incorporate that into our business plan so that we are as prepared as we can be to not just defend but to thrive in those markets.

Okay, that's a very helpful lens.

If I were to ask you to focus in on just one specific area, which is China right now, it feels like you are shifting and have over the past couple of quarters actually successfully from driving a lot of your growth from distribution gains much more to share gains.

Can you comment on that observation?

If that's really what's going on there, number one?

And, number two is what you're probably seeing from that marketplace?

I'd say that's probably -- because every additional city you bring on is probably slightly smaller than the last one.

They are still cities of millions of people so they are pretty good-sized chunks of business.

We are seeing, as you get traction in more and more places and are picking up share in those places that that's -- you are getting probably more share gain.

Although I would tell you any Nielsen data that you see in China you should think twice about just because the coverage isn't great yet.

I think maybe the one thing that is different in China is the rapid growth of eCommerce, and I think in some of the emerging markets, in particular China -- you could see a different form of retail development over time with a much bigger eCom play.

Particularly in areas with dense population and relatively low delivery cost.

So, I think we'll see how that plays out.

But, we're obviously spending a lot of time with our digital marketing capability and our eCommerce team there to make sure we're fully represented in that channel.

We agree with you about all the eCommerce stuff.

You've done a lot of work on it.

So, thanks again for the answers.

Thanks, Ali.

Bill Schmitz, Deutsche Bank.

Just on guidance first of all, you only took it down $0.05 -- why did you even tweak it?

Do you know what I mean?

Was the change just that K-C de Mexico came in a little lighter?

Because the [pull] prices came down a little bit.

Maybe they came down less than you thought, but it's not like they're up year over year.

So, can you just comment on that briefly?

Like I said, it's only $0.05.

So, we were saying -- it's only $0.05.

Basically, as we look at the back half of the year, we've got half the year in and a $0.20 range seemed a little wide given as tight as we usually are around numbers.

Mexico was down enough that we felt like that was probably the right signal.

So, we'll give you another look at it in the fourth quarter, may narrow it further at that point in time.

We will see.

Okay, got you.

Everything you have done over the last ten years has made you much more of a consumer products Company rather than more of a commodity pulp Company which has been great.

The only metric that hasn't really moved is the gross margin.

I'm curious if you think there is a compelling gross margin opportunity because like do you think the minute the portfolio -- think about the portfolio -- but that gross margin line -- I know commodities have a lot to do with it.

But, that's the one that really hasn't budged.

To emerge as a consumer products Company, I think that your gross margins are about 1,000 basis points below some of the other competitors there.

So, do you think that's an opportunity now that everything's kind of cleaned up?

Well, that certainly one that it has gotten better.

We're just sore you haven't noticed it as much, Bill, but it was down around 30%.

It's now up into the mid-30% again.

Now, that's where it was before we got hit with a lot of the commodity cost inflation, and I do think that is a big driver of multiple long-term.

It is one of the things -- one of the key metrics we focus on with each of our business teams is as we bring innovation to market is it gross margin-accretive.

And so, I would agree completely -- that's a key driver of a healthy franchise long-term.

Thank you so much.

Thanks, Bill.

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

All right.

We appreciate everybody's questions today, and we'll close with a comment from Tom.

Once again, thank you for your interest in Kimberly-Clark.

We continue to execute our plan effectively and expect to deliver continued strong results in the second half.

Thanks very much.

Thank you very much.