Q3 2019 Earnings Call

I have your presenters on conference. Please be aware you took her lines no listen only mode.

Conclusion of this morning's remarks, well open the floor for questions at that time instructions will be given this to the procedure to follow if you would like to asking all of your question. It's now my pleasure to introduce Mr. Paul Alexander.

Thank you and good morning, everyone welcome to Kimberly Clark's third quarter earnings conference call with US today, our Mike Shoe, our Chief Executive Officer, and Maria Henry Our CFO .

Here's the agenda protocol Maria will begin with a review of third quarter results. Mike will then provide his perspectives on our results and the outlook will finish with QNX. We have a presentation of today's materials in the Investor section of our website. As a reminder, we what would make you forward looking statements today. Please see the risk factor section of our legacy.

Your report on Form 10-K 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 time Maria Thanks, Paul Good morning, everyone. Thanks for joining the call today.

Let me start the headlines for the quarter organic sales increased 4% driven by higher net selling price that we achieved strong margin improvements in growth in adjusted earnings per share, while increasing brand investments and finally, we're on track with our overall capital plan and we continue to return cash to shareholders.

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

Our third quarter net sales were Oh were $4.6 billion, that's up more than 1% versus year ago and includes a two point drag from currency rate.

Organic sales were up 4%.

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

Mike will provide more color on our topline scheme in it.

Moving on to profitability third quarter adjusted gross margin was 35.8%.

Strong 260 basis points year on year.

Adjusted gross profit increased 9%, we're selling prices well ahead of currency headwind.

We generated solid total cost saving of $95 million from our forced and restructuring program.

Nor do they cost savings are now $300 million and it's more likely that full year savings will be toward the low end of our 400 to 450 million dollar target range.

Within that our restructuring is expected to over deliver well for savings are anticipated to be below plan.

Unforced performance has been solid in those businesses. This year that said, we're below plan in North America, where our supply chain is facing tight capacity and higher than expected demand.

The same time that were executing our restructuring activities.

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

This is the first time and almost three years that we've seen commodity deflation.

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

Moving further down the piano.

Between the lines spending was 130 basis point as a percent of sale.

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

S. DNA expense also increased compared to a relatively low spending in the year ago corridor and included higher incentive compensation expense.

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

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

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

All in all adjusted profit was up 8%.

Third quarter, adjusted operating margin with 18.5% 110 basis points versus year ago.

On the bottom line adjusted earnings per share were one dollar and 84 cents up 8% year on year.

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

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

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

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

Capital spending was $298 million in the quarter, that's up versus last year, driven by supply chain restructuring projects.

We continue to allocate capital and shareholder friendly way third quarter dividends and share repurchases totaled approximately $570 million and we expect the full year amount will be $2.2 billion.

Looking at our segment results in personal care organic sales were up 5%.

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

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

Improvement was driven by organic sales growth and cost savings.

In consumer tissue organic sales were up 3% net selling prices increased 5% while volumes fell two point.

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

In K C professional organic sales grew 3%.

Selling prices rose more than 3% and product mix improved one point well volumes were down 2%.

Hasty professional operating margins of 21% were up 210 basis points versus prior year.

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

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

Now I'll turn the call over to Mike.

Thank you Maria good morning, everyone.

Let me start by saying I'm pleased with our third quarter results, we achieved strong.

Improvement organic sales.

Margins and earnings per share.

We continue to launch innovations invest more in our brands and for Stuart referred as we also returned significant cash to shareholders. As many just mentioned, we delivered 4% organic sales rather than a quarter or pricing initiatives are on track and driving our growth.

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

Encouragingly the personal promotion environment remains broadly constructed.

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

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

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

Mix was up one point and led by Huggies diapers, which included modest benefits from a launch of Huggies special delivered.

Well I was were down one point overall adult care volumes were up double digits poison apparent have strong momentum.

Driven by product innovation marketing investment and robust consumer demand.

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

Results. This year included softness on baby wipes, and huggies snug and dry diapers.

In North America, KC professional organic sales increased 5% growth was driven by continued from price realization ball category volumes remain sluggish.

Now turning to developing and emerging markets. Our performance was solid with organic sales growth of 5% that included two points of growth from Argentina.

Well in terms of Archie personal care businesses in China organic sales were up mid teens compared to a soft performance last year.

Sales were up double digits in both diapers in Fem care and in diapers, our net pricing was Oh. It was helped by reduced it more targeted promotional spending.

In addition innovations we launched on premium huggies are delivering strong growth and improving mix.

In Fem care, our innovation and Premiumization strategy supported by Great digital marketing continue to deliver strong results.

And also you out organic sales rose high single digits led by Huggies in Vietnam.

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

Growth was wrong about huggies on Kotex, reflecting excellent sales execution, winning innovation and strong marketing.

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

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

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

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

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

Overall and for all the encouraged from our performance in beauty markets and remain optimistic about our future growth prospects.

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

Beyond sales I'm pleased with the margin and cash flow improvement we delivered in the quarter. Our teams are working hard on broke those froze.

Turning to the full year, we're raising our outlook on both the top and bottom line.

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

Well were up 4% year to date, the fourth quarters, our toughest quarterly comp a year that said, we expect a solid fourth quarter, which are bringing the full year well within the 3% to 4% range.

On the bottom line, we're now targeting adjusted earnings per share of 675 to 690, that's 10 cents per share higher than our prior outlook.

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

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

Our teams have recently started planning for next year and in terms of the operating external operating environment will be operating and we're encouraged with commodity cost trends on the other hand currencies remain volatile on a recent forward rates imply headwinds for the next year, especially in Latin America.

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

At this point, we're focused on building a robust plan for next year, that's consistent with our balanced approach the value creation.

One that includes higher growth investments and generally aligns with our Casey strategy 2022 financial objectives. As a reminder, those objectives are one of 3% growth an organic sales and mid single digit growth in adjusted earnings per share.

Certainly things could have all the next three months, but in a broad terms. That's how we're currently thinking about next year.

Will provide our specific outlook in January .

In summary, I'm encouraged by the progress, we're making them 29 team well, we invest more to enable longer term success, we're confident in our ability to deliver balances sustainable growth and create shareholder value.

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

Thank you, ladies and gentlemen, if you'd like to ask your question. Please signal by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question though.

Our first question comes from Bonnie Herzog with Wells Fargo.

Hey, Bonnie.

Mr. Hug your line, maybe mutant you need to allude to ask your question. Yes. It was good morning, Hi, I have a question on pricing in the U.S. I guess I'd love to hear your outlook for pricing, especially since you guys are starting to lap some of the price increase since you've taken over the last year. So just like to hear from your perspective, you know if you.

Our concerned at all that we might see pricing stagnate or even roll back you know again, given we're not seeing its much commodity pressures. We we saw last year or do you think you've got some pricing power to put through you know another modest increase later this year, possibly early next year. Thanks.

Bonnie overall I think your question with regard to North America, specifically will yeah.

The overall, obviously, we're on track for this year or volumes better than our plan. We feel good about where we are you know I think the you know it's going forward as you know there may not be as much list price an extra given where the commodity environment is we're not really seeing downward promotional pressure at this point, so I think though the category.

Remains relatively stable robust oh, and the consumer demand remains healthy I think going forward, whether or not or his list pricing up one of the things I mentioned in our and our Casey strategy 22 was or kind of commercial capabilities is I'm, calling them one area, which is revenue growth management, and we're really emphasizing driving net revenue real estate.

And whether that comes from list or.

Or a comes from a trade efficiencies or price pack, what I might say price pack changes. So those are is I think we're going to continue push into you know globally, the kind of drive revenue growth or whether or not there may be less pricing.

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

Ticket revenue, yes for sure Yeah, Okay, and then if I may just asked the second one on you know you're developing in emerging market grows so it looks like it moderated a bit sequentially. So could you walk through the key drivers of this and then separately you know most of the growth in.

You know you're developing in emerging markets. It still seems to be coming from pricing and really not from volume. So you know how much of this has been a response to FX headwinds and then do you expect to volume growth to Reaccelerate here, yeah, especially given your volume comps across emerging markets should be relatively easy. Thanks.

Oh, yes, but a great question, we feel really great very good about Danny growth I think that demand remains robust, where we are cycling or pricing that was pretty strong in the second half last year, particularly in Latin America. You know just for reference were up 7% year to date and do you any up five in the quarter and that's five consecutive quarter quarters of mid.

The high single digit growth for us and do anyway. So I think we feel very good about the progress we're making we are seeing a double digit growth in multiple markets, including central and Eastern Europe , China now importantly, on both diapers and Fem care or Aussie on business was up high single digits in Latin America overall was up high single digits.

The you know even excluding Oh, you know market like Argentina, which has a lot of list pricing, but Brazil in the quarter was up mid single digits with volume up as well and so a I think we internally we have a lot of emphasis on on driving volume certainly you know we have some benefits from pricing this year, but we feel good about the innovate.

No. We're launching this year, that's getting traction we feel great of our about our investments in advertising, particularly on the digital side, which we continue to increase our investment in and so you know part of the plan as we you know we you know we you you may not expect to have this level pricing every year, but we are looking to drive and earn our growth going forward.

All right. Thank you.

Thanks Bonnie.

Thank you. Our next question comes from Steve powers with Deutsche Bank.

Hi, Thanks, Good morning, Hi, soon to follow up on his question the gross margin than commodity deflation that you're seeing now as great as is the pricing resilience resiliency, but as we look to next year, especially with the market concerned about potential economic slowing as you had mentioned Mike.

Does this years gross margin upside increased the odds that all of competitive competitive activity in the your head and how do you monitor that risk from from where you said.

Yeah, you know I I think any prudent person would say could that could happen you know I would say you know largely you know I think we've said on previous calls the commodity inflation. That's occurred has been a multi year effect, a multiyear impact and so we're we're only now recovering margins from where they were from a couple of years ago. So so you know from from.

First I wouldn't expect us to.

To be very aggressive on price points going forward, but but certainly you know will want to be competitive you know and then as we're thinking on next year. No. I think we do believe commodities are stabilizing a bit and maybe will be less of a factor for next year.

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

Okay, Great and then as this quarter began and you welcomed Allison Louis aboard as Chief growth Officer can you talk a bit more about her role and her mandate and how perhaps her presence is expected to influence the planning process as you plot out 2020.

Yeah, we're really excited about Allison coming aboard where we feel very fortunate to have or just she brings a wealth of experience from comes from some great companies and that's great background, both innovation marketing digital spaces and all the areas that we're trying to grow. She Oh, you know her title of Chief growth officer that encompasses our marketing and arc.

Commercial functions, which include kind of our global sales, we don't have us it's not a global sales organization, but I'd say, it's a kind of center of excellence, that's going to drive you know better sales capability, a revenue growth management digital and end up and in our innovation. So.

Aside from that she's got the all while all the functions that you might attached to a CMO as well.

So we feel great about it she she's bringing a lot of thinking that's that's a I would say additive to kind of how we're thinking about things and she's going to bring a lot of expertise and insight. So great. Great start we're really excited about it.

Okay, great. Thanks, so much.

Thank you. Our next question comes from Lauren Lieberman with Barclays.

Hey, Laurie Thanks, Hi, Good morning, I'm first thing I just wanted to follow up on was the mentioned capacity constraints in North America, you haven't what business, that's been in where that where that surprises Dan My first question.

Yeah the eyes.

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

The on.

Hi capacity is or high utilization rates is one of the drivers that is affecting our a force cost savings in the in the quarter Hi, typically you you like to run it at very high capacity utilization, but it does limit your flexible.

Andy when volume comes in stronger than you anticipated.

And and instead, we're seeing some additional costs as the North America team looks to maintain high service levels deliver on the the volume that is coming in and a that's one of the factors that showing up with the below our force cost savings in the quarter.

Okay, Great and then I wonder if the follow up on Deeni markets because.

At least the way that you know we've been tracking it it looks like where there was maybe a little bit of they disappointment in the quarter by my my reckoning anyway within TCP and in the park in see any markets because consumer tissue and personal care continues to be pretty solid you know performance as we've seen for several quarters now the Casey.

He.

So a pretty materially being flat you can you just talk a little bit about what's going on in that business. It does this sort of intentionally stepping away from me, Jim maybe lower margin business or a bit macro volatility.

Because that was I think more of a factor in the quarter than I would've expected. Thanks.

Yeah. Thanks, Lorne Yeah overall, I think we feel very good about Casey P. I think it was real strong performance in North America solid quarter overall, but then he was about flat organic for the quarter I think nothing nothing really systemic there in fact actually you know a or leader there has a real emphasis on it on expanding DNA going forward, we feel like we have.

A lot of good growth opportunity, we've got a couple of major projects to kinda address a couple of key markets for us which include Brazil.

And in China for Us. So I saw I think we're very bullish about the any overall Ricky CP, but I, just a little softness in the quarter, but nothing systemic there we were really pleased with our 5% growth in North America, which I would tell you. It's a great result in a market were category actually category demand is actually softened.

From what we can tell them the category. So I think that the strategy of kind of elevating these categories or with our premium products is working fairly well.

Great and then I wanted to also just talk a little bit about the longer term and reinvestment.

Because you mentioned when you're talking about the turn a preliminary outlook or just conversation point around next year.

You've got you know encouraged by commodity is of course is FX had been taken all see higher growth investments, which you've already spoken to interpret articulating your vision and sort of long term plan.

But I was curious if you could talk about sort of maybe top three priorities for reinvestment. Some degree of the granularity you. You can you know is it still towards capabilities in the U.S. News for example, but any kind of thought process around.

The top three priorities for investment and to what degree that's getting started like you said a fourth quarter. This year and should start to see results as we go into 2020 <unk>.

Great question, Thanks for holding US accountable I think the you know one I'd say a couple of things, which is I think but you know things changed a lot over the past the course, let's say 12 to 18 months and I think we feel very good about reinvesting Warner businesses. A couple of key factors is certainly I think you mentioned in your note. This morning, which is the market environments.

Much more conducive to investment or given kind of the competitive environment I think it's giving an opportunity for marketing innovation to free and so so we're finding that in the investments, we're making in marketing or are more productive investments, we're making innovation or more productive. So so that's probably the first big thing and so certainly if you fall that line a logic.

Then you know one key area for us as invest more digital which is very high return for us, we're making a lot of progress there and we're offering our capability or I'd say, it's it's multiple markets and not only kind of our high kind of e-commerce markets more broadly overall across markets second we are investing and capability.

I I talked a lot about with Bonnie about a revenue growth management very important capability for us helped us realize all this pricing this year, but if there's not as much list pricing going forward it becomes a little harder and so we have to up the capability of the organization. We've been investing this year in training and development and tools to help our.

Organization do that and then the 30 area is the product investments and that's kind of the lifeblood of our businesses and innovation, we feel very positive about the innovation that we've been watching the five decor diaper in China is doing very very well, we just launched special delivery. Although it's it's just gaining distribution now so it's too early to tell but.

We're excited about the prospects for that in our business.

So I think those are probably though the three big areas and then when I might add is a I mentioned in my prepared remarks, a couple of hot spots in.

Areas that we want to address to improve our share performance I mentioned, a peru in our prepared remarks, snug and dry in North America, just a as always you're going to have some businesses, they're going to need a little bit more more work or investment and those are some targets for us.

Okay and is there just as you're looking forward is there any reason you you're talking in a fairly conservative way I would think around the commodity environment.

You tailwind should be materially as you go into next year at least on on pulp. So just anything you can offer as to why that might not be the case.

Yeah, I think I think it's too too early to I can't give a.

Confirmed outlook on I'm 2020, wherein on yeah there.

We look at the forward curves.

In addition to looking at the the spot rates, we've seen some estimates that have a commodities above where spot is today, but but we'll have to wait and see and we'll give you our perspective, when we got to January and Lauren If I would just build on that briefly you know some of the things that are.

Not quite as visible in the marketplace, but where we're experiencing pretty good levels of inflation this year.

Include local costs in Latin America, just as businesses like ours are raising prices are so our suppliers are also raising prices and that's a factor in their results. This year wherever it is next year, we'll see we'll give you our perspective in January .

And then also distribution costs continue to run higher year over year this year.

In Latin America, and really globally around the world. So whether that ends up again, we'll we'll give you a better visibility in January but those are two factors that are certainly.

Inflationary this year that you may not may not see fully.

Okay, great. Thanks, so much as from the questions I appreciate it.

Great excellent.

Thank you. Our next question comes from Jason English with Goldman Sachs.

Hey, Jason based on Hey, Hey, good morning folks. Thank you for taking my question I want to come back to its Lawrence question on the capacity tightness in EMEA. Your answer you mentioned that it's both tissue and personal care [laughter] I'd love to understand more what's going on in tissue because your volumes being down here.

2% in 17 in North America, 2%, 18 tracking down 5% year today.

So in context of the sort of multiyear volume erosion, what's led to capacity tightness in the network and the second sort of derivative question is is this really just a byproduct you reorganization in how many plants that you've targeted already I think there's eight maybe the you've announced or.

Identified how many of those sit within North America tissue network.

Hi, sure, but they they are they are very related hi, Jason on the on the tissue side of the house as we've been executing changes to get pricing into the <unk>. The market that is one of the factors that is driving the.

A utilization rate and that the capacity within our tissue plants to.

Execute against the on the volume demand. The restructuring is is also a major factor and what's happening in the supply chain in a in North America as we execute some facility shutdowns were standing up.

Additional capacity in various places across the network. So if you do you think about everything that's moving in North America, where are the pricing changes that we're making the restructuring activities that we have.

Going on the innovations that we have going into the market. There. There's a lot going on right now in a in the North America network, and and obviously executing the restructuring with thought with excellence and expeditiously is a high priority for us for a business.

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

As our a fuller 10 operation, which is a tissue manufacturing facility out in a out in California for North America.

Yeah, just a pile on Jason So you know as Maria said you know, we we liked we prefer to run at high utilization and or it doesn't leave your whole lot of wiggle room and your base State and then when ER when you're working through a restructuring you're you're building inventory to kind of move it but tissue asset or move production over.

At the same time when volumes a little bit better than your plan to kind of adds to a a triple witching abandoned. So ah. So we got a great team I would say these are not systemic issues, but we're just putting a lot of a challenges on them and we'll work through it I would tell you that you know some of these cost issues, there, they're not going to be systemic but they do reflect some of the the operational difficulties anymore.

Yeah.

That's helpful and one follow on just.

To help me sort of understand how the restructuring fits in with all this.

You step back and it's been a little surprising for us to see you and not defending market share a bit more aggressively in tissue. But then you mentioned your tight on capacity and you're actually working to shut down more capacity is there a concerted effort here to actually shrink your and your tissue business Volumetrically.

To get to more profitable base going forward.

No there there there isn't a wet but the net net oh <unk> results will not be that we continue to have strong can happy in the tissue business, but the more productive assets are the assets that.

We will be continuing to run and some of the less productive assets are the ones that will be taking.

Taking out of that the system, but but overall.

We we are not looking to reduce volume in our tissue business, yeah, Jason our teams would be really upset with us if we told them to shrink share a little bit and so we we recognize actually share. This year is probably one of the areas. We really want approval and that's one of the reasons why we want to reinvest so we're a little light in some areas and we're working our way back there and it's why we want to make some investments.

We're making.

Very good thank you very much.

Thanks, Jason.

Thank you for next question comes from Andrea to share with JP Morgan.

Hi, Good morning, how are you. So wanted to go back to 2020, New show guide. So it seems to me and in your stock obviously is getting a impacted now when you say you gave the new show look of I think the long term is once a 3% or getting girls and correct me if I'm wrong if that change.

So as you were change now too.

So before and the mid single digit Cps seems to me I'd be conservative given that you're gonna be lapping all these challenges in in commodities and use you do you feel like that as a matter of fact inflected to commodities. Finally this quarter. So Muslim me I understand when you were coming from a the pricing.

Please but the price increase it was about like 100, beeps or something on some of the areas. So I was I was just wondering if you can.

Kind of unpack that long term and why giving US you know that outlook, if you're still moving is to looking at the commodities and how the commodities will play out for next year. So I was just wanted to you know if you can impact both the topline and bottom line. Thank you.

Yeah, Andrew I think we you know we came out in January with you know under Casey strategy 2022 kind of a midterm.

Targets for Us, which we said organically was 1% to 3% and mid single digits on organic and then a mid single digits on the P.S. line and and so we just put those out in January we still think those are the right ones for us we recognize that we had a little benefit with some commodity easing perhaps this year.

But on a long term basis, we still see the fundamentals of our of our business kind of tracking toward that and so so we are we are working towards that and ER and that's how we're thinking about plan certainly an extra we think commodities are less of a factor, but we still have some FX issues, particularly in Latin America, a and we'll be working through those.

So that's how we're thinking about 2020 I don't Maria anything out now I I think that's right into the.

Mid term algorithm that we discussed with Casey 2022 on the topline is also informed by what we're expecting for the market growth rates and and is reflective of that.

[noise] indeed.

Sorry, if we can go back to China for Kinda squeeze that that commentary on baby I'm Baby diapers and also the commentary on.

Incontinence like if you can talk to was like how that is inflecting and how you are saying that's playing out into tiny tiny.

Oh, sorry.

About diapers and in continents in China, Yeah, Yeah in China, Yeah, <unk>, Yeah, overall, I'd say diapers a you know we're excited about our five D. Diaper, it's off to a very good start but overall I think in trying to right now shares overall flat I'd say, we're growing at a strong pace double digit rate and the value.

And the premium tiers, and then down a bit in the values years, which is aligned with our strategy, but we think you know one of the key things about trying to work for you know we're seeing is I think the terms of competition of a game is shifting back to innovation, which I think is important and good into market in which consumers want a better product we feel like we have very.

Good products and if not the best products that are in the market. There. So we feel great about that adult incontinence process is still the huge opportunity. It's a relatively small category in China, but I think a REIT for development and where we're increasing our focus there.

Thank you a personal.

Thank you. Our next question comes from Ali Dibadj with Bernstein.

Yeah.

Hey, guys. So I wanted to go back to a couple of things one is around the a the cost savings efforts and it's really rare to see you go to the lower end of a penny cost savings plan like like you're doing for fourth maybe even more broadly in and to Jason's question I think it was around the.

Implications of perhaps I think is getting to consumer tissue volume is down and and still having capacity issues I, maybe you've gone too far.

At least my interpretation of the sub text there.

How do you get comfortable that perhaps the cost savings and the shutting down the plants on the restructuring or anything else. It just isn't going too far.

And and you might have kind of pushed at all that I know it's a question. We've asked all of us for many many years, but isn't really the a really big sign here, particularly given the tissue volumes are down and in that area, you're running a too high of the capacity.

Yeah, I I think overall, we think that the plans that we haven't that we're executing on the on the restructuring our are completely up appropriate alley, I. I think that working through a restructuring of of this size.

The same time that there was a lot of other factors going on in the supply chain network is is Ah you know certainly not and not an easy task. So as we get through the execution period on the supply chain a restructuring.

It's it's not a totally surprising that there there are some some challenges around flexibility in the and that's what you're that's what you're seeing here in terms of the the savings I think they total savings are are solid and when you look.

At the details of it our teams are delivering on savings from product out optimization savings from productivity and waste improvement.

You know, we talked about coming into the year that on the savings front.

We've been have lower negotiated a price savings.

Associated with our long term contracts, so that that's been flowing through the numbers this year or the other thing I'd say is that the numbers outside of North America, where we've been talking about some supply chain challenges that are strong encore. So <unk> said good savings across the globe in.

The challenge is that we're having in in North America with the high utilization rates, just mean that were incurring more costs to meet a stronger volumes than we anticipated maintain a service levels and ER and and so that's what's really going on I think importantly, we still see lots of opportunity.

For productivity in our supply chain 10. So we're we're working through a lot of things I. The sheer with a lot of moving pieces were focused on getting that restructuring executed and err on the personal care side, we'll be adding some capacity into the network, hi, Ed and that will.

Ah that'll catch things up on a on the North America side of the house, but.

Overall the teams are doing good job executing it. There's there's there continues to be strong opportunity in the supply chain and I think when we have completed the restructuring program Oh, we're gonna be in a good place.

Yeah, and I think that's got a structurally only I'd say a you know, we're we're moving out of higher cost locations into more efficient.

You know a locations that will deliver lower total delivered cost lower.

Okay. So just to play back since I'm I'm dead clear on this.

You anticipated more than a negative for volume and consumer tissue in North America, So some more worse than that.

And that's why you have this capacity constraint and as you go forward for us and cost savings, we should be very surprised if theres a slowdown in that pace in 2020 or beyond that the right playback.

But I I haven't given any any numbers oh, specifically for 2020, but but what I will tell you is that there continues to be opportunity for additional productivity out of our out of our global global supply chain.

Okay and then thank you and then on pricing just just two factors on that would love your guys as historical perspective on what happens to pricing.

When commodities look like they're doing what they're doing now certainly my perspective from outside in view is what's not just the possibility, but it's a likelihood that the pricing comes down I'm pretty lean tissue press, a little less so in diapers in North America. So would love your perspective, there and then secondly on pricing.

Yeah. The word that everybody is using internally used over the past several months is premiumization and the whole industry I always find your guys. A sense of this is really useful in the lens for the whole industry, which is what how should we think about premiumization in a world between North America, where the consumer may actually be slowing down.

Down again over the next few years and ended that raise risk profile. So a lot of Kimberly Clark and other companies as such.

Yeah, I mean, I'll Ali I think you you know I'm you know, we're very focused on on having the right value proposition and so I do I personally believe premiumization is the path that that a company like ours needs to take globally. I think certainly holds in a core market like the U.S., but certainly a DNA in you know many de any markets are ready for that too but.

We're going to keep our sharp sharp eye on kind of having the right value proposition for the consumer and so therefore for US premiumization means we're going to earn it by making a products perform better or do more for the consumer. So that's the first part, but I'd say with regard to the first part of your question when commodities East you know I should say a part you know maybe.

First part is that a this has been a multiyear issue and so we're still well above kind of some of the commodity levels that we were a couple of years ago, and so and still recovering the margins that said a in the past and I've been around long enough seven years now a long enough to see a couple of cycles are those and you know we have seen alluded.

More promoted activity when you get some a long term deflation.

I I would say Oh, we're we're prepared for that I mean, one of the errors in our revenue growth management initiative is where you have invested in tools occasionally the let us pick kind of the more efficient events and Ah you know trade optimization and promotion optimization as a key work for us inside the holes here and so we'll work through.

To that but I you know I think I think were repaired and <unk> either scenario, but you know right now I think we're seeing you know pricing and promotion or relatively stable in the marketplace right now.

And you're not seeing sorry for that you're not seeing any incremental.

Questions being raised by retailers are for the industry or across the board.

Given perhaps their greater desire for margin in these categories.

I would say no more than the typical okay. Okay.

Yeah, and I I you know.

I just add that yes, well, while we're all please that culp is deflationary in the corridor, but the full year 2019, Paul pulp cost outlook is Ah, it's still above 27 teams level and and frankly, all other years since 2010 with the exception of 2018, so I.

You know, we we are happy with the trends, but it still on an l. an elevated level.

Okay. Thank you very much.

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

Great. Thanks, one talking what about specifically about Danny about pricing, because it's sort of feels a little bit like your knocking on the upper limit that the market can handle on pricing. So can you talk about the outlook there and your overall outlook for DNA going forward.

Yeah, I think for me the biggest spectra energy and either this quarter was a you know we're starting notes cycle or lap our pricing that we had in Latin America last year. I mean, there's this time last year were launched a increasing prices high single low double digits, ER and ER and brought that Ford being in this year I think we've rolled over our pricing.

In a market like Brazil, right now so you're seeing starting to see that so I think last quarter in Brazil, our organic was up teens, a this quarter's up mid single digits still a good number with volume up but certainly cycling the pricing and I I don't know that we will have a cycle the upper upper limit. There's a lot of factors in play to include.

During the the FX costs the ER the inflation in turn on the market and ER and the wage inflation that occurs like in a market like Argentina. So so I don't I don't think all judge on whether we're at a limit or not but I do think we have cycled a lot of the pricing that we had planned. This year, we don't have a lot more going forward for the balance of this year.

Olivia.

Hi, My mute so precede the answer but you know just in terms of the offset maybe volume you know increasing is their innovation coming to market are there. Other things is it you know usually in the second half you've got a little bit more of an innovation heavy period, So just kind of understanding what what's coming.

On the pipe or for DNA.

I think we feel good about or you know what's been in the marketplace and and you know overall for the year I'd say with the levels or pricing that we have our volumes overall had been a bit stronger in the market like.

Brazil, you know with volumes up with pricing you know last quarter up teens I think though it's a very good result lot of that was an artifact of Oh of a few things, which is one a great in market execution, we're expanding distribution on t. brands, a expanding our presence on t. items and so I think that's running very good results really grow.

On an expanding the adult care category.

The Fem care category and the venture Academy and the temperature category or in a in Brazil or into more geographies and I think a were up double digits in those categories and so we're really excited about a that progress similarly like in a C. I'd say, it's a combination of innovation.

Market execution or marketing this driving a you know high teens organic growth, including volume or trying to similarly, the innovations working in our five these type or are we saw return to growth last quarter. It's accelerated this quarter. So overall I think the teams are doing have been doing a very good job in d. any kind of driving the volume.

And with disciplined market execution innovation and good marketing.

Got it if I can turn to hold and obviously that market is no.

The prices there are stabilizing a bit so what.

Could you lock in more than you typically would at this point in the year in terms of in terms of the price on on pulp and what kind of visibility do you have on the couch cost outlook for yourself and and 2020.

Yeah I I.

Would would remind you that as part of our.

Oh.

Pulp price management strategy, we look to negotiate I got contracts that are generally a year or in a in terms and we look closely at how we do that and and we look at a combination of mechanisms we consider.

Died.

Oh floors in ceilings, we consider it a fixed pricing.

And and ER, we balance out how much we look at you.

Basically have a hedge on the pricing going into the following year and how much we want to leave flexibility to take advantage of the spot market. So we're working through all of those things like I don't have any specific thing to share with you won not how were thinking.

About that next for 2020, but when we provide our our our outlook in January it'll be reflective of a however, we land on that but but obviously, we have visibility spot market and the before where does the forward rate curves.

Okay. Thank you.

Our next question comes from Steve Strycula with you've yes.

Hi, good morning.

Just a quick clarification question can you quantify what Argentina was isn't impact for the global comp in the quarter and then I have a follow up question from rent.

Yes, Steve It was about two points of our total developing and emerging markets growth and D. and he is about 30% of company sales.

Okay Super helpful. And then Maria just to kind of piggy back on that last question. If we just assume spot rates just hold where they are for like the next 18 months. So we don't assume it better or worse should we think about the fourth quarter being the maximum flow through from called like pulp deflation or should we actually expect that to build further next year as we think.

About somebody's contracts being reset on an annual basis, and then I have one last question for Mike.

Sure I'm not in terms of this year's outlook. Our our outlook for 2019 is is generally aligned with a spot market a and then for for next year or a as I mentioned earlier it the forecasts are still moving it.

It does some forecasts have Ah how the outlook for next year or above a spot and Ah Theres a lot of factors that are still neighboring around so I hate to keep going back to this but you know well have more to say on that in in January as we Oh right as we continue to lock down our.

Mechanisms for our Oh applies.

Into next year.

Okay I appreciate that and then my fundamentally a lot's going right for you this year or for the broader team rather and wanted a few things you mentioned on the call where you would say there's an opportunity for improvement in 2020 is maybe selectively some pockets of market share we kind of comment on your top priorities from like category comp you know product, so or kind of.

Every country combination for next year and what do you think is like the mechanism of delivery interest in the former reinvestment that we need to see to kind of jumpstart the shared trends in this category country combinations. Thank you.

Yeah, maybe Steve I'm at the Great question, I think maybe the caveat I'll you know a precursor is Oh you know we're right in the middle of our plans for 2020 right now so I actually havent, even seen kind of the detailed roll up to 2020 for us yet although I'd say if you look at our business you know I will start with North America in overall I think our shares a little saw.

Often and we like this year, although we are seeing sequential progress this quarter I think the team is feeling very good about the progress there, making especially with the innovation and the marketing funds are they have so to see an ongoing improvement in North America is a top priority you know certainly we you know usually well we don't get very far into the call before we start talking about China. It remains.

Our biggest growth opportunity both in the near term and the long term.

We're really excited about I think that the progress of the theme has made a so our investments in both the product, especially in diapers.

And then the marketing side, both in diapers and especially in Fem care digital marketing I think is working really well for us and I think that's that's really important.

I think we've had great growth in central and Eastern Europe , both you know either a double digit growth whether it's in the twentys or the high teens you know for Ah you know a couple of years now and we feel great about that so that continues to be high priority Latin America as we talked about I think what does the Brazil team is doing a great job executing we have.

A couple of pockets in Latin America, or which are important markets for us like Peru that I mentioned that we're seeing a little increased competition and so we're going to make sure that we have the right product offering that market to be competitive and strengthen our position in that marketplace.

Great. Thank you.

Okay. Thanks to.

Thank you. Our next question comes from Kevin Grundy with Jefferies.

Hi, Kevin Thanks, Hey, Thanks, Good morning, Mike morning, Maria <unk>, just to kind of build on that on the on the last question, Mike I'm not sure. If you can say much more but if the question relates to in innovation pipeline and adequacy of investments when we spoke to earlier this year and you took over a leadership of the company. The comments were you weren't comfortable right.

Sitting earnings Kinda for the sake of resetting earnings in the absence of having.

The right sort of innovation pipeline to spend behind but kind of building on this we had a lot of conversations around sort of a lack of satisfaction with your market share trends.

In the U.S.

Where do you kind of stand now I mean, what what is the satisfaction with current investment levels for the company broadly and then kind of marrying that up with the higher growth investments in your slides you kind of gave US a few data points qualitatively lease you know between FX and commodities.

And then do you did include their higher growth investments looking at the next year, how should we be thinking about that is there potential for an acceleration relative to what we've seen that I've a follow up.

Yeah, I think we've been we've been working on a what I would say the you know commercial capability development of which innovation is a key area. It before pockets and I'll talk about innovation digital marketing overall, but digital especially revenue growth management, and then selling capability or end market execution. So those are a big four I will tell ya.

Very good about the progress, we're making globally across the enterprise in these areas one of the areas I do think we're making progress is on me innovation front and are you I think we're starting to see our teams work much more effectively together across markets to leverage our enterprise scale on technology and I think that's hitting the market.

It's going to affect what we're doing in the market or some of the five the liner that we saw in China was developed by other parts of the world are those the Huggy special delivery that we just launched North America was jointly developed between Korea, China, Brazil, and the U.S. team.

And so we're starting to see more of that activity. So so suffice to say, we want bigger more impactful innovation with our consumers and Ah you know you'll see more of that going forward and then in terms of the investment it's just to support that whether it's in the product cost or it's in the marketing of that product can be more aggressive in how we market that I think those are areas that we're going to want it.

Best and and then over the last area and it it coincides with our market execution.

Capability pillars, we want to play a bigger hand in developing categories and we're seeing more of that I think I mentioned it in Brazil, we're seeing double <unk> high double digit growth in adult care and baby wipes and Ah that's because of a concerted effort by the team in Latin America to focus on geography is in categories and expand those development.

Categories.

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

It might just it sounds like it feels like you believe the company can execute on that and still deliver on the company's long term U.P.S. algorithm I didn't I didn't detect anything that's it suggests the outsized investment would be needed is out there I mean, that's I think that's been our stance or you know since I think our January meeting, which is you know that's why we set for these media.

Term targets that would you know one to three top in mid single digit bottom in into the same time, we would or you know create the funds and room necessary for us to drive some of the investment that we think we need to do to improve the share position or brands for the long term and then also build the categories and kind of a big opportunities that we haven't Danny for them.

Long term.

Okay. That's helpful. One quick follow up.

The net revenue management would you spoken a lot about that's a big number I understand it approaches the company's cost of goods sold in terms of absolute dollars is that something you will ever put a number on a for for investors in terms of the opportunity in over a period of time, you think it can be realized.

Well I was about to say something when we are shaking her head. So [laughter], who said, we're not ready to put a number on that it probably that probably is not yet not at this point.

Okay Fair enough alright. Thank you good luck.

Thank you. Our next question comes from Caroline Levy with Macquarie.

Hi, Carolyn.

Yeah, you might be on mute Caroline.

Since leaving your line is open ended the UN mute your phone to ask your question.

[noise].

Sure. We go to the next next one in the queue, David and circle back to Caroline.

This time, we have no other questions in the Q.

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

Okay. What we're very pleased with our results. This year Oh, we have a strong quarter and we feel very good about the performance. Thus far this year, we're very optimistic about our growth prospects for the future both in the near term and the long term.

And our plan is liver balanced and sustainable value creation. So.

So thank you guys very much thank you very much.

Ladies and gentlemen that concludes this mornings presentation. You may disconnect your phone lines and thank you for joining us this morning.