金百利克拉克 (KMB) 2019 Q3 法說會逐字稿

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

We now have your presenters in conference.

(Operator Instructions) It is now my pleasure to introduce Mr. Paul Alexander.

Thank you and good morning, everyone.

Welcome to Kimberly-Clark's third quarter earnings conference call.

With us today are Mike Hsu, our Chief Executive Officer; and Maria Henry, our CFO.

Here's the agenda for the call.

Maria will begin with a review of third quarter results.

Mike will then provide his perspectives on our results and the outlook.

We'll finish with Q&A.

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 today.

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

Lastly, we'll be referring to adjusted results and outlook.

Both excludes certain items described in this morning's news release.

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

Now I'll turn the call over to Maria.

Thanks, Paul.

Good morning, everyone.

Thanks for joining the call today.

Let me start with the headlines for the quarter.

Organic sales increased 4% driven by higher net selling prices.

We achieved strong margin improvements and growth in adjusted earnings per share while increasing brand investments.

And finally, we're on track with our overall capital plan and we continue to return cash to shareholders.

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

Our third quarter net sales were up -- were $4.6 billion.

That's up more than 1% versus a year ago and includes a 2-point drag from currency rates.

Organic sales were up 4%.

Net selling prices increased 4%, and product mix improved 1 point while volumes fell 1%.

Mike will provide more color on our top line in just a few minutes.

Moving on to profitability.

Third quarter adjusted gross margin was 35.8%, up a strong 260 basis points year-on-year.

Adjusted gross profit increased 9% with selling prices well ahead of currency headwinds.

We generated solid total cost savings of $95 million from our FORCE and restructuring programs.

Year-to-date cost savings are now $300 million, and it's more likely that full year savings will be toward the low end of our $400 million to $450 million target range.

Within that, our restructuring is expected to overdeliver, while FORCE savings are anticipated to be below plan.

On FORCE, performance has been solid in most businesses this year.

That said, we're below plan in North America where our supply chain is facing tight capacity and higher-than-expected demand at the same time that we're executing our restructuring activities.

Commodities turned favorable in the quarter and were a modest benefit of $10 million.

This is the first time in almost 3 years that we've seen commodity deflation.

Other manufacturing costs also increased in the quarter compared to a relatively modest level last year.

Moving further down the P&L.

Between-the-line spending was up 130 basis points as a percent of sales.

That included higher advertising as we continue to invest more behind our brands, particularly in digital marketing.

SG&A expense also increased compared to a relatively low spending in the year ago quarter and included higher incentive compensation expense.

We're also starting to make investments to improve our commercial capabilities to drive future growth.

Most of our investments for 2019 will occur in the fourth quarter.

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

All in all, adjusted profit was up 8%.

Third quarter adjusted operating margin was 18.5%, up 110 basis points versus a year ago.

On the bottom line, adjusted earnings per share were $1.84, up 8% year-on-year.

A higher adjusted effective tax rate was essentially offset by higher equity income and a lower share count.

Now let's look at cash flow and capital efficiency.

Cash provided by operations in the third quarter was $886 million compared to 900 -- $692 million in the year ago quarter.

As expected, this was a strong quarter, including improved working capital and lower pension contributions.

Capital spending was $298 million in the quarter.

That's up versus last year driven by supply chain restructuring projects.

We continue to allocate capital in shareholder-friendly ways.

Third quarter dividends and share repurchases totaled approximately $570 million, and we expect the full year amount will be $2.2 billion.

Looking at our segment results.

In personal care, organic sales were up 5%.

Net selling prices increased 3%, and volumes and product mix were each up 1 point.

Personal care operating margins were 21.3%, up 60 basis points year-on-year.

The improvement was driven by organic sales growth and cost savings.

In consumer tissue, organic sales were up 3%.

Net selling prices increased 5% while volumes fell 2 points.

Consumer tissue operating margins were 17.8%, up 340 basis points versus a year ago, with significant benefit from higher pricing, along with cost savings and modest commodity deflation.

In K-C Professional, organic sales grew 3%, selling prices rose more than 3% and product mix improved 1 point while volumes were down 2%.

K-C Professional operating margins of 21% were up 210 basis points versus prior year.

The improvement was driven by higher net selling prices and cost savings.

Overall, it was a strong quarter, and I am pleased that we are in a position to raise our outlook while we invest in the business for the long term.

I'll now turn the call over to Mike.

Thank you, Maria.

Good morning, everyone.

Let me start by saying I'm pleased with our third quarter results.

We achieved strong improvement in organic sales, margins and earnings per share.

We continue to launch innovations, invest more in our brands and pursue our growth priorities.

We also returned significant cash to shareholders.

As Maria just mentioned, we delivered 4% organic sales growth in the quarter.

Our pricing initiatives are on track and driving our growth.

We also continued to improve product mix, which was up 1 point, for the third consecutive quarter.

Encouragingly, the pricing and promotion environment remains broadly constructive.

Let me share some of the top line highlights for the quarter starting in North America.

Organic sales in consumer products increased 4%.

And within that, organic sales rose 4% in personal care and 3% in consumer tissue.

Growth in North America was driven by 4% higher selling prices led by consumer tissue.

Mix was up 1 point led by Huggies Diapers, which included modest benefits from the launch of Huggies Special Delivery.

Volumes were down 1 point overall.

Adult care volumes were up double digits.

Poise and Depend had strong momentum driven by product innovation, marketing investment and robust consumer demand.

Baby and child care volumes were down mid-single digits compared with mid-single digit increase last year.

Results this year included softness on baby wipes and Huggies Snug & Dry diapers.

In North America K-C Professional, organic sales increased 5%, and growth was driven by continued strong price realization while category volumes remained sluggish.

Now turning to developing and emerging markets.

Our performance was solid with organic sales growth of 5%.

That included 2 points of growth from Argentina.

Now in terms of our key personal care businesses, in China, organic sales were up mid-teens compared to a soft performance last year.

Sales were up double digits in both diapers and femcare.

And in diapers, our net pricing was helped by reduced and more targeted promotional spending.

In addition, the innovations we launched on premium Huggies are delivering strong growth and improving mix.

In femcare, our innovation and premiumization strategies supported by great digital marketing continue to deliver strong results.

In ASEAN, organic sales rose high single digits led by Huggies in Vietnam.

In Eastern Europe, organic sales increased high teens with healthy gains in volume and pricing.

Growth was strong on both Huggies and Kotex, reflecting excellent sales execution, winning innovation and strong marketing.

In Brazil, organic sales were up mid-single digits compared to high-teens growth last year as we're starting to lap the price increases we took in 2018.

We've also modestly increased promotion support to enhance our competitive position.

Growth this quarter was relatively balanced between pricing and volume with volume growth led by adult care and feminine care.

We experienced softer results in Latin America outside of Argentina and Brazil, and that included Peru where sales were down in a challenging environment.

And as a result, we've dialed back the price increase we took earlier this year, and we've launched a value tier diaper.

Overall, I'm broadly encouraged by our performance in D&E markets and remain optimistic about our future growth prospects.

Finally, in developed markets outside North America, organic sales were up 1% with solid performance in South Korea and Australia.

Beyond sales, I'm pleased with the margin and cash flow improvement we delivered in the quarter.

Our teams are working hard on both those fronts.

Turning to the full year.

We're raising our outlook on both the top and bottom line.

Our revised organic sales growth target is 3% to 4%, which compares favorably to our prior target of 3%.

While we're up 4% year-to-date, the fourth quarter is our toughest quarterly comp of the year.

That said, we expect a solid fourth quarter, which should bring the full year well within the 3% to 4% range.

On the bottom line, we're now targeting adjusted earnings per share of $6.75 to $6.90.

That's $0.10 per share higher than our prior outlook.

I'm pleased that we're increasing our outlook while we continue to invest for future success.

I know many of you are starting to look ahead to next year, so I'll briefly comment on 2020.

Our teams have recently started planning for next year.

And in terms of the operating -- external operating environment we'll be operating in, we're encouraged with commodity cost trends.

On the other hand, currencies remain volatile and recent forward rates imply headwinds for the next year, especially in Latin America.

We'll continue to closely watch global economic conditions, which, in general, suggest slower growth going forward.

At this point, we're focused on building a robust plan for next year that's consistent with our balanced approach to value creation, one that includes higher growth investments and generally aligns with our K-C Strategy 2022 financial objectives.

As a reminder, those objectives are 1% to 3% growth in organic sales and mid-single-digit growth in adjusted earnings per share.

Certainly, things could evolve over the next 3 months, but in broad terms, that's how we're currently thinking about next year.

We'll provide our specific outlook in January.

In summary, I'm encouraged by the progress we're making in 2019 while we invest more to enable longer-term success.

We're confident in our ability to deliver balanced and sustainable growth and create shareholder value.

That concludes our prepared remarks.

And now we'll be happy to take your questions.

(Operator Instructions) Our first question comes from Bonnie Herzog with Wells Fargo.

I have a question on pricing in the U.S. I guess I'd love to hear your outlook for pricing, especially if you guys are starting to lap some of the price increases you've taken over the last year.

So just like to hear from your perspective if you are concerned at all that we might see pricing stagnate or even roll back again given we're not seeing as much commodity pressure as we saw last year.

Or do you think you've got some pricing power to put through another modest increase later this year, possibly early next year?

Yes.

Bonnie, overall, I think your question was regarding North America specifically overall.

Overall, obviously we're on track for this year.

Our volume is better than our plan.

We feel good about where we are.

I think the issue going forward is there may not be as much list pricing next year given where the commodity environment is.

We're not really seeing downward promotional pressure at this point.

And so I think the category remains relatively stable, robust and consumer demand remains healthy.

I think going forward, whether or not there's list pricing, one of the things I mentioned in our K-C Strategy '22 was our kind of commercial capabilities as I'm calling them, one area which is revenue growth management.

And we're really emphasizing driving that revenue realization, whether that comes from list or it comes from trade efficiencies or price packs -- what I might say price pack changes.

So those are areas, I think, we're going to continue to push globally to kind of drive revenue growth whether or not there may be list pricing.

Okay.

So it's more revenue management and a function of price/mix, if I hear you correctly?

Revenue -- yes, for sure.

Yes.

Okay.

And then if I may just ask a second one on your developing and emerging market growth.

So it looks like it moderated a bit sequentially.

So could you walk through the key drivers of this?

And then separately, most of the growth in your developing and emerging markets, it still seems to be coming from pricing and really not from volume.

So how much of this has been a response to FX headwinds?

And then do you expect volume growth to reaccelerate here, especially given your volume comps across the emerging markets should be relatively easy?

Yes.

Yes, Bonnie, great question.

We feel really great -- very good about D&E growth.

I think the demand remains robust.

We are cycling our pricing that -- it was pretty strong in the second half last year, particularly in Latin America.

Just for reference, we're up 7% year-to-date in D&E, up 5% in the quarter, and that's 5 consecutive quarters of mid- to high single-digit growth for us in D&E.

So I think we feel very good about the progress we're making.

We are seeing double-digit growth in multiple markets, including Central and Eastern Europe, China now importantly on both diapers and femcare.

Our ASEAN business was up high single digits and Latin America overall was up high single digits.

And even excluding a market like Argentina, which has a lot of list pricing, but Brazil in the quarter was up mid-single digits with volume up as well.

And so I think we -- internally, we have a lot of emphasis on driving volume.

Certainly, we have some benefits from pricing this year, but we feel good about the innovation that we're launching this year that's gaining traction.

We feel great about our investments in advertising, particularly on the digital side, which we continue to increase our investment in.

And so part of the plan is we -- you may not expect to have this level of pricing every year, but we are looking to drive and earn our growth going forward.

Our next question comes from Steve Powers with Deutsche Bank.

So to follow up on Bonnie's question, the gross margin and commodity deflation that you're seeing now is great as is the pricing resiliency.

But as we look to next year, especially with the market concern about potential economics slowing, as you had mentioned, Mike, does this year's gross margin upside increase the odds at all of competitive activity in the year ahead?

And how do you monitor that risk from where you sit?

Yes.

I think any prudent person would say it could -- that could happen.

I would say, largely, I think we've said on previous calls, the commodity inflation that's occurred has been a multiyear effect -- multiyear impact.

And so we're only now recovering margins from where they were from a couple of years ago.

So from our side, I wouldn't expect us to be very aggressive on price points going forward.

But certainly, we want to be competitive.

And then as we're thinking about next year, I think we do believe commodities are stabilizing a bit and maybe will be less of a factor for next year.

But we still expect to see some modest pricing carryover effects from this year into next year, at least in the beginning of next year.

Okay.

Great.

And then as this quarter began, you welcomed Alison Lewis aboard as Chief Growth Officer.

Can you talk a bit more about her role and her mandate and how perhaps her presence is expected to influence the planning process as you plot out 2020?

Yes.

We're really excited about Alison coming aboard.

We feel very fortunate to have her as she brings a wealth of experience from some great companies and has great background both in innovation, marketing, digital spaces and all the areas that we're trying to grow.

She -- her title as Chief Growth Officer, that encompasses our marketing and our commercial functions, which include kind of our global sales.

We don't have a -- it's not a global sales organization, but it's a kind of center of excellence that's going to drive better sales capability, revenue growth management, digital and innovation.

So aside from that, she's got all the functions that you might attach to a CMO as well.

So we feel great about it.

She's bringing a lot of thinking that's, I would say, additive to kind of how we're thinking about things, and she's going to bring a lot of expertise and insight.

So great start.

We're really excited about it.

Our next question comes from Lauren Lieberman with Barclays.

First thing I just wanted to follow up on was the mention of capacity constraints in North America.

Can you talk about what business that's been in, where that surprise has been?

That's my first question.

Yes.

The North America system is running at very high capacity levels, and it is across the segments, Lauren, in the consumer business.

The high capacity is -- or high utilization rates is one of the drivers that is affecting our FORCE cost savings in the quarter.

Typically, you like to run it at very high capacity utilization, but it does limit your flexibility when volume comes in stronger than you anticipated.

And so we're seeing some additional costs as the North America team looks to maintain high service levels, deliver on the volume that is coming in.

And that's one of the factors that's showing up with the lower FORCE cost savings in the quarter.

Okay.

Great.

And then I want to also follow up on D&E markets because at least the way that we've been tracking it, it looks like where there was maybe a little bit of a disappointment in the quarter by my reckoning anyway was in KCP in D&E markets because consumer tissue and personal care continued to be pretty solid performance as we've seen for several quarters now, but KCP slowed pretty materially being flat.

So can you just talk a little bit about what's going on in that business, if this is sort of intentionally stepping away from major maybe lower-margin business or if it's macro volatility because that was, I think, more of a factor in the quarter than I would have expected?

Yes.

Thanks, Lauren.

Yes.

Overall, I think we feel very good about KCP.

I think it was real strong performance in North America, solid quarter overall, but D&E was about flat on organic for the quarter.

I think nothing really systemic there.

In fact, actually, our leader there has a real emphasis on expanding D&E going forward.

We feel like we have a lot of good growth opportunity.

We've got a couple major projects to kind of address a couple of key markets for us, which include Brazil and China for us.

So I think we're very bullish about D&E overall for KCP, but just a little softness in the quarter, but nothing systemic there.

We were really pleased with our 5% growth in North America, which I would tell you is a great result in the market where category actually -- category demand has actually softened from what we can tell in the categories.

So I think that the strategy of kind of elevating these categories with our premium products is working fairly well.

Okay.

Great.

And then I wanted to also just talk a little bit about the longer term and reinvestment because you mentioned when you're talking about the sort of preliminary outlook or just conversation points around next year, you've got encouraged by commodities.

Of course, there's FX headwinds, as we can all see, higher growth investments, what you've already spoken to in sort of articulating your vision and sort of long-term plan.

But I was curious if you could talk about sort of maybe top 3 priorities for reinvestment, so degree of granularity you can.

Was it sales force capabilities in the U.S. just for example?

But any kind of thought process around the top 3 priorities for investment and to what degree that's getting sort of like you said in the fourth quarter of this year and should start to see results as we go into 2020?

Great question.

Thanks for holding us accountable.

I think the -- one, I'd say a couple of things, which is, I think the -- things changed a lot over the past -- over the course, let's say, 12 to 18 months.

And I think we feel very good about reinvesting more in our businesses.

A couple of key factors is certainly I think you mentioned in your note this morning, which is the market environment is much more conducive to investment.

Given kind of the competitive environment, I think it's giving an opportunity for marketing innovation to breathe.

And so we're finding that, again, the investments we're making in marketing are more productive.

Investments we're making in innovation are more productive.

So that's probably the first big thing.

And so certainly, if you follow that line of logic then, one key area for us is to invest more in digital, which is very high return for us.

We're making a lot of progress there and we're upping our capability.

I'd say it's multiple markets and not only kind of our high kind of e-commerce markets but more broadly overall across markets.

Second, we are investing in capability.

I talked a lot about -- with Bonnie about revenue growth management, a very important capability for us, helped us realize all list pricing this year.

But if there's not as much list pricing going forward, it becomes a little harder, and so we have to up the capability of the organization.

We've been investing this year in training and development and tools to help our organization do that.

And then the third key area is the product investments, and that's kind of the lifeblood of our business is the innovation.

We feel very positive about the innovation that we've been launching.

The 5D core diaper in China is doing very, very well.

We just launched Special Delivery.

Although -- it's just gaining distribution now, so it's too early to tell, but we're very excited about the prospects for that in our business.

And so I think those are probably the 3 big areas.

And then what I might add is I mentioned in my prepared remarks a couple of hotspots in -- areas that we want to address to improve our share performance.

I mentioned Peru in our prepared remarks, Snug & Dry in North America.

Just as always, you're going to have some businesses that are going to need a little bit more work or investment, and those are some targets for us.

Okay.

And is there -- just as you're looking forward, is there any reason you're talking in a fairly conservative way, I would think, around the commodity environment?

Tailwinds should be material as we go into next year, at least on pulp.

So just anything you can offer as to why that might not be the case.

Yes.

I think it's too early to give a confirmed outlook on 2020, Lauren, there.

We look at the forward curves in addition to looking at the spot rates.

We've seen some estimates that have commodities above where spot is today.

But we'll have to wait and see, and we'll give you our perspective when we get to January.

And Lauren, if I would just build on that briefly.

Some of the things that are not quite as visible in the marketplace, but where we're experiencing pretty good levels of inflation this year include local cost in Latin America.

Just as businesses like ours are raising prices, our suppliers are also raising prices.

And that's a factor in the results this year.

Where that is next year, we'll see.

We'll give you our perspective in January.

And then also distribution costs continued to run higher year-over-year this year, both in Latin America and really globally around the world.

So where that ends up again, we'll give you better visibility in January.

But those are 2 factors that are certainly inflationary this year that you may not see fully.

Our next question comes from Jason English with Goldman Sachs.

I want to come back to I guess Lauren's question on the capacity tightness.

And Maria, your answer, you mentioned that it's both tissue and personal care.

I'd love to understand more what's going on in tissue because your volume has been down 2% in '17 in North America, 2% in '18, tracking down 5% year-to-date.

So in context to the sort of multiyear volume erosion, what's led to capacity tightness in that network?

And the second sort of derivative question is, is this really just a byproduct of your reorganization?

And how many plants that you've targeted already?

I think there's 8 maybe that you've announced or identified.

How many of those sit within the North America tissue network?

Sure.

They are very related, Jason, on the tissue side of the house as we've been executing changes to get pricing into the market.

That is one of the factors that is driving the utilization rates and the capacity within our tissue plants to execute against the volume demand.

The restructuring is also a major factor in what's happening in the supply chain in North America as we execute some facility shutdowns.

We're standing up additional capacity in various places across the network.

So if you think about everything that's moving in North America with the pricing changes that we're making, the restructuring activities that we have going on, the innovations that we have going into the market, there -- there's a lot going on right now in the North America network.

And obviously, executing the restructuring with excellence and expeditiously is a high priority for our business.

In terms of the plant closures, we've announced 7 of approximately 10 that we intend to close.

One of them is our Fullerton operation, which is a tissue manufacturing facility out in California for North America.

Yes.

And just to pile on, Jason, so as Maria said, we like -- we prefer to run at high utilization and doesn't leave you a whole lot of wiggle room in your base state.

And then when you're working through a restructuring, you're building inventory to kind of move the tissue asset or move production over.

And at the same time, when volume's a little bit better than you planned, it kind of adds to a triple witching event.

And so we got a great team.

I would say these are not systemic issues.

But we're just putting a lot of challenges on them and we'll work through it.

I would tell you that some of these cost issues, they're not going to be systemic, but they do reflect some of the operational difficulties that you might have.

That's helpful.

And one follow-on just to help me sort of understand how the restructuring fits in with all this.

You step back and it's been a little surprising for us to see you not defending market share a bit more aggressively in tissue.

But then you mentioned you're tight on capacity and you're actually working to shut down more capacity.

Is there a concerted effort here to actually shrink your tissue business volumetrically to get to a more profitable base going forward?

No, there isn't.

What -- the net results will be that we continue to have strong capacity in the tissue business.

The more productive assets are the assets that we will be continuing to run and some of the less productive assets are the ones that we'll be taking out of the system.

But overall, we are not looking to reduce volume in our tissue business.

Yes, Jason.

Our teams would be really upset with us if we told them to shrink share a little bit.

So we recognize actually share this year is probably one of the areas that we really want to improve on, and that's one of the reasons why we want to reinvest.

So we're a little light in some areas, and we're working our way back there.

And that's why we want to make some of the investments we're making.

Our next question comes from Andrea Teixeira with JPMorgan.

So I wanted to go back to the 2020 initial guide.

So it seems to me -- and then your stock obviously is getting impacted now when you say you gave the initial outlook of -- I think the long term is 1% to 3% organic growth.

And correct me if I'm wrong if that changed with your change now to the 4%.

And the mid-single-digit EPS seems to me a bit conservative given that you're going to be lapping all these challenges in commodities.

And you inflected -- as a matter of fact, you inflected the commodities finally this quarter.

So I'm assuming -- I understand when you're coming from the price increase, but the price increase, it was about like 100 bps or something in some of the areas.

So I was just wondering if you can kind of unpack that long term and why giving us that outlook if you're still moving -- if you're still looking at the commodities and how the commodities will play out for next year?

So I just wanted to -- if you can unpack both the top and the bottom line.

Yes, Andrea.

I think we came out in January with, under K-C Strategy 2022, kind of a midterm targets for us, which we said organically was 1% to 3% and mid-single digits on organic and then mid-single digits on the EPS line.

And so we just put those out in January.

We still think those are the right ones for us.

We recognize that we had a little benefit with some commodity easing perhaps this year.

But on a long-term basis, we still see the fundamentals of our business kind of tracking toward that.

And so we are working towards that and that's how we're thinking about our plan.

Certainly, next year, we think commodities are less of a factor, but we still have some FX issues, particularly in Latin America, and we'll be working through those.

So that's how we're thinking about 2020.

I don't know Maria, anything to add?

Yes.

No, I think that's right.

And the midterm algorithm that we discussed with K-C 2022 on the top line is also informed by what we're expecting for the market growth rate, and is reflective of that.

And sorry.

If we can go back to China, if I can squeeze that commentary on baby diapers and also the commentary on incontinence, like if you can talk to us like how that is inflecting and how you're seeing that playing out into 2020.

Sorry, Andrea, about diapers and incontinence?

In China?

Yes, in China, yes.

Yes.

Overall, I'd say diapers, we're excited about our 5D diaper.

It's off to a very good start.

Overall, I think in China right now, share is overall flat.

I'd say we're growing at a strong pace, double-digit rate in the value -- in the premium tiers and then down a bit in the value tiers, which is aligned with our strategy.

But we think -- one of the key things about China we're seeing is I think the terms of competition of the game is shifting back to innovation, which I think is important and good in the market in which consumers want a better product.

We feel like we have very good products, and if not the best products that are in the market there.

So we feel great about that.

Adult incontinence for us is still a huge opportunity.

It's a relatively small category in China but I think ripe for development, and we're increasing our focus there.

Our next question comes from Ali Dibadj with Bernstein.

So I want to go back to a couple of things.

One is around the cost savings efforts.

And it's really rare to see you go to the lower end of any cost savings plan like you're doing for FORCE even more broadly.

And to Jason's question, I think it was around the implications of perhaps -- I think you're getting to consumer tissue volumes down and still having capacity issues, i.e., maybe you've gone too far, at least my interpretation of the subtext there.

How do you get comfortable that perhaps the cost savings and the shutting down of the plants and the restructuring or anything else just isn't going too far and you might have kind of pushed it a little bit?

I know it's a question we've asked, all of us, for many, many years, but this is really the -- a really big sign here particularly given the tissue volumes are down and in that area, you're running at too high of a capacity.

Yes.

I think overall, we think that the plans that we have and that we're executing on the restructuring are completely appropriate, Ali.

I think that working through a restructuring of this size at the same time that there's a lot of other factors going on in the supply chain network is certainly not an easy task.

So as we get through the execution period on the supply chain restructuring, it's not totally surprising that there are some challenges around flexibility, and that's what you're seeing here.

In terms of the savings, I think the total savings are solid.

And when you look at the details of it, our teams are delivering on savings from product optimization, savings from productivity and waste improvement.

We talked about coming into the year that on the savings front, we would have lower negotiated price savings associated with our long-term contracts.

So that's been flowing through the numbers this year.

The other thing I'd say is that the numbers outside of North America, where we've been talking about some supply chain challenges, are strong on FORCE, so good savings across the globe.

And the challenges that we're having in North America with the high utilization rates just mean that we're incurring more costs to meet stronger volumes than we anticipated, maintain the service levels, and so that's what's really going on.

I think importantly, we still see lots of opportunity for productivity in our supply chain.

And so we're working through a lot of things this year with a lot of moving pieces.

We're focused on getting that restructuring executed.

And on the personal care side, we'll be adding some capacity into the network, and that will catch things up on the North America side of the house.

But overall, the teams are doing a good job executing it.

There continues to be strong opportunity in the supply chain.

And I think when we have completed the restructuring program, we're going to be in a good place.

Yes.

And overall, I think structurally, Ali, I'd say we're moving out of higher-cost locations into more efficient locations that'll deliver low -- total delivery costs lower.

Okay.

So just to play it back so I'm dead clear on this, you anticipated more than a negative for volume in consumer tissue in North America, so it's a more -- worse than that and that's why you have this capacity constraint.

And as we go forward, FORCE and cost savings, we should be very surprised if there's a slowdown in that pace in 2020 or beyond.

Is that the right playback?

I haven't given any numbers specifically for 2020.

But what I will tell you is that there continues to be opportunity for additional productivity out of our global supply chain.

Okay.

And then on pricing, just 2 vectors on that.

Would love your guys' historical perspective on what happens to pricing when commodities look like they're doing what they're doing now.

Certainly, my perspective from an outside end view is it's not just a possibility, but it's a likelihood that the pricing comes down particularly in tissue, perhaps a little bit less so on diapers in North America.

So I would love your perspective there.

And then secondly, on pricing, the word that everybody is using and certainly used over the past several months is premiumization in the whole industry.

And I always find your guys' sense of this is really useful in the lens for the whole industry, which is how should we think about premiumization in a world particularly in North America where the consumer may actually be slowing down again over the next few years?

And does that raise risk profiles of a lot of -- Kimberly-Clark and other companies as such?

Yes.

I mean Ali, I think you'd know we're very focused on having the right value proposition.

And so I do personally believe premiumization is the path that a company like ours needs to take globally.

I think it certainly holds in a core market like the U.S. But certainly, D&E, many D&E markets are ready for that, too.

But we're going to keep our sharp eye on kind of having the right value proposition for the consumer.

And so therefore, for us, premiumization means we're going to earn it by making our products perform better or do more for the consumer.

So that's the first part of it.

I'd say with regard to the first part of your question in -- when the commodities ease, I'd say part -- maybe the first part is that this has been a multiyear issue.

And so we're still well above kind of some of the commodity levels that we were a couple of years ago.

And so -- and still recovering in the margins.

That said, in the past -- and I've been around long enough, 7 years now, long enough to see a couple of cycles of this.

And we have seen a little bit more promoted activity when you get some long-term deflation.

I'd say we're prepared for that.

I mean one of the areas in our revenue growth management initiative is we have invested in tools and capability to let us pick kind of the more efficient events.

And trade optimization and promotion optimization is a keyword for us inside the halls here, and so we'll work through that.

But I think we're prepared in either scenario.

But right now, I think we're seeing pricing and promotion relatively stable in the marketplace right now.

And you're not seeing any incremental questions being raised by retailers for the industry or across the board given perhaps their greater desire for margin in these categories?

I would say no more than the typical.

Yes.

And I'll just add that while we're all pleased that pulp is deflationary in the quarter, the full year 2019 pulp cost outlook is still above 2017's level and frankly, all other years since 2010 with the exception of 2018.

So we are happy with the trend, but it's still at an elevated level.

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

Want to talk a little bit specifically about D&E, about pricing because it sort of feels a little bit like you're knocking on the upper limit that the market can handle on pricing.

So can you talk about the outlook there and your overall outlook for D&E going forward?

Yes.

I think probably the biggest factor in D&E this quarter was -- we're starting to cycle or lap our pricing that we had in Latin America last year.

I mean this time last year, we are launch -- increasing prices, high single, low double digits and brought that forward in the beginning of this year.

I think we've rolled over our pricing in a market like Brazil right now.

And so you're seeing -- starting to see that.

So I think last quarter, in Brazil, our organic was up teens.

This quarter, it was up mid-single digits, still a good number with volume up but certainly cycling the pricing.

And I don't know that we will have cycled the upper limit.

There's a lot of factors in play, including the FX costs, the inflation internal in the market and the wage inflation that occurs like in a market like Argentina.

So I don't think I'll judge on whether we're at a limit or not, but I do think we have cycled a lot of the pricing that we had planned this year, and we don't have a lot more going forward for the balance of this year.

Appreciate the answer.

But just in terms of the offset, maybe volume increasing, is there innovation coming to market?

Are there other things?

Is it -- usually, in the second half, you've got a little bit more of an innovation-heavy period.

So just kind of understanding what's coming down the pipe for D&E.

Yes.

I think we feel good about what's been in the marketplace.

And overall, for the year, I'd say with the levels of pricing that we have, our volumes overall have been a bit stronger.

In a market like Brazil with volumes up, with pricing last quarter up teens, I think that was a very good result.

A lot of that was an artifact of a few things, which is, one, great end market execution.

We're expanding distribution on key brands, expanding our presence on key items.

And so I think that's driving very good results.

We're really growing and expanding the adult care category, the femcare category and the femcare category in Brazil into more geographies.

And I think we're up double digits in those categories.

And so we're really excited about that progress.

Certainly, like in CEE, I'd say it's a combination of innovation, in-market execution and marketing that's driving high teens organic growth, including volume.

China similarly, the innovations working in our 5D diaper we saw return to growth last quarter, it's accelerated this quarter.

So overall, I think the teams are doing -- have been doing a very good job in D&E and are driving the volume with disciplined market execution, innovation and good marketing.

Got it.

If I can turn to pulp.

Obviously, that market is now -- the prices there are stabilizing a bit.

So what -- could you lock in more than you typically would at this point in the year in terms of the price on pulp?

And what kind of visibility do you have on the cost outlook for yourself in 2020?

Yes.

I would remind you that as part of our pulp price management strategy, we look to negotiate contracts that are generally a year in term, and we look closely at how we do that and we look at a combination of mechanisms.

We consider floors and ceilings.

We consider fixed pricing and we balance out how much we look to basically have a hedge on the pricing going into the following year and how much we want to leave flexibility to take advantage of the spot market.

So we're working through all of those things.

I don't have any specific thing to share with you on how we're thinking about that mix for 2020.

But when we provide our outlook in January, it'll be reflective of however we land on that.

But obviously, we have visibility in the spot market and the forward rate curves.

Our next question comes from Steve Strycula with UBS.

So a quick clarification question.

Can you quantify what Argentina was as an impact for -- to the global comp in the quarter?

And then I have a follow-up question for Maria.

Yes.

Steve, it was about 2 points of our total developing and emerging markets growth and D&E is about 30% of company sales.

Okay.

Super helpful.

And then Maria, just to kind of piggyback on that last question.

If we just assume spot rates just hold where they are for like the next 18 months, so we don't assume it better or worse, should we think about the fourth quarter being the maximum flow-through from, call it, like pulp deflation?

Or should we actually expect that to build further next year as we think about some of these contracts being reset on an annual basis?

And then I have one last question for Mike.

Sure.

On -- in terms of this year's outlook, our outlook for 2019 is generally aligned with the spot market.

And then for next year, as I mentioned earlier, it -- the forecasts are still moving.

It -- some forecasts have the outlook for next year above spot, and there's a lot of factors that are still moving around.

So I hate to keep going back to this, but we'll have more to say on that in January as we continue to lock down our mechanisms for our pulp by -- into next year.

Okay.

I appreciate that.

And then Mike, fundamentally, a lot has gone right for you this year or for the broader team rather.

And one of the few things you mentioned on the call where you would cite as an opportunity for improvement in 2020 is maybe selectively some pockets of market share.

Will you kind of comment on your top priorities from like category comp product -- or category/country combination for next year?

And what do you think is like the mechanism of delivery in the form of reinvestment that we need to see to kind of jump-start the share trends in these category/country combinations?

Yes.

Maybe -- Steve, it's a great question.

I think maybe the caveat I'll -- precursor is we're right in the middle of our plans for 2020 right now.

So I actually haven't even seen kind of a detailed role of 2020 for us yet.

Although I'd say if you look at our business, I will start with North America.

Overall, I think our share is a little softer than we would like this year, although we are seeing sequential progress this quarter.

And I think the team is feeling very good about the progress they're making, especially with the innovation and the marketing plans that they have.

So to see an ongoing improvement in North America is a top priority.

Certainly, we -- usually, we don't get very far into the call before we start talking about China.

It remains our biggest growth opportunity, both in the near term and the long term.

We're really excited about, I think, the progress that the team has made.

So our investments in both the product, especially in diapers, and then the marketing side, both in diapers and especially in femcare, digital marketing, I think is working really well for us.

And I think that's really important.

I think we've had great growth in Central and Eastern Europe, both -- either double-digit growth whether it's in the 20s or the high teens for a couple of years now, and we feel great about that.

So that continues to be a high priority.

Latin America, as we talked about, I think we're -- the Brazil team is doing a great job executing.

We have a couple of pockets in Latin America, which are important markets for us, like Peru that I mentioned that we're seeing a little increased competition.

And so we're going to make sure that we have the right product offering in that market to be competitive and strengthen our position in that marketplace.

Our next question comes from Kevin Grundy with Jefferies.

So just to kind of build on the last question.

Mike, I'm not sure if you can say much more.

But the question relates to innovation pipeline and adequacy of investments.

And when we spoke with you earlier this year and you took over leadership of the company, and the comments were -- you weren't comfortable resetting earnings kind of for the sake of resetting earnings in the absence of having the right sort of innovation pipeline to spend behind.

But kind of building on this, we've had a lot of conversations around sort of a lack of satisfaction with your market share trends in the U.S. Where do you kind of stand now?

I mean what is the satisfaction with current investment levels for the company broadly?

And then kind of marrying that up with the higher growth investments in your slides, you kind of gave us a few data points, qualitatively at least, between FX and commodities.

And then you did include there higher growth investments looking out to next year.

How should we be thinking about that?

Is there a potential for an acceleration relative to what we've seen?

And I have a follow-up.

Yes.

I think we've been working on what I would say is the commercial capability development of which innovation is a key area.

The 4 pockets that I'll talk about, innovation, digital -- marketing overall, but digital especially, revenue growth management and then selling capability or in-market execution.

So those are our big 4. I will tell you, I feel very good about the progress we're making globally across the enterprise in these areas.

One of the areas I do think we're making progress is on the innovation front.

And I think we're starting to see our teams work much more effectively together across markets to leverage our enterprise scale on technology.

And I think that's hitting the market or is going to affect what we're doing in the market.

Some of the 5D liner that we saw in China was developed by other parts of the world.

The Huggies Special Delivery that we just launched in North America was jointly developed between Korea, China, Brazil and the U.S. team.

And so we're starting to see more of that activity.

So suffice it to say, we want bigger, more impactful innovation with our consumers, and you'll see more of that going forward.

And then in terms of the investment, it's just to support that, whether it's in the product cost or it's in the marketing of that product and being more aggressive in how we market that.

I think those are areas that we're going to want to invest in.

And then the last area and it coincides with our market execution capability pillars, we want to play a bigger hand in developing categories, and we're seeing more of that.

I think I mentioned in Brazil, we're seeing double -- high double-digit growth in adult care and baby wipes.

And that's because of a concerted effort by the team in Latin America to focus on geographies and categories and expand the development of those categories.

And so you'll see more of that investment going forward as well.

But mike, it sounds like -- it feels like you believe the company can execute on that and still deliver on the company's long-term EPS algorithm.

I didn't detect anything that would suggest an outsized investment would be needed.

Is that fair?

Yes.

I mean that's -- I think that's been our stance since, I think, our January meeting, which is -- that's why we set forth these medium-term targets that would -- 1 to 3 top and mid-single-digit bottom.

And at the same time, we would create the funds and the room necessary for us to drive some of the investment that we think we need to do to improve the share position of our brands for the long term and then also build the categories in kind of the big opportunities that we have in D&E for the long term.

Okay.

That's helpful.

One quick follow-up.

The net revenue management, which you've spoken a lot about, that's a big number.

I understand it approaches the company's cost of goods sold in terms of absolute dollars.

Is that something you will ever put a number on for investors in terms of the opportunity?

And over what period of time do you think it can be realized?

Well, I was about to say something but Maria's shaking her head, so (inaudible).

I'm just kidding.

I'm just kidding.

We're not ready to put a number on that.

It probably is not yet -- not at this point.

Our next question comes from Caroline Levy with Macquarie.

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

All right.

So Caroline, if you're not there, we appreciate everyone's questions today, and we'll wrap up with a quick comment from Mike.

Okay.

Well, we're very pleased with our results this year.

We had a strong quarter, and we feel very good about the performance thus far this year.

And we're very optimistic about our growth prospects for the future, both in the near term and the long term.

And our plan is to deliver balanced and sustainable value creation.

So thank you, guys, very much.

Thank you very much.

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

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