金百利克拉克 (KMB) 2016 Q2 法說會逐字稿

Excuse me, ladies and gentlemen, we now have your presenters in conference.

(Operator Instructions)

It is now my pleasure to introduce Mr. Paul Alexander.

Thank you and good morning everyone.

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

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

Now here is the agenda for the call.

Maria will begin with a review of second-quarter results.

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

We will finish with Q&A.

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

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

Please see the risk factors section of our latest annual report on Form 10-K for a 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 release has further information about these adjustments and reconciliations to comparable GAAP financial measures.

And now I will turn it over to Maria.

Thanks, Paul.

Good morning everyone.

Thanks for joining our call today.

Let me start off with the headlines for the quarter.

Organic sales were up 3% with volume growth of 4%.

We achieved significant cost savings, improved our margins and grew adjusted earnings per share.

And we also increased cash flow, improved our capital efficiency and returned cash to shareholders.

Now let's cover the details, starting with sales.

Our second-quarter net sales were $4.6 billion.

That's down 1% with a 4 point drag from currency rates.

Organic sales rose 3% in the quarter.

That included a 7% volume increase in North American consumer products and 5% organic growth in developing and emerging markets.

Tom is going to provide some more color on our top line in just a few minutes.

On profitability, second-quarter adjusted gross margins was 36.3%, up 50 basis points compared to the prior year.

Adjusted operating margin was 18%, that's up 100 basis points.

Our teams continue to deliver significant cost savings in order to improve profitability and fund growth investments on our brands.

Second-quarter FORCE cost savings were $95 million.

We have had strong performance on cost savings in the first half and we're now targeting $350 million to $400 million of FORCE cost savings for the full year.

In addition, our organization restructuring remains on track and generated $15 million of savings in the quarter.

Commodities continued to be favorable, delivering $20 million of benefit mostly from lower fiber costs.

We expect full-year deflation of $25 million to $125 million which is broadly in line with our previous assumptions.

While currencies have improved since January, they remain a significant headwind year over year.

The total earnings drag from currency was more than $0.15 per share in the second quarter and we now expect the full-year drag on EPS to be at least 10%.

On the bottom line, second-quarter adjusted earnings per share were $1.53, up 9% year on year.

A lower adjusted effective tax rate contributed about 5 points of that earnings growth.

We expect the tax rate will be significantly higher in the second half of the year compared to the first half of the year.

Moving on to cash flow and capital efficiency, cash provided by operations in the second quarter was strong at $860 million.

That's up 11% year on year.

On adjusted return on invested capital halfway through the year we're up 100 basis points.

So we're on track to easily exceed our long-term goal of 20 to 40 basis points of annual improvement.

On capital allocation second-quarter dividend payments and share repurchases totaled nearly $0.5 billion.

The full-year amount should be between $2 billion and $2.1 billion.

This will be the sixth consecutive year that dividends and share repurchases will total at least $2 billion.

Looking at the segment results, in Personal Care, organic sales rose 5%.

That included 6% growth in developing and emerging markets and 4% improvement in North America.

Overall Personal Care operating margins were healthy at 20%, although off 50 basis points year on year including significant currency headwinds.

Moving on to Consumer Tissue, organic sales were up 2% led by 4% growth in North America.

Consumer Tissue operating margins of 18.4% were up 110 basis points with the benefit of organic sales growth, cost savings and lower input costs.

In our third segment, K-C Professional, organic sales were up slightly including 6% growth in developing and emerging markets.

Lower sales of nonwovens to Halyard Health reduced the segment top line by more than a point.

K-C Professional operating margins were 18.6%.

That's up 100 basis points year on year, driven by cost savings.

Before wrapping up let me recap.

We achieved growth in organic sales and adjusted earnings per share, we delivered significant cost savings margin improvements in cash flow and we continue to improve our balance sheet efficiency and allocate capital in shareholder-friendly ways.

I will now turn the call over to Tom.

Thanks, Maria, and good morning everyone.

I will share my perspectives on our second-quarter results and then I will comment on our full-year outlook.

So overall we continue to deliver good financial results and we're executing well in a challenging environment.

Starting with the second quarter, as Maria mentioned our organic sales increased by 3%.

We made progress on targeted growth initiatives and product innovations and that helped us achieve the volume growth of 4%.

In our developing and emerging markets organic sales were up 5%.

Let me comment specifically on some of our key growth markets.

In Brazil organic sales in Personal Care rose about 10% with both selling prices and volumes up year on year.

While underlying category demand remains down in a tough economic environment I'm encouraged by our second-quarter results following a soft start to the year in the first quarter.

Moving to China, our diaper volumes there continue to grow at strong double-digit rates in the quarter and our market positions remain healthy.

Nonetheless because of increased price competition our organic sales fell high single digits and that compared to a 30% growth comp last year.

Competitive activity picked up during the quarter in China and we responded to protect our market share position and maintain our volume momentum.

So I'm very bullish about our business in China.

While the current pricing environment is dynamic we have plans to continue to deliver strong volume growth with benefits from innovation, city expansion and category growth.

Moving to Eastern Europe, organic sales in diapers there rose more than 15%.

Volumes were up at a double-digit rate led by Huggies in Russia.

Selling prices were also up modestly as we've now lapped most of the increases that we took last year.

Elsewhere in developing and emerging markets our feminine care organic sales were up double digits in the quarter including strong performances in Latin America and adult care organic sales were up high single digits.

For the full year we're now targeting mid-single-digit organic sales growth for our developing and emerging markets business.

We have lowered our expectations for selling price increases, primarily due to an improved currency outlook in Latin America and Eastern Europe.

We have also taken into account the dynamics in China and slowing economies in some parts of the world.

I continue to be optimistic about our business in developing and emerging markets.

Our market positions are generally improving or holding steady in most of the key markets we compete in and we've got lots of innovation coming to help drive our future growth.

Now let's turn to our North American consumer businesses.

Our teams there delivered another strong quarter with 7% volume growth and healthy market shares.

Product innovations, great marketing programs and good retail execution continue to drive results across our portfolio.

Promotion activity was also a little higher than average in the second quarter.

Our adult care, child care and feminine care volumes each increased by about 10% including benefits from innovations on Poise and Depend, Pull-Ups and U by Kotex.

Our Huggies diaper volumes rose mid single digits and marketshares improved by about a point as we continue to make progress following last year's Snug & Dry relaunch.

Consumer Tissue volumes improved 6% with mid to high single-digit growth in all categories led by Kleenex facial tissue.

So overall our brand positions are very healthy in North America.

Through the first half of the year marketshares improved or were even with prior-year levels in seven of the eight consumer products categories in which we compete.

So our volume comparison will be more difficult in the back half of the year but I'm encouraged by our execution and our momentum in North America.

Moving beyond sales, I'm also encouraged that our teams around the world continue to manage our Company with financial discipline.

At this point in the year our FORCE cost savings are tracking to an all-time high, our adjusted operating margins and return on invested capital are both up 100 basis points and cash flow has picked up significantly.

Maria has already highlighted our shareholder-friendly capital allocation.

So these results demonstrate to me the continued strength of our business.

So all in all, we've made progress in several areas in the first half of the year.

While we've got opportunities to improve further we're broadly on track with our plans for 2016.

Now let's move to our outlook for the full-year.

On the top line we expect that currencies will reduce sales by 4% to 5%.

Our prior assumption was for a negative impact toward the low end of the 5% to 6% range.

In terms of organic sales we expect growth will be at the low end of our 3% to 5% target range.

This assumes less benefits from selling price increases, primarily due to the improved currency outlook.

Volume growth which was 3% in the first half of the year should drive the vast majority of our organic sales growth for the full year.

On the bottom line we continue to target adjusted earnings per share in a range of $5.95 to $6.15.

That's up 3% to 7% year on year despite an expected high single-digit drag from the combined impact of changes in currencies, commodities and selling prices.

Through six months we're on track relative to our full-year earnings impact.

That said, as Maria mentioned, the tax rate should be higher sequentially in the back half.

We also continue to closely watch currency and commodity markets, competitive activity and economic conditions.

So in summary we continue to execute our global business plan strategies well, we expect to deliver on our financial targets again this year and we're optimistic about our prospects to continue to generate attractive long-term shareholder returns.

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

(Operator Instructions) Ali Dibadj, Bernstein.

Hey guys.

I wanted to spend a little bit of time just on your top line and the guidance.

You decided not to change the guidance, you just pushed people to the lower end.

But even to get to the lower end one would have to expect a little bit of an acceleration going forward, especially because the comp gets a little bit tougher with the 5% organic sales growth.

So I'm struggling again to figure out what exactly is going to get better than you anticipate to get to even the low end.

I guess you could round there but really to get to the low feels like a little bit of a stretch given the comps they have.

So a little bit more detail there would be helpful to start.

To your point the volume comps get tougher but some of the pricing comps get easier in the back half.

So some of the Chinese activity that we talked about, that started to accelerate in the back half of last year and so we'll see that the bleed off.

And we've got a lot of innovation coming in the back half and we feel pretty good about the volume momentum in a lot of places including North America.

So just to go back to China in particular, recently you've been saying Brazil you expect a little bit of a bounceback, China still kind of being tough.

Can you update us on those two markets in particular, because those seem to be a little bit of a fulcrum for your top-line guidance going forward?

I think Brazil if you look at it how the year has played out is a pretty stuff start to the year with negative volume trends as we push pricing into the market.

Second quarter the volume was positive in diapers and then a significant amount of price, we would expect to see more volume in the back half.

And so I'd say if you look at share positions in Brazil we're up a couple of points in femcare and have a good momentum there and are down about half a point in diapers and would be looking to close that gap in the back half of the year.

In China we're really expecting the birthrate to pick up as we'd expect to see a little bit more volume come there in the back half.

Pricing has been more competitive than we had anticipated and we're expecting it's going to continue to be competitive in the back half of the year.

And that's probably one of the shifts in our thinking from the first quarter when we talked last.

So on that I mean there's kind of a recurring theme throughout the release and your commentary about product mix being tough.

I think it's the first time in many quarters that we've seen that promo being somewhat unfavorable in lots of regions.

How much of that is centralized on China?

It certainly doesn't seem that way.

It feels like it's across the board and how much of that I guess is consumers trading down versus competitive situation and why do you think that gets better?

Thanks.

A lot of the negative mix in the quarter was actually in North America and it has a lot to do with large count packs.

In timing of promotional activity in some of the larger format retail was probably the biggest single driver of that and that has more to do with did we promote in the second quarter versus the first quarter or the third quarter last year.

And we had a little heavier activity this year in the second quarter and that's probably a part of it.

Okay, thanks very much.

Wendy Nicholson, Citigroup.

Hi, good morning.

Can you talk a little bit more about China?

And I guess my question is maybe bigger picture, it seems like in baby care there's been tremendous downward pressure on pricing and lower price competition but from other companies we hear the opposite, that consumers are appealing to more premium price products.

What's the difference with baby care?

Do you think it lasts?

Do you think there's something just structurally about the economics of the category that will keep it a category that's subject to consumers trading down as opposed to up?

Well actually do consumers are trading up in terms of product format.

So you're looking -- if you look at the Tier 5 super premium type products, those segments are still growing.

And so the issue is you've got it's one of the largest diaper markets in the world, it's probably one of the fastest-growing diaper markets in the world in unit volume.

And so you've got us and a couple of big Japanese players and P&G all competing in that same space.

And everybody thinks the other guy started the fight but it's gotten more price competitive.

And there's also a channel issue whereas e-commerce is growing dramatically in that space and retailers are also trying to make sure they don't lose their share of that young family's market basket.

So there's a lot of competition and promotional activity.

And the manufacturers like us are certainly fully participating.

But I'm trying to think of in the past in any other market where you've had so many players all trying to eke out their share of the market, and granted the market is growing and that's great, but I'm just struggling to sakes why is it ever going to get any better from a pricing perspective now that you've had a whole bunch of companies invest in the market, etc., etc.

I don't see what breaks the log jam, if you will.

Well we say in the short term we're not projecting it is going to get better.

Our comps get easier because some of this started in the fourth quarter of last year.

You can also see as the yen has strengthened you would think that there is more pressure being put on some of the other international competitors that import.

But I'd say in the short term we'd expect that China is going to be a pretty competitive market.

It's more competitive than we anticipated.

On the other hand, we've generated innovation and cost savings and our gross margins there are still attractive and we think the growth is still a place that is worth investing in.

Okay, got it.

Then just a quick follow-up.

I noticed I think that you bought in your joint venture, the 50% you didn't own that Hindustan owned in India.

And I know it's a tiny business but I was just curious what drove that decision.

Was that them putting their interest to you or did you want to consolidate that interest and how is that business for you?

Thanks.

Yes, sure.

It's a small deal and so the deal hasn't happened yet.

I think Hindustan was required under local Indian law to announce that they were considering a transaction.

It's a business that we like and like most JVs over time eventually one partner buys it up and takes full control of it.

I'd expect that's what will happen here.

We're bullish on India long term and we'll expect that to happen at some point but it won't have any significant impact on our financials this year for sure.

Got it.

Thanks so much.

Keith Powers, UBS.

Steve Powers but, okay, thanks.

So given that the lower organic growth you now expect is attributable to lower pricing given the less adverse FX, does that mean you're now reversing some pricing that you already had in place?

Are you adding promo, for example in China as you called out, or is it more you not taking additional planned increases as the year progresses?

Is there a D, all of the above, that I could choose from that one?

So it really depends on the market.

So in a place like Russia and Eastern Europe where we put price in place in the first quarter some competitors didn't follow so you spend some of it back competitively on trade.

We have rolled back in a couple of markets those price increases but then you also don't fund your trade temporary price reductions at the same level.

So it doesn't have that much sequential, as much sequential impact on your net price realization.

There are other markets where we had more increases planned for the back half of the year that we probably won't go forward with them given that currencies have eased and there's really no economic justification for it.

And we don't think it would be likely to be accepted in the marketplace.

Okay, that helps.

Then I guess in order for things to get better in the back half, given the more adverse volume comparisons you called out, it seems like you're betting a lot on new innovation benefits to carry you through and push that acceleration.

Can you help us with where you expect to see the biggest impacts of H2 innovation whether by geography or category?

I'm sure it's broad-based but just some directional help would be useful.

Yes, sure.

We've got a lot happening in diaper pants and open diapering in a number of key markets.

And that will roll market by market in the back half.

We've got a pretty good lineup of feminine care product innovation coming across the globe, as well.

And so you're seeing that femcare I think we've had what, Paul, four or five quarters in a row of double-digit emerging-market growth --

Yes.

And expect that to continue to go.

Diaper pants was a strong double-digit growth again in a lot of our key markets and expect that to continue.

So a good pipeline of activity which is essentially what we've been doing, expect it to continue going forward.

Okay.

And in North America was the bigger push in Q2 versus H2?

Yes, North America had a little easier comps versus last year.

I think we were only up 2% in volume last year.

We were up 5% in the back half, partly because of the Huggies Snug & Dry relaunch.

But we've got really good momentum across the business.

Tissue volumes were up 6% and expect to see good momentum as we roll through the back-to-school season with Kleenex and have some good things coming there as well.

And Pull-Ups with a double-digit volume growth was the first time we've seen that in a while.

Saw a little healthier category dynamics, as well, which is probably good innovation on our front, probably a little healthier consumer on the front, as well.

And so we'd like to keep that going.

And I will pass it on after this but just to clarify, will it cost you as much in the back half to keep that momentum going?

Because the promotion investment in Q2 to get that volume growth was pretty steep.

It's a pretty good spend, I would say, in a couple of places.

It wasn't as much trade funding as it was either FSI coupons or digital coupons in a couple of categories.

We also did a few more bonus pack promotions which effect that gets shown as a reduction of sales.

So you'd see more of that I would say was strategic design, that driving innovation in specific categories as opposed to broad-scale trade funding that would tend to be viewed as negative price.

Okay, thanks so much.

Iain Simpson, Societe Generale.

Thanks very much guys.

Just a couple of questions from me.

Just to go back to China, I may have missed something here but you're saying you've got good double-digit volume growth but that overall organic sales growth was kind of down a fair bit in the second quarter.

Just mathematically that suggests that you're seeing pricing in China that's negative to the order of mid-teens best and potentially worse than that.

If you could comment at all on the kind of impact that's happening on your gross margin position there as everyone has got different cost structures I guess.

Then in terms of Brazil, it's clearly you're gaining a lot of share in femcare there but are you seeing underlying consumer recovery there as well and should we project that as the run rate for the rest of the year?

Any insights would be very welcome.

Thank you.

Sure.

On China gross margin I'd say the team there has done a great job of driving premium mix where we can and taking cost out, as well.

So our overall K-C international team did a phenomenal job of delivering on their FORCE cost savings and China certainly was a part of that.

So our Chinese gross margins were down a bit but nowhere near the level of price change in the market.

So again we'd be pretty happy that China is an investable business with strong gross margin and OP margin potential.

On the Brazilian consumer you're still seeing some negative category trends and the economic outlook is still not terrific, although I was on the phone with our guy who runs Brazil last week and I think there are some early signs of optimism perhaps there that expecting things to be a little better in 2017.

And so we'll see.

I think the economy is running on expectations and hopefully the Brazilian consumer will start to be a little bit more optimistic and we will see that translate into category growth.

But I would expect for 2016 it's still going to be a challenging category story.

Thank you very much.

Jonathan Feeney, Consumer Edge Research.

Good morning, thanks for taking the question.

You showed in Q2 you're comparable weighting volume growth over pricing broadly [MAE].

That's true in China but as a result for the whole business, and it strikes me this is hugely countercultural versus some of your US-based peers.

I guess I'm wondering do you see loyalty and repeat as bigger opportunities in your categories, especially some of those strategic areas you just identified versus what your peers are seeing?

Or is there something, and as going forward if commodities continue to go from being a tailwind to flat maybe if they became a little bit more of a headwind, how would you look at that commitment to building loyalty and repeat through maintaining the volume momentum?

Thanks very much.

Jonathan, that's kind of a deep philosophical question this morning.

But my general approach to this, and our general approach to it over the years, is to say you are really trying to develop loyal consumers that have a strong habit of using your brands to care for their families.

And so you typically want to drive volume growth at least ahead of or tracking with your category that you're in so that you're improving your volume market share and the percentage of time she's going to use your product to care for her family.

Many of our products, particularly as you think about things like feminine care or bath tissue or facial tissue, you start using a product and you use it for your entire life if you find a solution that works for you.

So we typically generate price when there's big commodity swings or when there's big currency swings.

Other than that we tend to plan for core volume growth as the lever to drive our business forward.

And I don't know of enough about my competitors' strategies in depth to know if it's that different from the way that they think it but where you can get mix through premiumization and through up driving the consumer into a better performing product that's also an important element of our strategy.

But that's really about giving them good value for a product that works better in the end.

So, again, I think where we can drive volume that's I think the healthiest form of organic growth for us in our business model.

That's real helpful.

Thank you.

Lauren Lieberman, Barclays.

Great, thanks, good morning.

I wanted to ask again about mix in Personal Care emerging markets because I believe you guys reported that as being a negative just 1% but it's the first time I can recall seeing mix as being a drag.

And I just scrolled back, it's at least two years, probably longer.

So if you could just talk a little bit about what happened there, is it a timing issue, something with innovation but are you seeing any kind of less interest in the more premium end of the category or is it necessarily trade down?

There is nothing that I would call out.

I will let Paul give you a little bit more color if there's anything else you'd highlight there.

Not real big swings, Lauren, as you mentioned, only down 1%.

In a few markets we actually had really strong growth in diapers in some of our smaller sizes, so newborn and then Phase 1 in 2 which is actually good because we're getting the consumer into the category early on.

But those on average are a little bit lower price points, so that's probably the only thing to comment on that really moved the number.

You get more diapers in the bag and we sell it at the same price so you get negative mix.

It's not necessarily trading down.

Okay.

That's great.

Thank you.

And then maybe for Maria, sneak attack with the question for Maria, but I wanted to talk a little bit about cost savings.

(multiple speakers)

Maria loves questions, Lauren.

Ask her all the questions you want.

But going back a couple of months now, maybe almost a year, Maria you started talking about opportunities for raising the Company's game in terms of annual productivity.

So could you talk about any update to that line of thinking?

I know you raised the targets for this year a bit, but just bigger picture can those annual numbers go higher and where are you on the process of identifying and starting to institutionalize that thought process?

Sure.

Our global supply chain team is up and running and already having an impact on the organization.

You see that in our year-to-date performance on FORCE cost savings.

If you remember coming into the year we set a strong expectation for ourselves for 2016.

And given the strong performance there we did raise our outlook for that to $350 million to $400 million.

So we're pleased with that.

The add-on benefit that we're getting from the efforts in the global supply chain area are that we're also seeing improvements in inventory.

And so we had a very strong cash flow quarter.

Our inventories improved and so we're seeing good performance across the board.

I continue to be optimistic about what we can do in this area.

I think that the numbers that we had talked about are over the long term to get to best-in-class.

We'd be at a 4% to 5% cost of sales productivity number on an annual basis and my outlook there hasn't changed.

Now, again, that's over the long term.

So I'm still bullish on the long term and very pleased with the performance this year.

Okay, great.

Then just one final thing, sorry, was on advertising spending.

Just brand investment in the quarter up, down, flat, any change to the outlook on spending for the year?

Yes, there's really no change in advertising spend on a percent of net sales.

What we do see is we do see a shift in some of our categories where we're doing more digital couponing versus advertising.

And we're also seeing a stronger shift overall to digital advertising.

On certain forms of digital couponing and promotions they actually are a reduction to net sales.

So there's a little bit of a shift from advertising up to net sales but in general we would expect to see our advertising percent to sales be relatively consistent to what you saw last year.

Okay, thank you.

Olivia Tong, Bank of America Merrill Lynch.

Great, thanks.

In terms of the dynamics in D&E Personal Care just trying to understand your take because the mix is down which we attributed to entry earlier into the category, newborn size 1, size 2, etc., which would suggest a positive feeling on the macros but then also you're saying that the macros are challenging.

So can you just help us understand that a little bit better?

Then in terms of pricing specifically to North American Personal Care, how much of this is promotion to support some of the new products that you have versus just normal defense against competition?

And how long do you expect that promotional activity to stay elevated at those levels?

On the D&E of mix question I would just say some of the category fundamentals, things like Brazil we've talked a little bit about where you're actually seeing category unit volumes decline by a couple percent.

That's probably been worse and stayed worse longer than we would have anticipated in our model for the year.

Then you're seeing some other economies that are moving a little slower than would have been expected across Latin America.

Some parts of Eastern Europe as well are probably not quite as robust as they were in our plan, at least going into the year.

Having said that, markets like China where you're expecting a strong birthrate this year, a little uptick in the birthrate, we are investing in newborn and early category entrants to make sure we get more than our fair share of the new babies born in some of those key markets.

So you can see a little mix drag from that.

It wasn't a big super big impact but it was big enough to talk about I guess.

As it shifts to the US, we had a lot of good stuff happening with the Pull-Ups relaunch continuing through the second quarter and had strong double-digit growth there.

Femcare really had a lot of good execution at retail happening and that was a little bit more promotionally intense.

On the other hand, we saw double-digit volume growth which was the first time we've seen that in our femcare business in a while.

Adult care we haven't lapped the Poise Impressa launch, so some of that was lapping that from last year but we still had high single-digit growth in our adult care business ex-Impressa.

And we've got more good innovation coming.

Now the comps get a little tougher in the back half but again a lot of it was some of the bonus pack activity, some of the digital coupon activity as opposed to more trade funding.

If anything I'd say the trade funding levels are pretty consistent year on year.

It was maybe more of the other strategic marketing investment that was probably a little elevated this quarter.

Got it.

That's very helpful.

I hate to ask the question but just given the divergence in trends in Brazil between femcare and diapers, do you think that Zika is playing any part in terms of the diaper demand?

And then just the last question I have is on K-C Pro, with volume down in North America, flattish in D&E, can you talk about your view on these trends?

Because I thought you picked up some share there last quarter and I know part of this reflects the Halyard comp issue.

So can you just remind us when that anniversaries and then your overall thoughts on K-C Pro?

Thanks so much.

Sure, on the Zika question we don't really have any a good read on that.

Again we're still in the nine-month gestation period where before you would really I think see any impact from that on the birthrate.

So I don't know if some of the negative category trends we're seeing in Brazil have something to do with the source of the data, are consumers shifting into some less measured outlets doing more in the down the trade lower quality products.

Are some middle-class becoming poor and not able to afford even the basics?

And so I think we're still trying to figure out what's happening with the category.

I wouldn't blame much of it on Zika at this stage, at least from what we can tell in the data.

On the K-C P question, I would say we were happy with some of the emerging market growth on K-C P of kind of mid-single-digit and probably a little slower in some of the developed markets in Europe and North America.

The Halyard stuff is burning off and the supply agreement I think officially wraps up at the end of this year and we may continue to supply each other after that at some level.

But we expected that there was going to be a spike last year and it would probably burn off this year and that is playing out.

Thanks for taking my questions.

Caroline Levy, CLSA.

Good morning, hi, it's Caroline Levy with CLSA.

But thank you.

I just wanted to ask to clarify, in China when you're talking about pricing being down high, what, call it 15%, whatever it is, roughly around there, that does not include the impact of exchange rates.

So that's not the (inaudible) number, right?

That's correct.

That's in local.

Correct.

I thought so.

Thank you.

I'm wondering if we could just talk a little bit about Mexico because I think the underlying business in that JV was very strong.

What would the equity income have been without the currency translation?

It would have been up pretty nicely.

The peso is down something like 15% year on year.

So it certainly would have been up.

And they would have had some transactional impact, as well, because they buy a lot of their raw materials in dollars, as well.

So they had a very solid quarter and good performance in local currency and given the currency impact didn't translate into as many dollars but they are still executing well in a local market.

Got it.

Thank you.

And then could we talk a little longer term about the adult diaper opportunity and Impressa what you've learned so far with Impressa?

And I think I adult is still a relatively small percentage of your volume globally, if we could just talk about that for a few minutes it would be helpful.

Yes, sure.

The adult care category is probably, what, about a $1 billion category in the US and for us is a much smaller business outside the US.

So there's a huge growth opportunity.

And there's some international markets where it is if you looked at Japan, for example, today which we don't participate in to any great extent but the adult care category is larger than the diaper category there.

So there is a huge opportunity as the population ages in many parts of the world and we've got our adult care business grew high single digits in the developing and emerging markets.

We also had pretty good performance in Korea.

We've got a good adult care business in Australia.

So there's pockets where we've seen this start to play out, but we still got a long way to go to fully take advantage of the opportunity, I think, and so our teams are focused on getting there as quickly as we can.

In terms of Impressa, again I would say so far so good.

It's probably maybe a little slower than expected but it's also one in a new product form it's sometimes hard to predict how quickly consumers will change habits.

So far retailers are happy with the movement and we're continuing to look at generating trial.

Our repeat rates are where we would hope for.

So now it's really focusing on how do we make sure we're getting trial rates up where we'd like them to be.

And some of that is retail execution and some of that is making sure we getting the marketing messaging out, and so our teams are continuing to check and adjust and continue to drive this exciting opportunity for us.

Great, thank you.

I have one last question which is more technical.

Just given the strong volume in Personal Care in the second quarter, is some of that going to take away from the third quarter?

I know you said you've got a lot of activity, but should we assume, though, that some of it did shift out of the third quarter?

It shouldn't.

We typically don't load customers and so our stuff is bulky and expensive to ship in store and so customers typically want it to flow right to the selling floor.

So we should continue to expect consistent results as we move from quarter to quarter.

Thank you so much.

That's great.

Erin Lash, Morningstar.

Hi, thank you for taking my question.

I just wanted to follow up on the emerging market diaper business in particular.

There's been a lot of discussion this morning in terms of the mix impact and the smaller size diapers selling better.

I was wondering if you could talk a little bit about usage trends among those consumers and the extent to which they've maybe increased their usage of daily diaper use in that sort of context?

I would say overall as a general statement, as GDP per capita increases a consumer's ability to participate in a category increases.

So we see diaper rate usage per day go up as they get more income.

So in a market like China and the higher income households, you'd see diaper usage per day very similar to any other developed market.

And the more rural markets in China where you have very low GDP, you might see consumers that either use no diapers at all or maybe use one a day just for overnight.

So I think that's when you -- so you think about like a market like Brazil, if you've got a middle-class consumer who became poor, she may still use diapers for overnight but she may not use them as frequently during the day.

So I think in terms of how the economics of the category play out, I think that's true across a number of consumer staple spaces.

Thank you.

That's very helpful.

Then just one last question.

In terms of, there's been discussion about the lower or I guess reduced need to take pricing in emerging markets, given what we've seen with FX rates.

But I was just wondering if you could talk about the retail reception to some of the price increases that you've already put through, and the extent to which you've maybe received pushback or whether that continues to be more of a seamless endeavor.

Again, it depends on the geography.

I'd say in markets where they have -- where it's pretty common to have big currency swings, if you looked at a number of Latin American markets or Eastern European markets, the retailers are quite understanding of the need for their imported products or products with imported raw materials to take price.

That's kind of the way the market works.

And in probably more established markets if you looked at like Australia and the UK and maybe even China, the currencies have been pretty stable and they've had a history of being pretty stable and you don't typically get a big price -driven impact from currencies.

For example, the Sterling has weakened a bit since the Brexit announcement.

I don't think you're going to see a lot of suppliers taking price in the UK because A, it wasn't that big of a swing and B it's a challenge to push price through with a UK retailer.

That color gives you some context for the way you think about it.

Yes, that's very helpful.

Thank you so much.

Iain Simpson, Societe Generale.

Thanks very much for allowing me a follow-up.

(multiple speakers) We're here all morning.

So we just keep taking question until you guys get done asking them.

All right, we will keep going until we get bored.

Just on femcare, you guys are doing very well in that category, clearly.

So is a certain Swedish competitor of yours.

Clearly there's got to be some fairly chunky share donors going on in that category, I'm guessing both of your US-based competitors.

I just wondered if you're seeing anything change in the competitive intensity within the femcare markets in which you participate or are those guys just kind of happy to sit there and seemingly lose a little bit of share each quarter and not really do much about it?

Thanks very much.

Femcare is probably one of the more complex competitive sets out there.

So it is a bit more regional, so in the US we would have P&G would be the largest competitor and then the Edgewell spinoff of Energizer which include some of the Playtex and former J&J brands would also be a player.

And pretty competitive market but I'd say pretty normal competitive.

And we've been driving innovation, we've been doing a lot with our U by Kotex brand to really make sure we've got the right offer at the right price point and bringing news to the marketplace.

If you go to a market like Brazil you'll see P&G is there but you will also see some other local players.

CMPC is there, actually a Chilean player along with others.

And I've just recently become the share leader in Brazil and continue to have good momentum there with our Intimus by Kotex brand there.

You go to China and you've got some of the Japanese players are in that market as well as Hengan which is a local Chinese company.

Hengan is probably the overall share leader in that market.

And we're a relatively small player, we're growing nicely but we're only about a 4 share in China.

And so it's really probably one of the most diverse competitive maps.

We've got a pretty consistent positioning aimed at an 18- to 24-year-old young woman as she is adopting her brand choice and really trying to drive innovation against that target around the world and have been pretty successful at it.

But you do have to adapt to win in each local market.

Okay.

But there is nothing changing in the competitive landscape and we shouldn't expect any reaction, I guess, from the pretty impressive share gains that you guys have pumped out for a few quarters now?

So far we've got plenty of competition every day.

They want to eat our lunch and we want to get our fair share of the category and so far we've been holding our own.

Great, thanks very much, guys.

Ali Dibadj, Bernstein.

Be careful on offering your time to answer all of our questions.

Let me chat about one thing --

At some point you guys will hang up and it will just be us here.

So obviously we've been all I think with good reason asking about this year 3% to 5% organic sales growth number and can you mix the bottom end and what's going to drive that.

But I wanted to pull up a little bit and to add to that your view of 3% to 5% target for the long term.

We've been started to be accustomed I guess since 2012 with the 4% to 5% type organic sales growth number mostly because of the opening up of emerging markets for you.

But before that it was kind of 3% to 4%.

So I think we've all forgotten about that time frame, and wanted to get a sense from you about whether is there anything that you're seeing that would suggest that we're back about thinking of 3% to 5% as a real range as opposed to it always being at the high end of the range kind of like you're seeing perhaps for this year.

That's a really good question and I think it's one that we think about a lot and I think we've been at 3% to 5% for a long, long time.

If you go back far enough you're probably right that at various points we were struggling to get into the low end of the range and then the last several years with the explosion in emerging markets we've been bumping up against the high end of the range.

We've even had some investors suggesting whether we'd take it up to 4% to 6% and we said 3% to 5% still feels about the right range long term.

You think categories are probably growing 3% to 4% typically in if you looked at the kind of long-term trend data.

So if you deliver that with some innovation and some share growth you can see your way clear to playing in the full space of that range.

You look at some more recent trends where emerging market economies are under a little bit more pressure like they are today when the categories are going negative in Brazil, that affects that model a little bit.

And I still think 3% to 5% is the right range and in any given year we're going to be aiming to be solidly in the middle of that.

There will be times where we'll overdeliver either through our good category tailwinds or great execution and there may be times where we're at the lower end of it because if either one of those things doesn't go the right way.

And so thank you.

The way you're saying category growth 3% to 4% kind of long term, so you have to gain share to get above that.

Obviously given some of the woes of P&G it feels like it might have been, and frankly some of the Japanese players being behind the eight ball as well in technology, it feels like it was recently a relatively, easy is never the right word, right, but a less contentious time to gain share perhaps.

Do we get any credit for good execution?

Or no?

I want to be careful with that.

Absolutely you guys should get credit on excellent execution, certainly on a relative basis.

Okay.

I think I feel better.

But do you think, for example if P&G is stepping up are you seeing any changes there?

Do you think the competitive atmosphere gets that much tougher because you do have a big heavyweight who is clearly struggling and so maybe share gains are tougher going forward.

Not that you are going to execute any worse but share gains are just tougher going forward?

I think that's a fair question.

So if you looked at China, for example, you'd say well we kind of pioneered the super premium segment five or six years ago.

Lots of other players are piling in there and they are doing it at maybe narrower premiums than we were initially structuring.

And so that's made that segment a little bit more competitive, certainly, and the Japanese competitors as well as P&G are playing.

We were probably a little bit early at e-commerce and had more than our fair share of that space.

Lots of other players are piling in there and e-commerce is more competitive now than it was several years ago.

And so yes, there's certainly -- it's certainly a competitive environment, especially when categories aren't growing as fast and everybody is still trying to get their volume growth.

That makes for a little bit more competitive environment.

So you're probably seeing some of that, I'm sure, in our results.

Okay, thanks very much, guys.

Faiza Alwy, Deutsche Bank.

Good morning.

I just had a quick question on North American pricing because I know you're lapping your pricing, your price cuts but it looks like P&G is lowering pricing on Luvs now.

So just wanted to get your take on how do you see the pricing environment and what your outlook is going forward?

Yes, I think what we've seen with P&G in the category in North America they probably have been doing a lot of stuff with couponing.

They are also spending pretty aggressively on advertising on both Pampers and Luvs.

And so it's been a pretty a strong, competitive response not unanticipated and that may have been why some of our competitive activity was a little higher in the second quarter, was making sure we continue to show the value on Huggies.

The good news is we still saw mid-single-digit volume gains on Huggies and we are up a share point.

So we feel like we're on the right track and anticipate that P&G will continue to be competitive.

Okay great.

Thank you.

Jason English, Goldman Sachs.

Hey, good morning folks.

Thank you for the question.

So it sounds like a common theme coming out of the line of questioning and the prepared remarks and responses has been slower for longer up top is probably the right base case scenario, particularly with the pricing lever out of the equation in the near term.

In that context can we turn into the belly of the P&L and talk a bit more about the cost saves and the inflation/deflation?

This was some of the deflationary benefit has subsided into this quarter following the abatement last quarter, as well.

And I think this is the first time in a while that fiber has been the primary driver.

So two questions there.

First, is it fair to say that the benefits of lower oil derivatives is now behind?

And secondly, what are you seeing in the pulp markets, because certainly what we're seeing shows a market that's been a bit more stubborn than we would have hoped.

Okay, so Maria and I will probably tag team this one.

And on the pulp market I'd say our outlook has moderated very modestly quarter to quarter.

I think we were looking at 820 to 850 eucalyptus, in April we're 840 to 860 now, so it's slightly worse.

Current spot prices are slightly higher than that.

We've probably bought a little bit more spot tonnage in some of the northern softwood area which gives us a little bit more benefit because there has been some good availability at attractive prices there.

So again I would say not too much change sequentially in our view of the pulp market and we'll see what happens going forward.

I don't know, Maria, if you want to comment on the oil-based materials and how you're seeing that.

Yes, on the oil-based materials remember that we're buying oil-based derivatives where on the polymer front we were actually seeing inflation versus deflation.

So the benefit that you would typically expect for us to get from the lower price of oil isn't as much given the derivatives that we purchase there.

I will follow up on your line of questioning beyond the commodity situation where we did narrow the range of expectations for the year.

I commented on the FORCE cost savings earlier and the fact that we increased our outlook for that in 2016 with good performance there.

And then as you go down the P&L on the cost side, we still continue to invest in some areas, particularly selling and research, and we still have some local inflation on our general cost base that you can see come through in the numbers.

Overall, we continue to focus aggressively on cost structure and to look to take money out of areas that add less value and to invest in areas that have more value and help us achieve the top-line growth.

Thank you.

That's helpful.

One quick follow-up.

I'm not trying to push you into any sort of foreshadowing of guidance for next year but as you step back and look at your productivity pipeline, how does it look?

And how are you feeling about cost savings as we go beyond this year?

I don't think we want to get into guidance.

As I mentioned I'm very happy with what the teams are delivering on the FORCE cost savings this year.

We are optimistic about what we can achieve in that area over the long term.

We also continue to have a lot of opportunities to invest in our business, as well.

So we'll have to see it how all of that comes together as we close out this year and look at next year.

Very good.

Thank you very much.

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

All right.

Well we will conclude the call.

We appreciate all the questions and we will let Tom wrap up with a closing comment.

Once again a solid performance, really aiming against continuing to deliver long-term shareholder value.

And we appreciate your support of Kimberly-Clark.

Thanks very much.

Thank you very much.

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

You may disconnect your phone lines.

And thank you for joining us this morning.