金百利克拉克 (KMB) 2017 Q1 法說會逐字稿

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

We now have your presenters in conference.

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

Thank you, and good morning, everyone.

Welcome to Kimberly-Clark's First Quarter Earnings Conference Call.

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

Here's the agenda for our call.

Maria will begin with a review of first quarter results.

Tom will then provide his perspective in our results and the outlook for the full year.

We'll 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 today.

Please see the Risk Factors section of our latest annual report on Form 10-K for further information.

Lastly, we'll be comparing our 2017 results to 2016 adjusted results, which exclude certain items described in this morning's news release.

The release has further information about these adjustments.

And now I'll turn it over to Maria.

Thanks, Paul.

Good morning, everyone.

Thanks for joining our call today.

Let me start with the headlines for the quarter.

Total sales were even year-on-year with organic sales down 1%.

We achieved strong cost savings, which helped us improve our margins and grow earnings per share.

And we're on track with our overall capital plan.

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

Our first quarter net sales were $4.5 billion, that's even year-on-year with a 1-point benefit from currency rate.

Organic sales fell 1% in the quarter, and Tom will provide more color on our top line results in just a few minutes.

On profitability, growth and operating margins were each up 30 basis points year-on-year.

First quarter gross margin was 36.9%, and operating margin was 18.6%.

The margin improvements included good progress in developing and emerging markets.

Our FORCE cost savings for the quarter were $110 million, so we're off to a good start relative to our full year savings target of at least $400 million.

Commodities were a $35 million drag that was mostly offset by currency benefit.

On the bottom line, first quarter earnings per share were $1.57, up 3% year-on-year.

Lower equity income reduced earnings by $0.02 per share offset by a lower effective tax rate.

Now let's take a look at cash flow.

Cash provided by operations in the first quarter was $436 million and in line with our expectations.

Cash flow was down compared to $553 million in the year-ago quarter driven by higher tax payments this year.

On capital allocation, first quarter dividend payments and share repurchases totaled more than $600 million.

That includes $300 million of share repurchases.

We continue to expect that for the full year, dividends and share repurchases will total between $2.2 billion and $2.4 billion.

Looking at the segment, in personal care, organic sales were even year-on-year.

Organic sales increased 6% in developing and emerging markets but were down elsewhere.

Overall personal care operating margins were 21.4%, up 110 basis points.

The improvement was driven by cost savings, higher volumes and favorable currency.

In consumer tissue, organic sales were down 3% driven by North America.

Consumer tissue operating margins were strong at 18.9%; that's up 20 basis points.

In K-C Professional, organic sales in the quarter were even with prior year.

K-C Professional operating margins were 19%, down 70 basis points.

The comparison was impacted by cost inflation and strong results last year.

So let me recap.

We achieved significant cost savings and improved our margins.

We delivered bottom line growth in a challenging environment, and we continue to allocate capital in shareholder-friendly ways.

I'll now turn the call over to Tom.

Thank you, Maria, and good morning, everyone.

Since Maria covered the financial details for the quarter, I'll focus my comments on our organic sales in the quarter and then on our full year outlook.

As Maria just mentioned, organic sales were down 1% in the quarter, so in January, we said that growth would be higher in the second half of the year compared to the first half largely due to comparisons.

That said, our first quarter organic sales were somewhat below my expectations, most of that coming from North America.

In North America, our organic sales fell 3% in our consumer businesses, and that reflects a combination of category softness, greater competitive activity and slower promotional shipments.

Overall category growth across all channels, including e-commerce, was about 0.5% in the quarter, and that's about a 1.5% below what it was for the full year 2016.

In terms of our key businesses in North America.

Our personal care volumes were off by 1%.

In infant and child care, our volumes overall were down low single digits, which is broadly in line with the mega category.

Category consumption continues to shift out of diapers and into training pants.

And volume growth in e-commerce is continuing to accelerate.

Our market share overall was even year-on-year and up 1 point sequentially in infant and child care.

In consumer tissue, our volumes were down 7%, mostly in bathroom tissue.

Results were impacted by competitive activity and lower promotional shipments in the last year.

We got a stronger promotional calendar scheduled for the balance of the year.

We expect better performance going forward in North America, particularly the back half of the year when our comparisons get a little easier.

Our planned product innovations will also help drive our growth.

In the near term, that includes the introduction of U by Kotex fitness in our feminine care business, improvements to Huggies diapers and baby wipes and some new Kleenex facial tissue offerings.

In addition, we're placing even more focus on the execution of our sales and retail merchandising strategies with stronger programming going forward.

In terms of the category overall, trends were a little bit better in the last part of the first quarter, so we're cautiously optimistic that market growth will get back to more normal levels over time.

Moving onto developing and emerging markets.

We delivered 4% organic sales growth in this part of our business, and performance and category conditions were broadly in line with our expectations from January.

Looking at some of our key markets.

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

While the promotion environment remains competitive, we're optimistic that pricing won't be as negative in 2017 as it was in 2016.

We also have several innovations on Huggies launching in the second quarter.

In Brazil, our organic sales in Personal Care were up high single digits compared to a decline of 5% in the year-ago period.

Category demand remains down in Brazil, and our team there continues to innovate in its product improvements in market on diapers and feminine care.

In Argentina, our organic sales in personal care were up low double digits driven by higher selling prices.

We relaunched Huggies diapers late in the quarter, and that helped us deliver modest volume growth despite category volumes being down double digits.

At Eastern Europe, organic sales in diapers were similar year-on-year.

Volumes were up double digits again this quarter, with continued benefits from innovations in Russia.

Selling prices were down, reflecting price rollbacks last year following the strengthening of the Russian ruble.

Lastly, in developed markets outside of North America, organic sales were down 2%, mostly in South Korea.

We expect results there to pick up as the year progresses including benefits from innovation launches.

Now moving onto our outlook and our specific targets for the year.

We expect sales to increase 1% to 2% in 2017, the currency impact on sales should be neutral overall, which is about 2 points better than what we expected in January.

Regarding organic sales, we also expect growth of 1% to 2%, and that compares to our original estimate of approximately 2% and reflects our first quarter results, the category conditions in North America and slightly lower-price realization due to improve currencies.

Regarding earnings, while the currency outlook has improved, our cost inflation estimate has increased by $75 million on average compared to our assumptions in January.

In total though, we're still planning that the net impact of changes in currencies, commodities and selling prices will be a mid- to high single-digit drag on our bottom line.

That's consistent with our original plan for the year although at a different mix of these factors.

All together, we continued to target earnings per share of $6.20 to $6.35 for 2017, and that's up 3% to 5% year-on-year.

So in summary, we're investing in our brands and growth initiatives to help us grow and compete effectively.

We're managing our company with financial discipline, and we continue to be optimistic about our opportunities to create long-term shareholder value.

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

(Operator Instructions) Our first question comes from Lauren Lieberman with Barclays.

I just had a couple of questions, not surprisingly, on North America personal care.

So first is just, overall, from a category perspective, does it feel to you like there's been some sort of tipping point in terms of where consumers are shopping these categories?

Meaning the Nielsen tracked versus untracked, because the data obviously looks -- from a category perspective looked far worse than what you've said in terms of what you guys are seeing on category growth.

And it looks like it's been dramatically different since the start of this year versus end of '16?

So just that was my first question.

I'll let Mike Hsu give you a little bit more color on that, but we've certainly seen a pretty strong uptick in e-commerce, and that's a trend that's happening in lots of places, but it did seem to accelerate in the U.S. in the last couple of quarters.

But...

Yes, Lauren, I do think maybe a shift upwards in e-commerce sales and other channels that are not scanned by Nielsen.

I think if you look at the diaper category specifically in Nielsen xAOC, you probably would have seen a high single-digit decline in volume, but across all outlet, that was probably down about low single digits across all outlets.

And so you are saying maybe an increasing shift to e-commerce.

I will say, there's probably a lot written about this topic, but our relationships across all channels are strong.

We -- our strategy is not to advantage or pick winners in this -- across retailers, and so we do fund customers on the same program across all channels, and then we tailor our execution support to support our customer-specific strategies.

Okay, okay.

And then the -- also the data that Tom cited on category performance and actually market share performance for the infant and child care business.

This sort of -- this wasn't mentioned.

It feels like then perhaps adult and femcare is where the sort of more material under performance versus the categories were.

So if you could just talk about that and the outlook on those businesses, it would be great?

Yes, go ahead, Mike.

Yes, in adult care, I think I'd say, our volumes overall year-on-year, about similar versus a year ago, and our comparisons were actually, probably impacted by the base period.

A year ago, we had strong double-digit growth.

We are affected a little bit, I would say, by a strong competitive activity in the category.

Price promotion remains elevated in adult care.

Our market share is strong at 54%, but that is down 2 points versus where we were a year ago.

The category overall is up mid-single digits.

And we expect mid-single to high single-digit growth for the balance of the year.

So we still think adult care has a lot of growth in it, both in the short term and the long term.

We've got a strong innovation plan.

We're launching a Poise overnight pad this year that's great, and then we'll continue to invest to make sure we're competitive in the marketplace.

And Lauren, femcare was down I think mid-singles, and part that is timing of launch.

We've got the femcare, U by Kotex Fitness launch coming that starts in the second quarter, so we expect to see a little stronger calendar in the back half of the year.

Okay.

And do you have pretty good visibility on that in terms of shelf set?

It feels like there's been some delisting of other femcare brand.

So is that freeing up space for you guys?

Or is it coming out of your own existing space?

I'd probably say it's a bit of mix, but obviously, for us, our goal is to get incremental space.

And we're launching U by Kotex Fitness.

It's got some pretty good traction and excitement from our customers, and so we're getting the right shelving and space for that.

It's a very innovative product.

And from our side, the product is very tailored for fitness or exercise, with real product differentiation there.

So we're excited about it.

Our next question comes from Wendy Nicholson with Citi Research.

Two things, just following up on Lauren's line of questioning on the online stuff.

Can you tell us at this point, specifically your U.S. personal care business, how much of that is online versus through the traditional trade?

And second thing, I'm having a little bit of trouble understanding why there would be sort of some inflection point, January 1, 2017, all of a sudden online really starts to row that much faster.

Because as Lauren said, the track channel data just kind of fell off a cliff.

Was there more promotional activity online?

Was there greater assortment online?

Is there anything that you can speak to specifically, either about your business or about the category, and I'm really thinking about personal care specifically, that would represent such a shift just on the last few months?

Yes, Wendy, I guess a couple things I would say.

Number one, giving you an accurate e-commerce or online versus offline share is pretty tough for us to do because there's a lot of our traditional brick-and-mortar customers that do quite a bit of click and collect.

And so we don't really have any visibility of that because it goes into their existing distribution system and into their existing stores and they take off their shelves.

So Amazon would be a big one that isn't in the tracked data that probably is the gap.

And again, they've had a strong quarter across lots of businesses, including ours.

And I don't know, Mike, if you want to comment anymore about anything that you're seeing in that specific space.

Yes, I think, Wendy, the only thing I would add is that obviously, the retailers have decided that mom is very important to them, and there's a strong battle to win mom.

We have seen some retail price competitiveness across channels, both from bricks and mortar and online, and that's probably driving some price competition and price decline from our (inaudible) which has accelerated the shift to some degree this year.

To just give you an example, I think in the diaper category, infant child care's mega category across training pants, diapers, infant care and child care, the category volume overall across all outlets is down 1% in volume, but down 5% in net sales.

So that gives you an indication of the price deflation.

Okay.

But there's been a lot written about, oh, with all of the shift in terms of where people shop, Walmart is going to coming back and putting pressure on the manufacturers.

Is there any -- I mean, I know you said, hey, we treat all our customers equally, but in terms of incremental promotional spending that you are planning -- I know you said, for the back half, you'll be spending more on promo, but that's been in the plan for a while.

That's not a specific function of Walmart coming back and saying, "Hey, you need to be more friendly to us given the changing dynamics and where people shop." Is that right?

I mean, I guess I would just call it, as you look at the North American price was pretty neutral quarter-on-quarter.

So that would be an indication that we're not funding additional competitive spend activity.

Got it.

Okay.

And then I just had a quick, short question on China.

I know, Tom, you said specifically that you are hoping that in 2017, pricing in China won't be as negative as it was last year.

Is that a statement about something you're already seeing in the market?

Or is that your confidence in sort of what's going on with the Chinese consumer?

Or what's driving your optimism about the Chinese pricing environment?

Yes, if you look at the pricing in Q1 versus fourth quarter last year, it's pretty similar.

So we didn't really see further degradation.

All the price decline was a carryover effect of things that happened in the first half of last year.

So we would feel like it seems to have stabilized at this point in time.

And the good news is you're still seeing really strong category volume growth.

And so our pricing comps will get a lot more favorable in the back half, which gives us some confidence on our organic top line outlook.

Our next question comes from Ali Dibadj with Bernstein.

A few questions for me, too.

One is, so just from a short-term perspective, at least for the next 12 months short term, your organic guidance range just really ticks down a little bit, so the 1 to 2 relative to the above 2, which really just suggests that the rest of the year will be kind of what you had anticipated when you gave the guidance the first time around, the start of the year.

And I'm still having kind of trouble understanding that.

It feels a little optimistic to me and at least very simplistically look at things like, even in the D&E markets, sequentially looks a little better, but the 2-year stack just keeps looking like it's getting worse.

The North America business clearly, as you said yourself, a little bit worse than expected.

Pricing competition, maybe you're not driving the competition yet, although looks like Nielsen just recently started to match, but a lot more competition in the U.S. So look, I'm not trying to be whatever accuse me of being generally optimistic, but it looks like you guys are being relatively optimistic that nothing's going to get worse.

It's just going to go back to what you anticipated before this less-than-expected quarter.

So I guess, can you help me quantify how that gap will be closed?

Yes, I guess I'd say, Ali, I mean, the year started out a little slow, Jan, Feb and March was much better.

And when we look at that and the plans that we have rolling forward with some of the innovation that we've got coming, that's what gives us some confidence.

Our comps get quite a bit -- get easier in the back half, so we knew the first half was going to be a tougher comparison to deliver organic growth, and we've got good momentum in a lot of markets around the world.

I'd say that the 2 factors were probably in the cull down of the top line was a little slower start in consumer tissue in North America and then some price rollbacks in markets where there was pretty big price recovery last year and where the currencies have strengthened.

So Brazil and Russia, in particular, have been places where the currency was pretty weak last year.

We took a lot of price, and some of that snapped back.

But we'll give you an update as the year progresses.

We call it, as you know, down the middle of how we see the fairway, and we'll keep updating that as we go through the year.

Okay.

And just on I guess the shape of the fairway.

Let's use an analogy a little bit on North America.

Clearly, that looked pretty tough, and you talked about something that seemed like they might get better including March, but it just seems like there's a lot more competition in the space, whether it be, again, some of the private-label stepping in, whether it be Procter & Gamble directly.

It does feel like some retailers like Walmart are reacting a little bit to preemptively stopping the Aldi's or the Lidls are coming through.

Although they're small, they don't want to get them to be too big.

A bigger tilt towards Amazon, where I think, at least in the U.S., your shares are lower, you said before publicly, versus offline.

So I guess I'm trying to figure out more broadly why there won't be more secular challenges, and it's maybe not just impacting you guys, but just overall to the sector.

What do you guys see from those elements, again, competition getting tougher, retailers clearly struggling to gain share from each other, tilt towards Amazon going forward?

And how do you think that actually impacts you guys in the sector broadly?

Because it does feel like those are secular challenges.

Yes, I mean, I guess we would say that 1 to 2, we still feel like relative to our long-term goal of 3 to 5, reflects some of those secular challenges.

Yes, and Ali, I think what -- while I certainly acknowledge that the North American environment has gotten more challenging than it was last year, I don't think our first quarter in consumer tissue is how we plan to perform through the balance of the year.

I think we are expecting our execution to improve.

We recognize that it's gotten a little bit more price competitive, and we will be competitive in the marketplace.

But a lot of it comes down to how we execute in the stores, and I think our -- well, we are expecting to improve our execution in the stores.

And so just my last question on that goes right in there, which is just your 3 to 5 long term.

Do you think -- it used to be that you guys are delivering 3 to 5 and then really toward the high end of that, emerging market clearly slowed down, competition clearly picked up and now we're in this kind of lower end obviously, below that low end of the guidance for this year.

Any kind of views on the 3 to 5 sustainability over the long term?

Do you still think that's sustainable?

Yes, we do.

In fact, Mike, maybe you'll comment on this because he's taken a refreshed look at the long-term strategic plan, which we won't unpack all the details for you this morning.

But I'd say we still see strong category growth potential, particularly in a lot of the emerging markets.

But maybe, Mike, do you want to comment just a little bit on that?

Yes, definitely, Ali, strong potential long term, particularly D&E.

If you think about it with continued household formation, wealth creation, the emergence of the middle class in a lot of these countries, our categories are still, I think, fairly early in our growth cycle, particularly if you think about femcare, diapers, adult care, especially.

And so we do see long-term growth.

Now what we see near-term volatility or cyclical volatility as we're experiencing over the last 1.5 years or so, yes, that's probably the case.

But I think right now, we are building plans to kind of keep us in that range.

But obviously, with some of these new conditions, we haven't fully analyzed what's -- what just started happening in North America this January.

So I think our analysis will continue to evolve, but right now, we are still shooting for that 3 to 5 range.

Our next question comes from Kevin Grundy with Jefferies.

Just to come back to the guidance and the acceleration there.

Tom, how reliant is the improvement in the back half on category improvement?

And is that something you can put a number on for us?

And then I have a follow-up.

Yes, I mean, I think as you look at some of the price competition in China, that's rolling off, I mean, what we're seeing is the underlying category has been robust from a volume standpoint.

It's just been masked by some of the price challenges.

And so yes, we feel pretty solid that, that's going to continue and flow through.

Yes, there are other markets like Brazil or Argentina, where the economy hasn't yet really turned substantially.

There's still a fair amount of price recovery to go in Argentina to get back to a more equilibrium state, and so there's probably some question marks there.

On the other hand, Russia and other parts of Eastern Europe, still seeing actually strong category growth, even though the economy hasn't fully recovered.

And North America, I'd say it's a mixed bag.

On the personal care front, we still see good category growth.

In adult care, we got good innovation coming.

In femcare, we -- actually, the growth in the training pant category and out of diapers favors us given our share with Pull-Ups, so we feel pretty good about that.

In consumer tissues, one where we got to step up our execution a bit and make sure we're getting our fair share of that category.

So I wouldn't say it's dependent on improvement in category growth.

It's more sustaining what we see happening and then executing against it.

And Tom, just to stick with that for a moment, if I may.

So in North America, your slide suggests overall category growth of about 0.5% in the quarter.

That was down 150 basis points relative to 2016.

So more specifically, the improvement in North America and better than your guidance, which implied like 1.5% to 3% for the balance of the year from down 1%, so specifically.

And maybe you don't want to put a number on it, and that's fine.

But is that something you can put a number on for us?

Yes, I don't think we could probably give you an accurate read on that specifically.

And I think we'd probably say, we're still trying to exactly figure it out what happened with the consumer in North America in the first quarter.

There's been lots of theories.

You've seen a little bit of category weakness across lots of places.

So how much of it is broader economic slowdown, which you don't seem to be seeing in other areas.

I mean, job report was a little weak, but not substantially so, so that's still probably what we're trying to dial in a little bit more precisely.

Okay.

Just one follow-up, if I may, and some of this has sort of been discussed, but maybe I'll ask it a little differently.

So some of the commentary and what's been written around Walmart and the pricing posture and them looking to sort of solidify their lead as the price leader, along with the sort of underscoring an emphasis on private label.

Tom, are those discussions -- and Mike, are those discussions different now?

And maybe don't comment on Walmart specifically, I wouldn't expect that.

But just broadly, are you feeling more pressure on the manufacturers at this point?

That would be number one.

Number two, all this promotion that we're seeing, which is not just unique to your categories.

There's a number of others, of course.

How much of this, in your sense, is being funded by the retailers versus that which is being funded by -- I'm sorry, how much is being funded by the manufacturers versus how much is being funded by the retailers?

And then lastly, are you seeing greater emphasis on private label at this point?

Or is that a bit overemphasized or overdone in terms of what's being written?

That's a pretty long question, Kevin.

We'll do the best we can with that.

I guess I would say, price competition among retailers is not a new phenomena, and it's maybe heating up a bit.

And ultimately, finished product selling price is the retailers' responsibility, and you didn't see a lot of price change in our North American numbers.

So our trade programs are pretty, pretty much intact, and I'll let Mike comment a little bit more, if you want, on private-label trends or the general nature of discussions there.

I will say this though, when you've got good innovation and strong ends, it leads to a different discussion than if it's a -- if you're -- if you don't have those things, it becomes more of an item price discussion.

Yes, I'd say, the private-label trend, I think, they're category-specific.

And so I would say in diapers probably the brands are holding up pretty strongly.

In consumer tissue, maybe there's a slight improvement in private label on the back issue side, so I think it varies by category.

Certainly, I think given the kind of conditions we're given, we talked about with increasing penetration along line.

I think price has gotten -- come more to the forefront, and we're having discussions with our customers.

But they feel similar to discussions we have most years, and our job is to make sure we provide our customers with the right support.

As I said, we do try to fund our customers on similar programs, and what we do tailor is how we support them executionally with promotions and through their own marketing tactics.

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

In terms of, first on your revised price mix outlook, it sounds like it's primarily just currency-related.

Currencies are coming in a little bit, so some of the pricing you would've expected to take in emerging markets is no longer justified.

But you also talked about some of the things you need to do in North America consumer tissue and some other categories.

So is that embedded into your outlook?

Was that already in the outlook?

Or is there something that's -- or are you expecting more price/mix -- price promotion associated with that?

And perhaps, also where does pricing against incremental commodities inflation stand relative to your whole price/mix structure?

Yes, I guess, I'd say -- and maybe Mike can comment a little bit more on North America.

But I'd say, our overall plan in North America hasn't changed much.

We just didn't get it all executed in the marketplace in the first quarter, particularly in consumer tissue.

And so our plan for the year hasn't changed in terms of what we plan to spend broadly.

I don't know, Mike, if there's anything else you want to add to that.

Or...

Yes, but I think both in -- maybe in child care and in consumer tissue, we are seeing increased promotion intensity.

Our goal is to be competitive in the marketplace, and we may either increase our spending in some areas.

But again, we have a pretty well-established trade promotion effectiveness program, and we try to be very analytical in our approach and make sure we get the right returns on our investment and trade.

And then on the commodities inflation, it's not enough to drive finished products selling prices in most places and in particularly, when you see the -- many of the international markets, the currency turning favorable.

It's not a calculus that would lead to a lot of price in markets like that.

We are getting some pricing and where secondary fiber has gone up quite a bit.

In K-C Professional, we're getting some price recovery.

I think there's been more broad price increases across the industry that have been announced recently, and so that will give us some benefit.

But that's about the only one that I can think of that there's maybe a direct commodity-driven price change that we'd see coming this year.

Got it.

And then in terms of margins, those have held up fairly well despite the top line slow down, and personal care was a particular standout.

And given the level of competitive activity in there...

(inaudible) Olivia.

No, no, no.

I mean, they've actually been pretty decent, but just trying to understand some of the key drivers of the improvement there and how you think about the sustainability of that.

We would say brilliant leadership would be right at the top of the list.

But jokes aside, we had a great cost savings quarter, $110 million in FORCE cost savings and great way to start the year.

And then that certainly was a driver of that.

Good mix of negotiated material, savings, pretty good productivity, some of this material specification changes and then an increasing element of that bucket is in some of the distribution and logistics-related savings.

It's encouraging.

I know Maria is a fan of this to see our inventories keep coming down, and that not only delivers cash, but also delivers cost savings as we've got less stuff to store and handle.

I don't know, Mike, if there's anything else you want to build on that.

Got it.

Just last question.

Your thoughts on sort of the deal environment, growth has obviously slowed, first in emerging markets, now a bit more in developed markets.

And are there any areas you think where you could expand that could help your growth?

And then broadly, what's your view on the M&A environment as a whole right now, given some of the chatter and some of the attempts have been made not too long ago in the broader HPC space?

Yes.

I would say, there aren't that many tuck-ins internationally that -- there are a few in a few places, but we did a lot of that in the '90s and really bought up a lot of the market positions that we wanted.

And we've been able to consolidate some joint ventures into being 100% owned over time.

And so I'd say relatively light calendar of M&A activity.

And we read all the same chatter that you guys read, and quite honestly, we're more focused on running our own business every day and stay pretty focused on that and don't play too much with the speculation process on what might happen.

So I think so far, that served us well.

Our next question comes from Andrea Teixeira with JPMorgan.

I was wondering if you can please elaborate on the inventory levels in North America and China, and I -- we benefit from your comments, but with the shift to online, and I know we discussed a lot on the call, but are you seeing inventory levels increase at the bricks and mortar?

And how can -- specifically North America.

And how about China?

Have you cycled most of the cost levels of inventory there?

I would appreciate.

Yes, in terms of retail or inventories, we didn't see a big shift and -- anywhere really, and we have pretty high cube, high-velocity categories, and particularly in a place like China, where so much of it is e-commerce.

Often, the e-comm players really aren't even holding any inventory.

They'll pick up at our distribution center and deliver the same day.

And so there's not a lot of inventory in those systems.

And I know we've seen some minor shifts in inventory across other channels, but nothing that would be significant enough to call out in the quarter.

And if I can ask -- this is very helpful.

If I can ask on the FORCE program.

If -- I mean, I know you did not update it much.

I mean, the numbers are still there, and you tracked well on the quarter.

But how much of it is related to FX and also the commodity environment, like you see some potential upside there or actually the opposite, given that as you translate some of these cost savings might be -- I mean, as it translate, it might be higher, but if you look at the commodity, the commodity outlook, how you can track that number?

Yes, sure.

As Tom mentioned, we did have a strong first quarter at $110 million of savings.

And their savings came from across all the areas that our team looked to deliver against.

Only one of those areas has to do with sourcing savings, which would be affected by the commodity environment.

The tougher the commodity environment, the tougher the negotiations are.

But we were very pleased with our team's ability to negotiate that -- to continue to negotiate well in the first quarter.

And we would expect to see that continue through the remainder of the year.

In terms of the other areas though, we expect that we'll continue to drive productivity in our manufacturing operations.

Our global supply team -- supply chain team is partnering well with the regional supply chain teams and the in-country teams to really be focused on driving the manufacturing programs, driving waste out of the system.

We've got some momentum there.

We continue to build supply chain capabilities in that area.

So we feel good about our number, $400 million for the year.

One thing that I will note is, if you look at our cost savings last year, we will have tougher comps on cost savings in the second half of this year because our cost saving's really built throughout last year.

But I think with the capabilities we're building and the execution and focus of the teams, we still feel good about that $400 million number for the year.

Our next question comes from Eve (sic) [ Steve ] Powers with UBS.

So first, just a couple of cleanups from your original guidance.

I think, originally, you'd expected interest expense to come down slightly this year versus '16, but given how you started the year, should we rethink that?

And I guess, maybe as a potential offset, you've guided -- maybe guided the buybacks to 800 million to 1 billion, but started off ahead of that pace, so is there some offset there?

Yes.

Interest expense, we still expect, should be down slightly.

We've got a refinancing that's coming up.

We have a bond that comes due for $950 million in August, and that's at 6.125%.

So we'll replace that with cheaper financing, which will help us.

In terms of the share repurchases, we're still expecting to do between 800 million and 1 billion this year.

We started out a little stronger.

As you recall, we finished last year with a little bit more cash on hand.

We had very strong cash flows last year.

So we started out a little stronger in the first part of this year.

Okay, cool.

And one more cleanup, which is just on the commodity backdrop.

Just what you're now assuming full year for oil and pulp, and where you expect each to exit '17?

That would helpful.

But broader question, maybe this is for Tom.

But I was hoping you could comment a bit more on market share trends globally, really, because I think you mentioned flat shares in North American personal care.

But clearly, you undershipped in consumer tissue versus consumption.

And overseas, there seems like a mixed bag as well.

So just maybe more specific comments on where you're seeing relative market share strength versus weakness?

And given that you're not really expecting category improvement going forward, are you embedding improving market share trends instead?

Or is it simply sell-in versus sellout timing that will drive sequential improvement over the balance of the year?

Okay.

I'll do the best I can with that, Steve, and we'll see, Steve, what I leave left for you to follow up on.

In terms of pulp and oil, we'd say, for pulp, we're probably up $40 to $50 a ton versus our original guidance in terms of what we expect in terms of market pricing for eucalyptus, so we're calling euc at 870 to 900 a ton.

And I know that current price is above that, but that's kind of our outlook for the year.

Oil, we're kind of in the 50 to 60 still, and there may be some upside for us on that, depending on where oil shakes.

In the meantime, the polymer has actually gone up a bit as there have been some supply challenges on polymer.

And we don't have a lot of direct oil.

We do a lot more polypropylene, and oils are sort of a long-term proxy for that.

But in the short term, they can go different directions.

Swinging to the market share front, if you looked at shares sequentially in North America, yes, they're pretty, pretty flat.

Up in a couple, flat in a few, down in a couple, year-over-year, and particularly in consumer tissue, where we had the most negative share comparisons, but that was probably a high watermark for consumer tissue last year.

But as you travel around the world, I'd say, yes, you'd see relatively stable share positions.

And Brazil is up in femcare, down a little in diapers, similar story in Argentina.

China shares were, I think, pretty flat to down 1 point.

Korea, kind of a similar story.

Positive shares and Russia, Ukraine, other -- more parts of Eastern Europe on diapers, in particular.

I don't know, Mike, if there's any other ones that jump out for you.

I mean, femcare has probably been our star, and that we've had very strong share performance in most markets on femcare.

Yes.

The only I'd add, I think certainly, I think in China, holding on pretty good and doing a good job out there.

Central and Eastern Europe, I think we are seeing a pretty good share growth.

I think Latin America, as Tom said, plus and minuses, but we know we need to get our shares pointed in a stronger direction.

And then certainly, North America, I think BCC or infant child care shares about flat in the quarter.

But most of the other categories, a little softer year-on-year versus what we are expecting, so we know we need to perform better there.

Okay.

I just wanted -- I think it was in response to Kevin's question earlier.

You had said over the balance of the year, you weren't really expecting much category improvement, but obviously, you're guiding to sequential improvement.

So if shares are roughly neutral, which is what I gather from all those comments in aggregate, but you're expecting improvement, it seems like you're expecting to be gaining share if you're not expecting the categories themselves to improve.

Is that fair?

Or am I missing something?

Yes, I think that's a fair statement.

When we get done with this call, Mike and I are going to go in and talk to our team leaders around the company, and one of the things we're going to tell them is we're not satisfied with our market shares in the first quarter.

So we'd expect to do better as the year progresses.

And Steve, this is Paul.

Just remember, similarly to our organic growth trends in last -- from last year, the market share trends followed suit, so the comparisons get easier on both metrics as we get into the back half of the year.

Our next question comes from Nik Modi with RBC.

So just a couple for me.

Globally, maybe you can just provide some perspective, Tom, on the promotional environment.

If you're looking for market share gains to accelerate or improve as the quarter -- as the year unfolds, do you expect the promotional environment to moderate as well?

Is it getting worse?

Did you see that in the quarter?

And then the second question is, my understanding is that you've taken a price increase or list price increase on Kleenex, and I'm just curious if you've seen Procter follow at this point?

All right, maybe I'll let Mike comment on both of those, so on promotional environment broadly and then facial pricing.

Yes, I think the promotion environment is, as you've heard us discuss, I think has gotten more challenging, and our expectation is, at this point, is that, that environment will continue.

And so we're going to be prepared to operate in that environment.

And I think what we need to do is be competitive with our promotions and the right price points, but be disciplined about how we spend.

And so that's the emphasis going forward.

With regards to Kleenex, we did do a list price increase beginning of the year, and that has flowed through.

I probably -- Paul, I probably won't comment specifically on the profitability impact.

Oh, I was asking on P&G -- if P&G has followed in the market?

I'm not aware that there's been any change on their end.

Yes, I don't believe so.

Yes.

I think the other point, Nik, would be, as we've got innovation coming, you want to use your promotion along with your other strategic marketing tools to drive that.

So we've got a pretty strong calendar coming, and so that wouldn't be unusual for us to put more money behind those ideas either.

Great, and just one more thing.

I mean, I know you guys talked about March getting better versus Jan and Feb, and it just seems like no one really knows what happened in January and February.

I'm just wondering if maybe you have any thoughts outside of just a macro comment.

I mean, was there anything specific to your business that you saw that really caused a weakness like a dislocation between consumption and inventory or just higher trade spending?

I mean, anything you can give us to just get us some perspective around that?

No, I wish I could tell you the clear answer because then I would have done something about it before now.

But it was -- I think everybody was talking about retail store traffic was down broadly.

And they can't point to weather.

There was theories about late income tax refund.

Again, I don't know why that would necessarily affect our category.

But on the other hand, if you're not in the store shopping, you definitely saw that in terms of retail traffic.

In other words, some uptick in e-commerce that balanced up a part of that.

We are seeing probably, I don't know, Mike, if you want to comment on this, just a little bit less in terms of the fill-in trips.

Maybe part of it has some retailers unpack that, but I think it's still pretty early to figure out exactly what happened.

Yes.

I think when you have this much going on, which is maybe consumer confidence, the e-commerce shift.

And then these theories around the tax, I mean, I know that perhaps a lot -- we had the base internally around how far-fetched the tax refund timing, certainly in conversations with retailers, I think many of them believed that was strong conviction.

And so I think there's multiple factors that we don't have enough analysis to be able to tease out exactly what happened, but I do think there was some softening that we saw, particularly in January and February, and we came out in March a little bit better.

Our next question comes from Bonnie Herzog with Wells Fargo.

I just have a couple of quick questions on 2 of your key markets, China and Brazil.

So first on China, I guess I was hoping you could drill down a little bit more on the pricing dynamics in the market.

In the past, you guys have called out currency dynamics versus some of your peers as a key driver behind lower pricing.

But I guess, it now feels that some of this is also due to general competitiveness in the market.

So could you help us better understand the dynamics there?

And then on Brazil, could you comment on some of the volumes strength you saw during the quarter, which seems to be an improvement versus last quarter?

So curious to hear if you're seeing any improvements in the underlying consumer in Brazil.

Or is this more a reflection of you guys lapping easier compares?

Yes.

And I think on China, I mean, a lot of the pricing was really led by some of our other international competitors over the last couple of years almost, and some of that was probably funded by a weaker yen, but I think that seems to have normalized.

In the meantime, it is one of the fastest-growing markets in the world, and it's not surprising to see everybody chasing after that consumer growth.

And so right now, you've got 2 big U.S.-based players and 2 big Japanese-based players all chasing growth in the Chinese market.

And I think the good news is that pricing seemed to have stabilized in the quarter, although it was down year-on-year, reflecting some of the things that happened in the first quarter last year.

On the Brazil front, part of it was we had a lousy start last year in the first quarter.

So our comp was easier in that markets, and that was why our volume uptick was there.

I'd say, the shares we've seen in that markets are just Jan, Feb, and we had a stronger March, so you could have had a situation there where maybe shipments were even a little bit ahead of category consumption.

But we'll see when we get the next share data.

I don't know, Mike, if there's anything else you want to add on, on either of those markets.

Well, in Brazil, I think the Q1 personal care sales were up high single digits.

And as Tom was saying, we were cycling a 5% decline in the base period.

So volume up, and the net sales prices, down slightly.

FX obviously contributed a little bit, but the team has really done a nice job, I think, fine-tuning the price pack competitiveness and getting the right price points on shelf.

And I think that's making a difference.

The macro factors, I think they are improving slightly, but the environment is still tough.

And GDP is still contracting but maybe at a slower rate.

Inflation is a little bit lower than it was this time a year ago and -- but the consumer I think is still pretty well under stress.

And then back to China, I think we are encouraged by, I think, the performance in Q1 on China.

I think organic was up low single digit but volume was up strong double digits, somewhat offset by net -- lower net selling prices.

Pricing environment, as Tom says, has stabilized, but it's consistent with what we've been planning.

So we think we still have -- we're encouraged about what's happening this year, and I think our performance will be good this year in China.

Okay.

And then just one final question, if I may, on the promotional environment.

A lot of discussion this morning about it.

But just wanted to touch on something or hear from you how you think that's going to evolve throughout the remainder of the year or into next?

If you think about what's going on with some of the channel shift going to e-commerce and as these brick-and-mortar retail partners of yours are feeling increased pressure, how much more pressure ultimately will there be on retail pricing and greater promotions?

Well, I'd say this, if you have slower growth and you've got lots of competitors chasing it, that sometimes result in higher promotional environments.

And so you're also seeing retailers get creative across the space in terms of more of a click and collect, and there's a lot of innovation happening, not just around price, but also around service and how shoppable the categories are in different environments.

And so I will expect that, that will continue as we roll forward.

I don't know, Mike, if there's any other color you've got on that.

No.

I mean, we've seen the shift occur in other markets, China and Korea particularly, and we've adapted pretty well and in some cases, led that change.

And so we need to be as nimble and responsive to the market conditions than we plan to be.

Yes, and e-commerce does cause great price transparency.

On the other hand, retailers have been comp shopping each other stores in bricks and mortar for 100 years.

So it's not a new phenomena.

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

So just 2 questions and 1 detail.

Tom mentioned lower promo shipment in North America personal care and tissue, and I know you talked a whole bunch about execution.

Just what specifically -- a lot of it seems like it's category and competitive landscape.

So if you can give us like an anecdote or 2 of what the kind of decisions you made in Q1 in North America that you'd like to change over the course of the year, independent of and maybe where some of those types of decisions have worked?

Second question is, nice volume improvement in China in diapers.

And do you think maybe some of these lower prices in your clearly premium diaper business are maybe enabling more trade-up?

And if you could comment on price gaps with mid, lower-tier products there.

And just the detail, if tax rate was better this quarter, I didn't see any real change to guidance for the full year, a comment around that.

Can you tell us a little bit how that flows over the course of the year?

A pretty comprehensive list there.

So on the promo front, maybe Mike can comment a little bit on that.

Yes, I think with regard to North America, I think the promo timing, we had a few major events with large customer shift out of our quarter that we knew going into the year.

And so we had assumed that.

So that explains a bit of the shift.

Probably what was new news to us was probably the more aggressiveness in promotion activity and promotional price points.

And that's the one that we're adapting to right now.

And again, we're going to manage our business with discipline, but we want to be price competitive in the marketplace.

With regard to China, the -- sorry.

Yes, on China, I think the question was, have you seen any kind of trade-up in e-comm, and I think broadly, that is the case.

So I mean, we've just launched a super-premium diaper pant in China that we're really excited about.

And moms that tend to shop in e-comm tend to skew a little bit higher income, and so that should be a positive for us.

And then the last question was tax rate, which Maria can comment on.

Yes, our tax rate, as we mentioned coming into the year, will be variable by quarter because of the various tax planning initiatives that we do.

Our tax rate this quarter was slightly below what we had last quarter.

But for the -- I'm sorry, last year, first quarter.

For the full year though, we still expect the tax rate to be similar to the full year that we delivered in 2016.

Our next question comes from Ali Dibadj with Bernstein.

Just wanted to follow up specifically on the free cash flow on the quarter being much lower.

I know you mentioned taxes.

I'd love to understand a little bit more.

But also you're telling me that working capital looks worse too.

Can you just talk a little bit more about that and whether -- even on the inventory being so high, whether we should expect some idling or anything or whether we're at that level?

So taxes and then working capital.

Sure.

The -- we expected that our tax payments would be higher this year versus last year, not only in the first quarter, but for the total year.

The driver of that was actually tax benefits that we had last year, which lowered our overall cash tax expense.

This year in terms of cash taxes, it's a much more normalized level.

So we'll be impacted that by that year-on-year.

On working capital, working capital was actually good for the quarter.

Our cash conversion days were at 18, which is down 4 days from the average of last year.

The primary benefit there is in payables.

In terms of inventory, we clearly have room to continue to optimize our inventory.

And those are supply chain teams and our finance teams are very focused on this.

We made really good progress on that last year.

They'll be some timing effects as we go through the year, but that's an area where we're very focused on it to drive down inventory as part of our overall working capital program.

And Ali, one difference there, you might be looking just at fourth quarter only working capital number.

We tend to compare to the full year average because there is a bit of cyclicality as the year rolls through.

Yes, I mean, I was looking at Q4, so I didn't quite get a [ raised ] answer.

Yes, we were very, very low in the fourth quarter last year.

Our next question comes from Jason English with Goldman Sachs.

We obviously covered a lot of ground, so I just got a couple of quick questions I'll try to pound through quickly.

First, Michael, I think you mentioned that some promotion shifted out of this quarter.

Was that a shift into the fourth quarter of last year?

Is that a shift into the second quarter?

Well, one, I think part of the shift was out of our plan entirely for the year, and then part of it was shifting into the second, third quarters of this year.

Okay.

So it's a little more programming, as you mentioned, coming in the second quarter and the back of the year.

But a lot of comments also in terms of cadence and comparisons.

As we look forward to the remainder of the year, as you've highlighted, second half comps get easy.

The second quarter comps get really tough, particularly in North America tissue and personal care.

And it sounds like the environment is pretty darn challenged.

It fair to expect the second quarter to look sort of comparable, if not a little more challenged, than what we've seen in the first quarter?

Jason, we don't give quarterly guidance, as you know, so I think you can do the math as easy as we can, and you're correct in assessing that the comps get tougher in the second quarter.

But beyond that, I'm probably not going to give you any more color on quarterly guidance.

Fair enough.

And then China, encouraging to hear that, sequentially, prices are sort of holding pretty consistent with what we're seeing in the admittedly limited-scope Nielsen data out of that market.

As we go into the back half and we comp the price decrease, that's assuming we hold obviously year-on-year pricing looks better from there, should we expect year-on-year volume to decelerate at the same time?

In other words, are you seeing the volume lift because this year-on-year price degradation that's going to abate once the price degradation is no longer there?

No, not at all.

I mean, the volume actually had been pretty strong throughout, and so it's been more a function of innovation and category growth and consumer spending power.

And that we expect those stronger results to come through more clearly in the back half of the year.

Yes, I'll give you, Jason, a couple of factors why we believe that.

I mean, one, we do have news, as Tom mentioned, great new innovation in super premium tier 6. Second, the birthrate is increasing.

Two years ago, I think the birthrate was about 16 million live births.

Last year, we estimate around 17.5, and this year, it could be as high as 20.

And so that's kind of in our favor.

And then we still are expanding our penetration of cities, and we'll continue to add cities in distribution this year.

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

All right, well, we appreciate everybody's time today, and we'll wrap up with a comment from Tom.

Well, once again, we are continuing to execute our Global Business Plan and allocating capital in shareholder-friendly ways and we appreciate your support of Kimberly-Clark.

Thanks very much.

Have a good day.

Thank you.

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

You may disconnect your phone lines, and thank you for joining us today.