金百利克拉克 (KMB) 2016 Q4 法說會逐字稿

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

We now have your speakers in conference.

(Operator Instructions)

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

Thank you and good morning, everyone.

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

Here with us today are Tom Falk, Chairman and CEO; Mike Shu, Chief Operating Officer; and Maria Henry, CFO.

Here is the agenda for our call.

Maria will begin with a review of our 2016 results, focusing on the full year.

Tom will then provide his perspectives on our results and the outlook for 2017.

We'll finish with Q&A.

As usual, 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 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, which 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.

Now I'll turn it over to Maria.

Thanks, Paul.

Good morning, everyone.

Thanks for joining the call today.

Let me start off with the headlines for our full-year results.

Sales and earnings for the year were consistent with our previous outlook.

We achieved record cost savings and excellent margin improvement, and we generated strong cash flow, improved capital efficiency, and returned cash to shareholders.

Now let's take a look at the details of our results, starting with sales.

Fourth quarter net sales were $4.5 billion, with organic sales growth of 1%.

Full-year net sales of $18.2 billion were down 2%, and included a four point drag from currency rates.

Organic sales growth was about 2% for the full year, in line with the guidance we provided back in October.

On profitability, we had very strong performance in 2016, and we expect to make more progress in 2017.

Our fourth-quarter adjusted gross margin was 37%.

Full-year gross margin was 36.6%, up 70 basis points year on year.

Our adjusted operating margin was 18.9% in the fourth quarter, bringing the full year to 18.4%.

That's up 110 basis points.

Adjusted operating profit for the year rose 4%, right in line with our original target of 2% to 5% growth.

Our teams delivered record fourth cost savings of $435 million for 2016.

That was well above our initial target of at least $350 million coming into the year.

Savings were 3.8% of our cost of sales, up nicely from 3.1% in 2015.

I'm encouraged by the progress our business units and supply chain teams are making on this front, and I continue to believe there is long-term potential in this area.

Our savings target for 2017 is at least $400 million.

In the fourth quarter, we successfully completed our 2014 organization restructuring.

We generated $70 million of savings in 2016, bringing the cumulative benefit to $140 million annually.

I'm pleased that we were able to achieve the high end of our savings commitment one year ahead of plan.

Commodities were a $65 million benefit for the year.

In 2017, we expect commodities to change from a positive to a negative for us.

We're expecting modestly inflationary -- a modestly inflationary environment, and we're planning for cost inflation between $50 million and $200 million.

Currency declines continued to impact our results in 2016.

For the year, the total earnings drag from currency was in the low double digits.

The net impact of changes in currencies, commodities, and net selling prices reduced our earnings by about 10%, just above our original plan of a high single-digit drag.

In total, fourth-quarter adjusted earnings per share were $1.45, bringing the full year to $6.03.

That was up 5% year on year, and in line with our previous outlook of $5.95 to $6.05.

Now turning to cash flow and capital efficiency.

Cash provided by operations was $3.2 billion for the year, up 40% year on year, and somewhat ahead of our plans.

The increase was driven by improved working capital and lower pension contributions.

We expect another year of strong cash generation in 2017; however, it's likely that our cash flow will be down a little bit, given our over-delivery in 2016, and our expectation for higher tax payments this year.

We reduced primary working capital cash conversion cycles by two days in 2016.

That was at the high end of our original improvement target of one to two days.

We're planning for a one-day improvement in 2017.

On adjusted return on invested capital, we improved this metric 120 basis points.

That's well above our long-term target of 20 to 40 basis points.

On capital allocation, in 2016 we returned approximately $2.1 billion to shareholders, through share repurchases and dividends.

That marks the sixth consecutive year that we've returned at least $2 billion to our shareholders.

In 2017, we plan to repurchase $800 million to $1 billion of Kimberly-Clark stock.

In addition, as mentioned in our news release, we're increasing our dividend in 2017 by 5.4%.

This is our 45th consecutive annual increase in the dividend.

Now let's take a look at the segment results for the year.

In personal care, organic sales rose 3%.

That included 5% growth in developing and emerging markets, and 4% volume growth in North America.

Personal care operating margins were healthy, at 20.5%, even with last year.

In consumer tissue, organic sales were even with the prior year.

Consumer tissue operating margins were 18.7%.

That's up 120 basis points, including benefits from cost savings and lower input costs.

In K-C Professional, organic sales were up slightly, with 5% growth in developing and emerging markets.

Lower sales of non-wovens to Halyard Health reduced the segment top line by more than 1%.

We don't expect that drag to repeat in 2017.

Our K-C Professional operating margins were 19.1%.

That was up 80 basis points, with benefits from higher-selling prices and cost savings.

To summarize, our full-year top- and bottom-line results were consistent with our previous outlook.

We delivered record cost savings, improved our margins nicely, and increased ROIC.

We generated strong cash flow, and continued to allocate capital in shareholder-friendly ways.

I'll now turn the call over to Tom.

Thanks, Maria.

Good morning, everyone.

In terms of our full-year 2016 results, I'll focus my comments on organic sales and our market shares and current market conditions.

Then I'll address our outlook for 2017.

Starting with our results, as Maria just mentioned, organic sales were up about 2% for the year.

In developing and emerging markets, we delivered 4% organic sales growth, even though we were impacted by category declines in some markets, and by price competition in China.

Let's take a look at some of our key markets.

In eastern Europe, organic sales in diapers increased by more than 15%.

Results there were led by Huggies in Russia, with double-digit volume growth and one point of market-share improvement.

In China, organic sales in diapers were up low single digits, as strong volume growth was mostly offset by lower selling prices.

Our market share was pretty similar year on year in China.

Looking ahead in the China market, we expect another year of significant volume growth.

Category demand should remain strong, and we have lots of innovation coming on Huggies, including a new super premium diaper pant that we recently launched on Singles Day in November.

Based on market trends in the last half of 2016, we're cautiously optimistic that pricing in China will be less negative in 2017.

Turning now to Brazil, organic sales in personal care were down slightly for the year.

Category volumes fell throughout 2016, and competitive activity on diapers picked up in the second half of the year.

Our market share for the year was down in Brazil one point in diapers, but up two points in feminine care.

We expect that market conditions will remain difficult in Brazil in 2017, particularly in the first half of the year.

In Argentina, volumes in personal care were down high single digits, and that's similar to the overall category.

Conditions were more challenging in the back half of the year, and we're continuing to closely watch the dynamics in this market.

Our adult care and feminine care businesses in developing and emerging markets had very strong organic sales growth, double digits for adult care and high single digits for feminine care.

In developed markets outside of North America, organic sales were even year on year.

Moving now to North America, our consumer businesses achieved 3% volume growth and had excellent operating profit performance for the year.

Overall market shares were stable year on year in a pretty competitive environment overall.

Looking at key categories in North America, in child care volumes were up high single digits, with benefits from category growth and innovation on Pull-Ups training pants.

In baby wipes, volumes increased mid-single digits.

On Huggies diapers, volumes were down low single digits, while market shares were up about 0.5 a share point.

In adult care, volumes rose mid-single digits, aided by category growth and innovation on Poise and Depend.

Lastly in feminine care and in consumer tissue, volumes in both businesses were up low single digits.

Moving to K-C Professional in North America, our organic sales were up 2%, and we think that's a little bit ahead of the market in that space.

Overall, while we experienced challenging category conditions in 2016, particularly in some of the developing and emerging markets, our market shares are broadly healthy and holding up well in this environment.

Now moving beyond sales, I'm very encouraged with our performance on cost savings, margins, cash flow, and return on invested capital.

Results on these metrics were excellent, and we're ahead of plan across the board, and demonstrating the continued strength and great execution by our business teams.

Finally, we grew the bottom line by 5%, and that's in line with our guidance for the year.

Now moving on to our outlook for the coming year.

In 2017, we'll continue to execute our global business plan strategies.

Our teams will invest in innovation, marketing, and targeted growth initiatives to keep our brands strong.

We'll also continue to manage our Company with financial discipline, focusing on cost savings, cash flow, and shareholder-friendly capital allocation.

In terms of our specific guidance, on the top line, we're targeting organic sales growth of approximately 2%.

That's broadly in line with our assumption for overall market growth in 2017.

We're expecting only modest improvement in the overall environment in developing and emerging markets.

While we aren't expecting growth to pick back up significantly in 2017, we are still very optimistic about the long-term possibilities for us in these markets.

Innovation continues to be an important part of our growth plans.

In developing and emerging markets, we've got a number of launches planned in diapers and diaper pants, feminine care, and adult care.

We also have a strong lineup in North America.

Near-term activity includes upgrades on Huggies Snug and Dry diapers, Good Nights youth pants, and Depend underwear.

We expect that organic sales growth will be higher in the second half of 2017 compared to the first half of the year.

That's largely because of tougher comparisons in the first half of the year.

On the bottom line, we're targeting earnings per share of $6.20 to $6.35.

That's up 3% to 5% compared to our adjusted results in 2016.

We plan to achieve solid improvements in both gross and operating margins in 2017, and that's despite an expectation for a mid- to high-single-digit drag on earnings from the combined impact of changes in currencies, commodities, and net selling prices.

Our outlook also includes a meaningful decline in equity income.

That's driven by the weaker Mexican peso, which impacts our earnings for K-C de Mexico.

Recent spot rates for the peso have been down 15% or more compared to the average rate for 2016.

In terms of capital allocation, you should expect us to continue to be shareholder friendly.

We expect to allocate between $2.2 billion and $2.4 billion to dividends and share repurchases in 2017.

That's a higher amount than in 2016, and that's equivalent to 5% to 6% of our current market capitalization.

All in all, we remain focused on continuing to compete effectively in the near term, as we execute our global business plan strategies for long-term success and shareholder value creation.

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

Ladies and gentlemen, at this time the floor is now open for your questions.

(Operator Instructions)

Our first question comes from Wendy Nicholson with Citi Research.

Hi, good morning.

Hi.

Good morning, Wendy.

Good morning.

Could you just talk about the pricing environment?

Your guidance specifically for 2017 looks like it's almost entirely volume-driven.

I'm surprised a little bit, not only with currency head winds but also with your expectation for higher commodity prices and innovation, why you're not expecting more benefit from price mix?

Thanks.

Yes, that's a great one.

I think I would say we're going to have some carry-over price drag in places like China.

We still probably will get some additional positive price in markets like Brazil and Argentina, but net-net we're not counting on a lot of price.

In some of these markets the consumer's been pushed pretty hard.

We just don't see a big opportunity to take price.

Even in markets like the UK, where you had the Brexit phenomenon, we will try to take some small positive price increases, but we're not counting on a lot of that to drive our year in 2017.

I think that while the currency hit isn't as big as it's been in the past, the commodities -- we're assuming that oil is up double digits and secondary fiber's up double digits; but some others like eucalyptus pulp is going to be pretty flat.

We just say the net of that is we're not counting on a lot of price in 2017.

Okay, but your innovation broadly speaking, can we assume that that's for the most part premium price innovation, or is it more just important to get the pricing right for the local consumer?

I think both of those.

We tend to try to innovate on the premium end, and we want all of our innovation to be margin accretive wherever we can.

In markets like Brazil, though, we are making sure we're innovating on the low tier.

When the category's moving down into tier 2, you want to make sure you've got a good performing product and can make competitive claims.

We are trying to make sure we're innovating where the consumer's moving toward.

Got it.

Terrific, thank you very much.

Thanks, Wendy.

Our next question comes from Ali Dibadj with Bernstein.

Hi, guys.

Good morning, Ali.

Hi.

I wanted to interlay two things.

One is the marketing research and general expense being down 70 basis points.

I'm trying to get a better understanding of what the driver of that was, and if any of that was adjustments in Q4 on ad spend, i.e., decline; and linking that to what you're effectively expecting for 2017, which is an acceleration for the past couple quarters of organic sales growth, up to this 2% level sustained for the year.

I get the sequencing you gave in the first half for the back half.

But A, was it advertising spend that went down, and how should we take that as we think about your expectation of acceleration for 2017 on the top line?

Yes.

I guess the way I'd come at that, I'd say the marketing research general did not include advertising in that number.

That would really be the cost of the marketers and any marketing research or other things.

I would say if you just looked at the quarter, there was probably some more timing things, particularly on R&D, where the third quarter was a little heavier than the fourth quarter, which is a little unusual for us.

I'd probably look at the full-year number to be more predictive.

Our advertising spend overall was pretty similar to the prior-year fourth quarter but down a little bit sequentially, so that's not that unusual.

We continue to see shifts out of advertising into digital couponing, and a lot of that cost gets captured between gross and net sales, so you don't really get good visibility of that.

As you think about the top line in 2017, the way I would come at it is that we're calling it roughly 2%.

That's roughly what we did in 2016 on average.

2016 was very front-half loaded, and the back half was fairly light, as you described.

2017 from a comp standpoint, we'll have tougher comps in the front half and easier comps in the back half; but I think we're calling it fairly similar overall to what we saw for the full year in 2016.

Then just the sequential improvement that you're seeing, you're saying is just basically from a comps perspective right?

The zero and the one this past couple quarters getting up to a two, you're saying that really just looks -- the comparisons are easier for the back half, and that's where we're going to make up the slack.

Is that the right way to think about it?

Yes, I think that's the right way to think about it.

Okay.

Then on the commodity piece to it, I guess the $50 million to $200 million of inflation.

Are you basically saying you're not going to be able to recover any of that?

Is that the right way to think about it, because historically you've been able to recover 60%, 70% of commodity inflation.

Is it just a different environment right now competitively, that you just sounds like won't be able to recover any of that given the pricing you're supposing for 2017?

Yes, I wouldn't say any of it, it will be much more market specific.

In places like Brazil and Argentina where there's a lot of local market inflation, not necessarily even big commodity categories, they will be taking price up in those markets.

Will they recover all of it?

I think that's an open question.

You are seeing more competitive activity in some of those markets.

We'll still have some of the carry-over drag from some of the Chinese price reductions that we experienced in 2016 that will be a drag in 2017.

In markets like the UK or even in North America, the level of inflation that we're seeing, we may get some pricing in KCP around secondary fiber, where we've got double-digit price increases in secondary fiber; but I wouldn't expect to get much price in our other broad consumer categories, just because the inflation level isn't that big relative to the size of those businesses.

Okay, thanks very much.

The other thing, Ali, is that we feel pretty good about our cost savings going forward.

Our ability to absorb a little bit of inflation -- these are fairly low inflation numbers relative to what we've seen in the past.

Generating cost savings in the $400-million-plus a year gives us the ability to cover some of that and be competitive in the marketplace.

Okay, thanks.

Thanks.

Our next question comes from Lauren Lieberman with Barclays.

Thanks, good morning.

Hi, Lauren.

Hi.

I wanted to carry on this conversation about pricing versus inflation.

Is it -- is there something specific to your categories and where they fall in the line of consumer needs and willingness to trade down or pull back on usage that's limiting the ability to price in line with local inflation?

If, as you said, the consumer's been pushed pretty hard, particularly in Brazil and increasingly in Argentina, is what's triggering the share losses -- even though they're modest -- is it trade-down that you're really seeing in the market place, or is it another similarly-priced competitor that's winning currently?

Is there an all of the above answer I can choose, Lauren, on that one?

(laughter) No.

I think it is a little bit of all of those.

I think there is -- as growth rates in a lot of our categories have slowed, we said we're expecting category growth rates of roughly 2%.

We would have said several years ago 3% to 4% was probably more what we were trending.

Those rates have come down.

There's still lots of competition, including local competitors who are aggressively pursuing business.

We're trying to make sure we got the right innovation, we got the right price point, we're executing well in market.

That probably makes it a little tougher in this environment to get price increases.

In a market like Brazil where the category is going backwards 3% to 4% in volume, and you're taking list price up, you can generate some short-term category value increases, but that's -- you don't want it to be a race to zero, either.

Yes, understood, okay.

You'd also mentioned in the release lower category demand in diapers in the US.

Can you talk a little bit about that?

Is it a birth rate conversation that's driving that?

There's been a pretty big category shift in the last year where training pant category growth is up strong double digits, and diaper category growth is down a little bit.

In fact, since I got Mike Shu here on his first call -- Mike runs our North American business.

Why don't you weigh in on that one, Mike, and give them a little color on that?

Yes, I think our baby and child care team across both child care and infant doing a great job, but I do think we see a category shift to training pants.

I think in some ways, Lauren, we see that as probably some positive green shoots on the economy, because training pants tend to sell at a premium to diapers on a like-for-like sizing.

The consumers, when they have confidence in the economy tend to trade up.

The converse happens when the economy is bad.

I think there has been some shift.

The other thing is, though, we've made some significant improvements starting in 2015 on product quality.

Pull-Ups gives you the performance of a diaper but the benefits of training.

We made a major improvement in 2015.

We saw double-digit consumption growth in 2015, and that's carried through to 2016.

Double-digit consumption and probably high single digit on shipments.

I think there's been a lot of activity there.

In terms of the commercial programming, I think we've been talking to moms about the benefits of training and when to start training, and I think that's having an effect in the category.

The other factor is our primary competitors also re-entered or refreshed their product in the category and made a lot of promotion activity, which is probably drawing consumers in the category.

There's been a shift from diapers, but the overall mega-category if you say all outlet across non-measured and measured channels and diapers and child care, is overall flat.

We were up 2%, 1.5% or something like that last year.

Yes.

Okay, that's really helpful.

The last thing --

Is that helpful?

Amazingly.

The last thing -- I'm sorry-- was just the Nielsen data.

There's been this disconnect we're seeing across companies and categories.

If you can comment at all about, in your categories, what you think the shift to un-track channels was driving, in terms of growth versus what we're seeing in Nielsen?

Yes, Lauren, it's probably playing out the biggest in diapers, and because of a couple factors.

The non-measured, the online channels are growing at a rapid rate, and you can't see some of the customers that are in there.

Also, some of the changes in terms of who's reporting with whom, between Nielsen and IRI, is also going to start affecting us as well.

It's a bit of a challenge right now, and we're working through some of those issues, too.

Okay.

All right, I'll pass it on, thank you so much.

Thanks, Lauren.

Our next question comes from Jason English with Goldman Sachs.

Hi, Jason.

Good morning, folks.

Thank you for letting me ask a question.

Like the others, I've got two questions.

First at a high level, Tom, you're guiding for your second year of under-delivery versus your historical 3% to 5% aspiration.

You mentioned category growth overall is obviously a key contributor with it just being a slower end-market environment out there.

How are you thinking about the forward?

Is there a path back to that 3% to 5%?

Is 2%, maybe 2% to 3% a new reality for at least the foreseeable future?

If there is a path that's going to drive us higher, what are some of the key variables that you think we should be looking at to gauge whether or not we can get traction on that?

Yes, that's a key question, Jason.

Obviously I'd say Latin America economic recovery would be a key driver.

If you look at Brazil-Argentina, they've taken a pretty big shock, but Brazil in particular from lower oil prices.

As those come back, we've got pretty big businesses down there.

That could cure a lot of top-line growth issues.

On the other hand, as you look at places like Russia, China, still very strong category volume growth.

We still see big penetration opportunities in lots of markets around the world.

I think that's why we would still say long term there's huge opportunity here for us.

In the short term, we're at a little slower spot in the GDP growth per capita range that is going to make the categories grow at a little slower rate.

Makes sense, thanks.

Next question is on EBIT math.

I really appreciate all the inputs you give us in terms of the guidance assumptions into next year.

I also obviously appreciate the bridges you give in the Qs in terms of what's driving EBIT growth.

We can use all these variables to build it up and see what the theoretical earnings potential is for next year, but one wild card that we don't have good visibility to is that Other line that you roll through in the 10-Q.

I know there's a lot in there, but it's been a material source of leakage the last couple of years, north of $400 million every year of operating profits that are leaking out the Other line.

Can you give us some color on what are some of the key inputs to that, and how we should be thinking about that catch-all Other as we go into this year?

Yes, well we call it other, Jason, because it is just a big unknown.

But no, seriously, I'll have Maria give you a little bit of color, but there's a lot of local inflation in there.

We would also have other product improvement costs would be in there, so if we're upgrading and adding functionality to a product, we would put that into that line.

Any start-up costs for new capital equipment around the world would go into that line.

I don't know, Maria, if there's anything else you would add to that or build on that?

Yes, I think that's right.

Definitely has a currency component to it, as well as the inflation component to it, is what drives that.

And thoughts on what that could look like as we go through 2017?

I would say that line tends to be pretty similar year to year, but I don't know Paul, if you've got any -- we've never tried to forecast Other, so.

Typically, as you'd expect with all companies, we're going to have general inflation in our P&L, and we break out the commodity component of that inflation, but wage increases, things of that nature.

Benefit costs.

Benefit costs.

Those are going to be, I would say, modestly increasing year to year.

Pretty similar year to year, yes.

All right.

Thanks a lot, guys.

I'll pass it on.

Thanks, Jason.

Our next question comes from Caroline Levy with CLSA.

Hi, good morning, Caroline.

Thank you.

Hi, good morning.

Just a follow-on on that inflation question, wage and benefit inflation.

Are you saying then that that's your head office that gets put in the Other, or is it allocated -- or is there any allocation to each division?

Well, each country team would have their own wage and benefit program.

As we break out the analysis of change and share that with you, we capture those cost increases in the Other bucket.

I think that's the nature of the question that was asked.

We try to run a very efficient corporate overhead team, and Maria overseas the corporate G&A budget.

They're planning for fairly flat.

I don't know if you want to comment on how you're approaching that going into 2017?

Yes, on the corporate side, we've pretty aggressive management of those expenses.

I think you saw a decrease year over year 2016 to 2015 when you look at the segment reporting that we have on the corporate expenses.

We'll remain diligent on that, and I think we benchmark well in that area.

Trust me, if we were sending our operating unit teams bigger bills from corporate we would hear about it.

Got it, okay.

My other question is understanding what's going on in the China diaper market, please.

My understanding is there's about a 30% share now held by locals.

It's a bit confusing that in something with technology, I would imagine, is very important that hundreds of local players have been able to take so much share.

If you could just tell us a little bit more about what's going on with pricing, where -- what's growing, what isn't, and how you see us coming out of this?

Yes, that local share seems very high to me.

I mean, they're -- you've got essentially four big global diaper players, with P&G as still the share leader, where their share is high teens.

Our share would be high teens.

[Kyle] would be similar, and Unicharm I think is about a 10 share.

Then [Hangon], which is the local player, is about a five share.

I think it may depend on which data set you're looking at there, because there's a substantial portion of the Chinese market is in e-commerce.

Another good chunk is in baby superstores.

Then there's relatively smaller segment than you might see in other markets that are in traditional retail.

If you looked at a Nielsen traditional retail number, you could probably get a high share for a local player, but that's covering a very small part of the market.

Got it.

I actually got those numbers from a competitor, but it does seem clear that competition is extremely high and pricing has weakened.

What do you think marks a turning point in that, in pricing?

Well, I think the pricing is down double digits for the year.

A lot of that happened in the -- it started really in late 2015, but rolled through early 2016.

Our expectation is going into 2017 that pricing is not going to get better in the short term.

We do see good category volume growth, see a strong birth rate -- high single-digit, maybe even low double-digit increase in births in China, good category participation rate.

There aren't many markets in the world that are growing that fast.

It's not surprising that there's a lot of competition there.

The thing our team has done a fantastic job of is improving the product and reducing our costs so that our margins overall in China are still quite attractive.

That's great.

Thank you very much.

Thank you, Caroline.

Our next question comes from [Steven Papps] with UVA.

Hi.

First, good morning.

Tom, on the composition of growth next year, maybe looking at it by segment, are you anticipating a similar mix in terms of the growth between personal care, tissue, and professional, or are you seeing an acceleration in tissue and professional, and then perhaps offset by some level of decel in personal care?

Personal care should still be the fastest-growing segment, I would say overall.

KCP had about a one-point drag this year on their segment organic growth due to lower sales to Halyard on some of our internal non-wovens.

That was expected as that supply agreement wound down.

We won't have that negative comp holding them back in 2017, so KCP could be a bit higher.

Consumer tissue I'd say overall will be pretty similar.

Okay, thanks.

Then Maria, if we turn to FORCE, I know there are a ton of moving parts in how you run that program from the bottom up, but is there any way you can call out any kind of bucket of cost in particular, in terms of where you saw up side in FY16, just looking back over the year, and then more importantly, where you expect the most incremental improvement to come in 2017?

The momentum both based on what you achieved in 2016 and what you're indicating now for 2017 is well ahead of where I think you would have put it a year ago at this time.

I'm just trying to understand better where you're seeing that momentum sourced from?

Thanks.

Sure.

The FORCE cost savings come in three main areas, and that was consistent in 2016, as it has been.

Those, as a reminder, are savings that we derive from negotiating with our vendors, so on lower material prices, improving our productivity and waste across our facilities through lean manufacturing processes, and driving out waste everywhere.

The third area is optimizing the cost of our product specifications, and in particular looking for what are things that don't matter to the consumer that we can optimize, or how do we engineer our products with more effective materials to lower the overall cost of the product.

Those were the three areas for 2016 that drove our FORCE cost savings.

What I will say, though, is because we did over-deliver our expectations, that our teams were incredibly focused on driving savings as we continue to fight it out in a very tough macroeconomic environment.

Some of the areas where we over-delivered include in our international markets and also in some of our manufacturing and distributions operations.

Those were ahead of our expectations in 2016.

The other thing I would add to that is Maria and our new supply chain leader Sandra MacQuillen have done a great job of driving inventory down.

As we have held less inventory, you get lots of other distribution and logistic savings.

That's probably another area that we've done better at.

I think there's more to come there.

Yes, I would agree with that.

I think that really helped us on the cash flow side.

We took two days off of our CCC.

That was at the high end of our expectations.

A lot of that improvement was driven by inventory, which I'm particularly pleased with.

The teams are very focused on that area.

Not only global supply chain, but the local teams are really doing a great job in working capital.

Okay, thank you very much.

Thanks.

Our next question comes from Bill Schmitz with Deutsche Bank.

Hi, Tom.

Good morning.

Good morning, Bill.

A couple things.

The first is do you guys think you have enough pant capacity?

It seems like all of the growth in the category over the next 10 years is going to come in the pant category.

Have you thought about the capital requirements there, and whether you'd explore modular diaper lines to make taped and pant diapers in the same line?

Yes, I'd say the simple answer to your question is yes, we do believe we have enough pant capacity.

We've been -- that's pretty much -- we've been adding pant capacity in every major market in the world.

We've got new assets in China, Brazil, Russia, Czech Republic, even Central America.

Our team in Mexico has also added capacity.

We do feel pretty good about that.

Not to get too technical, but the great change between a diaper and a pant would be time consuming enough that you probably wouldn't want to do it very often, so it's better to have dedicated assets.

Okay.

All right, that's helpful.

Then what do you think the end game is for all the competitors, with all the price and activity we've seen in some of these markets?

Is it mostly distribution-specific?

Are you seeing super-intense activity in the e-commerce side in China, and maybe less activity in the traditional stores?

Any deeper color on what you think the rationale is for doing this?

It seems like it's just shrinking the category growth globally.

I'm trying to figure out what you think the end game is for yourselves and others?

I think the end game for us is deliver winning products, build market share, and sustain your business over time.

It's tried and true techniques.

In China, we invested a ton in 2016 in our newborn program, to make sure that we were capturing new moms and carrying them through.

We're doing a lot of hospital sampling in many markets around the world to make sure that mom goes home from the hospital with the right products.

It's all the basics.

As we deconstruct some of the P&Ls, or attempt to, of our key competition, I think these are still attractive businesses even at reduced prices.

We've been good at getting the cost out to help protect our margin structure.

We want the diaper to work better and cost less.

If we can continue to deliver on that, that makes it tougher for anybody to compete with us.

I don't know if that addresses it specifically.

There's another part to your question, Bill.

I don't know if I answered that or not.

No, that's perfect.

The other part was do you see more aggressive activity in different parts of the distribution network by channel?

I think the point I would make there is that e-commerce is making pricing more transparent everywhere.

There's more -- retailers used to comp each others' promoted prices.

Now, e-commerce, you can go comp three websites quick and easy and there's apps that will do it for you.

I think that's probably driving more of an EVLP-type environment, recognizing there's still room for some promotion.

I don't know, Mike, if you've got a view of that, of what you see in North America?

Yes, certainly in North America, I think e-commerce is having an effect.

I think it's both the transparency, it's also maybe the game theoretic of impact, which is some of our customers feel like they can promote their products and their service offering more aggressively by promoting certain product lines more aggressively.

I think that has a -- as you may call it -- a deflationary effect across the category sometimes.

In some ways you could argue it's not healthy for the category.

In other ways, it can bring new users into the category.

Our job is we're trying to serve our customers across the board, and we need to make products that serve their needs and the economics can work for us.

That's how we're approaching it.

Okay, great.

Then one last quick follow-up.

Is there anything funky?

I know you said there was a shift in spending on the R&D side in the SG&A line or with M&A or whatever in the fourth quarter.

Was there anything like incentive comp reversals, or things like that, that you lap next year?

No, nothing really unusual that stood out.

We were probably tightly controlling spend, as you would hope we are always doing, but I would say there was no unusual item that rolled through there.

Okay, great.

Thanks so much.

Thanks, Bill.

Our next question comes from Nik Modi with RBC Capital Markets.

Hi, good morning, everyone.

Two quick questions.

Tom, if you could give us your assessment of the global consumer?

I'm putting the category dynamics aside with competition.

We're hearing from a lot of global companies right now.

It seems like the message is that the emerging markets are starting to stabilize.

I'm just curious on what you're seeing in some of the big markets.

Then the second question is, and I know this is out of left field, but are you guys working on anything as it relates to robotics and automation -- not just in the supply chain and manufacturing, but more back-office type stuff?

Thanks.

That is a left field question, Nik.

I think that would be the first time I've had that one.

But let me answer the first question.

The global consumer I would say probably a bit of a mixed bag.

If you're in an economy that had oil as a large part of your economy, you're feeling still some pressure.

You saw negative GDP in Russia.

Nigeria is certainly under pressure, very slow or negative GDP per capita growth there.

Some of the challenges in Brazil have been there, as well.

If you're an oil-consuming nation, you've got a big windfall in 2016 and saw pretty good GDP per capita growth, generally, or improving.

I would say if you looked at a market like China, the underlying category demand growth, the birth rate, those are all really positive signals.

Despite a little bit of a slow-down in their overall GDP growth, you still saw really good growth in GDP per capita, and more consumers coming in reach of our products entering the category, and starting families, et cetera.

You'd see some similar things.

Vietnam is a very good market for us, as well.

You saw -- actually saw very -- we had a terrific year in Korea.

Despite a fairly flattish economy, our Korean business did pretty well.

I'd say the UK, with Brexit, our KCP business in particular saw a little weaker year than we were expecting there.

I think you saw some distributors not wanting to hold inventory, not certain necessarily what was happening next.

That seemed like that calmed down a bit at the end of the year.

It feels like maybe the UK is more stable at the moment, and we'll see what the next step is in Brexit for them.

I don't know, Marie, if you want to add anything to that?

No I'll take the next one though.

Okay, go ahead.

You're going to do robotics and automation?

Yes, robotics and machine learning and back office.

Yes, we have a global business services initiative at Kimberly-Clark.

We've got shared services centers around the globe where we look to consolidate and optimize transaction services, and more routine types of back-office work.

Robotics automation can be applied in those areas, so we are working with our vendors staying on top of the technology and understanding what is that opportunity for us.

But clearly it's part of our global business services initiatives, where we're looking at robotics, automation, machine learning, and how we might be able to change the game on that in the future.

Maybe just to build on that, Nik, the way to think about it is if you could think about the perfect order or the perfect payables transaction or the quantity, the price, the delivery terms, everything lined up perfectly with the purchase order, where it could sail right through your system and get paid without any human involvement, that would be the gold standard.

I'd say too often, some of those things don't work out and you need human beings to fix and adjust and correct all those minor errors that happen.

If you think about a customer transaction, if we could take the customer's order, get the price exactly right, the quantity shipped on the date they wanted it with the correct terms so it flies right through our system and their system without any additional intervention, that's a big opportunity.

It takes friction out of everyone's transaction costs, but we've still got a long way to go to get to that.

Great.

Thanks so much for the perspective.

Thanks.

Our next question comes from Erin Lash with Morningstar.

Thank you for taking the question.

You're welcome.

I was hoping we could talk a little bit about usage, particularly in for diapers in developing and emerging markets.

Obviously with the economic environments being challenging, particularly in Brazil, whether that you've seen usage continue to come down, or whether some of the price competition that you're seeing is actually negating a decline in any -- preventing, I guess, a decline in usage?

Yes, that's a -- Erin, it's a mixed bag.

If you looked at Russia, which has had a pretty good economic shock, we still saw a very strong category growth.

Our Huggies business was up double digits in volume, and we had higher selling prices, launched a lot of innovation, saw responsive consumer to that.

Brazil, on the other hand, you've tended to see category volume declines in the low single digits, 3% to 4% over the last couple of quarters.

That would say the consumer is either reducing their household inventory or reducing their usage in some cases, or shifting from five or six diapers a day to three or four diapers a day.

That could account for that, if a sub-set of the consumer base is doing that.

Argentina has probably been the biggest shock.

They've had a pretty big economic transformation under way there to move some of their utility costs to more of a market rate, and that's having a big impact on household budgets.

You're seeing lots of categories declining in that market.

I think it will take some time to really tell how that's going to shake out, but we saw in the third and fourth quarter in Argentina double-digit declines in category diaper volume, which is pretty unusual.

You don't see that every day.

That's very helpful, thank you.

Then just with regards to the growth that you're seeing in the training pant category in the US, that's been entirely driven by the average-age toddler or child, as opposed to a shift or any consumer interest in moving down, similar to the emerging markets where the diaper training pant has been picking up steam, and is preferred for even newborn consumers, correct?

Yes, I think that's true.

I don't know, Mike, if you want to comment on diaper pants, broadly?

I think we're still digging through the data on that, but I do think part of it is I would say yes, right now, it's about average.

I think our training pant business leaders would say hey, we think mom should be starting earlier.

There's a strategy on their part to say hey, we want children to start training earlier, and we want them to stay more consistent in the training pant.

That's a long term strategy for the Pull-Ups brand manager.

Then for the Huggies, they want them to stay in Huggies.

I think our job again, here, is we want to serve the consumer in how they want to be served, and given the choices, and provide the best products so they can make the choice.

Then to your point in the US market, we're not offering training pants that go down to newborn sizes, whereas in some of the emerging markets you do find diaper pants in smaller sizes, although usually not newborn, but usually in size one, two.

You find some, but those are still a pretty small part of those categories.

Training tends to start around 18 to 24 months.

Even diaper pant usage in emerging markets tends to start when babies are a little bit more active, crawling stage.

Thank you, that's very helpful.

Thanks.

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

Great, thank you.

Hi, Olivia.

Hi, how are you?

Pretty good.

Good.

Obviously with the comps that you have in 2016, you're looking for organic sales growth through more second-half weighted.

Can you talk about the phasing of some of the innovation that you discussed in your prepared remarks?

Are there some quarters that will benefit more than others?

Then on price mix, obviously you said flat to up slightly, but you're not looking much from price, as we already discussed, so it sounds like obviously more is coming from mix.

What's that based on?

Do you expect the environment to improve as the year progresses and consumers mixing up, or is there something else more to that?

Thank you.

Yes, I'd say there could be a couple of mix factors.

As I said earlier, in China we invested a lot in newborn in 2016.

As those babies move up into the more mainstream diapers, we expect to see a little bit of more positive mix.

Newborn hurts our mix, just because there's more diapers in a bag, and you sell the bag for the same price -- although you'd argue that builds your franchise, so you definitely want to have a leadership share there.

But we were probably a little overweight newborn in China, and that will have an effect on us going forward.

I'd say broadly, we're not expecting a lot from price or mix in 2017.

I think they will both be slightly positive, but it's not going to be the story driving our growth.

It's going to be core volume.

Got it, and then the cadence on innovation?

Cadence on innovation, obviously it's going to vary by market.

Typically, we've got quite a bit of stuff going on in North America.

Mike, I don't know if you want to comment on some of the things going on in Depend and Pull-Ups without revealing any -- too much competitive launch data?

Yes, I think the teams there, particularly in adult care, we're still focused on driving category penetration, which is still a big opportunity for us.

The business is forming well, up mid-to-high single digits.

I think the innovation is coming.

We're really focused on adding value into the category.

Some of the things -- in Poise it's been thin-shaped, and Depend in 2016, Night Defense, which has been a very successful item.

Then coming in 2017, new and improved super premium briefs on Depend, both Real Fit and Silhouette.

Again, super premium, softer, more absorbent, better performing.

Then in China we launched a new super premium diaper pant in November, and so that will really just start to get traction as we roll into 2017.

Great, thank you so much.

Thank you.

Our next question comes from Bonnie Herzog with Wells Fargo.

I just have a question on your personal care business in North America.

Could you talk a little bit more on the competitive environment and promotional activity, which appears to remain pretty elevated across many of your categories?

Can you give us a sense of how you're thinking about the environment going forward, and what's really factored into your FY17 guide?

Bonnie, I think the environment is elevated.

I think we saw an elevation occur in the third quarter, and you can probably see that through in our results back then.

I think we improved in the fourth quarter.

I think the teams responded well to the kind of change in environment, and ramped up their intensity in terms of both securing the right merchandising activity and the right marketing activity.

I think our call is that it's going to remain this way for a while.

That's what we're assuming for 2017.

I think our teams are prepared for the right innovation, both in diapers, child care, adult care, and gun care.

We're excited about our plans for 2017.

Then regarding your innovation pipeline, would you characterize in general your pipeline as more full versus last year across your categories?

Just trying to get a sense of where you're at with innovation going forward?

Yes, I'd probably say comparable, but we've got some pretty good items in there.

I think we're not ready to disclose what they are yet, Paul, but I think we feel good about it.

I'd say, Bonnie, we're pleased, but never satisfied on that front.

Okay, and then just one final question for me.

Can you give us a sense as to how your higher-margin wiper business within K-C Professional is trending recently?

I think it's been a few quarters since you guys called this out, so trying to get a sense if you're still seeing strong growth there or are things maybe moderated?

Thanks.

Yes, I would say wipers was a little -- was flattish in the quarter and for the year.

We saw a little bit more growth in our core washroom business, and we've driven a lot of our innovation and commercial programming around the washroom and probably refreshed that business a little bit.

We still see an opportunity with wipers, particularly in some of the heavy manufacturing areas, things like aeronautics and so forth, where we do a fair amount of work.

As those pick up, we should see some opportunities to drive more wiper business.

Okay, thank you.

Thank you.

Our next question comes from Ali Dibadj with Bernstein.

Hi, Ali.

Hi, thanks for the follow-up.

I was just reflecting on the whole conversation this time and last quarter and everything.

We're all taking as a granted that there's much more competition out there, but we don't talk a lot about why.

I'm trying to get a sense of why from your perspective there is a lot more competition.

Clearly local players, clearly P&G is stepping it up, but how would you characterize it?

Long-term concerns might be things like there are just lower barriers to entry so it's tougher to differentiate; competitors are cutting more costs, so they are willing to spend more back.

Maybe it's just that the macro environment is tougher, and so people are more intrigued about share gains than anything else.

I'm trying to get your sense of that.

You're going to say look, this is a great category; it's always been competitive.

But it's clearly more competitive now than it has been before.

I'm trying to get a sense of your belief and the drivers of that, to get a better sense of is it going to get worse, is it going to get better, or is it going to be the same?

Does that question make sense?

Yes.

No, I think that's fair.

I guess the way I would think about it would be number one, as economic growth globally has slowed down, and some of the markets we talked about, there's just less growth around, and just as many people chasing it.

That inherently will make that just a bit more competitive.

If you were growing 3% to 4% and now you're growing 2%, and then you've got the same number of competitors, it just makes the same number of people fighting over pieces of a smaller pie, or smaller growth opportunity.

That's probably one.

I also think you're seeing more competitors expanding into more markets.

As CMPC has moved out of Chile and is now operating in Brazil and moving into Peru and they are operating in Mexico, that's new geography for them, and they're obviously trying to get traction and launch.

We've seen Unicharm launch in Brazil.

Haven't built a big share position there yet, but that increases the competitive set.

SCA's done acquisitions and increased their footprint globally in lots of places.

Maybe it used to be us and our primary global competitor in a market; now you've got usually one or two other global players that are around.

This makes it so you got to be sharp on innovation, you got to be sharp on cost, and you got to be great on execution.

We're up for that challenge, but there's other players in the neighborhood.

This is really helpful.

Does that concern you, given that it feels like those things aren't going away for your 3% to 5% organic sales growth target longer term?

I'd assume people aren't going to now retrench and go away, unless you believe the underlying market gets better and so people are more lax?

Does that concern you, all these things you just described -- more competition in the same markets?

Theoretically, you would expect it to put pressure on your 3% to 5% organic sales growth in the long term.

Is that right?

Is that a fair concern, or no?

I would say this.

I think the -- if you think about all the weighting of those factors, the slower economic growth is the one that's probably that you can't do anything about, but that's probably the bigger challenge.

If the economies are growing better, there's more growth to feed more mouths in the category in particular places.

The fact that we've got more competition in more places, at the end of the day we've got to deliver a winning product solution at an attractive cost, and execute it well in the market; so does everybody else.

I'm absolutely up for that challenge.

Okay, thanks very much for that.

Thanks, Ali.

Our next question comes from John Feeney with Consumer Edge Research.

Thanks very much, guys.

I wanted to follow up on Ali's question, actually, about could you compare -- within everything you just discussed, could you compare and contrast the dynamics in Brazil and Argentina, specifically, with maybe what went on with the entry into China?

What's different from a macro standpoint?

Are there any learnings from the China experience, what you're going through, versus how you're going to handle it -- maybe what the next couple years will hold as maybe the structure or competition in Brazil and Argentina change?

Does it evolve in the same way China has evolved right now?

Maybe what have you learned from the development of that super premium segment in China?

Thank you.

Yes, they are pretty different markets, I would say.

China is an explosive growth opportunity, where more and more people as their GDP per capita improves are entering the category.

With a billion-plus people in the country, that is a near limitless supply of consumers that could eventually come into our category.

I'd say if you contrast it to Brazil, you probably had higher category penetration rates to start with, and less GDP per capita growth.

Lately it's been negative GDP per capita trends.

I'd just say it's a different starting point and different economic.

One's got a great tail wind, and one's got a head wind that you're running against.

We have launched diaper pants in Brazil; have seen pretty good conversion.

We launched things like in adult care and our Depend Plentitude, which is our brand in that part of the world.

We've been pretty successful at transitioning the category from a lower-cost briefs which is more like an adult diaper to a higher-cost pant, similar to what we would sell in the US, just because it's a much better solution and delivers terrific value, even though that is an income-challenged consumer.

You do still see responsiveness, but you don't have the explosive growth of GDP per capita and more people entering the category that you probably have in China.

Thank you very much.

Thanks, John.

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

All right, we appreciate all the questions today.

We'll wrap up with a comment from Tom.

Well, once again, we had a good year in 2016.

We've laid out our aggressive plan for our global business plan strategies in 2017, 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.