金百利克拉克 (KMB) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for your patience and holding, we now have your speakers in conference. (Operator Instructions). It is now my pleasure to introduce today's first presenter, Mr. Paul Alexander.

Thank you and good morning, everyone; welcome to Kimberly-Clark's third-quarter earnings conference call. With us today are Tom Falk, Chairman and CEO; Maria Henry, CFO; and Mike Azbell, our Controller.

Here is the agenda for the call. Maria will begin with a review of third-quarter results. Tom will then provide his perspectives on our results and the outlook for the full year. We will finish as usual with Q&A. We have a presentation of today's materials in the Investors section of our website.

Now as a reminder we will be making forward-looking statements this morning. Please see the Risk Factors section of our latest annual report on Form 10-K for a further discussion of forward-looking statements.

We will also be referring to adjusted results and outlook; both exclude certain items described in this morning's news release. The release has further information about these adjustments and reconciliations to comparable GAAP financial measures. And now I'll turn it over to Maria.

Thanks, Paul. Good morning, everyone. Thanks for joining the call today. Let me start with the headlines for the quarter. Organic sales were basically even year on year including 3% growth in developing and emerging markets. We achieved significant cost savings and margin improvement and we increased cash flow, improved capital efficiency and returned cash to shareholders.

Now let's cover the details starting with sales. Our third-quarter net sales were $4.6 billion, that is down about 3% including a currency drag of more than 2%. Tom will provide more color on our top line in just a few minutes.

On profitability, third-quarter adjusted gross margin was 36.4%, up 30 basis points compared to the prior year. Adjusted operating margin was 18.2%, that is up 70 basis points. I am encouraged that our teams continued to improve the shape of the P&L even in a tougher environment. Our cost savings initiatives continue to be a key driver of margin improvement.

Third-quarter FORCE cost savings were $105 million, equal to our previous all-time record. Through nine months FORCE savings are $295 million, so we are tracking to be towards the high end of our $350 million to $400 million full-year target.

In addition, our organization restructuring generated $15 million of savings in the quarter. Commodities were favorable by $10 million mostly due to lower fiber costs. Full-year deflation should be toward the middle of our previous estimate of $25 million to $125 million.

On the bottom line third-quarter adjusted earnings per share were $1.52, up 1% year on year. That is despite a currency drag of more than $0.10, mostly from transaction effects.

Moving on to cash flow and capital efficiency, cash provided by operations in the third-quarter was strong at $948 million. That is up 12% year on year driven by improved working capital. [Unadjusted] return on invested capital through nine months were up 100 basis points, nicely ahead of our long-term goal of 20 basis points to 40 basis points of annual improvement.

On capital allocation, third-quarter dividend payments and share repurchases totaled more than $550 million. The full-year of amount should be approximately $2.1 billion.

Moving on to segment results, in Personal Care organic sales rose more than 1%. That includes 4% growth in developing and emerging markets. Overall Personal Care operating margins were healthy at 19.8%, although off 70 basis points year on year including significant currency headwinds.

Moving to Consumer Tissue, organic sales fell 2% driven by results in North America. Consumer Tissue operating margins of 18.1% were up 110 basis points with benefits from cost savings and lower input costs.

In our third segment, K-C Professional, organic sales were down 1%, that included a 1 point impact from lower sales of non-wovens to Halyard Health. K-C Professional operating margins were 19.6%, that is up 100 basis points year on year driven by higher net selling prices and cost savings.

So overall it was a soft quarter on the top line in a tough environment. Nonetheless, we delivered significant cost savings, improved our margins and increased cash flow. We also continue to improve our balance sheet efficiency and allocate capital in shareholder friendly ways. I will now turn it over to Tom.

Thanks, Maria. Good morning, everyone. I will share my perspectives on our third-quarter results and then I will comment on our full-year outlook.

So, starting with the third quarter. As Maria mentioned, our organic sales were about even year on year and reflected a more challenging economic and competitive environment.

Regardless of the reasons, I am not satisfied with our top-line results and I expect some improvement in the fourth quarter. On the other hand, I am broadly encouraged with our current market share positions, so we are holding up well in a challenging environment.

Let me give you some details about our third-quarter sales and market conditions. In developing and emerging markets organic sales were up 3%, that compares to a 5% growth in the second quarter as performance improved in China but softened in Latin America, particularly in Brazil and Argentina.

In Brazil organic sales in Personal Care fell about 5% year on year due to lower volumes. Results were impacted by competitive promotion activity and an even more difficult economic environment. We will be launching more innovation in the next few quarters in Brazil while making sure we protect our brands appropriately.

In Argentina, while selling prices were up in the quarter, volumes were down low-double-digits in a challenging consumer environment. Category volumes were declining at about the same rate as our volume declined and have worsened over the last three months.

Now looking outside of Latin America, in Eastern Europe organic sales in diapers increased 10% due to broad-based volume growth on Huggies across the region. In China organic sales in diapers were up low-single-digits as strong volume growth was mostly offset by lower selling prices.

Looking ahead, in China we expect our volume momentum will continue with benefits from innovation and healthy category demand. We also expect the promotion environment will remain competitive.

So overall, while organic growth in developing and emerging markets has moderated this year, that is mostly because of slower economic growth which has resulted in weaker category dynamics. In most of our key businesses, our market positions are generally improving or holding steady.

I am still very optimistic about our long-term growth prospects in developing and emerging markets because of the inherent category penetration opportunities that exist in this part of the world. Nonetheless, given the volatility in the current environment it is difficult to predict when growth will pick back up significantly.

Turning to our North American consumer businesses, Consumer Tissue volumes were down about 3%, the comparison included impacts from changes in the timing of promotional shipments and 6% growth in the year ago period. Year to date our volumes are up 2% in this business, that is a good indicator of our ongoing performance.

In addition, our market shares in the third quarter were relatively stable sequentially, so we expect better volume performance going forward compared to the third quarter.

Personal Care volumes in North America were up 1% compared to 10% growth last year. Childcare volumes were up double-digits, they benefited from innovation and category growth. Baby wipes volumes were also up double-digits in the quarter.

Volumes were [off] low-single-digits in diapers and mid-single-digits in adult care. Both businesses had double-digit growth last year with increased promotion shipments and benefits from innovation.

Competitive promotion activity has also picked up somewhat recently particularly in adult care. Our market shares in the third quarter were stable in diapers and down about 1 point in adult care.

In terms of overall market shares in North America, our positions remain healthy. Shares improved or were even with prior-year levels in seven of eight consumer categories on a year-to-date basis and in five of eight categories in the third quarter.

Now moving beyond sales, we continue to manage with financial discipline. As Maria highlighted, we delivered another quarter of strong performance on cost savings, margins, return on invested capital and cash generation. We continue to allocate capital in shareholder friendly ways. These results demonstrate the continued strength of our business.

Now moving on to our outlook. We remain optimistic about our long-term future. We will continue to execute our innovation, marketing and targeted growth initiatives to grow our brands. We will also continue to focus on improving the profitability and efficiency of our businesses.

In terms of our guidance for full-year 2016, we expect organic sales growth of 2%, our previous target was 3%. On the bottom line we are targeting full-year adjusted earnings per share in a range of $5.95 to $6.05. Compared to our previous guidance we have lowered the top end of the range by $0.10 per share to reflect our new organic sales estimate.

Our earnings outlook represents year-over-year growth of 3% to 5%, which I believe is pretty solid performance in this environment. Over the next three months we will continue to assess the environment and finalize our detailed operating plans for 2017. And as we always do, we will provide our guidance for the coming year in January when we announce yearend earnings.

So in summary, while it has been a more difficult environment to generate top-line growth this year, we are competing effectively and our market positions are in good shape. We are managing the Company with financial discipline. And we continue to execute our global business plan strategies for long-term success and shareholder return.

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

(Operator Instructions). Lauren Lieberman, Barclays.

Can you guys hear me? Hello?

Lauren Lieberman.

Hey, Lauren, sorry we had a little mix up there. Good morning.

That is okay, no problem. Good morning. Okay so first thing I actually wanted to ask about was margin performance, because you showed really good margin expansion in both Consumer Tissue and K-C Professional even with volumes down.

So is that -- is it because those businesses have been where most of the cost savings activity is or is it more about the deflation? Because I think that is sort of an interesting dynamic to think about as we look into next year.

Yes, if you looked at the cost savings by segment, I mean it was relatively proportionate. In fact, if anything Personal Care was probably a little heavier than Consumer Tissue. I think you probably had more of the competitive pricing activity particularly in some of the emerging markets like China affecting Personal Care.

On the deflation side, it was only $10 million, but again most of it was pulp. So that did benefit Consumer Tissue probably a little bit more than Personal Care.

Okay, and when you think about the margin expansion and the productivity work, a couple places in your remarks you mentioned the promotional environment.

And I think I am having a hard time getting my arms around how much of the sort of deceleration that you have seen, not just this year but also with it getting more severe this quarter, would you try to competitive environment, the macro environment?

And whether or not you think there will be a need or desire to spend back more to kind of continue to protect market share positions or to stimulate category growth?

Yes, that is sort of the interesting question I think in this environment. So I would say there is no question that there is less growth out there in lots of places. And so, Latin America was certainly the case where categories have gone negative in a big way due to some of the economic impacts in places like Argentina. And there is just as many people chasing that growth. And so that does make it more competitive.

On the other hand, you saw some pretty heavy activity in some markets in the third-quarter that probably won't repeat at the same level. There was some very heavy adult care couponing in North America, for example, by both of our primary competitors. Think $14 digital coupons, on a $13 item, that we don't see that reoccurring, it was probably more of a onetime thing.

You also saw some pretty big Easy Ups couponing, more like a $5.00 coupon, which is way above normal in that market as they were launching a new product. And again, don't see that continuing at that level. And we didn't match those offers, but that does affect your short-term volume while that stuff is working its way through the market.

So is that the expectation that particularly gets done? Like in North America Personal Care, that some of the promotional activity -- you are assuming it doesn't continue and that helps with the -- because you need things to accelerate pretty significantly Q4 versus Q3 to do the 2% for the full-year total Company.

I think it is not as big a step-up as you think. There are a lot of things across the Company that should be better sequentially. So if you looked at KCP, we had about a point drag from Halyard, that rolls off in the fourth quarter. Europe was also very weak and KCP, which some of that was Brexit related; that has gotten a little bit better sequentially. So we will see how that plays out in the fourth quarter.

If you looked at Consumer Tissue, there was more of a promotion timing 2Q versus 3Q. If you look at our year-to-date volume we are up a couple percent on Consumer Tissue in North America and expect to have a solid fourth quarter versus the negative trend in the third quarter. So there is a number of things that were probably working against us in the third quarter that will make the comparison a little easier in the fourth quarter.

Okay. And so it sounds like particularly -- because KCP and Consumer Tissue, those are the two. I think the Personal Care comparison was something a lot of people had their arms around. But the volume seeming shortfall in KCP and Consumer Tissue is what really felt pretty surprising. So it feels like (multiple speakers).

Yes, those were the two that were probably the biggest miss versus our plan as well.

Okay. All right, I will pass it on. Thank you so much.

Jason English, Goldman.

I guess I want to pick up first on Lauren's line of questioning, maybe from a slightly different angle. As you think about your categories and the growth trajectory in the markets in which you operate, do you have a sense of how fast they were growing last year and how fast they are growing now?

We don't measure that on a quarterly basis. We would have said last year the global growth rate was somewhere in the 3% to 4% range. We haven't redone the math for this year, but I would say it is going to at the low end or even slightly lower than the low end if I would have to guess.

Just when you see places like Argentina where we were tracking mid-single negative category growth through the first half of the year and saw kind of double-digit category dips in the third quarter. That and -- or Brazil would be the other big market that is kind of mid-single-digit negative category growth comps. Those are the things that would be a bigger drag on that standpoint.

That and the pricing environment in China is probably the only one that is a big shift this year relative to what it would have been doing last year. And so, we will take another look at it going into 2017. But I would guess it is certainly lower than the 3% to 4% we had estimated last year.

That is helpful. And speaking of going into 2017, I know you are not in a position to give guidance, so I wouldn't ask you to at this point in time. But we can't help thinking about the business' trajectory into next year with some of the fading momentum we have right now.

It sounds like year to date I think FX all ins have been about a 12% headwind, consuming sort of flat line in the fourth quarter. You are looking at sort of maybe a 9 point drag to EPS this year. Implying constant currency despite the top-line decel, you are still posting pretty solid double-digit earnings growth.

Assuming rates hold, FX abates next year, what are some of the offsets that would prevent you from kind of getting to that sort of constant currency growth rate? Whether it be sort of inflation, what you're seeing on that front, clearly slower end markets, etc. And any thoughts you could provide on that front would be appreciated.

Yes, again, you are right. We will give you a more complete look in January. And I would say for us it tends to start with our outlook on category growth and some of that is driven by what is going on economically. So every economic forecast it seems like that we look at lately has a lower GDP growth number than the one before it. So we are not expecting a snapback from category growth.

In terms of -- as we tend to look at the combination of input price, currency and commodity costs, that probably still net feels like a drag year on year going into 2017. On the other hand, we have also seen lots of big swings between now and the end of the year.

And so, we have a number of other events happening between the presidential election and two more Fed meetings. So we will see where we are at on that calculus a couple of months from now.

Very good. Thank you, guys. I will pass it on.

Wendy Nicholson, Citigroup.

I just had a quick question sort of following up on Brazil specifically. Because when we visited you guys down there, I mean we were struck by just how strong the business was. You've specifically chosen to play in the higher tiers. And historically and even last year when things were tough economically you guys were still doing really, really well.

So I am just wondering if you can just speak a little bit more about Brazil. Is it specifically the diaper business or is it the fem care business more that has deteriorated? And is it -- do you really think it is the economic situation? Are people trading down, are they doing without? Or is it just a competitive environment? And if you could speak to the pricing environment specifically, that would be great. Thank you.

Yes, sure. That is an important market. So I would say if there was all of the above on your -- as an option for your answer I would probably -- it is probably a little bit of all of those things. But let me go category by category.

So fem care for us doing really well, I think we are up 3 share points year to date. Category leadership, have launched a bunch of innovation. And I would say that business looks pretty solid overall.

Diapers has been more competitive, the category has been weaker. There has been some trade down in the category as well and you have seen more Tier 2 growth. It has been more competitive. And so from a pricing standpoint, promotions standpoint, there has been more activity on that front as well.

And I think within that you have seen some -- either it is household inventory destocking or it is moms who were using four or five diapers a day now using three or four diapers a day. And so, you take one diaper a day out of the equation and that is a double-digit category decline for that consumer.

And so, I think it takes a little while to get household panel data to really understand what is driving that. But it has gone on for long enough now, it is probably more than just inventory destocking where you are actually seeing the middle class in some cases in Brazil are getting poorer and having to make tough tradeoffs.

You can certainly see the same kind of phenomena in Argentina as well as they are moving to more of a market-based economy. In some areas that is putting big pressure on consumer wallet.

So while we are still well-positioned and bullish long-term on Brazil, it has been a tough economic environment. You've had a recession for the second year in a row. Their overall outlook is not that optimistic and the economy is running expectations. And until people start to believe it is going to get better it is not going to snap back, probably.

And if you see people really trading down or even not leaving the category but just using less, I mean would you contemplate a more aggressive pricing action there to sort of spur consumption? Or are you still happy to play at the relative premium end and you want to preserve that position?

In Brazil we have a very strong Tier 2 business. So we actually are continuing to drive that and are benefiting in that area. But now that the whole category is down it has been -- there hasn't been enough to stimulate the consumer to use more at this point, anyway.

Got it. And then just ballpark -- I know you don't break out advertising as a percentage of sales on a quarterly basis, but of the sort of roughly high 3%s, 4% this year are we trending at that same level or has there been any change up or down for you?

No, I think year to date we are almost right on. As a percent of sales it is 3.8% or 3.9%, something like that. So very little movement. And I think the thing that you don't see is that we are probably doing more digital couponing, which shows up as a reduction of net sales which can factor into our price column of our analysis of change in sales. But there has been more competitive couponing activity as well.

Fair enough. Okay, thank you so much.

Caroline Levy, CLSA.

I would like to ask for a little more explanation of what you think is going on in China. Our surveys there are not -- I guess the retailers and distributors are not really talking about price discounting. But you are obviously seeing it.

So I am just wondering if you can talk by channel where the pricing pressure is coming from and maybe even by competitor, just (inaudible) to understand what is going on. And I don't know if you have any more specifics on the volume growth?

Yes, I mean the volume growth for us was very strong, particularly in newborn, and we are expecting and seeing a stronger birthrate in China that was backend loaded this year. And it is really across all classes of trade.

We tend to look at modern retail, baby superstores and then e-commerce as sites that we have data insight into. And we are doing well and growing strong double-digits in all of those categories.

In terms of the pricing, I think again that is the place where it is one of the fastest growing markets in the world. And you are seeing lots of competitors chasing it.

So the two Japanese competitors as well as P&G are all very aggressive and it is probably one of those things, Caroline, where everyone thinks the other guy started the price war but we are all trying to drive our business in that market.

And our shares are pretty stable overall and we have got good innovation in the market and more coming. And so we feel pretty good about our position in that market.

So just on that innovation, do you have different product by channel? So for example, online would you have different innovation? And what has been driving the growth [this year]?

No, I mean it is a pretty similar product lineup. You may have different pack counts or pack sizes by channel. And for us, as we said, newborn has been a strong driver this year. But our premium lineup is continuing to do well and China overall Tier 5 which we would call it, but our top of the line Huggies products are doing well in China.

Thank you. Just last question. Do you see this persisting, this competitive environment?

I don't think it is going to get any easier anytime soon, because China is one of the best growth opportunities available in the world right now. And I think it is going to be the biggest consumer market at some point in time in just about every category. And everyone is trying to build a position there and we are certainly among them.

Thank you so much.

Ali Dibadj, Bernstein.

I am not sure I am getting a very clear picture about the split of the slowdown between competition and just the economy around the world. So I know it is tough to tell, but is it 50/50, is it 60/40? I mean how should we think about splitting that?

Because going forwards between competition and economic slowdown we obviously tried to figure out which one of those was going to get better. So maybe start with the -- what's the split here?

Is it between P&G and the Japanese companies we have heard from before just like you just said a second ago getting super aggressive in China? Is it economic slowdown? Can you just give us some more quantification of which one is really driving it?

Because it sure feels like -- my editorial comment is it sure feels like since basically Q4 last year we have been hearing, look, China was just a onetime thing, it was [single day]. And then we heard, oh, no, people are getting more aggressive in China but it is really because of this VAT issue. And then now it doesn't sound like it is that benign.

And similarly in the US and in Latin America, we kept thinking, look, things are okay, things are okay, and things have slowed down quite dramatically. So I am still trying to un-earth this economics versus competition.

Yes, that is fair, Ali. So if I were to give it to you regionally, I would say in Latin America it is probably more category decline than competitive activity. Although when a category is declining you do still have more competitive activity as everyone is trying to hang onto their share of the business.

In China it is more competitive activity. The categories are fine; the birth rate is fine in China. You are seeing good underlying category growth on a unit volume standpoint.

In North America honestly on a year-to-date basis we are fine. We had a tougher third quarter; we had tougher comps for sure in a lot of areas because of some of the launch activity last year.

But if I looked at Consumer Tissue in North America, which had a negative comp it had more to do with we had a little heavier promotional schedule in the second quarter, we had great volume growth than we did in the third quarter where we went backwards. We are expecting to finish with a strong fourth quarter and that business is on track from a share perspective.

Europe, Eastern Europe, I would say Western Europe, the UK was pretty weak overall economically. Some of their reaction to the Brexit vote -- you had a lot of people who didn't want to hold inventory for a while, we had fairly weak growth in both the consumer and the KCP side.

Eastern Europe is essentially fine. It is competitive, about like normal, categories are performing reasonably well.

So, it is more of a region-by-region assessment. You do have some of both factors in both places. But I don't know if that helps you understand it better, but that is probably how I would break it down for you.

No, it certainly helps. And to tie that a little bit to your share position, so healthy shares, on average not -- it sounds like what you are saying not losing share.

So should we expect your competitors to deliver kind of zero organic sales growth or are there things that you think may make the category growing faster than you are growing [EG] tough compares or what have you?

Because it feels like a lot of this is -- if you are not losing share everyone else is going to have to be feeling some pain as well. Is that a fair assessment?

Well, we will find out I guess this week. But that would be my assessment.

I mean, I think, Ali, I would just adds it's probably better to look at results through nine months. As Tom said, there was a lot of noise in the third quarter. And I think if you look at through nine months that is probably a better reflection of how we are doing.

Okay, thank you. And then the last thing I just want to throw in again on the topic is kind of almost what I started with in terms of how should we -- why should we expect this getting better?

I mean it feels like competition is not going away yet. I don't know if you guys have seen anything that suggests the macroeconomic situation in Latin America or whatever is getting better. You hear from Walmart that they are going to have to put in more private label to (inaudible) all of the (inaudible) in the US.

It just feels like there is more brewing here that may make it tougher before it gets better. And wanted to just get your reaction given you guys see many more things than we do.

I would agree with the statement that it is not going to get better quickly. I don't expect a snap back here. On the other hand, there are some green shoots in some places. I am encouraged by the volume growth in China, the birth rate in China; we have got lots of good innovation coming in lots of places.

I look at our fem care business for example where we have seen share growth in the vast majority of the categories that we compete in around the world and the consumer is still responding to innovation. We have still got good growth opportunities for adult care overall and it is a little bit more competitive in North America, but we have seen good growth outside North America.

And so, while there is -- maybe we are going to a tougher economic period of time, I do think in the long term there is still lots of room for category penetration here.

Thanks very much [as usual].

Stephen Powers, UBS.

I may have missed it, but can you talk a bit more about what drove the tissue mix -- or sorry, tissue miss in North America? I know you cited the promotional timing shifts into Q2, but that should have been foreseeable. So I am just trying to figure out where the miss versus your own expectations resided?

I mean it is one that -- again, we didn't give you guys quarterly guidance, but it was one that we expected to do a little bit better in the third quarter than we did. Some of it was our primary competitor in North America probably did a better job of executing against the Olympics promotions.

And while we had activity, it didn't compare at the same level. And so will have a little stronger program in the fourth quarter. On the other hand we did have a very strong second quarter and last year our comps were tougher. So it made it look worse then maybe it would. If you looked at it on a year-to-date basis it looks fairly similar.

Okay. And then if I could drill to Russia. You seem pleased with the Eastern European trends in general. But if I just triangulate it, it seems like Russia is a little bit softer than at least I would have expected based on your commentary coming out of Q2. Can you just expand on that a little bit?

I mean overall it is up double-digits in the quarter across Russia, Ukraine, CIS, which should be what we would all bucket into those categories. And I would say Russia and CIS are probably performing the best. Ukraine is maybe less negative than it was in the past, but that is still an economy that is under quite a bit of stress with everything else that is going on in that market. But overall I would say our Russian business is on track for the year with our expectations.

Okay, okay. And then lastly if I could, I know you don't expect a snap back, but to questions earlier, the Q4 outlook implied in the full-year guidance does feel like somewhat of a snap back to more or less normal. Is all of that Consumer Tissue re-normalizing or should we expect sequential improvement in both Personal Care and Tissue?

Yeah, I mean, it is one that -- I think to hit our revised full-year guidance we only need, Paul, what -- about a point of growth in the fourth quarter --

Yes.

-- versus zero in the third quarter? So it is not a huge uptick to be able to round to 2% growth for the year. So it is one that -- again I think that is doable across a number of places. But overall I would expect the ones that were off the most in the third quarter will have the biggest opportunity to close the gap.

Okay, thank you very much.

Olivia Tong, Bank of America Merrill Lynch.

Tom, first question is just when you characterize your market shares as sort of broadly healthy and you are probably encouraged by them, are you talking about dollar share or volume share?

We typically look at dollar share. We look at both, but the one that we probably focus more on is dollar share. So when you hear us talk about it externally it is typically dollar share.

Got it. Because you when you talk about specific categories you talk a lot about volume. And when I look across Nielsen data it looks like a couple of the categories you are sort of trending downwards, particularly in some of the developed markets, US for example and then a couple of the emerging markets. So just wanted to clarify that.

And then also going into Q4 and also into 2017. When you think about what is driving that improvement, is it coming primarily from volume or -- and what do you think about mix and price and the roles that they play in terms of driving that organic sales acceleration?

Yes, I would expect that the sequential improvement will be mostly volume-based. Particularly in North America I don't expect to see any big pricing improvements. There is no major price increases that are happening in any of the categories.

Got it. And then just -- can you update us on your view of what the industry is growing at in your categories, more so for the medium-term rather than the very short- or very long-term? And has there been any change in terms of what you think the industry will grow at?

Yes, we had commented on that a little earlier. Typically our long-term outlook has had the categories growing 3% to 4%. And we haven't re-measured that for what we think actually happened in 2016 or what we think might happen in 2017. And we will give you another look at that when you give you guidance in January.

My guess is that it had slowed down just because of the category declines that we have seen in Latin America as well as the pricing activity that we have seen in China, those two together would probably -- those are all large markets and would definitely bring down the category growth rates a bit.

Got it, thank you.

Jonathan Feeney, Consumer Edge Research.

I just wanted to ask about the cash flow. The last time -- I mean excellent cash flow performance and I am wondering two things. The last time you spent at this rate on CapEx, which you lowered for the full year, it was back in 2009 when obviously there were some very different macro dynamics.

And I guess with the very strong cash flow performance is it -- is that something we should expect going forward? What are your sort of priorities for allocation with this outperformance? And does that signal anything about your expectations for structural growth because I think in prior periods it probably did. Thank you.

Sure. We did have really strong cash flow in the quarter, as you saw, and we had really good performance in working capital, particularly in reducing inventories, and that came through to help our cash flow numbers.

In terms of CapEx, we do expect that we will be below our original guidance that we gave coming into the year. But that is driven by a couple of things. First, we have had really strong productivity this year and you see that showing up in our FORCE cost savings as one of the levers that we used to drive that. And we also do have slower volume in sales growth than we expected coming into the year.

And so, we are very rigorous on what we spend capital on and making sure that we are matching up the timing of when we are putting assets in the ground with our expectations. And with slower volume growth this year our capital is lower than we expected.

This is an area that we continue to drive. You know that we set up a global supply chain organization last year. And that organization partnering with the finance organization and the operating teams are continuing to drive added rigor into our capital process.

And so, we are not changing our long-term expectation there, but we are incredibly rigorous on that and we will flex the CapEx spend with the needs of the business. I wouldn't take it as a signal for anything else other than just where we are as a Company this year.

Thank you very much.

Erin Lash, Morningstar.

I wanted to ask specifically about China and the growth. The organic sales that you cited with regard to diapers seem to be an improvement. How much maybe was that driven by the just overall category demand as opposed to innovation?

And then more broadly with regards to innovations across the categories that you compete in, I guess in light of the tough macro backdrop as well as intense competitive activity, do you see your innovation skewing either more to the premium or the value end or has that not really shifted in light of what is going on? Thank you.

Yes, those are good questions. And so, I mean if we look at China today the birthrate is definitely helping. And we expect more live births this year and it could be as much as 7% more live births in 2016 than there was in 2015.

You are still seeing GDP per capita go up in China, so more consumers have more money to spend in categories like ours which helps. We are continuing to drive our city expansion, so we are in now 130 cities where we started the year at 115. So we have got more geography to cover as well which is fueling our growth. And we continue to launch innovation.

And so we have been driving some improved newborn products and that has really helped drive a lot of our near-term volume growth. But we've also -- we are also driving diaper pants hard across a number of tiers, both mainline and premium tiers. And so, I think there is -- a combination of those factors has really helped our volume growth this year.

And then with regards to innovation more broadly I guess across the categories in which you play, where that kind of maybe -- if that is skewing one way or the other?

China tends to skew a bit premium. The golden baby phenomenon is alive and well in China. And Chinese moms and dads invest a lot in their child -- and hopefully children as they go to more than a one child policy. And we tend to see the best for baby is a strong pull for our business in China.

Okay. And then in a more competitive or I guess challenging economic environment like Brazil would that still skew more premium or would that be more balanced or skew maybe more value?

Yes, Brazil you are seeing a bit more trade down, more growth in the lower tier products there still as a segment of the consumer that has money to spend and will pay more for best for baby. So you have got to balance your innovation across those tiers. But you are seeing more emphasis on the value equation in markets like Brazil and Argentina.

Thank you very much, that is helpful.

Iain Simpson, Societe Generale.

Just a couple of questions from me. I wondered if you could just talk a little more about the pricing environment in Chinese diaper. I know you have touched on it, but I seem to recall at the second-quarter stage you talked about it being down about mid-teens year on year. I was just wondering if that was a similar level in the third quarter.

And also I think in some other kind of infant channels we have seen some destocking in the C2C channel. I just wondered if there were any signs of that there.

And then moving on to tissue, really high level, but your comp in the Q4 is a couple of points tougher than your comp in the Q3, yet you are talking about an improvement despite that. Any color you can give on to the drivers of this a bit more and whether you think there is a risk that lower input costs from pulp coming down does translate into a tougher pricing environment would be great. Thanks.

Okay, on China pricing and -- broadly I would say the market got a little bit more competitive in Q3 than Q2. And so again, you saw lots of innovation, lots of good global competitors trying to drive their business and the Chinese consumer is the beneficiary of that for sure.

I wouldn't say we have seen any significant destocking impacts in any of our businesses. I mean we have a pretty big e-com presence in China and that business tends to be relative -- for us at least relatively efficient, low inventory and it flows pretty directly to the consumer. So again, China a good growing competitive market, we are competing well and we feel pretty good about our position there.

On the tissue comps, I mean again it was a -- we had a weaker promotional calendar in the third quarter as it turned out than we needed and we expect to have a stronger quarter going into the fourth quarter.

Fourth-quarter is also typically a little bit better facial tissue quarter, so we will see how cold and flu shapes up. And on the pulp question, at the levels of pulp change that we are seeing I wouldn't expect that to have much impact on pricing.

Thank you very much.

Bill Schmitz, Deutsche Bank.

Can you just talk a little bit more about the timing of the promotional activity? Because it seems like you probably would have planned some promotions in the back half of the year and they didn't come through. So how does that happen I guess is the first question?

But I think it was Cottonelle and Huggies and Viva had like a really good back half last year, and so you have to lap it again I think this year.

And then a couple of follow-ups. The fourth-quarter guide to get to 2% is between like 1.5% organic and 5% organic. So if I heard you right you think it is going to be the low end of that sort of 1.5% to 5%. Is that fair?

And then the last one is just on the [SG&A leverage], which was great. Can you just talk about what is driving the SG&A growing substantially lower than sales and how sustainable that is?

Okay, you have got a pretty eclectic list there, Bill.

I know, I wanted to get them all in.

Yes. On the tissue growth, and some of it is timing of promotions and when they ship. I think overall we had a pretty good promotional calendar. On the other hand we probably underestimated the impact of front of ad circular Olympic stuff and how much lift that would provide to a primary competitor.

So in some cases we had the promotion we just didn't get as much out of it as we thought we were going to get. And that obviously has lapped and we will expect a little stronger performance going into the fourth quarter. And so we feel pretty good about the lineup we have got.

And again, year to date we feel like the tissue business in North America is at or ahead of its plan. So we are comfortable with what we are doing on that front.

The fourth-quarter comps, I essentially would say that to get to the low end of our guidance we only need to deliver one. And so to put that in perspective, I wouldn't say I was predicting that and we will see what it looks like when we post it in January.

As you guys know, I would rather give you guys annual guidance anyway. And this is the one quarter of the year where I have to give you quarterly guidance, otherwise I would just rather talk about where we are going from an annual plan and not manage the business quarter to quarter.

SG&A growth, we are -- maybe, Maria, you want to comment on that. Because we are really trying to make sure we are focused on controlling that element of our P&L that we can control.

Sure. We also have some currency effects when you look on the face of the P&L and SG&A. If you unpack that and look locally, we actually have SG&A increases in some places, particularly in Personal Care where we continue to invest in our capabilities and building that business out in developing and emerging markets.

We also operate in some high inflationary environments. And so again, when you strip the currency, we have increasing SG&A in some places because of inflation. But we balance it out, we continually look at our SG&A spend to make sure that we are directing as much of it toward growth oriented initiatives. And then have extreme rigor on the more discretionary non-growth oriented core SG&A spend.

Okay, that was very helpful. Thank you.

And at this time we have no further questioners in the queue.

All right, well, we appreciate all the questions everyone and we will wrap up with a comment from Tom.

Well once again thank you all for spending some time with us this morning. We hope to deliver a little stronger performance in the fourth quarter and thank you again for your support of Kimberly-Clark.

Thank you very much.

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines and thank you for joining us this morning.