金百利克拉克 (KMB) 2018 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's 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.

With us today are Tom Falk, Chairman and CEO; Mike Hsu, Chief Operating Officer; and Maria Henry, our CFO.

Here's the agenda for the call.

Maria will start with the review of first quarter results and provide a brief update on our Global Restructuring Program.

After that, Mike will share his perspectives on our results and the outlook for the year.

We'll finish with Q&A with Tom, Mike and Maria.

We have a presentation of today's materials in the Investors section of our website.

As a reminder, we'll 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.

Finally, we'll also be referring to adjusted results and outlook, both of which exclude certain items described in this morning's news release.

The release has information about these adjustments and reconciliations to comparable GAAP financial measures.

And now I'll turn it over to Maria.

Thanks, Paul.

Good morning, everyone.

Thanks for joining the call today.

Let me start with the headlines for the quarter.

We returned to delivering organic sales growth, with a solid increase of 2%.

Margins were impacted by significant commodity inflation.

Helping to offset that, we delivered strong cost savings and reduced overhead spending, and our adjusted earnings per share increased 9%.

And finally, we're on track with our restructuring program and our overall capital plan.

Now let's look at the details of our results.

Let's start with sales.

Our first quarter net sales were $4.7 billion.

That's up 5% year-on-year, with a 3-point benefit from currency rates.

Organic sales grew 2% in the quarter, led by improved performance in North America.

Mike's going to provide some more color on our top line in just a few minutes.

Moving on to profitability.

Our first quarter adjusted gross margin was 33.8%, down 310 basis points year-on-year.

Commodities were a drag of $175 million in the quarter primarily due to higher pulp costs and, secondarily, inflation in other raw materials.

We're now expecting that full year cost inflation will be between $400 million and $550 million.

That's $100 million to $150 million more than we assumed in January.

Meanwhile, our FORCE cost savings program continues to deliver strong results.

First quarter savings were $90 million.

Moving down the P&L.

Adjusted operating margin was 17.4%, down 140 basis points.

Between-the-lines spending fell 140 basis points as a percent of net sales as we continue to tightly manage overhead and discretionary spending throughout our company.

In a few minutes, Mike will talk about what we're doing to improve margins from the first quarter levels.

All in all, adjusted operating profit was down 3%.

In addition to the factors that I just mentioned, results benefited from volume growth and $20 million of favorable currency translation effects but were also impacted by lower net selling prices.

On the bottom line, first quarter adjusted earnings per share were $1.71, up 9% year-on-year.

That included about 7 points of earnings growth from a lower tax rate, along with benefits from lower interest expense and share count.

Turning to cash flow and capital efficiency.

Cash provided by operations in the first quarter was $542 million compared to $436 million in the year-ago quarter.

The increase was in line with our expectations and driven by lower tax payments.

We continue to allocate capital in shareholder-friendly ways.

Dividends and share repurchases totaled approximately $550 million in the first quarter, and we expect the full year amount will total $2.1 billion to $2.3 billion.

Looking at our results by segment.

In Personal Care, organic sales were even year-on-year.

Volumes and product mix each improved 1%, offset by lower net selling prices.

Overall Personal Care operating margins remain healthy at 20.4%, although down 120 basis points including impacts from commodity inflation and lower selling prices.

In Consumer Tissue, organic sales rose 5%.

Volumes increased 7%, while product mix was down 2 points.

Consumer Tissue operating margins of 15.8% were down 340 basis points.

Significantly higher pulp costs were partially offset by top line growth, cost savings and lower between-the-lines spending.

In our K-C Professional business, organic sales grew 2%.

Volumes increased approximately 2%, and price and mix were both also slightly positive.

K-C Professional operating margins were 19%.

That's up 10 basis points as our team continues to manage well in this environment.

Now let me share a brief update on our 2018 Global Restructuring Program.

Initial implementation steps are under way, and we're on track with our plan.

In terms of our administrative and overhead organization, in North America, we offered a voluntary severance plan to most of our salaried employees in the first quarter, and that plan is now closed.

Soon, we will begin to share more specifics with our workforce, primarily in North America, about our redesigned organization and the resulting implications.

We've also announced our intention to move our European shared service center from the U.K. to Poland in order to reduce our labor costs.

In terms of manufacturing facilities, we've announced our intention to close our consumer tissue facility in California and our plan to close our nonwovens facility in Wisconsin.

We continue to expect $50 million to $70 million of restructuring savings in 2018, with the vast majority of these savings occurring in the second half of the year as our workforce reductions ramp up.

With that, I'll now turn the call over to Mike.

Thanks, Maria.

Good morning.

I'm going to focus my comments this morning on organic sales and our full year earnings outlook.

As Maria just mentioned, organic sales grew 2% in the quarter, which is a good start to the year.

Performance included benefits from targeted growth initiatives, innovations launched over the past 12 months and increased investments in our brands.

On our conference call in January, I talked about our 3 main growth priorities for the year.

Let me now spend a few minutes on each.

Our first priority is to strengthen and grow our core businesses.

In North American consumer products, organic sales increased 3% in the first quarter, behind volume growth of 6%.

Market shares were up or even year-on-year in 5 of 8 product categories and up or even sequentially compared to the prior quarter in every category.

In Personal Care in North America, volumes increased 3%.

Net selling prices were down 2%, reflecting increased investment levels that helped our volume performance.

In terms of innovation, in the first half, we're launching product improvements on Pull-Ups Training Pants, premium Huggies Diapers, Huggies Baby Wipes, Poise pads and Depend underwear.

In Consumer Tissue in North America, volumes rose 9% compared to a decline of 7% in the year-ago period.

Results benefited from increased promotion support, a severe cold and flu season and promotion timing differences compared to last year.

Product mix was down 3 points because of the promotion activity.

Now in terms of product news, we're introducing new Kleenex wet wipes and bringing major bath tissue improvements to Cottonelle and part of our Scott lineup.

The bath tissue upgrades are shipping now and come with sheet-count reductions.

This will improve net realized revenue high single digits on nearly $1 billion in annual sales.

In our K-C Professional business, volumes were up 2% in North America, with growth in all product categories, led by wipers.

K-C Professional volumes increased 4% in developing and emerging markets, led by Asia-Pacific.

In our developed markets outside North America, organic sales rose 2%.

In South Korea, our diaper business continues to be impacted by a lower birth rate.

However, this was offset by strong results in our other consumer businesses there.

Now let me turn to our second priority, which is to accelerate Personal Care growth in developing and emerging markets.

First quarter organic sales for these businesses were even year-on-year.

Looking at some of our key markets, in Brazil, organic sales were up mid-single digits, driven by broad-based volume growth.

Market shares were up nearly 3 points in diapers and 2 points in feminine care.

Elsewhere in Latin America, organic sales were down low single digits.

That included lower volumes in Argentina, Chile and Colombia.

That said, our market positions are holding up well, including in Argentina, where Huggies share is up 1 point.

We expect our sales to pick up in Latin America.

We have a number of product innovations launching throughout the region, and we are implementing selling price increases to help offset inflation.

In China, organic sales were down mid-single digits as strong growth in feminine care was more than offset by lower sales in diapers.

We've just started to introduce a significantly upgraded Huggies premium diaper, and we have more innovation coming later in the year.

We expect these innovations will improve our volume trends in the coming quarters.

In Eastern Europe, organic sales increased mid-teens.

Our momentum continues to be strong in this part of the world, with another quarter of double-digit volume growth and share gains on Huggies and Kotex.

Regarding our third growth priority, which is to further build digital and e-commerce capability, we continue to make good progress.

Our targeted digital marketing programs, investments in tools to improve capabilities, and customer joint business plans are producing strong results.

That was especially true this quarter in North America.

So to summarize our top line, I'm encouraged with our start to the year.

We know we have more work to do because we continue to operate in a competitive environment.

That said, our first quarter results and our plans going forward give me further confidence in our 1% organic growth target for the year.

Now let me turn to our earnings outlook.

We continue to target full year 2018 adjusted earnings per share of $6.90 to $7.20.

That's year-on-year growth of 11% to 16%.

Our teams are taking actions to improve net realized revenue and reduce costs to offset the commodity headwinds we're facing.

We expect these actions will help improve our margins from first quarter levels, especially in the second half of the year.

On the revenue front, we're taking steps in several areas of our business.

Key actions include the sheet-count reductions in North America and the price increases in Latin America that I've just mentioned.

In addition, our consumer businesses in other international markets will be raising prices, and our K-C Professional team has begun to do the same in most regions.

While many of these initiatives were included in our original plan for the year, our overall expectation for selling price increases has improved slightly from 3 months ago.

In terms of our focus on costs, FORCE savings should build from first quarter levels.

In addition, as Maria noted, restructuring savings will occur mostly in the back half of the year, and our teams are moving with urgency to accelerate actions.

We're also redoubling our efforts to reduce discretionary spending.

In total, we expect these actions, combined with our volume growth initiatives, a slightly better currency outlook and some flexibility that we've built into our original 2018 plan, will enable us to deliver our earnings guidance for the year.

So to summarize, we're off to a good start to the year on the top line and with our market positions.

We're taking steps to improve our profitability, and we are broadly on track with our 2018 plan.

Overall, we remain very optimistic about our opportunities to create long-term shareholder value through successful execution of our strategies.

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

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

So I wanted to just ask a little bit about pricing.

So I think the sheet-count reductions in Consumer Tissue is something where you should probably have very good visibility, have done it many, many times before.

And your math is pretty easy to do.

Thank you for that detail, Mike.

I was curious, though, on the Personal Care business, particularly in North America and in Brazil.

So one is that in North America, I think we've heard, and we heard last week from a major competitor about things just getting a lot tougher on the private label end of the world in terms of retailers all kind of reacting to each other, we'll say, and the pressure that's putting on the lower-end pricing in their portfolio.

So I was wondering about your visibility on pricing on North America diapers, how much pressure there is there and if you really think you can move things up a bit more.

And then in Brazil, some chatter about some deflation in Brazil and it being a difficult place to get pricing.

And I was wondering to what degree that was critical to your forecasts.

I'll let Michael elaborate.

And I guess I'd say just kind of broadly, as you look at private label shares in North America, they really haven't moved around a lot.

Our first quarter -- our estimate of the first quarter private label market share for diapers in North America is about the same as the full year average last year and actually down slightly from fourth quarter.

So maybe we had a little bit different view of it than others might.

But I don't know, Mike, do you want to add anything else to that and then comment on Brazil and what's going on with pricing there?

Yes.

I think, Lauren, diapers, specifically, I think was maybe up 0.5 share point in the quarter in North America.

I think maybe the opportunity for us is -- we are evaluating some count reductions on diapers.

And then the other lever for us in pricing in North America would be fine-tuning our trade promotion plans, right?

So there's always an opportunity for us to adjust our frequency and our depth, and that's what we're evaluating right now.

With regard to Brazil, we have a good start to the year in Brazil.

Sales and volume and share were all up pretty good.

I will say we are taking pricing and have taken pricing in Brazil, and that feels like that has gone through, and the market has responded accordingly.

Okay.

And in North America, the frequency and depth, I mean, is that something that you're seeing competitors move to?

What's the retailer receptivity to that?

Because it feels like, if anything, retailers are looking at diapers as, whether you want to call it -- go as far as calling it a loss-leader, but something that drives traffic, bringing families in, et cetera, so I think that's a category, in particular, where they'd be wanting more and more support from their suppliers rather than less promotional activity.

Yes.

Obviously, Lauren, the baby category and mom is very important to retailers, and so they're very focused there.

But I do maybe have a different take, which is I think a lot of the pricing activity you're seeing may have been promotion-driven versus a retailer strategy.

And while I think they all want to be competitive on the diaper business, I think it's, in some ways, up to us to make sure we're managing the business appropriately for the long term.

And in this category, I think innovation and creating value-add and premiumizing the category over time is really the best way to grow a fixed consumption category, and that's what we're focused on.

And I think a lot of retailers will understand that strategy and approach.

Our next question comes from Jason English with Goldman Sachs.

Michael, I guess in your prepared remarks, early on, you talked about increased investment in brands to drive growth, yet you referenced in the press release kind of pulling back.

And if we look at the last few years, you've continued to sort of pull back.

It looks like this will be the fifth year in a row that, as a percentage of sales, advertising, if not marketing overall, has shrunk.

It begs the question of whether or not you may be under-investing behind your brands, particularly in the competitive environment.

Can you shed your perspective -- or share your perspective on that and why we shouldn't be concerned that you may need to reinvest going forward, particularly given the weakening top line, especially in emerging markets?

Yes.

Thanks, Jason.

Obviously, I think as a long-term driver, we do want to grow our investments behind the brands.

I think that investment comes in multiple ways, however.

And so I think, overall, I think we're very balanced on our advertising spend.

We've increased our promotional spend.

And as we saw the market kind of get more competitive toward the back half last year, we did share some funds into both consumer and trade promotion.

And as we go forward this year, I think we've got very strong investments, both in terms of product and innovation in China and North America and in Latin America, and we strengthened our execution or our merchandising investments in the brands.

And Jason, just to build on that, I mean, everything we moved to digital coupons winds up being a reduction in net sales and kind of showing up as negative price, even though we might argue that that's a strategic targeting of an individual consumer.

Okay.

That's helpful.

And then real quick, if you could delve in a bit more into China.

The decline there this quarter is a bit surprising.

Can you talk a little bit more about what's going on?

You're talking about innovation.

I mean, when you talk about innovation, it seems like you have a pretty full product cycle for quite a few years there, but your -- yet your position in the market has kind of been eroding.

Are there more structural reasons that you could be losing ground?

Perhaps it's the Made in China stamp that's on your product?

Maybe it's the marketing posture?

I'm not sure.

I'm hoping you could shed light on that.

Yes.

There are usually a couple of headlines, Jason, that Mike can build on.

I mean, pretty much all the big international branded players lost share in the last quarter.

And so it's been the local Chinese brands that have actually probably picked it up through e-commerce, and so -- and that's really just in BCC.

In fem care, we had a great quarter with strong growth.

And so China is a tough competitive market.

It's a huge market with huge potential.

We're -- we've got lots of innovation coming, and we still believe in the opportunity there.

But it's a tough competitive place in the short term.

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

Yes.

Just as Tom said, Jason, I think the China diaper category is under a little bit of pressure from the local players, and we're addressing that with a major launch of a significant product improvement on Huggies.

China, overall, remains our single largest growth opportunity, both in the near term and over the long term.

Pricing has been competitive, but I think that's stabilizing.

And I really believe fundamentally, in China -- well, it's not structural.

It's product performance and features are still the key driver of brand choice, and that's still what's driving that marketplace.

And so we are launching our best-ever diaper that delivers a really significant improvement in both thinness, softness, breathability and absorption.

I mean, it's a pretty impressive product.

We're excited about it.

It outperforms -- it's certainly better than what we had out there before and outperforms all major competitors.

So we expect that's going to improve our performance as we get into the back half of the year.

Just starting to ship now.

Well, it's going to be a competitive market for a long, long time just given the opportunity there.

Our next question comes from Ali Dibadj with Bernstein.

I guess a few things.

One is just to talk a little bit more about the negative price/mix dynamics in this quarter and then kind of going forward, in particular, in North America.

Because you guys just said a second ago the retailers aren't the ones pushing you on price.

They kind of have a little bit more buy-ins from the de-sheeting perspective in tissue, at least, and maybe even a reduced count in diapers, it sounded like.

But private label, you can see in the Nielsen data, you guys mentioned it, has gone up, actually, quite a bit.

The 50 basis points is not small in the past quarter.

And so let's just say, even assume, the retailers get it.

I mean, again, private label's in their choice, right?

Let's assume even the retailers get it, how come you have more confidence that the competitors are getting it?

P&G, for example, gets it, that pricing should be more benign going forward or more positive as opposed to you guys losing a lot of share.

I'm trying to dig into that incremental confidence you have.

So maybe I'll give you some macro view, and then Mike can give you some details.

I mean, number one, if you look sequentially, price for us was negative 2 in the fourth quarter.

It was negative 1 in the first quarter.

So it did ease a little bit, not a lot.

And we have some initiatives in the marketplace that roughly track commodities.

When you see commodities move at this level historically, you typically see some finished product price recovery, either a pullback in trade, a little bit less depth, and you're starting to see some of that play out in different markets around the world.

And so I think that's not surprising, and we'll see how the rest of the year plays out.

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

No -- I mean, Ali, we're trying to be balanced.

And obviously, we need -- we want to drive the organic growth, but we also want to deliver our margin commitments, and so we are walking that balance.

And so the opportunity for us is -- we've evaluated opportunities for count reductions and have a few -- quite a few in the plan, but the other opportunity for us is to get more efficient with our trade spending.

And we're looking at the competitive marketplace, and our field teams have a good sense of what is required to drive the promotional list that we need.

And we think we have an opportunity to fine-tune it.

So just continuing on this, are you leading the planned price increases?

I'd say, in general, we're probably matching up globally with competition.

I was going to say some of them -- as an example, we didn't lead it, to put -- to be clear.

You did not?

In some large market examples that have happened recently, we did not lead it.

And then from a production on pulp price, I know you guys are very loyal to the RISI numbers.

Can you give us an update on what that's looking like going forward?

Last quarter, we all talked about the RISI numbers being perhaps a little bit too positive in terms of pulling the pulp prices down, at least on NBSK, it seemed like, towards the end of this year.

Can you tell us where that is and how you guys are modeling the prices at this point on pulp?

Yes.

I mean, we use RISI because they've been the best forecaster out there.

I don't know that we're in love with any of them.

And I think every pulp forecast I've ever gotten in my career just about always had a positive upward slope, and they're only right half of the time.

So at this point, every forecast we get lately, pulp prices look like they're going higher than the last one we got.

And so you're certainly -- having seen pulp markets in the past, they can get a bit frothy.

And if the producers are disciplined on taking downtime and you get some Chinese demand, you can definitely see some upward moves in pulp price.

And that's certainly shown up in some of the RISI data we've seen lately, and that's kind of -- the high end of our forecast range is kind of the worse case than what we're seeing from RISI lately.

So not tailing off until lower by the year-end of the year, effectively, is what you're saying?

I think that's what the current outlook would look like.

Okay.

And then my last question is just this mix between -- I think between-the-lines, as you call it, or A&P, I guess, spend as part of between-the-lines versus trade spend.

I get that you can shift from A&P to an online coupon, and you get a response, right?

It's a transactional response.

But is that building brand?

Or are you training the consumer to be more looking for and seeking of deals, so you're actually hurting the brand over the long term?

And this is a debate we've had with many other companies who...

A very philosophical question this morning, Ali.

I'd say, first of all, every coupon is a company with some other kind of a brand message, and you want to click through -- get the consumer to click through and see your other brand equity-building messages.

And it is one of the things that we do think about, is that are you building equity in the right places.

And to Mike's earlier comment, I -- we believe product innovation and having winning products, talking about it in the right way and, in some cases, providing an incentive to try is the way you build brands long term.

But we are -- I think we're all trying to figure out how do we build a one-to-one relationship versus a mass media blast way of building brands.

Yes.

Ali, we're pushing a big shift into digital.

It gets more complicated because some of it goes into consumer promotion.

A lot of it, actually, goes into trade because we do some -- quite a bit of it through our customers with online media.

And that may -- it may not necessarily even be a coupon.

It could be a pure ad.

And we're finding we're getting a lot of efficiency in terms of ROI on it because it's allowing us to target our consumer with a lot more precision.

I was just with our Asia-Pacific team last month, and they were showing that the hits on target more than doubled over the past year in terms of reaching our target audience versus the spillover that you might get on TV.

Our next question comes from Stephen Powers with Deutsche Bank.

So I guess a little bit more on pricing, if I could.

So I guess if the environment's as constructive as I guess it sounds like you're implying, with branded and private label pressures may be less severe than many of us perceive, haven't we seen more pricing to date?

And why should things change going forward just because -- I mean, gross margin is down 300 basis points year-over-year.

It's a pretty -- just implies a pretty difficult backdrop.

So I'd just love a little bit more kind of clarity between what we're seeing in the actual data and then what your -- just like the qualitative communication today seems to be implying, there seems to be a disconnect there.

So just any color you have there would be great.

We don't want you to misread that we're saying it's an easy pricing environment.

It's not.

It's a challenging, competitive environment.

As we would look at our gross margins, it's down significantly year-over-year.

It's down about 100 basis points sequentially.

So it's not that far off from where it was in the fourth quarter.

Some of the pricing actions we talked about are just going into the market now or they've been announced and will roll in, in the second quarter.

So we didn't get a lot of it in the first quarter results.

And I think like everybody else, pricing has set an expectation.

And as commodity cost expectations have increased during the quarter, that's caused some of our teams to go back and relook at their plans for the year and see where else we can generate more revenue.

Mike, I don't if you want to build...

Yes.

I wouldn't -- Steve, I wouldn't -- I don't think we're trying to imply whether the pricing environment is difficult or easier.

All we're trying to suggest is these are the actions we've taken, which is we have taken some count reductions.

We are managing our trade budget to be much more efficient, and we're looking at the frequency and depth of our promotions.

Okay.

Maybe just it would help, on the sheet-count reductions specific -- that you mentioned in North America, is that an initiative you've led?

Or are you following someone else's action in the market?

I believe that our key competitor has already taken that in 2017, and so -- and we're coupling it with a significant product improvement, because it's also -- it's much easier to get price or revenue recognition when you've got innovation to package it with.

It's a whole different conversation with a retailer if you've got a better-performing product, and, oh, yes it costs a little bit more.

It's even a different conversation with the consumer.

If it's a straight list-price change, that's a little harder for them to swallow sometimes.

So some of the pricing actions are tying into innovation activities that we have planned as the year rolls out.

Yes.

For example, Steve, on Cottonelle, we've got a terrific product improvement, superiority versus other brands, and it's a breakthrough-type product for us.

And that did come with the sheet-count reduction, high single-digit, in fact.

Okay, great.

I guess -- and one last one, if you could.

Just given the way you've guided commodities, which effectively is below current spot and below year-to-date run rates, I guess in the context of pricing, I'm just trying to understand how you frame that, what's the pitch to retail partners, because it seems, on the surface, a bit muddled.

But we faced a lot of pressure.

We think commodities will trend lower, but we need some pricing.

And I'd just love some commentary there.

Well, they're still going to be higher significantly year-over-year.

I think -- and they're all launching it, and they're seeing it across other categories as well.

So it's not enough (inaudible).

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

Can you talk about how you're feeling about your market shares and relative strength, where you're seeing some improvements?

Because your commentary is clearly more optimistic than some of your competitors', and obviously, you're looking to price.

So I just would love to hear a little bit about market share, specifically in Tissue and Personal Care.

Yes.

I mean, Mike can give you a little bit more detail.

I mean, I would say we weren't satisfied with our market shares in 2017, and we had a better start to the year in the first quarter.

And so I think our -- and we track the major markets and major categories, and I think we were up in almost 60% of those in the first quarter.

But we'd still say that's kind of bouncing back from a tougher year in 2017.

So we're pleased, but we're not satisfied, I guess, is the way to describe it.

Yes.

I'd characterize it, Olivia, as maybe a good start to the year, but we want to continue to focus on it.

Overall in North America, overall, up about 1 share point, up in 5 of 8 of our overall categories, up in Brazil, significantly; Argentina; Eastern Europe, up a couple of points as well.

I think the one area that we need to improve, and that's where we're bringing innovation, is in China, where we're down about -- down a couple of points in diapers.

Good progress in fem care.

Got it.

And that sort of leads into my question about emerging markets because it's surprising to see that your sales were worse in emerging markets versus developed markets.

Typically, you don't see that.

So you mentioned earlier a lot of the local competitors kind of getting better in online, but I thought your shares were better -- or your shares were higher online than off.

So can you talk about the disconnect there?

Yes, that's still true.

I think online is a place where you probably have fewer barriers to entry, and so there's more players coming into that space.

And if you get trial in a category, you can drain off some of the growth in that category.

I mean, is most of the new products -- most of the innovation that's launching in China, is that primarily going to be in Q2?

Or is it more equitable through the year?

We'll have a big push in Q2, but then there's more coming later in the year.

Yes.

A lot of it is shipping out right now, yes.

Our next question comes from Bonnie Herzog with Wells Fargo.

I have a question on private label.

I know you guys are somewhat confident about your position against private label.

But some of the channel data we look at suggest that private label continues to make inroads in just kind of your larger categories.

So curious to hear if you guys are noticing instances where you might be losing shelf space to private label at retail?

Or possibly, are these share gains coming at the expense of some of your competitors' products?

Yes.

Okay, Bonnie.

We're following the private label trends very carefully, particularly, I think, in North America.

Our focus is really on differentiating our brands with value-added innovation and partnering with the customers to focus on category growth.

The overall penetration levels over -- if you looked over the past 5 years, had been at similar levels, down overall in Personal Care and up a bit In Consumer tissue.

We are focused on differentiation.

Where we've done that well, we've been able to grow our share, and that's occurred in categories like adult care, diapers and wipes.

Where we need to do a better job is in the bath tissue category, where private level penetration has grown a bit over the last couple of years.

And that's why we're bringing some significant innovation this year with Cottonelle and Scott Comfort Plus.

Okay, that's helpful.

And then I just had another question on your supply chain.

Some of your peers have talked about steps they've taken across their supply chain to really, I guess, adapt to the changing retail inventory demand patterns, and, I guess, in a sense, to more rapidly source products to reduce system inventory.

So I guess I'm curious to hear what steps you guys might be taking to reduce system inventory thus far and whether there are still improvements you can potentially make.

Yes, that's a great question.

I'll have Maria build on that.

And really, we're trying to keep our retailers in stock while minimizing system inventory, but there's a lot of stuff that we're working on.

Maria, maybe you can give them some color on that.

Yes.

I think there's a couple of points there.

As you know, we've got significant activities in our company to improve our overall supply chain: one, just generally through our FORCE cost savings program; and two, with our restructuring there.

We've taken that global view of our manufacturing network and are taking some steps to improve our advantages there.

In terms of the retailer inventory, I do think it's worth noting that, that was not an issue that we saw this quarter.

And so we're working the supply chain overall.

Clearly, it's evolving as new channels are evolving, and we're working with our key customers on how to make all of that work and continuing to improve what we've got.

Our next question comes from Kevin Grundy with Jefferies.

I wanted to drill down on gross margins a bit, if we could.

So if I'm not mistaken here, and looking at our model, it was the lowest gross margin you guys have delivered since the first quarter 2012.

And of course, we understand that the environment is difficult and input costs have moved higher.

But how should we think about this now?

Particularly, 2 pieces to it.

Number one, in the near term, the progression for the balance of the year.

Input costs, clearly higher.

You talked about some pricing you could potentially get.

But then also, the longer-term component of it, so your ability to restore gross margins to current levels.

I guess I ask it in the context of a couple of things.

Number one, Street expectations seem to suggest something in the 36%, even close to 37% range.

Looking out to 2020, is that a feasible number?

You delivered something close to that looking back to 2016, but is the environment different now?

And the market sort of discussion here is not lost on you guys in the least just in terms around CPG brands' strength, ability to take pricing maybe perhaps impaired.

So commentary there would be helpful.

Number one, the near term, the cadence here in the gross margin for the balance of the year.

And then the second piece, sort of longer term, what's your confidence now that we can come off of this sub-34% level and restore it something closer to where expectations -- Street estimates currently are in the 36%, 37% range?

Yes.

I think those are all important questions, and I'd say if you -- we've got a pretty significant commodity exposure.

And so you're going to see some swings in our gross margin.

When commodities are relatively low, gross margins will spike up a little bit and vice versa, which is what we're going through right now.

If you kind of look at the quarter, virtually all of the decrease in our gross profit, if you net it all out, was the negative price item.

All the other stuff, commodity costs, net of cost savings, net of currency benefit, kind of washed out, and the price kind of fell through the bottom line.

So as we roll forward, we hope we have more positive pricing comparisons as we get some price in the market.

This is probably the toughest commodity cost year-on-year comparison in the quarter, so commodity costs will start to lap those increases.

That started to happen in the second half of last year.

We expect our cost savings to build, both from our FORCE cost savings program and our restructuring cost savings, some of which will hit gross profits, some of which will hit in between-the-lines.

So we've got a lot of levers pulling that should improve our gross profit perspective as we work through the year, and that's kind of what our guidance is built around, if that's helpful.

I mean, directionally, it helps.

I mean, like more specifically, because I guess I think the market concern would be that '15 and '16 were sort of peak margins for this business.

The environment's now changed, particularly in the U.S. There's a balance-of-power shift to retail.

The pricing is going to become more difficult, that those levels are just not something that can be attained again.

It will be increasingly difficult.

Would you agree with that characterization on -- just specifically on quantifying that number, is that a realistic number?

I mean, I would say, as you look at our margins over a long, long period of time, they're going to oscillate around the commodity cycle, and there's usually a lag between when commodities go up and when you get price.

And then when commodities hit bottom, there's a lag before your price adjusts downward, if it's going to.

And so my goal is that there's still a positive upward slope to the line and that, hopefully, over time, we're getting more efficient.

We're driving more innovation.

We're improving our product mix.

And if we can do that, we should see long-term positive trend on gross margin.

You can have pretty big swings, as we've seen this quarter, from commodities in any one period of time.

That's helpful.

I appreciate it.

If I could just squeeze in one more and on a non-related topic, just around balance sheet flexibility and capital deployment decisions.

So the group has obviously been weak, and Kimberly included in that, with the market increasingly concerned around competitive dynamics, the moat of these businesses, et cetera.

And you guys haven't traditionally looked at M&A, and your balance sheet is in good shape.

So have you considered potentially buying the stock back more aggressively?

Would you add 0.5 turn of leverage or so and implement an accelerated share repurchase program?

Is that something that you think about given the pullback in the stock price?

Well, I'd say a few things.

We have a very balanced view on capital allocation, where we're looking to invest in our business, grow our dividend, And beyond that, then we look at what are M&A opportunities and what's the excess cash flow that you have in the business to look at how much to allocate to share repurchases.

From a leverage standpoint, I like our position at just around 2x leverage.

And maintaining our A credit rating is important to us because it does provide flexibility.

It provides access to lower-cost commercial paper.

And in a competitive environment, it's important to have a strong balance sheet so that we can deliver against our model, really, in any economic cycle and also not be competitively disadvantaged, where we've got large global competitors that also have strong balance sheets.

I would say that, while we haven't done a lot on the M&A front, we do look at it.

We actively look at M&A opportunities.

We've got a team of folks.

And as you can imagine, given our size in the space, if something's moving, we're probably looking at it.

But we're very disciplined in how we allocate our capital, and so you haven't seen us pull the trigger on M&A because we haven't found something that makes economic sense and that we believe will create long-term shareholder value.

But we do like the flexibility that the balance sheet gives us, and there are advantages to having that flexibility.

And, Kevin, the only other build I'd add for you is that we've just kicked off this big restructuring program.

I know over the next couple of years, we're going to be spending more than normal on capital spending and maintaining a healthy share repurchase program, so that is going to put a little bit of pressure on our debt in the near term.

But we think investing in our core business, with the work that we're doing with the restructuring program, is a very high-return approach for us relative to other things that we could do with the money.

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

Just 2 questions for me.

The first one is just broadly on category growth.

Just would love to get your perspective on some of the major markets, particularly in North America.

And then the other question is, how does Kimberly-Clark measure consumer value equations?

And has the methodology changed?

And I guess I'm asking because there's so much change going on in the marketplace.

Like how do you make sure that you have the right value propositions relative to the peer group just given what's going on with private label, online, emerging brands, et cetera, et cetera?

Yes, okay.

Nik, one, on the overall category, North America, I think maybe the headline was -- the big change was in diapers with the infant and child care category, which was flat across all outlets last quarter, which was the first time it was flat since 2016.

So that was a big change.

You may know that was down mid single-digits most of last year, so that was a big change for us.

And then most of the other categories in North America were generally consistent or slightly improved from prior quarters.

So I think green shoots, I think, on the category front in North America.

And then in most other markets, I think in Brazil, we're encouraged with -- it looks like GDP is expected to grow about 3% this year.

Unemployment was down a little bit less than it was -- than we had expected in Q1.

So we're off to a very good start in Brazil this year.

China, I think the diaper category overall continues to grow.

It's just, I think, the competitive situation has gotten a little tougher due to some product innovation from the local competitors.

Any other?

And the consumer value equation question, Nik, is another philosophical question.

It's one that is probably more opaque because you don't have visibility of what everybody's doing in the digital space, but it's one that -- we're continuing to try to refine our measures and test different things to see how to assess that.

I don't know, Mike, if you've got anything else that you can share that's not proprietary on that.

No -- yes, Nik, I think we're pretty disciplined.

I mean, the equation side is like what are the brand benefits, product quality, the brand impressions, all those -- the bundle of features and benefits that we're offering, and we're pretty disciplined about assessing our, what we call, product acceptability or how good our product is in absolute terms relative to both brands and private label.

And then the denominator of that equation, obviously, is the price.

And our strategy is we want to be superior on the benefits and competitive on the price, which is why you're seeing -- when we talk about fine-tuning promotions -- I think last year, I was talking about fine-tuning and getting a little bit more competitive on price.

And then this year, I think the fine-tuning, given the commodity environment, is headed the other way.

Our next question comes from Jonathan Feeney with Consumer Edge.

I wanted to follow up on the discussion, I think, Bonnie started with a couple of specifics.

So when I look at -- was North -- was volume, and North America volume, particularly, better than your expectations this quarter?

And I wanted to maybe parse out how, in general, when you're making big supply chain moves, you approach that volume-price balance because, on one hand, you want the absorption to be right that would tend to emphasize volume, but you also want the price to be right?

Or does that supply chain move inform your strategy in North America, specifically, at all?

Yes.

I mean, I think maybe to simplify it is we really want our supply chain to track closely consumer demand and consumer takeaway.

So we want -- the consumer is the boss, so we want her and her purchase patterns to drive our supply chain, and we need to be able to react to that.

And then our teams are planning the business in 6-month buckets as to when they have promotional activity planned.

And we are trying to get better and better at our ability to forecast that and make sure we deliver outstanding customer service and can fulfill everything that we committed to our customers to go to.

And so we plan to have a better start to the year in North America.

And I'd say, Mike, it even started a little better than we would have expected, but our supply chain was able to adapt to that.

Our next question comes from Andrea Teixeira with JPMorgan.

So my question is on the cost and expense savings program.

First, if you can elaborate on the discretionary marketing spending reduction you called in since guidance in the last quarter.

Any examples of the cuts you have implemented?

Is that TV, sampling?

And the second part of the same question, on the manufacturing footprint, the closure of the California plant that Maria referred on the prepared remarks, that seems to coincide with the increase in the imports from Kimberly Mexico, which you have a minority interest.

Is there a plan for you to increase to do this cost-plus agreement with Kimberly Mexico?

And the reason why I ask is that you had $90 million in cost savings this quarter as far as I understand, which is tracking below your $460 million for the year at the midpoint of guidance.

So I wanted to see if you can elaborate on those 2 points.

Yes, sure.

I'll start with your last point just to pick up on some of the comments that Tom made on the $90 million of FORCE cost savings.

That's a good first quarter for us.

We expect that those savings will ramp through -- as the year goes on throughout the year, and we are still holding to the $400 million target that we've got for the year.

In terms of the manufacturing footprint and specifically the plant-related actions that we're taking as part of the restructuring, as we laid out our restructuring program, we did a lot of detailed planning on how we would fulfill demand as we move through the restructuring and then longer term.

And we've looked to optimize that.

What I would say is K-C de Mexico is a great partner for us and a very strong company.

They had nice results this quarter.

And it's certainly an option.

But as we looked at our overall footprint optimization, the majority of the sourcing comes from Kimberly-Clark plants.

And then your -- first part of your question was around our lower SG&A expenses, and I think it was particularly around advertising.

And what I'd say there is that we've done a deep dive on our advertising expenditures in all of our major markets.

And what we found is that we had an opportunity to reduce the amount that we're spending on nonworking advertising activities and redeploy some of those funds to working advertising.

And so that's an area that we're focused on.

And then as we talked about earlier, there's a shift between doing mass advertising and doing more specific, targeted activities, some of which -- such as digital couponing and outside of the advertising line.

So when I look at our overall investment, I think we're in a good place, even though you see the advertising line on the P&L a little lighter than it was last year.

Yes, maybe just to put that in perspective, I mean, yes, it's going to be -- we're roughly 10 basis points down from the average of last year.

First quarter was the high watermark last year.

Some of this also has to do with timing of innovation and when new products will launch.

I mean, we're still committed to supporting our brands at the right level, both with advertising and as well as promotion.

Yes, (inaudible).

I just know when we look at focusing on the cost reductions and the discretionary spend that I talked about, there's an intense focus more around the general expenses, on the general and administrative expenses on the P&L.

And I think when you look at the numbers, you saw some really good progress there again in the first quarter.

No, this is very helpful.

Just one quick fact check on the -- what Maria said.

The $90 million obviously tracks well with the FORCE, but then this quarter, I don't think you had much of the other restructuring program savings.

Are you still tracking to that amount for the full year?

Yes, yes.

So we've got -- in addition to the FORCE cost savings, we're targeting $50 million to $70 million for benefits from the restructuring program.

And those are expected to come in the second half.

I mean, basically, in the first quarter, we announced the plan to our employees and got organized to implement it.

And so, as Maria mentioned, we did a voluntary severance program in North America.

That is now closed, and those job reductions will start to take place in the second quarter.

So we'll start to get savings more in the back half of the year from that effort.

Our next question comes from Caroline Levy with Macquarie.

Having just got back from many different places in Asia, the commentary on the local competition in China was really brought home when I was there.

And I'm just trying to understand how a product that can be substantially below your quality, which I believe it really is in these local cases, how the innovation is going to drive the local players out of the market, because it seems to me they're not really competing on product quality.

They're kind of competing on something else.

That was my first question.

The second is, please, if you could address whether you're doing any private label production, if so, if it was meaningful to the first quarter.

And what percentage of your sales goes online in the U.S. right now versus China?

That's 3, sorry.

Okay.

Yes.

Yes, we can -- between Mike and I, we can probably cover those.

I mean, I think in China competitive, you raised an interesting point, and there's lots of interesting products available over there.

Some are good and some are not.

Some are very high-priced, even well above the price that you pay for a premium or super-premium international product.

And if they get trial, they might not get repeat, but they can still pick up some market share.

And our hope is that, over time, we're building loyal consumers that want to stay in our franchise.

But moms, especially moms in China who want the best for baby, are exploring new ideas and trying new things.

And so there's just a lot more competitive offerings in that market.

And so our belief is product performance matters.

If we do a great job of delivering on that and talking to the consumer about it in the right way and having it in a place where she can find it, that we're going to win in any market, including China.

And then I think -- private label production, I mean, is a tiny part of our business overall.

It's less than 5%.

I mean, I think I wouldn't really comment too much on that.

And then e-commerce in China, Michael is probably...

Overall, it's about a 50% penetration in China, about -- probably north of 70% in Korea, depending on the category we're talking.

And then North America, mid- to high single digit, but that varies quite a bit amongst categories, with diaper being significantly higher than that.

So diaper is double digit in terms of market share online in U.S.?

Yes.

Yes.

Well, market share and also penetration, right, category penetration.

That's also -- I want just to be clear, the data is not as robust as other data we would give you because there's a ton of retailers that are doing Click & Collect.

Virtually every retailer is doing some form of Click & Collect, and none of that is counted anywhere in an e-commerce measurement because no one collects the data that way.

So that probably is bigger than any number we would quote you in North America, but we don't have any way to measure it, really.

Yes.

And I'd add, Caroline, we're doing well in e-commerce.

I think we grew strong double digits overall globally last year, and we're expecting similar results this year.

And last one.

Did you grow double digits in China e-commerce?

Was that down quite substantially?

I guess it must be, actually.

I don't have that number right now.

Our next question comes from Lauren Lieberman with Barclays.

Just one quick question on freight costs.

It's just a topic kind of across the industry that's not something we've talked about much.

So what are you guys seeing in terms of freight inflation?

Is it generally kind of in line with your going-into-the-year expectations?

Or is that something we should just be thinking about as well?

Yes.

It's an issue.

And we ship high-cube, low-value items, so freight is a big cost for us.

But we probably -- we are less of a spot freight buyer and more of a contract freight buyer because of that.

And so we probably have been buffered from some of the spot gyrations than maybe some that are structured a little differently or freight is a smaller part of their cost that might manage it in a different way.

So in our high-volume freight lanes, we have contractual relationships that we pay higher diesel, but we aren't paying some of the other costs.

Now we may eventually have some pass-through when those contracts are renegotiated, but for the moment, we're not suffering quite as much as others.

That's helpful.

Our next question comes from Ali Dibadj with Bernstein.

So 2 things.

One is, North America e-commerce, clearly, is one of the focus areas for you.

Can you give us a sense of your online share versus your offline share and a sense of the pace of that closing, if at all?

Yes.

I mean, I'd say, broadly, in total, our online share is pretty similar to our offline share.

In fact, it might even be a little bit higher because there's no private label, typically, in your online share.

But it can vary a little bit by category.

But I would say we're competitive.

Because there is less private label online, we would probably want it to be even higher than our offline share.

Yes.

And we vary by category, so a little bit ahead maybe in -- in maybe tissue and adult and fem care.

And maybe we got off to a little bit of a slow start years ago on the diaper category, but we are gaining ground in diapers as well.

Okay.

And no private label except that private label you guys might be making or might not be making for Amazon?

So I wondered if I (inaudible)...

You couldn't resist that one, Ali, I guess.

Just trying to chum the water and see if I take the bait, is that the strategy this morning?

No, no.

Look, you guys are very good with that stuff.

On private label, in general, look, I get it.

For you guys, I get it's less than 5% of your sales.

Can you give us a sense of the growth of that less than 5%?

I mean, I wouldn't say it's been something that we would feel like we needed to talk about or we would have talked about it.

So it's one that -- we've got a very small number of customers that we do that for, and we're happy with the business.

I think they're happy with the business.

But we really are focused on driving innovation behind our brands and winning with that total bundle.

But it's growing much faster than your underlying business.

Is that a fair assumption?

I don't think I would agree with that statement.

It hasn't changed much as a percent of sales, let me put it that way, over time.

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

All right.

Then we will wrap up with a comment from Tom.

Well, again, we're off to a good start in the first quarter relative to our plan for the year.

And so it's a challenging environment, but you can count on your Kimberly-Clark team to try to manage through that as best as we can.

Once again, we appreciate your support of Kimberly-Clark.

Thank you very much.

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

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