金百利克拉克 (KMB) 2020 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 today's first presenter, Mr. Paul Alexander.

Please go ahead, sir.

Thank you, David.

Good morning, everyone.

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

This morning, you'll hear from Mike Hsu, our Chairman and Chief Executive Officer; and Maria Henry, our CFO.

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

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

Please see the risk factors section of our latest quarterly and annual reports for further discussion of forward-looking statements.

Lastly, 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 on the call this morning.

Let me start with the headlines for the quarter.

Organic sales increased 3%, with good underlying momentum and benefits from increased demand related to COVID-19.

We significantly increased our growth investments and improved our market positions.

We had another strong quarter of achieving cost savings and returning cash to shareholders.

And finally, while earnings were down, as expected, we are increasing our full year outlook.

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

Our third quarter net sales were $4.7 billion.

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

Volumes were up 2%, and the combined impact of changes in net selling prices and product mix increased sales by 1%.

By segment, organic sales rose 10% in consumer tissue and 5% in personal care but declined 15% in K-C Professional.

Mike will talk more about our top line and our market share performance in just a few minutes.

Moving on to profitability.

Third quarter adjusted gross margin was 36.2%, up 40 basis points year-on-year.

Adjusted gross profit increased 2%.

We had excellent cost saving performance in the quarter.

Combined savings from our FORCE and restructuring programs totaled $140 million, including continued strong productivity improvements.

Commodities were a benefit of $25 million in the quarter driven by pulp and other raw materials.

Other manufacturing costs were higher year-on-year.

That included incremental costs related to COVID-19.

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

Moving further down the P&L.

Between-the-line spending was 18.9% of sales.

That's up 180 basis points and driven by a big step up in digital advertising.

G&A also increased, including capability-building investments and higher incentive compensation expense.

We expect between-the-line spending will rise further sequentially in the fourth quarter.

Our SG&A spending is typically high in the fourth quarter, and this year, we'll also have project activities that were temporarily delayed because of COVID-19.

All in all, for the fourth quarter -- for the third quarter, sorry, adjusted operating profit was down 6%, and operating margin was 17.2%, down 130 basis points versus a year ago.

By segment, operating margins were up in consumer tissue and healthy in personal care.

K-C Professional margins were down significantly, including an approximate 600 basis point drag from fixed cost under absorption.

On the bottom line, adjusted earnings per share were $1.72 in the quarter compared to $1.84 in the year ago period.

Turning to cash flow and capital efficiency.

Cash provided by operations in the third quarter was $559 million compared to $886 million in the year ago quarter.

The decrease was as expected and driven by the timing of tax payments and higher working capital.

We continue to allocate capital in shareholder-friendly ways.

Third quarter dividends and share repurchases totaled approximately $560 million.

And for the full year, we expect that total will be $2.15 billion.

So let me now turn to the full year.

The overall headline is that we're raising our top and bottom line outlook.

On the top line, we now expect organic sales growth of 5% compared to our prior target of 4% to 5%.

Through 9 months, organic sales are up nearly 6%, and we expect a solid fourth quarter.

On average, we expect slightly less headwinds from currency rates than previously anticipated.

In addition, we'll begin consolidating the Softex Indonesia business into our results on November 1 on a 1-month lag.

All in all, we expect net sales will grow 2% to 3% this year.

That's 1 point better than our previous estimate.

On the bottom line, our new outlook is for adjusted earnings per share of $7.50 to $7.65.

That represents year-on-year growth of 9% to 11%.

Our prior outlook was for adjusted EPS of $7.40 to $7.60.

The increase in our outlook is driven by improved top line partially offset by higher incentive compensation expense and other manufacturing costs.

Overall, I'm encouraged that we're improving our near-term outlook and investing significantly in the business for longer-term growth.

I'll now turn it over to Mike.

Thank you, Maria.

Good morning, everyone.

I'll begin by reinforcing that we remain focused on 3 near-term priorities that we established since the outbreak of COVID-19.

First, we're focused on protecting the health and safety of our employees and our consumers; second, we're proactively managing our supply chain to ensure supply of our essential products; and third, we're prudently managing the business through near-term volatility while continuing to strengthen the long-term health of Kimberly-Clark.

Our 40,000 employees continue to do heroic work in this COVID environment.

Our supply chain operations have remained online with strong productivity gains and fewer COVID-related disruptions over the last 3 months.

The environment is still dynamic, and we're closely monitoring virus hotspots.

And thus far, our supply chain has been resilient, and our teams have done a great job overcoming daily challenges.

Now I'll turn to our results, focusing on organic sales, category conditions and our market shares.

As Maria mentioned, organic sales increased 3% in the quarter.

In North American consumer products, organic sales rose 8%.

Now within that, personal care grew 6% driven by broad-based volume growth in baby and child care.

We improved our market shares on diapers, baby wipes and in child care.

In late July, we launched Pull-Ups new weave training pants, which features supersoft natural materials and is our most premium training pant.

This is another example of our Elevate the Core strategy in action, and new weave is off to a very good start.

In North American consumer tissue, organic sales increased 11%, and that reflects strong demand due to the COVID-19 work-from-home environment and strong momentum on Kleenex facial tissue.

Bathroom tissue shipments benefited from our efforts to restore customer inventory levels.

In the fourth quarter, we expect more benefit from those efforts and from people continuing to spend more time at home.

Our market share performance in North American consumer products was strong in the third quarter.

Shares were up or even in 6 of 8 categories.

Turning to K-C Professional in North America, organic sales declined 15%.

Sales were down about 35% in washroom products, and as you'd expect, the category has been significantly impacted.

There are fewer people working in offices and lower levels of business activity, including in travel and lodging.

Sales were a bit better in September, but we're planning for only a modest near-term improvement in the environment.

On the other hand, KCP sales were up double digits in wipers, safety and other products.

Our efforts to expand our face mask business by leveraging our superior nonwovens technology is off to a good start.

We're also expanding our wipers lineup with Scott 24-hour, which delivers long-lasting surface protection from bacteria.

Moving to D&E markets.

Organic sales were up 2%.

That was driven by 7% growth in personal care.

In terms of key personal care markets, organic sales were up mid-teens in China, mid-single digits in both Latin America and Eastern Europe and strong double digits in India.

Organic sales were down mid-single digits in ASEAN.

We also improved our market shares in many countries in the quarter, and that includes Brazil, China, throughout Eastern Europe, India and Peru.

While category conditions remain difficult in many D&E countries, government restrictions on social mobility and store operations have eased somewhat since the last quarter.

Finally, in developed markets, organic sales were up 3% driven by strong growth in consumer tissue.

Looking ahead, we're launching Kleenex Proactive Care in the U.K. and other markets in EMEA.

This lineup includes hand towels, antibacterial hand and face wipes, sanitizing gel and face masks.

Now in terms of market share performance, we continue to make good progress.

We're on track to grow or maintain share in approximately 60% of the 80 category/country combinations that we track.

This is a result of higher investment levels, innovations and strong in-market executions.

Our capabilities are driving our results, and our investments are working hard for us.

Through 9 months, I'm very encouraged with our performance, how we're navigating this environment and how our teams are taking care of each other and our customers.

Before closing, I'd like to comment on our recent acquisition of Softex.

This transaction is a strong strategic fit with our focus on accelerating growth in personal care in D&E markets.

Softex expands our presence in a high-growth market where we had limited exposure.

The diaper market in Indonesia is already the sixth largest in the world, and it's projected to nearly triple in size over the next decade.

Our Softex team has built a strong business with deep local market knowledge, excellent brands and market positions, and strong profitability.

This transaction improves our underlying growth prospects, and we're looking forward to leveraging our combined strengths in innovation, marketing and go-to-market.

In conclusion, we're managing through the COVID environment safely and effectively.

We remain optimistic about our opportunities to generate long-term growth and create shareholder value.

We're investing in our brands and improving our market positions.

We're raising our full year outlook and are on track to achieve excellent financial results, and we continue to operate our business with a balanced and sustainable approach as we execute K-C Strategy 2022.

Now that concludes our prepared remarks.

And now Maria, Paul and I will be happy to take your questions.

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

So I was hoping we could just dive in a bit on K-C Professional and that operating margin headwind from lower absorption that Maria called out.

I know you don't discuss gross margins at the operating unit level but was wondering if that's really kind of core drag on gross margins this quarter on the manufacturing costs.

And if that's the case, kind of what made it so significant this quarter versus in 2Q, right, because the business is already under pressure?

And then in that vein, as we look forward, how should we think about manufacturing dynamics of that business?

Okay.

Lauren, let me start and then I'll ask -- go ahead, Maria.

Go ahead, Mike.

Sorry, we're not in the same room, as you can tell.

Yes.

Sorry, I'll give you a high level, and then Maria can give you a little bit more texture there.

But I would say, overall, Lauren, here's the -- overall, the business was down about 15%.

I would -- I think the business actually outperformed what mobility tells us what is the general kind of B2B environment, what that looks like.

And so we feel good about the pivot that the teams are making to drive safety and wipers and masks.

But the washroom business is significantly down.

I think for us, overall, maybe the big change between Q2 and Q3, a big impact was we knew we had deferred maybe some of the volume impact in Q1 and Q2, and it did come to realization in Q3 because, I think, the market environment was soft in Q1 and 2. But as we mentioned on those calls, there were distributors and end users buying in to make sure that they had the right inventory when businesses were set to go back.

And so we experienced some of that at the tail end of Q1 and the beginning of Q2.

I think this does represent kind of the current run rate of where the market is.

And I think it's better than kind of where the overall market is, but it's a pretty significant hit.

And so it's affecting our -- obviously, we have high fixed costs, and so it's affecting our fixed absorption and other factors.

But Maria, maybe you can give a little bit more detail here.

Sure.

Lauren, I would say you're spot on in how you're thinking about it.

And while we don't give specifics on gross margin, what I'd tell you is that we had a nice improvement in personal care in the quarter and very nice improvement in consumer tissue, as you would expect, on the organic sales in that segment being up 10%.

The whole story here is around K-C Professional, which the gross margins were down meaningfully primarily driven by those other manufacturing costs.

The 600 basis points on fixed-cost absorption that I mentioned in my prepared remarks, that's a meaningful dollar number and was a big contributor to why our other manufacturing costs were up meaningfully in the quarter.

So you're right on with that.

Okay.

That's great.

And then sticking with that, I know at our conference, and you brought it up again today, some of the innovations that you're launching.

Can you just talk a little bit about how that's progressing?

If you're adding staff, kind of what needs to happen to sort of build up a more material -- even more material business, I guess, I should say, in safety and wipers?

And anything in terms of progress?

Or is it still too early days on kind of incremental opportunities on the hand towel business in professional channels and transitioning customers away from air dryers?

Yes.

I think we're making very good progress on all those fronts, Lauren.

In fact, we have added staff.

We did announce that we are making some organizational changes to exactly do what you're saying, which is add more resources to where the growth areas are.

And not only are we adding people resources but we are making capital investments to support the growth and expansion of that business, particularly in more advanced nonwovens capacity.

So I think we feel very good about where that is going.

Our mass business is off to a very strong start.

We just started shipping in Q3.

And so we feel good about the trajectory of that business.

We're launching, as I mentioned in my remarks, Scott 24-hour -- or relaunching in a different format.

And we think that would be a very good offering for customers and end users, and so we're excited about that as well.

So we are going to be bringing more innovation.

We think both in safety, masks, wipers, there's a lot more room for more fundamental innovation.

And with our superior nonwovens technology, I think we feel like we can offer differentiated solutions.

So we're looking forward to building that business.

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

I wanted to ask you about price/mix, which continues to be pretty positive in Q3, but it looks like what's really driving that is the professional business.

So I assume lower away-from-home tissue, while hurting you on gross margin, is benefiting you a bit on price/mix and more in the industrial wipers and such.

So does that price/mix benefit reverse when COVID conditions normalize?

And then flipping over to the consumer business, can you talk about the promotional environment overall, like what you're expecting over the next 12 months?

And obviously, the supply is more to personal care than consumer tissue and kind of compare and contrast what you expect to see from branded versus private label competitors.

Yes.

Thanks, Olivia.

Yes, overall, I would say the organic was more driven by volume in the quarter.

And so price/mix were combined, overall for us, up about a point.

And I think the dynamic that we saw in Q1 and Q2 is persisting, I think, in Q3, which is that price has been, in general, fairly neutral, mostly because in developed markets where there's been high demand, our promotion intensity for the category and for our brands, in particular, have come down a bit.

And so I think as demand remains elevated, we'll see this.

There are some categories that we are seeing perhaps return to more normalized promotion levels that happens to be more in personal care at this point.

And so I think the overall pricing environment, Olivia, I would say, is generally constructive.

But there are a few selected hotspots.

We're seeing elevated promotions in adult care in North America, in particular.

And promotions have increased a bit somewhat, I would say, in the consumer tissue business in Europe.

Got it.

That's helpful.

And then your U.S. type of performance was actually quite strong.

So just wanted a little bit more color there in terms of what you're seeing, the state of competition, promotion levels and things like that.

Procter did talk on their call earlier this week about a new mid-tier diaper, so just would love a bit more color there.

Yes.

Olivia, our North American diaper team is doing a fantastic job.

And I think when you peel the onion, there's no kind of secret bullet -- or silver bullet going on there.

It's really very strong product offering lineup.

And I think they've put very diligent efforts to improve the product offering and bring innovation.

This year, the big innovation was a new and improved Snug & Dry, or our tier 4, product on a shaped diaper that was a significant improvement versus our previous version.

But when you take great product performance with very strong marketing and strong digital investment, we feel like it's working very hard.

And they're working in great partnership with our customers with great retail plans.

And so we feel very good about it.

The business overall was up low double digits despite the category being down a couple of points overall.

And our share was up as you can see in the Nielsen.

I would tell you all out, it wasn't up as much because we had some promotion timing -- or promotion events that came out of the quarter versus prior year.

But we feel very good about our momentum on that business, and we'll continue to bring strong innovation.

Our next question comes from Dara Mohsenian with Morgan Stanley.

So Mike, can you discuss your viewpoint on birth rates in the U.S. and some of the other key geographies around the world as we look out to 2021?

How much impact you're expecting from COVID on birth rates and category growth as you look out?

Yes.

Dara, I'll start with North America.

I think the last set of data that we had, which generally lags a year, Dara, I would say, the category birth rate was down about 1%, which was an improvement over the prior couple of years, which were down about 2-ish percent.

So I think it was heading in the right direction.

We're reading the same articles you may be reading about the category, and there's all different kinds of projections, including baby boom because there's less to do and also a decline because there's -- the affordability is tougher.

And so we're not seeing that yet.

And thus far, as I mentioned, the category has been off about 2% year-to-date.

And so we're watching that very closely.

Glad to say our performance has been better than that.

And that's, as I just mentioned with Olivia, because of the strong share performance and the strong product performance and marketing performance that we have in North America.

I think in other markets, I would say it's -- there's a lot of -- it's a mixed bag across different markets.

Certainly, one of the big reasons why we made the acquisition of Softex was to bind to a market that was expanding on the cusp of strong income -- household income growth in the population and strong birth rates, and that's Indonesia.

Several other markets that have that profile for us.

In our bigger developed markets, we have seen somewhat of a slowdown.

Now in -- for instance, South Korea, I think our team has done a great job rebuilding our share position.

And so we've seen significant share gains, but the birth rates in South Korea continue to be a bit soft.

So overall, I don't have a great view right now at this point as long-term effects of COVID.

I will say that the long-term math is our categories have a long runway of growth, particularly in D&E markets, which is why we're continuing to invest to build our business there.

The overall, Dara, my theory would be the category is less than 1/3 developed in D&E., and so we're going to continue to -- emphasizing and building that business.

Okay.

That's helpful.

And then obviously, with the new earnings guidance, you're expecting growth around 10% at your midpoint.

That's clearly well above the mid-single-digit longer-term algorithm.

So just wondering, as we think about 2021, 2022 sort of medium-term earnings going forward, should we think about 2020 as the right EPS base to work off of?

Is it more 2019 is the right base and look at 2- and 3-year averages versus whatever might -- you might consider a typical algorithm to be as we look out to '21 and '22?

And part of the reason behind that question is, in the past, you've sort of flexed marketing spending, I think, to get to more of that sustained mid-single-digit type of earnings growth rate year-to-year, both on the positive and negative side.

So just wondering sort of, conceptually, coming off this above trend year, how you view the medium-term earnings growth profile from here.

Yes.

Dara, I might ask Maria to comment, but I will say, one, we'll provide our 2021 outlook in January.

I think a good thought from my perspective would be to look at the combo of '19, '20 as a trajectory.

But for certain, for us, we're in the middle of planning.

There's a lot of uncertainty in the environment, as you can -- probably will surmise.

And so we're still working through the details.

You can expect us to continue to focus on improving our market positions and -- by making the kind of investments that we're making this year and continue to make progress on the value drivers, like in investing brand -- in brands and commercial capability.

Cost savings and continue to drive FORCE is going to be a big feature of our plan, and ongoing discipline in capital allocation.

But Maria, any additional thoughts here?

Yes.

I think that's exactly right.

And I would not look at 2020 as a baseline year as we benefited from some onetime net positives from the effects on our business from the COVID situation.

Next year, as we look ahead, mathematically, that'll be a challenging comp.

But if you put the 2 years together on 2020 and 2021, I think that's probably a good way to look at it.

And we're not coming off kind of our KC 2022 algorithm at this point.

Our next question comes from Kevin Grundy with Jefferies.

I wanted to start on the advertising spending in the quarter.

Mike, you mentioned or -- excuse me, in the press release that you indicated it was up significantly year-over-year.

And if you just sort of tumble through the numbers in terms of the benefits behind the FORCE savings and restructuring and commodity, it could be up quite a bit.

Can you frame that number for us, either year-over-year or a percent of sales, or both?

And then I have a follow-up for Maria.

Yes.

I think -- overall, I think our investment between the lines, overall, which includes advertising but also some of our capability build and I think incentive comps affected, I think we said it's in the remarks -- or in our release, which was up about 180 basis points.

So that's a pretty significant impact in the quarter.

We do feel like we have strong business -- underlying business momentum across our businesses, both -- globally in both consumer tissue and in personal care.

Pleasant surprise in the quarter was, I think, a very strong improvement versus Q2 in developing and emerging markets.

So we feel good about that.

We feel like the spend is working.

And it's something that we feel like is going to yield dividends in quarters to come.

So Maria, any additional thoughts here?

No.

I think nothing to add.

And then just a quick follow-up.

I hate to belabor this, but the K-C Professional margins, I think it's important, I just want to make sure understand it clearly because, I think, it frankly overshadows what was otherwise a pretty strong quarter for the company.

Maria, what was treated differently about the fixed-cost absorption?

And I guess, I say that in the context, volumes were down in the segment, 16%, 2Q; 21%, 3Q.

So obviously worse, but margins were up 170 bps in the second quarter, down substantially 160 bps in the third quarter.

So what specifically changed with regard to how fixed-cost absorption was being treated?

What changed in terms of customer mix or otherwise?

I just want to make sure I understand clearly.

Yes.

I think what you're seeing is that in the second quarter, we had record levels of performance on the consumer side of the house.

And so we had a big fixed-cost absorption benefit coming from that, and that was offsetting the fixed -- negative fixed-cost absorption that we were experiencing in the K-C Professional business.

As that has come down from the second quarter, our total fixed-cost absorption for the company was negative in the third quarter driven by the Professional business.

And it just wasn't up by nearly as much in terms of a benefit on the consumer side of the house as it was in the second quarter.

And so what you see in the third quarter on the margins is the impact of the volumes being down meaningfully in the K-C Professional business showing up on the total company P&L.

Our next question comes from Steve Powers with the Deutsche Bank.

Maria, not to belabor this even more, but I just -- on the Professional thread, is that -- so is the outsized magnitude to be limited to 3Q?

Or are you expecting that fixed-cost deleverage impact to directionally persist into 4Q as well?

The macro trends that are affecting the K-C Professional business are not likely to change from what they were in the third quarter.

And as long as those volumes stay down, as people continue to work from home and as mobility is limited, I would expect to continue to have a negative fixed-cost absorption impact coming through the P&L.

Okay.

I think we've got that one pretty well vetted now.

I guess, Maria, maybe while I have you talking, I guess, can you just maybe frame for us in a bit more detail how you're sizing up the cost outlook exiting the calendar year and, I guess, entering your 4Q contracting season?

We've seen some upward pressure on inputs as well as freight, and P&G echoed those sentiments earlier this week.

So how would you frame that outlook from where you're currently situated, just looking out over year-end and out of the horizon?

Sure.

Well, on the commodity side of house, in the quarter, it was in line with our expectations overall.

When I think about what's new from the last time we spoke in July, well, recycled fiber is still inflationary.

It was down from the peaks that we saw in the second quarter.

On the other hand, resin-based materials are rising.

And if I look at what happened in the quarter, our polymer costs increased double digits versus our expectation coming into the quarter.

So we are seeing the oil-based commodities rise, and so that'll certainly be a factor exiting the year.

The other area that you mentioned is on our distribution costs, which are also a bit more inflationary than they were in the first half of the year, and that's due to the tighter capacity in the system.

So those are kind of the big trends, as I see them.

As I look forward, pulp has been favorable globally year-on-year, and it's been quite stable sequentially.

If you look at the forecast there, the forecasters are calling for it to rise, although they've been calling for that for a while.

And so with COVID, I think that gets pushed out a little bit.

What else would I tell you?

The other thing I'd call out is in the fourth quarter, overall commodities could be inflationary for us.

And I think you see that -- kind of the outlook that we gave for the year, where -- the $215 million benefit year-to-date, my current point of view on that is that we'd be at the midpoint of the range for the year.

So commodity is turning slightly inflationary in the fourth quarter and as we head into next year.

Perfect.

And I guess, if I could just squeeze in one more and just put that in the context, Mike, of what you were talking about earlier.

I don't think you were painting a picture negatively at all, but you did mention some competitive -- I think you used the word hotspots in adult care, tissue in Europe.

Again, harking back to P&G earlier this week, they were talking about elevated promotion that they saw from competition, I presume, something from you, and pockets in diapers.

So just as you have these elevated competitive hotspots, I guess, juxtaposed against that more inflationary outlook, is that a concern from where you stand?

Or just let's just sort of be aware, but overall, it's all pretty rational and level headed?

Yes.

I feel like -- I think I used the term generally constructive, and I feel that way.

I think there have been some hotspots.

I -- hopefully, I don't think they were talking about us because I think our promotion levels have been down, and our percent sold on promotion has been down consistently through this year.

And frankly, we feel good about driving volume through product innovation and advertising, particularly digital.

And so that's kind of the direction we've been moving in, Steve, and I think it's working.

I think when I say some hotspots, we are seeing some elevated promotions actually from Procter on -- in adult care.

And then in a few other categories, I think that may be more driven by retailer strategies.

But I wouldn't say -- again, I think it's still, I think, constructive, and we feel good about where it is right now.

But we're keeping a close eye on it, obviously.

Our next question comes from Andrea Teixeira with JPMorgan.

So could you discuss a little bit of the consumption and shipments, in particular in personal care and also in tissue, if you can, into your guidance for the fourth quarter?

So I think if we discussed a little bit also the promotional environment that we elaborated more in the last question.

I think you touched this, Paul, I think, in other larger markets, as I can see from your prepared remarks in China, Australia, South Korea.

And I would say, I don't know in Brazil, it seems the same.

But from your comments, it seems like the prices went down, and I'm surprised that you needed to do that now given that volumes are still up.

So is that the mix is a trade down?

Or are you seeing in those countries also some competitive environment increasing from, I think, what we hear from your competitors as well?

Yes.

Okay.

Yes, let me start with the -- maybe the consumption and shipments dynamic.

I'll probably speak mostly about North America because I think that's where kind of the big divergence has occurred through the first 3 quarters.

In personal care, I'd say consumption and shipments have largely caught up.

And so in the first quarter, there was a period where demand had kind of exceeded supply a bit on personal care, but I think most of that kind of reversed out during the second quarter.

And I think our -- overall, our performance has been solid, and shipments have been strong and kind of reflecting kind of where the consumption has been.

I think in consumer tissue, we've been working to catch up to demand all year.

And I think in the first quarter, the category was up about 30%.

And as you're well aware now, consumer tissue businesses aren't geared to be able to ramp up at that speed.

And so we have been working to restore customer inventory levels.

We're making progress.

In the third quarter, the category of tissue was up about 9%.

That's an overall category number.

And you can see on our numbers, we shipped 11%.

And so we shipped a little bit more than what was consumed with consumers, and that's restoring inventory levels.

I think it will take us all of -- at least all of Q4 to get our customers back to the inventory positions on tissue that they really want to be at.

So that's that point.

And then with regard to global pricing, I wouldn't say -- at this point, our plan is to hold pricing kind of where it is.

There have been some changes.

I mentioned earlier, in Europe, I think pricing has come down a point or 2, and that's more reflecting of retailers wanting to get back to their promotion strategies.

Similarly, in China, we are seeing a little bit more promotion activity.

Again, that's not our strategy in China, and our strategy is to drive -- and we feel like we're doing a very good job growing the business right now through strong product performance and digital advertising.

And then -- so generally, our strategy has been, as we articulated in K-C 2022, great innovation supported by strong executional capability.

Promotion is not really the way that we want to earn business going forward.

Our next question comes from Jason English with Goldman Sachs.

Congrats on the market share momentum.

I know we've kind of come at margins a few different times, but I got to be honest, I'm still really confused here.

I'm looking at your margins in KCP or tissue or consolidated at the gross margins, and the volumetric components for the company don't fit with the deleverage story from 2Q to 3Q.

It looks like there's something else going on.

But if I look at 1Q to 3Q, it kind of makes sense.

So it brings me back to the question of was 2Q just inflated to a degree that's unsustainable in a substantial way?

And our issue is less about where 3Q landed.

It's more the comparison, the sequential comparison to 2Q.

So why the big swing between the two?

Is there an accounting thing going on?

Were we not absorbing enough cost in the second quarter and we had to push into the third quarter?

Or just help me understand the moving pieces because the overall firm, volume growth, 1Q plus 9-ish; plus 1.5% in 2Q, plus 1.5% in 3Q, volume leverage doesn't seem to explain the swing factors we're seeing in Q-to-Q.

Sure.

Yes.

Maybe I'll start -- go ahead, Maria.

No.

Go ahead.

Go ahead.

No.

I was just saying, I think just to amplify on Maria's prior response, I think, Jason, it does reflect, I would tell you, extraordinary performance in our consumer tissue business under extraordinary circumstances, right?

There was extraordinary demand, and we simplified our assortment and drove strong utilization on the consumer tissue side in the second quarter.

I think that has probably come back a little bit in the third quarter.

And at the same time, we probably didn't fully realize the full fixed-cost absorption in KCP in the second quarter because we had a little bit additional volume then.

But Maria, any additional thoughts here?

Yes.

I think that that's it.

If I look at the drivers of the gross margin in the third quarter, we've already commented on the differences by the 3 segments.

But overall, the margin was up on volume mix benefit, continued price realization, strong cost savings, still had some modest commodity deflation in the quarter.

And that -- the benefits of that were offset by the higher other manufacturing costs and currency headwinds.

So that is it.

There was no accounting change or any other unusual things going on that would have affected the results.

Paul, I don't know if you have any additional color to add.

Yes.

Thanks, Maria.

The one thing I would add, Jason, is that if you look at where the volumes were up in the second quarter, we had very strong performance in North America, and that's where our margins are the highest, both gross and operating.

And in the third quarter, the volume growth, while still strong in North America, was not nearly as strong as Q2.

And we had better performance internationally in developing and emerging markets where our margins are lower.

So there was a geographic mix component sequentially from Q2 to Q3 as well.

Our next question comes from Wendy Nicholson with Citi.

My question, believe it or not, actually has to do with the top line growth in the Professional business, not so much the margins.

Can you give us a sense -- I mean, I was actually a little bit surprised.

I know you said it came in line with your expectations, but I was surprised that there was as much of a sequential deceleration on the organic volume side as there was.

So can you talk about maybe what you're seeing?

I know it's only, whatever, 3 weeks into the new quarter, but what are you expecting in that business in the fourth quarter?

And kind of -- obviously, we get into incredibly easy comps by the time we get to the June quarter, but when do you think that business starts to pick up?

Yes.

Wendy, I do think, overall, I think the business is outperforming with at least our data would suggest is kind of the B2B kind of activity or general business environment for offices in industrial and travel and lodging, et cetera.

And you're probably well aware of kind of where those are.

But generally, the data we say -- mobility data would tell us those are generally off between 30% and 50%.

Our business down 15% does reflect -- we're down 35% in the washroom business in North America.

But overall, we were down 15% in North America, and that's because our wipers and our safety business has really started to grow at double-digit rates.

And so I think we are pivoting to where the growth is right now.

I think the washroom business is where it's going to be at for a while.

I mean you can look at the projections for what the COVID infection rates are going to do.

There is going to -- appears to be an escalation in Q4 before it starts to come down sometime in Q1.

And I do expect people to remain working from home for the next -- for the foreseeable period into next year.

And so we -- I think -- again, overall, I think our Professional business is outperforming what the environment says, but it is a pretty significant decline, and we're managing through it.

Got it.

And I guess, second question, just as we sort of think about capital allocation.

The acquisition sounds like it's a great fit and all that good stuff, but your CapEx has been running high both last year and this year, higher than we've seen for a while.

Where do you expect that to be next year just directionally, that would be great?

Sure.

On CapEx, it is higher than it previously had been driven by our Global Restructuring Program.

When we launched that program, we said that we would have $600 million to $700 million of incremental capital that we would be spending as we execute that program, and so that's what's driving the elevated CapEx.

When I look at the number for the year, the range is 1.2 to 1.3.

I believe we will come in there.

I would comment that we have had some programs that were scheduled for this year move into next year as there were COVID-related delays, as people couldn't travel, people couldn't get into our manufacturing facilities for safety reasons, and we needed to keep our operations focused on producing products given the elevated level of demand.

So some of the 2020 projects have been pushed into 2021.

And then we added some very attractive projects this year that were enabled by COVID-related opportunities, particularly around PPE.

So we're not giving a number yet for next year, but I would call out that we know that some of the programs that we were expecting to do this year are pushed into next year.

We're in the midst of our planning process, as Mike mentioned.

So we'll be evaluating the opportunities on CapEx, both for growth capital and productivity capital.

And as always, we'll be disciplined on that, but we also won't be shy about investing in our business if we have high return opportunities.

But we'll have more to say in January.

Fair enough.

And, Mike, I just wanted to ask a quick follow-up on one of the comments you made.

You said that the retailers were getting a little bit more aggressive when it comes to some promotional activity.

Can you just clarify, do you mean that they're promoting national brands?

Or are they promoting more of their own private label?

Well, the -- what I think I meant in that comment reflected national brands.

Overall, Wendy, if you look at the private label shares, I think they're up in 1 of our categories and flat or down in 7, right?

And so generally, I would say there's been a flight to quality at least in North America and generally in developed markets, I think, given the tough economic times.

But I think we find typically in times of uncertainty that consumers look to the big brands for reliability, and so I think we're seeing that reflected in some of the numbers.

Yes, the pricing environment, I think it's no more than the typical, I would say, skirmishing that happens across channels and across retailers with price points.

Some of that has been less so this year overall because of extreme focus on supply and the reduction in promotions overall.

But especially in tissue, I think it's been lower levels.

But I think with personal care back kind of in stock positions across the industry, I'd say there's been more of a return to more normalized levels of promotion.

And so it's no more than that.

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

Okay.

Well, thank you very much, everyone.

I'm encouraged by our ability to manage through challenging additions and deliver healthy business results, and so we thank you for attending our conference call this morning.

Thank you very much.

Thank you.

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

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