金百利克拉克 (KMB) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding.

We now have your presenters in conference.

(Operator Instructions)

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

Thank you, and good morning, everyone.

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

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

Now, here is the agenda for our call.

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

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

We will finish with Q&A.

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

And 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 a discussion of forward-looking statements.

We'll also be referring to adjusted results and outlook; both exclude certain items described in this morning's release.

The news release has further information on these adjustments, and reconciliations to comparable GAAP financial measures.

And now, I will turn it over to Mark.

Thanks, Paul, and good morning.

Let's start with some headlines.

First, we achieved organic sales growth of 5%.

It was highlighted by 11% growth in developing and emerging markets.

Second, we delivered strong cost savings, margin improvements, and growth in adjusted earnings per share.

Third, we continue to allocate capital in shareholder-friendly ways.

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

First-quarter sales were $4.7 billion, down 4%, including a 9-point drag from currency rates.

Our underlying organic sales rose 5%.

Adjusted gross margin was 35.6% in the first quarter; that's up 140 basis points year on year.

Adjusted operating profit was up 7% versus a year ago, with an operating margin of 17.4%.

That is up 180 basis points compared to the prior year.

I am really encouraged by our margins and our cost savings performance as we start the year.

We delivered $90 million of forced cost savings, and we are off to a very good start relative to our full-year target for savings of at least $300 million.

In addition, our Organization restructuring is on track, and generated $10 million of savings in the quarter.

Commodities were a $10-million benefit in the quarter; that is the first time in more than two years that we experienced cost deflation.

On the other hand, we absorbed significant currency headwinds.

The total earnings drag from currency was approximately $0.25 per share, or about 19%, in the quarter.

On the bottom line, first-quarter adjusted earnings per share were $1.42.

That is a strong start to the year, and up 8% compared to last year.

Now, turning to cash flow, our cash provided by operations in the first quarter was $20 million.

That's compared to $437 million last year.

The decline was primarily due to higher pension contributions, currency effects on operating working capital, and the impact of last year's spinoff of our healthcare business.

In February, we made contributions, which we financed by a debt offering, to our US pension plan in conjunction with the annuity transaction that we announced.

As a result of these contributions, we now expect that cash provided by operations in 2015 will be down somewhat year on year.

In terms of primary working capital, first-quarter cash conversion cycle was down seven days compared to full-year 2014.

So, we are ahead of our three- to four-day improvement objective for the year.

Now, moving to capital allocation, first-quarter dividend payments and share repurchases totaled $0.5 billion.

We continue to provide a top-tier dividend payout among our peers; and in February, we announced our 43rd consecutive annual increase in the dividend.

As we mentioned in this morning's news release, in the first quarter we acquired the remaining interest in our subsidiary in Israel for $150 million.

As a result, we are now targeting full-year share repurchases in a range of $700 million to $900 million.

Full-year dividends and share repurchases should be at least $2 billion, or about 5% of our current market capitalization.

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

In personal care, organic sales rose 6%.

Performance was led by developing and emerging markets, with organic sales up 16%.

Overall personal care operating margins were 19.7% in the quarter.

That is up 50 basis points year on year.

Moving to consumer tissue, organic sales were up 1 point, including strong bathroom tissue volumes in North America.

Consumer tissue operating margins of 18.5% were up 330 basis points year on year, with a strong cost-savings performance and lower between-the-lines spending.

And lastly, K-C professional organic sales increased 7%.

Organic sales were up 8% in developing and emerging markets, and 4% in North America.

The total KCP segment top line also benefited from sales of non-wovens to Halyard Health in conjunction with a limited term supply agreement.

Overall, KCP margins were 16.9%, and that was even with a year ago.

So, that wraps up my comments.

To recap, we are off to a strong start in the first quarter, led by organic sales growth at the high end of our 3% to 5% full-year target.

We delivered strong cost savings, improved margins, and growth in adjusted earnings per share, and we continue to focus on allocating 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 first-quarter results, and then I will address our full-year outlook.

But before I do that, some of you may know, this is Mark Buthman's last conference call as Chief Financial Officer for Kimberly-Clark.

In fact, we tried to figure this out the other day, and we think he's done 49 or 50 of these earnings calls in a row, and that is an amazing record.

In fact, you should know that we have a box of our fine Kleenex facial tissues sitting next to Mark on the table in case -- just in case a tear appears in the corner of his eye.

Because I know how much he is going to miss doing these.

But seriously, I would like to take a moment just to thank Mark for all of the contributions he has made to Kimberly-Clark.

He's been an outstanding Chief Financial Officer, and a terrific leader and friend throughout his career.

So, I'm pleased that Mark will be able to achieve his long-term goal of retiring later this year.

Maria Henry, who is an experienced CFO -- some of you may know her from her work at Hillshire Brands -- will join Kimberly-Clark next Monday, and will succeed Mark as Chief Financial Officer.

Mark and Maria will work together over the balance of this year to ensure that we have a smooth transition.

We are all looking forward to working with Maria, as we continue to focus on creating shareholder value through our global business plan.

So, now let me turn back to our results and our outlook for the balance of the year.

Overall, we delivered very good financial results in the first quarter, and we're executing well in a challenging environment.

Organic sales growth in the quarter was 5%, with benefits from our targeted growth initiatives, from innovation, and from selling-price increases in some markets.

As Mark just mentioned, our Business in developing and emerging markets had another strong quarter, and it was led by our personal care segment.

Organic sales in diapers rose high teens in these markets, as we continued to benefit from innovation, expansion of the diaper pant, and category development overall.

So, this business has been growing rapidly for some time.

And you may not know, but our diaper business in developing and emerging markets is more than 1.5 times the size of our diaper business in North America.

In terms of key growth markets, organic sales in diapers increased 55% in eastern Europe, 35% in China, and15% in Brazil.

Huggies volumes were up nicely in all three markets, and we have innovation launching in the next few quarters to drive additional growth.

We have also increased selling prices in eastern Europe and Brazil to offset some of the currency declines that have happened in those places.

We are also doing well in our other personal care businesses in developing and emerging markets.

Organic sales in fem care were up mid-teens, and that included very good performance in Latin America, led by Brazil, and also in China.

Organic sales also increased double digits in baby wipes, and in our adult care business.

And K-C professional grew organic sales high-single digits in developing and emerging markets in the first quarter; also a very good performance.

So, overall, we're delivering excellent growth in the developing and emerging markets, and I expect our momentum there to continue going forward.

Turning to our developed markets business outside North America, organic sales in the quarter were even with the prior year.

On the bottom line, operating profit and operating margin increased significantly.

And that included very good results in Korea, with additional progress in western and central Europe.

Moving to our North American consumer business, sales volumes were up nicely across a number of our brands.

That included Huggies baby wipes, Poise and Depend in adult care, GoodNites youth pants, Cottonelle bathroom tissue, and Scott and Viva paper towels.

On the innovation front in North America, we introduced improved Huggies baby wipes, and we started shipping new Poise pads and Depend briefs.

In March, we began the relaunch of our mainline Huggies snug and dry diapers.

This relaunch includes product upgrades, a new marketing campaign, and increased promotion support.

And this new product should be on shelf in about 80% of our retail customers in North America by late April.

In K-C professional in North America, we had solid volume growth in our higher-margin, faster-growing wiper and safety products businesses.

In washroom, our volumes were up low-single digits, which is a step in the right direction after a softer performance last year.

In terms of the bottom line, as Mark mentioned, we had an excellent quarter improving margins.

Our focus on profitable volume growth, raising selling prices where we can, and then driving cost savings helped us overcome some pretty significant currency headwinds.

Finally, as Mark already highlighted, we continue to allocate capital in shareholder-friendly ways, which is a key strategy of our global business plan.

So, all in all, I'm encouraged by our first-quarter results.

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

Our teams continue to focus on delivering their plans for the year, and creating additional flexibility to further invest as appropriate.

While we are only one quarter of the way through the year, and the environment out there remains very volatile, I am pleased with our execution so far.

And despite a more negative currency outlook, we are well positioned to achieve our earnings commitments for the year.

On the top line, we continue to target organic sales growth of 3% to 5% for 2015.

And on the bottom line, we continue to expect full-year adjusted earnings per share in the range of $5.60 to $5.80.

And while currency headwinds have increased over the last three months, we have good momentum with our growth initiatives and with our cost-savings programs.

And the commodity-cost outlook has improved slightly compared to where we were at, at the beginning of the year.

Our updated currency and commodity-cost assumptions are included in this morning's news release, if you want to refer to those.

So, in summary, we are off to an excellent start to the year.

We continue to focus on the fundamentals that drive our long-term performance, and we remain optimistic about our prospects to generate attractive shareholder returns.

That wraps up our prepared remarks, and now we will begin to take your questions.

(Operator Instructions)

Ali Dibadj, Sanford Bernstein.

Mark, congratulations to you.

I hope the box of Kleenex will put you the joy of not dealing with us anymore on these calls (laughter).

That's exactly what we meant, Ali, absolutely.

A couple questions.

One is, it looks like you are starting to enter this sweet spot, as we call it, of commodities really being a tailwind.

And not having to put back a lot of that into pricing in the category and promotions in the category.

Historically, you guys used to say 60% or 70% of the commodity tailwind you'd have to put back into the category somehow or reinvest it.

Is that what you are expecting going forward in this environment?

Is it a little bit more, is it a little bit less?

And are you yet at that run rate of reinvestment, or should we continue to see some of the expansion in the sweet spot?

I think that is an interesting call.

As look around the world, you're still seeing some inflation in some markets.

So as local currencies are wiggling around in places like Argentina, for example, or even Brazil.

And so we had $10 million of deflation in the quarter, which is good, and we think that our guidance of $50 million to $150 million for the year is probably the right ballpark.

I think given that last year we had close to $250 million of inflation and didn't fully recover price on that front, I hope that prices will be a little sticky on the way down.

I think the other big driver historically has been pulp.

And pulp is not moving around as much as the oil-based commodities.

Pulp has probably driven pricing more than any of the other commodities overall.

So in other words, do you think you'd be able to hold onto more than historically given what's happed over the recent history of prices?

Yes, that would certainly be our goal going into it.

Okay.

So something that you said actually links to another question I has which is just FX and pricing.

So if you look at Personal Care, in developing and emerging you say negative 20% FX plus fixed price.

If you look at developed non US, there's mismatch there, negative 8% FX pricing a little lower than that, same thing on consumer tissue.

So it looks like the gap between the currency headwind and the pricing you are able to take in markets has widened a little bit.

And wanted to get your perspective on that as it relates to the health of the consumer that you're seeing broadly, or competition as well.

It is tough to get full reflection of the translation impact of currency.

So if you can get most of the transaction impact covered, you are doing reasonably well.

And so, in most of these markets we are seeing that.

We're getting the transaction partially or mostly covered, but we're not covering the full translation impact.

Okay.

And then just the last thing on pricing in North America.

Personal Care and Consumer Tissue, negative again.

Is there any risk of that becoming or is it already in this irrational zone, I guess to use a heavy word, or do you think this is just normal competition?

A lot of this is really stuff that happened last year.

So it's being annualized.

It started in the second quarter, and we stepped up in the third quarter.

So it is really more of the comparison.

I wouldn't say it's gotten significantly worse sequentially.

You see some pockets where there's some lower price points, but overall I'd say it has been pretty consistent.

Okay.

Thanks again, and congrats again, Mark.

Thanks.

Gail Glazerman, UBS.

Can you talk a little bit about your operating performance in Consumer Tissue?

It's a fair bit stronger than I would've expected.

Looking at 2% volume, 1% price decline, it's not intuitive where the improvement was coming from.

Can you just talk about what really drove the earnings recovery?

A lot of it was in the US where we were plus 5% volume.

It was very strong quarter, good execution.

Cottonelle continued to do well, and some of it was in the non-measured outlets where you would see or you wouldn't necessarily see it in the Nielsen data.

And then we called out the Viva Vantage launch, and so good strong growth there.

And typically, it is a strong facial tissue selling season.

Facial tissue was okay, although it was being driven more by Cottonelle, Scott bath and Viva towels.

Okay.

And can you talk a little bit about the US diaper market?

Last quarter, you talked about having to step up and maybe address some of the share loss.

How do you think you are doing and when to you think you'll see the full benefit?

And is the slightly narrower volume decline a reflection of comp more than actions, or is that a reflection of some of the actions you have taken to date?

It is probably that comps are getting a little easier.

We are up about a share point sequentially.

But the relaunch of our mainline, Huggies, didn't really start to roll until mid-March, and it will roll through the end of April.

And so the better products are getting on shelf, we're getting better execution at store.

Stronger advertising claims coming.

So I think we will have to see how that plays out over the balance of the year more than we saw in the first quarter.

Okay.

And just one last question.

Do you just have any comments on the US consumer?

Any changes in behavior, buying pattern in terms of whether there is more willingness maybe to spend up on premium purchasing in different channels, purchasing different sizes, just seeing any response to improving confidence and lower gas prices?

I wouldn't say we have seen a ton yet.

I think a lot of retailers that I have talked to have said that a lot of -- the lower fuel price has either been saved or has been spent inside the gas station buying an extra cup of coffee or something like that.

I wouldn't say we have seen that in category demand.

So the trends have been pretty stable.

It is not getting worse, but we're not seeing a big shift up either at this stage.

Are you seeing anything in the K-C Professional business that might give you encouragement or is that pretty much more of the same?

Yes, I would say -- I was talking to our KCP guys recently.

We just had a big meeting with a lot of their US distributors, and they were more bullish.

They are seeing the continued slow steady growth in the US economy, the job growth and maybe it's been disappointing to some but it's been positive and pretty consistent.

And so they were more bullish this year.

And I think last year with the tough weather in the northeast, which we called out as a reason why -- partly why we were down, it was still a tough winter.

But it wasn't as bad as it was last year.

So everybody had a little bit stronger start to the year, which was good.

Okay.

Thank you.

Chris Ferrara, Wells Fargo.

Congratulations by the way.

Gross margin.

Look, there has been a lot of question around pricing, right?

And obviously pricing slowed a little bit sequentially.

But gross margin was up pretty substantially in the quarter.

And when you do the math on what currency must have done to gross margins and you look at force, force is good, but it wasn't a particularly extraordinary force number.

Cost savings, restructuring savings were okay, $10 million, but not moving the needle.

So can you talk a little bit more about where did all of the incremental gross margin expansion come from in the quarter?

And how sustainable is that?

Because the trends, if you look at where commodities are going and where currency is going you would think that you would probably build on that increase.

So I was hoping you could talk that through a little bit.

I will let Mark dive into the cost savings numbers just a little bit.

But essentially, Chris, if you think about it, gross profit essentially was flat year on year, sales were down 4%.

So gross margin was up 180 basis points.

So essentially, it took cost savings, volume benefits, selling price increases, all of that collectively to cancel out the translation and transaction impact on currency.

So we had a great start on cost savings, and maybe Mark can add a little color on where we over delivered on the $90 million.

Chris, as the year progresses, typically, we build our cost savings programs.

So to start a year, $90 million is really a good result coming out of the gate.

And it is a combination of leveraging our global sourcing organization, productivity and waste improvements, and then a big contributor in the quarter was product design, which are the three typical buckets that we have.

I would say the other thing is, our operations are performing very well.

So if you think about tissue, when we to run tissue machines full and they have low waste and high productivity, there is really good absorption.

And you actually don't see that element coming through in force.

So I say it is just a combination of good start to the year in cost savings, and just overall good operations.

Great.

And I guess, can we dig a little bit deeper into the state of US diapers?

So obviously, if you just had the mainline relaunch of Snug and Dry, and I guess are we seeing or will we be seeing in April the sum total of everything you are doing to get that turned?

And how are you feeling about the brand equity there?

How are retailers responding to it?

Have you gotten -- have you held shelf space?

Have you maybe even gotten a little extra?

Just any more detail on the prospects for a turn in that area of the business would be helpful.

I think a couple of things.

The super premium end of that business has grown really well, and had a very strong first quarter.

All of our share improvement sequentially was in the super premium end.

So great innovation, winning products out there, and strong claims, and saw that continue.

I think on the Snug and Dry, the mainline business, we have a much stronger plan this year than we had last year.

There's better product on shelf, stronger advertising claims, and we've got a better retail execution plan with more distribution, more feature and display activity.

So we will watch and see how that plays out.

Again, we didn't lose all the share in one fell swoop, and so I'm sure it won't all come back in one quarter.

But I do expect to make steady progress, and see some improvement in that business this year.

Thanks, guys.

Olivia Tong, Bank of America Merrill Lynch.

Congrats, Mark.

Best of luck, first.

Thank you.

And the first question, just you started the year at the high end of the 3% to 5% range.

So it sounds like you're keeping the range at least at 3% to 5%, which in Q1 certainly makes sense.

But can you talk through about what is going on for the remainder of the year that could potentially result in growth decelerating from where you started the year?

We would get pretty good momentum, but the comps get a little tougher in the back half.

As you recall, we finished pretty strong in the second half of last year.

And so particularly in some of the emerging markets, we will see that happen.

While everyone is talking about the China slowdown, we haven't seen it yet in our business.

But it is affecting some other competitors.

So that is something we'll watch as well, we've got aggressive product innovation plans going there.

The first quarter on the volume front in places like Eastern Europe, we had some big price increases that took place on April 1. So we had a little bit more volume that went in in the first quarter, on the other hand we'll get the benefit of those price increases in the subsequent quarters.

So we still should see some organic growth, but a little bit more volume than price.

So overall, I would say we feel pretty optimistic and we kept the same range.

As you said, it is early in the year and this increases the confidence that we can achieve our plan for the year, and maybe even give us the opportunity to think about areas that we could reinvest to set up for an even stronger 2016.

So it is a nice place to be at at this point in the year.

Got it.

Thanks.

And then also, you had mentioned that force typically gets better as the year progresses, and you're starting at a $90 million.

If we just roll that through for the year, that clearly suggests something quite a bit higher than just at least $300 million.

So can you talk through some of the savings this year relative to year's past, and whether it just was a particularly good start to the year or there is quite a bit of potential upside to your existing force target?

Olivia, you have taken a page out of the CFO handbook.

Take a good performance and just annualize it.

So for us, we did have a good start to the year.

I would say given the nature of the environment that we are dealing and with all the currency challenges and competitive challenges around the world, the teams really were focused on savings as a lever that we control heading into the year.

We decided, while it is a good start to the year to hold our outlook for the year.

Phasing should typically get better, but we started a little faster.

So we will give you an update when we get to the second quarter, and it feels good to start but we got to keep delivering.

I think we had a really strong first quarter in the emerging markets on the cost savings front.

And so that was a big plus for us.

Some places where we have had big good currency headwinds, those teams are looking at price and cost savings to make sure they can try to get as close to their US dollar profit goals as they can, and I think that also helped get us off to a good start.

Does the cost savings target, the force target, include the impact of currency as well as just a -- it's a dollar target?

Typically, that is what we would disclose and that they would aim at.

In some individual markets, they might have local currency targets that they'd aim at, but at a regional level they are all measured on a dollar basis.

Understood.

Thanks again.

Appreciate it.

Lauren Lieberman, Barclays.

I was just curious going back to the Consumer Tissue profitability, I just -- I look -- my model goes back to 1999, and there is not a quarter with 18.5% margins.

Well there is now.

There is now.

Exactly.

So this carries with it -- to what degree do you think you've structurally changed the profitability of that business?

I understand 5% volume in North America would help a lot, but still, the base was already quite good.

And I guess for that question, for Consumer Tissue, but even for the Company overall.

Because as you pointed out, it has been two years of inflation, so you can't even say it's deflation driving this.

But I am just curious your views on whether the structural profitability of the portfolio has changed, and if so, how and why?

Lauren, I think as you know, we have really been working hard on this over the years.

And we did the Tissue restructuring several years ago that had us exit some businesses and close some Tissue facilities.

We did the European restructuring, which had us exit diapers but also had us shape our Tissue portfolios.

So we have really been focus our business in the higher margin targeted growth areas of that business, and we have been making steady progress on the margin front.

And it feels pretty good to be here, and I think that the team is excited and is looking for areas where they can invest behind great brands in profitable ways to keep that momentum going.

Do you feel like the -- the margin, is the margin profile of the emerging markets, what does that look like?

Because I know we can see North America versus rest of the world, but I'm just wondering if the D&E market profitability is also mixed benefit?

In Tissue specifically or broadly?

I guess both, since you offered it up.

I would say that we saw a good margin performance in emerging markets as well.

And the developing is still lower than developed, but they are narrowing the gap and it is a pretty solid performance.

So I don't know, Mark, if you want add any other color to that, or do you --?

That is their goal is to grow at or better than the underlying growth rate in the local market, and close the margin gap overtime.

So I think you just saw it making progress in the first quarter.

Okay.

And when you said that you have covered the transaction expense, would 9% FX headwinds at top line but 19% on the bottom line, I'm guessing you didn't mean just with pricing.

When you've say covered transaction, do you also mean by virtue of the cost savings?

Yes.

Because in many markets where you have had transaction impact like in Western Europe and Australia, it's very difficult to get any selling price.

And there has been a pretty good size currency hit in markets like that.

In places like Brazil and Russia and the Ukraine, we probably had a better opportunity to close the transaction gap.

But overall, a combination of cost saves, volume growth, pricing, we have been able to offset the currency impact.

Okay.

All right.

Thank you.

Caroline Levy, CLSA.

This is actually Brian Doyle in for Caroline.

I just had a couple questions.

If you could comment on just the share trends in US adult care overall, and for the Poise brand in particular.

And then the second question was, if you could just clarify the sales to Halyard?

In the release, it read like you were saying that was most of the 6% segment organic growth.

Is that accurate, and how long does the agreement run?

Thanks.

I will take the first one, and I will throw Mark the second one on Halyard.

So on adult care trends, we have -- we would probably say we have successfully defended and Procter will probably say later this week they have successfully launched.

And so we have lost less than our fair share.

If you look sequentially, I think we were down about 0.5 points overall.

I think if you looked year-over-year, Paul, we are down what?

We are down about 4 points.

A little bit more on the Poise side, less on the Depends side.

We're launching more innovation this year, and are aggressively competing and promoting, as is our primary competitor.

So I think private label and the other small branded player have lost more than their fair share.

And in the meantime, the category growth has picked up.

So we saw solid high single-digit category growth, which may be a little overstated because of the amount of couponing that's out there in the marketplace, but it is still a strong performance.

Brian, on Halyard, that 3% impact which we reported as mix and other in KCP is less than half of their organic growth for this quarter.

So it was an important component, but it wasn't really the underlying driver.

And the agreement will run for two years.

And I'm sure there is a small markup on that.

I'm sure the Halyard team is looking for alternative supplies as quickly as they can, but the agreement commitment is two years.

Great.

Thanks a lot.

Bill Schmitz, Deutsche Bank.

Mark, it's been a great run.

I guess the next fish-fry is probably on you.

I hope.

All right.

We'll see you at Powers Lake.

The first question is, where are you getting all of this extra distribution in non-scan channels?

Because again, there is a big disconnect from some of the Nielsen stuff we're getting.

But it seems like it's pretty clear, and I think you already alluded to a bit that you're during very well in some of the non-track channels.

So what are those channels, and is that distribution gains or is it just better relative growth?

Are you talking about any market in particular?

In North America.

The US stands out the most.

North America is essentially a club -- is the biggest non-scan channel, and are probably underweight historically in club on tissue products.

And so that has been an area that we have been trying to crack into with Cottonelle, and Viva, and Scott tissue and things like that.

So we had some success in the first quarter, and that enabled some of that growth.

If you looked more broadly, particularly in Asia, e-commerce is probably by far the biggest non-track channel that I would say outperforming in relative to the track channels.

So Korea and China, in particular, would be places where we would see better growth than the track channel.

Got you.

And then, is there a long-term defense strategy against what P&G is trying to do in Russia and China and Brazil?

And is there any incremental impact from some of the Japanese guys, mostly Unicharm but maybe Kao as well who are probably going to start using some of the currency to get more aggressive?

So what have you done so far, and what is the plan going forward?

It is a tough competitive marketplace out there, Bill, as you have noted.

Pretty much everybody wants to eat our lunch somewhere, so we have got strong global competitors, we've got some strong local competitors.

And so we have got to have good innovation, and be competitive on price, and execute well every day to keep it going.

So we see that with some of the things that Procter is doing on diaper pants, but we'd also would say Unicharm and Kao in many ways have some of the best performing products that we benchmark against.

And so we're up against those guys in lots of different places.

And I am really proud of the way the teams have executed and got better performing products with good execution in market.

I would say, Bill, that our categories are largely local.

Our stuff doesn't ship long distances.

So you might get some currency change like on commodity inputs and things, but largely the battle is fought locally.

I think with our motto, we're set up to do that as well as anybody.

Okay.

That makes total sense.

And the just China.

Can you just disaggregate or is it impossible to figure out what is the real comp sales growth, and how much of it is distribution expansion?

Because I think you're going to add another 10 cities this year, plus or minus.

So is there any way to look at that massive growth and separate between the two?

It is tough.

I think if you look sequentially, I think our city comp didn't change much.

If you looked versus first quarter last year, we were at [105%] versus [90%] last year.

But I would also tell you, e-comm probably was the bigger growth factor than the city comp change.

So some of that is category penetration or channel growth that is helping those consumers get products in a different way.

But, Mark was just in China about a month ago, so he's probably got a more relevant snapshot of what you saw when you were over there.

So maybe you can give us some local color.

I would say, Bill, too, that the market is still growing at very healthy rates.

It is down from where it was, but our team still is very excited and executing well in bricks and mortar.

But e-comm is a place where we have invested a lot and we are over indexed.

And as Tom said, that is probably the place where we have driven more of the relative share gains.

I think the category is still growing at high single to low double-digit.

And double digits this year.

So we are growing at a multiple of that.

And city expansion is a piece of it, but I would say e-comm and channel expansion is the bigger component.

Got you.

Just a very brief follow-up, and I'll let you go.

Do you guys co-locate in China like some folks do in the US with the e-commerce players?

So are they sharing distribution space with your manufacturing?

Yes.

Our China team is working with our big e-comm customers to figure out ways to take costs out of the whole supply chain.

So we have done some of that in larger cities as well.

Great.

Thanks guys.

I appreciate it.

Javier Escalante, Consumer Edge Research.

My questions have to do with the SG&A line item that was much lower than a year ago.

My calculation is $48 million down.

Is that something that has to do with savings, or does is it has to do with marketing expanding because you are -- it is an issue of timing ahead of the relaunch of the Huggies Snug Dry diapers?

And then I have a couple of follow-ups.

I will let Mark get into the SG&A overall.

The top line, on an advertising spend standpoint we were down 10 basis points as a percent of sales versus prior year.

But we were basically 10 basis points higher than the average of advertising spend for the full year of last year.

So it was in the ballpark of what we would expect normally around 4% of sales.

On the SG&A, you probably had a little bit of currency benefit that would affect it.

But maybe Mark has got some additional color on that.

Javier, I think currency -- when you look at the absolute dollars, currency is a big shift.

We have obviously -- if you'll look at the difference between gross margin and operating margin, we have got some between the lines efficiencies that the businesses are driving.

But currency is probably the biggest impact.

When you consider the launch of the Huggies diapers, is that's because we already have data through mid-April, and your sales are down 6% in track channels.

So either it's a timing issue with regards to again marketing spending where you are doing on shelf?

Because this is the weakest monthly data, that we have seen for you guys in a long time.

Like I said, we have been getting the distribution which started in mid-March, and we should be in about 80% of the channels by late April.

And that is really when you will start to turn on more of the marketing effort at that point in time.

We're probably seeing a little bit better consumption data than I would say you're quoting from the data you are saying.

But it is still early days on the relaunch at this point.

Finally, what drove the 55% growth in Eastern Europe?

And how sustainable that is?

Two factors.

I would say probably two-thirds of it was or 25% of it was volume, and balance of 30% of it was price.

So some big price increases.

Some of the volume was buy-in ahead of an April 1 price increase.

But I think if you talk to that team, they'd double-digit volume growth in Eastern Europe is the right way to think about what they are aiming at for the year.

And then, they are attempting to get as much price as they can to offset the currency impact.

So in the second quarter we should expect emerging markets to decelerate then?

Eastern Europe you would see less volume growth, but we'll get the benefit of the price increase that went in.

So I wouldn't necessarily assume that you will see a big deceleration.

But is the 55% the right number, or is it 20% or 15% for Eastern Europe?

55% is probably higher than you would typically expect to see going forward.

So you'll see some deceleration in Eastern Europe overall, but I think emerging markets should still have another strong quarter.

Thank you.

John Faucher, JP Morgan.

Mark, congratulations.

And I wanted to go back to the CFO playbook you mentioned, because this is a comment that comes up multiple times on calls.

Which is, if the productivity is heavier towards the end of the year, why don't we see that end of the year productivity carryover into the first half?

So you guys aren't alone in terms of saying that.

But it seems if it is good, sustainable cost saves and I'm not trying to question them, it just seems like that would end up rolling over.

And then my main question goes back to some of the comments about female incontinence and the category growth accelerating here.

And I guess I understand that there is some couponing, which is probably leading to some pantry loading.

But I guess how long until you know how big this category can be?

You do hear that when you get a new product launch from a big competitor, that can make the category bigger.

And I look at some of the advertising you guys have out, and looks like you are encouraging some switching in terms of Poise.

Can you talk about; a, how big the category can be; and b, how do you feel about categories switching out of fem care and into incontinence?

How does that work for you guys from an economic standpoint?

Thanks.

Let me take the cost savings one first.

John, I think it's just how the math works and a little bit of programming.

So typically, we will work out an annual budget cycle and the teams are focused on annual incremental programs.

And you are exactly right.

The programs that we had in place last year don't stop.

They are delivering.

But we also launch and think creatively about new programs to help us hit our near-term target.

And so I think it is just a matter of the phasing as we go.

The underlying programs roll into your base, and then you are looking to build on top of that as we go.

So you look at cumulative cost savings over time, it is a pretty big number.

But they build on each other over time.

It is just the way the planning process goes and how the businesses behave.

Switching to adult care, we have known for a long time that a lot of women that have light bladder leakage issues.

And one in three women at some point in their life experience light bladder leakage, that they've used fem care as a solution.

And so given that we have a much larger share with our Poise brand in that space than we do in fem care, we would love to shift them into that space.

It is a better solution, and it's a place where we are going to get more than our fair share of those new consumers.

So you are seeing a little bit of that of the growth in Poise has been a bit of a decline in the fem care category.

And overall, we should benefit from that and consumers will get a better solution for the issues that they are trying to treat.

Okay.

Great.

Thanks.

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

We thank everyone for their questions, and I will turn the call back to Tom.

Well usually I give the last word on these calls, but since this is Mark's last call, I am going to throw it to Mark and let Mark have the last word today.

I'm just grateful to work for Kimberly-Clark.

I have a cold today, so I have the world's softest facial tissue right at hand, and also have antivirals so I don't transmit my germs to my fellow conference call mates.

I have had the good fortune to build a career at a great company like Kimberly-Clark, and work with great leaders like Tom who always got the best out of me.

Work with great people like our investors and our Board of Directors, the leadership team that Tom has, my leadership team.

And it is it has been a very good run.

I'm really proud of what we have accomplished.

But I'm also optimistic about the future.

Tom has made a great selection for my successor.

Maria is fantastic.

And she is going to see opportunities that, quite frankly, being around for a long time I just didn't see.

So I am optimistic about the future, and committed to helping Maria and the new GSLT get started up.

So thanks for your support, and thanks as always for your support of Kimberly-Clark.

Thank you very much.

Ladies and gentlemen, that concludes today's presentation.

You may disconnect you phone lines at this time, and thank you for joining us.