Q3 2020 Kimberly-Clark Corp Earnings Call

Ladies and gentlemen, thank you for your patience in holding we now have your presenters in conference. Please be aware each of your lines isn't on listen only mode.

At the conclusion of this morning's presentation well be opening the floor for questions and at that time instructions will be given as to the procedure to follow.

I'd like to ask about your question. It is now my pleasure to introduce todays first presenter Mr. Paul Alexander. Please go ahead Sir.

Thank you David and good morning, everyone welcome to Kimberly Clark's third quarter earnings Conference call.

Morning, you'll hear from Mike Shaffer, our chairman and Chief Executive Officer, and Maria Henry Our CFO.

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

As a reminder, we will be making forward looking statements. This morning. Please see the risk factor section of our latest quarterly and annual reports for further discussion of forward looking statements.

Lastly, we'll be referring to adjusted results and outlook both exclude certain items described in this morning's news release.

That release has further information about these adjustments and reconciliations to comparable GAAP financial measures now I'll turn the call over to Maria.

Thanks, Paul and good morning, everyone. Thanks for joining us on the call. This morning.

I need to read the headlines for the quarter organic sales increased 3% with good underlying momentum and benefits from increased demand related to Kobe 19, we significantly increased our growth investments and improved our market positions.

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

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

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

Our third quarter net sales were $4.7 billion, that's up 1% from year ago and includes a two point drag from currency rates.

<unk>, 2% and the combined impact of changes in net selling prices and product mix increased sales by 1%.

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

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

Moving on to profitability third quarter, adjusted gross margin was 36.2% up 40 basis points year on year.

Adjusted gross profit increased 2% we had.

We had actually cost savings performance in the quarter combined savings from our forced in restructuring programs totaled $140 million, including continued strong productivity improvements.

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

Other manufacturing costs were higher year on year that included incremental cost related to poke at 19.

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

Moving further down the piano.

Between the line spending was 18.9% of sales that's up.

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

<unk> also increased including capability building investments and higher incentive compensation expense.

We expect between the line spending will rise further sequentially in the fourth quarter. Our EPS DNA spending is typically high in the fourth quarter and this year well also have hijacked activities that were temporarily delayed because of coke at 19.

All in all for the fourth quarter.

For the third quarter, sorry, adjusted operating profit was down 6%.

Operating margin was 17.2% down 130 basis points versus year ago.

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

KC professional margins were down significantly, including an approximate 600 basis points right from fixed cost under absorption.

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

Turning to cash flow and capital efficiency.

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

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

We continue to allocate capital in shareholder friendly ways third quarter dividends and share repurchases totaled approximately $560 million and for the full year, we expect that total will be $2.15 billion.

So let me now turn to the full year.

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

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

Three nine months organic sales are up nearly 6% and we expect a solid fourth quarter.

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

In addition, we'll begin consolidating the soft tax Indonesia business into our results on November 1st on a one month lag.

All in all we expect net sales will grow 2% to 3%. This year, that's one point better than our previous estimate.

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

It represents year on year growth of 9% to 11%.

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

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

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

I'll now turn it over to Mike.

Thank you Maria good morning, everyone I'll begin by reinforcing that we remain focused on three near term priorities. We established since the outbreak open my team.

First we're focused on protecting the health and safety of our employees and our consumers.

Second we're proactively managing our supply chain to ensure supply of ours essential products and.

And third we're prudently managing the business through near term volatility well.

While continuing to strengthen the long term health of Kimberly Clark.

Oh 40000 employees continue to do heroic work in this cobot environment.

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

The environment still dynamic and we're closely monitoring virus hot spots and thus far our supply chain has been resilient and our teams have done a great job overcoming daily challenges.

Now I'll turn to our results focusing on organic sales category conditions, and our market shares as Maria mentioned organic sales increased 3% in the quarter in North American consumer products were getting extra sales rose, 8% now within that personal care grew 6% driven by broad based volume growth in baby and child care.

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

In late July we launched pull ups, new Weve training pants, which features super soft natural materials and as our most premium training pants.

This is another example of our elevate the core strategy in action and new leaf is off to a very good start.

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

And strong momentum on kleenex facial tissue.

[laughter] bathroom tissue shipments benefited from our efforts to restore customer inventory levels in the <unk>.

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

Our market share performance in North American consumer products was strong in the third quarter shares were upward even in six of eight categories.

Turning to the K C professional North America organic sales declined 15%.

Sales were down about 35% in washroom products and as you'd expect the category has been significantly impacted there are fewer people working in offices and lower levels of business activity, including a travel and lodging.

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

On the other hand, TCP sales were up double digits in wipers safety and other products our efforts to expand our face mask business by leveraging our superior Nonwovens technology is off to a good start.

We're also expanding our wipers line up what's got 24 hour, which delivers long lasting surface protection from bacteria.

[laughter] moving it do you any markets organic sales were up 2% that was.

That was driven by 7% growth in personal care and.

In terms of key personal care markets organic sales were up mid teens and try and up mid single.

Mid single digits in both Latin America, and Eastern Europe, and strong double digits in India organic sales were down mid single digits in Austria.

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

[noise] well category conditions remain difficult in many Danny countries' government restrictions on social mobility and store operations have eased somewhat since the last quarter.

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

Looking ahead, we're launching clean X proactive care in the UK and other markets in EMEA. This line up includes handheld anti bacterial henin face wipes sanitizing gel and face masks.

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

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

This is a result of higher investment levels innovations and strong in market execution.

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

[noise] through nine months I'm very encouraged with our performance how we're navigating this environment and our teams are taking care of each other and our customers.

Before closing I'd like to comment on our recent acquisition of Softex. This transaction is a strong strategic fit with our focus on accelerating growth in personal care and any markets.

Softex expands our presence in a high growth market, where we have limited exposure.

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

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

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

In conclusion, we're managing through the cobot environments safely and effectively we remain optimistic about our opportunities to generate long term growth and create shareholder value.

We're investing in our brands and improving our market positions, we're raising our full year outlook and are on track to achieve excellent financial results and we continue to operate our business with a balanced and sustainable approach as we execute Casey strategy 2022.

Now that concludes our prepared remarks, and now Ria, Paul and I will 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 by pressing star one on your Touchtone phones now if you're on a speaker phone. Please make sure that your mute function is disabled to allow the signal to reach our equipment I can press star one to ask a question now.

And our first question comes from Lauren Lieberman with Barclays.

Great. Thanks, Good morning wondering like Hey.

Hey, So I was hoping we could just dive in a bit on on K C professional and that that operating margin headwind from lower absorption that ran called out I know you know you don't discuss gross margins at the operating unit level, but was wondering if that's really kind of the core drag on gross.

Margins this quarter, and then manufacturing cost [noise] if.

If that's the case kind of what made it so significant this quarter versus and you can't write the business is already under pressure and then in that vein as we look forward how should we think about manufacturing dynamics that business. Thanks.

Okay, He won't laboratory and analyst.

Oh [laughter] Maria.

Okay go ahead, Mike [laughter], sorry, I Didnt.

[laughter] [noise].

Yeah, sorry, I'll give you a high level than you ever Maria can give you a little bit more texture, there, but I would say overall lorne years. The the overall is the business was down about 15% I would think I think the business that's actually outperform what what mobility tells us what is the general kind of the b to b environment, what that looks like and so we feel good about.

The pivot that the teams are making to drive a safety and wipers and masks.

But the Washington business is significantly down.

I think for US overall, maybe the big change between Q2 and Q3, a big impact was we knew we had the for maybe some of the volume impact and you know in Q1 and Q2 and then they did come to realization in Q3, because I think the market environment was soft in Q1 and two but as we mentioned on those calls there there were.

Our distributors and end users.

Buying in to make sure that they had the right inventory when businesses for we're set to go back and so we experienced some of that at the tail end of Q1 at the beginning of Q2.

I think this does represent kind of the current run rate of where the market is and I think it's better than kind of where the overall market is but it's a pretty significant hit and a and so its affecting or obviously, we have high fixed costs and so it's affecting our are all fixed absorption. Another other factors button you know Maria maybe you can give a little bit more detail here.

Sure I'm, Lauren I I would say you're right you're spot on in how you're just how you're thinking about it and while we don't give.

On gross margin when I tell you is that we had a nice improvement in personal care in the quarter and a very nice improvement in consumer tissue easy when you would expect on not on the organic sales in that segment being up 10%. The whole story here is around Casey.

Oh professional which are the gross margins were down meaningfully hi, primarily driven by these other manufacturing costs at that 600 basis points on fixed cost absorption that I mentioned in my prepared remarks, that's that's a meaningful dollar number and I was a big contributor to why.

Are their manufacturing costs were up meaningfully in a in a quarter or so.

So so you're you're you're right on with that.

Okay. That's great and then sticking with that I know you know at our conference and event I mean, I'm, probably not again today that some of the innovations that that you're launching [noise].

And can you just talk a little bit about how that's progressing if you're adding staff kind of what needs to happen to sort of build up a more material that even more material that is I guess [laughter] say in safety and wipers and anything in terms of progress or is it still too early days on.

Kind of incremental opportunities on the hand, how old business and professional Calvin transitioning customers away from from Air Dryers.

Yeah.

I think we're making very good progress on all those fronts Lorne in fact, we have added staff Oh, we did announce that we are making some organizational changes to exactly do what you are saying, what just add more resources toward the growth areas are and not only were adding people resources, but we are making capital investments to support.

The growth and expansion that business, particularly in a in more advanced nonwovens Ah capacity. So so I think we feel very good about where that goes going our mass business is off to a very strong start we just started shipping in.

In Q3, and so we feel good about the trajectory of that business.

We're launching as I mentioned in my remarks, Scott 24 hour or Relaunching, a in a different format and we think that would be a very good offering for for for customers and end users and so works.

And so we're excited about that as well.

So we are going to be bringing more innovation, we think both.

In safety masks wipers that there was a lot more room for four more fund them on innovation and what's our superior Nonwovens technology I think we feel like we can offer a differentiated solutions. So we're looking forward to building that business.

Great alright, thanks, so much.

Thanks Lauren.

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

Great. Thanks, good morning.

How are you wanted to ask you about price mix, which continues to be pretty positive in Q3, but it looks like what that's really driving that is the professional business. So I can lower away from home tissue. While her you on gross margin is benefiting a bit on price mix and no more industrial bipartisan such she does that price mix benefit reverse money.

The conditions normalize and then.

I'm flipping over to the consumer business can you talk about the promotional environment of all like what you're expecting over the next 12 months.

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

Yeah. Thanks, Olivia Yeah, Oh, you know overall.

I would say you know the organic was more driven by volume in the quarter and so price mix. You know, we're you know combined overall for us up about a point and I think that the dynamic that we saw in Q1 into Q2 is is persisting I I thought I think in Q3, which is that are you know price has been.

General fairly neutral, mostly because you know in the in the <unk> in developed markets, where there's been high demand our promotion intensity for the category and for our brands in particular have come down a bit and so I think as is demand remains elevated well see this there are some categories that we are seeing.

Perhaps a return to more normalized promotion levels that that that happens to be more in personal care at this point.

And so I think the overall pricing environment in Libya, I would say is generally constructive but there are a few selected hot spots. You know we were seeing elevated promotions and adult care in North America in particular and.

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

Got it that's helpful and then Youre U.S. staple performance is actually quite strong. So just want a little bit more color. There in terms of what you're seeing state of competition promotion levels and things like that after did talk on their call earlier. This week about a new mid tier diapers sensors for about a little bit more color there. Thank you.

Yeah, Olivia our North American sniper team is doing a fantastic job and I think you know when you when you when you Peel Peel the onion, a there's no kind of secret bullet or silver bullet going on there. It's really you know very strong product offering line up and I think they put very diligent efforts to improve the product offering and bring innovation.

This year, the big innovation was a a new and improved snug and dry work to your our tier four product Oh on a shape diaper that was a significant improvement versus our previous version of it but you know when you take a great product performance with very strong marketing and strong digital investment.

We feel like it's working very very hard and they're working and great partnership with our customers up with great retail plans and so.

No we feel very good about it the business overall was up low double digits. Despite the category being down a couple points overall and our share was up as you can see in the Nielsens I would tell you is all outlet wasn't up as much because we had some promotion timing or promotional events that came out of the quarter versus prior year, but we feel very.

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

Great. Thanks, I'll pass along.

Thank you. Our next question comes from an enormous anyone with Morgan Stanley.

When the door.

Hi, guys.

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

How much impact you're expecting from Covidien birthrates and.

By category growth is as you look out.

Yeah, I'll start I'll start with North America up you know I think the.

You know the last set of data that we had which generally lags that your daughter I would say the you know or you know the category birthrate was down about 1%, which was an improvement over the prior couple of years work, we're down about twoish percent. So I think it was heading the right direction.

You know we're reading the same articles you maybe reading about the category and there's all different kinds of reductions, including baby boom because there is less to do and also a decline because there's a you know the affordability is tougher and so we're not seeing that yet and thus far as a as I mentioned the category has been.

Off about 2%.

To date and ER and so we're watching that very closely.

You know glad to say our performance has been better than that and that's as I just mentioned with Libya because of the strong share performance and strong product performance and marketing performance that we have in North America I think in other markets you know a I would say it's a it's there's a lot of Ah, it's a mixed bag across different markets.

Certainly one of the reasons why we made the acquisition of Softex was to buy into you know the market that was Ah expanding are on the cusp of a strong income household income growth in the population and strong birth rates and that's Indonesia.

Several of the markets that have that profile for us in our bigger developed markets. We we have seen some somewhat of a slowdown now in you know for instance, South Korea I think our team has done a great job rebuilding our share position and so weve seen significant share gains, but the birth rates in South Korea continues to be a bit soft so it's over.

Ross I don't have.

A great view right now at this point is long term effects of coded I will say that the long term that is our categories have a long runway of growth, particularly in d. any markets, which is why we're continuing to invest to build our business. There are you know the overall dollar as you know.

My My theory would be you know the categories less than a third developed and do you need and so we're going to continue to.

Emphasizing a building that business.

Okay. That's helpful. And then obviously with the new earnings guidance, you're expecting growth around 10% of your mid point, that's clearly well above that the mid single digit longer term algorithm. So just wondering as we think about 2021 2022 sort of medium term earnings going forward.

Should we think about 2020 is the right you P.S. base to work off of is it more 2018 is the right base and look at two and three year averages versus whatever might you might consider typical algorithm to be as we look out to 21 and 22 and you know part of the the reason why that question is in the path.

Do you have sort of flex marketing spending I think to get some more that sustain mid single digit type of earnings growth rate year to year, both on the positive and negative side. So just wondering sort of conceptually coming off this above trend year, how you view the the medium term earnings growth profile from here.

Yeah, Darren I'm, not asking to read a comment, but I will say one will provide our 2021 outlook in January.

I think I think a good thought from my perspective would be to look at the combo of 1920 as a trajectory, but you know you know for certain for US. We're in the middle of planning a there is a lot of uncertainty environment. As you can probably will surmise and so we're still working through the details.

You can expect us to continue to focus on improving our market positions and by making the kind of investments that we're making this year.

And continue to make progress on the value drivers like in investing brands and brands and commercial capability.

You know cost savings and can you drive force is going to be a big feature of our plan and an ongoing discipline in capital allocation, but you know Maria any additional thoughts here.

Yeah, I think that's exactly right and I I would not look at 2020 as a as a baseline year.

As as we benefited from some one time net positives from the first time business from the current situation Hi next year is as we look at look ahead in a mathematically that that will be a challenging comp, but if you put it.

It's two years together.

On on non 2020 and 2021.

Okay.

Yeah, I think that's probably a good way to look at it and you know.

We were we're not coming off kind of RTC 2022.

Ah algorithm at this point.

Great. Thanks, that's helpful.

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

Hi, good morning, Kevin.

Hi, Good morning, I wanted to start on the advertising spending in the quarter, Mike mentioned or excuse me in the press release that it you indicated it was up significantly year over year I'm with you to sort itself out through the numbers in terms of the benefits of all four savings the restructuring commodities.

Yes, quite a bit can you frame that number for us either year over year or percent of sales or both and then I have a false Maria.

Oh, Yeah, I think overall I think our investment between the lines overall, which includes advertising, but also some of our capability build and I think its incentive comps affected I think we said you know it's in that it's in the remarks or in our release, which was up about 180 basis points. So that's a pretty significant impact in the quarter you know we do.

We feel like we have seen strong business on underlying business momentum across our businesses both globally in both consumer tissue.

And and and personal care a pleasant surprise in the quarter was I think a very strong you know pre.

Prudent versus Q2 and are developing in emerging markets. So we feel good about that we feel like the spend is working and and it's something that we feel like is going to yield dividends are in quarters to come so [noise].

Oh, yeah, any additional thoughts there I'm sorry.

No I I think nothing to add.

That's great and then just a quick follow up.

Not to belabor this 80 professional marketing.

I think it's important I just wanted to turn to send a clear signal that frankly overshadows, what was otherwise a a pretty strong quarter for the company.

<unk> what was treated differently about the fixed cost absorption I guess I'd say that in the context volumes were down to segment, 16% to 24% Threeq you. So obviously worse, but margins were up 170 bits in the second quarter down.

360 beds than in the third quarter, so what what specifically changed with regard to how fixed cost absorption would be treated what change in terms of customer mix or otherwise I just want to make sure I understand clearly that.

Yeah, I I think flight time, and what you what you're seeing is that in the second quarter.

You know we had we had a record levels of performance I'm not on the consumer side of the house and so we had a.

A big fixed cost absorption benefit.

Coming from that and that was offsetting the up tick, but the negative fixed cost absorption that we were experiencing in the K C professional business.

As that has come down from the second quarter, our total fixed cost absorption for the company with.

It was negative in the third quarter, driven by I find that professional and business and it just wasn't up by nearly as much a in terms of a benefit on the consumer side of the house as it was in that in the second quarter and say what you see in the third quarter on the margins is the.

Intact.

Yeah.

Volumes being down meaningfully in the K C professional business showing up on the total company piano.

Okay I'll take it offline with Paul Thank you very much for the time I appreciate it.

Great. Thanks, Kevin [noise].

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

Hi, Thanks.

Yeah, I agree about hey, good morning, everybody not to belabor, that's even more but I just on the professional thread is that so is the outsize magnitude to be limited to Threeq. You are you expecting that fixed cost deleverage impact <unk> directionally persist into Fourq you as well.

The on eye.

They did shrink the macro trends that are affecting that that K C professional business.

They are not likely to change from what they were in India in the third quarter.

And as long as those days volumes or stay down as people continue to.

Continue to work from home and as nobility is limited I would expect you can continue to have a negative fixed cost absorption impact coming through coming through the piano.

Okay. Okay. Thanks, that's it I think we've got that one pretty pretty well, but enough I guess.

[laughter] Ria, maybe while I have you talking I guess can you maybe frame for us in a bit more detail, how you're sizing up the cost outlook exiting the.

The calendar year, and then I guess entering your your Fourq you contracting season.

Yeah, Weve seen some upward pressure on inputs as well as freight and PNG Echo those sentiments earlier. This week. So how would you frame that outlook from where from where you're currently situated just looking out over.

Over a year end of <unk>.

Out of the horizon.

Sure well on that on the commodity side of the house in the quarter. It was it was in line with our expectations overall, when I think about what's new friend. The last time, we spoke in July I, well recycled fiber it is still inflationary it winds down from.

The peaks that we saw in <unk> in the second second quarter on the other hand resin based materials are rising and if I if I look at what he.

What happened in <unk> in the quarter, our polymer costs increased double digits first is our expectation coming into the quarter. I said, we are seeing that oil based commodities that rise and instead that'll that'll certainly be a factor.

Exiting the year yeah. The other area that you mentioned is a fine art.

Our distribution costs, which are are also a bit more inflationary ban now than they were in the first half of the year and that's due to a they tighter capacity in in the system. So they.

They are kind of the big trends as I as I see them I look forward I Paul has been favorable.

Globally year on year, and its and then not quite stable sequentially. If you look at the the forecasts there that the forecasters are calling for it too high to rise, although they've been calling for that for a while a insseco with cold and I think that gets.

Just out.

A little bit.

Hi.

What else would I would I tell you the other thing.

The other thing I'd call out is in the <unk> in the fourth quarter.

Overall commodities could be inflationary for US then I think you see that kind of the outlook that we are that we gave for the year, where that she was $215 million benefit year to date.

Mike My current point of view on that is that we'd be at the <unk> the midpoint of the range for the year so commodities turning.

Hi, slightly inflationary in the fourth quarter and as we head into next year.

Perfect. Thank you so much I guess, if I could just squeeze in one more and round and just put that into context, Mike of what you were talking about earlier.

I don't think you were.

Okay painting that picture.

Negatively at all but you did you did mention some competitive I'm think used the word hot spots in adult care tissue in Europe, Yeah, again harking back to PNG earlier. This week they were they were talking about.

Elevated promotion they saw from copper.

Competition I presume some from you in pockets of diapers. So just as you have these elevated competitive.

Hot spots I guess juxtaposed against I got stuck that more inflationary up outlook is is that a is that a concern from where you stand or just that's just sort of be aware, but overall, it's it's it's all pretty rational and and level level headed.

Yeah, I I feel like you know general I I think I used the term generally constructive and I feel that way I think there have been some some hot spots or you know I I hopefully I don't think they were talking about US is I I think our promotion levels have been down and it's in our our percent sold on promotion has been down consistently to this year and frankly.

We you know we feel good about you know driving volume through product innovation and advertising, particularly digital and so so that's kind of the direction we've been moving in.

Stephen and I think it's working.

I think when I say some hot spots you know we are seeing some some elevated promotions actually broke from procter or on a in adult care and then in a few other characters I forget that may be more driven by retailer or you know strategies, but I.

But I wouldn't say you know again I think its still I think constructive and you know we feel good about where it is right now, but we're keeping a close eye on it obviously.

Okay. Thank you so much.

Okay. Thanks, Steve.

Thank you. Our next question comes from Andrea Teixeira with JP Morgan.

Yeah, Hi, good morning. Thank you so could you discuss a little bit of the consumption and shipments in particularly in personal care and.

And and all things you see if you can into your guidance for the fourth quarter and so I think.

Discuss a little bit off some of the promotional environment that we mean elaborate more on the last question I think you.

Hey, Steve posed I'm thinking other larger markets I'd say as I can see from your prepared remarks in China, China South Korea.

And I would say I don't know in Brazil. It seems the same but from your comments. It seems like the prices went down I and I'm surprised that you know you need it sooner than now given that volumes are still up.

So is that is that the mix is the trade down or are you seeing in those countries also some competitive environment, increasing phone I think what we hear from me up on Saturdays as well. Thank you.

Yeah, Okay. Good morning, Andre Yeah, let me start with the maybe the the consumption and shipments dynamic I'll, probably speak mostly about North America. So I think thats, where kind of the big divergence has occurred through the first three quarters.

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

You know in the first quarter. There there was a you know a period. We're we're we're dummy.

The man had kind of exceeded supply a bit on personal care, but I think most of that kind of reversed out during the second quarter and I think our overall our outperformance there.

Our performance has been solid and ER and shipments have been strong and kind of reflecting kind of where we're going to Miss you know consumption has been I think a good consumer tissue, we've been working to catch up to demand all year I think in the first quarter the categories up about 30% and as you're well aware and now you know consumer tissue.

She businesses aren't gear or to be able to ramp up it at that speed and so.

So we have been working to restore customer inventory levels, we're making progress.

In the third quarter the category of tissue was up about 9%. That's an overall category number and you can see on our numbers, we shipped 11 and a and so you know we shipped a little bit more than what the was consumed a well with consumers and that's for storing inventory levels I think it will take us almost all of <unk>.

We sold Q4 to get our customers back to the inventory positions on tissue that they really want to be at.

So that's that point and then with regard to global pricing or you know a a I wouldn't say it's at this point I you know our planet's the whole pricing kind of where it is a there have been some changes I mentioned earlier you know in Europe, I think pricing has come down a point or two.

And that's more reflecting of retailers wanting to get back to their their promotion strategies [noise] Sims.

Similarly in China, we are seeing a little bit more promotion activity again, that's not our strategy in China and our our strategy is to drive him and we feel like were.

We're we're we're doing a very good job growing the business right now through strong product performance and digital advertising and then Ah. So so generally you know our strategy has been as we articulated in KC 2022, no great innovation supported by strong Executional capability, a promotion is not really the way that we want to be.

Business going forward.

Thank you Mike.

Okay. Thanks Sandra.

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

Morning, Jason Hey, Hey, good morning folks hope all is well congrats on DM on the market share momentum.

Hey, I know, we've kind of come up margins. This year, if at times, but I got to be honest I'm still really confused here and I'm looking at you.

I'm looking at your margins and K, CP or tissue or consolidated debt to gross margins.

And.

The volume metric components. It for the company don't <unk> with a de leverage story from Twoq to Threeq you.

Looks like there is something else going on if I look at once you to Threeq you. It kind of makes sense. So it brings me back to the question. It was two huge is just.

It is slated to a degree that's on sustainable in a substantial way and our issue is less about where threeq you landed it's more the comparison the sequential comparisons to Q.

Why the big swing between the two is there an accounting thing going on because they were worried not absorbing enough cost in the second quarter and we have to push it to the third quarter or just help me understand the moving pieces because overall for volume growth, one Q plus nine ish, plus one and a half into Q plus what happened Threeq you volume leverage doesn't seem to.

To explain the swing factors, we're seeing in Q to Q.

Sure.

Oh God <unk> no guidance go ahead.

No I was just saying I I think just to amplify on a maria's. Prior response, you know I think.

Jason that does reflect.

I would tell you extraordinary performance in our consumer tissue business under extraordinary circumstances right. There was extraordinary demand and we've we simplified our assortment and drove strong utilization on the consumer tissue side in the second quarter I think that has probably come back a little bit in the third quarter and a at the same.

Time, you know, we probably didn't fully realize difficult a fixed cost absorption in K C. P. In the second quarter, because we had a little additional volume that but number in any additional thoughts here.

Yeah, I I I think that that that said if I if I look at that.

Drivers of the gross margin in the third quarter. We've already commented on the differences I didn't three I by the three segments, but you know for all the margin was up on volume mix benefit.

I continued price realization strong cost savings I still had some modest commodity deflation in the corner and I.

That the benefits of that were offset by the higher either manufacturing costs and currency headwinds. So on that that is that there there was no accounting change or any other add on.

Unusual things going on.

But that would have affected the results Paul I don't know if you have any idea any additional color to add.

Yeah. Thanks, Maria the one thing I would add Jason is that.

If you look at where the volumes were up in the second quarter.

You had very strong performance in North America, and that's where our margins are the highest both gross and operating and in the third quarter.

The volume growth, while still strong in North America was not nearly as strong as Q2, and we had better performance internationally in developing and emerging markets, where our margins are lower so there was a geographic mix component.

Sequentially from Q2 to Q3 as well.

Okay. Okay. Thank you.

Thank you that's that that's helpful I'll pass up.

Okay. Thanks, Jason.

Thank you. Our next question comes from Wendy Nicholson with Citi.

Hi, Good morning, Good morning, well My question I believe you are not actually has to do with the topline growth on a professional business not so much the margins can you give us a sense I mean, I was actually a little bit surprised I know you said it came in line with your expectations, but I was surprised that there was as much of a sequential deceleration on the organic volume side.

Yes. There was so can you talk about maybe what you're seeing I know, what you know only whatever three weeks into the new quarter, but what are you expecting in that business in the fourth quarter, and and and kind of like obviously, we get an incredibly easy comps by the time, we get to the June quarter, but but when do you think that business starts to pick up.

Yeah, Wendy you know I I do think overall I think the business is outperforming what we start data would suggest is kind of the b to b kind of.

Activity or general business environment for offices in industrial and travel and lodging et cetera, and you're probably well aware of kind of where those are but you know generally the data we say mobility data would tell US you know those are generally off between 30 and 50% our business down 15.

Does reflect were down 35% in the Washington business in North America.

You know, but you know overall, we were down 15% North American that's because our wipers and our safety business has really started to grow at double digit rates and so so I think you know where we are pivoting to where the growth is right now I think the you know the washroom business is where it's going to be.

For a while I mean, you can look at the projections for what are the cobot infection rates are going to do the you know there is gonna <unk> appears to be an escalation in Q4.

Before it starts to come down some time in Q1 and I do expect people to remain a working from home or you know for the for the next you know for the foreseeable period into into next year and so.

So we you know I think again overall I think our professional business is outperforming what the environment says, but it is a pretty significant.

Significant decline and a and we're managing through it.

Got it and and and I guess second question, just as we sort of think about capital allocation.

[music].

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

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

Sure on [noise] on not on Capex. It get it is higher than it previously had been driven by our global restructuring program. When we launch that that program. We said that we would have thought $6 million to $700 million.

Incremental capital that we.

That we would be spending as we as we execute that program and so that's that's what's driving the elevated capex when I look at the number for the year. The range is 1.2 to 1.3 I Ah I believe we will come in there I believe.

I would comment that we have had some programs that were scheduled for this year and move into next year and they were Tobin related delays that is people.

People couldn't travel people couldnt get into our manufacturing facilities for safety reasons, I and we needed to keep our operations focused on producing products given that the elevated level level in financing some of the 2020 projects have been pushed into 2021.

And then we added I think very attractive projects this year.

That were enabled by content related opportunities, particularly around P. P E.

I said, we're not giving a number yet for it for next year.

But I wouldn't call out that we know that some of the programs that are weird.

We are expecting to do this year are pushed into next year, where in a in the midst of our planning process as Mike mentioned, so I will be evaluating the opportunities on capex those for both capital and productivity capital and its always will be a disciplined on that high but.

But we also want to shy about in investing in our business. If we have high high return opportunities that we'll have more to say hi in January.

Fair enough and then Mike I just wanted to ask a quick follow up on one of the comments you made you said that the retail we're getting a little bit more aggressive when it comes to some promotional activity can you just clarify do you mean that they are promoting national brands or are they provoked promoting more of their own private label.

Oh, well, the well I I think I.

Well I think I met and that kinda reflected national brands, you know overall Wendy if you look at the private label shares I think they're up in one of our categories and flat or down and seven right and so so generally I would say there's been a a flight to quality <unk> at least in North America and generally in developed markets I think given.

The tough economic times, but you know I think we find typically in times of uncertainty that consumers look to the big brands for reliability and so I think we're seeing that reflected in some of the numbers yeah. The pricing environment I think it's it's no more than the typical I would say skirmishing that happens across channels and across retailers with.

Price points out some of that has been off you know less so this year overall because of extreme focus on supply and the reduction in promotions overall, but especially in tissue I think it's been lower levels, but I think with with a personal care you know back kind of in and in stock positions across the industry.

I'd say, there's been more return to more normalized levels of promotion and so it's no more than that.

Fair enough. Thank you so much.

Thanks Wendy.

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

Okay, well. Thank you very much everyone I'm encouraged by our ability to manage through challenging additions and deliver a healthy business results and so we thank you for attending our conference call. This morning.

Thank you very much.

Thank you ladies and.

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