Q2 2020 Kimberly-Clark Corp Earnings Call
Ladies and gentlemen, thank you for your patience and holding we now have your speakers in conference. Please be aware that each of your line is when I listen only mode.
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Conclusion of today's presentation, we will open the floor for your questions at that time instructions will be given as to the procedure to follow if he would like to ask a question. It is now my pleasure to introduce Mr. Paul Alexander. Please go ahead Sir.
Thank you and good morning, everyone welcome to Kimberly Clark second quarter earnings Conference call. This morning, you'll hear from my true, our chairman and Chief Executive Officer, Maria Henry Our CFO.
<unk> presentation of today's materials in the investors section of our website as a reminder, we will be making forward looking statements. Today. Please see the risk factor section of our latest quarterly and annual reports for further discussion of forward looking statements.
Lastly, we will also be referring to adjusted results and outlook both exclude certain items described in this morning's news release.
Not really has further information about these adjustments and reconciliations to comparable GAAP financial measures now I'll turn the call over to Maria.
Thanks, Paul and good morning, everyone. Thanks for joining the call I hope everyone is continuing to stay healthy in safe in this environment.
Having start with the headlines for the quarter organic sales increased 4%, reflecting good underlying momentum and net benefits from increased demand related to covert 19.
We achieved significant cost savings margin improvements and record adjusted earnings.
And Additionally, we achieved all time record operating cash flow.
Now, let's cover the details of the results starting with sales.
Our second quarter net sales were $4.6 billion, that's up slightly from a year ago and includes a four point drag from currency rate.
Volumes were up 2% and net selling prices and product mix each improved one point.
By segment organic sales rose, 14% in consumer tissue and 2% in personal care, but declined 10% in K C professional.
Mike will provide more color on the top line in just a few minutes.
Moving on to profitability second quarter adjusted gross margin was 39.8%.
520 basis points year on year.
Adjusted gross profit increased 16%.
Got outstanding cost savings performance in the quarter combined savings from our force and restructuring programs totaled $175 million, including strong productivity improvements.
We're now targeting for your cost savings of $510 million to $560 million, that's up nicely compared to our original range of $425 million to $500 million.
Monday's, where a benefit of $80 million in the quarter driven by Paul We now expect full year commodity deflation of $150 million to $250 million on average that $75 million better than our original outlook.
On the other hands foreign currencies were a headwind in the quarter, reducing our operating profit by a high single digit right.
The full year currency effects are expected to be a high single digit drag on operating profit.
Versus our original plan the incremental currency headwinds are about twice the benefit of the improved commodity outlook.
Other manufacturing costs were also higher year on year for the full year. These costs are expected to increase more than we originally planned that's due to incremental expenses related to Kogut 19, partially offset by improved fixed cost absorption.
Moving further down the piano between the lines spending was up 40 basis points as a percent of sales driven by a nice pick up in digital advertising.
All in all adjusted operating profit was that 28% second quarter adjusted operating margin was 21.9% up 470 basis points versus year ago.
Margins were up in all three business segments with significant improvement in consumer tissue.
Consumer tissue margins included an approximate 175 basis point benefit from improved fixed cost absorption.
On the bottom line adjusted earnings per share were a record $2.20 up 32% Yearonyear.
Let's turn to cash flow and capital efficiency.
Cash provided by operations in the second quarter wasn't all time record up nearly $1.6 billion compared to $609 million in the year ago corridor.
The increase was driven by unusually strong working capital benefits higher earnings and a temporary delay in tax payments.
Cash flow is expected to decline in the back half of the year, we expect full year cash flow will be up very nicely year on year.
Second quarter dividends and share repurchases totaled about $400 million that was lower than normal because of our decision to temporarily suspend share repurchases for most of the second quarter.
As we mentioned in this morning's news release, we will be restarting our share repurchase program beginning tomorrow.
Oh and all we delivered very good results across the board, while continuing to invest for future success I'll now turn the call ever Tonight.
Thank you Maria and good morning, everyone.
We want to wish you in your family's good health and safety.
I'll begin by commenting on how we're operating in the current environment, and then I'll turn to our results and the outlook.
Well since the code outbreak of Cobot 19, Kimberly Clark has taken decisive action to manage our business effectively through this crisis.
Our key operating priorities remain as follows.
First and foremost we are focused on protecting the health and safety of our employees in our consumers.
Second we're proactively managing our global supply chain to ensure supply of our central products.
And third were prudently managing the business through near term volatility, while continuing to strengthen the long term health of Kimberly Clark.
I'm really proud of how our 40000 employees are managing through the challenges we're facing every day.
Global supply chain organization led by our frontline manufacturer employees is doing an outstanding job keeping our supply chain rolling.
We have not experienced material impact even as we've had disruptions in several markets with elevated infection rates.
Despite the tough environment, our teams continue deliver strong cost savings and productivity improvements.
While much of our attention has been on the near term, we're continuing to execute our longer term strategies.
Our teams pivoted rapidly to pursue new growth opportunities that have been created in the pandemic environment and this includes opportunities to better meet consumer and end user needs around health wellness and protection, both at home and in the workplace.
It also includes opportunities to accelerate ecommerce and digital as consumers change how they engage with our brands.
Now I'd like to make a few comments about our results.
As Maria mentioned organic sales increased 4% in the quarter in North America consumer products organic sales were up 12% now within that personal care rose, 5% and that was driven by ongoing momentum on premium tier huggies childcare and baby wipes.
In North American consumer tissue organic sales increased 22%.
Category demand was strong reflecting increased at home consumption and some continued consumer stock have been bath tissue.
Category growth moderated in the latter part of the quarter.
Shipments exceeded category demand, especially in Bath tissue as we worked 24 seven to restore customer inventory levels.
Turning to K C professional North America organic sales declined 3% and volumes fell 9%.
This decline reflects the challenging environment and I'll note that we experienced strong shipments growing in the quarter, which included benefits from higher than normal custom orders in late March there were ultimately fulfilled in April.
Now by product category second quarter volumes were down about 20% washroom down double digits in safety.
No volume was up double digits in wipers and other products.
Moving to de any market sales were down 3% driven primarily by KC professional.
Personal care organic sales and be any were up 2% no. She personal care markets organic sales were up mid teens in China.
And up double digits in India.
In Eastern Europe organic sales were up slightly although results were impacted by some destocking and the impact of economic Lockdowns.
In Latin America organic sales fell low single digits, despite favorable pricing in Argentina.
Category demand in many de any countries has been impacted by a drop in consumer purchasing power.
And government restrictions on social mill, the mobility and store operations.
In developed markets organic sales were up 3% driven by strong growth in consumer tissue.
Now as you know, we're also very focused on improving our market positions and we're making good progress overall, we're growing or maintaining market share in approximately 60% of our 80 category country combinations that we track.
In North American consumer products market shares are up or even in five of the product categories.
Indeed, any market shares are up in eastern Europe up or even in China and somewhat mixed in Latin America.
And developed market shares were up in South Korea, and the UK.
So to summarize our first half I'm very encouraged by our progress we're delivering strong financial results were strengthening our market positions and we're managing through this crisis safely and effectively.
Now I'll address the outlook.
The duration and impact of Coke 19, our business remains unclear and there continues to be uncertainty in the environment.
However, our visibility is improving and were restoring forward looking guidance for 2020.
[noise] compared to our original plan, we're raising our outlook for both organic sales and earnings. We're also increasing growth investment primarily in digital advertising.
On the topline, we're targeting organic sales growth of 4% to 5%, which is above our original plan of 2%.
And this increase reflects a combination of improved underlying brand performance.
And higher demand driven by cobot.
A few additional thoughts about our second half organic outlook.
We have good underlying momentum and we'll continue to support our brands with strong advertising in innovation.
The renovation includes launches on plots in North America, and feminine care in Eastern Europe, Brazil and Australia.
In addition, we expect that tissue sales in North America will benefit from more people being at home and from our actions to improve customer inventory levels.
[noise], we expect to continue facing challenging conditions and KC professional and in consumer categories in some de any markets.
We also expect to see additional consumer de stocking in the second half.
[noise] on the bottom line are advised outlook as adjusted earnings per share of Sevenforty to 760, that's up 7% to 10% year on year compared to our original plan of seven tend to 735.
Well, we're increasing our outlook will also invest more in our brands and capabilities.
We temporarily pause some investment in the second quarter and now plan to restore and further increase investment this year.
We're doing this to fuel market share momentum and a better position us for sustainable long term success.
In conclusion, we remain very optimistic about our opportunities to generate long term growth and create shareholder value.
Well continue to prioritize the health and safety of our people on our consumers.
Executing our strategy as well and we continue to operate our business with a balanced and sustainable approach.
That concludes our prepared remarks, and now we'd be happy to take your questions.
Thank you ladies and gentlemen at this time the floor is open for your questions. If you would like to ask a question you may do so now by pressing star one on your Touchtone phone.
Questions will be taken in the order, which they are received if at any time you'd like to remove yourself from the question in queue Press star too.
My first question [laughter], Dara Mohsenian with Morgan Stanley.
Your door.
Hey, already maybe and I hope.
You guys hear me, we got you Yeah. We got you Okay. Great Hope all is well on your end up your full year EPS guidance here at the high end the C. So high single digit year over year earnings drop in the back half a year. So I was just hoping for a bit more clarity on some of the drivers behind that.
First time, assuming a consumer pantry de load probably depresses topline results that given your comments about moderating category growth towards the end of the quarter, but perhaps that might be offset by you guys rebuilding.
Retailer inventory levels from a shipment perspective, so just any commentary on sort of the hangover from a topline standpoint in the back half versus the first half's elevated levels would be helpful. And then second you mentioned the reinvestment back behind advertising can you give us a sense is that a significant amount of rain.
Spend versus your original guidance a couple of quarters stack is somebody other piano line items that come in better than expected.
And then just last of you budgeted more conservatism into that guidance than you normally would so the back half just given the volatility in the environment.
Okay. Thanks, sorry, yeah.
Handful of questions I'll, Let me, let me we'd off in a lost Maria to jump in because I think to give you a little bit better context, but I, but I will say you know resuming the guidance that definitely reflects our growing confidence in our ability to SAB safely operate in this covert environment. There are some big puts and takes a in its certainly in demand a wi.
See net favorable impact on Duran overall, though and that reflects you know the you know the strong demand growth in North America.
Obviously in tissue, which happens to be our <unk> one of our largest businesses.
We are seeing some offsetting effects both in K C P.
And D. as I mentioned, some de any markets outside of China.
And Ah you know I I think that's still remains to be seen and at this point of here I think where our range, it's still fairly wide and that probably if reflects to some degree somebody uncertainty that's still exists out there but on the overall as we feel like it's the man should be up for us overall, a net positive.
On the investment side definitely a in the second half our plan was tilted to increased investment in the second half were a little bit more investment the second half we feel very good about where our product quality is and where our marketing and communications programs are for consumers and we feel very good about the underlying brand performance Oh.
Cross globally in most markets and so we really feel good about increasing our investment.
The plan is for US we had a pretty significant uptick last year I think it was about 60 bips in advertising increase in our plan. This year would be north of that and that was our original plan and we plan to admit to to meet that but where do you want to jump in there.
Sure I think Mike you you covered the that the highlights when I when I think about the year. The overall financial looked really good as we've raised our Oh Pete growth.
Forecast and we've raised our EPS forecast for the year operating cash flow should be stronger for the year than now than we expected back in January so the overall financially it should be a really good year Kimberly Clark.
All of that.
Hi, with increased investment in our business not only for the near term, but the long term.
The way that favorability comes in is that its first half weighted for I Ah for obvious reasons, given the kobin situation.
And it's flow three impacts on our on I guess now so when I look at the full year outlook I you know, we're benefiting from solid topline growth, which is led by volume growth plus benefits from next than price.
Currency headwinds are expected to be partially but not entirely offset by a commodity deflation benefit [laughter] savings are strong we raised our outlook on total savings from forcing GRP to $510 million to $560 million for for the year and as Mike said we.
Our significantly increasing investments this year, particularly in in advertising.
But also another other areas like long term capability belt.
So so for the total your it looks good if I compare the first half second happen give you little bit more detail right in the second half a for profit we will have that we're expecting slowing volume growth.
Which impacts our profit where we had a sizable benefit in the first half.
A little further benefit from 2019 pricing actions and also as shelf availability improved in the back half. We we should see I returned to more normal levels and promotion hi, commodities are becoming slightly modestly inflationary by the engine.
Yeah, Hi, and in addition, our cost savings are not expected to be a strong in the second half and we're also increasing our investment.
In the back half of the year as Mike talked about so that's really what's going on and Mike My comment on the guidance as the I'm happy to reinstate guidance at this point given that we have more.
Comfort and insight into our supply chain team's ability.
To maintain our operations during spikes of Kobin.
Oh that was less less uncertainty U.S. bat backend not the April timeframe. So their supply chain RASK <unk> has been reduced Oh, My God number one number two the commodity currency environment. Overall has has calmed down sense since where we were in in March.
April and yet so I would say that the guidance is realistic and it reflects what we're thinking based on what we see in the actions we intend to take throughout the remainder of the here.
Okay. That's very comprehensive that's helpful and then not on the promotional environment you mentioned the pricing environment.
Obviously, we've seen a big promotional pull back in the U.S.
Here post coated.
What do you guys expect fitting into balance who you're just some of that linger do we get more back to normalized type of environment, particularly if category growth weakens a bit does that create more risk and perhaps just touch on what you're seeing from a competitive standpoint, particularly on the private label friend here in terms of the U.S. pricing environment.
Yeah, a U.S. in particular, I think a dart I would say the same thing I said last quarter as I think the market is broadly been constructive.
And that's because right now, especially the focus is on supply and you know we still are rebuilding inventories I. Obviously, we've made progress on the personal care side, we are still catching up and we're making we're gaining on on tissue, but worse our service level store.
Where we wanted to be at our in stock still isn't where we want it to be and so we're still working through that and so we're we're not promoting as much as we had in the past in this environment I think actually the categories or other than other players in the <unk> in the market are not promoting as much either I think just a couple of Factoids volume sold on promotion in the quarter for the category.
Down depending on the category or somewhere between 25, and 50% and so I think that does real reflect the situation and I think that makes sense and as a makes sense for the business at this point.
Okay, and I was getting at more sort of the back half of the year. What you guys are expecting what she started towards the end of the quarters. So for July have you seen any changes in behavior and is this sort of new environment Post Cove is likely to linger in your mind or could you see a ramp up with.
You know category growth dissipating a bit so looking more ahead as we look out through the balance of the year. Thanks.
Yeah, I I don't see I don't see a changing significantly in the balance here because of the supply situation I mean.
I think I I think I've, just said that you know, we're making a little progress in improving our supply situation on tissue, but we still have lot of work to do to catch up and because of that supply still tight and so I don't see you know certainly from our in a heavy promotional environment from our perspective.
Great. Thanks.
Thank you. Our next question comes from Lauren Lieberman with Barclays.
Good morning Lorne.
Great. Thanks, so much.
So I was hoping first you could talk a little bit about net and Mike one of the thing that you've talked about why didn't they didnt elevating the category.
Some of the effort that you're putting.
Toward that in terms of innovation.
On the personal care, Nick would you know I keep percent this quarter.
Talk a little bit about that we're seeing if you're seeing greater.
Traction with the higher priced innovation and then how we should think about that in more economically challenged market like in Latin America, or perhaps is it evolved number on central and Eastern Europe. How we should think about next then your innovation agenda. Thanks.
Yeah, Great question, Yeah mix overall I think across.
Both consumer personal care and consumer tissue and in K C. P mix generally has been favorable for us across all markets and ER and it's.
Part of its <unk>, the core strategy, which is elevate elevate our categories being one we have recently been more focused on premiumizing, our categories with higher margin products that serve the consumers better with better product features and and so we've driven that and and for reference you know we've shifted our mix in Brazil, but.
Spurs significantly we were primarily a couple of years ago, primarily a value to your brand and we're at the precipice of being primarily a premium to your brand at this 0.2 years later and so no but copy out to that is a with the shift in economic conditions, we've got to be able to pivot.
And meet the needs of our consumer and so even that Oh. The team is focused on premiumizing are driving the premium tiers in Brazil. The last couple of years and made a lot of progress they've shifted rapidly and if you look at the quarter I think in Brazil. The category was down a high single digits, mostly driven through macros right that there's there's as we mentioned.
In my remarks, less consumer purchasing power it literally less money for consumers to spend and so there really tightening up their household budgets.
And so for US you know, we like having kind of a broad portfolio that we play in the value tier and the premium tier and while a long term long term strategy is drive premiumization, a we want to be able to play both sides and so we're pivoting accordingly, and driving the value to your business at this point and so that's occurred in consumer.
Oh consumer tissue as well, notably our Cottonelle share was up almost a couple of points I think this quarter and that has a positive effect on mix for us in some ways. A if you look at diapers. Obviously, we are premium tier diapers, our little movers <unk> little stoppers had been growing a faster and our business and then.
Interesting Casey P. Also a strong positive mix shift this quarter behind wipers, which tend to be a little bit higher margin for us.
Okay, great and just to complete the thought on Brazil, you'd mentioned that the category was down high single digits in personnel and what was your performance.
Yeah. So we were up we were up slightly right and so and ER and so overall and I think this would apply to many of our de any markets I think our end market or underlying brand performance has been strong across DNA, but ER as we may be highlighted and last quarter.
The unknown around cobot was the implications or what the impact was gonna be on some of the market conditions and what's what's happened in somebody's de any markets like Brazil, and Russia is Ah you know the govern the government doesn't have a programs like P.P.P. in the U.S. and so the consumers don't have a backup plan or a subsidy.
When they're out of work, we're not going to work and say really batten down the hatches on their household spending pretty tightly pretty quickly and a and because of that you know I would say, we're pivoting our programming around dog, which which products we emphasize but the underlying performance continues to be strong for example in raw.
Russia.
Which had a slim similar slow down in the category. The category was down slightly we were up a week, but we gained three sure points, but are there was a big pretty big macro effect.
Okay, that's great and if they can I ask a slightly longer term question. So I know, we're gonna have challenging comparisons in 21. When she comes off you know you laid out youre sad to see 2022 crimes, you're looking for organic sales growth was about 1% to 3%.
Range, 2% originally for this year.
Yeah that as you were making investments.
Oh, great capability marketing innovation product quality, all the things you could you know we accelerate towards too.
With the higher spending that well is the commodity environment and that sort of consumer demand is allowing you.
That plays out in terms, the timeline to kind of get closer to their long term organic hardship.
Yeah, again beyond that sort of course, it enhances the well.
[laughter].
Yeah, Yeah, Great question. The you know <unk>, Yeah, we would like you get back to where a longer term targets overtime and I think a you know one of the reasons. We we moved to kind of these medium term targets originally.
Was the categories had slowed down significantly and obviously in this environment. The category has to ticked up again, I think or you know.
You know we're building the fundamentals and building our capability and as we get more confident are both in our plans in it and the quality of our investments in our ability to invest you know we would hope you know it to get to a faster growth algorithm. If at some point in time, but right now I think we're still we still believe the medium term targets. We put out there are the right ones for us.
Oh and don't and then we'll update those when we feel like it's appropriate.
And again my thought would still has more to do a category growth.
I'm not wanting to call that rather than you know your I guess, the magnitude and strengthens the advertising programs the innovation product quality.
Yeah, I think I think would be a combination of both I think we would definitely when I see a little bit more from the category more consistency over over a longer period of time and also get more confidence and our own executions in our own plans.
Polymer any other other commentary there.
No.
Yep.
I I would just say that the investments that we're making a we we are expecting return on investment and I.
Much of the investment is its growth related and investments Oh. There is also investment on core core right capabilities not only in growth related but also productivity related.
So they they Ah we are expecting a.
Strong return on this about them.
Okay, great. Thank all pocket I think Tonight.
Thanks weren't in Florida.
Thank you. Our next question comes from Kevin Grundy with Jefferies.
Morning, Kevin.
Hey, good morning, everyone and congrats.
During the first half the year, particularly given the environment.
Mike just to pick up on single line of questioning regarding investment levels, particularly around advertising and marketing.
My question, what do you think is the appropriate level longer term well to step up that you're targeting this year be or your permanent one and maybe help us think about the magnitude of the increase this year because when we kind of couple through the numbers you know again for you as well just given what you provided with respect to commodities.
And for students in restructuring and FX, you know, there's a pretty substantial offset could get to your numbers. So how much of that is advertising and marketing and then how should we be thinking about that and Mike how are you thinking about it.
<unk> that.
Yeah, Yeah, I'll, let me maybe Maria comment further on kind of the details of the step up but you know we are planning a significant increase this year just as we did last year. The you know Kevin I don't we have not set internally a long range target, but in terms of what our overall in p. spending should be but I really would recognize wall historically our ever.
Tizing has been about average for the industry. It's been it's been less than some of our direct competitors and so we feel like you know there's two two factors that we want to do which is to you know to accelerate growth, we feel like we need to fuel that with better products and better programming, both advertising and and ER and.
Sales programs to drive our business and market development programs.
And then the same time, it's going to require more investment and so we're doing that no. We don't have a long range target that public but are you know I would say you know we would like to be north of where we are today and what we finish this year.
Okay. Thanks, Brent Yeah.
Yeah, I mean, I would just add that Oh right you know as a reminder, our advertising investment will be back half loaded and our capability.
Hi building investments last it'd be back back half loaded you you may recall that when we were on the phone in April we talked about.
The fact that with all of the volatility and uncertainty we were causing some of our our investments and so on the back half.
Higher numbers are partially related to two that stepping stepping back out to our original levels of investment and then also increasing the level of various investments given the overall performance for the year.
Okay. Thank you both for the current groups that Ive number questions I'll pass it on other folks. Thank you.
Thanks, Kevin Thanks Kim.
Thank you. Our next question comes from Steve powers with Deutsche Bank.
Morning, Steve.
Good morning, good morning, Thank you.
I don't know if you guys have looked at this way, but I guess.
And maybe I was hoping you could talk us through <unk> second quarter gross margin.
Lessen relative to a year ago, <unk>, but relative to the first quarter, just because you know I know, there's a lot of variables, but it just based on the headline.
Headline disclosures, it's hard to you know conceive of how the margin gets 260 basis points better in Twoq versus once you I'm. Just maybe you can talk a little bit that they give us a essentially moving parts.
Sure I S U or a few pieces to comment on the savings in that setting corridor.
There were a very strong high at as we I asked me to Scott on the margin side.
Oh the house, we I. We also have benefit from geographic next so when you look across the board that's stronger performance in.
North America, where are our margins are higher than in developing and emerging market.
Definitely helped us on the on the margin side of the house. So and then it's where it's what she wasn't a two way to make our drivers.
Okay. Okay.
Makes sense.
I guess the other question and I think you've talked a little bit about this but I guess, they listen to your answers to Kevin's question to Laurens before that.
Is there maybe you can just talk a little bit more because like you can't them on the specific nature of the second half investments I'm, just a little bit more specificity be helpful and I guess I'm really trying to get a sense for how much of those investments are you know more tactical where we can think of the return.
Turns that you mentioned sort of being yielded in the next 12 months versus those those that are longer term in nature. You know you know that are capabilities that wont yield returns since early next year, but.
In the coming you know two or three plus years.
Is there way to the to describe that balance.
Yeah, Yeah, I think let's see Steve.
I guess I would probably characterized them all as longer term in nature, but that includes advertising and brand building and capability investment and and both at classifies more more long term <unk> more longer term in nature versus what I would say short term hey, we're going to do a big.
I wouldn't get when free promotion right. So so it's it's it's less tactical in that sense, a more long term in the sense of building equity over long term and but no. The kabi outside as lot of the most of the advertising investment.
As in digital and that does generate returns sooner and now we can we can evaluate those real time, that's one of the reasons why we do it but that has booked an equity building component and in some in some ways a volume drop or short term volume driving component and so I'd say, it's a big chunk is as Maria mentioned in her remarks.
Digital advertising.
We are investing a significant some that will flow through to more the overhead lines and capability building and really a couple areas that we're investing aggressively in his <unk> well, we we've called <unk> revenue growth management, which was going to help us with.
You know trade promotion efficiency, and our price pack architectures, and how we do pricing globally and ER and really the view. The notion here is as were building the global capability, we have a global framework in approach to it.
We need to have the right analytics or around the world, we need to have the right talent and we need to have the right tools and so that are significant investments, we're making to improve that capability. There. Similarly on <unk> on digital and our digital capability not only in the in the spend but you know Overdriving is what you know Allison.
Well performance marketing capability and that requires the same things that I, just highlighted and revenue growth management, which is analytics talent and tools and so those are some longer term investments we're making.
Yeah, that's how I guess just.
Last follow up on that is you know just the lead time you need to make on these investments are these investments that you know as we sit here in July that you kind of earmarked and locked in for the back half or you know such they're not result was not a lot of flux in it or.
Are there are elements to the investments that can be flexed, you know to the extent that that yeah, the pricing environment, but right now it looks good you know kind of looks differently or the demand environment dries up just how much how much discretion flex do you have in what's lined up for the second half.
Oh, well, maybe I'll defer to Maria judgment here, but I would say, there's always some flexibility nothing's ever set in stone XL, unless we we bought up fun, everything which and in our case, we haven't and by definition I think there's a lot more flexibility and digital Oh in terms of how we go to Mark So Maria and an additional.
I I think I think that's I think that's right. We do have I have some some flexibility on their discretionary investments that we plan to make in a in the second half and be here and it just circle circle back to your first question, which I I guess, one other relevant component.
I'm not huge huge huge <unk> Q1, I mean, you may recall that we need a meaningful investments yeah sure up our mail and and that include and I additional compensation.
As as well as a other supply chain investments that is where first quarter weighted and then I'd just reiterate my comment that we did we didn't take applies on spending and investment in that in the second quarter and that that affected our R&D kinase gene the DNA increased whatsoever in.
The second question and the first quarter, two just to try to help them out there yeah. No. Thank you. That's that's all all those comments are helpful. Thank you very much I'll pass it off.
Thank you.
Our next question comes from Nik Modi with RBC capital markets.
Morning, Nick.
Yeah. Good morning, everyone. So Mike I, just wanted to kind of get your sense, obviously things are changing at a rapid rate openings and closings and well have an impact on consumption, especially at home consumption. So I was just hoping you can get some context, what you're seeing in July.
Some of the changes taking place on a regional basis and is your supply chain in a position yet it can actually you know execute baseball you know some of these you know very kind of micro regional changes you know whether it be by county.
Or bye bye just at the city or state level.
Yeah, and Nick I assume you, we really asking is you know as as infection rates change around market patients.
Yeah, just yeah, that's dictating how how open in economy is.
Yeah, well I'll talk maybe so operations and then the economy, one I will start with our operations, which I think the team has been doing a phenomenal job executing very well and and without really disciplined approach to covert 19, you know Nick we really haven't prioritizing the safety of our employees.
And our plans and Ah you know we've had some sporadic outages I will tell you were on the <unk> mode. Now is we're tracking the infection rates very closely.
So the lowest level possible and in the U.S. that means by by County, a is we're where we rack and then we make our decision [noise].
We.
Proactively close plans are for cleaning, we're making the decisions based on what those infection rates are and so overall as I mentioned earlier I think Oh, we become more confident our ability to operate and now in it and infection rate environment that fluctuates and we've done that throughout this year, thus far and so it's one that component I think.
Really escalated ours, our safety procedures, and we feel good about that I.
I think from Oh economy perspective.
Again, you know it we're still kind of working through kind of the changes and I think we highlighted in Q1 that or you know there were some question marks and develop in emerging markets. How that would be affected I think that has that has come to real or to be realized particularly in Latin America, where we're seeing a fairly high impact a coated pipe.
Yes.
In a lot of it the markets down there are lot of countries down there very strict government lockdowns on social mobility, and and as I mentioned earlier less money for consumers to spend and so we're seeing a bigger impact I think we've we've made the call in our forecast and we feel like we haven't called right, but Ah you know what is one of the reasons why we love the range a little bit wider because.
You know there still is some uncertainty there, but net net you know I would say if you look at the U.S.
We would expect them, we mentioned in them and bath tissue, probably would be modestly higher because of people being at home more often and you know what the U.S. being a walk by far our largest market. That's that's that's a net positive financially and then we'll work through some of the challenges in some of the Danny markets, even though our underlying brand performance continues to be.
Uh huh.
And then if I could follow up real quick on a quick online question. Just it seems you know there for the kind of an arms race, you know to get into consumers Baskin, especially because those new online consumers. How do you feel about your current positioning around that example, being that the number one choice in the basket right now because it seems.
Like that going forward would be a lot more sticky Dan what you'd normally seen a brick and mortar environment or you can disagree with me do you think that's not the case.
No no, but overall, we feel very good I mean, I think we you know overtime and I think we've made progress in our digital E Commerce capability E. Commerce. In particular, you know we've got very highly developed businesses in Asia, particularly South Korea, and China. The U.S. I think we're we've we've really strengthened over the last five or five years.
So I think well I think when we started off a you know we're probably in the U.S., a little lighter or a little later to the party in baby and child care, but I think we've caught up and I think we're at our fair share online now and then tissue we've been a little bit I. I think a little bit ahead, and so we feel very good about overall positioning the interesting areas.
There are some of the de any markets, where even 18 months ago. Nobody was talking you know E commerce in Brazil, and it was in infant test small part of our business its its becoming fairly significant and we're making a lot of progress fast and the interesting thing is in the capability built when we're talking about what this does.
A little and E Commerce global capabilities no. We really are applying lessons from our top markets like China, or South Korea globally, and that's really having a big impact for instance, one of the key strategies that Bill Parcells running is really adopted from our South Korea business.
Great. Thanks, Mike Good luck.
Okay. Thanks, Nick.
Thank you. Our next question comes from Andrea Teixeira with JP Morgan.
Right right now.
Uh huh.
Hi, good morning, and congrats on restoring the guy that buybacks and also the bar that seeking for shipping all this while I am. So can you can you comment on what you saw in orders exiting the quarter for both developed and emerging markets on the consumer side and in the professional business in other words, what was the body weight is generally.
Much lower than the corridor or use to catching up on the shelf Destocking as you said a couple times during this call.
And following up on the makes comments in emerging markets. It's great to hear about the margin creative innovation in Brazil, but are you seeing category being also in China in eastern Europe or disposable income craft shows are more than offsetting we opened thank you.
Yeah, maybe I'll start with it I think the K C. P. Just to give you a little more texture. I think you know definitely the business impacted by the global slowdown, but the teams really pivoting aggressively to create help your work places.
So the organic overall for the business globally was down 10, North America was down three.
And for your question and I think I mentioned in my remarks, we had significant orders in March that we shipped in April so that offset so I think a run rate.
Is there is a little worse than three and a but there's a couple of factors I mean definitely declines in the core washroom business I mentioned globally, but I think the washroom business was down about 20%.
You know offices industrial traveling lodging, all significantly down and remain significantly down we do see some pickup in health care.
Grocery and E Commerce Ah that's offsetting that to some degree and then also also in K C. Professional well we are capturing growth as I mentioned wipers is up double digits and so.
That's that's a positive one for us with a positive mix effect and then we are expanding our mask offering you know we had sold.
Some co pack mass so we're a with a very small mass business. What we have begun self manufacturing mass. So we actually think we have great technology from a materials perspective for a large non wovens producer and we feel like our nonwovens fabrics are are excellent materials for mass and so we are.
Reducing some mass <unk>, primarily we started for internal production for our mills are used in our plants.
But we are selling them externally now and that will be a good part over business going forward. So so that's the KC part.
And again I think I think your question on on on the on the consumer side again.
In personal care, there was a pronounced stock up in the first quarter as you might recall and and we had double digit growth across the categories. If you think about personal care like a diaper. There's no reason up for search like that and so subsequently in Q2 were seeing.
If you look at the Nielsen some of that reverse out and Ah, but I do think ER and personal care overall little love the level out to more normalized numbers still probably positive, but a more normalized in tissue people at home more equals more use at home and so we will see I think a fairly significant growth this year.
Overall for the tissue categories and were up in all three tissue categories in North America up double digits and ER and we think despite you know there's been a a little softness in the last quarter. Some reversals, but we still should see higher overall consumption in tissue, both in North America and other developed markets.
For the balance of the here. So a pause there I think there were a couple other questions. There. If you could just remind me Andrew what else you want me to head on.
Yeah, sorry, Mike Yeah, I went into it so if you take us through all the World I'm sure you do likes it you're kinda like your comments about the consumer tissue business are you see because we'll be talking Nielsen obviously doesn't capture.
You know that then on track channels are you see I guess are you losing share or like industry. I mean, I think you mentioned like five out of age categories. They gained share I said that somebody's encompassing as all channels. So you can take it could that and then talk about take us well the world also for China and Uh Huh.
And and clearly gotten some share those category yeah. Okay. Yeah. So largely I think we feel very good about our share performance on them are making progress. There you know by the categories Retracting, we track 80 country category combinations, where we come cohorts were up or even in 60% of those in North America.
We had five evade.
Within fit within a consumer tissue, we we the way we tracked across all outlets were up in all brands with the loan exception of Scotland that or Scott Bath tissue and that was mostly driven by we're probably the most supply constrained on Scott 1000, and so cottonelle was up about two sharply.
For almost two share points kleenex was up over a point kleenex up in many markets up significantly and so we feel good about the share performance overall.
Importantly in North America, Huggies was up two share points and so.
Behind strong momentum on the premium inside the business.
Click all around the World you know strong share momentum ins in central and Eastern Europe, a as I mentioned earlier category has slowed down because of consumer purchasing power, but across C.E. Our shares were up significantly in diapers in Russia, we were up three sure points.
Fem care up a 0.0, we were up about two points in the Ukraine and up about two points in Kazakhstan.
And and growing still growing well across C.I.S. and so I think that we're continually make progress there importantly in China. A I think we are about even in share in diapers and up pretty significantly in feminine care.
And the mix on diapers is really a a tale of were probably up almost two share points on the premium side of the business.
But offset by declines in value, which were de emphasizing a little bit in China right. Now. So we feel good about you know the strategy in China and the progress we're making on the China business a an overall in China I think we were up strong double digits or mid teens, a in the quarter on performance [noise]. The a and then the other.
Areas or you know as we mentioned I think Brazil, I think we were up in one category or even in one category and down in one category and but overall I think the store in Brazil is more about the category and the economy and a the team is holding up well and pivoting accordingly.
The other areas that we mentioned the past we are making pretty good progress and <unk>, Peru. We've mentioned that's been an issue for us towards the second half of last year, we're making very strong progress with pretty significant share improvement sequential share improvement a in our diaper business, but similar story to Brazil. The stories more the category there.
The category was down about 10% in the quarter, which is the biggest Rob I think perhaps in Peru in 30 years, and so which has been a strong growth of category for us for a long time, that's all related to.
To co bid and ER.
No and I see is really strong improving brand performance. So not just through a lot that you all oh pause there and ask if you have any other follow ups here.
No that's great.
The color and then on the E Commerce and all the keep up the what does that you're putting together can you update as to how involved.
Scott, It's the second quarter and why do you feel goal.
As you put more money behind capabilities.
Yeah, well I think though from the capability perspective are you know we've got we've resource teams are we built out kind of an overall global approach and we've got leaders kind of in each of the for kind of core commercial capabilities that we've talked about the report you know through Allison Lewis, our chief growth Officer.
And so we stood that up and now you know we're in the process of making the right investments as I mentioned in the tools in adding talent, adding staff with people who know how to do this stuff cold and then ER and then in driving the analytics to help us to better decision, making.
And how much do you are you ready to share like how much it represents.
There's not only the second quarter I'm Lucky So calmer school.
Oh, I don't think where I don't think we're ready to share that yet, but oh pause and I'll, maybe I'll defer to Paul here.
Mike I can take that so andrei on a year to date basis from what we can see we would say sales via E commerce.
An omni channel perspective would be growing at 30% across the company.
Okay. That's helpful. Thank you.
Okay.
Thank you. Our next question comes from Olivia Tong with Bank of America.
Great. Thanks.
[laughter].
Hi, Olivia.
Hi, Good morning. Thank you I hope he is actually doing well one asked you about cost savings force and the other restructuring savings on quite a bit better than your expectations are dependent on your and your expectations. So or these new projects that had absolutely nothing to do the pandemic already seen that came.
I have come out because of the efficiencies required to meet covered related demand because it sounded like you pushed out some projects from the first happens and then second half Oh seems chronic so that's my first question. Thanks.
Sure I got some of the benefit is Ah covisint related but.
The topic about force and restructuring on unforced It went.
A very strong quarter and better than we were expect expecting and that's really coming from productivity in our manufacturing site as well as a step up in not expected savings associated with negotiated material pricing.
On the productivity signed the reason I say some of it it's coated.
Related insight as we discussed before we did do sound SK, you rationalization and with fewer skews to Ryan.
Don't play on our machines as much higher stay strong productivity there and we also see last waste when we had five fewer and fewer chain changeovers.
When we talk about some of that co bid related delays, which we mentioned back in April those.
I'm going to impact second half at more than they did in that in the second corner I say that that's on force and then on restructuring you get that same benefit.
Not productivity the assets that we have stood out as part of that restructuring program are running better than we expected and I I again, they delays that we had there.
Starting up these restructuring programs as we can't get people in into the mills when they travel restrictions and safety considerations that those will impact that second half more than not more than first half.
[noise] [laughter] can't talk a little bit about the you parse it out you know what came just from Covidien potentially comes you know returns.
Basically there was a reinstated.
Cost go back and then once things get better and then the other thing. It's just you know if you can talk through the flexibility in your manufacturing and distribution, particularly if a region you know not seem to spike in cases, and you do and applications in a plant that results in a particular, obviously lower productivity in a plant.
Now that we see cases rising areas, where are you guys actually make stuff. So what you know what kind of tie ins do happen place what kind of flexibility do you have this particular area and shut down and I know there is their capacity in another lead into it to ship a marriage a little bit talk when it comes from tissue tell RBC and couple of your other categories. Given you know these are.
Things that don't typically move very long distances. Thanks.
Sure sure I think yeah, that's strong productivity gains that we had oh, we laid at U.S.K. you.
Rationalization, we we I, we wouldn't expect the level of.
Rationalization that we're currently <unk> delivering in order to meet the elevated demand, but we also don't expect to go back to where we where we work. So and then they are there should be some ongoing benefit.
On Sunday night, as we look out longer term high productivity and savings also are right are driven by higher volumes I higher volumes have a lot of benefit across that can now and cash flow do you think about one or the elements of our I Force savings program is a then.
[laughter] from.
Product design changes.
So if we reduced the cost producing a product right you've got a net savings and then that's multiplied by by the volumes that when you've got higher higher volumes, you bigger bigger savings so part of that because as I as the volumes go on the on the way it shows up in Iraq and RPM now.
Hi Inn on your other question I know on.
Supply chain and an inventory that we've done a few things too.
To help ensure that we've got that supply to meet the customer and consumer demand hi. This I've seen team has taken a number of actions to new inventory closer to.
So where are they demand is coming from a we have also well up.
I across the globe assets, where we have production capacity to help help out where we are capacity constrained as you know that's more efficient and some of our Uh huh.
Products, particularly in the personal care area versus the tissue area.
But on the tissue area. We're also getting some help from my Casey to Mexico, with which has been great and the team has been actively working to you.
All of my third party suppliers to help us need the the high levels of demand.
That's super helpful. And then just one question Mike I'm on the on personal care side of the business. So can you just talk little bit about the competitive environment and the balance you're looking for as you try to drive market share growth, but of course thinking through what may become a more difficult macro environment actually California.
You know what's your view in terms of it sounds like supply is now because sort of.
Pretty much closer to demand so what's your view on promotional environment does it still say suppressed or does it actually come back a supply in production on license.
Yeah, I think we're on a personal care side generally I think we're at this point you know we haven't caught all the way up but we're getting closer I'll certainly closer than we are in tissue.
I I do think though the terms of competition and personal care are healthy you know we you know it at this point you know the in most markets. They have turned it I would say to product quality and to advertising, notably in China, which I think had been very price sensitive for maybe the prior.
Three years or so I think it was returned to you know maybe a help your competitive dynamics in the category in the sense of a bringing more innovation and meeting consumers' needs and that dimension I think.
And that's something that you know certainly our strategy which is.
We'll take the high road, a make better products and to bring more consumers into the category is kind of our focus versus trying to rent share and ER and so we're seeing that generally and in most markets. Maybe is there there is a little bit of Oh of a competitive.
Entry in ER in Argentina, and Brazil, Oh without some local competitors.
But overall I would say generally in North America, China, essentially eastern Europe, I think it's been we've been competing on it and innovation and marketing I feel like that's healthy for the category.
Great. Thank you so much.
Okay. Thank you Olivia.
Thank you. Our next question comes from Jason English with Goldman Sachs.
[noise] when Jason.
[noise]. Thank you.
Thank you guys. Congratulations on the strong results this quarter and strong results year to date. So it's it's impressive particularly complex environment [noise].
I want to come back and it's come back to the same line of questioning we're getting early in the Paul on the implicit guidance for the back half year, because I'm still left at this level [noise].
You've talked about currency and commodity for their netting each on the back half you got to China to 60 of productivity steel Tom.
You're expecting organic sales growth on both volume and price yet EBIT is gonna be down 120 to 220 like ourselves obviously in the back half year, you suck it up and it implies well north of $400 million, just thinking about the business and that's on top of the heavy investment or he came in the first house. There. So it doesn't look to be a lot of evidence.
You're deferring expenses.
Question is up 9% pop up so I think every once in a walkaways Jane.
This is really conservative, they're not going to spend that much.
And why was that conclusion be law like what are we missing that's a huge chunk of money is are there other offsets or where will you said, it's such a big slug of dollars if that is the right.
Yeah, Let me, Jason let me kind of I I go head and take three went and then or alternative or the might to talk more about the investments that that we are making if if I look at.
Currency commodity and price stays then we had I, we had a meaningful benefit from that in a first half of the year and and that will be a dry in the second half of the here.
Unpriced as I mentioned.
The year over year benefit from that 2019 pricing actions that we touch.
Hi has now materialized itself in that you now a input cost inflation benefit our hi, hi weighted should that first half.
And while input costs are expected to stay relatively stable to [noise], maybe slightly inflationary in the back half when you look at that.
Every year can Harris, then you'll remember that input costs and higher input costs turns.
Deflationary for asked in the second half of last year said, when you look year over year.
We don't have the benefits that we enjoyed in that CNL in the first cat.
We're getting malware or benefit from from volume next [noise].
Our other manufacturing costs will continue to remain elevated given the safety and sanitation protocols that we had in place we talked about the step up in in advertising and capability in Batman and then we have lower savings from restructuring program and the force out program in a [noise].
In the second half and just to be.
Clear on that on where we stand on his main drivers and then I'll turn it back to Mike to.
Comment on the investment.
Yeah, I mean, I I think it is you know we do have significant investment plan, we feel like we have good opportunities to do spend it on as I mentioned, you know primarily digital advertising and then the capabilities that we talked about revenue growth management, and ER and digital marketing us, but I think for me the other the other two things I mean.
Engine is there's still a lot of uncertainty in our back half a part of it related as I mentioned remarks related K C P and ER and I would say because of the April or March April North America impact you know I would probably say, there's probably still a little more slowdown that we would expect <unk> planning for.
Okay, and then there's a lot stole lot of cobas related uncertainty in developing in emerging markets, where we just saw kind of the beginning of that.
You know and the second quarter and so.
You know so there's two really to impact Ah Ah aspects, which is there's definitely investment but was also you know were well within our plans were leaving ourselves some room.
To manage through some of the co related issues are still exists that are still widely unknown.
Okay I understand that.
Real quick on the in elevating manufacturing cost because it's only and maybe that's the 1.1 thing is missing from our bridge [noise].
When we looked at the second quarter, though is not a lot of evidence in the gross margin expansion was her ROIC.
What I bridges through with volume price the productivity and de input cost of goods you gave it kind of all sorts, there's no sort of leakage. Despite what seems to be some decremental margins Oh, we just the business mix. So it doesn't look like there's a lot of elevated manufacturing costs and the second quarter of it.
What was it like why wouldn't that same sort of margin bill hold why wouldn't be start to see leakage on this sort of simple build in the back half of the year if that makes sense.
Right I think I think for worried that back half I versus the first half on what we call either other manufacturing costs.
They drag will be a relatively similar and it within other manufacturing cost that.
Categories generally inflationary say that night.
Unusual and it continues to be inflationary on this standard components, including our investment in product improvement, but shows up in the form of on cost in the manufacturing I Oh pardon the piano and also regular labor rate inflation, what what is new and related to Covanta.
Is that we have these cost increases.
Related to that supply chain impacts around Senate standardization in safety.
Protocol.
That that that are elevating these ah I know, that's partially offset by fixed cost absorption from the stronger volumes, but it's it's not completely completely off that.
Okay. Thank you very much a passionate.
Thank you thanks, Jason.
Your next question comes from a Wendy Nicholson with Citigroup.
Morning, Wendy.
Hi, I know this has been a long call someone to make my question is really a direct and short and and simply on on the professional business. You know that business. You know, we all expected I think to be week on I'm wondering number one you know what do you see a third quarter is just started but what are your expectations for trends in that business in the third core.
Our same type of volume decline better or worse and can you remind us of the gross margin in that business is it above or below corporate average. Thanks.
Yeah, maybe I'll have a trend and maybe Paul or Maria if you. The gross margin that'll have got off the top my head, but I think the but the trend I would say and given kind of the remarks, we made Wendy would be a probably slightly worse than what we had in the second quarter because of that or you know the high orders that came at the end of March that were shipped.
In April and sort of run rate was probably a little a touch lower North America, then or the 3% that are that we ended up in the quarter that said you know so we'll we'll have the core walk from business down you know double digits. We are we are making progress on our wipers and as I mentioned, our new mass business.
And so those will be offsets to that to the good.
And Paul I'm, not not sure about if we comment on gross margins I'm going I I'm going to pass that to you.
Thanks, Maria So we don't provide specific numbers at the segment level on gross margins, what I would say is that.
Maybe not surprisingly.
Margins for Casey he would be in between personal care and consumer tissue.
And they're pretty healthy overall.
Yes, and the reason I mean, when it's my apology yeah.
Yeah.
The apologize the three must run separate rooms, because of cobot. So normally if I start answering that Paul with flat me with the ruler, but that's not able to do that right now [laughter] no problem.
[laughter] because that that business in particular, I mean, obviously you saw a sharp shortfall in sales again, which we expected but youre.
Cost control.
Gross margin or the benefits of commodities, you know really insulated your profit there and so I'm wondering on it you know just as we think about the second half and modeling I assume that the business that that all of the investment spending you probably not going to spend quite as much from an investment spending perspective. So so I would think about the business they could on.
Whatever continue to kinda carried the day from a profitability perspective simply given the commodity environment is still so favorable et cetera et cetera is that fair assumption sounds like you've made significant cost cuts, which is what's your sort of structural restructured that business a little bit am I am I reading too much into that.
I think the one the team is doing an outstanding job managing the cost.
But also there they're doing an outstanding job pivoting to maybe what you know I think our Ross our president of that division would call kind of the essential to create healthier workplaces, sorry, its minimum mission critical to create a healthier workplace and so the the notion that wipers and and mass will become a bigger piece of the business.
It has a positive mix effect on from a margin perspective.
Got it and that thank you so much.
Yeah that business is also benefiting from that that geographic mix component that we that we talked about Ah. So so I would have been called that out.
Fair enough. Thanks, a lot.
Okay. Thank you Wendy.
Thank you speakers at this time, we have no further questioners in the Q.
Great well, we appreciate all.
Close go ahead Mike.
Okay, Yeah, just want to thank everybody for Darwin and join US today, we remain very optimistic about or opportunities during it generate long term growth and create shareholder value. Our Casey 2022 strategies are working and we see more opportunity for us to elevate and expand our categories. So thank you.
Thank you very much.
Thank you ladies and gentleman that concludes this mornings presentation. You may disconnect your phone lines and thank you for joining us today.