金百利克拉克 (KMB) 2015 Q4 法說會逐字稿

(Operator Instructions)

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

Thank you, and good morning, everyone.

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

Here with me today are Tom Falk, our Chairman and CEO; Maria Henry, our CFO; and Mike Azbell, VP and Controller.

Now, here's the agenda for the call.

Maria will begin with a review of our results, focusing on the full year.

After that, Tom will provide his perspectives on our results and our outlook for 2016, and we'll finish with Q&A.

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

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

Please see the risk factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements.

We'll also be referring to adjusted results and outlook.

Both exclude certain items described in this morning's news release.

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

And now, I'll hand it over to Maria.

Thanks, Paul.

Good morning, everyone.

Thanks for joining the call today.

Let me start off with the headlines for our 2015 results.

Our organic sales grew 5%.

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

We achieved excellent cost savings and margin improvement, helping us deliver adjusted earnings per share toward the high end of our original guidance.

And finally, we continued to improve our capital efficiency, and return cash to shareholders.

Now, let's take a look at the details for our results.

Let's start with sales.

Fourth quarter net sales were $4.5 billion.

That's down 6%, with an 11-point drag from currency rate.

Full-year net sales were $18.6 billion, down 6%, including a currency headwind of more than 10%.

Organic sales growth was about 5% for both the fourth quarter and the full year.

On profitability, fourth-quarter adjusted gross margin was 36%.

The full year was 35.9%, up 160 basis points year on year.

Adjusted operating margin was 17.2% in the fourth quarter.

The full-year margin was 17.3%.

That's up 120 basis points compared to the prior year.

I'm encouraged that operating margins were up in all three business segments and across all three geographies: North America, developed markets, and developing and emerging markets, excluding the impact of the Venezuelan devaluation.

Our teams delivered $365 million of FORCE cost savings in 2015.

That was above our initial target of at least $300 million, and just $5 million shy of our all-time record.

We expect another strong year in 2016, with a savings target of at least $350 million.

In addition, our organizational restructuring is on track, and it generated $65 million of savings in 2015.

We expect additional savings of at least $50 million from this program in 2016.

Commodities were a $150 million benefit for the year, mostly in oil-based materials.

That was at the high end of our original assumption for the year, but on the other hand, currency declines severely impacted our earnings.

For the year, the all-in earnings drag was about 25%, well above our going into the year assumptions, for a drag of more than 15%.

On the bottom line, fourth-quarter adjusted earnings per share were $1.42, bringing the full year to $5.76.

That was up 5% compared to the results from continuing operations in 2014, and toward the high end of our original guidance range of $5.60 to $5.80 per share.

Turning to cash flow and capital efficiency, cash provided by operations was $2.3 billion for the year, versus $2.8 billion in 2014.

A number of factors drove the lower cash amount, including our debt financed pension contributions, the Halyard spin-off, and higher total working capital.

I expect a significant improvement in cash generation in 2016.

We reduced our primary working capital cash conversion cycle by eight days in 2015, as a result of extending payables terms.

On adjusted return on invested capital, we improved this metric 360 basis points, including benefits from the spin-off of Halyard Health.

On capital allocation, in 2015, we returned $2.1 billion to shareholders through share repurchases and dividends.

For 2016, we plan to repurchase between $600 million and $900 million of Kimberly-Clark stock.

We also expect to increase the dividend at a mid single digit rate.

That's generally consistent with the 5% growth in adjusted earnings per share that we delivered in 2015.

Now let's look at the segments.

In personal care, organic sales rose 7%, continuing our long track record of delivering strong growth in this segment.

Our personal care business grew 14% in developing and emerging markets.

Operating margins were 20.5% in personal care, up 180 basis points.

The improvement was enabled by organic sales growth, cost savings, and lower input costs.

In consumer tissue, organic sales were up more than 1%, including volume growth of 6% in North America.

Consumer tissue operating margins were 17.5%.

That was up 150 basis points, and includes benefits from another year of excellent cost savings performance.

In K-C Professional, organic sales increased 4% overall, with 6% growth in developing and emerging markets.

The segment top line also included a 1.5 point benefit from sales of non-wovens to Halyard Health, in conjunction with a limited term supply agreement.

Those sales should be somewhat lower in 2016.

K-C Professional operating margins were healthy at 18.3%, up 50 basis points year on year.

To summarize, our fourth-quarter results capped off a very good year overall, as we achieved mid single digit growth in organic sales, and adjusted earnings per share.

We delivered strong cost savings, and broad-based margin improvements, and we continued to improve ROIC and allocate capital in shareholder-friendly ways.

I'll now turn the call over to Tom.

Thanks Maria, and good morning, everyone.

I'll share my perspectives on our full-year 2015 results, and then I'll comment on our outlook for 2016.

So, starting with this past year, we delivered another year of good financial performance in a challenging environment.

As Maria just mentioned, our organic sales grew about 5%.

This reflects very good execution, that compares favorably to many other consumer packaged goods companies.

Our volume growth was 4%, and that's our best performance since 2007 on this metric.

Our business in the developing and emerging markets had another great year, with 10% organic sales growth.

This performance was highlighted by 14% growth in personal care.

That's the fifth consecutive year this part of our portfolio has grown organically at a double-digit rate.

Looking at some of our targeted growth initiatives in the developing and emerging markets, in diapers, our organic sales increased more than 35% in Eastern Europe, 25% in China, and 10% in Brazil.

Innovation across all these markets continues to help drive our growth, and in 2016 we will launch more product upgrades on Huggies throughout the developing and emerging markets.

In China, Huggies diapers are now sold in 115 cities, and we're targeting to be in 130 cities by the end of the year.

And in Brazil, as a result of the continued decline in the real, we've recently initiated price increases across these categories.

Elsewhere in personal care, our organic sales and feminine care rose double digits in developing and emerging markets.

Our performance in fem care was especially strong in Latin America, led by Argentina and Brazil.

We also had a very good year in China and in the Middle East, Eastern Europe, and Africa on fem care.

In addition, our adult care and baby wipes businesses also grew organic sales in double-digit rates, in developing and emerging markets.

K-C Professional organic sales rose mid single digits in developing and emerging markets, even though demand has slowed in some places, toward the end of the year.

Overall, our business in the developing and emerging markets was 30% of Company sales in 2015.

Even though volatility has increased and economies are slowing in some parts of the world, we remain very optimistic about our growth prospects.

For 2016, we're targeting organic sales growth of at least high single digits for our business in the developing and emerging markets.

Turning to our developed markets business outside of North America, organic sales for 2015 were even with the prior year.

We continue to generate very solid growth in South Korea, while market conditions were relatively soft in Western and central Europe.

Moving to our North American consumer business, we delivered 5% volume growth and excellent operating profit performance.

In adult care, we delivered high single digit volume growth, with benefits from innovations, brand investments and category growth.

Our market shares improved sequentially as the year progressed, with shares up 1 point in the second half of the year, compared to the first half.

In baby and child care, volumes were up mid single digits on Huggies baby wipes and low single digits on Huggies diapers.

Our second-quarter relaunch of Snug N Dry diapers is on track, and helped deliver volume growth in 2015.

In consumer tissue, volumes were up mid single digits, with benefits from market share gains, good retail execution, and increased promotion support.

Performance was led by Cottonelle bathroom tissue, and Viva towels.

In K-C Professional in North America, volumes increased mid single digits on our higher-margin wiper products business, and in washroom products, organic sales were up low single digits, roughly in line with the overall market.

Maria has already highlighted how we continue to manage our Company with financial discipline, so I'll just add that I'm encouraged with our cost savings delivery, our margin improvements, our improvements in return on invested capital, and the cash that we've been able to return to our shareholders.

I'm also pleased that we delivered bottom line earnings growth, toward the high end of our original commitment, even though currency rates were much worse than we had planned for the year.

So all in all, I'm proud of our team's accomplishments in 2015.

We have good momentum overall, and we're focused on driving further improvements going forward.

Now, let's move on to our outlook for 2016.

We will continue to focus on the fundamentals that create shareholder value.

So in 2016, we will deliver healthy levels of organic sales growth, cost savings and margin expansion.

We'll improve working capital, cash from operations, and return on invested capital.

And we will return a significant amount of cash to shareholders again in 2016.

At the same time, we'll continue to invest in our brands, our growth initiatives, and our capabilities, in order to improve Kimberly-Clark over the long term.

In terms of our specific 2016 targets, on the top line, we expect organic sales growth of 3% to 5%.

That's consistent with our long-term objective.

On the bottom line, we're targeting adjusted earnings per share in a range of $5.95 to $6.15.

That's up 3% to 7% year on year.

Similar to this past year, at this point, we're expecting that earnings will be higher in the second half of the year, compared to the first half.

Like other multinational companies, we're facing continued currency headwinds.

We're planning that currency translation will reduce sales and earnings by 5% to 6% this year.

The all-in drag on earnings, including currency transaction, is expected to approach 15%.

These projections are based on forward exchange rates as of a couple of weeks ago, which are pretty consistent with recent spot rates in most cases.

To reduce the impact of currency headwinds, we plan to raise selling pricing in some of our international markets.

We're expecting a relatively benign year on the commodity front.

We're starting the year planning for a total impact between $100 million of cost deflation to $50 million of cost inflation.

Although some commodity costs should benefit from lower oil prices, others, like polypropylene resin in North America, are being impacted by market-specific dynamics.

In addition, cost for materials in some international markets are expected to increase, due to local inflation.

As we said before, it's important to look at currencies, commodities and selling price assumptions together, since they're all somewhat related.

On average, we're expecting the net impact of these three factors to result in a high single digit drag on our 2016 earnings.

With that in mind, the underlying growth of 3% to 7% EPS growth that we've included in our outlook is pretty healthy.

As we always do, we'll continue to closely monitor the environment, and we'll provide updates on our progress and our outlook each quarter, as the year unfolds.

In summary, we delivered another year of good financial performance in 2015.

We expect to continue our momentum in 2016, and we remain very optimistic about our prospects to generate attractive shareholder returns through our global business plan.

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

(Operator Instructions)

Our first question comes from Steve Powers of UBS.

So Tom, maybe starting with personal care in North America.

It looks and sounds like competition and promotional intensity held roughly flat, sequentially.

Would you agree with that?

And if so, what's the assumed outlook there, as you look forward to calendar 2016, just given all that's happening in that marketplace and at P&G in general?

A similar question on China, given the general demand conditions there, but also obviously a highly competitive market there too.

Yes, I think broadly, the market was pretty similar Q3 to Q4.

But also, there was more activity in the second half of 2015 than there was in the first half.

So if you looked at percent sold on deal and the level of A&P support across the category, it was probably increased for all the major brands.

We've got quite a bit of innovation coming in 2016.

We believe our primary competitor does, as well.

So I would guess that the current level of competitive activity will continue.

We feel good about the progress in our unit volume growth on diapers in North America, and feel like we've got good momentum on diapers and training, for sure.

In China, we saw a bit more competitive pricing being spent in the market by some of the competitors, which we matched up to at some extent.

But we saw some of that in the third quarter, as you may recall, but had a very strong volume quarter again, and again have lots of innovation coming.

So still tons of competition around, but I wouldn't say it's getting worse, but it is continuing.

Okay.

Thanks.

And then shifting gears a little bit, given another round of devaluation in markets like Brazil and Russia, et cetera, what's your confidence on the continued ability to push through incremental pricing?

You mentioned another round in Brazil, but is there a level at which it becomes too difficult to maintain that incrementality?

I think we're watching the consumer carefully, particularly as you see GDP per capita go backwards in some of these markets.

In Brazil, for example, we saw category volumes decline a bit in the fourth quarter for both diapers and bathroom tissue, which you don't see that too often.

In Eastern Europe, the Ukraine in particular has been a market that's been hard hit, if you look at category volumes.

Some of that is because there's been quite a bit of parallel imports there, that because of value-added taxes that they put in place.

So we are watching the consumer.

Of on the other hand, where you've got real transaction exposure hitting these markets, you're trying to cover the transaction cost, just to try to keep the shape of the P&L in order.

And I think every major CPG is in that balancing act right now.

Okay.

Lastly, Maria, if I could, so based on the dividend and buyback outlooks, and then combining that with CapEx and the defined benefit contribution, it looks as though maybe we should assume you might be adding it again to your debt balance in 2016.

Is that a fair assumption, or is there something I'm missing in there?

If it is fair, could you just talk about how you view the borrowing environment given all the volatility we're seeing in capital markets generally, and if there's a certain profile of incremental debt that we should assume or perhaps some timing, that would with great.

Thanks.

Sure.

The way that we think about it is, we are very focused on maintaining our single A credit rating.

So at any point in time, we're looking at what are our expected cash flows, our focus is on continuing to fund the dividend, to spend CapEx at healthy levels, given the significant opportunities that we have in our business for high ROI returns type of projects.

And then we look at share buybacks to balance out what we do with the remainder of both our cash flow and our remaining debt capacity under the single A credit rating metrics.

So we'll see how that unfolds during the year.

You know that we took our debt up in 2015 and ended the year at $7.8 billion.

But as a reminder, a big chunk of that came from the debt finance pension contributions that we made in 2015.

But going forward, we expect stronger cash flows in 2016 from operations, and so we'll balance those things out as we go through the year.

Okay.

Thanks very much.

Our next question comes from Wendy Nicholson with Citi.

A couple things.

Number one, I think you gave us the organic sales growth breakdown for China, Eastern Europe and Brazil, just for the full year.

Can you give us those for the fourth quarter specifically?

And then with regard to Brazil pricing, do you intend to raise prices consistently across all the segments?

I know there's a very big gap between the various segments, and I'm just wondering how much risk of trading down there might be?

Paul will give you some of the quarterly details, and then we can talk about pricing in general.

Wendy, for the quarter, Eastern Europe first of all, was up about 25%, largely due to higher selling prices.

This is in diapers.

In China, organic sales were up more than 15%, all driven by volume.

Volume was a little bit north of 20% in the fourth quarter.

And then in Brazil, personal care was up about 15%, diapers was up about 10%, with both higher volumes and selling prices.

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-- by product.

We will probably be a little bit more aggressive on pricing, in that space, but we're also looking at it by tier to see what's possible.

Part of that's also driven by how much does the local content of a particular product make up versus the US dollar component.

So if we're using a ton of imported materials you're going to be more likely to have to price up for that.

Thus far, have you seen much trading down across the segments in Brazil, or not so much?

We've seen a little of the trading up, trading down phenomenon, like we have seen in other markets.

Where the super premium segments are growing, where you've got real innovation and some differentiation, and then you're seeing some uptick in the value and the middle segments have taken a bit of a hit.

We've seen that in other markets in similar situations.

Got it.

And then I just had one last one on your regional operating margins.

The progression in North America just continues to be fantastic.

But there's still a lag, or the international margins are still significantly below, and that makes total sense.

But my question is going forward, just given that we continued to see such outsized growth from your international business, there's obviously an inherent drag there on your overall margin expansion.

I'm just wondering, conceptually the FORCE savings, the cost savings, the margin expansion priorities, how much of those are oriented towards the international business versus North America?

So at what point do you think we'll start to see that gap close?

The good news is our international business is closing the gap, and so their margins have improved this year.

So even though the sales shrunk by a lot, they came much closer to their dollar target than you might think, given the size of the currency hit that they took.

And so really, it was very minimal margin drag on the Company.

In fact, this year, because they shrunk as a percent of the Company's overall sales, we actually had a slight margin tailwind this year, from a mix standpoint.

But getting back to the root cause, we tend to focus on gross margins in emerging markets and try to narrow that gap.

And there, the gap is a little closer than operating margins, because in some markets where we are investing in A&P or are building infrastructure to support a larger business, we're not quite as efficient between the lines in the international markets yet.

But that's one that the team is working on and our markets that are at scale, like Korea, you see margins there that are at or above the North American levels in individual categories.

Terrific.

That's very helpful.

Thank you.

Our next question comes from Bill Schmitz from Deutsche Bank.

One quick one, how big is Argentina, both sales and profits directionally?

Should we start getting concerned about what's going on down there?

Last year or this year, Bill?

It's a little smaller this year.

(laughter) Right.

I think it's 2% or 3% of sales, and probably similar from profits.

They had a great year last year, and part of the other expense hit we took in the quarter was the devaluation that happened in mid-December.

That probably was a $0.03 hit to our fourth-quarter results.

But I actually feel pretty optimistic about Argentina over the long term.

So as we see the new government coming in place, and they're opening up their markets, so there's some product categories for example that were imported, like our KCP business, for example, in Argentina, had to import all their safety products because we didn't manufacture anything locally there.

Well, over the last year or so, we were not allowed to import.

So we had to go out of that business.

That's all going to open up in 2016.

So there will be a translation and transaction hit, but I'm more optimistic about the future of Argentina going forward.

Okay.

Great.

Actually, just one other quick one.

On the working capital side, is working capital going to turn positive next year?

I know it's a pretty significant use this year.

Yes, our working capital use was a bit higher in 2015 than we would like.

There were a number of factors that impacted that, including the negative impact of currency on our derivative settlement, and we also had a tax receivable that moved up into accounts receivable at the end of the year.

Despite the use of cash, we made really good progress on our core working capital metrics, as I talked about in my prepared comments.

So for 2016, working capital is clearly an opportunity for us, and we'll be sure to get at that, and as I said, he I expect cash from operations to be significantly higher in 2016 versus 2015.

Great.

Thanks very much.

Our next question comes from Lauren Lieberman with Barclays.

First, just on the other income line, other expense, so the hit from the devaluation of Argentina this quarter, is that a one quarter effect, or should we think about it being at these elevated levels throughout the year?

No, you pretty much to write your payables down on the date devaluation occurred, so I don't know, Maria, if you have got any more color on that?

We took a significant hit on the devaluation in the fourth quarter, and then it will just depend what happens to the currency from here, how we have to remeasure the balance sheet moving forward.

Okay.

Great.

And then on K-C Professional, you had mentioned slowing demand at the end of the year in emerging markets.

Can you talk about that also for North America, if you're seeing any slowing in demand there, and your outlook for that business, being the more cyclically tied piece of the portfolio?

I would say this.

We had probably different causes and different markets.

They had a little softer fourth quarter on the top line than we were expecting overall for the year.

They had decent organic growth, which is what we tend to look at.

In North America, we saw some distributor inventory destocking, because we look at our out-the-door sales versus our in-the-door sales, and in the fourth quarter they sold more out-the-door than they purchased in-the-door.

I think those guys are calendar year end.

They were doing some inventory level trimming as they hit their year-end.

I'd say in other markets like Brazil, which is a big market for KCP, there you're seeing more, just the decline in GDP has had a pretty big impact on business activity.

It's affected the key KCP market much more than the consumer market for the year.

And other markets, China a mixed bag, was a little weaker quarter for us, and some of that was execution on our front, that we need to improve, and there's plenty of competition there.

Probably a bit of the economic slowdown, but again that market's still growing overall, it's just not at the same that it once was.

Lots of different issues in individual markets that added to a little less than we were thinking we were going to get on the top line.

Okay.

Great.

And then on cost savings, so certainly notable that you're starting the year talking about FORCE being $350 million.

Just a question on restructuring though.

I think came in at the lower end of the expected range for savings in 2015.

If I layer on than the $50 million you're expecting in 2016, that would still have you below the $120 million to $140 million in the total realized.

Does this mean it extends a little bit further into 2017, or is it going to be the lower end of the range on the total program?

Yes, our overall restructuring program is firmly on track.

We delivered the savings of $65 million in 2015, and that brings the total to date to $70 million, and our guidance for 2016 is another $50 million of savings, putting our cumulative level within the target range of $120 million to $140 million for the full program, and we still expect to realize some additional benefits in 2017.

So we're clearly on track in terms of the savings that we expect to realize for that program.

Lauren, this is Paul.

I would just build on that.

Remember, we said the charges would end in 2016, but as Maria has mentioned, the savings is really through 2017.

Okay.

Perfect.

And just a final quick thing on SG&A.

I know in the release you mentioned FX's impact.

I just wanted to check if there was anything else in SG&A, because it was a little bit higher than I modeled this quarter, and just think if it was mostly FX, or any other investments in marketing?

There's a couple things.

You mentioned FX.

That clearly has an impact on the reported expense levels, but our expenses are higher, as we're investing in capabilities, and we also had some higher variable compensation expense in the fourth quarter and for the year, given our strong performance.

When you look year-over-year, I think it's probably also worth noting that we had lower levels of spend in the second half of last year, as the organization was really focusing on the spin and the restructuring program, which is a lot of work.

And this year, as we said on our second-quarter earnings call, we were intending to invest in capabilities, and we did that.

And Maria, can you just elaborate on those capabilities?

Is it people?

Is it mostly in selling?

Is it in marketing, or is it actual dollars in the marketplace already?

Yes, it's in number of areas.

Clearly in our selling capabilities, is an area that we're focused on investing in.

In marketing capabilities, particularly around electronic commerce, as we grow in new channels, and then we also had some investment in the area of IT, in terms of data analytics, and things like that, all focused on supporting our organic top line growth efforts.

Okay.

Thank you so much.

Our next question comes from Chris Ferrara with Wells Fargo.

Good morning, Chris.

Chris, are you there?

Chris, your line is open.

(Operator Instructions)

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

My question has to do with the bigger picture of the Company's earnings power, right.

If you step back and look at 2015, you have got 25% impact of currency, and yet delivered, if my calculation is correct, nearly 30% currency neutral earnings.

This year, you're targeting something about 20% currency neutral earnings.

So if you can help us understand like the sustainability of that, how much of this earnings growth in 2016 has to do with savings versus leverage, versus -- that can absorb [smart].

One of the things that I'm noticing now is the share repos are coming down, relative to the past.

So basically the financial side of the EPS growth is less of a contributor.

So if you can explain to us what is -- what do you think is the earnings power of this Company, because 20% on top of 30% currency-neutral EPS growth is pretty substantial.

Thank you.

Yes.

Javier, maybe the way to think about is, is looking at the net of price, of currency, and raw material inflation or deflation.

When you net those three things together, it's a little smaller drag, as we talked about for 2016, it's probably a high single digit drag.

So then to deliver 3% to 7% growth puts your real earnings power more in the low double-digit range, which is still above what our historical average has been.

So the things that helped us get further along in 2015, and will help us again in 2016 has been strong volume growth.

So good organic top line, and a strong cost savings program.

We've been ramping that up over the years, and it's been never more important than in times like this.

And so if you look at the organic top line drivers, we feel pretty good about the innovation program that we've got, as well as a portfolio of markets that we're growing, where the categories are still growing, there's still opportunity for geographic expansion.

On the cost savings front, the three factors that are driving us there are negotiated material savings, our basic productivity programs, and material specification changes, and we're getting organized to deliver that on an even more consistent basis going forward, with some of the work that we're doing with a new global supply chain leader.

So I feel pretty good about volume growth and our cost savings performance, and hopefully, that delivers the earning power that overcomes some of the currency drag, and other things that we've got facing us.

Finally on North America again, tissue pricing in North America down 2%, is that a temporary promotional activity, or do you think that this is elements of the pass-through of lower commodity prices starting to kick in, and is it something that is led by you, or something more of a reaction to, say, your competitors?

Thank you.

On the tissue front, they didn't really get too much of benefit from deflation in the year.

More of it was oil related, which benefited the personal care segment.

They got a little bit of transportation benefit from lower diesel and things like that, but beyond that, it wasn't much benefit from deflation.

The pricing was a little bit more competitive in the marketplace.

We try to make sure we matched up to that.

I think any time you have a discussion about this, it's always the other guy that started it.

So I'm sure there's some cases where we were aggressive behind innovation and trying to drive our business, and that may have precipitated the response or maybe the converse is true.

But I do think the overall market was a little bit more competitive.

We've seen that for several quarters, and we feel good about the volume performance.

We grew share in five of six of the North American consumer tissue categories, and we saw good margin improvement behind cost savings.

So overall, I think the execution was there, and we delivered on the plan and expectations for the year.

But just if I understand correctly, so you basically see the Q4 slightly aggressive pricing as something more like a one-off, as opposed to the pass-through timely finally kicking in, because the category has been very positive, so in terms of very constructive, in terms of pricing.

Do you think that this is sustainable into 2016?

You haven't seen much commodity benefit again.

So our forecast is calling eucalyptus down a little bit in 2016, so that will help.

And at the moment, I'd say the competitive environment is going to be pretty similar in 2016 to what it was in 2015.

Thank you very much.

Our next question comes from Nik Modi with RBC.

Yes, thanks.

Hey, I was wondering if maybe you can give us a state of the union on category growth globally.

Clearly, we've seen some dramatic headlines on the economies in general across the world.

Curious what you're seeing from the category perspective.

Do you expect it to be flat going into 2015, or decelerate or accelerate?

Any thoughts around that would be helpful.

I'd say broadly, we still would say the category opportunity is 3% to 4% on average.

If you look at a market like China, we'd still say high single digit growth, that's going to be the year of the monkey in China, which is a good year.

You typically have a little bit of an uptick in the birth rate, at least that's what the forecasters are calling for.

The birth rate in the US is actually ticking up.

I'd say the places we're watching are markets like Brazil and the Ukraine, which are going negative where the GDP has happened, we see that as a short-term category issue, or is there a bigger trend in place.

But if you guess the category growth rate was 3% to 4%, or maybe rounding down closer to 3%, reflecting some of the challenges in some markets around the world.

Just one last question.

As you take pricing in many of these emerging markets, have you seen the price gaps dislocate with some of the local players that may not be under the same currency pressures?

Any context on the magnitude of maybe some of the dislocation would be helpful.

Most local markets, we are playing in local currency.

And so you're tending to look at transaction exposure as the driver for pricing.

So in most of these places, most of the competitors including local players, buy pulp that's denominated in dollars, or they buy super absorbent that's denominated in dollars, or they buy non-wovens that are using polymer that's priced in dollars.

So there's a transaction exposure that affects everybody, and that tends to drive pricing more than trying to price for the translation exposure.

Great.

Thanks so much.

Our next question comes from John Faucher with JPMorgan.

Just a little bit of a follow-up there on the last comment on the pricing.

You guys are looking for a little bit more price mix sequentially in 2016 versus 2015 and the gross margin performance has been amazing, with less pricing than what we're generally seeing from peers.

Is that something where the markets are -- you have good visibility, because the markets are letting you take that, or it's a pricing that went in later in 2015, that's rolling through into 2016?

So I guess just, what's the visibility?

Is that more transactional pricing rolling through, mix, what have you?

Yes, there's a mix of that, I'd say.

If you look at the markets where we've been most successful at getting pricing, it's tended to be Latin America.

Brazil had quite a bit in 2015.

We've announced with some of the recent currency moves, more in 2016.

We'll see, my guess is when Argentina, the dust finally settles and the pricing rules of the road down there are more visible, there will likely be some pricing opportunities in that market.

Eastern Europe has been the other place where you've seen real currency volatility, where everyone in those markets has been pretty aggressive on pricing, and so that would account for most of it.

If you looked at a lot of the other developed markets like Australia, where there's been a little bit of currency movement, or even Western Europe, you're probably not going to get a lot of pricing for the size currency moves that you've seen there.

It will be very low single digits, if at all, and so I think that's the way it's shaking out, is you get a few hot spots where there's been big currency swings, where you get price recovery, because everybody's being hit with the same wave of transactional cost hits.

And then there are lots of other markets where you're having to manage it with cost savings, mix or innovation or other things that are going to drive your revenue realization.

Okay.

Great.

Thank you.

Our next question comes from Ali Dibadj with Bernstein.

Just a few questions.

One is on cash flow sources and uses.

And if you think about -- first, I'd love a little bit more detail on the working capital impact this year, and then how and why it's expected to go down next year, so from a sources perspective, as well as why your CapEx remains in this $1 billion range even after Europe and Halyard got spun off.

So that's from the sources perspective.

And on the uses side, your buyback range is lower than has historically been the case, and if you add that to your dividend guidance, the shareholder return seems to be a little bit off course versus what we've seen recently.

So I'm trying to get a sense of if that's just macro concerns, trying to be cautious, or if there's something else going on.

And I am trying to adjust for Europe and Halyard and both those, so both sources and uses, please.

Sure.

Let me take a crack at it and Tom can certainly jump in here.

Let me start with CapEx.

We're fortunate to have a lot of opportunity to invest in high-return capital projects that support both our top line growth and savings.

If you think about our CapEx, you can think of the spend in three areas: growth which supports expansion capital, and also investment behind our innovations.

Cost savings, which is a second category, a lot of that supports the FORCE savings that you're seeing come through, and that we talk about.

And then the third category on maintenance, we fund our operations to adequately maintain a productive and safe manufacturing environment.

So those are the three categories.

And I think the range of $950 million to $1.050 billion is about right for our business now, given the opportunities that we have and the size of our operations, and the opportunities that we have for expansion in some of the geographies.

We'll continue to monitor that over time.

As you know, we hired a Head of Global Supply Chain and under her, organizations will work with the finance team and the local operators, to make sure that we continue to make sure that we're optimizing our CapEx spend, as we move forward.

On working capital, I said that I thought our working capital usage was a bit higher than we'd like it to be.

I think the areas of opportunities that we have in 2016 are around areas like inventory.

We talked about strong performance on payables in 2015, and so, again, with our global supply chain organization, working with our local teams, we'll be focusing on what we can do on the inventory side.

And then in 2015, we also had some negative impacts on working capital from currency, on our derivatives settlements, that we used to manage our exposures on the balance sheet.

And then also, we had a large tax receivable that moved up into AR at the end of the year.

So when you look at the numbers, that's in there, too.

I think the third part of your question was around buybacks.

And that goes back to what I said earlier, that we're very focused on maintaining our single A credit rating.

So there's, as you know, a set of metrics around single A and we watch those very closely.

Then, look at how do the cash flows come in, make sure that we fund the dividends, invest in our business through CapEx, and then the remainder determines how much we buy back.

And we use both cash flow, and then any capacity that we have on the debt side within that A rating, to really fund buybacks.

So depending on where the results of the operations come in, will depend on the flex within the range on the share buybacks for 2016.

Okay.

And I guess it has been over the past several years, you've certainly been giving back more to shareholders than you've been generating from a free cash flow perspective.

That obviously has an impact going forward.

Switching gears, on taking prices up more in the particularly developed and developing and emerging markets, the FX headwinds for both the personal care and the consumer tissue business in this quarter just -- it has been there for a while, it's been quite significant, so like negative 23%.

But you're only taking about 6% price mix say in those -- in that market, at least in the personal care business.

So there's still a very large gap between the currency and what you're taking from a pricing perspective.

In your goal of taking prices further up, what gap should we think about between those two numbers as a target?

Well, the way to think about it in terms of how we're approaching it is, we're not necessarily trying to cover the translation exposure, which is probably the biggest piece of it.

We are trying to cover the transaction exposure.

But as you look at our net income impact, that also includes things like the balance sheet remeasurement in Argentina that flowed through other expense or any other hedging gains or losses.

They're looking more like the run rate transaction exposure on the impact on imported materials, and what their ongoing cost of goods is going to be, and using that to think about pricing going forward.

And then balancing that with what's your innovation plan look like, what other things can we do to substitute a local source material, and avoid the transaction exposure.

It is a market by market approach, and again, I would say in Latin America and Eastern Europe, is where you found both those markets are, I guess I'd say, used to dealing with high inflation.

And so when you get hit with this, people aren't shy about taking price.

But other markets, you're not going to see that in Korea, you're not going to see that in Australia.

And so my last question is a little bit on that, in terms of just the growth rates you've seen obviously in developing and emerging have been still very strong.

You obviously decelerated a little bit to high single, as opposed to low doubles, but still very, very strong.

Can you try to help again with how much of that is shelf space gaining, or distribution gaining versus same store sales, and focus if you could, and then answer a little bit on China specifically, given the massive volume improvements you've seen, or massive growth you've seen in volumes, as opposed to pricing.

And perhaps you guys have seen it, we've certainly seen it, the disconnect in the Nielsen data in China which clearly is not perfect, because it doesn't cover all channels, but there's a very quick deceleration in the back end of the quarter last year.

And do you see that being a disconnect?

Because online is growing more, or the data just isn't good, or what's going on there?

Because you're going to have to continue to get very good numbers in terms of growth in China, to make some of your top line targets for this year.

So I'm trying to figure out that data, and how that's a disconnect there.

I think the biggest disconnect is e-commerce in China, Ali.

So single day was November 11, which was huge for us, as well as for all of the online players.

So that probably skewed the Nielsen data, which tends to look at measured and baby stores, because there was a lot of online activity, and particularly in November.

But again, I'd say if you were to decompose our growth in China, we increased the number of cities.

I think we started the year at 105.

We ended the year at 115.

We'll be at 130 by the end of this year.

Now, each incremental city is incrementally a little bit smaller, but you still are seeing good geographic expansion.

We're still growing share in the cities that we're in.

We're doing a ton in e-commerce, and that channel is growing pretty dramatically in China.

And so it's probably a third of our diaper sales were in e-commerce, which is overweight the rest of the category.

We're still seeing good mid-tier super premium segment growth, where we tend to do better.

So again, I'd say China, we're pretty bullish, lots of competition but good growth in innovation coming, and some geography expansion, as well.

Thanks very much.

Our next question comes from Lauren Lieberman with Barclays.

I just wanted to know if you could update us on your fiber mix.

I thought it was interesting, you didn't mention your planning assumption for Northern softwood.

I just was wondering what the balance was between eucalyptus and Northern softwood, currently?

We've been talking about euc for a while.

That's the biggest grade that we buy.

I don't know, Paul, probably what, two-thirds of our fiber mix on the virgin pulp side, I guess?

Is that about right?

It would be two-thirds, if you're just looking at eucalyptus versus Northern softwood.

Then that also consumes some fluff pulp in pers care.

Overall, I'd say eucalyptus is still roughly half of our fiber mix.

It's the biggest single grade, which is why we started quoting that one versus Northern softwood.

Okay.

And do you have a range for the Northern softwood outlook?

We're not giving a range.

But it should be down a little bit year on year.

Probably just take whatever RISI was looking at, and that's essentially what our forecast would be.

Okay.

Do you have a sense for how your fiber mix currently compares with some of your bigger competitors in tissue in North America?

Like is there a difference in terms of your fiber mix, and then obviously, what you're looking for in terms of inflation or deflation versus your competitors?

I haven't looked at that in a while.

My guess would be, Lauren, is that we're pretty similar to P&G.

And GP might have a little bit more variability, just because some of their tissue mills are more connected to their own internal pulp sources.

That would be my hypothesis.

On the KCP front, we all run with a lot of recycled fiber on that front, so we'd be pretty similar on the KCP front.

The move to eucalyptus, do you think that's happened in parallel, or was P&G more biased towards eucalyptus earlier than you were?

I think this is probably more fiber morphology than you're interested in on a Monday morning.

Eucalyptus helps make tissues soft, but it's not as strong as Northern softwood.

So you get that right, now, hardwood makes it soft, and softwood makes it strong.

We've been trying to drive more softness and use more eucalyptus, and you're trying to figure out ways to make the tissue stronger using other means, so that you don't give up the strength that Northern softwood would bring you.

But I think there are even some markets where we've run 100% eucalyptus sheet, and are able to do that, and still hit adequate strength targets.

Thank you so much.

Our next question comes from Jason English with Goldman Sachs.

Thanks for squeezing me in.

I guess I'll take --

We take all our calls here this morning.

We'll be here until you guys run out of questions.

Good news.

Hopefully I'm the last.

I don't think all of us want to be on the call all day.

But I'm going to pick up where we left off in the last line of questioning around fiber, and the outlook.

Many people, including ourselves see downside risk to pulp prices as we go through next year.

Clearly your forecast is not calling for that, only modest deflation.

Curious, first, if there are factors you see that would prevent more downside to where pulp prices go.

That's a tough one to call.

We tend to just look at the -- we take two or three industry forecasts, RISI being one, and I think we look at a couple of others and we don't apply an immense amount of judgment to that.

We tend to take a look at what the predictions are calling for.

I do think the weakening of the US dollar in some of these local markets may not be fully captured in the forecasters, because they're looking at forward currency rates, as well.

And so if you look at a Brazilian producer who is selling their product in dollars, or a Canadian producer who is selling their product in US dollars, certainly, you could make an argument that there could be some price decline.

From a capacity standpoint, the Canadian markets should be pretty stable for a while.

They have to run the mills this time of the year, or they freeze up.

There's some additional capacity coming in Brazil, but I don't think it's going to be until the end of 2016.

So we'll see what happens.

At this point we're not -- we're seeing a little bit of weaker spot prices for Northern softwood, but the eucalyptus market has been relatively balanced, and there's not a huge spot market on that at this stage.

Jason, I would just add that remember, as we talked about earlier, there's a lot of big moving pieces in our planning assumptions, but think about all of them together.

If pulp does weaken more than we're expecting, you could see some offsets and a bit higher promotion spending.

Sure.

Especially in context of the higher promotional spending, without any cost relief this past year.

You talked a little about those dynamics earlier.

Could you elaborate more, and give us a sense of where you see the competitive activity settling out now, and if we do see pulp relief, how much worse do you think it could get?

I would say the competitive activity has been relatively modest in tissue.

We've had a lot of news between Viva Vantage.

We've had some improvements on Kleenex.

We've had some upgrades on Cottonelle.

We want to make sure we get our fair share of quality promotional support, as have some of our other competitors.

The good news is, you didn't see much private label movement in the fourth quarter.

I think private label shares were pretty flat on bath.

I think private label was up half a point on the year on bath, was up a little bit more on towels, but we were up in both categories.

So I think it's just the normal competitive environment, and we'll see what happens going forward.

If you do see a big move in pulp, that typically would lead to a change.

I think the relatively modest moves that we're talking about shouldn't have a major impact on promoted pricing.

Got it.

Thanks a lot.

I'll pass it on.

At this time we have no further questions in the queue.

All right.

Thanks everyone for the questions, and we'll conclude with a comment from Tom.

Well, once again we wrapped up the year with a very solid performance in 2015, and we've got great momentum, and we appreciate your support of Kimberly-Clark.

Thanks for joining us today.

Thank you.

Ladies and gentlemen, that concludes today's presentation.

You may disconnect your phone lines.

Thank you.