金百利克拉克 (KMB) 2019 Q4 法說會逐字稿

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

We now have our presenters in conference.

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

Thank you, and good morning, everyone.

Welcome to Kimberly Clark's year-end earnings conference call.

With us today are Mike Hsu, our Chairman and CEO; and Maria Henry, our CFO.

Here's the agenda for our call.

Maria will begin with a review of full year 2019 results.

Mike will then provide his perspectives on our results and the outlook for 2020.

We'll finish, as usual, 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.

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

Both exclude 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, and good morning, everyone.

Thanks for joining us today.

Let me start with the headlines on our full year results.

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

We achieved strong margin improvements and bottom line growth while increasing our brand investments, and we improved capital efficiency and returned significant cash to shareholders.

Now let's cover the details of our results, starting with sales.

Full year net sales were $18.5 billion.

That's even year-on-year and included a 3-point drag from currency rates.

Organic sales were up 4%.

Looking at the top line by geography.

In North America, organic sales in consumer products increased 3%.

Within that, personal care grew 4% with positive volumes, pricing and mix.

Consumer tissue grew 2%, with selling prices up 7% and volumes down 5%.

In K-C Professional in North America, organic sales increased 3% driven by higher prices in all major product categories.

In developing and emerging markets, organic sales rose 6%.

That included about 2.5 points from Argentina.

In terms of key personal care markets, organic sales increased 20% in Eastern Europe and high single digits in Brazil, China and ASEAN.

Outside of Brazil and Argentina, we experienced increased volatility and soft results in Latin America, particularly in the second half of the year in Peru, Bolivia and Chile.

In developed markets outside of North America, organic sales rose 1%.

Moving on to profitability.

Full year adjusted gross margin was 35%, up 180 basis points year-on-year.

Adjusted gross profit increased 5%.

We generated $425 million of cost savings from our FORCE and restructuring programs.

That was right in line with our initial target and slightly better than we expected in October.

For 2020, we're targeting to deliver between $425 million to $500 million in total cost savings, and that includes $325 million to $375 million from FORCE.

Commodities were a drag of $145 million in 2019, although they turn favorable in the back half of the year.

Foreign currencies were also a headwind, reducing operating profit at a high single-digit rate.

For 2020, we expect commodities will be somewhat favorable, mostly offset by currency headwinds, particularly in Latin America.

Other manufacturing costs were also higher in 2019.

Moving further down the P&L.

Between-the-lines spending was up 90 basis points as a percent of sales.

That included higher advertising spending, which was up 60 basis points.

SG&A spending also increased and included higher incentive compensation, along with capability-building investments.

Adjusted operating margin was 17.8%, up 80 basis points, and adjusted operating profit grew 5%.

Operating margins were up nicely in all 3 business segments led by consumer tissue and secondarily, K-C Professional.

The adjusted effective tax rate was in line with plan and a drive year-on-year, partially offset by higher equity income and a lower share count.

In total, full year adjusted earnings per share were $6.89, up 4%.

Our October guidance was for earnings of $6.75 to $6.90, and our original outlook last January was for earnings of $6.50 to $6.70.

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

Cash provided by operations was $2.7 billion, down year-on-year as expected and driven by higher working capital.

We expect a solid increase in cash flow this year driven by higher earnings.

Capital spending was $1.2 billion in 2019, in line with plan and up year-on-year due to supply chain restructuring projects.

Spending will remain elevated in 2020 because of our restructuring.

We improved adjusted return on invested capital by 70 basis points to 27.2%, which is an all-time high.

On capital allocation, dividends and share repurchases totaled $2.2 billion.

That's the ninth consecutive year we've returned at least $2 billion to shareholders.

We expect to return a similar level of cash to shareholders in 2020, and our Board has already approved our 48th consecutive annual dividend increase.

Let me finish with a short update on our restructuring program.

Overall, we've made significant progress as we close out the second year of this program.

The implementation of our redesigned overhead organization has gone very well, and we've already realized most of the total program SG&A savings.

In terms of supply chain, activities continue to ramp up.

We've announced 7 of the approximately 10 facilities that we expect to close or sell, and we've taken action on 6 of those.

In 2020, we will start up approximately 20 new assets globally, which is roughly twice the level of activity that we would have in a typical year.

Looking at the key metrics, we're about 70% to 75% of the way through pretax charges and workforce reductions.

Cash payments are about 65% complete.

And on savings, we accelerated savings in both 2018 and 2019.

And so far, we've generated $300 million of savings compared to our total program target of $500 million to $550 million by the end of 2021.

So overall, it was a very good year, and I'm pleased that we delivered top and bottom line growth ahead of our plan while we invested more in the business for the long term.

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

Thank you, Maria.

Good morning, everyone.

Let me start by saying I'm encouraged by our results and the progress we made in the first year of executing K-C Strategy 2022.

On the top line, organic sales were up 4% in '19, ahead of our original plan for 2% growth.

Our teams maintained strong focus on price realization and executed their plans well throughout the year.

As a result, pricing was up 4%, and that's the highest realization we've achieved in a decade, and it was necessary because of the multiyear inflation that we faced.

Our strategies to elevate our categories and drive trade up also helped us improve product mix by 1 point.

While volumes were down 1%, that was better than our original expectation because of strong in-market execution, higher brand investment and less impact from price increases.

Beyond sales, we delivered broad-based margin improvements and above-plan earnings.

We continue to leverage our financial and capital discipline as we achieve significant cost savings, improve ROIC and return significant cash to shareholders.

We also invested more in our brands and businesses in 2019.

As Maria noted, we increased advertising spending by 60 basis points.

Digital advertising is now about 2/3 of our working media mix, and it's helping us target consumers more effectively and deploy our campaigns more quickly.

We're leveraging our digital expertise in more businesses around the world, and our marketing ROI is improving.

Importantly, our digital strategy is helping us grow volumes in businesses like in femcare internationally, diapers in Eastern Europe and adult care in North America.

Now beyond advertising, we've also started to invest behind and focus more on improving our other commercial capabilities, including revenue management.

We're taking a disciplined program management approach to this effort.

This includes making sure we have the right tools, processes and resources so we can better leverage these growth capabilities.

While it's still early days, we're making good progress, and I expect more going forward.

All in all, our teams have made excellent progress in 2019, and I'm proud of their accomplishments.

Now I'll turn to our outlook for 2020.

Our plan is consistent with our balanced approach to value creation, includes higher growth investments, and it aligns with our K-C Strategy 2022 financial objectives.

On the top line, we're targeting organic sales growth of 2%, and that's consistent with our medium-term objective and similar to our expectation for category growth.

We expect selling prices, product mix and volumes to all improve in 2020.

Pricing should be weighted to the front half of the year, while volume growth will likely be more weighted to the back half.

We expect the promotion environment to be competitive but remain broadly constructive.

We will continue to increase our growth investment in 2020, and that includes investment in digital marketing, in our commercial capabilities and in our products as part of our innovation agenda.

In the first half, we will launch innovations in North America on Huggies Diapers and adult care, along Cottonelle bathroom tissue.

In D&E, we have several upgrades coming in personal care in key markets such as China, Eastern Europe and Latin America.

We're confident our growth investments and innovations will help us grow volume and improve product mix this year and improve share performance over time.

Our investments will start right away in the first quarter, while the benefits should build as the year progresses.

We're targeting to grow adjusted operating profit 3% to 5%, and on average, that implies 50 basis points of operating margin expansion.

Gross margin should increase more than that.

On the bottom line, we're targeting adjusted earnings per share of $7.10 to $7.35.

At the midpoint, that represents growth of 5%, in line with our K-C Strategy 2022 objective.

Finally, as Maria said, we expect to improve cash flow and return significant amounts of cash to shareholders.

So in summary, I'm encouraged by our progress in 2019 and our outlook for 2020.

We're investing more in the business to drive long-term success, and we're confident in our ability to deliver balanced and sustainable growth and create shareholder value.

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

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

I guess first thing is, I'm struck by the 60 basis point increase in advertising spending.

In my model, which goes back to, dare I say it, 1997, that's the largest 1-year increase in advertising in the company's history that goes back that far.

So that, coupled with the fact that you had $100 million of incremental SG&A in the fourth quarter and then looking ahead into next year, the implied reinvestment spend.

So can you just talk about, like, are there areas where you feel like as a company, you've been underinvested, that it requires this much step-up in spend?

Some of it's being supported by the fact that it's a benign input cost environment, but the plans that you'd laid out a year ago didn't contemplate the deflation that we're seeing.

So I'm just kind of curious, like the aggregate amount that's going back in, where you would say it's most focused and what it takes to start to see a return on that?

Because the revenue guidance for 2020, while healthy, doesn't seem to tie with the amount of money that's going back into the business.

Yes.

Okay.

Thanks, Lauren.

Yes, I think there's a part -- maybe there's a small part of it I would say, hey, we had a tough couple of years, and so we had trimmed back a little bit of our A&CP.

So part of that is restoring a bit of that.

But the other part I would tell you is we feel really good about our stance on investment.

And I think it really reflects, in our view, the quality that we have in our commercial programming for this year.

And also, I think the fact that the category conditions, we think, are very conducive to growth.

And I think that's a big change versus when we talked this time last year where the -- we were uncertain about the marketplace, and we still were launching new innovations and new commercial programs.

So we feel really good about that.

I think consumer demand has been pretty darn resilient, and the competitive environment has been, we would say, broadly constructive.

And so that makes the conditions pretty -- very good for growth.

And then the commercial programming, we've got great innovation that launched in 2019: in North America, in adult care; in China, in diapers.

We've got great innovation coming this year across personal care in multiple markets that we're very excited to support.

And so we feel good about that.

So a big chunk of it is increased investment in the product and ongoing, and we have some good news coming.

And then importantly, I mentioned digital, which is about 2/3 of our overall advertising spend, is being very productive for us.

And we feel really good about our campaigns and the content we have out there and our team's ability to manage it effectively at a higher ROI level.

So that's the second area.

And then commercial capability.

And for us, I'll translate commercial capability that includes kind of the innovation process, it includes revenue growth management, it includes sales execution and then the digital aspect.

And so all those areas, we're investing and building our capability there.

Yes.

And Lauren, I'd chime in that we were up 200 basis points in the fourth quarter.

We were also up in the third quarter.

And if you recall, fourth quarter and the back half of 2018 had particularly low spending between the lines.

So I think the full year comparison is the best way to look at this.

And for the full year, we're up 90 basis points.

60 basis points of that was advertising.

Mike mentioned the investment in commercial capabilities, which ramped up toward the end of the year.

And then the other thing I'd call out is incentive compensation, which we've talked about before.

This year, we over-delivered on our plan and, therefore, had higher variable compensation.

And last year, the opposite was true.

We under-delivered on our plan, and therefore, the variable compensation was lower.

So you look at the year-on-year increase, and that's an effect.

And the last thing I'd point out there is the way that our plan was constructed back in January, we had plans for a ramp on between-the-lines spending in the second half and even more so in the fourth quarter, just the way that the timing of our programs in areas like IT were scheduled to execute.

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

Wanted to talk about the pricing contribution for fiscal '20.

Interesting to see that you're expecting to be positive.

So is that price that's already in place that's had yet to lap?

Or more pricing that hasn't been introduced yet that you're putting in place are more a function of decisions you're making on promotional levels like you did on China as you focus on revenue management?

Has there been -- sorry.

And just any change in your promotional expectations for fiscal '20.

Yes.

Thanks, Olivia.

Yes.

I think broadly, I'd say the pricing environment in 2019 was broadly constructive, and our expectation is for it to remain so in 2020.

We do have some pricing in our plan.

I would say a big chunk of that -- the majority of that is carryover from actions we took in 2019, right?

And so you'll see most of that come through in the first half.

And then we do have probably some pricing plan to address specific issues in specific markets where we've got some volatility in currencies or the economy.

So that's that aspect.

I think in the overall, I'd say net pricing in 2019, I think, was ahead of plan, and the volume impact was less than plan.

There were probably a few isolated hotspots, and there are probably a few isolated hotspots now.

Our teams are staying close to those situations, and we're going to fine-tune our promotion plans as appropriate.

But maybe the headline I would say is we're more focused on driving category growth and driving it the way that you would want us to do that by launching improved products and driving advertising.

We'd rather, I think, earn our share and own our share through innovation and advertising instead of renting it through promotion.

And so I think right now, our expectation is the environment should remain constructive.

Great.

And then just following up, obviously, you've talked about China price promotion actions you've taken in the past.

Just your view on the market for D&E personal care because it's nice to see the volume growth again, but the sales have decelerated a bit.

So just if you could talk through that a little bit.

Okay.

Olivia, just to be clear, that was about China?

Yes, specifically on China.

Yes.

Okay.

Yes.

China, we're feeling very encouraged by our progress.

We're up double digits behind really strong momentum on femcare and really, an improving trends in the diaper business.

I'd say on the diaper side, really, what's driving our improvement is really good innovation that's gaining a lot of traction with consumers in the marketplace.

It has been, to date, mostly launched in our premium tiers, so our Tier 5, 6, 7, and -- which is growing at a pretty good clip.

I'd say we still have some issues on our lower tiers where we have -- still a little more softness there.

We are expanding that innovation.

We have more exciting innovation that we're launching this year, and we're rolling that out across this business in diapers.

And so we feel really good about our position.

The birth rate has been down a little bit '19 versus '18.

We expect it to probably be flat to down a little bit in this year as well.

But we still think there's plenty of develop -- market development opportunity in China.

And we're still very early, I think, in the life cycle of our categories in China.

Our next question comes Ali Dibadj with Bernstein.

So I have a couple of -- well, 3 questions.

One is on your comments about constructive pricing.

We've -- I asked this earlier this morning, too, but we've kind of seen this movie before where there sometimes these air pockets where pricing stays, that commodities roll over, so gross margins expand, offers the opportunity to invest in the category through advertising, everything else, which is what your plan is for the year.

But again, having seen this before, you've seen this before as well, oftentimes, a quarter from now, maybe 2 quarters from now, you start seeing competition creep in from a pricing perspective, and things get worse, not that they get bad, they just get a little bit worse than the plan.

So how are you confident that this movie is not going to end the same way or have the same competitive pressure picking up over the next little while here?

And tactically, how much notice do you get about that?

Yes.

I mean the scenario that you paint or that possibility always exists.

And I think the overall is we're going to remain competitive in the marketplace, and we'll be competitive on price.

However, I think maybe the emphasis, Ali, for us is we feel really good about our innovation, and we feel really good about our commercial or our marketing programs.

And so that's where we want to invest.

And you may have covered categories that have commoditized.

I've worked in categories that people have seen commoditized over time, and that's a dead end.

And so for me, I think we want to take the high road and build our categories we have.

If you -- our thesis is there's a lot of growth left in our categories in D&E and in elevating our categories in developed markets.

But to do that, you need to bring innovation and you need to get the consumer a good reason to buy, which is by creating more value through our products.

So that's where our focus is.

We will be however competitive.

But the other factor on pricing, I'd say, is also if you look at it, we're still above our 2017 cost levels.

And so we're still -- we still want our margins back to kind of where they are.

We're not all the way back yet and to the extent that we would like them.

And then the other side of it is that we are anticipating some pulp inflation in the back half of the year.

So there's a lot of other factors going on.

But our teams, I would say, have gotten sharper and more tuned with our revenue growth management capability to the market conditions.

And so we'll stay close to it, but we're going to run the play, which is the high road play right now.

Okay.

Okay.

I'm not -- again, I'm not questioning you guys.

I just wonder if others follow that same high road who are more private-label prone or smaller or more private or whatever.

Okay.

I guess we'll watch it.

Second question of 3 is on free cash flow.

Looks like certainly, for the year, it was down quite a bit.

A lot of that was CapEx-driven.

Could you talk a little bit about -- maybe Maria, for you, can you talk a little bit about the drivers of free cash flow in 2019, how we should think about it for 2020 and in particular, the CapEx as a percentage of sales, still looking perhaps elevated?

Sure.

The cash flow in the fourth quarter was actually strong at $924 million for the year.

As you call out, operating cash flow was $2.7 billion, and that's down from prior year.

It's not -- it's in line with our expectations, so it was very planned for.

As you know, we are funding the restructuring last year, this year, and so we got elevated expenses coming up on CapEx.

The big driver on operating cash flow, which we've talked about before, is that we had a big shift in working capital, particularly around payables, where in the fourth quarter of 2018, we had a very high inflow from working capital driven by payables timing.

We basically had to pay that back out in the first quarter of 2019, and that affected the operating cash flow for the year.

That was the big driver.

Encouragingly, though, Ali, when I look at our cash flow from operations, we were up nicely year-over-year in the second half of 2019.

We were up about 10%.

And the trends on working capital are positive, but that was true both in the third quarter and the fourth quarter.

I'd also call out, related to that, our cash conversion cycle was 10 days for the year, which was a day better than it was the prior year, and it was better than our expectations.

In terms of CapEx, CapEx was elevated in 2019, and it will be elevated again in 2020 as we work through the restructuring.

And as you recall, we said when we announced the restructuring program that we were expecting incremental CapEx of $600 million to $700 million on that program.

And so during the time of the supply chain activities, which is '19 and '20 on restructuring on a percentage of sales, we've got a pretty high number.

I think it was 6.5% of sales or something like that.

But we did say that coming out of the restructuring, our expectation is that CapEx will be 4% to 5% of sales, and that is down from our historical model of 4.5% to 5.5%.

So a long answer, but I feel that the cash flow for the year was good.

And as expected, CapEx is in line with what we've been talking about as we execute the restructuring.

Okay.

So it's still going to ramp down after 2020.

Okay, that's very helpful.

For my last question, we talked about China with a question earlier.

But just more broadly, the emerging and developing markets for you only grew 3%.

That continues to be a slowdown.

I get the comp is tougher.

But are there signs of improvement in that growth rate?

Or should we continue to expect kind of -- again, taking into account compares that we're talking about this low single-digit-type emerging market -- emerging and developing market growth rate?

Yes.

Ali, yes, I think we feel very good about our D&E performance.

I know it slowed down sequentially a little bit in the fourth quarter.

But if you look at the key markets, Brazil continues to do very well.

We would say excellent performance in a tough market.

China, I think the trends are improving.

CEE is, as Maria pointed out, 20% growth on the year.

So we feel good in our key markets.

I think the big driver of the slowdown, if you look at the fourth quarter, was, one, we're starting to cycle pricing in some key markets in Latin America.

For example, in Brazil, I think our pricing on the front half was up double digits.

And so we're starting to cycle that.

And the other part of it is, as we mentioned, we've got some softness due to some macro issues and competitive issues in what we would call South Latin America, which is Peru, Bolivia and Chile.

And you're probably aware of what's going on there, but there's a lot of social unrest, which is actually affecting some of our categories.

And so we're managing through that.

We got a great team.

They're very experienced in kind of working through this, and we've got very solid plans to address at least some of the competitive issues in those markets.

Our next question comes from Andrea Teixeira with JPMorgan.

My question is on...

Andrea, you're cutting out.

We can barely hear you.

I'm sorry.

I don't know if you could hear the question.

So my question is on emerging markets.

So with China growing double digits, I think you just mentioned Brazil doing well but lapping the double-digits price increase.

So is the other South of Latin America markets, which I understand they're much smaller, what are you embedding in terms of deceleration for developed and emerging into your guide?

Or are you just expecting it to continue to be in the low single digits into your 2%, so that obviously embeds that the developed markets would be about 1%?

So I would just want to kind of double-click in your separate emerging markets and developing -- and developed markets.

And then just a clarification question on the reinvestment question.

So I understand that you're trying -- like you're saying like we have a lot of innovation.

But according to our math, you're kind of reinvesting about $400 million on top of your base of SG&A and already invested about -- you already increased around $170 million.

So I understand the breakdown in assumptions.

But if you can break into the large line items, including compensation, R&G and advertisement into your guide, so that we can understand why it's capped into the mid-single-digit growth.

Sure.

This is Paul here, Andrea.

There were several questions there.

So I'll take the first 1 or 2, and then we'll pass the investment questions over to Mike and Maria.

On the outlook for 2020 in developing and emerging markets, we don't have a hard and fast number to give you, given the several moving pieces in the business.

But as Mike said, we're confident about the underlying trends in several of the markets.

There is some increased volatility that we saw in the first -- in the back half of 2019.

We think that those have largely stabilized but probably at a lower level.

So as you -- as we enter 2020, that will be with us for a period of time.

But overall, we would be looking to deliver a solid organic growth in developing and emerging markets in 2020.

In developed markets, in general, our expectation is unchanged from what we've been delivering over time, which is modest growth.

And then on the between-the-lines outlook for 2020, we are expecting it to increase both in terms of dollars and as a percentage of sales, and that we expect to be driven by higher advertising as well as, I'd say, secondarily capability investments.

Just as a reminder, there's a few other moving pieces in SG&A.

We are expecting some modest benefits from restructuring in 2020.

We'll have the benefit of incentive compensation normalization.

And then going the other way, we'll have our normal labor and other cost inflation that runs through SG&A.

Beyond that, we're not providing a specific target for the level of increase, but we are anticipating that it will be a healthy level of increase.

Our next question comes from Jason English with Goldman Sachs.

I wanted to come back to emerging markets because I'm having a hard time footing the narrative with the numbers.

The 3 points of organic, how much did Argentina add to that this quarter?

It was slightly less than 2 points.

Okay.

So we've got slightly north of 1 point as sort of underlying emerging market growth right now.

And you're saying China is up double digits; Central, Eastern Europe, growing like 20s; Brazil, strong.

Is it that the declines in these sort of noncore EMs are that substantial that they're weighing you down?

Or were the growth figures you're giving us for these other markets, were they annualized and not just a quarter?

I'm just having a hard time because I always view Brazil, Central and Eastern Europe and China is like chunky.

And if they're growing, the EMs, I thought, would do better.

So I'm really having a hard time footing strength there but really no growth kind of in aggregate.

Yes.

So again, I think it's as you postured, which is good growth out of those markets, and I think a continued growth and a little softness in what I would term our other Latin America was probably the big chunk of that.

And it's actually probably a little more substantial when you add it all up than you might think.

And then also, K-C Professional outside of North America has had lower numbers in the D&E markets than what we would have anticipated and the same factors that we talked about with the volatility.

But obviously, when we give the total numbers, that includes KCP as well as the consumer business.

Our next question comes from Wendy Nicholson with Citigroup.

Just circling back on kind of the line of questioning about the international markets.

We talked about the margin internationally before, and I know there's just a lot of structural, lower pricing and whatnot.

But just in terms of the longer term, kind of over the next 3 to 5 years, how much will the international margins benefit from the restructuring?

I know a lot of the restructuring you're doing is North America-centered.

But I'm just wondering how long will it be until we can see real margin improvement in those international markets.

Yes.

I mean, well, I would say, we are planning for margin improvement over time.

And I think there's a couple of different things.

One, related to the restructuring, which gets us to better and more common assets across the world, especially in personal care, so that's going to be 1 factor.

But the other piece is our strategy to elevate our categories.

And so we are going to see -- we are expecting and planning for mix premiumization and innovation that's going to drive more positive mix and margin over time.

A good example of that would be China.

We feel great that we've delivered substantial product improvement.

Our gross margins are at record levels with that product improvement.

So that's kind of a win-win innovation in our minds.

And Wendy, you'll be able to see our geographic disclosures when we publish our 10-K in February, but I can preview it to say that our international margins in total were up somewhat in 2019 despite the volatility and the currency headwinds.

Okay.

Because I'm just thinking, obviously, to the extent the focus is on accelerating the growth there, so long as the margin gap is as significant as it is, that's actually a headwind to your margins.

So I'm just trying to balance that as I think about over the next few years.

Would love to see you grow faster outside the U.S., but obviously, it could come at a cost if you can't ramp up those margins as well.

Right.

Okay.

Second question, just back on the North American business, are you surprised -- I mean, just given sort of the size of private label in some of your categories, we're surprised that we haven't seen more promotion or aggression on the part of private label.

Do you think we should expect that in 2020?

I mean I guess we've been surprised not only because so many retailers are talking more about private-label investments, but also in your categories, it seems like given the commodity environment, we're at pretty unique opportunity for some of those private-label guys to get more aggressive on pricing.

So what's your take on that?

And is it just that consumers are really loyal to brands and innovation in your category all of a sudden?

Or is that a legitimate threat as we look at 2020 and the cost environment?

Yes.

I guess maybe the key thing for me is, in general, we're seeing a little increase in private label throughout '19.

Pricing, particularly in tissue, has not moved up, right?

And so maybe in some select pockets, but in general, has not moved up at the same levels that the brands have.

So that's one factor.

I really don't expect and wouldn't think it would make sense to overly promote private label, mostly because of the reason that you probably surmised, which is I don't believe consumers drive retail choice or their choice of retail outlet by -- because of private label.

I think there's study after study that concludes that they make choices based on national brands, and they -- and that's what drives that behavior.

And so I don't know that necessarily promoting on the private label side is a productive behavior.

In fact, obviously, I have skin in the game here, but I would suggest that if they drive the right national brand strategy, I think that will help grow the retail business more effectively.

Our next question comes from Kevin Grundy with Jefferies.

Mike, I wanted to come back to the topic.

We're kind of bouncing around, I guess, asking it different ways.

But with respect to gross margin, so your performance was fantastic as was Procter's this morning.

Still seeing some pricing benefit, albeit one dissipating and commodity costs lower.

From a retailer's perspective and understanding the importance of brands, so we've been asking this from, okay, what if Procter moves, what if private label moves or so forth on promotion.

But from a retailer's perspective, why wouldn't they be coming back to you guys now, to the manufacturers, and asking for some of this to be dealt back through trade promotion?

They never want to take a price increase, right?

So now -- in the current environment now, why wouldn't -- what's the risk that the retailers sort of forced the issue and lean on manufacturers to start dealing some of this back?

And then I have a follow-up.

Yes.

Well, I think, Kevin, again, I'd still point out that we still had inflation in 2019.

Our costs are still higher than they were in 2017.

And so this -- when we say this inflationary impact has been multiyear, our pricing hasn't even -- hasn't fully recovered that.

It's actually far from fully recovering that.

So that's kind of my view from my chair on the pricing.

On the other side of that, I think you'll need to talk to the retailers to get their views.

But my personal side would be our discussions with retailers tend to be around how are we going to grow the category, and that's what they're most interested in.

As long as we've got the right plans with innovation and category support to drive category growth, that's really kind of where their focus is, and that's what our -- what most of our conversations are about these days.

Okay, Mike.

And Maria, quick follow-up to a question that was asked earlier.

I think what investors, what analysts will try to figure out is the level of conservatism that's in your guidance versus how much investment, whether that's advertising and marketing or other areas of OpEx that are more sort of locked and loaded.

Can you help us think about that?

Because in the absence of kind of putting some parameters around that, given the benefit that you're seeing from commodities, that you're seeing from FORCE, that you're seeing from restructuring, it certainly looks conservative.

And it's hard to envision advertising and marketing stepping up to a level that's implied.

So can you help us as best you can with the level of conservatism and flexibility maybe behind the competitive environment?

Maybe kind of help us think about that.

And that's it for me.

Sure.

What I would say is I think that we've got a reasonable and balanced plan that we're shooting for in 2020.

And we've shared with you the primary assumptions that go into that.

What I can also tell you, coming up on my fifth year here is that there are a lot of variables that happen that we can't accurately predict as we go into a year.

We've seen that happen on the downside a couple of years ago, a bit on the upside last year.

And so as we go through the year, we'll react to the environment that we're in.

But there is potential volatility on the commodity side.

There's potential volatility on the currency side.

We've talked a lot about strong competition and competitive activity so far in this call.

So there's a lot of moving pieces.

And as we always do, we will make the decisions that we need to make during the year to deliver on the balanced model that we strive to achieve year-on-year.

Our next question comes from Steve Strycula with UBS.

I got a question for Mike and then a quick follow-up for Maria.

Mike, on your organic sales outlook for the full year, should we interpret that to mean that volume should improve from the rate it was in '19?

Or we should see absolute volume growth for the full year fiscal '20?

And what specifically is driving that?

I imagine you're going to say innovation.

So how do we put the diaper innovation in the context of 2020 relative to how the special delivery diapers for Huggies did in, call it, 2019?

Yes.

The organic outlook is 2%, and that really reflects our expectation for both the category and then, obviously, our performance as we cycle the pricing.

The volume in our plan is absolute growth.

Again, we're expecting balanced growth from volume mix and still a little bit of pricing, Steve.

The -- it's innovation.

I probably would say that the flip on volume is not going to be as daunting as you might perceive because I would say our underlying volume performance in 2019 was very good.

And what I mean by that is, obviously, if you're going to take pricing, you're going to have a negative volume effect in accordance to whatever you think your elasticity is.

And so we saw that.

But I do think we had really good underlying initiatives, whether they were driving distribution in new categories or new markets in different countries or launching innovation and increasing advertising.

We saw the volumes come underlying that offset most of or some of the price elasticity effect and actually more than we had anticipated.

So we think we've got very -- we had very good execution in 2019.

And I don't think the effect in '19 was related to elasticity impacts were less than we expected.

It was more related to execution of volume initiatives were better than we had expected.

Did that help?

Okay.

No.

It does.

For Maria, just quick follow-up to Ali's question.

Could you give an operating cash flow number?

If it was $2.7 billion in 2019, should that be a little better, a little worse in 2020?

And then on the commodity piece, if it was $60 million deflationary in the fourth quarter but the full year outlook is $50 million to $200 million, can you help us think through what is basically baked into your commodity outlook assumption?

Sure.

On cash from operations, we are expecting that to be up in 2020.

And on commodities, we are expecting fiber to start to tick up, particularly in the back half of 2020, which is built into our assumption of the $50 million to $200 million for next year.

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

Great.

Well, we appreciate everyone's questions today, and have a good day.

Thank you very much.

Bye.

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

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