金百利克拉克 (KMB) 2018 Q3 法說會逐字稿

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

We now have your presenters in conference.

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

Thank you, and good morning, everyone.

Welcome to our conference call.

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

Today's call will focus on 3 things: our third quarter 2018 results, our full year outlook and this morning's announcement that Mike Hsu has been elected Kimberly-Clark's next Chief Executive Officer effective January 1, 2019.

This morning, you'll hear from Tom, Mike and Maria, and then we'll finish with Q&A.

As usual, we have a presentation of today's materials in the Investors section of our website.

As a reminder, we will be making forward-looking statements this morning.

Please see the Risk Factors section of our latest annual report on Form 10-K for a further discussion of forward-looking statements.

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

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

Now I will turn the call over to Tom.

Thanks, Paul, and good morning, everyone.

I'd like to be the first to congratulate Mike Hsu on his upcoming move to become Chief Executive Officer of Kimberly-Clark.

So congratulations, Mike.

The Board of Directors and I have been working on this succession plan for several years, and it was my recommendation that Mike is the right choice and now is the right time.

So this is a carefully planned and natural transition, and I'm confident Mike is the right leader to build on Kimberly-Clark's nearly 150-year legacy of caring for the needs of people around the world while delivering top-tier performance.

He's passionate about our people, our brands and our businesses, and he has a deep understanding of what it takes to win in the marketplace.

Now let me hand the call over to Mike.

Good morning, everyone.

First, I'd like to thank you, Tom, for your tremendous leadership of Kimberly-Clark over the past 35 years, especially the last 16 years as CEO.

And during your tenure, you really transformed K-C into one of the world's leading consumer products companies.

You've also been a great mentor to me, and I'm honored to lead this great company and I'm excited about our future.

So now back to the business at hand, I'm going to turn the call over to Maria to talk about the third quarter results.

Okay.

Well, congratulations, both Tom and Mike.

Tom, your great leadership and mentorship since I joined in 2015; and Mike, looking forward to the future.

So as awkward as it is, I'm going to pivot to the headlines for the quarter.

So let's get into it.

Organic sales were up 1%, driven by 3% growth in developing and emerging markets.

Margins and operating profit were impacted by significant commodity inflation and negative foreign currency effects.

Helping to partially offset those headwinds, we delivered strong cost savings and reduced overhead spending.

And with the benefit of lower taxes, our adjusted earnings per share increased 7%.

And finally, we continue to return cash to shareholders.

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

Our third quarter net sales were $4.6 billion.

That's down 2% year-on-year with a 3-point drag from currency rates.

Organic sales increased 1% versus a year ago.

Net selling prices and product mix each improved 1%, while volumes fell 1 point.

Moving on to profitability.

Third quarter adjusted gross margin was 33.2%, down 250 basis points year-on-year.

Third quarter adjusted operating margin was 17.4%, down 120 basis points.

Commodities were a drag of $210 million in the quarter, primarily due to pulp and other raw materials.

We're now expecting that full year commodity inflation will be in the upper half of our previous estimate of $675 million to $775 million.

Foreign currencies were also a sizable headwind in the quarter, reducing operating profit by a high single-digit rate.

On the other hand, we achieved $105 million of FORCE cost savings, including significant benefits from negotiated short-term raw material contracts.

We also delivered $40 million of cost savings from our restructuring program.

In terms of that program, we're making good progress overall, including closing a small consumer tissue converting facility in Latin America this quarter.

In addition to the restructuring, we also continue to reduce our overhead costs.

In total, between-the-line spending declined 150 basis points as a percentage of net sales.

All in all, adjusted operating profit was down 8%.

On the bottom line, third quarter adjusted earnings per share were $1.71, up 7% year-on-year.

That included significant benefits from a lower tax rate, along with lower interest and share count.

We now expect the full year tax rate will be between 21% to 22%, which is better than our estimate of 23% from 3 months ago, largely because of some planning initiatives.

I'm pleased that our effective tax rate is expected to be below target this year.

Looking ahead, at this point, I expect our rate in 2019 will move back up somewhere into the 23% to 26% range that we initially targeted for 2018.

Therefore, we're expecting that the tax rate will be a pretty significant year-on-year earnings headwind for us in 2019.

Now let's turn to cash flow and capital efficiency.

Cash provided by operations in the third quarter was $662 million (sic) [$692 million] compared to $805 million in the year ago quarter.

The decrease included a $100 million U.S. pension plan contribution, restructuring payments and the benefit of lower taxes.

We continue to allocate capital in shareholder-friendly ways.

Dividends and share repurchases totaled approximately $520 million in the third quarter.

We expect the full year amount will total $2.2 billion, in line with our $2.1 billion to $2.3 billion target.

Looking at our segments.

In Personal Care, organic sales were up 2%.

Performance was led by developing and emerging markets, with organic sales up 5%.

In terms of the highlights for D&E Personal Care this quarter, in Brazil, organic sales were up high teens, including inflationary-driven price increases and solid volume growth on diapers.

In Argentina, organic sales were also up high teens as price realization continues to accelerate while our volumes, both for us and for the category, were down.

In Eastern Europe, organic sales increased double digits for the fourth consecutive quarter, with strong volume growth on Huggies and Kotex.

In China, organic sales were down high teens due to lower diaper sales and continued challenging market conditions.

Elsewhere in Asia, ASEAN, which represents about 3% of Kimberly-Clark sales across all of our business segments, ASEAN had strong double-digit organic sales growth in Personal Care driven by Huggies in Vietnam.

Personal Care organic sales were up 2% in North America.

Infant and child care volumes increased high single digits compared to a mid-single-digit decline last year.

Pull-Ups Training Pants momentum remains strong, and Huggies Diapers benefited from growth in e-commerce and the timing of promotional shipments.

Adult care volumes were down mid-single digits, reflecting strong growth last year, changes in promotional timing and competitive activity.

Overall Personal Care segment operating margins continue to be healthy at 20.7%, although down 40 basis points year-on-year.

Switching to the Consumer Tissue segment.

Organic sales fell 2%.

North America organic sales declined 5%, primarily due to lower promotional activity.

Overall, our initiatives to improve net realized revenue lead to a 2% increase in net selling prices and a 1% improvement in mix.

Developed markets outside of North America grew Consumer Tissue organic sales by 4% led by Western and Central Europe.

Consumer Tissue segment operating margins were 14.4%, that's down 310 basis points driven by commodity inflation and lower volumes, partially offset by higher pricing and cost savings.

Lastly, in our Kimberly-Clark Professional segment, organic sales grew 1%.

In D&E markets, K-C Professional organic sales rose 4% driven by continued volume growth in Asia Pacific.

Organic sales were up slightly in North America, including volume growth in washroom products and wipers.

K-C Professional segment operating margins were 18.9%, that's down 160 basis points versus record performance last year.

Results this year were impacted by commodity and currency headwinds.

In summary, our third quarter results were impacted by a difficult environment, with depreciating currencies adding to continued significant commodity inflation.

Nonetheless, we achieved higher net selling prices, delivered significant cost savings and reduced overhead spending, and we continue to allocate capital in shareholder-friendly ways.

With that, I'll turn it back over to Mike to comment on our full year outlook.

Okay.

Thanks, Maria.

As most of you know, the overall environment remains challenging, especially with commodity inflation and currency volatility.

In the near term, we're responding by aggressively managing our business up and down the P&L.

At the same time, we continue to execute our long-term strategies to deliver sustainable growth.

As we mentioned in this morning's news release, we are confirming our previous outlook for our key top and bottom line financial targets.

On the top line, we continue to target organic sales growth of approximately 1%, that's equal to our actual performance through 9 months.

I'm encouraged that we're making progress improving net selling prices.

Pricing went from being down 1% in the first half to up 1% in the third quarter, and that's consistent with what we said in July when we indicated that pricing should be modestly positive in the back half of the year.

And in mid-August, we announced price increases on the majority of our consumer businesses in North America.

Many of those increases will start to go into effect in the first quarter of 2019.

Realizing higher selling prices will be important next year, given that recent commodity forecasts and foreign currency rates imply pretty significant headwinds, again, in 2019.

Now looking at commodities and currencies for 2018, we expect these factors will negatively impact our adjusted operating profit by slightly more than the 20% to 25% range we assumed in July.

That's mostly because of the recent weakness in many foreign currencies, especially in Latin America.

In addition, our commodity inflation outlook is a bit higher on average.

And so as a result, our teams are further reducing costs and raising selling prices.

In addition, as Maria mentioned, our outlook for this year's tax rate has improved.

All in all, we continue to target bottom line adjusted earnings per share of $6.60 to $6.80 for the year, that's up 6% to 9% year-on-year.

So let me wrap up with the following: First, I'm extremely proud of the 40,000 K-C employees around the world who are committed to our vision to lead the world in essentials for a better life.

We have a strong senior leadership team in place to help lead this company forward.

Second, while the current environment is challenging, I'm optimistic about the long-term opportunities we have to grow our brands around the world.

And third, our teams are focused on improving our business, winning in the marketplace and creating long-term shareholder value.

So that concludes our prepared remarks, and now we'll be happy to take your questions.

(Operator Instructions) Our first question comes from Olivia Tong with Bank of America Merrill Lynch.

First, congrats, Mike, and congrats, Tom.

I wanted to ask you about the progress in price in Q2, particularly in Personal Care.

Obviously, North America was still negative but less so.

So, as we go into Q4, should we expect it to swing positive as some of your price plans take hold?

Or are there still promotions still planned that could suppress that realization?

And then, in the developing and emerging markets, it's nice to see also that, that swung positive.

But how much more can you price, even if it is cost justified given the macro challenges across several of the key markets?

Yes.

Maria, maybe I'll comment on the first part.

I think, overall -- well, I think, globally, I would say our pricing overall is on track and that we're cautiously optimistic about the progress we're making, and that we will make the progress.

As you're probably well aware, we've taken pretty significant actions, especially in North America, Europe and Latin America.

North America and Europe, I think, generally mid- to high single-digit price increases on the brands we've increased prices on and in Latin America, generally double digit.

At retail in North America, we've had the wide range of discussions that you would probably expect us to have, but I think we're all in agreement that we're going to try to move forward and minimize the potential disruptive impact on consumers.

But we recognize that the market does need to move upward.

And right now, we're cautiously optimistic that the market is moving in the right direction.

With regard to the D&E, I think it is a challenge.

I mean, one of the headlines is the Argentinian consumers are highly stressed, and we are raising prices double digits to offset both the commodity impacts and also the currency impacts.

I mean year-on-year, in the diaper category, the diaper price will increase almost 100% for this year, while their wages have increased generally about a quarter of that.

So it's a challenge, but we are doing what we need to do to manage this business.

Got it.

And just on...

Go ahead, Olivia.

So on China, you didn't touch on that.

But with all the talk about the opportunity there, particularly in recent conferences, are you concerned about the decline in China now that volume is also down in addition to price?

Was there any change in launch timing?

Because, I think, you've mentioned last quarter that you had some innovation come in, and I assume you still think this is just part of a cycle rather than a long-term market change.

So what are you doing to sort of shift the trajectory and what are the mile markers you're using to indicate where things stand?

Yes.

On China, obviously, we're not satisfied with our performance right now in China.

It remains our biggest long-term opportunity, but it's also a complex market and it's got its challenges.

I think the team is pulling on all the right levers that you would want them to pull, and that starts with improving the product.

And we are excited about the product enhancements we've made to the line.

But that said, pricing did come down in the middle of Q2, and we're going to be competitive on price in that marketplace.

But we believe -- I don't really believe that market out in China is commoditizing.

We are seeing consumers still interested in new products and product quality.

That said, a number of manufacturers have pulled pricing down, and so we're going to need to be competitive.

But I do view it as a challenge.

It's going to be ongoing for a while in the near term.

But long term, it's a big growth market.

Volume for the year to date has been up high single digits.

The challenge has been the pricing.

Our next question comes from Jason English with Goldman Sachs.

Michael, you guys have clearly faced a lot of headwinds in the last couple of years, both on competition and cost, and you've pulled a lot of levers to minimize sort of the pain at the bottom line, including reductions in a lot of discretionary spend as you guys highlighted once again today in your release.

Do you believe your reductions in discretionary spend have left you competitively vulnerable?

And should we expect you to use any of your productivity and price benefits to be utilized to restore investments going forward?

Yes.

Maybe I'll start, and maybe Maria can comment as well.

But one, I think the simple answer, Jason, is no.

I think we're doing -- the teams are doing a great job getting more efficient at cost.

We had a very big global restructuring that we announced in the beginning of this year that is proceeding very, very well.

I think we are identifying a lot of good opportunities for us to improve our efficiency.

But -- however, we're still going to spend, and we are spending this year in the right areas, product innovation, marketing programs and sales execution are critical growth drivers for us and that we feel like we're investing in the right areas.

But we also had identified opportunities for us where we weren't spending efficiently, and we're managing that better.

But Maria, any additional?

Yes.

I think that's certainly the headlines, Mike.

But if you look at where we're taking the biggest amount of cost out, it's in the general administrative types of activity.

And on the discretionary activities like travel, consulting, those types of things, really pulling back and working differently in order to get done what we need to get done.

We've also had a big focus on reducing nonworking advertising costs, and that has really paid off for us this year.

So we're leveraging the restructuring program to structurally drive down the cost base of the company, and that -- a portion of that will be sustainable.

Yes.

The thing I'll note further, Jason, is I think, overall, I think our end market performance in most geographies is improving, especially in big markets and our big businesses in North America consumer, I think are getting better in diapers and in parts of Consumer Tissue.

I think in many of our D&E markets, with one notable exception, China being that one, are having good performance in their markets.

So I think we are investing in the right places.

Our next question comes from Ali Dibadj with Bernstein.

Congrats, Mike and Tom.

A few questions from me.

First, I guess we were a little surprised by the margin disappointment even with the start of some pricing looking -- this looks like -- and it looks like we're going to see continued pressure on EBIT given your guidance has worsened a little bit here.

And a lot of pressure looks like it's coming from Consumer Tissue, so that's pulp, but it looks like FORCE was a little bit behind what we would have expected.

Pricing, clearly, is still on the come, and you got to believe it's going to happen.

So can you talk a little bit about the trajectory you expect your margins to look like over the next few quarters given all those moving parts?

Yes.

I mean, the trajectory will go up in the next few quarters.

I think the challenge is -- has been, we announced our pricing mid-August, and obviously, most of that has not taken root yet.

We did have net selling prices in Consumer Tissue up a couple of points this quarter in North America, which was good progress, that was related to some of the innovation and the desheet that we made more at the beginning of the year.

So we've got more price increases coming through, generally mid- to high single digits in North America.

And we'll start to see that generally take place in the first quarter of 2019, and that includes Personal Care as well.

And then in emerging -- developing and emerging markets, we have made significant progress, particularly in Latin America, but we've got huge currency headwinds there, and in Europe.

Yes.

And if I comment on the cost side, Ali, what I'd say for the quarter, that pulp was relatively stable, if you look at the breakdown of what we gave on the $210 million on inflation.

In the other raw materials, polymer was worse than we expected in the third quarter.

It was up 40% year-on-year and we weren't expecting that coming in.

On FORCE cost savings at $105 million, I'd just describe it as a solid number, but it was somewhat behind our expectation.

We had some plant outages in our KCP business and so we lost some momentum there on the FORCE cost savings within that segment in the quarter.

And then the other big one is currency and we had a significant drag from transactional currency in the quarter, particularly in Latin America where we not only have the transactional effect, but -- in those countries, they're buying U.S. dollar-denominated pulp.

And with the lower-value currencies, that's a double hit for that region of our business, so the transactional currency was a meaningful negative for us in the quarter.

Yes.

An interesting side note, I think if you add up and look at the quarter results, which the breakdown is pricing and cost savings, generally offset commodities.

It was the unexpected hit in currency that probably left that a little soft there.

But -- so just to follow up on that a little bit and another question.

One is, look, the pressure was in Consumer Tissue, specifically on margins.

That's disproportionately domestic business, number one.

And it looks like pulp is, to your point, kind of stabilized.

So a better understanding there.

And then on Latin America pricing, I mean, if we're doing our math right, Argentina, call it, 2%, 3% of sales, 40%, 50% price inflation, so the bulk of your pricing actually came from that, right, just Argentina.

So those are the follow-ups there.

And then just a broader question.

Mike, for you, as you look forward, given all these moving parts and challenges, are there pieces of the business that you think you want to spend more time on as you look forward for your vision for KMB?

Yes.

Let me come back to -- let me -- I'll address the Argentina.

I think in Latin America, we've taken fairly broad pricing increases in many markets, and most notably, also, Brazil, so it's more than just Argentina.

And then, Ali, I wasn't clear about your question about North America Consumer Tissue?

Well, also, I'm just saying your Consumer Tissue operating margins were where you really kind of had some pressure this quarter, and that's disproportionately a North American business.

So you're taking the pricing in North America, it's not going to be resolved going forward by international pricing.

So I'm trying to understand the trajectory of, I guess, the Consumer Tissue operating margin, in particular, as you go forward here as well.

Yes.

I think in the quarter, obviously, and the North American Consumer Tissue team has done a nice job trying to offset a lot of it.

That's a pretty big hit from a commodity impact.

They've offset -- I would say about half of it.

But obviously, that's not good enough, and therefore -- which is why we did the additional price move in August, and we'll start to see that impact starting in January.

And Ali, I would just add that margins were up sequentially in that business by 30 basis points and so that's in line with what we were expecting, given that the pricing, as Mike has said a couple of times, hasn't come in to the market yet.

Yes.

And then maybe with regard to your third question, strategic direction.

I'll give you a couple of thoughts.

Right now, I'm still focused on the job I'm in, which is we've got to finish '18 strong, and so that's kind of where the focus is.

We will have plenty of opportunity to talk strategic direction as this transition occurs, but -- so I'll share more then, but I'll give you just a couple of thoughts.

A few things, here's what's not going to really change going forward which is, one, we're going to continue to manage the business in a shareholder-friendly way with a focus on our shareholders.

We're going to continue to operate with a balanced and long-term perspective on what drives shareholder value.

And the core tenets, as you would expect, Ali, I mean, it's a CPG business, so we're going to focus on innovation, brand building, end market execution and cost savings.

And those are kind of the 4 areas that every company kind of manages.

I think it's kind of how you assemble them.

And so when you talk about maybe where the strategic emphasis is, I will tell you a couple thought starters that we've been working on.

One is we've got big developed -- big businesses in big developed markets, and I think we have -- they're inherently slower growing, right, but I think we have a big opportunity to elevate those categories and premiumize those categories and make those categories worth paying more for.

And the great thing that we have in our categories is we've got actual performance differences and where performance really matters.

So elevate kind of our core business is a key opportunity for us.

The other big opportunity, obviously, is the developing and emerging markets potential, and we need to continue to lead the world in driving our Personal Care business across D&E markets.

It's a multibillion-dollar opportunity over a long time, and I think we can do a better job driving our -- the weight of that in our portfolio and also, how we lead market development across important markets for us.

The third big area is the digital-only commerce front.

I think it can have a transformative impact on our business.

I think our business really matters to our consumers and our retailers because of the ring, the spend they're spending in our categories, the frequency they're using it and the long duration they are in our categories, and so we're going to really look to focus on how we transform our business through digital and e-commerce.

So those are a couple thought starters.

I don't know if that answers your question.

It helps and look forward to chatting more about it.

Congrats again.

Our next question comes from Bonnie Herzog with Wells Fargo.

Congrats to both Tom and Mike.

I have a question on your 1% organic sales growth in the quarter.

I'm wondering if this performance was better or maybe worse than your expectations internally.

I guess I'm thinking about this in the context of your fourth quarter expectations, which imply that your organic sales growth won't accelerate sequentially for you to meet your 1% full-year guidance.

So I guess I'm wondering why this is and how you guys are thinking about the impact of some of the pricing actions you've mentioned?

Yes.

I think, Bonnie, overall, about -- on track for us.

I mean, year-to-date, we're up about 1%.

We're expecting for the full year to kind of be on that path.

And the important thing is, what I mentioned a little earlier, we are seeing improved performance in many of our key markets including in North America and most of our D&E markets.

In a lot of D&E markets were up a few points on share in our key categories and we are seeing good organic growth.

Okay.

And then I had a couple of questions on private label.

First, I was curious to hear from you why we're not seeing more trade up into branded products from private label, especially given the current strength across the U.S. macro-environment and the consumer.

And then second, we're hearing a lot of the private label has followed on pricing, so could you guys confirm this?

And then wondering how you see the relative price gaps narrowing and if you think this should encourage more trade up to your brands.

Yes.

I would love to see more trade up faster.

I think the recent private label trends are a little mixed.

If you look at our categories, I think, in the third quarter, private label was up in 3, down in 3 and flat in 2. So overall, kind of mixed.

It was up a bit more across the Consumer Tissue categories, for us.

I think we are seeing, though, improved performance in parts of our tissue business, particularly bath tissue, both Scott 1000 and Cottonelle, Kleenex premium side and our towels business is also performing better.

I think the focus there for us is we really are focused on the product experience and bringing innovation.

And those are areas, particularly on bath tissue this year, we've brought really good innovation, and I think that's why we are seeing improved performance there.

Now as Maria mentioned, our overall organic in Consumer Tissue North America for the quarter was down 5%.

A lot of that was associated with some promotion shifts that we had or decreases in promotional spending that we're making to try to improve profitability of the business.

The underlying base performance of the business and the brands, particularly in bath, I think is improving.

Our next question comes from Lauren Lieberman with Barclays.

I was hoping you could talk a little bit about the adult incontinence category in the U.S. So I think that, when Proctor reentered the category, the conversation was sort of more activity, more advertising, raises awareness, raises the profile of the category and grows the category, so share wasn't really the right metric to be watching.

But recently -- and you mentioned it in the release, but also it's in the Nielsen data, that actually sales trends have turned negative.

So can you talk a little bit about what's going on in that business?

If there was something in the quarter, in particular, in terms of promotional timing that may have impacted it?

Or it's, in fact, it's now not just a share game -- or not just the shares in the indicator we should be watching, it's actually the sales growth.

Yes.

Lauren, in North American adult care, I think it's also a soft area for us that we want to improve our performance in, and I think the team is addressing it.

But one is the -- that's probably the one category in North America where we're competitive and promotional activity remains fairly elevated.

We are still seeing some aggressive couponing out there.

And so that's kind of the environment we're operating in.

Also in that, I think the opportunities for us is we have had some negative distribution changes that the team is working to correct and we also are working on some product improvements as well.

So I think, it's a competitive category.

There's still growth inherent in that business.

The focus for us going forward is to make sure that we're focused on driving category growth.

I'll note that I think before P&G reentered, we were growing hot, low double digits or even mid-double digits for a number of years, and that growth has slowed down with maybe a little more competitive activity.

And my hypothesis would be a little bit more -- too much emphasis competing versus marketing message driving the category expansion, which is what we're getting back to and we're going to focus on bringing consumers back into the category, we call them new category entrants, back into the category.

Okay.

That's really helpful.

And then also with that as backdrop, it feels like Proctor, a primary competitor, is behaving a bit differently in terms of in-store execution, maybe working with retailers a bit differently to work on their displaced basin activity in store.

So can you tell us and talk about if in your businesses, you've already mentioned maybe some distribution losses on incontinence, but if you feel like you're still getting your fair share of activity in the store, if there needs to be sort of a change in perspective on how you're working with retailers to get support for our innovation in store?

Yes.

I would say that while we feel like we're getting our fair share of performances, the opportunity for us is we can still enhance and improve our in-store execution globally, and it's a big opportunity for us.

And given I spent some years in sales, I mean, I tend to be a little obsessed with our performance there and still think we have an opportunity to improve.

And so while we can respect what our competitors are doing, we see our own opportunities.

And while there's parts of our -- a lot of our performance we're pretty pleased with.

We know we can be a lot better and we're going to focus there.

Our next question comes from Dara Mohsenian with Morgan Stanley.

Congrats, Tom and Mike.

So I have 2 main questions.

First, I guess, this just more of a forward-looking version of Jason's question.

But I'd love to hear about any plans going forward in terms of reinvestment behind the business in marketing or other areas under your leadership, Mike.

It's typical that a new CEO often chooses to take the opportunity to reinvest in the business.

There's been some market share pressure recently.

Theoretically, you need to support the business post pricing.

So just given those factors, should we expect more reinvestment behind the business as you look going forward?

Could it be significant or are you pretty comfortable with the level of investment that you're planning for leaving 2018?

And then also, Mike, on 2019, I know you won't provide guidance today, but you did sort of go out of your way to cite the recent commodity forecasts and forward currency rates implies some significant headwinds.

Maria mentioned the tax rates going back up significantly and it seems like some of those headwinds are worse than you would have expected a few months ago.

So I'm just curious, are there additional areas you're sort of coming up with to help offset those pressures?

Obviously, you've announced a lot of price increases, is it possible to get more going forward?

Another round of pricing?

Is there more room on the cost side, where you've been effective the last few years, beyond the specific programs you've outlined?

It just feels like some of those headwinds could be pretty significant for next year, so I'm wondering about sort of some of the offsets the other way.

Okay.

Maybe I'll start and then maybe, Maria, you could talk a little bit too.

Yes.

But I think the first part is on the investment.

There's probably not a General Manager in any company that would say they're happy with their overall investment levels.

And so while we spend it -- what's average for a CPG, would I like to put more behind good ideas?

Yes.

And that's a big reason why we've done the restructuring and that's to provide fuel for reinvestment, which we are doing in some cases.

I think, also, if you think about what I just talked about with Ali, which is the 3 kind of planks, elevate the core of our business, lead Personal Care development across D&E markets and drive our digital and e-commerce growth.

I think those are areas that would be good candidates for investment as we think about how do we build out our market positions in international markets and leading market development.

I think that could -- there could be investment dollars well spent after that or in terms of how we fund innovation.

And so we are going to do some of those things, I don't think we're ready to share the details of that yet, and that's still to come.

So I think that's part, maybe, one.

I think with regard to the -- what you're asking about maybe the outlook, one is we're not -- our practice is not to give guidance on 2019 right now.

We'll do that in January, and that's kind of how we do that, and so we're going to stick to that.

I will tell you a couple things, though, just to kind of get -- since we're talking, just to give a little more context.

We're going to continue to focus on building a holistic plan.

And that means focusing on the proven long-term drivers like innovation, brand building and cost efficiency, so we're going to do that.

However, it's fair to say the near-term challenge has become more difficult with commodity inflation and you should see that -- you can probably see that the commodity and currency impact has amplified over the last 2 or 3 months.

Just for reference, I think, in this year, the commodity and currency combined is equal to about $1 of EPS negative impact on the P&L.

So we expect that commodity and currency to be further headwind next year.

And part of that is some of our contracted terms for some of our key commodities like pulp are probably -- are unlikely to be as favorable as they are this year, given the current environment.

And so with that, we've got that to work through.

Our tax rate is going to be a drag.

But the pricing and the cost savings are obviously going to be a help for us next year.

So we're going to give you more specific guidance as we get back to January.

So those were a few thoughts.

Yes.

I don't think I have anything to add.

Obviously, we'll update you in January when we're together.

And the comments that we're making on a couple of those items are just in the spirit of transparency to make sure you know what we're thinking in a couple of areas as we all start to think more about 2019.

Our next question comes from Stephen Powers with Deutsche Bank.

Mike, Tom, congrats.

If we take a step back versus where we were a few quarters ago, it feels to me as though the broader discussion, not just for you but for the industry as a whole, has toned down a bit in terms of any potential tension between CPG suppliers and retailers.

And I'm curious if you agree with that and, if so, also your perspective as to why.

Because from the outside, it feels like the dialogue is somewhat more constructive today, but I wonder if that's just potentially rooted in the fact that the retailers themselves don't feel -- don't seem to be acting quite so aggressively towards one another.

Amazon is arguably operating with more of a bottom line focus than a year ago when it was prioritizing pure customer acquisition, hard discounters haven't taken over the world, consumers are generally healthy, spending, Walmart is doing well, et cetera.

And it feels like that has all helped to create a relative truce at retail, which in turn, I'd argue, has opened up a window for yourselves and other CPG players to pursue some pricing.

And I guess, I'm just trying to figure out am I making things up?

Do you agree with that summary in broad terms?

And then to the extent you do agree, I guess, what is the more normal state of affairs?

What we're living through now, which is arguably less intense?

Or the more aggressive environment that we saw 2, 3, 4 quarters ago?

Steve, maybe I'll start since I haven't answered a question for a while and you'll have to listen to the sound of my voice a little while longer.

But I guess I would say, I'll let Mike build on this, is that I don't think it was ever quite as bad as investors thought it was.

And I think every retailer that I've called on, and I know Mike would probably echo this, they want to hear from you how you're going to help them grow their category and how you're going to help them execute their strategies.

And so as long as you're bringing value to that conversation and bringing innovation and putting it behind brands that are important to consumers that shop on their stores, you're going to have a pretty constructive conversation where you have challenges with retailers is if your innovation isn't working, your service is lousy or those kind of things, those are the most difficult discussions.

And thankfully, we usually stack up pretty well on that front.

I think most of the retailers, they read the business newspapers and know what's happening to commodity costs and know what's happening to exchange rates, and so they aren't shocked when you come in with a pricing conversation.

I think the -- where you really start to get their attention though is when you pivot to talking about innovation and what you're going to do to make the category bigger and how you're going to close the execution with a customer in their store.

But Mike, maybe you can build on that.

I definitely agree with Tom, which is, I think the tone of discussions with retailers has been consistent over the last several years, and I don't think last year was any different.

I think it probably got bigger play in a few areas and maybe part of what's -- maybe what you're perceiving as change is the improved growth in the infant and child care category as it relates to us.

I think, last year, in the middle of the year, ICC was down about 5% in value.

I think that was kind of a rude awakening and caused quite a concern amongst us and the retailers.

And so what's changed this year is we were down 5% in July last year.

The category now, in this latest quarter, was up 3%.

Huge swing, and I think that probably has changed what you might perceive as a tone.

But I think the -- in the meeting discussions and the tone of discussions with customers has been consistent last year, this year, the year before even.

Okay.

That's great.

And Tom, thanks for weighing in.

We did miss you, so far, this call.

Just one quick cleanup, if I could.

Maria, on the tax rate, the lower tax rate in 2018.

Is that...

Yes.

Should I -- should we interpret that as benefiting free cash flow and cash?

Is that a cash tax benefit or is it more just an income statement benefit?

No.

It's also on the cash side of the house.

So we did have a nice benefit on cash taxes in the third quarter, and that helped offset things like cash that we spent on the restructuring and also helped cover the lower operating profit that we had in the quarter.

Okay.

Perfect.

And so for '19, that step up back to the more normal tax rate would also be a normal cash tax step up as well?

Yes, that's right.

Our next question comes from Wendy Nicholson with Citi.

Just as a follow-up on that question on the taxes.

I mean it feels, to an outsider, that the lower taxes are helping you make your earnings target for this year, which is great.

But I'm wondering, given how many categories or markets or situations specifically that you referenced where competitive activity has intensified, whether you debated internally, hey, let's take some of that benefit from those lower taxes and plow them back into more competitive spending immediately.

So forget the earnings guidance range but just increase that competitive investment or promotion or advertising or whatever it is or hurry up on the new product activity to insulate some of your market shares, whether it's in China, whether it's in adult incontinence, et cetera, et cetera.

And then sort of bigger picture, Mike, if you look at the business, the advertising spending is down, if you think 3.5% of sales maybe this year, down from almost 4% just a few years ago and yet your business has shifted, I would argue, to categories and markets where advertising spending is arguably more important than it was 5 years ago.

So as you look forward over the next 5 years, do you think 3.5% of sales in advertising is right?

Do you think you need to migrate back up to the 4%, maybe even higher given how intensely competitive these markets are, et cetera, et cetera?

Okay.

Wendy, I'll start on the et cetera, et cetera part and then let Mike build.

But I guess I would come -- maybe coming back to the tax rate discussion, I mean, some of that is a discrete activity, putting the extra $100 million in the pension plan, which we get to deduct at last year's tax rates, created a tax benefit that was a onetime deal, really, as part of the whole new tax bill and figuring out what options you have under that to create shareholder value was sort of a separate discussion.

As you look at the investment behind the business, I mean, we're more or less investing on plan behind the right innovation and the right markets, and I'd say that's showing up in share.

I mean, we're -- I think we're up in high 50s of the category country intersections that we track and feel like we're generally investing at about the right levels.

We're also generating a significant amount of nonworking media savings as part of the restructuring.

A lot of that's been reinvested in advertising and promotional activities.

And so I think the team has pivoted to driving price increases in the back half, which we need.

And there are times where you may be focused on that and missed some other opportunities, but I still think that's the right thing to be focused on.

But I'll let Mike build on that.

Yes.

Wendy, overall, yes.

I would like to get the advertising spending up.

But that said, at our number, you can't read too much into that number these days because it goes into a lot of lines.

And so, for example, there's 2 things going on which, for example, digital online spend sometimes can be slotted into promotion even though it may feel like more like an advertising expense, so there's a lot of differences going on there.

The other thing is, given all the innovation that's occurring in the digital media, our ROIs are improving significantly, and so we're really excited about that.

And I think that has a big impact for businesses like ours that are more continuity based or that are consumers in the category for a long time, every day, and so I'm pretty excited about that.

But overall, if you think about the areas that I had mentioned earlier around elevating the core, D&E markets and digital, yes, I would like to get us to spend more.

And maybe, I don't know if this will make you feel any better, Wendy, we're not going to -- I don't think we're disclosing this.

But in the quarter, our advertising spend was above the full year average by a small amount, so we're spending at the right levels even in this quarter.

That does make me feel better.

And thank you, Tom.

It's been a pleasure knowing you, and congratulations on your retirement.

Our next question comes from Kevin Grundy with Jefferies.

Congratulations, Mike and Tom, as well.

Mike, 1 question for you.

Broadly here, I was hoping to get your updated thoughts, and we've touched on a lot of these issues throughout the call, but just balancing some of these pricing objectives, given some of the margin degradation that you've seen here with market share trends, which I'm sure you guys are a little bit disappointed, particularly in the U.S. And just 1 data point, as we look at the Nielsen data, I mean, for the most recent 4-week period, we have Kimberly-Clark losing market share in every single one of its major categories, which I'm sure can't be satisfying to you.

So maybe you can talk a little bit about that?

This still also touches on an issue which was brought up earlier, are you willing to sacrifice near-term profitability to restore lost market share?

How important is some of this lost market share, particularly some of these losses at the private label in tissue and towels?

And then just broadly, discussion around market share, how worrisome this is and your level of confidence that we'll see this improve during the near term.

So thanks for all that.

Yes.

Kevin, let me start with like the foundational principle, which is like -- we exist to deliver a strong value proposition to our consumers, and that's what we're focused on.

And that's the only way you can win over the long term, and I fundamentally believe in that.

So -- and that does go along with market share over the long term.

I think, in the quarter in North America, I think our data, given all outlet, is probably slightly different, and so I have us up or even in 5 out of 8 categories.

There's a lot of activity going on in the club channel and also in online, so I think that's one.

And then what I was saying earlier, I think our performance is broadly improving across many markets in D&E.

In Russia, I think we were up 3 points in diapers and up 1 point or so in feminine care.

In Latin America, including both Brazil and Argentina, we're up 2 or 3 share points in diapers and up 1 point or 2 in feminine care.

So we are seeing improved performance, and we are very focused on market share.

And we -- we have to recognize that we need to drive and continue to focus on driving up the right value proposition, which guides a lot of the pricing activity.

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

This is actually Steve Shemesh on for Nik.

We'd also like to echo congratulations to Tom and Mike.

And then we were hoping, just kind of building off that last question, if you could talk about e-commerce and your market share positioning online versus offline?

And then what plans you have in place to further increase your share online?

Yes.

Again, e-commerce, I think, proceeding pretty -- very well for us.

Our online shares generally are ahead of our offline shares or even.

The 3 big markets for us are China, Korea and the U.S., although we are seeing some growth in some other markets as well.

Overall, our business this year, year-to-date, is up double digits as it was strong double digits last year, and so we feel good about that.

I think maybe the looking forward part, Steve, is we think we can leverage it even more effectively going forward.

I mean the teams are innovating in terms of how they deal with their e-commerce channel partners.

Most recently, I think we were ranked #1 in advantage in dealing with e-commerce in China, which was hot off the press.

I don't even think a lot of us -- some of our team internally have seen that data yet, but pretty exciting news.

And I know the teams are doing a great job around the world and also driving great efficiencies in terms of how they're spending and how they're driving their results.

And then, Steve, maybe I'd just add that we just want to be present with the right offer and the right product mix wherever mom wants to shop, and so we're doing a lot with e-comm.

We're also doing a ton with a lot of our brick-and-mortar retailers who are doing Click & Collect.

And we're -- that's not really captured in any of our data, but every retailer we serve is working on that.

And so we really want to make sure we've got the right product, the right offer wherever mom is looking to do her shopping, and that's really our overall strategy.

Our next question comes from Andrea Teixeira with JPMorgan.

Tom, Mike, congrats on the news.

So Maria, on the upper end of commodities headwinds, what are your embedded assumptions for pulp and oil prices?

And on a separate question to all of you on the competitive environment, in particular, North America and China, and I appreciate all the comments, but you had volumes down 8% in North American Consumer Tissue and also declines in China, too.

So what are you going to do in terms of continued volume share losses?

Or are you just timing as your key competitors are putting more money behind innovation?

Or are you cutting?

And given the commodity tax headwinds into 2019, should we assume that you'll continue to be cautious on reinvestment in marketing?

Or just broadly, as you said before, not commenting on 2019, but you would expect that reinvestment innovation to pick up as you progress in 2019?

Sure.

I'll go ahead and start with some of the commodity questions that you have.

Running through our assumptions on the key commodities, we're expecting that eucalyptus will be up about 20% for the full year.

The same with polymer.

That we're expecting it'll be up more than 20% for the full year.

And then on SAM, Super Absorbent, we are expecting that, for the full year, it will be up low double digits.

And so those are our commodity expectations.

And I think something that's worth noting is, if you look at commodities and currencies combined, for the full year, we are expecting that to be about just over a 25% drag on our operating profit, so it is significant for the year.

Yes.

On the commodity -- on the competitive front, Andrea, I think the -- what I would say is in North America, I think it's mixed performance but overall, I think, improving.

And if you take North America infant and child care, obviously, I mentioned that the category trends are improving, but the category trends are improving, I think, because of our performance more recently.

Our share is up about 1 point in the quarter.

Huggies volume was up mid-single-digits.

Pulps volume or childcare volumes were up low double digits.

And so we feel good about where that is and I think that the categories are responding well to the innovation that we've put out there.

I think in Consumer Tissue, one of the big things is that we have been dialing back on our promotional activity.

And that does come with some volume and share impacts.

The big challenge, given all the commodity inflation this year, it's a significant headwind, and I think the team has done a good job chopping that back.

But one of the levers they have pulled is pricing, both in terms of sheet count reductions but also including promotion reductions, and so that's what we're seeing some of the effects there.

And then the other area that I mentioned, yes, adult care has been a challenge.

I think we're down about 3 points in share and that's kind of the big focus area for us where we need to improve.

Our next question comes from Steve Strycula with UBS.

So I had a question on China diapers.

I wanted to know, if you didn't say it already, how did this business trend on a year-over-year basis?

And competitively speaking, where are we in the shakeout of the industry?

Are we seeing new and local competitors and regional entrants?

Has that kind of reached an asymptote?

Or are we now seeing a point where there's a little bit of a fallout in the industry?

And then I have a follow-up.

Yes.

I think Steve, I would say the competitive intensity in China for the last few quarters or maybe the last couple of years has escalated.

And just to give you some reference, our Personal Care organic sales in the quarter were down in the high teens.

We had strong growth in fem care, but that was not enough to offset some declines in diapers for us.

And so diaper pricing dropped in the market by about 15% to 20% back in Q2, and so we're working our way through that.

And that's kind of flowing through our business and impacting our business right now.

Overall, volumes, as I mentioned earlier, I think volumes in the category are up high single digits, so far, this year.

But with pricing, if the category is about flat or even slightly down in terms of value terms.

So despite all these price moves, personally, I don't believe the category is commoditizing.

And some of the effects you're seeing are consumers that are trying new products, local products, that they perceive to be interesting or of higher quality or have attributes that they're interested in.

We have responded by upgrading our products, and we're really excited about the offering that we have out there.

However, some of that impact is muted because of all the price activity.

China is critical for us.

It's the largest market in the world right now in diapers, it's going to continue to be, and will continue to grow.

And so we're going to compete in China for the long term and we're going to focus on the right value drivers, which includes a great product offering, the right marketing and obviously a competitive price.

Okay.

Great.

And then I had a quick follow-up across your 3 -- top 3 diaper markets online, China, Korea and the United States.

Could you just comment, for context, what the penetration is roughly across those markets?

And on the last call you mentioned that private label is currently under-indexing online.

What structurally is driving that, in your view, relative to brick-and-mortar?

Maybe the first part, I think -- so overall, in Korea, very highly developed in terms of our overall diaper sales online, Paul, can I -- do I share?

It's almost a 90% online development in China.

It tends to be that the overall category is about 50% or slightly over 50%.

And the U.S. is a little bit more behind.

I'd say, right now, it's in the mid-teens, overall.

And part of the -- when you talk to retail partners across the country, they all say the same thing.

Well, the U.S. is still a car culture.

And as long as they have cars, people are still going to want to shop in the store, but we are seeing very good growth in North America as well.

And then, sorry, Steve, I missed the second part of your question.

Yes.

It was, on the last call, you mentioned private label under-indexing online relative to the share at brick-and-mortar.

So just curious, what do you see as structurally driving that?

And I imagine that fosters very good repeat rates, purchase rates, because this is almost a subscription-like business.

Yes.

I don't have a good hypothesis right now as to why that private label is under-indexing.

I would say that the reason some of our businesses are performing well online is there's a lot of online marketing activity and digital marketing activity that we put in place to drive that.

And the tools are becoming increasingly sophisticated and our teams are getting better at managing and marketing through those tools, and so that might be a reason why you see lower development levels of private level.

Yes.

Maybe, Steve, I'll just chime in on that one.

I'd say 2 things: one is physical store environment.

You get to interact with the product and so you can see the packaging.

You may not be able to necessarily touch and feel the product, but you know what you're getting.

Whereas online, you know what you're getting if you're buying a brand, but you may not know what you're going to get on private label.

So it is a little bit of a hurdle on that front.

And then, secondly, I mean, a large supercenter may have 50,000 to 100,000 items in distribution.

An e-tailer may have a couple million items on their distribution.

So just the complexity of managing private label across a number of different categories is not trivial, and that could be another factor.

Yes.

And also, the failure rate issue.

We're concerned that consumers have on our products.

If you think about what they are and what they do for the consumer, that having a trusted brand is important.

And when you're shopping online and you don't have that ability to interact with the brands at shelf, as Tom described, consumers tend to migrate in our categories to brands.

Our next question comes from Jonathan Feeney with Consumer Edge.

Tom, thanks and congrats on a great run.

Mike, congrats and best of luck.

A question on mix, and 3 questions in that really.

What are the biggest -- I noticed positive mix not only broadly but in each of the segments.

What are the biggest 1 or 2 sources of that positive mix, would you say?

Is this something that's intentional and may be tactical this year as a way of -- another way of coping with higher commodity prices?

And about how much of a positive factor in adjusted gross margin, if any, is mix?

Because I know you think of the business in terms of total dollars.

Yes.

I'll start.

So is it intentional?

Absolutely.

So typically, we would like all of our innovation to be mix accretive.

And to your further point about pricing challenges, often, if you can't get price easily, you try to get mix.

And so the teams will try to upsell the better value-performing item, and so our sales teams are absolutely motivated by that.

Now sometimes you can see mix drag as the business grows in some of the larger format packs, which can be a countervailing force on that.

But by and large, we would hope that, day in and day out, we're doing some things that will give us some improvement on mix and offset some of the headwinds that we face from growth in other channels.

Yes.

And on the profit question, the positive mix was definitely a contributor, both in the third quarter and year-to-date.

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

All right.

We appreciate everyone's questions this morning.

We'll conclude the call, and we look forward to speaking with you in January.

Everybody, have a good day.

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

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