金百利克拉克 (KMB) 2020 Q2 法說會逐字稿

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

We now have your speakers in conference.

(Operator Instructions)

It is now my pleasure to introduce Mr. Paul Alexander.

Please go ahead, sir.

Thank you, and good morning, everyone.

Welcome to Kimberly-Clark's second 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 today.

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

Lastly, we will also 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 the call.

I hope everyone is continuing to stay healthy and safe in this environment.

Let me go ahead and start with the headlines for the quarter.

Organic sales increased 4%, reflecting good underlying momentum and net benefits from increased demand related to COVID-19.

We achieved significant cost savings, margin improvements and record adjusted earnings.

And additionally, we achieved all-time record operating cash flow.

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

Our second quarter net sales were $4.6 billion.

That's up slightly from a year ago and includes a 4 point drag from currency rates.

Volumes were up 2% and net selling prices and product mix each improved 1 point.

By segment, organic sales rose 14% in consumer tissue and 2% in personal care but declined 10% in K-C Professional.

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

Moving on to profitability.

Second quarter adjusted gross margin was 39.8%, up 520 basis points year-on-year.

Adjusted gross profit increased 16%.

We had outstanding cost savings performance in the quarter.

Combined savings from our FORCE and restructuring program totaled $175 million, including strong productivity improvements.

We are now targeting full year cost savings of $510 million to $560 million.

That's up nicely compared to our original range of $425 million to $500 million.

Commodities were a benefit of $80 million in the quarter driven by pulp.

We now expect full year commodity deflation of $150 million to $250 million.

On average, that's $75 million better than our original outlook.

On the other hand, foreign currencies were a headwind in the quarter, reducing our operating profit by a high single-digit rate.

For the full year, currency effects are expected to be a high single-digit drag on operating profit.

Versus our original plan, the incremental currency headwinds are about twice the benefit of the improved commodity outlook.

Other manufacturing costs were also higher year-on-year.

For the full year, these costs are expected to increase more than we originally planned.

That's due to incremental expenses related to COVID-19, partially offset by improved fixed cost absorption.

Moving further down the P&L.

Between-the-lines spending was up 40 basis points as a percent of sales driven by a nice pickup in digital advertising.

All in all, adjusted operating profit was up 28%.

Second quarter adjusted operating margin was 21.9%, up 470 basis points versus year ago.

Margins were up in all 3 business segments with significant improvement in consumer tissue.

Consumer tissue margins included an approximate 175 basis point benefit from improved fixed cost absorption.

On the bottom line, adjusted earnings per share were a record $2.20, up 32% year-on-year.

Let's turn to cash flow and capital efficiency.

Cash provided by operations in the second quarter was an all-time record of nearly $1.6 billion compared to $609 million in the year ago quarter.

The increase was driven by unusually strong working capital benefits, higher earnings and a temporary delay in tax payments.

While cash flow is expected to decline in the back half of the year, we expect full year cash flow will be up very nicely year-on-year.

Second quarter dividends and share repurchases totaled about $400 million.

That was lower than normal because of our decision to temporarily suspend share repurchases for most of the second quarter.

As we mentioned in this morning's news release, we will be restarting our share repurchase program beginning tomorrow.

All in all, we delivered very good results across the board while continuing to invest for future success.

I'll now turn the call over to Mike.

Thank you, Maria.

Good morning, everyone.

I really want to wish you and your family's good health and safety.

I'll begin by commenting on how we're operating in the current environment, and then I'll turn to our results and the outlook.

Now since the outbreak of COVID-19, Kimberly-Clark has taken decisive action to manage our business effectively through this crisis.

Our key operating priorities remain as follows: first and foremost, we are focused on protecting the health and safety of our employees and our consumers; second, we're proactively managing our global 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.

I'm really proud of how our 40,000 employees are managing through the challenges we're facing every day.

Our global supply chain organization, led by our frontline manufacturing employees, is doing an outstanding job keeping our supply chain rolling.

We have not experienced material impact, even as we've had disruptions in several markets with elevated infection rates.

Despite the tough environment, our teams continue to deliver strong cost savings and productivity improvements.

While much of our attention has been on the near term, we are continuing to execute our longer-term strategies.

Our teams pivoted rapidly to pursue new growth opportunities that have been created in the pandemic environment, and this includes opportunities to better meet consumer and end-user needs around health, wellness and protection, both in home and in the workplace.

It also includes opportunities to accelerate e-commerce and digital as consumers change how they engage with our brands.

Now I'd like to make a few comments about our results.

As Maria mentioned, organic sales increased 4% in the quarter.

In North American consumer products, organic sales were up 12%.

Now within that, personal care rose 5%, and that was driven by ongoing momentum on premium-tier Huggies, child care and baby wipes.

In North American consumer tissue, organic sales increased 22%.

Category demand was strong, reflecting increased at-home consumption and some continued consumer stock-up in bath tissue.

Category growth moderated in the latter part of the quarter.

Shipments exceeded category demand, especially in bath tissue, as we work 24/7 to restore customer inventory levels.

Turning to K-C Professional in North America.

Organic sales declined 3%, and volumes fell 9%.

This decline reflects the challenging environment.

And I'll note that we experienced strong shipments early in the quarter, which included benefits from higher-than-normal customer orders in late March that were ultimately fulfilled in April.

Now by product category, second quarter volumes were down about 20% in washroom, down double digits in safety.

Now volume was up double digits in wipers and other products.

Moving to D&E markets.

Sales were down 3% driven primarily by K-C Professional.

Personal care organic sales in D&E were up 2%.

Now in key personal care markets, organic sales were up mid-teens in China and up double digits in India.

In Eastern Europe, organic sales were up slightly, although results were impacted by some destocking and the impact of economic lockdowns.

In Latin America, organic sales fell low single digits despite favorable pricing in Argentina.

Category demand in many D&E countries has been impacted by a drop in consumer purchasing power and government restrictions on social mobility and store operations.

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

Now as you know, we're also very focused on improving our market positions, and we're making good progress.

Overall, we're growing or maintaining market share in approximately 60% of our 80 category/country combinations that we track.

In North American consumer products, market shares are up or even in 5 of 8 product categories.

In D&E markets, shares were up in Eastern Europe, up or even in China and somewhat mixed in Latin America.

In developed markets, shares were up in South Korea and the U.K.

So to summarize our first half, I'm very encouraged by our progress.

We're delivering strong financial results.

We're strengthening our market positions, and we're managing through this crisis safely and effectively.

Now I'll address the outlook.

The duration and impact of COVID-19 on our business remains unclear, and there continues to be uncertainty in the environment.

However, our visibility is improving, and we're restoring forward-looking guidance for 2020.

Compared to our original plan, we're raising our outlook for both organic sales and earnings.

We're also increasing growth investment, primarily in digital advertising.

On the top line, we're targeting organic sales growth of 4% to 5%, which is above our original plan of 2%.

And this increase reflects a combination of improved underlying brand performance and higher demand driven by COVID.

A few additional thoughts about our second half organic outlook.

We have good underlying momentum, and we'll continue to support our brands with strong advertising and innovation.

New innovation includes launches on Pull-Ups in North America and feminine care in Eastern Europe, Brazil and ASEAN.

In addition, we expect bath tissue sales in North America will benefit from more people being at home and from our actions to improve customer inventory levels.

We expect to continue facing challenging conditions in K-C Professional and in consumer categories in some D&E markets.

We also expect to see additional consumer destocking in the second half.

On the bottom line, our revised outlook is adjusted earnings per share of $7.40 to $7.60.

That's up 7% to 10% year-on-year compared to our original plan of $7.10 to $7.35.

While we're increasing our outlook, we'll also invest more in our brands and capabilities.

We temporarily paused some investment in the second quarter and now plan to restore and further increase investment this year.

We're doing this to fuel market share momentum and to better position us for sustainable long-term success.

In conclusion, we remain very optimistic about our opportunities to generate long-term growth and create shareholder value.

We'll continue to prioritize the health and safety of our people and our consumers.

We're executing our strategies well, and we continue to operate our business with a balanced and sustainable approach.

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

(Operator Instructions) Our first question comes from Dara Mohsenian with Morgan Stanley.

Dara, you may be on mute.

Can you guys hear me?

We got you.

Yes.

We got you.

Okay.

Great.

Hope all is well on your end.

Your full year EPS guidance, even at the high end, seems high single digit year-over-year.

Earnings dropped in the back half of the year.

So I was just hoping for a bit more clarity on some of the drivers behind that.

First, I'm assuming a consumer pantry deload probably depresses top line results a bit given your comments about moderating category growth towards the end of the quarter, but perhaps that might be offset by you guys rebuilding retailer inventory levels from a shipment perspective.

So just any commentary on sort of the hangover from a top line standpoint in the back half versus the first half elevated levels would be helpful.

And then second, you mentioned the reinvestment back behind advertising.

Can you give us a sense?

Is that a significant amount of reinvestment versus your original guidance a couple of quarters back as some of the other P&L line items have come in better than expected?

And then just last, have you budgeted more conservatism into that guidance than you normally would for the back half just given the volatility in the environment?

Okay.

Thanks, Dara.

Yes, yes.

A handful of questions.

Let me lead off, and I'll ask Maria to jump in because I think she'll give you a little bit better context.

But I will say, resuming the guidance, that definitely reflects our growing confidence in our ability to safely operate in this COVID environment.

There are some big puts and takes certainly in demand.

We see net favorable impact on demand overall, though.

And that reflects the strong demand growth in North America, obviously in tissue, which happens to be one of our largest businesses.

We are seeing some offsetting effects, both in KCP, and as I mentioned, some D&E markets outside of China.

And I think that still remains to be seen.

And at this point of year, I think we -- our range is still fairly wide, and that probably reflects, to some degree, some of the uncertainty that still exists out there.

But on the overall it's -- we feel like demand should be, for us, overall, a net positive.

On the investment side, definitely in the second half, our plan was tilted to increase investment in the second half or a little bit more investment in the second half.

We feel very good about where our product quality is and where our marketing and communications programs are for consumers, and we feel very good about the underlying brand performance across -- globally in most markets.

And so we really feel good about increasing our investment.

The plan is for us -- we had a pretty significant uptick last year.

I think it was about 60 bps in advertising increase, and our plan this year would be north of that.

And that was our original plan, and we plan to meet that.

But Maria, do you want to jump in there?

Sure.

I think, Mike, you covered the highlights.

When I think about the year, the overall financials look really good.

As we raised our OP growth forecast and we've raised our EPS forecast for the year, operating cash flow should be stronger for the year than we expected back in January.

So overall, financially, this should be a really good year for Kimberly-Clark and all of that with increased investment in our business, not only for the near term, but the long term.

The way that, that favorability comes in is that it's first half weighted for obvious reasons given the COVID situation and its flow-through impacts on our business.

So when I look at the full year outlook, we're benefiting from solid top line growth, which is led by volume growth, plus benefits from mix and price.

Currency headwinds are expected to be partially but not entirely offset by commodity deflation benefits.

Savings are strong.

We raised our outlook on total savings from FORCE and GRP to $510 million to $560 million for the year.

And as Mike said, we are significantly increasing investments this year, particularly in advertising, but also in other areas like long-term capability builds.

So for the total year, it looks good.

If I compare the first half to second half and give you a little bit more detail.

In the second half for profit, we will have a -- we're expecting slowing volume growth, which impacts our profit where we had a sizable benefit in the first half.

A little further benefit from 2019 pricing actions.

And also as shelf availability improves in the back half, we should see a return to more normal levels of promotion.

Commodities are becoming slightly -- modestly inflationary by the end of the year.

And in addition, our cost savings are not expected to be as strong in the second half.

And we're also increasing our investment in the back half of the year, as Mike talked about.

So that's really what's going on.

And my comment on the guidance is I'm happy to reinstate guidance at this point given that we have more comfort and fight into our supply chain team's ability to maintain our operations during spikes of COVID.

That was less uncertain to us back in the April time frame.

So the supply chain risk has been reduced, number one.

Number two, the commodity currency environment overall has calmed down since where we were in March, April.

And so I would say the guidance is realistic, and it reflects what we're thinking based on what we see and the actions we intend to take through the remainder of the year.

Okay.

That's very comprehensive.

That's helpful.

And then on the promotional environment you mentioned, in the pricing environment, obviously, we've seen a big promotional pullback in the U.S. here post-COVID.

What are you guys expecting in the balance of the year?

Does some of that linger?

Do we get more back to a normalized type of environment?

Particularly, if category growth weakens a bit, does that create more risk?

And perhaps just touch on what you're seeing from a competitive standpoint, particularly on the private label front here, in terms of the U.S. pricing environment.

Yes.

U.S., in particular, I think, Dara, I would say the same thing I said last quarter is that I think the market has broadly been constructive.

And that's because, right now, especially, the focus is on supply, and we still are rebuilding inventories.

I would say we've made progress on the personal care side.

We are still catching up, and we're gaining on tissue.

But we're -- our service levels still aren't where we want them to be, and our in-stock still isn't where we want it to be.

And so we're still working through that, and so we're not promoting as much as we had in the past in this environment.

I think, actually, the categories or other players in the market are not promoting as much either.

I think just a couple of factoids.

Volumes sold on promotion in the quarter for the category was down, depending on the category, somewhere between 25% and 50%.

And so I think that does reflect the situation, and I think that makes sense and as -- makes sense for the business at this point.

Okay.

And I was getting more sort of the back half of the year, what you guys are expecting, what you started to see towards the end of the quarter so far in July?

Have you seen any changes in behavior?

And is this sort of new environment post-COVID likely to linger in your mind?

Or could you see a ramp-up with category growth dissipating a bit?

So looking more ahead as we look out to the balance of the year.

Yes.

I don't see it changing significantly in the balance of the year because of the supply situation.

I mean I think I just said that we're making a little progress in improving our supply situation on tissue, but we still have a lot of work to do to catch up.

And because of that, supply is still tight.

And so I don't see, certainly from our end, a heavy promotional environment from our perspective.

Our next question comes from Lauren Lieberman with Barclays.

Great.

So I was hoping, first, you could talk a little bit about mix.

Mike, one of the things that you've talked about quite a bit is elevating the categories and some of the efforts that you're putting towards that in terms of innovation.

So personal care mix was up 2% this quarter.

So if you could talk a little bit about that, where you're -- if you're seeing some greater traction with the higher-priced innovations.

And then how we should think about that in more economically challenged markets like in Latin America or perhaps as it evolves over Central and Eastern Europe, how we should think about mix in your innovation agenda.

Yes.

Great question.

Yes.

Mix, overall, I think across both consumer, personal care and consumer tissue and in KCP, mix, generally, has been favorable for us across all markets.

And it's -- part of the core strategy, which is elevate our categories being one.

We have recently been more focused on premiumizing our categories with higher-margin products that serve the consumers better with better product features, and so we've driven that.

And for reference, we've shifted our mix in Brazil diapers significantly.

We were primarily -- a couple of years ago, primarily a value-tier brand.

And we're at the precipice of being primarily a premium-tier brand at this point 2 years later.

And so now the caveat to that is with the shift in economic conditions, we've got to be able to pivot and meet the needs of our consumer.

And so even the -- all of the team has focused on premiumizing or driving the premium tiers in Brazil for the last couple of years and made a lot of progress.

They've shifted rapidly.

And if you look at the quarter, I think Brazil, the category was down high single digits, mostly driven through macros, right?

There's, as we mentioned in the remarks, less consumer purchasing power, literally less money for consumers to spend, and so they're really tightening up their household budgets.

And so for us, we like having kind of a broad portfolio that we play in the value tier and the premium tier.

And while our long-term strategy is drive premiumization, we want to be able to play both sides.

And so we're pivoting accordingly and driving the value-tier business at this point.

And so that's occurred in consumer tissue as well.

Notably, our Cottonelle share was up almost a couple of points, I think, this quarter, and that has a positive effect on mix for us in some ways.

If you look at diapers, obviously, our premium-tier diapers are little movers.

Little Snugglers have been growing faster in our business.

And then interestingly, in KCP, also a strong positive mix shift this quarter behind wipers, which tend to be a little bit higher margin for us.

Okay.

Great.

And just to complete the thought on Brazil, you've mentioned that the category was down high single digits in Brazil.

And then what was your performance?

Yes.

So we were up slightly, right?

And so -- and -- and so overall -- and I think this would apply to many of our D&E markets.

I think our end market or underlying brand performance has been strong across D&E.

But as we may be highlighted in the last quarter, the unknown around COVID was the implications or what the impact was going to be on some of the market conditions.

And what's happened in some of these D&E markets like Brazil and Russia is the government doesn't have programs like PPP in the U.S., and so the consumers don't have a backup plan or a subsidy when they're out of work or not going to work.

And so it really batten down the hatches on their household spending pretty tightly, pretty quickly.

And because of that, I would say we're pivoting our programming around which products we emphasize, but the underlying performance continued to be strong.

For example, in Russia, which had a similar slowdown in the category, the category was down slightly.

We were up, but we gained 3 share points, but there was a pretty big macro effect.

Okay.

That's great.

And if I can ask a slightly longer-term question.

So I know we're going to have challenging comparisons in '21.

But just in general, as you've laid out your Strategy 2022 plan, you're looking for organic sales growth sort of in that 1% to 3% range, 2% originally for this year with the idea that as you were making investments to upgrade capabilities, marketing, innovation, product quality, all those things that you could reaccelerate toward 3% to 5%.

With the higher spending that both the commodity environment and the serve consumer demand is allowing you, how do you think that plays out in terms of the time line to kind of get closer to those long-term organic targets as we look beyond -- again, beyond the sort of COVID-enhanced, if you will, near-term environment?

Yes.

Great question.

The -- we would like to get back to our longer-term targets over time.

And I think one of the reasons we moved to kind of the medium-term targets originally was the categories had slowed down significantly.

And obviously, in this environment, the category has ticked up again.

And I think we're building the fundamentals and building our capability.

And as we get more confident, both in our plans and the quality of our investments and our ability to invest, we would hope to get to a faster growth algorithm at some point in time.

But right now, I think we're still -- we still believe the medium-term targets that we put out there are the right ones for us, and then we'll update those when we feel like it's appropriate.

And again, Mike, that would still have more to do with category growth and not wanting to call that rather than your, I guess, the magnitude and strength of the advertising programs, the innovation, product quality and so on?

Yes.

I think it would be a combination of both.

I think we would -- definitely when I see a little more from the category, more consistency over a longer period of time and also get more confidence in our own executions and our own plans.

Paul and Maria, any other commentary there?

No.

I would just say that the investments that we're making, we are expecting a return on those investments.

And much of the investment is growth-related investments, although there is also investment on core capabilities, not only growth related, but also productivity related.

So they -- we are expecting a strong return on those investments.

Our next question comes from Kevin Grundy with Jefferies.

Congrats on the strong results in the first half of the year, particularly given the environment.

Mike, just to pick up on some of the line of questioning regarding investment levels, particularly around advertising and marketing.

So my question is what do you think is the appropriate level longer term?

Will the step-up that you're targeting this year be a permanent one?

And maybe help us think about the magnitude of the increase this year because when we kind of tumble through the numbers, and then for you as well, Maria, just given what you've provided with respect to commodities and for savings and restructuring and FX, there's a pretty substantial offset to get to your numbers.

So how much of that is advertising and marketing?

And then how should we be thinking about that?

And Mike, how are you thinking about it longer term?

Yes, yes.

I'll let maybe Maria comment further on kind of the details of the step-up.

But we are planning a significant increase this year, just as we did last year.

The -- Kevin, I don't -- we have not set internally a long-range target, but I -- in terms of what our overall A&P spending should be.

But I would recognize, while historically, our advertising has been about average for the industry, it's been less than some of our direct competitors.

And so we feel like there are 2 factors that we want to do, which is to accelerate growth, we feel like we need to fuel that with better products and better programming, both advertising and sales programs, to drive our business and market development programs.

And at the same time, it's going to require more investment, and so we're doing that.

Now we don't have a long-range target that's public, but I would say we would like to be north of where we are today and what we finish this year.

Okay.

Maria, anything to add?

Yes.

I would just add that, as a reminder, our advertising investment will be back-half loaded, and our capability building investments will also be back-half loaded.

You may recall that when we were on the phone in April, we talked about the fact that with all of the volatility and uncertainty, we were pausing some of our investments.

And so the back-half higher numbers are partially related to that, stepping back up to our original levels of investment and then also increasing the level of those investments given the overall performance for the year.

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

I don't know if you guys have looked at it this way.

But I guess, Maria, maybe, I was hoping you could talk us through the second quarter gross margin, less so relative to a year ago, but relative to the first quarter, just because I know there were a lot of variables.

But just based on the headline disclosures, it's hard to conceive of how the margin gets 260 basis points better in 2Q versus 1Q.

So I'm just -- maybe you can unpack a little bit of that to give us a sense of the moving parts.

Sure.

A few pieces to comment on.

The savings in the second quarter were very strong, as we discussed.

On the margin side of house, we also have benefit from geographic mix.

So when you look across the board, the stronger performance in North America, where our margins are higher than in developing and emerging market, definitely helped us on the margin side of the house.

So those were 2 of the bigger drivers.

Okay, okay.

That makes sense.

I guess the other question, and I think you talked a little bit about this.

But I guess, as I listen to your answers to Kevin's question, to Lauren before that, is there -- maybe you can just talk a little bit more, to the extent you can, on the specific nature of the second half investments.

Just a little bit more specificity would be helpful.

And I guess I'm really trying to get a sense for how much of those investments are more tactical, where we can think of the returns that you mentioned sort of being yielded in the next 12 months versus those that are longer term in nature, that are capabilities that won't yield a return necessarily next year but in the coming 2- or 3-plus years.

Is there a way to describe that balance?

Yes, yes.

I think -- let's see, Steve.

I guess I would probably characterize them all as longer term in nature, but that includes advertising and brand building and capability investment.

And both I classify as more long term -- more longer term in nature versus what I would say short term, hey, we're going to do a big buy one, get one free promotion, right?

So it's less tactical in that sense and more long term in the sense of building equity over the long term.

But now the caveat of that is a lot of the -- most of the advertising investment is in digital, and that does generate returns sooner.

And now we can evaluate those real time, and that's one of the reasons why we do it.

But that has both an equity-building component, and in some ways, a volume -- or short-term volume-driving component.

And so I'd say a big chunk is, as Maria mentioned in her remarks, digital advertising.

We are investing a significant sum that will flow through to more of the overhead lines in capability building.

And really, a couple of areas that we're investing aggressively in is what we've called a revenue growth management, which was going to help us with trade promotion efficiency and our price pack architectures and how we do pricing globally.

And really, the notion here is as we're building the global capability, we have a global framework and approach to it.

We need to have the right analytics around the world.

We need to have the right talent, and we need to have the right tools.

And so they're significant investments we're making to improve that capability there.

Similarly on digital and our digital capability, not only in the spend, but what we're driving is what Alison would call performance marketing capability.

And that requires the same things that I just highlighted in revenue growth management, which is analytics, talent and tools.

And so those were some longer-term investments we're making.

Yes.

That's helpful.

I guess just last follow-up on that is just the lead time you need to make on these investments.

Are these investments that, as we sit here in July, you've kind of earmarked and locked in for the back half or -- especially, there's not a lot of flex in it?

Or are there elements to the investments that can be flexed to the extent that the pricing environment that, right now, looks good, kind of looks differently or the demand environment dries up?

Just how much discretion and flex do you have in what's lined up for the second half?

Well, maybe I'll let -- I'll defer to Maria's judgment here, but I would say there's always some flexibility.

Nothing's ever set in stone, unless we bought upfront everything, which, in our case, we haven't.

And by definition, I think there's a lot more flexibility in digital in terms of how we go to market there.

So Maria, any additional insights?

Yes.

I think that's right.

We do have some flexibility on the discretionary investments that we plan to make in the second half of the year.

And to circle back to your first question, which I missed one other relevant component on the Q2 to Q1.

You may recall that we made meaningful investments to shore up our mills, and that included additional compensation as well as other supply chain investments.

Those were first quarter weighted.

And then I just reiterate my comment that we did take a pause on spending an investment in the second quarter, and that affected our G&A.

So the G&A increase was lower in the second quarter than the first quarter.

So just to try to help with the math there.

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

Yes.

So Mike, I just wanted to kind of get your sense.

Obviously, things are changing at a rapid rate in terms of openings and closings, and that has an impact on consumption, especially at at-home consumption.

So I was just hoping you can give us some context on what you're seeing in July as it relates to some of the changes that have been taking place on a regional basis?

And is your supply chain in a position yet where it can actually execute based on some of these very kind of micro regional changes, whether it be by county or by just that city or state level?

Yes.

And Nik, I assume you're really asking as infection rates change around markets or locations?

Yes, yes.

Just given that's dictating how open an economy is.

Yes.

Well, I'll talk maybe operations and then the economy.

One, I will start with our operations, which I think the team has been doing a phenomenal job executing very well and with a really disciplined approach to COVID-19.

Nik, we really have been prioritizing the safety of our employees in our plants.

And we've had some sporadic outages.

I will tell you, we're on the mode now is we're tracking the infection rates very closely to the lowest level possible.

And in the U.S., that means by county is where we -- we make our decisions.

We proactively closed plants for cleaning or make other decisions based on what those infection rates are.

And so overall, as I mentioned earlier, I think we've become more confident in our ability to operate in an infection rate environment that fluctuates, and we've done that throughout this year, thus far.

And so on that component, I think we've really escalated our safety procedures, and we feel good about that.

I think from an economy perspective, again, we're still kind of working through kind of the changes.

And I think we highlighted in Q1 that there were some question marks in developing and emerging markets how that would be affected.

I think that has come to be realized, particularly in Latin America, where we're seeing a fairly high impact of COVID, plus in a lot of the markets down there, a lot of countries down there very strict government lockdowns on social mobility, and as I mentioned earlier, less money for consumers to spend.

And so we're seeing a bigger impact.

I think we've made the call in our forecast, and we feel like we have it called right.

But it is one of the reasons why we left the range a little bit wider because there still is some uncertainty there.

But net-net, I would say, if you look at the U.S., we would expect and we mentioned in bath tissue probably would be modestly higher because of people being at home more often.

And with the U.S. being our -- by far, our largest market, that's a net positive financially.

And then we'll work through some of the challenges in some of the D&E markets, even though our underlying brand performance continues to be strong.

And then if I could just follow up real quick on a quick online question.

Just it seems this is kind of an arms race to get in the consumer's basket especially because those new online consumers.

How do you feel about your current positioning around that in terms of being the #1 choice in the basket right now?

Because it seems like that, going forward, will be a lot more sticky than what you would normally see in a brick-and-mortar environment.

Or you could disagree with me.

Do you think that's not the case?

No, no.

Overall, we feel very good.

I mean I think we -- over time -- and I think we've made progress in our digital and e-commerce capability, e-commerce, in particular.

We've got very highly developed businesses in Asia, particularly South Korea and China.

The U.S., I think we've really strengthened over the last 5 years or so.

I think when we started off, we're probably in the U.S. a little lighter or a little later to the party in baby and childcare, but I think we've caught up, and I think we're at our fair share online now.

And in tissue, we've been a little bit -- I think a little bit ahead.

And so we feel very good about our overall positioning.

The interesting areas are some of the D&E markets where, even 18 months ago, nobody was talking e-commerce in Brazil, and it was an infinitesimal part of our business.

It's becoming fairly significant, and we're making a lot of progress at best.

And the interesting thing is in the capability development we're talking about with this digital and e-commerce global capabilities, we really are applying lessons from our top markets like China or South Korea globally, and that's really having a big impact.

For instance, one of the key strategies that Brazil is running is really adopted from our South Korea business.

Our next question comes from Andrea Teixeira with JPMorgan.

Congrats for restoring the guidance and buybacks and also the Brothers team for shipping all this volume.

So can you comment on what you saw in orders exiting the quarter for both developed and emerging markets on the consumer side?

And in the professional business, in other words, what was the volume rate in June, much lower than the quarter?

Or you were still catching up on the shop and destocking, as you said a couple of times in this call?

And following up on the mix comments in emerging markets.

It's great to hear about the margin accretive innovation in Brazil, but are you seeing category improving also in China and Eastern Europe?

Or disposable income pressures are more than offsetting the reopenings?

Yes.

Maybe I'll start with -- I think the KCP -- just to give you a little more texture.

I think definitely, the business is impacted by the global slowdown, but the team is really pivoting aggressively to create healthier workplaces.

And so the organic, overall, for the business globally was down 10%.

North America was down 3%.

And per your question, and I think I mentioned in my remarks that we had significant orders in March that we shipped in April.

So that offsets.

So I think the run rate is a little worse than 3%.

And -- but there's a couple of factors.

I mean, definitely, declines in the core washroom business, I mentioned globally, but I think the washroom business was down about 20%.

Offices, industrial, travel and lodging, all significantly down and remains significantly down.

We do see some pickup in health care, grocery and e-commerce that's offsetting that to some degree.

And then also in K-C Professional, we are capturing growth.

As I mentioned, wipers is up double digits, and so that's a positive one for us with a positive mix effect.

And then we are expanding our mask offering.

We had sold some co-pack masks, so we're -- we have a very small mask business, but we have begun self-manufacturing masks.

We actually think we have great technology from a materials perspective.

We're a large nonwovens producer, and we feel like our nonwovens fabrics are excellent materials for masks.

And so we are producing some masks.

Primarily, we started for internal production for our mills using our plants, but we are selling them externally now, and that will be a good part of our business going forward.

So that's the KCP part.

And again, I think your question on the consumer side.

Again, in personal care, there was a pronounced stock-up in the first quarter, as you might recall, and we have double-digit growth across the categories.

If you think about personal care like a diaper, there's no reason for a surge like that.

And so subsequently, in Q2, we're seeing -- if you look at the Nielsen, some of that reverse out.

And -- but I do think in personal care, overall, it'll level out to more normalized numbers, still probably positive, but more normalized.

In tissue, people at home are equals more use at home.

And so we will see, I think, a fairly significant growth this year overall for the tissue categories.

And we're up in all 3 tissue categories in North America, up double digits.

And we think despite -- there's been a little softness in the last quarter, some reversals, but we still should see a higher overall consumption in tissue, both in North America and other developed markets, for the balance of the year.

So I'll pause there.

I think there were a couple of other questions there.

If you could just remind me, Andrea, what else you want me to hit on.

Yes.

Sorry, Mike.

Yes.

I wanted to just go -- if you take us throughout the world.

But before you do, like just to finalize your comment about the consumer tissue business.

Are you seeing -- because what we've seen, Nielsen, obviously, doesn't capture the non-track channels.

Are you seeing -- are you losing share or like industry?

I mean I think you mentioned like 5 out of 8 categories that you're gaining share.

So that I'm assuming is encompassing of all channels.

So if you can take us through that and then talk about -- take us throughout the world also for China and Korea in terms of share of those categories.

Yes.

Okay.

Yes.

So largely, I think we feel very good about our share performance, and we're making progress there.

By the categories we track, and we track 80 country/category combinations, what we call in the cohorts, we're up or even in 60% of those.

And in North America, we had 5 of 8. Within consumer tissue, we -- the way we tracked across all outlets, we're up in all brands with the lone exception of Scott -- or Scott bath tissue.

And that was mostly driven by -- we're probably the most supply-constrained on Scott 1000.

And so Cottonelle was up about 2 share points or almost 2 share points.

Kleenex was up over a point.

Kleenex, up, in many markets, up significantly.

And so we feel good about the share performance overall.

Importantly, in North America, Huggies was up 2 share points and so behind strong momentum on the premium side of the business.

If I click around the world, strong share momentum in Central and Eastern Europe.

As I mentioned earlier, category has slowed down because of consumer purchasing power.

But across CEE, our shares were up significantly.

In diapers, in Russia, we're up 3 share points; femcare, up a point.

We were up about 2 points in the Ukraine and up about 2 points in Kazakhstan and growing -- still growing well across CIS.

And so I think that we'll continue to make progress there.

Importantly, in China, I think we are about even in share in diapers and up pretty significantly in feminine care.

And the mix on diapers is really a tale of -- we're probably up almost 2 share points on the premium side of the business but offset by declines in value, which we're deemphasizing a little bit in China right now.

So we feel good about the strategy in China and the progress we're making on the China business.

And overall, in China, I think we were up strong double digits or mid-teens in the quarter on performance.

The -- and then the other areas, as we mentioned, I think Brazil, I think we were up in one category -- even in one category and down in one category.

And -- but overall, I think the story in Brazil is more about the category and the economy, and the team is holding up well and pivoting accordingly.

The other areas that we mentioned in the past, we are making pretty good progress in Peru.

We've mentioned that's been an issue for us towards the second half of last year.

We're making very strong progress with pretty significant share improvement -- sequential share improvement in our diaper business.

But similar story to Brazil, the story is more the category there.

The category was down about 10% in the quarter, which is the biggest drop, I think, perhaps in Peru in 30 years.

And so -- which has been a strong growth category for us for a long time.

And that's all related to COVID.

And I see really strongly improving brand performance.

So I know I just threw a lot at you.

I'll pause there and ask if you have any other follow-ups here.

No.

That's great.

Appreciate the color.

And then on the e-commerce and all the capabilities that you're putting together, can you update us how it evolved since the first quarter to the second quarter?

And what is your goal as you put more money behind those capabilities?

Yes.

Well, I think from the capability perspective, we've got -- we've resourced teams.

We've built out kind of an overall global approach, and we've got leaders kind of in each of the 4 kind of core commercial capabilities that we've talked about.

They report through Alison Lewis, our Chief Growth Officer.

And so we stood that up, and now we're in the process of making the right investments, as I mentioned, in the tools in adding talent, adding staff or people who know how to do this stuff cold and then in driving the analytics to help us to better decision-making.

And how much do you -- are you ready to share like how much it represents on your sales now in the second quarter and how much it grew e-commerce globally?

I don't think we're ready to share that yet, but I'll pause and maybe I'll defer to Paul here.

Yes.

Mike, I can take that.

So Andrea, on a year-to-date basis, from what we can see, we would say sales via e-commerce or an omnichannel perspective would be growing at 30% across the company.

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

I hope you guys are doing well.

Want to ask you about cost savings.

FORCE and the other restructuring savings were quite a bit better than -- your expectations are quite a bit better than your January expectations.

So are these new projects that have absolutely nothing to do with the pandemic?

Or are these savings that came -- that have come out because the efficiencies required to meet COVID-related demand?

Because it sounded like you pushed out some projects from the first half into the second half, some of the cost savings projects.

So that's my first question.

Sure.

I -- some of the benefit is COVID related, but let me talk both about FORCE and restructuring on FORCE.

It was a very strong quarter and better than we were expecting, and that's really coming from productivity in our manufacturing sites as well as a step-up in expected savings associated with negotiated material pricing.

On the productivity side, the reason I say some of it is COVID related is, as we've discussed before, we did do some SKU rationalization.

And with fewer SKUs to run the output on our machines is much higher, so strong productivity there.

And we also see less waste when we have fewer changeovers.

When we talk about some of the COVID-related delays, which we mentioned back in April, those are going to impact the second half more than they did in the second quarter.

So that's on FORCE.

And then on restructuring, you get that same benefit on productivity.

The assets that we have stood up as part of the restructuring program are running better than we expected.

And again, the delays that we had there on starting up those restructuring programs as we can't get people into the mills with the travel restrictions and safety considerations, those will impact the second half more than more than the first half.

Can you talk a little bit about the -- you parse it out.

What came just from COVID and potentially comes returns?

Basically, those are reinstated costs that go back in once things get better.

And then the other thing is just if you could talk through the flexibility in your manufacturing and distribution, particularly if a region sees a spike in cases, and you do end up with cases in a plant that results in a -- obviously lower productivity in a plant.

Now that we see cases rising in areas where you guys actually make stuff.

So what kind of plans do you have in place?

What kind of flexibility do you have if a particular area shut down?

And another -- is there capacity in another region to ship from there?

It's a little bit tough when it comes to tissue towel, obviously, and a couple of the other categories given these are things that don't typically move very long distances.

Sure, sure.

I think the strong productivity gains that we had related to SKU rationalization, we wouldn't expect the level of rationalization that we're currently delivering in order to meet the elevated demand, but we also don't expect to go back to where we were.

So there should be some ongoing benefit from that as we look out longer term.

Productivity and savings also are driven by higher volumes.

Higher volumes have a lot of benefit across the P&L and cash flow.

If you think about one of the elements of our FORCE savings program is the benefit from product design changes.

And so if we reduce the cost of producing a product, you've got the net savings, and then that's multiplied by the volumes.

So when you've got higher volumes, you have bigger savings.

So part of that goes as the volumes go on the way it shows up in our P&L.

And on your other question on supply chain and inventories, the -- we've done a few things to help ensure that we've got the supply to meet the customer and consumer demand.

The supply chain team has taken a number of actions to move inventory closer to where the demand is coming from.

We have also looked across the globe at where we have production capacity to help out where we are capacity constrained.

As you note, that's more efficient on some of our products, particularly in the personal care area versus the tissue area.

But on the tissue area, we're also getting some help from K-C de Mexico, which has been great.

And the team has been actively working to qualify third-party suppliers to help us meet the high levels of demand.

That's super helpful.

And then just one question, Mike, on the personal care side of the business.

So can you just talk a little bit about the competitive environment and the balance you're looking for as you try to drive market share growth but of course thinking through what may become a more difficult macro environment as we go forward?

What's your view in terms of -- it sounds like supply is now sort of pretty much caught up to demand.

So what's your view on the promotional environment?

Does it still stay suppressed?

Or does it actually come back as supply and production normalizes?

Yes.

I think we're -- on the personal care side, generally, I think we're -- at this point, we haven't caught all the way up, but we're getting closer, certainly closer than we are in tissue.

I do think, though, the terms of competition in personal care are healthy at this point.

In most markets, they have turned, I would say, to product quality and to advertising, notably in China, which I think had been very price-sensitive for maybe the prior 3 years or so.

I think there was a return to maybe a healthier competitive dynamic in the category in the sense of bringing more innovation and meeting consumers' needs in that dimension.

And I think -- and that's something that -- certainly our strategy, which is to take the high road, make better products and to bring more consumers into the category is kind of our focus versus trying to rent share.

And so we're seeing that generally in most markets.

Maybe there is a little bit of a competitive entry in Argentina and Brazil with some local competitors.

But overall, I would say, generally, in North America, China, Central and Eastern Europe, I think it's been -- we've been competing on innovation and marketing, and I feel like that's healthy for the category.

Our next question comes from Jason English with Goldman Sachs.

Congratulations on the strong results this quarter and the strong results year-to-date.

It's impressive, particularly in context of the environment.

I want to come back and just come back to the same line of question you were getting early in the call on the implicit guidance for the back half of the year because I'm still left a bit befuddled.

You've talked about currency and commodities sort of netting neutral in the back half.

You've got 210 to 260 of productivity still to come.

You're expecting organic sales growth on both volume and price, yet EBIT is going to be down $120 million to $220 million or so roughly in the back half of the year.

You stack it up, and it implies well north of $400 million of reinvestment in the business, and that's on top of the heavy investment that already came in the first half.

There doesn't look to be a lot of evidence of you deferring expenses.

SG&A is up 9% in the front half.

So I think everyone's going to walk away saying, "This is really conservative.

They're not going to spend that much." And why would that conclusion be wrong?

Like what are we missing?

That's a huge chunk of money.

Are there other offsets?

Or where will you spend such a big slug of dollars if that is the right figure?

Yes.

Let me kind of go ahead and tick through it, and then I'll turn it over to Mike to talk more about the investments that we are making.

If I look at currency, commodity and price, Jason, we had a meaningful benefit from that in the first half of the year, and that will be a drag in the second half of the year.

On price, as I mentioned, the year-over-year benefit from the 2019 pricing actions that we took has now materialized itself in the P&L.

Input costs, inflation benefits are weighted to the first half.

And while input costs are expected to stay relatively stable to maybe slightly inflationary in the back half, when you look at the year-over-year comparison, you'll remember that input costs turned deflationary for us in the second half of last year.

So when you look year-over-year, we don't have the benefits that we enjoyed in the P&L in the first half.

We're getting lower benefit from volume mix.

Our other manufacturing costs will continue to remain elevated given the safety and sanitation protocols that we have in place.

We talked about the step-up in advertising and capability investments, and then we have lower savings from both the restructuring program and the FORCE program in the second half, so just to be clear on where we stand on those main drivers.

And then I'll turn it back to Mike to comment on the investments.

Yes.

I mean I think it is -- we do have significant investment plan.

We feel like we have good opportunities to spend it on, as I mentioned, primarily digital advertising and then the capabilities that we talked about, revenue growth management and digital marketing.

But I think for me, the other 2 things I'd mention is there's still a lot of uncertainty in our back half.

Part of it related, as I mentioned in my remarks, related to KCP.

And I would say because of the April -- or March, April North America impact, I would probably say there's probably still a little more slowdown that we would expect in KCP planning for.

And then there's a lot -- still a lot of COVID-related uncertainty in developing and emerging markets where we just saw kind of the beginning of that in the second quarter.

And so there's 2 -- really 2 impact aspects, which is there's definitely investment, but there's also -- we're -- in our plans, we're leaving ourselves some room to manage through some of the COVID-related issues that still exists that are still widely unknown.

Okay.

I understand that.

Real quick on the elevated manufacturing costs because, to me, maybe that's the one thing that's missing from our bridge.

When we look at the second quarter, though, there's not a lot of evidence, and the gross margin expansion was heroic.

And when I bridge it through with volume, price, the productivity and the input cost figures you gave, it kind of all fits.

There's no sort of leakage despite what seems to be some decremental margins with just the business mix.

So it doesn't look like there's a lot of elevated manufacturing costs in the second quarter.

What was it?

Like why wouldn't that same sort of margin build, hold?

Why would we start to see leakage on that sort of simple build in the back half of the year, if that makes sense?

Right.

I think for the back half versus the first half on the -- what we call other manufacturing costs, the drag will be relatively similar.

And within other manufacturing costs, that category is generally inflationary, so that's not unusual.

And it continued to be inflationary on the standard components, including our investment in product improvements, which shows up in the form of on costs in the manufacturing part of the P&L and also regular labor rate inflation.

What is new and related to COVID is that we have those cost increases related to the supply chain impacts around standardization and safety protocols that are elevating these.

And then that's partially offset by fixed cost absorption from the stronger volumes, but it's not completely offset.

Our next question comes from Wendy Nicholson with Citigroup.

I know this has been a long call, so I want to make my questions really direct and short.

And then simply on the professional business, that business, we all expected, I think, to be weak.

I'm wondering, number one, what are you seeing -- third quarter has just started.

But what are your expectations for trends in that business in the third quarter, same type of volume decline, better or worse?

And can you remind us of the gross margin in that business?

Is it above or below corporate average?

Yes.

Maybe I'll have the trend.

And maybe Paul or Maria, if you could, the gross margin.

I don't have that off the top of my head.

But I think the trend, I would say, and given kind of the remarks we made, Wendy, would be probably slightly worse than what we had in the second quarter because of that -- the high orders that came at the end of March that were shipped in April.

And so the run rate was probably a little -- a touch lower in North America than the 3% that we ended up in the quarter.

That said -- so we'll have the core washroom business down double digits.

We are making progress on our wipers, and as I mentioned, our new mask business.

And so those will be offsets to the good.

And Paul, I'm not sure about -- if we comment on gross margins.

So I'm going to pass that to you.

Yes.

Thanks, Maria.

So we don't provide specific numbers at the segment level on gross margins.

What I would say is that maybe not surprisingly, margins for KCP would be in between personal care and consumer tissue, and they're pretty healthy overall.

And the reason I ask is because...

Wendy, my apologies.

I'll just -- I'll apologize.

The 3 of us are in separate rooms because of COVID.

So normally, if I started answering that, Paul would slap me with a ruler, but he's not able to do that right now.

No problem.

And the reason I ask is because that business, in particular -- I mean, obviously, you saw a sharp -- shortfall in sales again, which we expected.

But your cost control and the benefits of the gross margin or the benefits of commodities really insulated your profits there, and so I'm wondering just as we think about the second half and modeling, I assume that's a business that all of the investment spending, you're probably not going to spend quite as much from an investment spending perspective.

So I would think that that's a business that could, whatever, continue to kind of carry the day from a profitability perspective, simply given the commodity environment is still so favorable, et cetera, et cetera.

Is that a fair assumption?

Sounds like you've made significant cost cuts, which have sort of restructured that business a little bit.

Am I reading too much into that?

I think that, one, the team is doing an outstanding job managing the costs.

But also, they're doing an outstanding job pivoting to maybe what I think our -- Russ, our president of that division, would call kind of the essential to create healthier workplaces, right?

It's now mission-critical to create a healthier workplace.

And so the notion that wipers and masks will become a bigger piece of the business, it has a positive mix effect from a margin perspective.

Got it.

And that business is -- yes.

That business is also benefiting from the geographic mix component that we talked about, so I would call that out.

Speakers at this time, we have no further questioners in the queue.

Great.

Well, we appreciate all the questions.

We'll close -- go ahead, Mike.

Okay.

Yes.

I just want to thank everybody for dialing in and joining us today.

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

Our K-C 2022 strategies are working, and we see more opportunity for us to elevate and expand our categories.

So thank you.

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 today.