金百利克拉克 (KMB) 2014 Q3 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 third-quarter earnings conference call.

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

Here is the agenda for our call.

Mark will begin with a review of third-quarter results and give a short update on the Healthcare spin-off.

Tom will then discuss our organization restructuring and also our full-year outlook.

We'll finish with Q&A.

We have a presentation of today's materials in the investor's 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'll turn it over to Mark.

Thanks, Paul, and good morning.

Let's start with the headlines.

First, we achieved organic sales growth of 4%, highlighted by 10% growth in K-C International.

Second, we delivered adjusted earnings per share of $1.61.

That's an all-time record and up 12% year on year.

And third, we continued to see strong results from our focus on capital management, including working capital, cash generation, capital spending, and returning cash to shareholders.

Now let's cover the details of our results.

Third quarter sales were $5.4 billion.

That's up more than 3% versus last year.

Underlying organic sales rose 4%.

Adjusted gross margin was 35.1% in the third quarter, up 70 basis points year on year.

Adjusted operating profit was up 15% versus year ago with an operating margin of 17.4%.

That's up 180 basis points compared to the prior year.

Results benefited from organic sales growth, $100 million of FORCE cost savings, and lower G&A spending.

I'm really encouraged by our team's continued focus on cost savings and spending discipline.

That's helping us improve margins and invest for future growth in areas like advertising, which was up $10 million in the quarter.

On the other hand we absorbed $55 million of input cost inflation and negative effects from currency exchange rates.

Moving down the P&L, equity income fell 37%, driven by softness at K-C de Mexico.

In addition, the adjusted effective tax rate was a $0.05 drag on the quarter.

That was mostly offset by a lower share count.

So putting it altogether, third-quarter adjusted earnings per share were $1.61, up 12% year on year.

It reflects continued top line momentum in K-C International, broad-based margin improvements, and FORCE cost savings.

Now turning to cash flow.

Our cash provided by operations in the third quarter was $976 million.

That's up 7% year on year driven by improved working capital.

We continue to drive down primary working capital.

Our year-to-date cash conversion cycle is down three days compared to full year 2013.

So we're tracking to comfortably exceed our one- to two-day improvement objective for the year.

In terms of capital allocation third-quarter dividend payments insured purchases totaled more than $0.5 billion.

As a reminder on October 7 we increased our full-year share repurchase target to $2 billion.

That's up from our previous estimate of $1.3 billion to $1.5 billion as a result of cash proceeds we expect from Halyard Health in conjunction with the spin-off of our Healthcare business.

So this means that full-year dividends and share repurchases should be at about $3.3 billion.

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

In Personal Care organic sales rose 6%.

Performance was lead by K-C International, with organic sales up 12%.

In terms of highlights for KCI this quarter, in diapers organic sales were up 25% in China, 25% in Russia and Eastern Europe, and 10% in Brazil.

Organic sales in K-C International were also up double digits in feminine care, lead by Brazil, China, Eastern Europe, and South Korea.

Finally our adult care and baby wipes businesses delivered double-digit organic sales growth in the quarter.

In North America Personal Care organic sales were down slightly.

Volumes were up for our Poise and Depend adult care brands, Good Nights youth pants and Huggies baby wipes.

On the other hand volumes were down in Huggies diapers and Pull-Ups training pants.

Overall Personal Care operating margins were 19.5% in the quarter.

That's up 160 basis points year on year with improvements in North America, K-C International, and Europe.

Moving to Consumer Tissue, organic sales increased 3%.

In North America organic sales were up more than 3% behind strong volume performance.

That reflects market share gains, innovation, and increased promotion activity.

K-C International, organic sales were up 5%, was driven by higher net selling prices in response to unfavorable currencies and cost inflation.

Consumer Tissue operating margins of 16.8% were up 250 basis points year on year, driven by organic sales growth and cost savings.

Now K-C Professional, organic sales increased 3%.

Performance was lead by 13% growth in K-C International.

We continue to expand our business where industrialization and economic development are occurring, particularly in Latin America and China.

Elsewhere KCP organic sales were down 2% in North America and up 3% in Europe.

Overall KCP margins were 18.9%.

That's up 50 basis points year on year.

And lastly Healthcare organic sales were off 3%, mostly due to lower net selling prices.

Healthcare operating margins of 13.3% were down compared to a strong performance a year ago.

Our year-to-date margins remain healthy and up year on year.

Now a quick update on the Healthcare spin-off.

We're in the final stages of completing the transaction.

The Form 10 registration statement has been deemed effective by the SEC, Halyard's Board of Directors has been fully established, and debt financing for the Company is in place.

The spin-off is set to occur at the end of the day on Friday, October 31 and Halyard Health will begin trading under the ticker symbol HYH on Monday, November 3.

So that wraps up my comments.

To recap, we achieved solid organic sales growth, we delivered significant cost savings and all-time record adjusted earnings per share, and we continue to allocate capital in shareholder-friendly ways.

Now I'll turn it over to Tom.

Thanks, Mark, and good morning everyone.

Since Mark has reviewed our third-quarter results, I'll just add that I'm encouraged with our performance in a challenging environment.

While we certainly have opportunities to further improve, our growth initiatives are on track and our financial discipline is generating strong cost savings, margin improvements, and cash flow.

Now let me turn and comment on our organizational restructuring.

As we have said all along since we announced the Healthcare spin-off, we're committing to offsetting the impact of the stranded overhead costs that result from the spin.

This restructuring program will do that and will make us more efficient at the same time.

The restructuring program will also give us more flexibility to invest in our brands, to invest in our targeted growth initiatives, and to build the capabilities that will help us win in the marketplace.

This restructuring is a result of a global assessment by our functions and by our business teams that have identified ways that we could streamline the organization structure, simplify the way we work, and make our overhead spending even more competitive with the best-in-class companies.

Our organizations in all major geographies will be affected by this program.

Workforce reductions are expected to be in a range of 1,100 to 1,300 people and primarily affect salaried employees.

The majority of the reductions are expected to occur by the end of next year.

The financial details for the restructuring are included in this morning's news release, but to recap the total costs for the program are expected to be $130 million to $160 million after tax.

Charges will begin in the fourth quarter of this year and will be wrapped up by the end of 2016.

Savings will begin in earnest next year and should total $120 million to $140 million pretax by the end of 2017.

That's nicely above the stranded overhead costs from the spins which are about $85 million.

Cash costs will be about 80% of the total charge.

So the cash payback on the restructuring is less than 1.5 years.

This restructuring effort is further evidence of how we manage our Company with financial and cost discipline.

Now let me move to the outlook for the full year.

Although the macroeconomic environment remains volatile, there have been no significant changes to our full-year input cost or currency rate assumptions from the outlook that we provided to you in July.

Still, most currencies have weakened relative to the US dollar in just the last month.

As a result we expect that currency overall will be a sequential headwind in the fourth quarter as compared with our third-quarter results.

We also continue to closely monitor the environment in Venezuela.

Access to letters of credit to pay for imported raw materials there continue to be inconsistent.

Going forward, if we don't receive adequate amounts of letters of credit we could curtail some of our production as necessary rather than further increase our US dollar exposure.

Now in terms of our business overall, we have good top line momentum with more than 4% organic sales growth through the first nine months of the year.

We expect the full year to be at least at the mid point of our 3% to 5% target.

On the bottom line our guidance for the year is consistent with our previous outlook adjusted for the Healthcare spin-off.

We expect adjusted earnings per share will be between $5.93 to $6.03, assuming the spin-off occurs at the end of October.

This guidance includes a $0.10 per share impact from the spin-off of the last two months of Healthcare's 2014 earnings.

Our previous guidance was between $6 and $6.15 a share and included a full year of Healthcare results.

So adjusted for the spin-off, the midpoint of our current outlook is equivalent to the midpoint of our previous guidance.

Following the spin, historical results for our Healthcare business will be reported as earnings from discontinued operations.

So included in our 2014 outlook is $0.47 of adjusted earnings per share from discontinued operations.

That means our outlook for adjusted earnings per share from continuing operations is $5.46 to $5.56 a share.

So in summary, we continue to deliver good financial results and we're on track with our plans for the year.

We're taking further steps to improve our business and we are convinced that successful execution of our global business plan will continue to result in strong returns to our shareholders.

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

(Operator Instructions)

Our first question comes from Gail Glazerman with UBS.

Hi, good morning.

Good morning, Gail.

Just starting on the restructuring program, do you think the benefits you could see next year can at least offset the stranded costs?

I know you are not looking for much impact, but can they at least offset that?

Yes, I think between the combination of the benefits that we're going to get, plus we'll have some transition services agreement income, we should be able to cover the stranded cost hit next year.

We'll give you more guidance, specifics on that in our January fourth-quarter release where we'll have more specific guidance for 2015.

Okay, and just turning to personal care, can you talk a little bit about both the adult incontinence market and the strength that you saw, particularly in light of P&G's reentry into the market, as well as diapers?

And is there something strategic and big that you need to do to start to get that growing again?

Sure, I'll cover both of those.

In adult care, we probably would say that we've done a pretty good job of preparing for the entrance of Procter into the category, so we've been able to launch a lot of innovation.

We actually strengthened our distribution in the face of their launch, so we feel like we're on track with our plan for the year.

And as I'm sure you'll hear from Procter later this week, my guess is they'll say they got the distribution they were looking for, and their launch is on track.

And so, it could be that both those statements are true, and the rest of the category is feeling the pinch in terms of [10 on] private label is where most of the share gain that Procter has gotten so far has come from.

But good, strong growth there.

On the diaper front, what you're seeing is a trading up/trading down phenomenon.

Our super premium segment of our category grew double digits in the quarter, picked up a couple of share points, but we lost more than that in Huggies main line, and Luvs picked up a fair amount of share.

And so, there's some product performance things we're going to be addressing, and we're going to make sure we're watching the value gaps with Luvs to try to stabilize that business and deliver a better performance.

But you can rest assured that we're not happy with the US diaper business at this point in time.

Okay.

And just lastly, on K-C Professional -- I guess there's away from home increase in the market.

Can you just give an update on how that's proceeding?

Yes, we probably had limited benefit from that, and as you saw in the quarter, we had a negative price in KCP in North America.

And so you're seeing some price erosion in the low end of that business.

And so any net price gain has been pretty minimal at this point in time.

And I think you're seeing a fairly stagnant economy is probably not helping much on that front.

Okay, thank you.

Thanks, Gail.

Our next question comes from Ali Dibadj with Sanford Bernstein.

Good morning, Ali.

Hey, guys.

So, a couple things: First, wanted to push a little bit more on diapers, and as a broader category, because -- in North America -- because you talk a little bit about product mix improving slightly, but then in North America in particular, clearly the Huggies volumes were down.

And I'm trying to understand whether you're seeing any resurgence into Pull-Ups versus what it used to be?

Any improvement from the consumer trade-up there?

And also, any birth rate changes?

Because we are starting to hear rumblings of positivity there.

Yes, we'd say on the birth rate there has been very slight positive signals so far, which in a sense is good.

It's not falling anymore, so that's probably good news.

I wouldn't say it has turned into a baby boomlet yet on that front.

And in the Pull-Ups category, I mean, we really aren't seeing much traction yet.

And so, still moms staying in diapers a little longer, still seeing size 6 growing as moms are choosing to stay at that level.

So, there's things we're working on to make sure we're driving the right innovation in Pull-Ups.

We did have a very good GoodNites quarter, as we launched some new innovation on GoodNites.

And so our total child care volumes were pretty flat in the quarter.

But Pull-Ups was down and GoodNites was up, and didn't show up in the share numbers because a lot of the GoodNites stuff was pipeline fill.

Okay.

And then, on North America consumer tissue, looked like volumes were good, price mix was down 3%.

Can you talk about the effect of de-sheeting on that price mix?

Obviously, [it still looked good], it might have rolled off.

And in particular, how much of that is related to what we've been hearing for years now, but sounds like it's now in the ground and producing -- the private label TAD technology trying to compare with [Eurok] TAD?

And moreover, what do you think the price volume equation looks like going forward?

Yes, I think -- good question.

So, I'd say on consumer tissue, we've rolled off most of the de-sheeting impact, so there really wasn't much in the quarter on that front at all.

We did step up promotional activity from second quarter where we were not competitive in the marketplace.

It was more competing with other branded activity in the market, where some of our competitors had stepped things up in the second quarter.

We picked it up in the third quarter, and you saw that show up in the volume growth.

So it's a business that responds well to that.

We were more competitive.

We were not leading the price down, but we were trying to make sure we're matching up to the feature pricing in the marketplace, and saw good volume growth across the board.

Had a good back-to-school season on facial, and saw high single-digit growth there.

Good growth on Cottonelle and solid growth on Scott tissue.

Viva Vantage launch is pretty much on track, and towel growth was up mid-single digits overall.

So it was just good execution and making sure you're competitive on shelf every day.

Okay.

And the last one, if I can just throw in is around Halyard, or your healthcare business.

So, is it fair to think about the overall dilution?

We mentioned that we talked about it, that 9% on a full-year basis, excluding any adjustments.

But then if you go through and look at the transition services agreement, you look at the share repurchases that you're getting from the payment they're giving you, and then this incremental cost cutting, is it fair to think about the net dilution of something like 4% to 5% on an annual basis?

Is that the right way to think about it?

Yes, I think you're probably in the ballpark.

We'll give you a little bit more specific guidance on that in January, but I'd say we'd expect to try to minimize that as much as possible.

And we'll be looking in our January guidance to give you on a continuing ops basis a plan that looks like our global business plan with consistent top line and high-single-digit bottom line -- mid- to high-single-digit bottom line as we've done in the past.

Okay, great.

Thanks.

Thanks.

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

Hi, good morning, thanks.

Good morning, Olivia.

Good morning, Tom.

Can you talk a little bit about the drivers behind international growth, because that continues to be quite robust, versus how fast are the categories growing now?

And have you seen any changes in the categories since the quarter ended?

And are you gaining more share in existing retailers?

How much of that is incremental distribution?

Yes, I mean, there's a lot going on in emerging markets.

It's been a pretty exciting place from a lot of dimensions this year, with a lot of volatility and a lot of -- some political instability mixed in.

So it's been a pretty exciting place.

And our teams there have done an awesome job of executing, driving innovation in the market.

And so, if you think about Russia and eastern Europe, we're up 25% in the quarter, done a great job of launching diaper pants in boy/girl there, and have really taken off in a fairly tough currency environment.

Managed to get price to offset a lot of the currency hit.

So, we'd say we're growing ahead of the category there, but the category is probably growing high-single, low-double digits, and we're -- as you look at the broad Russia and eastern Europe markets together, Russia is probably a little slower than that.

But good execution from our team on the ground.

China, again, 25% growth in the quarter.

That's on a 45% comp last year; so, very strong growth.

We're in 100 cities now -- that was our goal to be in 100 cities by the end of the year, so we've picked up distribution, which is part of it.

We've done well in eCommerce, which is the fastest growing segment in China.

So, we'd say -- the Nielsen data would look that the category is not doing much.

Our guess would be the China diaper category is probably growing high-single to low-double digit at this point, and we have not seen a big shift since the end of the quarter that I know of.

And moving to Latin America, good execution in Brazil with the launch of boy/girl diaper pants there as well.

In the face of a Unicharm launch and a pretty aggressive Procter investment, and so our business there has performed pretty well.

And we'd say we're, again, probably growing a little faster than the category in Brazil and across Latin America.

Argentina would be another market where a lot of economic turmoil, but the team's done a great job of delivering price increases and volume increases in the market.

So, it's been an exciting year in international with good innovation, good execution in the market, and it's showing up in good results.

Got it.

Thanks, I appreciate the comprehensive review.

And just following up on that, you talked a little bit about the dollar strengthening and where you got price in Russia.

How do you think about profitability for KCI going forward, obviously with the dollar strengthening, beyond just Russia?

I think that it will be a headwind in the fourth quarter, for sure.

We'd guess that probably sequentially as much of a $0.10 headwind is on currency third quarter to fourth quarter.

And we'll pull a plan together for 2015 that continues to look at preserving the shape of that P&L, and continuing to drive growth in local currency.

And we'll be transparent with you in how that shapes up in terms of dollars.

Would you expect KCI margins to be up year over year next quarter?

You know, they made good progress this quarter, and they had a good cost savings quarter.

They've done a great job of getting price where we've had currency weakness.

And so, I'd expect certainly margin stability sequentially.

We had terrific margins across our segments in the third quarter.

So, that's maybe a tougher comp.

But I'd say if you look at our year-to-date averages in the segments, that's certainly a good predictor of what we're capable of, and would expect that to continue.

Got it, thanks.

Just if I could add one last question?

I know you're not ready yet to give FY15 EPS outlook, but on raw materials with crude and natural gas down pretty dramatically recently, would you expect raw materials inflation to decelerate next year?

Or does the stronger dollar and still higher pulp and resin more than offset that?

Thanks.

I think this recent move hasn't floated its way into the supply chains yet.

So, if you looked at pulp outlook, it would still look like it's trending higher in 2015, but I don't think that the recent moves in the dollar are fully baked into that yet.

If you looked at polymer, polymer is going up right now, not down like oil has done.

But I would expect if oil stays where it is, that the polymer supply chain would start to reflect some of that.

And so, we'll hopefully have a bit more clarity on that when we talk next in January.

Great, thanks, Tom, appreciate it.

Thank you.

Our next question comes from Chris Ferrara with Wells Fargo.

Hi, Chris.

Hi, good morning.

Tom, I hate to get into 2015 again, but I'm only doing it because you said a couple of things that I just want to make sure I can pull together correctly, right?

So, you said the dis-synergy was $85 million.

I think you said that you could offset that in 2015.

I want to also understand how that works with your 2014 continuing operations base of $5.46 to $5.56?

So, that $5.46 to $5.56 includes all of the dis-synergy, right?

So, you would be offsetting $85 million, or call it $0.15 plus a share, in 2015 if you can offset that.

Is that the right way to think about it?

So, we're going to get some transition services income in 2015 that will offset a portion of the $85 million.

And then we should get the additional restructuring benefits that we think should have a shot at offsetting the rest of it.

So, I think the answer to your question is, yes, to the extent I understand it.

No, that's helpful.

I guess I'm just trying to understand what the growth rate will be off of that.

So, in other words, that $5.46 to $5.56 is a deflated base, right?

So, if you were to have a long-term planning algorithm EPS growth rate that you just cited, mid- to high-single digits in 2015, it would be above and beyond that $85 million of cost offsets.

Is that right?

Yes, I think that's directionally right.

On the other hand, we'll have other investment opportunities, currency, commodity cost issues.

And so, that's the rest of the picture that we need to bring together into a plan, and share that with you in January.

Okay.

And then I guess just on SG&A -- look, 2014 levels were, I mean, even in dollars, below 2013, below 2012 levels even.

I know you've said you're pretty pleased with cost savings, and that's a good number, but is there anything specific that was going on this quarter in SG&A that we should think about, and the sustainability of that sort of trend?

I'd say you had a more focused attention on it.

I think as people were getting ready for the restructuring, they were already starting to cut costs in many areas.

Good management of the controllables, things like travel and other things, were lower in the quarter than normal.

And so, I think that's part of it.

If you looked at the comp versus third quarter last year, we had more compensation increases last year, and we had a little bit of compensation decreases as we adjusted some of our long-term plans in the quarter.

That might be the only thing that might qualify as a little unusual, although those things get adjusted every quarter, up or down.

Third quarter last year was on the up note, and this year was a little bit lower, as we reflected some of the currency implications and other things on our sales impact on the three-year comp that's rolling every year.

That's great, thanks.

And just one last quick one: Can you just say what the Venezuela growth was for the quarter?

The volume growth was pretty flat, and so, I don't know if Paul -- I haven't looked at the total top line?

Yes, we did have a little bit of price benefit, but you're right, Tom, there was no volume growth in the quarter in Venezuela.

Got it.

Thank you.

Thanks, Chris.

Our next question comes from Chip Dillon with Vertical Research Partners.

Hi, this is James Armstrong for Chip.

How are you today?

Hi, James.

The first one is going back a little bit to the cost overhead reduction charge that's taking place in the fourth quarter.

If we're seeing most of that charge in the fourth quarter, why aren't we seeing the full benefits until 2017?

Could you help walk us through a little bit of the timing behind that?

Yes, sure.

We'll book the severance when we've made the decision, even though the separations won't occur, and will roll out over all of 2015 and even some into 2016, is the primary difference.

That helps.

And then, switching to tissue, is tissue volume strength coming at the expense of the other national branded players?

Or do you think you're gaining share versus private label?

If you look at the share charts, private label shares were pretty stable sequentially, and actually are up a bit year to date.

And our shares are up a bit year to date as well.

So, we would be primarily taking share from other players -- other branded players.

And then lastly, as you look at the demographic trends and coming back to this a little, with millennial households forming, what's your forecast in births in the coming years?

And how do you expect that to impact diaper demand as we go out into the 2015, 2016, 2017 time frame?

Yes, I'd tell you our -- we talked about birth rate in a couple of earlier questions, and our prediction is relatively flat, very slow growth in the US birth rate.

And we can quote you a number offline, but we'd say not -- we're not seeing much at this point.

I would say that's going to be a big driver of category growth in the next couple of years.

But I'd say we're also continuing to tinker with the model to be better at predicting.

Our more recent models looking at household formation and unemployment levels have been reasonable coming out of the crisis.

I'm not sure they're going to be as useful as we move into a more stable economy, and finding the next driver of birth rate is something that we continue to look for.

Perfect.

Thank you very much for your help.

Thanks.

Our next question comes from Wendy Nicholson with [KCC].

Hi.

My first question has to do with Venezuela.

In light of sort of how long that's been as difficult as it's been for you and others, is there a scenario where you would exit Venezuela, like Clorox has decided to?

Wendy, at this point, I don't think that's an option for us.

We've been consistently profitable in Venezuela, which is I think different from the situation that was there at Clorox.

We have substantial bolivar reserves in the country in cash to continue to finance our operation.

Our issue is access to US dollars to import raw materials.

And so, Mark and I have set an overall US dollar cap that we've reached for that business.

So, as long as we continue to get foreign exchange, we'll be able to find ways to continue to run the operations there.

We're also looking at more local sourcing: Can we find more raw material that we can buy with the bolivars that we have to run that business?

And at the end of the day, we're trying to make sure we're serving the moms in Venezuela that need diapers and need bathroom tissue every day to take care of their families.

We're trying to provide the employment and a stable life for our employees that are there.

And as long as we can do that and operate ethically, we'll continue to operate in Venezuela.

Got it.

And your market shares there are stable or strong?

Market shares have been stable, although because we have been limiting our exposure, we're not in full throttle growth there.

So, we've walked away from business because we didn't have foreign exchange to bring product in.

And as you know from probably reading about that place, there's shortages all over the place.

So, market share isn't a relative driver.

Our driver of that business is access to US dollars.

Got it.

And then, just back on the US business, obviously to the extent commodities come down as we expect them to, and that flows into the marketplace, it seems like there should be or could be a lot more flexibility on both your part as well as your competitors part, just simply get more promotional.

Is that a concern for the category?

I know you've got to be frustrated about your market share trends, but is your plan really to bring innovation to the market, or is it more marketing, or is there a risk that we get into some sort of down and dirty price competition like we've seen in some other categories in the US?

At this point, you're not seeing the commodity wave flow our direction.

In fact, if anything, I think polymer went up $0.08 a pound this month or something.

So, you're not seeing the benefit flow through that would support the first part of your statement.

And pulp has been sticky.

You've seen eucalyptus come down, but it's still at the high end or even slightly above our full-year outlook.

Northern softwood hasn't come down, and is above our full-year outlook.

So, you're not seeing the commodity underpinnings of that, that would lead to more price competition.

And at the end of the day and in every category, the value that mom gets is a combination of price and performance.

And we got to make sure we're delivering the right product performance at a competitive price.

And that's probably true the world over.

Got it, fair enough.

Thanks so much.

Thanks, Wendy.

Our next question comes from Connie Maneaty with BMO Capital.

Good morning.

Morning, Connie.

I am wondering about the restructuring you're now undertaking.

So, it looks like it is bigger than the stranded overhead.

So, my question is: Excluding the savings that you're going to get from it, do you think you have enough money to spend defending and growing your categories in diapers and adult incontinence?

Or did you need this program in order to be able to invest more?

No, I think that's the right way to think about this is that we started out looking at this restructuring program saying: First priority is we got to cover the stranded costs because those are not going away and we've got to make sure we do no harm with the spin -- that we protect the core business.

Second priority then is to say: What else can we do to create more capacity to invest in our Business, to invest in growth ideas, to invest in innovation?

And our business teams around the Company really rallied to that and came up with an aggressive plan.

And it's never easy to do these things, and these are people's jobs and employees' lives that are affected by it, but it is something that we need to do to allow us to invest and grow the Business.

And in answer to your question, is it enough?

It's probably never enough, and we've also had a great quarter of cost savings in our FORCE program and we need more from there as well.

And so, we're continuing to look at opportunities to get more productive in every aspect of the Business, to make every P&L line item work for us to allow us to compete and invest and grow our Business wherever we've got opportunities to do that.

Okay.

So, are the restructuring programs -- you said something I found interesting.

Are the restructuring programs essentially designed by the business units?

Or are they more top-down directed?

Well, it was a little bit of both.

In the functions that had the most stranded cost, there we had a clear target, and each of the teams went and worked for that target.

On the business unit side, they did a lot of competitive benchmarking and said: What are the best-in-class companies operating in each of the major functional areas that serve each of the businesses, and came up with a list of ideas and initiatives that we supported and decided to go forward with.

So, like every good plan, it's a mix of top down and bottom up.

Okay.

If I could just ask one final question on Venezuela?

Assuming that the three official exchange rates converge to one over time, it's not going to be towards the stronger end of the currency rates.

It will be towards the weaker end.

So, if these levels converge to, say, like VEF30 or VEF40 to the dollar, what's the impact on you, since you're still at the official [VEF6.3]?

Yes, so, several things.

First of all, the balance sheet would get repriced.

So, we've got a little over $400 million, I think $435 million will be disclosed in the Q today, of exposure that will get repriced at whatever that new rate is.

So, that's mostly in cash, but it's -- so that will be of impact on that line.

And then, the next question is, again, what price are you allowed to sell at?

So is there -- when you have that level of currency devaluation, typically there's, particularly for imported products, finished product price adjustments, all those prices are controlled by the Venezuelan government.

So, there would be application for price increases, depending on how those go and what level of prices you're able to charge would determine on whether you are going to be able to bring in imported product or not, or even bring in imported raw materials and convert it to finished products.

And so, we'd take a look at that environment, and try to come up with a business plan that made sense.

But again, you'd kind of come back to the key driver of it is, whatever rate they pick, are you going to get exposure or access to US dollars to be able to pay for the materials and products that you need to, to sell in that market?

And so, we'll work through that whenever those decisions are made by the Venezuelan government.

Okay, thank you so much.

Thanks.

Our next question comes from Erin Lash with Morningstar.

Good morning, thanks for taking the question.

Good morning.

I was wondering if you could speak to the acquisition environment?

Obviously, the step up in the share repurchase expectations for this year is fairly pronounced, and so I just wondered if that indicated anything about what you're seeing in terms of valuations for potential acquisitions?

Yes, I mean, we aren't a big acquirer.

We've done some tuck-ins and various sort of -- actually most of the tuck-ins we've done over the years have been in healthcare.

Quite honestly, our corporate team has been fully consumed with the spin this year and with the -- as well as getting ready for the restructuring.

So, we're out of capacity of human capital to go look at very many deals, and so -- but we haven't seen much lately that was of interest to us.

Thank you, that's helpful.

And then, just in light of the competitive environment, I wondered if you could speak to just kind of your assessment of your overall distribution, and if there are areas of opportunity to further extend distribution of your products into specific channels?

That would be helpful.

Yes, sure.

And the interesting thing is, around the world, there are all different kinds of channel migrations occurring.

So, you continue to see the traditional retailers for our consumer products, but you're also seeing more eCommerce in markets like China and Korea.

That's growing very rapidly, and is taking a bigger and bigger share of the category.

In markets like Argentina, there are small panaleras: neighborhood diaper stores that are growing rapidly.

In China, there's these baby stores that are high-end diaper, baby clothing, baby formula kind of a store -- that's a very prolific channel.

So, one of our key focus points is to make sure our products are available wherever mom wants to buy them, and make sure that we get the right offer and the right mix of products on sale.

And really tracking those channels and staying connected to mom digitally, and finding out where she wants to buy and how she wants to buy has been a key opportunity for us.

And it's been a lot of fun for our marketing teams to be able to work on that.

Thanks, that's helpful.

Thank you, Erin.

Our next question comes from Lauren Lieberman with Barclays.

Thank you.

Good morning.

My first question actually follows on just what you were discussing in terms of distribution and eCommerce.

I feel like I'd love to get some color on what efforts you're making in the US, because I feel like across both baby care and also the tissue business, you're probably a bit underexposed in eCommerce channels.

Could you discuss what you're doing, if anything, to change that?

Yes, sure.

I'd say eCommerce is certainly -- we were a little bit late to the party in the US.

We're probably ahead of the curve in markets like China and Brazil and Argentina and others; fully competitive in Korea and places like that.

So, we're catching up in the US, and I've got a good relationship with many of the large eComm players, both in the traditional brick-and-mortar retailers that are going in that space, the Wal-Marts and Targets and Sam's Clubs and Costcos of the world, as well as Amazon and Diapers.com and places like that.

And clearly all of the eComm retailers, just like our traditional retailers, want the young family as a loyal customer, and because of the basket size that those shoppers suddenly begin to buy and the lifetime value of that is really important to them.

And so, we worked a lot on that front.

Tissue -- we're present.

The logistics of that and the cost of distribution, a higher-bulk/lower-value item, the last mile to a consumer home, isn't as obvious.

Although there is some activity going on in that space, and we're working with our eCommerce partners to try to figure out: Where does that make sense and how do we do it most efficiently?

We're, interestingly, doing probably more work now with adult care.

And so, Depends and Poise are probably areas where you would see a little bit more consumer discretion, and you might have a desire to send the product as a caregiver to a family member.

And so, there's kind of a natural opportunity for us to be able to use that, and make it easy for consumers to get the products that they need in that market online.

Still very small, and early days, but there's a lot of activity happening there.

Okay, great.

And then also in adult care, also small and early days, I was hoping you could discuss the [Empresa] test market?

And I'm guessing also very early, but anything you can share on that would be really interesting.

Yes, we think that's an interesting idea, and could be in a very exciting product.

It's very early days in the test, so we don't have a lot of data to even read yet, but we'll see what happens, and hopefully we'll have something to talk about as it comes through the test next year some time.

And how are you going about just spreading word of mouth on that?

Because I think it's a -- it wouldn't be -- not necessarily new to the world, but new to the over-the-counter consumer market.

And I think education and awareness is a huge piece of it -- of it even being viable.

So, what are the plans?

Yes, absolutely.

Well, and you know, we have a long tradition of talking about new categories in different ways.

As you look at, coming out, we were the first to talk about feminine protection with Kotex back in the 1920s, and then Depend and talking about incontinence in the 1980s.

And so, I think you'll expect to see, with all of the new digital tools that we've got available, opportunities there.

We're also connecting with the appropriate medical community as well that would be logical recommenders of product forms like this.

So, they're exploring some of those different avenues in the test, and we'll see which of those have the biggest return and move the needle, and then we'll try to do more of that as we think about launching.

This may be a product that takes a bit of time to build, and we'll see how that plays out in terms of consumer behavior change.

Okay, great.

And last thing is just very subtle.

I think I picked this up correctly, that you talked about Russia and eastern Europe as a bucket rather than it just being Russia.

Why the change?

Well, we've actually -- whenever we said Russia before, it always included eastern Europe.

It just -- eastern Europe was pretty small, and it has gotten bigger, that we thought we should get them in the headlines.

So, our business in the Ukraine is actually also doing really well.

Our business in the stans, Kazakhstan, Kurdistan, Uzbekistan, Turkmenistan, Azerbaijan, all those countries that none of us have visited very often -- that part of the world has also grown nicely, and it's new geography for us.

And so, we're going in and building a good business there, and the collection of that has actually delivered quite a bit of growth this year.

Great.

So, those numbers are comparable, it's just giving eastern Europe -- ?

Yes.

Okay, perfect, thank you so much.

It wasn't big enough to add it, and we just wanted to talk about it a little bit more.

Okay, thanks, Tom.

Thank you.

Our next question comes from Javier Escalante with Consumer Edge Research.

Hello, good morning, everyone.

I have a follow-up on China, Russia and Brazil.

You mentioned that category growth is still at least high-single digits.

So, if you could tell us whether this is actual volume growth or is it inflationary pricing, whether you are seeing still trade up?

What part of -- if you can help us understand industry markets, whether you are seeing still consumers trading up or is it trade down because of the difficult economies?

Could you give us a little bit more of a view of the consumer industry markets?

Yes, I think a good way to think about all of these markets is that you're still seeing GDP per capita go up in all of these markets, as the middle class builds and builds, and more people are employed and are able to enter the middle class and afford our products.

So, even if they have a downtick in their GDP growth rate, the GDP per capita is still increasing at a decent rate, and that's fueling the expansion of consumable categories.

And so, I'd say the three markets are pretty different in that, [since] China, there really hasn't been much price.

You typically are seeing consumers trade up, so the lower tiers are moving up into the upper tiers.

The golden baby phenomenon is still very much alive, where mom wants the very best products for her baby.

So, you're seeing more rapid growth in eCommerce in China.

So, if you looked at Nielsen numbers, you wouldn't see that category growth rate, and it's imprecise, and data in China is difficult to get, but our guess is that you'd see high single-, low double-digit growth in the category with very little price.

In the case of Russia and Brazil, both there was some price this year.

And so, Paul, I don't know if you've got any more detailed numbers, but in the high-single, double digit -- low double-digit growth in Russia; you probably had half of that was price I'd guess in the period.

And not everybody took it, not at the same time.

And there has been some innovation in launching diaper pants.

That is a premium-priced offering that the consumer has traded up into.

So, you are seeing some mix improvements in both Brazil and Russia.

But both also got some price to offset currency that was a factor in the category growth.

And when it comes to -- that is very helpful, Tom -- actually, when it comes to what Unicharm is doing in Brazil, is it similar to what it is in China?

Is it super premium product or is it different?

It's a super premium product, and it's actually priced quite a bit higher than everything else in the market.

And, so far, hasn't gotten much traction, at least in the measured share data.

Both -- Procter launched aggressively, as did we, every kind of diaper pant we know how to make, and occupied I think all of the [logical] positioning that a Unicharm might want to go do.

And so, we never take them for granted or underestimate them.

But so far, our defense plans in Brazil have been working pretty well.

Finally, if I may, on Mexico, which is completely different from the dynamics in Russia, China and Brazil, could you explain a little bit of what's happening?

Why the JV income profits are down by so much, what is the pricing environment?

Could you explain that better?

Thank you.

Yes, sure.

Pablo Gonzalez will be hosting a call on Thursday where they'll go into more detail on their numbers, so I don't want to scoop him too much.

But I'd say it's been a continuation of the trend where it's been a slower growing economy than was predicted.

That's showed up in slower growth in lots of categories, and more investment in price to try to stimulate category growth.

And I think that that hasn't been fully effective.

So, we've invested in price, which has hurt the top line and hurt profitability, to hold and stabilize share positions, which we've been successful at doing.

But it's been a much more challenging economic environment.

I think they've had commodity cost inflation as well, and a little weaker peso, so they've had a number of factors that have combined to suppress their results from what they were hoping for this year.

But Pablo can give you more color on that on Thursday.

Thank you very much, Tom.

Thank you, Javier.

Our next question comes from Bill Schmitz with Deutsche Bank.

Hi, Tom, good morning.

Good morning, Bill.

My favorite topic: toilet paper in the US --

Yes.

It seems like there's a price war that's kind of emerging.

How problematic do you see that being?

Because I know your pricing has been negative, at least in the scan channels for a while, but it seems like P&G has finally bit the bullet and taken their pricing down pretty substantially in the last three or four months.

So, do these trends continue, and where does it end?

Because the latest round of data was actually pretty damning in terms of substantial sequential price cuts.

So, any commentary there would be appreciated.

I mean, the investment level certainly picked up in the late second and early third quarter, and we matched up to it in the third quarter, and you saw that in our pricing numbers.

We also saw it in pretty good volume performance.

And when I look at the overall margins in our consumer tissue business, and the uptick that we got in the quarter, this is a kind of near-term high-water mark for us.

So, I'd say we're balancing the marketing mix, and driving the premium variance where we can, and investing in price to make sure we're competitive on future price points.

And that's kept the momentum going in that business, which -- obviously, we're watching what P&G and GP Koch do in this environment, but we're weathering the storm reasonably well.

Great, thanks.

And then just the 45% of KCI that's not Lat Am, Russia and China, it looks like it's growing low-single digits.

I'm assuming that those three were up like 17% or something in the quarter.

So, what's the story there?

Is there an opportunity to accelerate growth in those markets?

I know Australia is kind of a slow growing market, and South Korea is probably the same, but is there anything else there that is perhaps an opportunity or a threat?

I'd say Korea's actually on track with their plan this year, and again, but it is a slower growth market than a lot of the rest of Asia.

Australia, you pegged that one correctly, and they'll have some big currency headwinds in the fourth quarter as they roll forward.

The rest of Latin America is a mixed bag.

Costa Rica and Central America is a little bit more developed -- has had a little bit more competition in the quarter.

So, we're working on some things on that front.

But I'd say Australia and Korea are by far the two big players in the balance of KCI that we talked about.

Great, thanks so much.

Then one last one; I know the call's gone a long time.

We answer all your questions on this call, Bill.

We're here for you guys.

It's great.

I feel much smarter now.

(laughter) The growth rate --

I'd say I'm nearly empty now.

I've given you all my wisdom.

(laughter)

I sucked it out.

The growth rate in diapers in Brazil -- it's like halved in the latest periods.

Do you know what's driving that?

Because it was sort of like pretty substantial in like the 20% range, and it fell to like 10%, 11%.

Is it like a temporary respite, or is there something more sinister going on there?

It's a more competitive environment, so everybody is spending money like crazy.

Procter is spending aggressively; we are as well.

Unicharm is launching.

So, I'd say delivering double-digit growth in that environment has been a pretty solid performance, especially against a weaker economic backdrop, which probably hasn't helped on that front.

And we've had a terrific performance in fem care in Brazil, and so there's a lot of good things happening in that business overall that we're pretty happy with.

Great, thank you guys so much.

Thanks, Bill.

Mr. Falk, at this time, we have no other questioners.

All right.

Thanks for all the questions today, and we'll wrap up with a quick comment from Tom.

Well, once again, solid execution, with great results in K-C International, lots of opportunities as we spin Halyard.

So, congratulations to the Halyard team, and we look forward to a successful transaction completed in the end of next week.

And once again, thank you all for your support of Kimberly-Clark.

Thank you very much.

Ladies and gentlemen, that concludes this morning's presentation.

You may disconnect your phone lines, and thank you for joining us.