Q2 2021 Kimberly-Clark Corp Earnings Call
Ladies and gentlemen, thank you for your patience and holding we now have your presenters in conference. Please be aware that each of your lines is in a listen only mode.
And at the conclusion of this morning short remarks, we will open the floor for questions at.
At that time instructions will be given I share the procedure to follow if you would like to ask a question.
Thank you and good morning, everyone welcome to Kimberly Clark's second quarter earnings conference call on.
And on the call with me today are Mike <unk>, our chairman and CEO and Maria Henry our CFO.
Earlier. This morning, we issued our earnings news release and.
And we also publish prepared and management remarks from Mike and Maria and summarize our second quarter results and full year, 2020.1 outlook.
Both documents are available on the investors section of our website.
We find it valuable to have prepared remarks ahead of this call.
And just a moment Mike will share a few opening comments and then we'll take your questions.
During this call we will make forward looking statements. Please see the risk factors section of our latest annual report on form 10-K for further discussion of forward looking statements.
We may also refer to adjusted results and outlook both exclude certain items described in this morning's news release.
The release has further information about these adjustments and reconciliations to comparable GAAP financial measures.
Now I'll turn it over to Mike Gray. Thank you Tara and good morning, everyone before we get into the Q&A I'd like to offer some additional perspective on them on our performance.
Clearly our results did not turn out as we expected and we knew it was a tough comp given our strong growth and record profitability and year ago quarter.
Now, while we expected volatility this year the external environment has proven to be even more volatile than our expectation at the beginning of the year and versus our April update.
Since we spoke in April and commodity inflation has spiked higher and.
And our supply chain and had been challenged.
These dynamics are impacting us and more broadly the industry.
We're also navigating historic levels of demand volatility on consumer tissue.
Last year, we worked really hard to support our consumers and our customers as demand increased at a record pace, while we expected the category to retract this year that the client has meaningfully outpaced our expectations.
This has been driven by reduced at home consumption due to increase mobility.
And destocking of both consumer pantries and retailer inventories.
Consumer tissue has historically been very stable and we expect I expect demand to normalize over time, we remain confident and our brand fundamentals, even as we acknowledged that the short term tissue outlook has been difficult to call.
We've taken decisive action to offset the impact of raw material inflation.
We've announced pricing and key markets around the world our pricing actions are on track and we expect to fully offset the effects of input cost inflation over time and as we've done in previous cycles.
We've also taken prudent steps to control and reduce discretionary spend across the business.
We expect this to be reflected and our results as we continued to implement these actions.
We view this level of input cost inflation, and the COVID-19 driven demand volatility to be discrete issues.
We will continue to take appropriate action to reduce the impact of volatility over time.
At the same time, we remain confident and committed to our approach to building brands.
Despite near term challenges, we have plenty of bright spots and our business our strategy to invest on our brands is working.
You can see this on our second quarter results broadly across personal care and especially on day any markets.
Excluding north American consumer tissue, our organic sales were up 4%.
Personal care organic sales were up 6% globally, driven by a 4% volume increase.
And any markets personal care organic sales were up 8%.
And with very strong market share performance, including in China, Brazil throughout Eastern Europe, India, Peru, and South Africa. We've recently captured a number 1 diaper share positions in China, and Brazil, which reflects the strength of our brand fundamentals with consumers.
Importantly, we're starting to see green shoots and K C. Professional the business grew your dog grew year over year and sequentially as we saw strength and international markets and positive trends and washroom products.
As more companies transplant transitioned back to in person environments, we expect KCP momentum to improve and the back half.
We're encouraged by our underlying brand performance and have made significant progress on addressing the supply challenges. We faced earlier this year and our north American personal care business.
Looking forward to the second half we are expecting better results across the business.
We believe the major factors impacting this quarter do not reflect the fundamental health of our business.
We remain committed to our strategy to deliver balanced and sustainable growth for the long term.
We will continue to execute K C strategy, 2022, and we'll invest and our business for the future. This includes investments in innovation and commercial capabilities and technology.
And importantly, I also want to emphasize that we are acutely aware of the impact that this pandemic continues to have on our employees, our consumers and our partners are and the world.
We will continue to prioritize the health and safety of our people and all the interact with Kimberly Clark.
Now with that we'd like to address your questions.
Thank you at this time, we will open the floor for questions. If you would like to ask a question. Please press the Starkey followed by the 1 key that is star 1 on your Touchtone phone now.
Questions will be taken in the order and which day RBC is that any time, you would like to remove yourself from the questioning queue. Please press star 2.
Thank you. Our first question comes from Lauren Lieberman with Barclays.
Good morning, Laurie good morning, Thanks for letting me and jump in first and wanted to first just start with I think the biggest question, which is relatively short term, but is the guidance reduction for this year and I think it would be helpful for everyone to just hear a bit about your degree of confidence that like this is it right at the end.
<unk> been incredibly volatile and.
But as you look forward from here.
And what degree have you built and flexibility for things to perhaps worse and and I think that's sort of and important starting point and and along with that within the inflation.
<unk> what has been the biggest Delta first is you know when you last communicated and outlook for the guidance to the street back in April.
Got it thanks, Lauren Yeah couple of things I'll start with the outlook and I'll ask Maria to.
And the ride a little more color, but first of all I'll just say overall my view on the outlook as it reflects certainly as I mentioned on in my prepared remarks significant changes and that external environment that the we and we hear view as being discrete issues and that really that we're managing.
And fully managing I would say that the 2 issues that we're talking about are 1 raw material inflation and then the consumer tissue demand changes, particularly in North America, and if you added up Lorne year on year. If you add those 2 it's well over $3 of EPS are you know on a on a year over year basis. So it's a pretty significant increase obviously given that amount and.
Given our outlook, we are covering a significant portion of that but we can't practically cover all of that this year.
Alright, and so what I would say is part 1 and our pricing of them and implementation is is largely on track and we expect to fully offset inflation over time, not all this year, but overtime.
And then the North American consumer tissue volatility is COVID-19, driven and I view that as more episodic in nature or temporary in nature and I think the team is doing a very good job navigating it but certainly you know Lauren it's a little tougher managing short falls on the category you know versus some of the gains that we we went up against last year and so those.
I think to it that I would say, our our discrete issues and the big Delta on the commodities.
And perhaps just less visible to all of you as the polymer resin side of the business right. So you could see though and you can track the eucalyptus prices, which have kind of remained on and in the space that we've called but what's really escalated as a resin, which I think for the full year estimate and it'll be up almost 100% and certainly at historic highs.
For us and you know that that should abate at some point, but you know I think it's a and we initially we thought that was going to come down some and the back half, but it looks like the highs are staying high longer and so that does reflect some of the price and that we've taken.
So overall I think those are really the 2 big issues I do really want to point out low and that our brands are fundamentally very healthy and we continue to see really robust growth around the world and both organic and and share and even though we were really really pleased with our north American personal care recovery you know, although we were a little light on share I would say.
Almost all of that is related to supply issues, we still under shipped order significantly and the quarter, despite being positive on organic growth on the quarter and so we feel good about where the businesses and where our brand fundamentals are and we're expecting a stronger Q3 and on personal care business, but maybe for Maria do you want on some color yeah sure a lot on it.
On your first question on worrying about and full year outlook I mean, we've been wrong twice now and so it's an incredibly dynamic environment that we're that we're operating in and and that the changes versus our expectations are clearly on the input cost side as well as.
How the consumer.
Consumer tissue category in North America. It has that has unfolded here. So you know and I think about the guidance range that we've provided.
We have 6 months left to go and the here and there there.
25, and still in the range and.
And I don't like to take guidance down ever and since we bought it we've done it twice I E. You cannot rest assured that but the guidance that we provided is.
So thoughtful and based on on not that the trends that we see.
And allowing for allowing for some ranges given how dynamic that's the current environment is.
And then on them.
The outlook for operating margin compared to 3 months ago, a couple of the things that I'd call out.
Higher commodity costs.
Lower volumes and a consumer tissue and along with these lower volumes.
There was an associated fixed cost absorption.
And tissue and that generally runs at very high utilization rates and has high fixed costs and the actions that we've taken to offset that and also go into our outlook, which include higher cost savings and reduced between the lines are pending.
Okay, great and.
And when I look forward I mean, it feels maybe a bit early but can look forward into next year as I think about the headwinds that you've faced year to date from this higher manufacturing cost via a combination of the and the storm impacts and in Q1 and really more materially and negative operating leverage that you have the absorption on cash.
Tissue and.
And then what do you mean look into 'twenty 2.
It's simply the absence of those factors. If you just go back and more normalized demand environment for tissue right those.
It should be and.
And there shouldn't they should just go away next year I mean is there anything I'm missing as I think about that kind of impacted profitability.
Some operating leverage and higher manufacturing costs looking into next year and as we start to compare against these period.
Yeah.
And I'll say 2 things, it's very attempting to talk about 'twenty 'twenty, 2 given and given where we are with this year and the and the very unusual dynamics and that that and we're facing and.
I'm going to resist that that temptation as the environment and are quite dynamic and.
I think where we're best off waiting to see another 6 months, that's why we call it 2020.2 given that the macro factors are right are moving so much but and that said, Laura and I the way youre thinking about it and that's correct.
Okay. Thanks, a lot and I'll pass it along I appreciate that.
Excellent.
Thank you. Our next question comes from Dara on the Sounion with Morgan Stanley.
Good morning Dara.
Hey, guys good morning.
So Mike.
And Mike You mentioned, you expect to be able to fully offset the cost pressures with pricing over time is that with just pricing alone to be clear does that include the other areas like cost savings.
And just given the Inflations unprecedented this year do you think you have pricing and place a year and to fully offset those cost pressures or might it take a longer period of time to realize the pricing necessary and and sort of a couple of rounds of price increases how do you. How do you think about that and you know I'm, particularly focused on how are you.
Think about pricing just given the magnitude of that inflation is much worse than it typically is when you take pricing.
Yeah.
Great question, I would say, yes, and yes, I am not trying to be flip, but I would say hey, 1 generally we've taken really broad based pricing action globally almost.
And I wouldn't say all markets, but and nearly all all key markets and pretty expensive and you know the price and the pricing ranges from mid mid single digit to high single digit and some cases double digits right and so so pretty extensive pricing and obviously, we couldn't recover all of that given timing because we announced in March are generally implemented in June.
Or and the beginning of the third quarter, So we'll get a half year or run on on the pricing and then and then a full year as we get into next year.
That said you know commodities have continued to move out, but but even as we announced our price and dark you know part 2 of pricing as you know we remain committed to leveraging our revenue growth management capability and there's a lot of other levers that we can pull beyond list you can treat and manage our pricing and our volume and we're committed to doing that so.
And so that's part 1 and I do think kind of given where we are and I think it's normal and and reasonable as expected. We're also going to leverage our cost savings program. I mean, we have a very strong program is as youre, well aware on force and and we've kind of beef that up over the course of the past year or so and we feel good about that and so we will continue to leverage that.
So so overall I you know again on I think the answer is yes on both but the bigger thing. So our as you know we we do recognize the impact of raw material inflation over time and.
And our categories they tend to be a little more volatile and where were you know a fundamental underpinning of our strategy is margin improvement and so because of that we believe would really have to on an ongoing basis offset the influx and the effects of it and inflation over time.
Okay, and just 1 follow up on the pricing from where you have implemented pricing so far what's the retailer reaction and receptivity been like and it would be early to judge consumer receptivity, but obviously, some pretty large price increases and your portfolio. So just any.
Thoughts on the ability of consumers to handle that higher pricing and impact on market share.
And any thoughts there on what we might see going forward would be helpful.
Yeah.
And what are we we never take our pricing actions lately and we know they can be stressful for both the retailer and our consumers and their shoppers.
So we think hard about that I I will say you know we believe our pricing actions globally are generally on track and I and I think broadly the retailer conversations.
And although never easy I would say have been largely constructive and certainly and they understand what's happening and the cost environment and and so we're working through that.
And <unk> and then I think you know from and on you know and execution perspective, our teams have done a phenomenal job executing rapidly around the world I would say in terms of other brands I would say generally we've seen a lot of the other brands move and a similar direction I wouldn't say you know.
Nicole, but directionally on that same place, but you know the execution of other brands and private label tends to vary market by market and so some will lag a bit more but oh, you know I would say generally we feel like our pricing actions are on track.
Great. Thanks.
Great. Thank you Dara.
Thank you. Our next question comes from Kevin Grundy with Jefferies.
Hello, Kevin Great Hey.
Hey, Good morning, Mike a question for you Mike on the advertising and marketing.
So it looks like you you did decide to defer some investments which is on surprising and the current environment I'd be the intention was clearly not not to do that.
And maybe it might just spend a moment on where you decided to pull back and and and why and then just I know this is difficult. We can appreciate that and the current environment, but balancing appropriate levels of investment behind your best and highest return ideas with the current commodity cost environment, and then I have a follow up.
Yeah. So so overall, though the thing about it and what I say you know our challenges are kind of discrete you know the challenges is as all you know remind much I'm sure you remember Kevin is like the inflation and North American tissue and the balance of our markets. Our businesses are performing very well and generally above plan and so so I would say maybe the thing all of land with you was the <unk>.
Our near term challenges, we're really focused on improving although on long term growth profile, we're really confident that our balance and sustainable approach to building brands is working and that the brand fundamentals globally are very healthy and that we're improving our market positions, we were up and share and about and by our tracking about 2 thirds of our market cap.
And combinations and the quarter and so we feel good about that and the brands continued to respond well to strong investment I mean, we had multi sharepoint games, and and and BC and infant and child care across China, South Korea, Australia, New Zealand, India, and India, Indonesia, Eastern Europe, Argentina, Peru, you know pretty.
Double digit growth and Brazil. So we felt good about the overall performance of the business. So because of that we're really maintaining investment whether that's working and where the where the businesses are on plan.
We have dialed.
Back in some markets you you you can assume and.
For example, in North America, and Bath tissue and given that the.
And the fluctuation of the category, we have chosen not to pull back a little bit on the spending.
And and we're gonna continue to do that and you know we're going to operate with discipline I think we talked about and prior quarters, but you know there is as much a mass component to our advertising program as there is a creative component and we're pretty disciplined it's it's kind of how we manage all of our consumer investments, whether that's trade or or marketing and so we're pretty disciplined on the on road.
And so our teams are reacting as you would probably hope that they would.
Barry you got anything.
Yeah. The only the only thing I'd add is is that if you look at our full year outlook for wet side and that's all on on advertising is that.
Is it down somewhat and 2020 for the reasons, Mike just discussed, but it's Oh well ahead of 2019 on a dollar basis.
Got it okay. Thanks, Matt 1 quick follow up for both of you just on capital allocation and M&A, we saw that the buyback outlook came down with the lower earnings outlook.
And when you're going through that type of environment, you're going through now and you can't say pricing fast enough and even sort of leaning in and getting the organization behind productivity, it's still not enough to offset the sort of commodity cost pressure does it sort of gives you pause with respect to the M&A strategy over time and at school of thought that the company should look to diversify.
Portfolio away from some of these commodity sensitive categories, and and do that and and a disciplined and and in an accretive way. So your your thoughts there would be helpful. And then I'll pass it on thanks.
Yes.
And what we're always looking at acquisition or.
M&A opportunities right and whether that means additions to the portfolio or subtractions to the portfolio. You know certainly you saw that last year with a with soft exports.
Continues to be a really exciting opportunity for us and that business is performing very very well by the way up and the teens up multiple share points in the quarter. So we're super excited about that.
Given where you are yeah, I think well continue to look for opportunity to enhance the portfolio and certainly.
You know on both the plus whether its attractive markets, where attractive categories. But also you know well we're going to continue to look hard at our performance of our existing categories and and businesses that don't don't add to our overall growth profile are or aren't going to be ongoing and will be accretive to our business. You know, we're going to take a hard look.
And so so again, where we are we manage capital with a incredible rigor and discipline and hopefully that's a that's what our investors will oh well appreciate about our approach yeah and on the buybacks specifically I E. You know or are right at the midpoint of our guidance our operating profit now.
And to be down 450 million year over year, and you'll recall that in January and when we were coming into the year and set our.
Target for buybacks and we were expecting operating profit to be up slightly.
Slightly stay with every day cash flow are attending and he died on the bit that bad debt that that's really what was behind the reduction of $250 million to $300 million on the share buybacks and then in terms of capital allocation.
We also have a trend or our capex plans for that.
$100 million and we remain committed today be a single a credit rating and to make all of that work after having leaned into it with the debt restructuring as well as the acquisition of soft tax and that's that's how we make all of that math work.
Very good. Thank you both good luck.
Thank you Kevin.
Thank you. Our next question comes from Chris Carey with Wells Fargo Securities.
Good morning, Chris.
I Hey, good morning.
So I just wanted to actually touch.
Touch on the consumer tissue outlook for the back half of the year.
It seems to me that's the.
And of the important part to making the outlook.
But at the same time you had noted that that's an area that's been a little tougher to call on.
And I guess I'm trying to understand maybe just a little bit of confidence around the normalization.
Which you had noted in your and your prepared remarks, it seems to me.
And that you know market share is really peaked during COVID-19, maybe some capacity benefits.
You've just you've seen some or Virgin and market share back without COVID-19 levels, and so do you kind of run it flat from 2.3 years ago. It it's sort of unchanged and I guess, what I'm getting at is just you know.
And what exactly you think is occurring in that and that business and just maybe specifically and the types of things that you're seeing that give you confidence and this reacceleration in that business and the back half, which again seems to be you know.
And your important factor and making a full year outlook work.
Okay, Yeah, Great question, and Chris and I'll try to unpack it and we can go back and forth on this a little bit.
First let me just say I remain very confident on our north American tissue business and we've got great brands performed very well last year I do think we have given back some share this year.
What happened last year, when the categories spiked and at this point last year I think the category was up about 30% or so.
Consumers were looking for tissue went on and our customers were looking for tissue and so our organization really moved aggressively to try to serve our customers and end consumers.
Point, where we felt like they need and less the most and so we we really pulled out all the stops we probably did gain a little bit of share, particularly on a brand like cotton L. A where we had a little more availability than maybe some of the some of the other brands and the marketplace and so it looks like you know to US you know while on our share was down a bit. This year you know I do think it's kind of reverted maybe it's the.
Prior year levels to some degree.
And well and will continue to go forward and earn our share growth overtime on that business, but you know we feel like our brands are healthy.
But you know we are navigating what I would say is like the most volatile part of the demand curve that we experienced last year. So the front half is where all the spikes in demand and so there were really 2 effects or is the spike and consumer demand and then there was a corollary effect on retailer supply and so maybe maybe the 1 disconnect that you might not have vis.
Ability to the data or you know the category and the quarter and North America on and I'm talking Bath tissue, specifically was down 12% and consumption. Okay. And then our shipments were down about 27% and so the difference between the 12 and the 27 is really for us.
You know, we estimate as retailer inventory changes and what happened last year on the inventory side was I.
I think exiting Q1, where there was the big spike retailer inventories as a percent if I index. It for to historical levels for 2019 levels had dropped down to below 40% of what.
And I would say the traditional turn inventories and so our retailers worked really hard and get back on the supply and so by the end of the year or toward the back half of the year, they were well north of 100% of overall levels and so as we we entered into this year.
Our estimate would be retail inventories were well, we're probably in the 130, 140% range and so so that's dialed back and the first and second quarter. This year and so explains kind of a big chunk of the Delta here on demand looking forward again I'll stay on standby it I mean.
And looked at this category for a long time and it's 1 of the biggest categories. Obviously, if you think about bath tissue and particular, it's a very stable category and so the logic for me is.
And a post Covid World I think there will be more people at home on an ongoing basis and there were pre COVID-19 and.
I think.
You know the office environment, where the work environment is ever going back to 100% every day and so so logic would say consumption should be a little higher than the base level and my team now year to date, we're below 19 levels for the category, but we think you know.
And I would say logic that would say that that should kind of normalize over time and you know.
And you know I won't estimate whether that's what point, you know, but and over the long term. This category is proven and be very stable and our brands have proven and very very stable and very healthy.
The other on that.
Net.
And I am please go ahead.
Yeah, it's on.
And just you were asking specifically on night on on consumer tissue, which certainly has that are being first half.
Second half in fact, if I if I look overall at first half second half.
And the first half our organic sales are down, 5% and our operating profit down 26%.
And if you take the midpoint of our ranges.
You get to a second half that looks something like a plus plus 3 on organic and a plus 5 on operating profit growth and.
And so if you think about that day.
And our second half outlook and and the key drivers there.
We will have easier comps I, we we will have a step up and benefit from volume growth and price realization and that and the second half.
Hi, you need the majority of the consumer tissue Destock, we are seeming occurred in our in the first half we won't have the winter storm effects that we had and the first half KCP washroom is I expect it to continue to see sequential improvement.
And the pricing actions are now fully in the market.
We'll see from build on our cost savings as we typically do it's usually second half weighted and our other manufacturing cost headwinds should be lower.
And then offsetting that.
What will be that the higher commodity cost headwinds.
Headwind if you if you take the 45 year to date and our guidance and implies year to go is a.
765 at the midpoint. So that's a those are the drivers for the second and second half and and certainly the dynamics and consumer tissue are a key part of that.
Alright, Chris that was always threw a lot at you and I and I threw a lot yeah I'm on tissue I don't know if that answered all your questions or and I'm happy to take follow up.
Debt that was extremely helpful. The only the only.
A quick follow up would just be just.
On the debt the level of inventory at retail inventory and tissue as you enter Q3, you'd given some percentages where do you see it today and then you know it.
And if I might I I would just sneak in a question on how you're thinking about birth rates and and medium term impact on volumes and then I'll get back from acute.
Yeah, Alright, and just from a disclaimer on my inventory those are our estimates and so Oh I you know that's kind of how we look at it and think about it I would say I would say close to historical levels are the caveat I'll say on Chris I was on.
No.
We're not exactly sure and I'm not sure the retailers actually sure how they want to handle it you know at this point right and so I think kind of given the the category and volatility.
And you know and and on a retailer by retailer basis included I think it's it's kind of continue to bounce around a little bit right and so and no.
Because you know and the example, I'll give you as you know we were building up inventories, but there you know there was another spike kind of in the <unk> and the fall period, and then the winter periods, you know as well and so you know I do think I do think consumers largely understand that there is plenty of tissue availability.
But that said you know.
You know what.
And a lot of new things over the last 18 months and so you know we will.
You know we won't be surprised if behaviors continue to shift around a little bit. So that's on on the tissue side.
And and the other part of it is certainly there was a consumer we think consumer pantry destocking as well I will tell you though.
The team and North America has done a phenomenal job conducting research and try to estimate that I will say, it's probably as accurate as try and estimate share from panel data right and so you were asking consumers how much they're carrying and so but we do believe our consumers.
Consumers, taking a lot of their stock out as they have more confidence that tissues available, but that remains to be proven out and so.
On the tissue and then on the birth rate Yeah. Our estimate for this year. You know first of all is probably down about mid single low to mid single digit you know and.
That's probably a little worse than the last the prior 2 years I think I think the prior couple of years, we're down about 1% to 2% depending on the year and then you know given COVID-19 I think it feels like you know some families have to decided to defer family formation and so are you know kind of and that.
Range I will say you know we feel really good about the recovery of our infant and child care business and the fact that Oh, we're really recovering from a supply perspective.
Our brand propositions, we feel very strongly about and and so we feel like you know and the third quarter, we should be back to.
And on track and our infant chocolate business and so.
Thanks for all that.
Okay. Thanks, Chris.
Thank you. Our next question comes from Steve powers with Deutsche Bank.
And what did you say it's okay.
Good morning. Good morning, you did throw a lot at us on that consumer tissue conversation, but I guess I have I guess I have a just a clarification coming out on the back and forth and just talk with Chris and.
Commentary this morning.
Yes.
I guess I'm still trying to ascertain.
Ascertain whether what do you see a change.
And in consumer takeaway expectations on the balance of the year, because what I would I, rather and the prepared remarks is that the consumer pantry and retailer inventory rebalancing. It goes faster than you previously assumed that's what we used to cure them.
And you just kind of reaffirm that but I didn't really hear anything about a net reduction and consumer takeaway. So I guess where are you not assuming.
And he and he rebalancing and the.
And of course, a 'twenty 1 before and it just happened in 'twenty, 1 and where you thought it would happen later about downstream or is there a is there stuff because I guess I can understand the pull forward and the and the rebalancing for the first half, which is more spread out and that hurt Q2, but we're still a net negative impact on the full year that I can't I can't pinpoint So and you just help me there.
Yes, Theres a couple of different ways for me to answer that question and I'll say, let me let me, let me anchored versus our original plan of our planned expectations for tissue at the beginning of the year and we walked and a year and and just think back to December ste.
You know, where the vaccines, where we're really not rolled out and so are our going in was that the category would be lower than 2020 overall, but you know and in some ways probably a mid single digit decline right. Because you know we thought you know at that point in time.
Tumors people would still be at home generally right.
Now coming out of that and as we entered our April update you know it was clear that the vaccines rolled out much faster.
And anybody anticipated and and mobility.
Data that we track show that you know we are returning to maybe 80% or 85% of historical levels and so that was faster than we had anticipated and so are our expectations for the category you know.
Actually we're down a little bit further you know I think coming out of the second quarter, you know I would say our category expectations, which were up about 22% and Bath last year, probably we would say are going to be down at least and the mid teens or so mid to high teens and so so overall I think our expectations for the category and we're gonna be worse and they work.
Beginning of the year.
That said you know at that level I would say that's still you know I still believe it should be above a base year of 2019 right. If you take the 2 years together that remains to be seen as it feels like a kind of a sticking.
Sticking my neck out there call on that just because of what we experienced from the front half, but again I'm working from logic that says they're likely to be more people at home and they're we're in 2019 and.
And if people are home more often and then there's the consumption of at home Bath tissue should be higher but that remains to be proven out.
Yeah, Okay, Okay that helps and I guess that segways into my next question, which is you sound.
Pretty satisfied and.
And I'm happy and.
And you kind of upbeat and the trajectory of the professional business probably in part because of that vaccination reopening trend I guess.
And so.
And that resonates with me, but I guess I was expecting a bit more you know just as it relates to <unk> given the dynamics you said is and all sorts of consumer tissue and so just maybe a little bit more colors on how you see that business trending and and kind of what your expectations are you in the back half.
And on K C. P. C. I wouldnt convey happy you know I would say you know, it's certainly proud of our team and how they respond and all these challenges are cautiously optimistic about where that category is and I do see some green shoots I mean, a couple of things kind of go on going on and I. You know organic was up 2 right, which is a sequential improvement versus.
Where we went and we've been for the past several quarters.
And that was predicated on and really strong growth internationally, which had a really soft comp from year ago, but importantly improvement and you know sequential improvement and the North American washroom business, which is a big business for us and and really really important and I wouldn't say, it's taken off yet, but we are seeing the impact of more people returning to work whether it's in the on.
Office environment or or Oh, you know a factory environment.
And and so I think that's that's those are all positives. There there are some offsets because you know we did grow significantly and our wipers and P. P or safety business last year are due to you know additional COVID-19 demand and that's probably cycling down a little bit this year and that's a bit of and offset so you know we we feel good about that.
Our KCP business I think the team even throughout last year was working hard I think somebody mentioned on the call are last year around jet Air drive conversions, and we've got better offerings and our washroom business a great products, great dispenser products and so we are winning conversions, but I think I've said on prior calls.
We haven't seen the <expletive>, we won't see the share until the products flow through the dispensers.
So, but we feel good about what the team is doing a and are looking forward to I'm cautiously optimistic.
Okay. Thank you for that Mike and if I could just Maria you had you.
You had mentioned that at 7 and 70 or so at the midpoint on inflation to come over the back half day do you is there any you know.
I guess color you can you can offer in terms of how you see that flowing through Q versus <unk>. If it's if it's weighted and a significantly 1 versus the other or if it's more evenly spread but just some help on the cadence there would be helpful. Thank you.
Yeah, I and I think the expectations are that.
The commodities will reach peak.
In the third quarter, and then start kick start to ease of debt and that as we get into the fourth quarter and.
I I'd use that as that kind of faith and guidance.
Perfect. Thank you both.
Okay. Thank you Steve.
Thank you. Our next question comes from Peter Grom with UBS.
Good morning, Peter.
Hey, good morning, everyone.
So you mentioned in your prepared remarks, and and I was also pretty encouraged by that performance and commentary around around G&A and so obviously you have pockets of strength.
Pockets of weakness and you mentioned strong share performance there, but you know I was just curious has the consumer being more resilient and those markets that you would have anticipated.
Given the Covid environment or is this strength really just you know Kimberly specific.
Oh Wow.
And that's really hard for me to generalize because I think I think it varies you know I think certainly there's a lot of markets and there were less impacted by Covid and I would say a lot of a lot of that is and Asia, although although I caution when I say that because it's starting to that's starting to pop up again now more significantly, particularly in markets big markets for us like Indonesia.
So I think there is some aspect of resiliency.
But the other aspect is and and maybe.
Underlying is the strategy that we're on which is to elevate the category and expand our markets and I think the teams are really concentrated particularly in and infant and child care with the with the Huggies brand really great product offerings. I mean, I think the big thing that's happened over the last I would say 2 years globally. Our teams on diapers had really align around.
And kind of a set of consumer benefits that we're going to win on and really have a blind on kind of the product technology platforms that are global platforms that are launching for reference you know were up 4 share points and Australia, New Zealand and diapers were already obviously the market leaders, there, but that that diaper has specific lineage.
And that is linked to our China diaper I wouldn't say, they're identical, but they're they're highly related right and so so that's kind of you know the work that we've been on we've taken share leadership positions and Argentina and Brazil.
And.
Again, the diaper there is related to the diaper that we're making and North America, there and they're not they're not twins, but there, but theyre related right and so I think again.
They're really focused on I would say a made a shift from product features to consumer benefits that we're focused on delivering and I think that's really shown and the and the shares and and you know again I say.
We're up about 3 share points on the quarter as we were last quarter. You know I mentioned 4 share points, and Australia, New Zealand, and 4 and Korea, 4 share points and Peru, So we're seeing pretty broad.
Share gains, but we feel like the earned it and we're certainly not promoting our way to those share gains because we don't really believe and renting share I think it's basically great products, great digital execution, and then and then really hard sales execution and great partnership with customers.
No in fact, that's Super helpful. And then I just wanted to ask a couple of follow up questions in regards to the commentary on second half organic sales growth. So first I just want to make sure I heard the comment on volume growth correctly is that a total company comment or was that something specific to consumer tissue I thought total company, but I just wanted to be share because I think Christmas.
Question was on consumer tissue and then just like anything you can share on phasing of that 3% growth between Q3 versus Q4, given the cycling of the accrual true up on Q4 would be really helpful. Thanks.
Sure I was making the comments I'm just bridging from the question on consumer tissue to the total company I because consumer tissue. It is certainly part of that.
And part of the story and are in the second half on when you look at the total company outlook. So to clarify I was talking about total company.
And my remarks about first half second half.
And I you you knew that debt, that's facing our eye and the corridors and I'm going to stay away from quarterly guidance here I think the things to consider are right or right at a year over year comp Oh.
And I I did make some commentary around and say you thing on not on the commodity headwind and a high and beyond that I think I'm gonna stay away from the quarters.
Okay, great well. Thank you so much and best of luck, Okay. Thank you Peter.
Thank you. Our next question comes from Jason English with Goldman Sachs.
Hey, good morning, Jason.
Hey, good morning folks thanks for slotting ma'am.
I appreciate it so a couple of questions I guess, it's I really wanted to focus in on.
On tissue and pricing.
You guys had phenomenal price growth and the fourth quarter, 'twenty and North American tissue and I believe it was because you had under accrued or over crude excuse me over accrued for trade spend throughout the course of the year have to true up.
So we're lapping a period, where you would over crude for trade spend and suggesting that well I know list prices take time to get and I think I was expecting my name is expecting you to at least get some pricing benefit from from lower trade yeah on a 2 year stack basis, and North America prices and eroded and developed markets outside of North America prices and deflationary and develop and.
And emerging markets your prices are deflationary and.
And you just achieved the worst price cost deficit and I can find out record.
So it begs the question of what is happening what what's really impeding your pricing power right now, particularly in an environment, where it is you're saying you expect demand to be about base case 2019.
Why aren't we seeing more responsiveness of sort of net price benefits are flowing through the P&L.
Yes I.
I will start you know, Jason So I you know I.
Part 1 is we have announced pricing.
And consumer tissue and in many markets and most of our tissue markets around the world, including in North America, I wouldn't say, we've taken and across every product line and so you know Scott 1000 is kind of a key product that we have and so and so that's 1 area.
Certainly you know we did benefit as you mentioned from some from accrual differences.
And at the end of last year our debt.
And the other thing that we benefit throughout last year was given the amount of demand and the marketplace.
We reduced our promotional spending overall right and so we kind of earn and maybe the same or higher volume levels without having to spend the trade. So that that was a benefit last year that we are cycling. This year and so we are we are putting some investment back and trade.
For reference I would say the category promotional intensity and north and a market like North America still below historical levels, but moving its way back to what I would say are more normalized levels and so we recognize the need to do that.
The thing that I will tell you is and you know I think your point is on which as you know we've got to get better price realization I will say you know we don't necessarily view it would be additional spending on trade to be a negative profit driver and the sense of you know we've invested a lot of tools and revenue management and we expect our teams and be able to use those tools to drive.
And volume and growth profitably and sobered a hole.
Ourselves accountable to that but with that you know again, we recognize the need to get additional price realization and there's many ways for us to do that in addition to the list pricing that we've taken and there's also ways for us to do that.
And through revenue management for trade efficiency, our price pack and and other things that that will continue to look at for you if you're on it and that's that's right.
Okay, and so there's other mechanisms, we just not going to see them, yet they're going to take time to see them.
And the last last time, we had inflation and tissue you guys ran a price cost deficit for 8 consecutive quarters before you flip positive.
It is.
Is there any reason to think that you could close the gap faster or given the environment that you're mentioning with promotional activity actually picking up and the face of rising cost could actually even be more prolonged this time.
Well again I think we've we've action are generally our pricing and and the marketplace and so you know I would think that you know hopefully the duration on that cap would be shorter you know certainly we didnt like the GAAP through you know through the first half of this year and so that's 1 part second you know again.
You know what we're going to continue to review you know kind of all the levers that we have on revenue management and make sure that we make the appropriate adjustments to our plans you know on a market by market basis.
Got it alright, thanks, guys I'll pass it on.
Okay. Thanks, Jason.
Thank you. Our next question comes from Andrea Teixeira with J P. Morgan.
Good morning, Andre taking my questions. Good morning, So I wanted to go on to pricing I'm sorry to.
Is that a dead horse here, but why don't you read on back on some of our allies.
He not only do you asked but also internationally.
And you're obviously competing with players that oftentimes a price, but specific to the U S. The dollar share that we were looking not only and tissue and tracked channel as I say explained well from Chris' question before but I'll say and diapers are you, saying that the same decline across all channels and and ease that and indeed.
Case and that consumers are probably down and training now that they see private label. For example, Scotts 100 and is the 1 that competes you know more next and act with private label. So are you seeing any.
And should there or perhaps you know you're going to tweak a little bit of your price increase now then you know what you know about tissue and then perhaps do more I G and where you a barbell and little bit on this price and crazy. So any any update on embedded in your guidance. If you are changing some of your pricing or any second rounds.
And all of America that you know, we may not be aware of or you embedded in there.
And so any any color that would be great. Thank you.
Yeah, Great question Andrea.
You know maybe the the the short answer from me is I don't know yet.
Think.
For reference we took about a high single digit price increase across our personal care businesses and then and then some selective price increases for example on Scott Scott tissue.
And in North America.
And Oh I would say those went into effect at the beginning at the end of June and so it's a little early for us to gauge that if I go off of history, though I will say the last list price increase we took on these businesses actually and personal care was not listed was more count okay, but that said I will.
I'd say the the consumer elasticity at that point back in 2018 was probably in my mind, a little lower than what we modeled in terms of elasticity. So you know what that implies I think theres a couple of different factors, if I would say.
The more price sensitive factors would be that I think consumers are facing broader inflation are you know and this environment across all categories right beyond consumer package goods. So that that may be 1 factor right that that makes it a little more challenging.
Other factor that I know talking to people and other industries as they're there and there have been reductions and other spending and consumer spending which create a little more wallet for some of the more consumables and so that's that's an offset so so for me. The answer is at this point, a little theoretical ambiguous and so and remains to be seen but you know we'll know as.
As we work through this quarter.
And no that's super helpful for tissue, and and diapers and like I felt that you don't have as much of these channel stuffing that we saw even I'm, assuming retail inventory I think you spoke mostly from our customers day, so perspective and not so much on the diaper. So what is happening there or do you see.
That's changing also on the left this is moving around as I'm moving targets where you.
You know again, I I I I don't see significant change, but again, it's still early for us to tell you I think you're right and the dynamics and personal care were very different and tissue last year and so there was a bit of a I would say a consumer buy in and the first quarter of last year, but it was a I would say a mid single digit.
Kind of number maybe mid to high single digit, whereas you know the first quarter of last year and consumer tissue was like up 30% and so so very very different behavior, and then we unwound that almost all of that and Q2 of last year and so so I think the consumer the personal care and North America behaviors comp, perhaps been a little bit normalized.
And again I think the same thing holds from what I was talking about tissue, which as you know our pricing has been kind of in the market for about 3 weeks now and so a little bit earlier for us to get a read on.
You know, but again I think we feel cautiously optimistic about it.
Okay. Thank you.
Thank you Andrea.
Thank you next we have a follow up from Lauren Lieberman with Barclays.
Oh, great and walking away.
And I see I was taken off guard and.
Wanted to ask about Fireeye.
Question, just the category growth and and personal care and B any markets and he talked a bit about and very.
And I must tell about about market share gains.
Other things that's definitely been out there and at the resilience of some of the categories and Dnb markets.
And so just anything you can offer in terms of their perspective on and why you know the categories and kind of held in as well as they have because even again with your share of growth its still implies the categories you're on a pretty good spot too.
Yeah.
And maybe I'll go around the horn because it varies so much because of a couple of things you know 1 Oh, you know probably the biggest 1 being COVID-19 you know I would say, where we were really positively encouraged by our performance across Latin America I thought it was terrific performance and a and a really really Chow challenge and Covid environment and I'm sure you are kind of reading all about.
And it but I mean and in a market like Brazil, or our personal care organic was up over 20%.
And you know volume and price and we did take pretty significant price pricing actions there.
Overall, we maintained our share there, where we're already and the leadership position and I think what's happening and Latin America broadly and why we're winning is the team is doing an excellent job, adding value or premium eyes, and the category, but also pivoting.
And some ways back and forth even within the same year between value and premium. So the big thing is we have very strong leadership positions throughout Latin America for example, and Argentina, we're the leaders and value tier and we're the leaders and premiums here and we're the number 1.
Brand overall, and so the team depending on kind of whats happening and the local environment kind of makes the pivot as to what what products, they're going on maybe drive it and and emphasize a little harder and certainly I think you know in Latin America, and maybe this year more than than maybe even 2 years ago.
Values very important consumers are stretching out their consumption.
But we we we flow through a lot of our great product innovation through our value tier as well and I think that's working so that's kind of 1 set of things I would say China is different you know Lauren and we were up <unk> 3 share points in the quarter. We were proud of at least you know for now we're and the number 1 share position, which we feel great about and we feel really great.
On our products and so I think the consumer continues to really respond to the product superiority and innovation I will say the category conditions are pressurized because you and I don't know how much youre seeing but the birth rates are coming down fairly significantly and so we recognize.
That's gonna be it you know and issue for us to work through but in the near term you know our team feels great.
Their ability to grow the business grow share and work with the big ecommerce partners.
And then and some of the other markets Eastern Europe, I mean, I think we were multiple share points up and almost every market across eastern Europe are somewhere in the range, 1% to 7 points of share and the quarter and again I think great offering.
They're all related.
China diaper the U S diaper the result.
There are kind of all related to each other and and very good and I think the teams are are recognizing how to drive to drive those so I think it varies but watch out area that we're very kind of paying close attention to because of Covid is is osteon.
You know, Indonesia, Vietnam, and India as well.
And again those those environments right now are really pressured with the you know with the pandemic and so we're really keeping.
And keeping a close eye on that so I don't I don't know if I answered what you were looking for something else Yeah. No absolutely. Thank you Mike I really appreciate it.
Okay. Thanks Loren.
Thank you next we have a follow up from Jason English with Goldman Sachs.
Hey, Jason.
Hey, Super quick follow up question real tactical on what you saw on floor and there I think you said China growth for you on personal care was up maybe mid single digits, but you. Just said you capture 300 basis points of share on the quarter and implies a pretty sharp market decline and the market. So can you drill down a little bit deeper there like what is the rate of decline you're seeing and I think you mentioned birth rate.
Down and is not me no birth rates down and that's it and that has a prolonged drag on infant population. So that's what we're selling today and likely to persist for a protracted period of time.
Yeah, sorry, my bad I was a little unclear on China overall personal care was up mid single digit our diaper business was up double digits.
But that said I think your question still holds yes, they're there they're are expected to be some birth rate challenges in China. So it will slow down as a market I still believe and I think our team believes there's still significant opportunity and premium is our categories and you know.
And we're still a low double digit share and so theres still plenty of share opportunity.
That said I do think there will be a slow down on the diaper side of the business are our fem care business has been growing strong double digits and the quarter. It was down a bit because we were cycling and promotion a big promotion that we decided to get out of this year and so but we feel great about our our fem care business that's grown strong.
Double digits for I think 3 or 4 years, and our ROE now and and.
So we expect continued growth in China, although I think on the diaper side of it.
Category will be challenged somewhat it also kind of points out you know our emphasis on diversify our growth across our developing and emerging market and so you know 1 of the things I'm excited about you know Jason as you know I think we grew significantly and India I don't know if I can there you know I think 50.
Strong double digits and the quarter and I would say you know Indonesia, you know I'm really glad we made the acquisition of soft ex it's a great business I think the business was up and the teens.
Even though they are cycling are working through some some pretty good COVID-19 challenges are pretty significant COVID-19 challenges, but it's a great business and a great team and a and again with Indonesia.
And India, I think the growth and those markets is gonna be very significant for us over the next several years.
Thanks for the clarification I appreciate it.
Yes.
Thank you there and no more questions at this time.
Okay Alright.
Alright. Thank you all very much we're certainly navigating some high volatility and external environment, but we're taking decisive action.
And we're continuing to improve our brand fundamentals to sustain long term sustainable growth alright, so for that thank you.
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Okay.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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