Q4 2019 Earnings Call
But each of your lines isn't in listen only mode.
This mornings presentation, we will open the floor for questions at that time instructions will be given this to the procedure to follow if you'd like to ask an audio question. It's now my pleasure to introduce today's first presenter Mr. Paul Alexander.
Thank you and good morning, everyone welcome to Kimberly Clark's yearend earnings conference call with US today are my true, our chairman and CEO and Maria Henry our CFO .
Here's the agenda for our call Maria will begin with a review of full year 2019 results. Mike will then provide his perspectives on our results on the outlook for 2020, well finish as usual with Q1 and.
We have a presentation of today's materials in the Investor section of our website.
As a reminder, we will be making forward looking statements today. Please see the risk factor section of our latest annual report on Form 10-K for further discussion of forward looking statements. Finally, we'll be referring to adjusted results and outlook. Both exclude certain items described in this morning's news release that release has further information about these adjustments.
Reconciliations to comparable GAAP financial measures now I'll turn the call overtime Maria baseball and good morning, everyone. Thanks for joining us today.
We started the headlines on our full year results organic sales increased 4% driven by higher net selling prices, we achieved strong margin improvement and bottom line growth, while increasing our brand investment.
We improved capital efficiency and returning significant cash to shareholders.
Now, let's cover the details of our results starting with fail.
Oh, your net sales were 18 and a half billion dollars.
Even year on year and included a three point drag from currency rate.
Organic sales were up 4%.
Looking at the top line by geography in North America organic sales in consumer products increased 3%.
Within that personal care grew 4% with positive volumes pricing and Matt.
Consumer tissue grew 2% best selling prices that 7% and volumes down 5%.
KC professional in North America organic sales increased 3% driven by higher prices in all major product category.
In developing and emerging markets organic sales rose, 6% that included about two and a half points from Argentina.
In terms of key personal care markets organic sales increased 20% in eastern Europe and high single digits in Brazil, China in the on.
Outside of Brazil, and Argentina, we experienced increased volatility and soft results in Latin America, particularly in the second half of the year in Peru, Olivia in Chile.
In developed markets outside of North America organic sales rose 1%.
Moving on to profitability full year adjusted gross margin was 35% 180 basis points year on year.
Adjusted gross profit increased 5%.
We generated $425 million a cost savings from our force and restructuring program that was right in line with our initial target and slightly better than we expected in October .
2020, we're targeting to deliver between $425 million to $500 million in total cost savings and that includes 325 million to $375 million from force.
Commodities, where a dry $145 million in 2019, although they turn favorable in the back half of the year.
Foreign currencies were also a headwind reducing operating profit at a high single digit right.
For 2020, we expect commodities will be somewhat favorable mostly offset by currency headwinds, particularly in Latin America.
Other manufacturing costs were also higher in 2019.
Moving further down the piano.
Between the lines spending was up 90 basis points as a percent of sales that included higher advertising spending which was up 60 basis points.
I see any spending also increased and included higher incentive compensation, along with capability building investments.
Adjusted operating margin was 17.8% up 80 basis points and adjusted operating profit grew 5%.
Operating margins were up nicely in all three business segments led by consumer tissue and secondarily KC professional.
The adjusted effective tax rate was in line with plan and I drive year on year, partially offset by higher equity income and a lower share count.
Total full year adjusted earnings per share were $6.89 up 4%.
Our tempur guidance was for earning $6 in 75 cents, just $6.90 and our original outlook last January was for earnings of $6.50 just $6.70.
Now, let's turn to cash flow in capital efficiency.
Cash provided by operations with $2.7 billion down year on year as expected and driven by higher working capital.
We expect a solid increasing cash flow this year driven by higher earnings.
Capital spending was $1.2 billion in 2019 in line with plan and up year on year due to supply chain restructuring project.
Then he will remain elevated in 2020 because of our restructuring.
We improved adjusted return on invested capital by 70 basis points, 27.2%, which is an all time high.
On capital allocation dividends and share repurchases totaled $2.2 billion. That's the ninth consecutive year, we've returned at least $2 billion to shareholders.
We expect to return a similar level of cash to shareholders in 2020, and our board has already approved our 40 eightth consecutive annual dividend increase.
Let me finish with a short update on our restructuring program.
Overall, we've made significant progress as we close out the second year of this program.
Implementation of our redesigned overhead organization has gone very well and we've already realized most of the total program SGN a stadium.
In terms of supply chain activities continue to ramp up.
We've announced seven over the approximately 10 facilities that we expect to close or sell and we've taken action on six of those.
In 2020, we will start up approximately 20, new assets globally, which is roughly twice the level of activity that we would have an atypical here.
Looking at the key metrics were about 70% to 75% of the way through pre tax charges and workforce reductions.
Cash payments are about 65% complete and I'm, stating, we accelerated savings in both 2018 and 2019 and so far we generated $300 million a savings compared to our total program target of 500 $550 million by the end of 2021.
So overall it was a very good year and I'm pleased that we deliver top and bottom line growth ahead of our plan well, we invested more in the business for the long term with that I'll turn the call over to Mike. Thank you Maria good morning, everyone.
Let me start by saying I'm encouraged by our results on the progress we made in the first year of executing Casey strategy 2022.
On the topline organic sales were up 4% 19 ahead of our original plan for 2% growth.
Our teams maintain strong focus on price realization and executed their plans well throughout the year.
As a result pricing was up 4% and that's the highest realization we've achieved in a decade and it was necessary because of a multi year inflation that we faced.
Our strategy is to elevate our categories and drive trade up also helped us improve product mix by one point.
Well volumes were down 1% that was better than our original expectation because of strong midmarket execution higher brand investment and less impact on price increases.
Beyond sales, we delivered broad based margin improvements at above plan earnings we continue to leverage our financial and capital discipline as we achieve significant cost savings improved Star Wars C and returning significant cash to shareholders.
We also invested more in our brands and businesses and 29 team.
That's where you noted we increased advertising spending by 60 basis points.
Digital advertising is now about two thirds of our working media mix and that's helping us target consumers more effectively and the poor campaigns more quickly.
We're leveraging or just digital expertise in more businesses around the world and our marketing ROI is improving.
Importantly, our digital strategies, helping us grow volumes and businesses like in Fem care internationally diapers in eastern Europe , and adult care in North America.
Nobody on advertising, we've also started to invest behind and focus more on improving or other commercial capabilities, including revenue management.
We're taking a disciplined program management approach to this effort.
This includes making sure we have the right tools processes and resources. So we can better leverage these growth capabilities.
While it's still early days were making good progress on I expect more going forward.
All in all our teams are made excellent progress in 2019, and I'm proud of their accomplishments.
I will turn into our outlook for 2020.
Our plan is consistent with our balanced approach to value creation includes higher growth investments and an aligns with our key strategy 2022 financial objectives.
On the top line, we're targeting organic sales growth of 2% and that's consistent with our medium term objective and similar to our expectation for category growth.
We expect selling prices product mix and volumes to all improving 2020.
Pricing should be weighted to the front after the year, while volume growth will likely be more weighted to the back half.
We expect the promotion environment to be competitive but remain broadly constructive.
We will continue to increase our gross investment in 2020 and that includes dessert investment in digital marketing in our commercial capabilities and then our products as part of our innovation agenda.
In the first though we will launch innovations in North America Huggies diapers in adult care, along cottonelle bathroom tissue.
In the any where several upgrades coming in personal care in key markets, just trying to eastern Europe and Latin America.
We're confident our growth investments in innovation will help us grow volume and improved product mix this year and improved share performance overtime.
Our investments will start right away in the first quarter, while a benefit should build as the year progresses.
Targeting to grow just <unk> adjusted operating profit, 3% to 5% and on average that implies 50 basis points of our operating margin expansion.
Gross margin should increase more than that.
On the bottom line, we're targeting adjusted earnings per share of seven tend to 735.
At the mid points that represents growth of 5% inline with our Casey strategy 2022 objective.
Finally, as Morris said, we expect to improve cash flow and returned significant amounts of cash to shareholders.
So in summary, I'm encouraged for our progress in 2019 and our outlook for 2020.
We're investing more in that business to drive long term success, and we're confident in our ability to those who deliver balanced and sustainable growth and create shareholder value.
That concludes our prepared remarks, and now we'd be happy to take your questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please signal del by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment again press star one to ask the question no.
[noise], our first question will come from Lauren Lieberman with Barclays.
Good morning.
Hey, good morning, and I guess first thing is I'm struck by the 60 basis point increase in advertising spending in my model, which goes back to Gary <unk> 1997, [laughter]. That's the largest one year increase in advertising and you know and the company's history and it goes back that far so [laughter] on that.
Coupled to the fact that you had 100 million of incremental M&A in the fourth quarter and then looking ahead into next year the implied reinvestment stand so [noise].
Can you just talk about like are there areas, where you feel like as a company you've been Underinvested. Then it requires this much stepped up and spend some of its being supported by the fact that it's a benign input cost environment, but the plans that you'd laid out a year ago didn't contemplate the deflation that we're seeing.
So I'm just kind of curious what like the aggregate amount that's going back again.
Where you would say its most focused and you know what it takes to start to see a return on that because the revenue guidance for 2020 well healthy.
It doesn't seem to tie with the amount of money that's going back into the business. Yeah. Okay. Thanks for yeah, I think the part, but maybe there's a small part of it would say hey, we had a tough couple of years and so we get trim back a little bit of arms, a and C. B. So you know part of that is restoring a bit of that but the other part I would tell you is you know we feel really good about our stand.
So on investment and I I think a really reflects in our view the quality that we have in our commercial program programming for this year.
And also I think a the fact that the category conditions. We think are very conducive to growth and I think that's a big change versus when you talk this time last year, where that we were uncertain about the marketplace and we still we're we're all watching new innovations a new commercial programs. So we feel really good about that I think a consumer demand has been pretty darn resilient.
And the competitive environment has been we would say broadly constructive and so that makes the conditions pretty very good for growth and then the commercial programming you know we've got great innovation that launched.
In 2019, North American adult care in China in diapers, all we've got great innovation coming this year across personal care in multiple markets that we're very excited to support and so we feel good about that so a big chunk of it is increased investment in the product Oh and ongoing and we have some good news coming.
And then a and then the importantly, I mentioned, a digital which is about two thirds of our overall advertising spend is being very productive for us and we feel really good about our or campaigns and the concept we have out there and our team's ability.
To manage it effectively it at a high ROI level. So that's the second area then and then commercial capability you know on for US all trends like commercial capability. It includes kind of innovation process. It includes a revenue growth management that includes a sales execution.
And then the digital aspect and so all those areas, we're investing and building our capability there, yeah, and Lauren I I chime in that we were up 200 basis points in the fourth quarter. We were also up in the in the third quarter and a if you recall fourth quarter and the back half of 2018 had particularly.
No spending on between the lines I think the full year comparison is the best way to look at that and for the full year I wear out 90 basis points 60 basis points of that Oh with advertising, Mike mentioned, the investment in commercial capabilities, which ramped up toward the end of the.
Sure a and then the other thing I'd call out is a incentive compensation, which we've talked about before.
This year, we over delivered on our plan and therefore had higher.
Variable compensation and last year, the opposite what's true we Oh, we under delivered on our plan.
And therefore, the variable compensation was that was lower so you look at the year on year increase than that that's an effect and the last thing I'd point out there is.
The way that our plan I was constructed back in January we Ah we had planned for a ramp on between the lines spending.
In the second half and diet and even more so in the fourth quarter, just the way that that timing of our other programs in areas like ice tea.
Well were scheduled to want to execute.
Okay, great. Thank you so much.
All right Lorne.
Thank you. Our next question comes from Olivia Tong with Bank of America.
Hi, good morning Olivia.
Talk about.
20.
Interest.
The positive so is that price, it's already in place I get to lap or more parking that hasn't.
Yeah, you're putting in place or more a function of you're making on promotional level.
In China.
Oh, Yeah, we have there been I'm, sorry, and just any change in your promotional expectations.
Thanks.
Yeah. Thanks, Livia, Yeah, I think probably I'd say you know the pricing environment in 2019 was broadly constructive and the and where our expectation is for to remain so in 2020, Oh, we do have some pricing in our plan I would say a big chunk of that the most the majority of that as carry over from actions. We took in 2019 rising.
So we and so you'll see most of that come through in the first half and then we do have probably some some pricing plan sewage address a specific issues in specific markets, where we've got some volatility in currencies or or the economies. So so that's that aspect I think and the.
The overall, you know I'd say not pricing in 2019, I think was ahead of plan and the volume impact was less than plan.
There were probably a few isolated hot spots and they're probably a few isolated hot spots now our teams are staying close to those situations and we're going to fine tune our promotion plans as appropriate.
Maybe love the headline I would I would say is we're more focused on driving category growth and driving us all the way that you would want us to do that by watching approved products and driving advertising you know, we we'd rather I think earn our share and own our share through a innovation and advertising instead of renting it motion.
And so you know I think right now you know our expectation is you know the environment should remain constructive.
Great. Thanks, and then just following up you know obviously you talked about China.
I can be picking up in the past just your view on the market for de any personal care because it's nice to see the mine. That's again sales have decelerated a bit.
If you could talk.
Okay, Let me just to because that was about China.
Yes.
Yeah, Okay, Yeah, China.
We're feeling very encouraged for our progress were up double digits behind really strong momentum on centre and really an improving trends in and the diaper business are you I'd say on the diaper side really what's driving our proven is a really good innovation, that's gaining a lot of traction with consumers in the marketplace. Its has been today mostly launch.
In our premium tier sort to your 567, and which is growing at a pretty good clip.
You know I'd say, we still have some issues on our lower tiers or were you know we have you know well you know we're still little more softness there.
We are expanding that innovation, we have more exciting innovation or that we're launching a this year and we're rolling that out across the business in diapers and so we feel really good about our position or you know the birth rate has been down a little bit Oh, you know a 19 versus 18, but it probably be flat to down a little bit and.
Sure as well, but we still think there's plenty of developed market development opportunity in China, and we're still very early I think in the in the lifecycle of our categories and in China.
Great. Thank you.
Thank you. Our next question comes from Ali Dibadj with Bernstein.
Hi, how are you so I've I've a couple of well three questions one is.
On your comments about constructive pricing.
You know weve.
Yes, it's early this morning to but we've we've kind of seen this movie before where there there's sometimes its air pockets, where pricing say that's come eyes rollover. So gross margins expand offers opportunity to you know invest in the category through advertising everything else, which is what your plan is for the year.
But again, having seen this before you've seen it before as well often times you know quarter from now maybe two quarters for now you start seeing competition creep in from a pricing perspective, and and things you know get get worse not only got bad they just got all but worse than than the plan. So how are you confident that this movie is not going to.
And the same way or have the same you know.
Competitive pressure picking up over the next little while here in and tactically how much noticed you get about that.
Yeah, I mean, I the scenario that you pain or that possibility is always exists or you know and I think the overall as you know we're going to remain competitive in the marketplace and will be competitive on price. However, I think maybe the emphasis all the for US as we feel really good about innovation and we feel really good about our our commercial or our marketing programs and so.
That's what we want to invest and you know you've you may have covered categories that have commoditized I've worked in categories that people seeing that commoditize overtime and that's not that's a dead end and so for me I think we want to take the high road and gold or categories. We have if you. If you Oh. Our thesis is there's a lot of growth left in our categories and deal.
I'd add in elevating our categories in developed markets, but to do that you need to bring innovation and you do need to get the consumer good reason.
To buy a which is by creating more value for our products. So that's that's where our focus is we will be however, competitive but the the other factor on pricing I'd say is also.
You look at it we're still a ball our 2017 cost levels and so we're still we still want our margins back to kind of work where they are we're not all the way back up into the extent that we would like them and then the other side of it is Ah we are anticipating some pulp inflation in the back half of the year. So you know so there's a lot of other factors gone, but our team.
I would say.
I've gotten sharper and more tune a with our revenue growth management capability to the market conditions.
You know and so we'll stay close to it but we're going to run the play which is by road play right now okay. Okay I'm not I got my question. You you guys I just wonder others follow that same high road, who are more private label kroner smaller or more private or whatever okay. I guess, we'll watch it second question a three is on free cash flow looks like.
Certainly for the year old John quite a bad a lot of that was a capex driven.
Can you talk a little bit about named Murray for you or can you talk a little bit about the drivers of free cash flow and 2019, how we should think about it for 2020 and in particular, the capex as a percentage of sales still looking perhaps elevated.
Sure I that cash cash flow in the fourth quarter was was actually strong and $924 million for that the here as you call out I operating cash flow with that Q2 point 7 billion and that's down from a prior year, it's not hi.
Oh, it's in line with our expectation so even if it's a very plan for it for as you know we are finding that restructuring or last year or.
This year and so we've got elevated expenses coming up on not on Capex, the big driver on operating cash flow, which we've which we've talked about.
Before is that.
We had a big shifts in a working capital, particularly around payables were in the fourth quarter of 2018, a week, we had a very high inflow from working capital driven by tables timing, we basically had to pay that back out in the first quarter of 2019 and that affected that.
Operating cash flow out for the here that but the that was the big driver Encouragingly, though alley when I look at our.
Cash flow from operations, we were up nicely year over year in that in the second half of 2019.
10% and are they trends on working capital our eyes are positive yeah, but that was tree both in the third quarter and that in the fourth quarter.
I'd also call out.
Related to that are like cash conversion cycle, that's 10 days for the here, which by the day better.
Then it was the prior year and it was it was better than not then our expectations.
In terms of Capex Capex was elevated.
And not 2019 and and it will be elevated again in 2020 as we work through the that restructuring and as you recall, we said when you announced the restructuring programs that we were expecting incremental capex.
But $6 million to $700 million on that program.
And so during that time of the supply chain activities, which is not a 19 and 20 on restructuring on a per cent set sail we've got a pretty high number I think it with six and a half percentage of sales or something like that.
What we did say that coming out of the restructuring our expectation.
Is that Capex will be 4% to 5% of sale and that is down from our historical model, a four and a half to to 5.5%. So a long answer, but I I feel that Ah you know that.
Cash flow for the year.
Why is that was good and as expected Capex is in line with what we've been talking about as we execute that restructuring.
Okay. So it's all going to ramp down after 2020, Okay. That's very helpful. Thanks for joining me for my last question, we talked about China with the question earlier, but just more broadly the emerging and developing markets for you only grew 3% that that continued to be slowdown I get the comp is tougher but are there are there are signs.
Improvement and that growth rate or should we continue to expect it's kind of again taking into account comparison that we're talking about this low single digit type emerging market emerging in developing markets that growth right. Thank you [laughter] yeah I.
I think we feel very good about our DNA performance I know it slowed down sequentially, a little bit in the fourth quarter, but if you look at the key markets, Brazil continues to do very well.
We would say excellent performance in a in a tough market China I think the trends are improving see he is a as Maria pointed out 20% growth on the year. So we feel good Archie markets I think the big driver the slowdown if you look at the fourth quarter was one we're starting to cycle pricing a in some key markets in Latin America for example in Brazil.
I think our pricing on the front half was up double digits and so were started a cycle that and the other part of it is all as we mentioned we've got some softness due to some macro issues that competitive issues.
What we would call South Latin America, which is Peru, Bolivia, and Chile, you're probably aware of what's going on there, but there's a lot of there's a lot of social unrest, which is actually affecting some more categories.
And so we're managing through that we got a great team are very experienced and kind of working through this and a we've got very solid plans to address at least some of the competitive issues a in those markets.
Okay. Thanks, very much installing.
[noise] like you were next question comes from Andrea It's a shirt with JP Morgan.
One of <unk> <unk>.
[noise] Andrei you're cutting out we can barely hear you.
I'm, sorry, I don't know if I exclude the here. The question I'm still my my question is on emerging markets. So weve, China growing double digits. I think is just mentioned, Brazil doing well, but lapping the double digits price increase so easy out of South Latin American markets, which I understand there's much to small.
What are you embedding in terms of deceleration for.
Developing emerging into your a guide or you're just expecting it to continue to be into low single digits into your 2%.
So that obviously bad stat develop that developed markets would be.
How about 1% so I I, just want to kind of double click in your separate the emerging markets in developing and and developed markets and then just a clarification question on the [noise] <unk>.
Reinvestment question. So I understand that you are trying like you were saying like we have a lot of innovation.
But according to our mass you you kind of reinvesting about $400 million on top of you know your base of S.J. knee and already invested about you're right increase <unk> around 170 million, so I understand the breakdown.
18 assumptions, but if you can break into the <unk> line items, including compensation RMG, an advertisement to ensure a guide so does weaken understand why it's kept him to the mid single digit growth.
Sure. This is Paul here and grow their reserve several questions. There. So I'll take the first one or two remember will pass the investment questions over to Mike and Maria.
On the the outlook for 2020, a in developing and emerging markets. We don't have a hard and fast number to give you give them you know given the several moving pieces in the business, but as Mike said, we're we're confident about the underlying trends in several of the markets.
There is some increased volatility that we saw in the first in the back half of 29 team.
We think that those largely stabilized.
But probably at a lower level. So as you as we enter 2020.
That will be with us for a period of time.
But overall, we wouldn't be looking to deliver a solid organic growth and developing and emerging markets in 2020 in developed markets or in general our expectation is unchanged from what we've been delivering over time, which is a modest growth.
And then on a that between the lines outlook for 2020, we are expecting it to increase both in terms of dollars and as a percentage sales and that we expect to be driven by higher advertising as well as I say secondarily capability investments.
No just as a reminder, there's a few other moving pieces in S. DNA, we we are expecting some modest benefits from restructuring.
In 2020, well have the benefit of incentive compensation normalization I and then going the other way, we'll have our normal labor and other.
Other cost inflation that runs through.
I asked DNA beyond that we're not providing a a specific target for the level of or an increase but but we are anticipating that it'll be a healthy levels increased.
Okay. Thank you.
Thank you were next question comes from Jason English with Goldman Sachs.
One of the Jason.
Hey, Good morning folks think Cirrhotics is taught me and I appreciate it and happy Blade in New York I wanted to come back to emerging markets, because I'm I'm, having a hard time, putting the narrative for the numbers.
The three points of organic.
How much did Argentina add to that this quarter.
It was slightly less than two points.
Okay. So we've got slightly north of one point is sort of underlying emerging market growth right now you're seeing China's up double digits central Eastern Europe growing like twenties, Brazil strong who is.
Is it took the is it the declines in these sort of noncore E M or that substantial that their Wayne you down or where the growth figures, you're giving us. These are the markets, where the annualized to not just a quarter just having a hard time, because I've always viewed Brazil, central and eastern Europe , and China is like chunky and if they're growing the EMS I thought would do better so I'm really having a hard time.
14 strengths, there about but really no growth kind of in aggregate.
So again I think it says as you Postured, which is a you know good growth out of those markets and I think good continued growth and a little softness and what I would term or other Latin America or it was probably the the big big chunk of that as its actually probably a little more substantial oh, when you add it all up than than you might you know.
I think.
And then and then also KC professional outside outside North America has Ah Ah.
Had lower numbers in the in the de any market than not then what we would have anticipated.
Hi, and stay the same factors as we talked it out with the volatility but.
Obviously, when when we get the total numbers that include Casey P. as well as the consumer business.
Yeah, Okay. All right. That's that's somewhat helpful. Thank you okay. Thanks, Jason.
Your next question comes from Wendy Nicholson with Citigroup.
When I just.
Good morning, circling back on kind of a line of questioning about the international markets.
No we talked about the margin internationally before and I know, there's just a lot of structural lower pricing and whatnot, but just in terms of.
You know the longer term kind of over the next three to five years, how much will the international margin benefit from the restructuring and a lot of the restructuring you're doing is is north America centric, but I'm. Just wondering you know how how long will it be until we can see you know real margin improvement in those international markets. Thanks.
Yeah, I mean, a wall I would say work we are planning for margin improvement overtime, and I think theres a couple different things one related to the restructuring which gets us to it you know better and more common assets across the world, especially in personal care. So that's going to be one factor, but the other two other pieces is ah or our strategy.
Elevate our categories and so we are gonna see we are expecting and planning for mixed Premiumization and innovation, that's going to drive more positive mix and margin overtime or you know a good example that would be you know China, we feel great that we've delivered substantial product improvement our gross margins are at record levels with that product.
Movement. So that's kind of off a win win innovation and normalize and went to you'll be able to see our geographic disclosure is one we publish our 10-K in February but I can prove you went to say that.
International margins in total were up.
Someone in 2019, despite the volatility in the currency headwinds.
Okay, because I'm just thinking obviously you know to the extent of focuses on accelerating growth. They are so long as the margin gap is not significant as it is it's actually a headwind to your margins on so I'm just trying to balance out as I think it out over the next few years, you know would love to see you grow faster outside the U.S., but obviously kind of come at a cost if you can't ramp up those margins.
Wow.
Right.
Okay second question, though just back on the North American business are you surprised I mean, just given sort of.
He did the size of private label and some of your categories. We're surprised that we haven't seen more promotion or aggression on the part of private label.
I think we should expect got in 2020, I mean, I'm I guess weekend surprised not only because so many retailers are talking more about private label investments, but also in your categories. It seems like given the commodity environment, we're at pretty unique opportunity for some of those private label guys to get more aggressive on pricing. So so what's your take on that and anything either just that.
Tumors are really loyalty brands on innovation and your category all of a sudden or is that is that a legitimate threat as we look at 2020 and the cost environment.
You know I guess or maybe the the key thing for me is in general you know, what we're seeing a little increase in private label throughout my team a pricing, particularly in tissue has not moved up right and so all that maybe in some select pockets, but in general has not moved up in <unk>, you know or at the same levels at the brands have.
So that's that's one factor I really don't expect and wouldn't think would make sense to overly promote private label, mostly because of the reason that you probably surmise, which is I don't I don't believe consumers.
Dr. retail choice or for a you know there towards the retail outlet by because of private label Oh, I think I think you know there's study. After study that concludes that are they make choices based on national brands and they and that's what drives that behavior and so I don't know that necessarily promoting on the private label side is a productive.
Behavior in fact.
Well I have skin in the game here, but I I would suggest that you know or if they drive the right National brand strategy I think that will help grow the retail business more effectively.
Got it terrific. Thanks, so much.
Thank you.
Thank you weren't next question comes from a Kevin Grundy with Jefferies.
Hi, Good morning, everyone, Hey, Mike I wanted to come back to the topic, you were kind of dancing around I guess, asking a different ways, but with respect to gross margin. So your performance was was fantastic guys was procters. This morning.
Still seeing some pricing benefit, albeit one dissipating and commodity costs lower <unk> from a retailers perspective and understanding the importance of brand. So we've been asking this from okay water Proctor me sort of private label moves or <unk> or so forth on on promotion, but from a retailers perspective, why wouldn't they be coming back to you guys now.
To the manufacturers and asking for somebody has to be dealt back through trade promotion. They never want to take a price increase right. So now in the current environment now why wouldn't what's the risk that the retailers sort of foresee issue and we don't manufacturers to start dealing some of this back and then I've a follow up.
I think Kevin again, I I still point out that you know, we still had inflation and 29 team our costs are still higher than they were in 2017 and so are you know this when we say this this inflationary impact has been multi year youre pricing hasn't even you know haven't fully recovered that it's actually far from fully recover.
So that's that's kinda my view from my chair on the pricing on the on the other side of that I. You know I think you'll you'll you did talk to the retailers to get their views, but Mike.
My my personal side would be you know our discussions with retailers tend to be around how are we gonna grow the category and that's what they're most interested in as long as you know we've got to write up you know right plans with innovation and and category support to drive category growth, that's really kind of where their focus is and Ah that's why.
<unk>, what most most of our conversations are about these days.
Thanks, Mike I'm really quick quick follow up.
Two or two question that was asked earlier.
I I think what would what investors what else would try to figure out is the level of conservativism. That's in your guidance versus how much investment, whether that's advertising and marketing or other areas excuse me of Opex that are there more sort of locked and loaded can you help us think about that because in the absence of kind of putting some parameters around that.
Given the benefit that you're seeing from commodities that you're seeing from from Fortunately, you're seeing from restructuring it certainly looks conservative and it's hard to envision advertising and marketing stepping up to a level. That's implied so can you help us as best you can with the level of conservativism and flexibility you maybe behind the competitive environment.
Maybe kind of help us think about that and that's it for me. Thank you.
Sure I Wonder if we say it's I think that's why we we've got.
A reasonable and balanced plan that we're shooting for in 2020, and a and we've shared with you. The primary assumptions that that go into that Ah well what I can can also tell you about coming up I might add here here is that I eat there're a lot of variables that that happen that.
So we can't Ah accurately predict as we go into two here.
We've seen that happen.
You know on that on the downside a couple of years ago <unk> a bit on me the upside last year I in so you know as we go through the year will react to the environment that ER that were in but there there's not there's potential volatility on the on the modified there's potential volatility on the on the currency.
Side, we've talked a lot about I got strong competition and ER competitive activity. So far in this call. So there's a lot of moving pieces and as we as we always do we will not make the decisions that we we need to make during the year to deliver on.
The balance model that we that we strikes you want to achieve year on year.
Okay. Thank you both.
Thanks, Kevin.
Your next question comes from Steve Strycula with you'd be yes.
Hi, good morning.
I've got a question for making that a quick follow up for a for Maria Mike on your organic sales outlook for the full year or should we interpret that demean the volume should improve from the rate. It was 19 or we should see absolute volume grows for the full year fiscal 20, and what specifically is driving dad I imagine you're gonna say innovation.
So how do we put the diaper innovation into context or 2020 relative to how the special delivery diapers for huggies did in call. It 2019.
Yeah.
The organic outlook is up 2% and that really you know reflects our expectation for both the category and that and then obviously our performance as we cycle that pricing the volume in our plan is absolute gross a again, we're expecting balance growth from volume mix and still a little bit of pricing Steve.
Ah, it's innovation I I, probably would say that you know the the flip on volume is not going to be as daunting is as you might perceive because I would say our underlying volume performance in 2019 was very good and what I, what I mean by that as you know obviously, if you're gonna take pricing you're going to have a negative volume affair.
In accordance to whatever you think your elasticities is and so we saw that but I do think we had really good underlying initiatives, whether they were driving distribution, a new categories or any markets in different countries, we're launching innovation and an increase in advertising you know we saw a you know the volumes come underlying.
That offset most off where some of but the price elasticity effect and actually more than we had anticipated. So so we think you know we've got very we had very good execution in 2019.
And I don't think be affected my team was related to the last this city impacts were less than we expected. It was more related to execution of volume initiatives were better than we had expected.
Okay, that's very helpful.
No. It does from real quick follow up Charlie's question did you give an operating cash flow number. If it was 2.7 billion in 2019 should that be a little better a little worse in 2020, and then on the commodity piece. Its it was $60 million deflationary in the fourth quarter, but the full year outlooks 50.
You didn't 200 million can help us think through what is basically baked into your commodity outlook assumption. Thank you.
Our I'm not a cash from operation, we are expecting that to to be up in 2020.
And on commodity or we are expecting fiber or just start to tick up particularly in the back half of 520, 20, which is built into our assumption of Ah that $50 million to $200 million for next year.
Thank you at this time, we have no further questions on the Q.
Great well, we appreciate everyone's questions today and have a good day. 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.