金百利克拉克 (KMB) 2017 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 presenter, Mr. Paul Alexander.

Thank you, and good morning, everyone. Welcome to Kimberly-Clark's Year-end Earnings Conference Call. On the call this morning are Tom Falk, Chairman and CEO; Mike Hsu, President and Chief Operating Officer; and Maria Henry, our CFO.

Here's the agenda for the call. Maria will begin with a review of full year 2017 results. After that, Tom will discuss our announcement this morning of a new global restructuring program and also our multiyear ongoing cost-savings target. Mike will then comment on our 2018 outlook, and we'll finish with Q&A.

As usual, we have a presentation of today's materials in the Investors section of our website. That presentation includes an appendix with a summary of business segment results for 2017 and our key planning assumptions for 2018.

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 will also be referring to adjusted results and outlook; both exclude certain items described in this morning's news release. The release has further information about these adjustments and reconciliations to comparable GAAP financial measures.

And now I'll turn it over to Maria.

Thanks, Paul. Good morning, everyone. Thanks for joining our call today. Let me start with the headlines of our full year results. Sales and earnings were broadly consistent with our previous outlook. We achieved record FORCE cost savings and reduced discretionary spending to help offset commodity inflation and fund competitive investment, and we improved capital efficiency and returned significant cash to shareholders.

Now let's cover the details of our results, starting with our sales. Full year net sales were $18.3 billion. Total sales and organic sales were both pretty similar year-on-year. On organic sales, volumes increased 1% and product mix improved slightly. Net selling prices were down more than 1%, reflecting the competitive environment and in some cases, improving currency rates.

Looking at the top line by geography. In developing and emerging markets, organic sales rose 3% with volume growth of 5%. In terms of key growth markets, personal care volumes increased mid-single digits in Latin America and in China, and nearly 20% in Eastern Europe. In developed markets outside of North America, organic sales declined 3%. The diaper category decline in South Korea was a big driver of that decrease.

In North America, organic sales for consumer products fell 2%. Our results benefited from innovations, but were impacted by competitive activity and the lower U.S. birth rate. In K-C Professional in North America, organic sales were similar year-on-year. Volumes increased 1% in what is a relatively sluggish market.

Moving on to profitability. Full year gross margin was 35.9%, down 70 basis points year-on-year. That reflects lower selling prices and $355 million of commodity inflation. Helping to offset those headwinds, our FORCE cost-savings program continued to deliver strong results. Full year savings were an all-time record $450 million.

Moving down the P&L. Between-the-lines spending fell 40 basis points as a percent of net sales as we tightly managed our overhead. Adjusted operating margin was 18.2%, down 20 basis points. By business segment, margins rose 50 basis points in Personal Care and 60 basis points in K-C Professional. Margins in consumer tissue were down 130 basis points and were impacted by higher pulp costs.

Our adjusted effective tax rate in 2017 was 28.6%. That was lower than our 2016 rate of 30.7% as our teams did a good job executing planning initiatives. Full year adjusted earnings per share were $6.23, up 3% year-on-year. That was in line with our October guidance to expect earnings to be at the low end of the $6.20 to $6.35 range.

Before I turn to cash flow, let me comment on how U.S. tax reform is going to impact us. Overall, we're pleased with the outcomes as the changes will give us a meaningfully lower ongoing tax rate. In 2018, we expect our adjusted rate will be between 23% and 26%. At the midpoint, that's equivalent to about 6 points of year-on-year earnings growth.

We also anticipate ongoing annual cash flow benefits from tax reform. That provides us flexibility to continue to allocate significant capital to shareholders, while we also fund increased capital spending and our restructuring program over the next few years. Finally, I'll note that the one-time cash flow impact as a result of tax reform shouldn't be significant for us.

Now let's turn to cash flow and capital efficiency. Cash flow provided by operations was $2.9 billion in 2017 compared to $3.2 billion in 2016. The decline was in line with our expectations and driven by higher tax payments. We expect cash flow in 2018 will be similar to 2017's level.

In terms of balance sheet efficiency for 2017, we reduced primary working capital cash conversion cycle by 6 days and we also improved adjusted return on invested capital by 20 basis points. On capital allocation, dividends and share repurchases totaled $2.3 billion. That's the seventh consecutive year we've returned at least $2 billion to shareholders.

In 2018, we plan to repurchase $700 million to $900 million of Kimberly-Clark stock. In addition, we're increasing our dividend by 3.1%. That's our 46th consecutive annual increase in the dividend. All together, we expect to allocate between $2.1 billion and $2.3 billion to dividends and share repurchases in 2018. That's equal to more than 5% of our current market capitalization.

So before I turn it over to Tom, let me summarize our results for the year. We increased earnings in a challenging environment, we delivered significant cost savings, reduced discretionary spending and managed our balance sheet well and we continue to allocate capital in shareholder-friendly ways. Tom?

Thanks, Maria. Good morning, everyone. As Paul mentioned, I'll focus my comments on our new global restructure initiative and on our ongoing FORCE cost savings program.

Let me start with FORCE. So I'm encouraged with the progress that we've made on FORCE over the last several years. Our investment back in 2015 to create a global supply chain organization that was tightly linked to our businesses is paying off. We have more capability, we have more process discipline and we've got more visibility into our future opportunities. And most importantly, we're just generating more savings, including the record performance that Maria just mentioned in 2017.

So looking ahead, our FORCE pipeline is healthy and we expect significant savings to continue going forward. And as a sign of that confidence, we're establishing a multiyear commitment for this program, which is to save more than $1.5 billion over the next 4 years. And those savings are on top of the benefits that we expect from our new restructuring initiative, which I'll talk about now.

So as many of you know, and if you followed us for a while, you know that we have a long track record of announcing and executing strategic changes that have made us a much stronger company over time. These actions and the execution of our ongoing strategies have generated significant shareholder value, and we've adapted appropriately to the challenging environments that we've encountered over the years. And so today's announcement of our 2018 global restructuring program is just the latest example of our proactive and strategic approach to managing Kimberly-Clark so that we can win in the marketplace and create long-term shareholder value.

So we're taking these actions to accelerate our return to delivering on our long-term top and bottom line growth objectives over time. We remain very optimistic about our long-term future. We've got a terrific portfolio of brands, we have leading technologies and we've got strong capabilities in our major countries around the world. And many of the categories we participate in have significant growth potential, particularly in developing and emerging markets.

So this restructuring program is the biggest program we've undertaken since we launched our Global Business Plan back in 2003. And this program will make our company leaner, stronger and faster. We expect the restructuring to generate cost savings of $500 million to $550 million by the end of 2021. And that means, over this time period, we will have generated more than $2 billion in total savings from FORCE and the restructuring program to help us drive sales, to handle commodity cost increases and currency changes and to improve our margins.

So these savings will allow us to do the following things: First, we'll be able to invest more to drive our top line growth, and those investments will be focused on strengthening and growing our core businesses, accelerating our personal care growth opportunities in developing and emerging markets and further building our digital and e-commerce capabilities. Mike can give you -- or will give you a little more color on those growth priorities when he talks about our 2018 outlook.

And second, we'll be able to compete more effectively in an environment that has become more challenging over the last 2 years. A key priority for us is to maintain or improve our market share positions, particularly in key markets and businesses. Investing more behind our brands will help us improve our share trends over time.

And third, we'll be in an even better position to improve our margins. Even in slow-growth conditions, we know we need to grow our profit and earnings to deliver attractive shareholder returns.

So in terms of how we'll achieve the restructuring savings, we'll streamline and simplify our overhead organization and our manufacturing supply chain. We'll also better take advantage of scale opportunities and technology. We'll continue to use our locally driven operating model, including having profit and loss accountability reside with local teams. At the same time, we'll shift more routine work and transactional activities to regional shared service centers. And all of our functions will drive more process discipline, which will help us with the efficiency and sharing of best practices. So these changes will lower our overhead spending and make us even more competitive with industry benchmarks.

From a supply chain standpoint, this program will require us to close or sell about 10 manufacturing facilities, and capacity at several other locations will be expanded to improve scale and cost at those facilities. Workforce reductions in conjunction with the restructuring are expected to be in the range of 5,000 to 5,500 employees. These are difficult, but necessary actions to make Kimberly-Clark an even stronger company going forward. We also expect to exit or divest some lower-margin businesses that are equal to about 1% of company sales, and those divestitures will be concentrated in the consumer tissue segment.

To implement the restructuring, we expect total cash spending of $1.5 billion to $1.7 billion by the end of 2020. And that consists of $900 million to $1 billion in pretax charges and approximately $600 million to $700 million of incremental capital spending. Because of the restructuring and other long-term investments that we've got planned, we expect our total capital spending in 2018 and 2019 will be somewhat higher than our long-term target of 4.5% to 5.5% of net sales.

When we get to 2020, we expect spending to return more in range of our long-term target. We'll continue to allocate capital in shareholder-friendly ways as we execute the restructuring. And we expect to continue to increase our dividend and repurchase meaningful amounts of our stock, including in 2018, as Maria just noted.

So to summarize, we're taking aggressive action to accelerate our return to delivering our global plan -- Global Business Plan objectives over time. We'll generate substantial savings over the next several years to provide more flexibility to invest and improve our margins. And we will significantly improve our company for the long term.

Now let me turn it over to Mike.

Okay. Thanks, Tom. Good morning, everyone. Let me start by expressing my enthusiasm and optimism about our long-term future. We are bullish about our categories, and the Global Restructuring Program will help us operate more effectively and efficiently.

Now let me turn to our 2018 outlook. In terms of market conditions, we expect 2018 will be pretty similar to 2017. We're assuming that category growth rates are only slightly better than this past year and we expect competitive activity will remain elevated, and we're planning for another year of commodity cost inflation.

However, we expect to deliver better results in 2018, and we'll also invest more in our brands to ensure our long-term success. On the top line, we're targeting organic sales growth of about 1%. That's similar to our expectation for overall market growth. Taking into account currency rates and last year's acquisition of our JV in India, total net sales in 2018 should grow 1% to 2%.

Now let me spend a few minutes talking about our 3 growth priorities that Tom just mentioned. The first priority is to strengthen and grow our core businesses. In North American consumer products, we expect better performance in 2018. We have a strong innovation line-up with launches in every major business. Near-term activity will include upgrades on Huggies diapers and baby wipes, Pull-Ups training pants, Depend and Poise in adult care and new Kleenex wet wipes. We would make targeted brand investments to support these innovations and to ensure we are more competitive in the marketplace. At the same time, our teams will be improving efficiencies by reducing spending on less productive items, such as non-working media.

The second priority is to accelerate our personal care growth in D&E markets. Overall, we'll build on the progress we've made in 2017 in our key growth markets. In Latin America, we'll launch a number of innovations in diapers, feminine care and adult care. Category demand in Brazil and Argentina has stabilized, and we're cautiously optimistic that conditions will improve modestly this year.

In Eastern Europe, we have good momentum on Huggies and Kotex, and that includes our business in Russia, where we'll leverage innovations and strengthen our commercial programs. In China, our femcare team will continue to focus on winning young category entrants with our on-trend premium positioning. In diapers, important innovations will phase in throughout the year, starting late in the first quarter.

The third priority is to further build out our digital and e-commerce capabilities. We are already well positioned and making good progress in e-commerce. Online sales in 2017 were a high single-digit percentage of company sales and increased more than 30% year-on-year. We expect to make more progress in 2018. We will also continue to improve our relationships with consumers through our direct digital marketing programs. We're investing in tools to help improve the speed, cost and effectiveness of our programming.

Moving beyond sales, our plan is to grow adjusted operating profit by 2% to 5% in 2018. At the midpoint of our guidance, that implies margin improvement of about 40 basis points. Cost savings will continue to be an important driver of our performance. Our teams are targeting to deliver approximately $400 million in FORCE savings and $50 million to $70 million from the restructuring. Those savings will help us offset cost inflation, which we anticipate will be between $300 million and $400 million. More than half of that inflation is projected to come in international markets.

At this point, we aren't planning for widespread selling price increases because of commodity inflation. That said, we have taken or expect to take selective increases in some of our businesses. That includes in KCP and in our consumer businesses in D&E markets.

On the bottom line, we're targeting adjusted earnings per share of $6.90 to $7.20. That's growth of approximately 11% to 16% year-on-year and includes the tax rate benefit that Maria described. In terms of our earnings profile in 2018, we expect earnings will be higher in the second half of the year compared to the first half, and that primarily reflects phasing of cost savings and benefits from growth initiatives. And secondarily, some expected moderation of commodity costs in the second half.

So to summarize our outlook, we're optimistic about our long-term future, we're planning for a better year in 2018 and we're taking important steps to make Kimberly-Clark stronger to enhance 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 Ali Dibadj with Bernstein.

I want to start with a similar question I actually asked on the P&G call just now around the increasing difference between commodity costs going up and the inability to take prices up to offset that. I've kind of rarely seen things this crummy from a price realization perspective. And I'm trying to understand kind of what's driving that. We certainly have our views. We would love yours on -- how much of it is retailers fighting? How much of it is competition in this slow growth environment? How much of it is the consumer just saying these categories are relatively commoditized. And really want to understand it because -- to see if you see that lack of pricing power really changing going forward or is this kind of the new reality? So that's the first question.

Yes. That's a good big picture question. I'll give you my take and then I'll maybe have Mike pile on. I mean, a couple of things. Prices are also set on expectations. So as we look at what's gone on in the pulp market, it's quite frankly surpassed our expectations on how quick it's gone up and why it is even at this level. And if you look at some of the forecasts that says it should moderate later in the year a bit. And so you also want to be a little bit careful that you don't spend too much energy trying to take prices in a particular category, then the commodity falls off and you've got to give it back and then some. And so there is a bit of that where commodities are running ahead of expectations. Our expectation is for that to moderate a bit over time. So that's part of it.

I think the other point you raised, particularly in developed markets, is that with relatively low or negative category growth, it's tough. You've got the same number of competitors chasing a tougher volume target. Having said that, there's also a lot of different ways you can get pricing in categories. In our '18 guidance, there's some more positive news on price. At least we're projecting it's not going to be negative as it was in '17. And so whether that's getting more efficient on trade or getting more efficient on some of the other between-the-lines -- between gross and net sales, that's another way to try to get some revenue in those businesses. But Mike, maybe you want to see what else you want to add to that.

Yes. Yes, Ali, I've worked at other companies and in commoditized categories, and we are very far from being in any commoditized categories. I think we've got a long runway of growth, both in developed markets and developing and emerging markets. And one of the reasons for that is that there's still a lot of opportunity for us to innovate. And if you think about the experience of our products, these -- the product experiences are pretty good today, but they're not perfect. And I put on the Depend Underwear every once in a while, and I -- while I think it's a great product, I think there is still room for us to achieve perfection. And so our focus is, hey, we're not going to be undersold. So we're going to be competitive on promotion. That's what you saw in the back half in North America. And we just want to be competitive there. But the way we're going to grow and the way we're going to drive value in these categories and what our retailer partners want us to do is to create innovation and bring marketing that's going to expand the category.

Okay. So look, helpful context. If you take that and you then say, okay, we're now doing an incremental cost-savings plan, which is great, right? I mean, you guys have shown that you can do that. FORCE looks like it has legs yet. But why do you think or how do you think reinvesting a lot of that back will actually drive the long-term growth trajectory, right? So you talked about innovation for sure, but it's not like you haven't been doing innovation so far over the past several years. So you're spending a lot more back and I'm struggling to get this confidence in ROI that you seem to have, as opposed to just saying, "Gosh, 3 to 5 long term isn't achievable. Let's think about a different mix of cost cutting and reinvestment back." So really, that ROI and what you're going to do from a cost-saving perspective reinvestment.

Yes. That's fair. I'll start and let Mike pile on, again, as well. I mean, I'd say, certainly, in '17 we had some factors like the birth rate in the U.S. and Korea being more negative than expected; that you can't encourage moms to use more diapers in a developed market where the babies aren't being born in those markets. So on the other hand, there's still huge category penetration opportunities in most of our markets around the world, and Mike can talk about that a bit more. And we also had some markets in Latin America where the economic conditions were tough in the beginning of '17. We see that turning and being more positive in '18. And as you look at the kind of years that we had in Eastern Europe and other places, we still see strong category growth opportunities across our space. And we do believe that there's more opportunity there than maybe we put on the board in '17. But Mike, maybe you can add something to that.

Yes. Ali, I fully believe we'll get back to our long-term growth goals. And in the global restructuring plans, the fuel we're going to need to help us get there and support both investments in the brands and also the margin improvement that we need to drive our business. I do believe the current slowdown is cyclical and some of it is macroeconomic or political, social, and some of it is competitive. And I -- and again, if you think through some of the competitive dynamics, there is not a real good reason why that's occurring. And so I think we've been in these situations as I studied our history, and been in and out of them before. And I think we'll cycle through that and get back to focusing on the things that drive the business, which I already mentioned. But I think the real important thing is, the takeaway is our investments are going to focus in the 3 areas that Tom and I mentioned as our growth plans. Which is, one, to strengthen and grow our core. We think there's a lot of room to bring value-added innovation into these categories. We've got a lot of runway left in developing and emerging markets. And to use the baseball analogy, I think we're in the early -- very early innings of that game or very early stages of global development. And then lastly, I think e-commerce and digital and data are really giving us a transformative opportunity to change the relationship with our customers and consumers and become much more efficient and create longer lasting relationships.

And just the last question I had is along the lines of increased penetration and macro, kind of combining those 2. Can you just give us an update on China, what you're seeing there, and also Brazil from a share/volume/price perspective?

Yes. China, it's still a dynamic market and we're going to continue to focus on high-impact innovation and capture the strong growth potential that's there. It remains our single largest growth platform, both in the near term and long term. And obviously -- yes, Ali, as you can see and probably heard, our competitors see the opportunity and are playing aggressively and hard there, too. So price has been a major factor, and I think the price situation in 2017 has stabilized, albeit at a lower level. I think our team has done a phenomenal job with our cost programs and our margins have never been higher even at this lower price level.

But I do think the long-term driver of growth in China continues to be, not price, but it is innovation and product quality and product innovation. And so we are expecting a better year. Femcare in China has a winning formula. They've been growing strong double-digits last year, and we're expecting that to continue. They got a great brand positioning. And then in baby and child care, we were up low single digit in volume for the year and about even on sales, but we're very excited about the innovation we're going to be bringing. We're not ready to talk about it yet, but that's going to be coming throughout the year, phasing in late in the first quarter. That's really about improved protection, comfort and fit in the premium tiers.

Our next question comes from Stephen Powers with Deutsche Bank.

So looking forward, and I guess building a bit on Ali's question on price, just given the intense competitive backdrop that you've called out. I mean, do you see any prospects of pricing relief without detriment to volumes in 2018 if your input cost outlook doesn't prove conservative enough? Or is that a likely risk to the implied margin outlook in guidance?

Well, Mike can build on this but I mean, embedded in our guidance is some improvement in the pricing environment. We've got some markets like Argentina, where there's pretty big price increases that were taken in '17 that will carry over. And then there are others where we expect to get some trade efficiency. I don't know that there will be that much list price change, but our teams have got plans to generate revenue in other ways in 2018. But maybe, Mike, you can give a little bit more color on that.

Yes. As Tom mentioned, we have some selective price increases in some businesses and then we are assuming, perhaps, a bit of a normalization in pricing in some of our key markets. I will tell you the reason why 2018 is going to be better, though, is because of a stronger innovation pipeline that we're bringing. We've got a lot of innovation that we're bringing out, particularly in the U.S., China and Brazil, in Latin America, and we're investing more in our brands with harder hitting messaging and advertising.

Right. But I mean, so like appreciating that innovation pipeline and understanding the direction of external forecast, I just -- I guess, I'm really just trying to test the logic of guiding commodities below spot prices at the midpoint of your guidance and not allowing for at least a wider range that contemplates upside risk to input costs. And I guess what I'm trying to get at is if that upside risk to input cost does manifest, do you think, given the competitive backdrop, that there's actually pricing relief? Or is that a likely risk to margins?

Well, I mean, I would say -- when you look at the range of commodity inflation that we've seen last year and that we're forecasting for '18, I've seen much big sharper cycles in commodity costs. And typically, if you have sharp swings in commodities, you will get some list prices change, so we're not afraid of that. I think it's just that in this environment, given the swings that we've seen and what we expect, that's probably not going to move the needle on list price much in most places.

Okay. Okay. And just one last question, different tact. On the new restructuring program, the cash costs to achieve seem high just relative to past programs and relative to the projected savings, and the 5,000-plus in workforce reductions seem potentially disruptive. So just trying to get underneath how you're assessing the aggregate kind of financial execution risks of this program relative to past initiatives that you've undertaken. Is there more uncertainty associated with this program or do you view it as comparable to past programs?

Yes. I'll comment on the cash costs. This program includes a number of activities that are on the more expensive end of restructuring, and I'll give you 2 examples. One is when you are shutting down facilities and factories, there are costs associated with moving equipment and doing the shutdown. So when restructurings tend to include plant shutdowns, they tend to run on the more expensive end on the cost side. The other thing is we are moving to a global business services platform for our more transactional and standard work. And when you do that, when you think about it, we're removing a role that is in country. So we're paying the full severance on that position that we're taking out and we're hiring back a role in a different location in a shared services center, and we're probably only picking up labor arbitrage and some productivity. So you're paying the full load on the cost, on the severance side, and you're not getting 100% of that same amount back on the benefits. So those are 2 of the factors that are involved in our restructuring that tend to weight the cost on the higher end of a restructuring program. What I can tell you, though, is as we look at the programs across our supply chain and also across our overhead structure, they have very strong returns and they'll position us well for the future.

Okay. Just -- sorry, one last cleanup on the restructuring program. The 10 facilities that you expect to close or potentially sell, is there any -- in the benefits of the program, is there any forecasted gain associated with sales on those assets? I guess, that's a question for you, Maria, just to clarify.

No, it is not.

Our next question comes from Jason English with Goldman Sachs.

I'll try to keep mine to 2 quick questions. First, the commentary on pricing. Your expectation for sort of normalization of price in some markets, I think is the word you used. And of course, the guidance for improved pricing in next year, albeit just coming back to sort of a neutral posture. It does stand in contrast to kind of the trajectory we've been seeing throughout the year. Is there any evidence of competitors kind of moving in this direction as you wrapped up last year, as we come into this year? In other words, is there anything you can give us that you're seeing that's tangible in the market that makes that expectation feel a little more credible?

Yes. Jason, I think maybe the better word I should have chosen is stabilization versus normalization, because I think normalization implies a return to some level. But I would say, right now, we're assuming that it's dropped to a level and will stay there. I think, maybe the dynamic -- and maybe I'll talk a little more about North America, is I do think -- we said in June of last year that we're going to get competitive and achieve competitive levels of spending on promotion because we felt like we were getting beat in the marketplace at the beginning of last year. And I think the teams have executed that and strengthened their promotion plans and fine-tuned them. And so in the third quarter, we improved some performance. In the fourth quarter, particularly in family care, did not get the takeaway. But I do think, in some degrees, we're going to have to continue to fine-tune. And so we don't want to drive overall promoter pricing down in the categories. We do want to focus on our innovations and bring in our value added. And so we are looking for the market to -- maybe a better word is stabilize.

Okay. That's helpful. And then a bigger picture question -- sorry, a bit more long-winded because I just don't know how to say this quite concisely. I want to get to market growth. And Michael, I think, you kicked off your section by saying you're bullish on your categories long term. But if we think about the environment we're in, your GDP growth globally, pretty solid. A little choppy here and there, but all in all pretty solid. Income growth, pretty solid. And we've got inflation in the system, which is usually sort of flattering to revenue growth. And all that yields a whopping 1% sort of global category growth, I think, is the figure you gave out. Which, frankly, isn't very growthy. So how do we foot sort of where we're at today with 1% with your comments sort of bullish long term? What do you think is holding us back? Where do you think the growth is? And if you can give any more color in terms of the divergent growth trajectories between your personal care and professional tissue, I think that would be helpful.

Yes. I think what we need to do is, one, we've got a major market in North America and we got to get that back to the growth path. And I think we feel better about our prospects for this year. I think the team has got very strong plans both, as I mentioned, on the innovation front in all major categories: in bath tissue, Kleenex, diapers, Pull-Ups and adult care. And so we feel very strong about the innovation. I think we will improve versus our decline last year, and so that's probably the first step. And I was personally involved in the North American business for a number of years, and fundamentally believe that, that's a market that we can grow. And so that's probably the first step.

And then in our developing and emerging markets, we've had a couple either competitive situations or macroeconomic situations in key markets. I think, in Latin America, we grew mid-single digits last year and we are expecting an improved performance this year. And I think we're modestly perhaps saying that the economic conditions are going to modestly improve, and so we're excited and looking forward to that. And then in China, I think we've been in -- it's a big market for us and then been a bit of a competitive situation. And again, I think in our earlier remarks we said, I think that situation has stabilized. We have some great product innovation coming that we think will get us back on a faster growth trajectory in diapers.

Our next question comes from Lauren Lieberman with Barclays.

I wanted to talk a little bit about consumer tissue. That's not a business that's getting a lot of air time these days, but it's still very big and considerably moves the needle. So first, if you can just talk a little bit about North America, right? We've had pretty sustained negative trend on organic sales growth this year. A lot of it driven by volume more so than pricing. And then, also, in the -- with the restructuring, you talked about some low margin exits. So a little bit about where those exits are coming from, dynamics in North America tissue and thought process and plans around improving that performance in particular.

So maybe, Lauren, I'll start with the exits part because we aren't going to be able to tell you very much about that right now until we get farther into it. We want to be able to share those details appropriately with the affected businesses. But again, it's less than 1% of our sales, so it's not going to be a big deal either way. And then maybe Mike can comment on North America and some of the dynamics that are going on there.

Yes, Lauren, I think the competitive market conditions in North America tissue, I think we expect that to remain, but we are expecting improved performance behind our innovation, differentiated product news and stronger advertising. Q4 volume and price were both down about 2% which drove a net sales decline of 4%. And what I will say is -- what I was telling Jason earlier is, hey, we improved the competitiveness of our promotion programs. And if you'll recall in our previous quarter, in the third quarter, I think our volume in consumer tissue was up 5. And so in the fourth quarter, we were disappointed because, I think, while we had about the same kind of merchandising and achieved the merchandising, our consumer takeaway was lower than we expected. We do expect 2018 to be better. We're going to remain competitive on promotion, but, of course, stay balanced there.

But the big difference is we got a lot of product news, and probably the most that I've had since I've been here at K-C. In bath tissue, we've got great news on Cottonelle. We're not ready to share exactly what that is yet, but I will tell you, it's going to lead to category superiority for us in bath. And Scott Extra Soft, which is also a big business for us, we're making it softer and thicker and that's important for helping us differentiate versus other brands and private label. And then our retailers are very excited about the innovation we're bringing to extend and expand occasions for Kleenex, which is an iconic brand and with our wet wipes launch. So we've got a lot of great products. And then I think the other thing that affected the fourth quarter is we were not as strong on our advertising as we needed to be, and I think the team has realized that and learned that. They've got very good, hard-hitting advertising coming this year to support these launches and we're excited about that.

Okay. And then with regard to private label activity I guess both in tissue and in diapers, there is certainly a lot of talk out there in terms of private label having more impact, consumers being more open to it. Can you talk a little bit about what you're seeing in your business? What you're seeing in terms of pricing pressure just coming from retailers giving more attention to their own private labels? Or if that's not something that's really been terribly on your radar screen as an incremental challenge of late?

Yes, I guess, Lauren, I'd say yes and no, I think it depends on which category. And generally, I'd say in our personal care categories, if you look over the longer term, I think in our key categories, private label penetration has been down over the last 5 years. But we have had some increases and some spot increases from year-to-year. And in this year, we're probably seeing a little more private label growth in tissue, and that's a big reason why we are very focused on differentiation and advertising because that's the only way for us to drive the long-term health programs.

Okay. And then just a final question, since you had mentioned digital and e-commerce and data and so on as being one of the key priorities going forward and where you're going to reinvest. My understanding is that you were a bit of a leader, a bit of a -- very much of a leader in terms of e-commerce penetration in China and it's been everyone else need to kind of catch up to where you are, but the reverse was the case in the U.S. So could you talk a little bit about where you are today versus where you were at the start of 2017 on your e-commerce penetration in the U.S., your relative market share positions online versus offline? And anything concrete and planned for 2018?

Yes, so we're strong leaders in China and Korea, both major e-commerce markets for us. And in the U.S., I would say, we got off to a slow start years ago but we've been catching up fast. I think we've had 3 straight years of share growth online in the U.S. And I think, overall, across all categories, I think, our -- we have about a fair share for our position. But we've had very strong double-digit growth. Well, I don't know how to actually describe it, but it's strong double-digit growth. And we're excited about it. And the reason why it's so important for us, Lauren, and I think why it's uniquely important for our categories, we are in very high rank, high involvement categories that are frequently used and our consumers are in these categories for years or in some cases, many, many years. And so it pays to have an effective long-term relationship with our consumers. And I think with the advances in what's happening with data analytics, online access and advertising and then with e-commerce, we've got an opportunity to really kind of change the model and make it much more efficient for us, our retail partners and our consumers.

Our next question comes from Bonnie Herzog with Wells Fargo.

Just had a quick follow-on question on private label. I'm wondering if you guys have plans to expand your private-label manufacturing footprint? I think you guys have mentioned in the past that it accounts for less than 5% of your overall sales. So just curious if you have any plans to increase that.

No, I mean, private label is still less than 5% of our overall sales and it really didn't move the needle significantly in the quarter.

And no plans going forward to step that up, just given some of the developments we've seen with private label in some of your categories and some of your comments?

No. I mean, we are primarily a branded manufacturer and we do a limited amount of private label with specific customers where we think it advantages our overall relationship with them. But we're not out trying to sell private label to everybody up and down the street.

Okay, makes sense. And then I just wanted to move over to China and your business there. Just hoping you guys could drill down a little further on, again, your diaper business in the market. And highlight some of the key changes that you've seen following Procter's launch in the summer. And then going forward, other than innovation that you touched on, what other levers do you plan on pulling to really stabilize your business there?

(multiple speakers) Go ahead.

Yes, I think I'd say, overall, I don't think our business was impacted significantly by the Procter launch overall. Obviously, you can talk to them about how they felt that went and their product. But we feel very good about our product line up. I do -- we did lose some share in diapers this year, but we see it primarily impacted by local players who have had an increase in online brands that have gained some trial. And I don't know how long that trial is going to stick and how much their -- how well the repeat is going, because we don't have data on that, but they are getting some trial and that has impacted our business a little bit. Our focus is on making the best product out there and we're very confident that we've got great products out there and we're going to have better products coming out throughout this year.

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

First, just some clarity on your outlook, particularly on the cadence given how many moving parts there are. Can you give a little bit more granularity on the margins this year as you model out? Do you expect margins to actually be down in the first half and then up in the second half? And then just for clarity, I think you said that EPS is better in second half versus the first half. Do you mean in absolute earnings or in growth, because typically you do deliver more earnings in the second half versus the first half.

Yes, so we probably aren't going to give you a quarterly margin profile. I'd just say 40 basis points for the year is the right way that we think about it and manage the business. And then on the second half versus first half, we say absolute profitability or the size of the earnings per share will be larger in the second half than the first half, and that we weren't referring to the earnings growth rates per se.

Got it. And then secondly, just about -- my question is about Amazon, as they clearly are entering more and more of your largest categories with their own brands before. Now you've got Presto, Mama Bear. Before that there was Kirkland, before that many others. So we know this isn't the first time you've had a retailer relationship where you had to wear different hats, but it certainly seems a little bit different this time around. So perhaps, can you talk a little bit about how you approach it differently this time around versus previous instances?

No, Olivia, we haven't confirmed that we are making Mama Bear, so we really don't talk about any private label relationships. And we do some with a few customers and then those are kind of private conversations with those customers, and we don't talk about their business and we let them talk about it. And so I would say that pretty much every retailer we sell to does private label. And so there is that inherent discussion as to what are they trying to do with their brand and their overall category strategy. And then how do we fit with our brands and what we can bring from an innovation standpoint. And that's the challenge that our customer teams have every day, is putting together a strategic plan with our key accounts that drive the business over the next 2 or 3 years.

Just to clarify, I meant more that Amazon's obviously a retailer but also they're selling your product but also you're competing with them in terms of product as well. So just want to clarify that.

I think it's -- like every other retailer we do business with. I mean, they -- I think everybody has private label on the shelf in some form. And so we've got to bring news and ideas and innovation that drive the business with them and then that makes them excited about it.

Got it. And then just lastly, the CapEx increase for this year, how much of that is related to the new restructuring program as opposed to potentially a bit of a build back of some of the things you may have had and originally planned for 2017 but they got shelved as things got a bit more challenging as the year progressed?

I mean, I would say that all of it is related to the restructuring program, but Maria, maybe you want to comment further on that.

Yes, I think we gave an incremental CapEx number related to the restructuring program, and clearly a portion of that will get spent in 2018. The other comment that I would make is that on the restructuring program itself, we started that last year, earlier in the year. And a lot of work and effort went into looking at the opportunities that we have across our supply chain as well as in our overhead. And so as our teams were working on the supply chain portion of that restructuring, we'd have to imagine they were delaying some of that CapEx that they would have spent in 2017 until we had a total view of how the actions we were going to take to optimize our overall footprint. So I would imagine there's also some catch-up there on projects that got delayed from 2017 as our teams were working on the restructuring.

Our next question comes from Ali Dibadj with Bernstein.

So I wanted to drill a little bit further on private label, and I understand -- cagey is the wrong word, but the caution that you have in terms of talking about it. I mean it's certainly...

I'm not cagey, Ali. I've been pretty transparent that I'm not going to talk about this.

It's the wrong word, but you're trying to manage relationships with these retailers as well. So I get that you can't go into too much detail about it. But generally -- a preponderance of evidence is that you are experimenting with Amazon. You might be doing something broader with Walmart, although I don't know for know for sure on that one. As you work with the retailers on private label, and 5% sounds small, but most of that's probably in the U.S. so almost double that, right, for percentage of your sales?

It's less than 5%. And I think you would be way high on your estimate of how big it might be.

Okay, so it's not 5%. Okay. So look, either way as you are kind of doing this, it feels like more and more, and although it's small everything starts somewhere. Can you talk a little bit about the impact on margins for you, generally for the retailer? You mentioned when you're answering one of the questions that you do it only when you feel like you have a -- it helps the relationship. Can you talk about what that looks like in terms of helping the relationship? Just some more context about private label and your interaction with the retailers would be great.

Yes, I can give you just a little bit of general color and maybe Mike may want to build on that. I mean, I think I've been around the businesses relationships with private-label customers for a long time, and we haven't done a lot of it ever, but we have done it with a few strategic people. And it is a -- for retailers that are serious about their private label, it is a pretty intimate relationship. It's their brand, it's their name on the package. They are involved in what goes in. They want to test the product. They care a lot about the materials and how you make it. And so we've got to put dedicated people working on the business that show the retail partner that we care about their brand and their business as much as they do. And we're -- if the retailer's willing to partner like that, it can be a good profitable relationship for both parties. If it's a business that's going to get auctioned every quarter and the low bidder gets the business, that's not the kind of a relationship that we're ever going to be looking for. So I don't know, Mike, if there is anything that you want to add to that.

Well, Ali, I think the only 2 things I would add is, yes, it's a small piece of our business. It's not strategic because it's not going to be a growth driver for us mostly because we are capacity-constrained. And so we don't have the capacity to give to a lot of private label out there. I will say, as Tom mentioned, we do a small amount, and maybe the reason why we do a good job at it is because we care about it for our customers and we want to have a good relationship. And just like everything we do, we care about what we do and want to bring good-quality work to what we do. And so we got a few selective relationships out there that are actually with different sets of customers. But again, it's not a primary or even a significant growth driver for us going forward.

Very helpful. And where does the shelf space typically come from when they push out private-label further? And do they tell you about, look, we want private label to be this big of the category?

Yes. So retailers typically are working with their category captains and category challengers to talk about where the shelf is going to go. And I would say most retailers in a brick-and-mortar world typically over -- and this is true across most formats, so over allocate space to private-label relative to share. And they typically often give preferred shelf space to private label. And so the brands know that they are fighting for their spot on the shelf as well. You've got to justify it with innovation. And when you do category line reviews, you've got to justify why you need that real estate and what it's going to do for the retailer when you get it.

Our next question comes from Wendy Nicholson with Citi Research.

I'm just wondering. First of all, I just heard your comment say you're capacity-constrained and that sort of feeds your decision process on private-label manufacturing, but with regard to the 10 facilities that you announced you're going to shut as part of the restructuring, first of all, how much of that is in the U.S. versus outside?

Yes, I guess, a couple of things. I didn't say we are capacity-constrained, I think someone was asking me if I was going to be building facilities to make private label, which I said that's probably not where we're headed. And then secondly, just because of where we are on the announcement phase and also the consultation phase with various works councils and unions and other things, we really can't give you any more color at this point on where the 10 facilities are. But I would say that the combination of the 10 affects every region.

Okay. Because I guess one concern I'd have just at first blush is some of the private label manufacturers in your categories that we've talked to, their growth is actually being held back it sounds like because they don't have the capacity, particularly in North America. So there's part of me that's worried that if you sell those plants to those players, it sort of might give oxygen to some of the private label manufacturers who are going to be competing against you? Am I -- is that crazy logic on my part?

I would say you're barking at the wrong tree there. I think most of the plants will be closed versus being sold.

Got it. Okay. And then my second question, just going back to kind of high level. It sounds like you don't want to back away from the 3% to 5% long-term revenue target. So I assume the restructuring program is sized to enable you to meet that target. But my question is, you also commented at one point how much margin expansion you've seen, and it's true over the last 4, 5 years, your EBIT margins have gone up much more than your peers, the ones we cover anyway. And so I'm wondering, is the restructuring program designed to fuel that growth? I get it, but do you really think margins can expand? I heard your guidance for '18, but longer term, is this restructuring program enough to fuel faster top line growth and long-term margin expansion? Or is there a risk actually that your current margins reflect some over earning and that you kind of have to reinvest more and so maybe margins stay flat. Does that make sense?

It's a complicated calculus, Wendy, that we're speculating with. We think so, I think is the answer. And so we feel like the restructuring program will give us a more efficient, more effective way to run the business. We're at kind of a cyclical peak on the commodity cycle and that may well swing the other way at some point over the intervening years. And so while we're not counting on that, that we also realize we've had higher commodity costs both last year and projected for '18 than we had in the previous several years. And so we will see. Basically, our view is that it is and that we do believe we have the possibility to get our business growing at that level and this is the right plan to get us moving in that direction.

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

Just one question. I wanted to ask about the genesis of and the planning around from a long-term standpoint a major restructuring like this, you know, and restructuring inside your company broadly. You're talking about -- you identified 10 plants, you talked about 13% headcount. How much of this specifically would you say were costs you could have addressed if you had the management bandwidth and whatever? And maybe should have 2 or 3 years ago, but you can only do so much in a certain period of time? Or -- and how much of this, roughly speaking, are redundancies that are the result of real technological changes or marketplace changes in the past couple of years? I'm just trying to understand the timing of all this and whether you're maybe digging deeper into things that you'd prefer not to have to do? Or -- and how much of it is like, no, really, things are changing really, really quickly and maybe we could expect more of this sort of thing in the years ahead?

That's a great question, Jonathan, I'll let Maria kind of expand a little bit on our process. I will tell you, I think I had an investor once tell me that he thought every CPG company restructured every 5 years. And I think your point would be gosh, it'd be great if we could avoid adding the cost in the first place so we didn't have to restructure it. But we've probably historically proven that we're not capable of that. On the other hand, I think this restructuring program was an excellent piece of work by our team, and Maria and Mike and I helped lead it. But Maria, why don't you comment a little bit on the process and how we got here.

Yes. What I'd say, I'd start by pointing back to a few years ago, actually, if you think about it, we hired a global supply chain leader coming up on 3 years. And she put a team in place and that team has been doing a lot of work over the last couple of years to assess and identify opportunities and you've seen a lot of their work along with our global teams in the mill delivered through the FORCE cost savings. But as they've done that foundational work leading into 2017, I think it gave us a good footprint on the overhead side of the house. We did a lot of work with both our IT teams and finance teams to get our information lined up in a consistent way so that we could understand better and have better visibility into our SG&A spend. And that work started, I'd say, a couple of years ago. So in 2017, we were in a really good position from the actions we had taken to go ahead and launch a very comprehensive process to look at our cost structure. We used a consulting firm to help us upfront to get the program structure -- structured and to set up governance to provide extensive benchmarks for us. But it was our teams though that did the work. And there were several hundred people involved in this process. The program isn't an across-the-board reduction plan, it's not a textbook BBB approach. We actually went function-by-function to look at the work that we're doing, where we're doing that work in order to identify opportunities to do things differently. Really we had a lens to say how can we run our business fundamentally on a lower-cost structure. And so on the SG&A side, we took a whiteboard approach and classified our activities into what's baseline, what do you need to do to keep the business running versus what are differentiated activities. We then went hard at looking for ways to reduce the spend on the table stakes types of activities and free up that money to invest in more differentiated capabilities and activities. And then on the supply chain side, I would say what we do with the restructuring is really accelerate the work that our global supply chain teams were doing on the network optimization because we wanted to get a comprehensive view of our opportunities globally. That enabled us to then identify the programs that have the best returns, take advantage of our global scale and prioritize our investments. And at the same time all of this cost work was going on, Mike and his operating team were taking a fresh assessment on our markets, our category growth rates, our competitive position, our innovation pipeline, and I'll let Mike talk about that more in a minute. But that the combination of all of that work together, the extensive work on the G&A side, the comprehensive view of our global supply chain and also an affirmation of our belief in the long-term growth algorithm from the growth work that teams have done are really coming together in the restructuring program that we've announced as well as our commitment on the FORCE target as well as our 2018 guidance on our longer-term outlook.

Yes, we went through maybe a concurrent process, let's say, hey, what is strategically -- where are we going to get our growth from and how do we best position ourselves to achieve that growth? And that includes restarting, we're accelerating our growth in North America, a lot of the work that we talked about with D&E, and also by leveraging technology, both this digital and e-commerce technology, but also our own product-making technologies, and how do we drive that more effectively. And so kind of we went through a process and worked on where we want to place our bets. And at the same time, I think, we also said what kind of company do we want to be and how do we want to evolve our organization. And I think the words that kind of came out over and over again were leaner, smarter and faster. And as Maria mentioned, lean means we want to be low cost, smarter means we want to leverage our scale more effectively and faster means; a, we are an agile organization, we are locally empowered, we could do better by simplifying some of the work that's done locally. So I think we're very excited about both elements of this program and looking forward to the returns.

Our next question comes from Andrea Teixeira with JPMorgan.

Just on the pulp estimate, and I appreciate your pricing commentary, but we before we go into pulp, I understand where you're saying in the U.S. will be more mix rather than pricing for innovation. So just to on a comparable basis, you are not taking prices in the U.S. correct?

You know, in terms of list price at this point in time, again, we don't talk to a lot about forecasting, but I don't think there will be major list price changes. It doesn't mean that there won't be opportunities with trade or promoted price points or things like that, that could be a factor. Should we (inaudible).

Yes. And then following up -- sorry, go ahead.

No, I was just saying, Andrea, that we'd like to be more efficient with our trade spending, and we still think we have a lot of opportunity to get better at that. And that goes into the proverbial word that we use of just fine tuning.

I understand. That makes sense. On the pulp side though, from what I understand, the pulp spot prices are closer to 1,200. And I get it that obviously throughout the year, it might -- it may change, right? But now you are saying on average, you are looking at 1,050 I think to 1,100 as you put it in the guidance. So you're saying, even though the beginning of the year will be -- so you're expecting to go down to an average of that number, I'm expecting that you believe you will be below 1,000 at the end. So if you can help me kind of like break down that estimate? So as the cadence of the year for pulp. Is there any indication that you are seeing that the back end of the year will be below 1,000?

Andrea, this is Paul. So just to level set everyone. Our outlook on pulp is solely based on what the industry forecasters tell us. So I don't think we're calling it any different than what you'd see if you asked RISI about their outlook for 2018. And in terms of the cadence, I think the forecast would show that some slight moderation starting late Q1 and then into the back half of the year. But I don't believe that there is any one time period that's supposed to be below $1,000 a ton.

Okay, okay. And the same for oil, I'm assuming, right? For oil, you're kind of using external, external -- yes. Okay.

Yes.

Our next question comes from Iain Simpson with Societe Generale.

Couple of questions from me, please. Firstly, it's very encouraging to see that mid-single-digit growth in China and thanks for the extra color. Just on diaper, what's the birthrate in China doing now? And could you comment a little bit on what percentage of diaper in China is online for both you and the market? And secondly, I know you've had a few questions on it already, but pretty much everywhere in the world consumer tissue is, sorry, consumer tissue is a commodity category. The U.S. is pretty unique in that respect. So looking at that pricing in U.S. consumer tissue, even with input costs doing what they're doing, is this structural? And what gives you confidence that what we're seeing isn't just U.S. consumer tissue becoming a commodity like it is everywhere else in the world?

Yes. Yes, Iain just on China, I'd say, first, we saw about 18 million births this year, which is the estimate, and I think that's driven pretty good double-digit growth in the category overall. Again, I think we underperformed the category on net sales just based on some of the competitive dynamics. But we do expect to improve that trajectory over time. The second part of your question was online and where we are. I think we believe we're the leaders in e-commerce in China. We've got great relationships with all the major e-commerce players and great capability. Over 50% of our business is currently sold online.

We're probably over indexed relative to the category a bit.

Yes.

And then to your last question, Iain, maybe I'll debate a bit. I mean, I would say, I don't think consumer tissue is a commodity category and we have terrific brands in specific markets. There are tougher category trading conditions in some places, I will not dispute that. But I look at our Andrex brand in the U.K. where we've got a strong low-30 share, very high brand loyalty, decent profit margins and good, good opportunities to innovate around that space. We've got specific markets in Latin America where we've got very strong branded positions as well and other specific markets like in Korea and others in Australia. So sometimes tougher from a margin standpoint, but I may be biased, I probably am, but I think it's a long way from a commodity category.

Our next question comes from Kevin Grundy with Jefferies.

My question relates to your appetite for M&A. So you've obviously been less active on this front and tend to discuss it less than a number of companies in the CPG space particularly those that are struggling to find growth. So we've talked a lot about the difficult environment, we can appreciate that, but does this lend itself at all perhaps to a greater openness for M&A in order to diversify away from some of these categories and given the strong cash flows of the business albeit with slowing top line growth? So a number of questions around that, how actively are you looking at assets? Is that any more or less than recent history? Would you need to build out your business development capabilities? What categories, geographies maybe of interest, et cetera? So any commentary there would be helpful.

Yes, sure. I would say our view hasn't changed. We've typically felt like we had enough organic growth opportunity in the portfolio and then that was the right thing for us to chase, that was the best opportunity to create long-term shareholder value. And so I've been around long enough that we've had done a bunch of M&A, we built most of our Latin American business through M&A in the '90s and early 2000s. There aren't that many of those kinds of opportunities left in the world that are things that we know a lot about that would be highly likely to be able to be integrated and create shareholder value. Having said that, we pick up small opportunities. We bought the other half of our business in India late last year from our partner. We bought the other half of our business in Israel couple of years ago from our partner. So there are some of those types of opportunities that are small and makes sense. But in our core space of things that we think we know how to do, we just haven't seen a lot that's out there that we think is shareholder value creating.

And fair to say, it doesn't seem like it's a big priority. I can appreciate the view that you don't want to overpay and go into categories where you don't have a lot of background or expertise or scale, et cetera, but it doesn't seem like it's a big priority to build out capabilities, personnel and otherwise to explore higher-growth categories in the ones you're participating in. Is that fair?

That's correct.

Our next question comes from Priya Ohri-Gupta with Barclays.

Just a quick one on housekeeping. Could you just tell us the split of the charges associated with restructuring plan that are going to be cash versus non-cash this year? And then secondly, how should we think about your plans to fund some of the added cash spend needs that you have over the next couple of years, particularly given the portion that's expected to be incurred this year?

Sure. For 2018 of the charges, a little more than half of them will be cash charges for this year.

And then in terms of funding, maybe you just want to comment on cash flow expectations and so forth.

Sure. In terms of cash flow for next year, I commented that we expect cash from operations to be similar to 2017. Included in there, we've got the cash that we will spend on to fund the restructuring. On the tax line, we get the cash flow benefit of tax reform. And as you know, with the restructuring charge that we take, there are also cash tax benefits that we'll have in 2018 that net us out to similar operating cash flow for 2018. Beyond that, we did give the higher expectation for capital spending. And so we would expect that we would take on some additional debt as we get into 2018 to fund the higher CapEx.

And in terms of the higher debt, should we anticipate that being through CP related? Or something more longer-term?

Yes. We do have a plan to make more use of CP. That'll give us the benefit of the very low rates that we are getting on that. And we've got a lot of capacity on the CP front.

Our next question comes from Iain Simpson with Societe Generale.

Just on your M&A comments, you highlighted that pretty much all of the acquisitions that you've done recently were buying out minorities. Could you just remind us what businesses with minorities you kind of have? And is there any comment you could make as to anything we should bear in mind on that? I mean the obvious one is Mexico but I just wondered if there were any others we should be aware of.

Yes, in Mexico, we're the minority. We own 48% of that one and the other 52% is a publicly traded company, so that won't be a little bit more complicated. Other than that, there is a very, very small minority shareholder interest in Central America. I think it's less than 5% of the operations and it's a family that seems pretty happy with that investment. And we've got a minority partner in Korea that owns 30% of the Korean business, and I think that's about it in terms of what's left out there.

Our next question comes from Andrea Teixeira with JPMorgan.

I just want to -- back into Maria's explanation about the financial expenses and layer into your guidance. As you take on more debt, I'm assuming -- you're assuming a much lower rate for, as you were saying. I just want to -- because you're taking more debt, but you're guiding for 20% lower financial expenses. Is that something related to hedging? Or anything that we may not be aware that would bridge the gap?

Sure, sure. We've done a lot of work to lower the tax -- the interest expense for the company. In 2017, we took out, as they came due, some or I should say we've replaced some high coupon bonds with much lower interest expense vehicles. For example, this summer, we took on $500 million of euro debt that's priced below 1%, as an example. And also as we closed out this year and with tax reform expected to come, we took out a very high coupon bond that was going to originally be due in November of 2018. So we took that out in December to play the arbitrage on the tax rate and get benefits there. So the actions we took in 2017 and have been taking to replace high coupon debt with low interest vehicles and then the early retirement of the November bond is what's driving the lower interest expense for 2018.

And then maybe just to add, we expect to maintain the A rating. And so the debt increases are fairly modest relative to historical standards for us.

That's helpful. So the average interest expense or the average interest rate is how much, if you can share against the 2017 average?

Yes. It's -- it is down. I don't think we share the specific.

Hopefully (inaudible) in a couple of weeks and you can do the math in the footnote.

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

All right. Well, we thank everyone for your questions and we'll conclude with a comment from Tom.

Yes, once again a lot of news for Kimberly-Clark. We are expecting to have a better year in 2018. We've got an aggressive plan to go execute, and we appreciate your support. So thank you very much for your time with us today.

Thank you.

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