Q3 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. At the conclusion of this morning short remarks, we will open the floor for questions and at that time instructions will be given after the procedure to follow if you would like to ask a question.

It is now my pleasure to introduce today's first presenter Terran Miller.

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

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

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 we also published prepared management remarks from Mike and Maria the summarized our third quarter results and full year 2021 outlook.

These documents are available in the investors section of our website.

We hope you find it valuable to have our 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 may make forward looking statements.

Please see the risk factors section of our latest annual report on Form 10-K prefer their 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 there.

The release has further information about these adjustments and reconciliations to comparable GAAP financial measures now I'll turn it over to Mike.

Thank you Tara good morning, everyone.

Before we go to your questions I'd like to offer some perspective on our third quarter and further actions. We're taking in response to this dynamic and challenging macro environment.

Organic sales were strong up 4% in the quarter and included the impact of pricing actions implemented in the second and third quarters.

In North America personal care organic sales were up 11% driven by mid single digit increases in both net selling price and volume.

Indeed, any markets personal care organic sales were up 7% organic sales increased double digits in Argentina, Brazil, China, India, Eastern Europe, and South Africa.

Our top line performance was strong despite the resurgence of Covid, which impacted growth in austere Latin American KC professional.

Our market positions remain strong and are improving reflecting strong innovation and excellent commercial execution in nearly all key markets.

Our share positions in North America remained solid with good sequential gains in personal care.

Our share performance in D&A markets remains robust, where we continue to strengthen our diaper leadership positions in key markets, including China and Brazil.

We also continued to focus on cost with our teams delivering solid savings of $150 million in the quarter.

In addition, we reduced between the line spending.

Now clearly our margins and earnings were disappointing as higher inflation and supply chain disruptions increased our costs well beyond the expectations, we established just last quarter.

I'd like to highlight the effect of three areas of volatility there are most impacting our business.

First as we noted in July and on the basis of external forecast, we had expected commodity prices to ease in the second half of 2021.

Instead prices for resident pulp increased further in the third quarter and are now expected to stabilize at a meaningfully higher level than our prior estimate.

Second a tight U S labor market and disruption in domestic and international transportation markets are having an elevated impact on our supply chain as we work to get our products to the shelf and meet consumer demand.

Third energy costs were up dramatically in Europe, where natural gas prices have risen as high as six times a year ago levels.

Energy prices in North America are also up sharply although not to the same extent.

As a result, our margins are down we're down with the claims only partially mitigated by the actions we've taken to date.

We're not pleased with our results and we're taking further action to mitigate the impact of higher input and labor costs.

These steps include further pricing actions additional initiatives to ensure we achieve our cost savings goals and tightening discretionary spending.

At the same time, we remain committed to investing in our brands and commercial capabilities.

While we expect to see some benefit from these actions in 2020. One we have further reduced our outlook for the year. This.

This reflects our third quarter performance and our expectations for the fourth quarter.

And while we're not ready to call our outlook for 2022, I will offer a perspective on key variables that will affect our planned next year.

First we continue to build topline momentum in.

In addition, our pricing actions brand investment and commercial program should provide further benefit in 2022.

Second some discrete headwinds we face this year will be behind US. This includes the U S winter storm and presumably consumer tissue destocking.

Third some headwinds we faced this year may become more persistent we're now expecting further inflation on several key commodities were also expecting continued tightness in the labor and transportation markets, which will continue to impact our global supply chain, all the way to our customers.

In addition, the going forward impact of Covid on both demand and supply remains very unpredictable.

We will continue to move decisively and navigate changing market conditions.

We will also continue to invest in our brands and capabilities to maintain brand momentum.

Our strategy is working and we remain confident in our future and are confident in our ability to create long term shareholder value.

Now 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 star key followed by the one piece that is star one on your Touchtone phone now questions will be taken in the order in which they are received is that any time, you would like to remove yourself from the questioning queue. Please press star two.

Again that is star one if you would like to ask a question.

Thank you. Our first question comes from Dara <unk> with Morgan Stanley.

Dara.

Hey, guys how are you.

Oh, good who'd been better [laughter].

Yes, well tough environment.

So you mentioned further pricing actions, Mike could you just be a little more specific there maybe review what you've done globally in terms of percent of portfolio magnitude of increase is Germany, where you've taken increases.

And maybe just some insight in terms of the forward pricing are you looking at it more on a product category basis geographic basis, but just as you think about the forward pricing any more insight would be helpful.

Okay, if you'll indulge me Dara, maybe I'll start a little bit philosophically, you know and I would say that but you know based on our strategy. You know improving margins is a core aspect of K C 2022 for us and so we've taken further actions to offset inflation, I mean and I believe.

Margin improvement is a fundamental pillar of what we need to do for the company and so we expect to fully offset inflation with both pricing and cost reduction so a combination.

We expect to fully offset that over time, so we announced some further actions in Q3 the year to date you know our actions are fairly broad.

Broad reaching every region every business are generally I wouldn't actually not every single business, but generally across most markets.

And so in Q3, we've been announce broader actions in North America, our professional and consumer Latin America.

And other markets selectively so so I would say pretty far reaching.

I will tell you Dara our earlier pricing actions are generally on track as you saw kind of in the release, we had three points of price factor in organic in the quarter. You know we have seen some other brands move.

Particularly in North America, I Havent seen significant movement in private label, yet, although I'll note that that typically occurs a little bit later, and we've had a little share softness but in general you know I think our volumes are holding up well.

Okay.

Okay and on the advertising side, certainly you've cut back a bit in this tire commodity environment.

Is there a point when you get concerned that maybe you've cut back a bit too much. Obviously you mentioned the market share results remained healthy.

But how do you sort of think about flexing that line item and we're sure of voices today in the categories you're competing in.

Yeah, I mean, I you know.

You could probably see it in the release I mean, we felt very good about our organic performance I think our private brands.

Our very fundamentally healthy and I think our investment in both innovation and commercial programming, especially advertising are working very hard for us. So we're going to we're going to obviously work hard to make sure our margins improve but we want to maintain that investment in the brands.

Especially where it's working that said we have made some adjustments in some categories, where it felt like it was perhaps a little less effective in the current environment and so to that extent, we've done that we have trends are between the line spend a little bit but that I would tell you that's been more on the.

On the G&A front than on the N C. P front in the quarter. So I don't know Brad if something went out yeah, I think I describe it as we're being we're being very pragmatic here, we had some challenges.

<unk>.

Side that are affecting us and so.

So you know we have challenge is getting the product to our customers.

And where we've got.

Higher demand than we can fulfill at the moment because of the supply chain challenges. Yeah. We're really looking at what what are the near term returns on not on our investments and we've been.

Prioritizing knows there's a as we we look at the current situation.

And so we we trend we've trimmed the advertising investment a bit but that's on the back of significant step ups over the last two years and when I look at the year. Our expectation is that on a dollar basis will be up nicely from where we were in 2019.

Okay.

And then last question just as we look out obviously, there's a lot of volatility from a commodity cost standpoint.

And things have been moving in the wrong direction, and you're taking a lot of pricing to help offset that is there a certain point you can look out to where you think the year over year pricing at least based on the plans that are in place today as well as spot commodities, where we are today, where you were able to fully offset it on a year over year basis.

Obviously, there's still you know there's a big gap, leaving this year, but I'm wondering on sort of more of a go forward basis is it more in the middle of next year. When you think you have enough pricing to offset year over year commodity increases could it be earlier than that how do you sort of think through that conceptually understanding will be some gap, leaving this year, but went on a year over year.

Your basis, do we sort of get to an ability maybe to offset some of these cost pressures from your vantage point.

Yeah Dara.

That's why we've been saying what will offset you know or get our margins back in line and improving over time.

Both pricing and cost reduction I think the middle of next year is probably a good kind of perspective for us because obviously you know what happened. This year was you know we we saw the change in the commodity line, obviously coming out of the first quarter and so we announced pricing.

That was effective or well announce it at the end of the first quarter and it was effective in our second quarter of this year.

You know certainly couponing as it moves significantly since then and so are.

We've made additional actions and and that's our goal.

Going to take us time to implement fully so that's that's one component. The other component I will tell you that looking forward as you know and I think we indicated this about 2022 is the.

The global supply chain is under pressure and we do expect costs to remain elevated for a period not not all costs are certainly I think there're some fundamentals in eucalyptus market that would say hey, there's more capacity coming on line, so that should come back a little bit but the.

The polymer based products seem like they're gonna remain elevated for a little while we mentioned.

U S labor costs and pressures on transportation globally, I think that's going to remain elevated for a while because I don't see a fundamental catalysts to change that in the near term and so that's why we're making some cargos, yeah and I I I would add it it will depend on the.

Where commodities go and any any pricing actions that god that would take from here.

<unk>.

So I I I might be a little bit more cautious than the middle of next year in.

In terms of March and high margin recovery, but you know what we'll have to see how the dynamics play out I think at this point. It's just it's too early to call what I would what I would say is we understand the situation we understand what the drivers are and we'll manage through it with.

And I toward recovering our margins overtime.

That's helpful. Thanks, I'll get back in queue.

Yeah.

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

Good morning, Good morning, I wanted to just focus in a little bit on the supply chain disruption and you mentioned briefly in the prepared remarks can you guys. Just go to the battle and it's also impacting your sales outlook for this year. So was hoping you could give us a little bit more color on you know what what categories are we.

Talking about is it youre not able to procure inputs or is it about not being able to get from your factory.

The store effectively you know, which element to supply chain, because it's under pressure and what category should we be looking for that pressure and particularly next quarter.

Yeah Okay.

Maybe I'll start and Morris, probably got much more detail, but I would just not to be flip for them, but it is affecting almost kind of all areas of our operation I mean, certainly I think you can clearly see.

You know on fiber and resin based the commodity challenges and so I think that's kind of well established and visible for you. All I think maybe what maybe is a little less clear is kind of how it's rolling through and when would I mentioned labor markets and the transportation market as it ripples through and you know my take would be it looks like.

Covid appears to have increased the demand for goods over the past year or so.

Shifting of spend it a little bit from services to goods and so with that the other effect of Covid is and you've read all the articles about the great resignation, whether thats the case or whether it's more but there are a lot more options for hourly work. It has really tightened the hourly labor supply.

And so because of that you know that pressure on both sides.

Increased demands means much more demand for containers or trucking.

Yes, labor means fewer drivers to drive the trucks and because of that.

As you noted in our third even in our third quarter, while our service levels are improving significantly we were not able to get all our out orders out the door on the timeline that we wanted and and because of that that rolls through in multiple ways. You know one is.

We pay higher rates for employees higher wages, we're paying higher rates for transportation.

It's rolling through.

Some cases are our employee tenure is shortened dramatically. So it changing how we staff because we have to staff more people to get the product out the door.

We've got production outages.

Missed deliveries and that ripples through with fines and everything else with customers and so there's just the many ways that I think both this pressure on the labor side.

In the transportation market is kind of ripples through the costs and that's kind of why you're seeing a little softness in art and our force delivery most of that was because of the elevated costs.

Ray do you have more of that yeah, no I think that was pretty pretty thorough it's basically across the board getting supply into high <unk> males are getting supply out of our mail getting.

The product news around that distribution network.

Lots of lots of challenges on the on the warehouse side.

We need to hire in in a normal time, if we have 30 people given the inefficiencies with the labor turnover.

We might need to have 40 people just to get the same amount of product out the door. As an example, so its an across the board primarily in North America although.

In the U K it was I'll say distribution challenges, that's another market, where it impacted our our sales in the quarter and that also has to do with labor related to Brexit. So it's it's a I've never I've never seen a supply chain environment like.

Like this and it's a it's affecting us across the P&L yeah.

The only thing I'll add is I don't know that there's a I think we said in the notes not.

A short term solution here because it does feel like it's based on fundamentals, which is theres more demand for goods and and I think we're seeing that many categories beyond consumer.

And then and then there is it does feel like there's more options for hourly employment and because of that that's putting pressure on the labor markets.

And hiring for the roles that we need right now.

Okay and so when you also mentioned about I think it was in the prepared remarks that investing in the supply chain to meet demand. This is what we're talking about just it just absorbing higher costs its not.

Sure it'll capex type investment its investment, meaning an incremental workers and so on.

Yes, right, it's the P&L and back end and then.

<unk>.

I think I've mentioned that before in terms of the overall investment in Capex and where are those dollars going on.

Going to that part of the investment is that is in digital supply chain and that's been a that's been a driver of our Capex and will continue to be for several years and let.

Let me even when we look at things like the the S. Four it kind of upgrade we've wrapped a lot of our supply chain digital capabilities into that program.

But that's not new news.

Okay, Great I'll leave it there because it was a lot that you gave me sir thanks very much.

Thanks Lauren.

Thank you. Our next question comes from Chris Carey with Wells Fargo Securities.

Good morning, Chris.

Hey, good morning, Thanks, so much so.

So a couple of category questions actually.

On the personal care side can you just maybe it could be.

A bit on the strength that we're seeing in the business.

There's been a lot of commentary around.

Around challenge Birthrates, and yet the business continued to see strong growth.

Thank God.

Medical might excuse me until that your volumes this quarter.

Our forecast is wrong you know from the growth rates. This year are certain income class is doing better.

These stimulus offset the impact of the job losses.

Just any any perspective, you might be able to provide around.

That business seems to be doing better and then I'll just add on the second kind of category of question here I mean, I appreciate that the tissue business the consumer tissue business, you're seeing difficult constant continued destocking, but there has been some more boxes I wonder if you could just.

Spanned up upon that as well so that's one on the AR on the personal care side, and then on the tissue side as well please.

Yeah. So overall.

Our brand fundamentals are strong and really improving and.

I think it's really based on.

Differentiated innovation and excellent local commercial program.

Really the driver and I think our our brands are about as healthy as ive seen as far as long as I've been here.

Obviously, not all of them are working the way that we would like to work, but you know in general our brands are performing quite well the birth rate is.

You mentioned in diapers is real.

Although there's a couple of different dimensions of that which is one certainly a big decline in birth rate in China.

Five years ago, they were about 17 or $18 million worse than this year. It looks like there'll be about 10 ish right somewhere in that range and that said its still going to be a big market right and still the largest type of market in the world for a long time. So that's one thing that's one that you know that's on the downside the U S. On the contrast, because there was a little bit of a decline versus last.

Year that accelerated because of Covid actually slightly up this year and.

Actually we're seeing through the first couple of quarters and the projection is moving towards modest growth in the second half.

Is oh, sorry, that's a bit of positive news, but the overall I think the reason why youre seeing a strong performance in personal care is more of what I've talked about previously which is strong innovation pipeline and strong strong local programming on the commercial side and the teams will say, it's not any one thing it's the combination of a plan meaning great.

Innovation backed with great marketing great.

Great sales plan and local execution all working together.

I think the numbers you may have seen but personal care. You know is accelerating globally. It was up nine in the quarter with a strong recovery in North America that was up 11.

And then we're continuing to see that strong performance across DNA and most markets, making good progress in K C professional as well that was up 12 with North America being up 16, and a healthy balance of both price and volume.

And then and then consumer tissue, although still down in the quarter. It was down six and down nine in North America, I'd say that was stabilizing our consumption in North America was better than our organic and that's because we were cycling a big euro go customer or consumer inventory build that happened in the third quarter little bit happened in the fourth.

Quarter last year as well so.

So we're cycling that but I'd say, you know I would say the good news on consumer tissue globally. It feels like its stabilizing we have given up a little share in North America, we probably picked up a little share last year on bath tissue, because we had a little more availability our teams were scrambling to.

Put out as much output was good as we felt like there was a lot of consumer need for our products last year and so we did that and we probably gave back a little share.

But again I think overall, we feel like consumer tissue, certainly stabilizing versus what we saw in the first and second quarters.

If I could just thanks for that if I could just have one follow up just on the pricing in consumer tissue I was surprised to see it come in.

Relatively low given the magnitude of the inflation that is historic as you mentioned number of times today is that just a function of timing with zero promotional event in the quarter that offset some of the pricing do you expect that to build significantly from here just any perspective or is that a function of sort of the market share issues youre seeing it maybe not pricing as much as you said.

Any perspective, you might be able to just provided around the pricing and you.

The consumer tissue business, and maybe how you see that shaping up in the very near term thanks for that.

Yes, consumer tissue, particularly in North America will build as the year goes on into next year and so yes. So there was not that much in this year and then we did have a little a little additional trade investment versus year ago, and so that offsets some of it but we expect that to continue to build as the year goes.

Okay. Thanks, so much.

Great. Thank you Chris.

Yes.

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

Good morning, Kevin Great Hey, Good morning, Mike Good morning Maria.

Mike I wanted to.

Want to come back just on market share you touched on a moment ago and you didn't seem overly concerned about the U S. As we look at the Nielsen data, it's down across the board for the most part in the most recent four weeks and 12 weeks and to your point, Mike. It has been more pronounced in tissue and towel, but but it's not entirely tissue Intel so I just wanted to kind of.

Get your get your opinion your view on where you stand in the U S. Your relative satisfaction. How you believe your supply chain may or may not be more impacted or impacted to a greater degree by some of the supply chain issues out there.

And how you're thinking about just broadly to a question earlier just pulling back on spending in light of some of the some of the market share trends, which I suspect, you're probably not where you'd hope they would be but I can start there and then I have a follow up.

Thank you for keeping us for.

Honest on the shares, but what I would say, yes, we're improving from a tight supply situation and so you know.

That's probably the big thing and so we're recovering really well I think we have for the year.

Or even in four of eight categories in North America, that's a little less than kind of what I would like but seven of eight sequentially. So we're making progress and so if you remember Kevin we had really.

Tight supply situation at towards the end of the first quarter and that flowed through the whole second quarter, we were down.

Mid single digit share points I think in diapers at that point and so the team has really done a nice job recovering I think in diapers were up 340 basis points sequentially in the quarter.

And just a little just about even maybe a little bit.

Less than even on share overall.

In the quarter. So so we feel good about the recovery I think we're making good progress in adult care tissue as I mentioned on the Bath tissue side were a little soft because we had maybe a little elevated share that I was hoping to hold onto.

But we haven't held onto it but that was more due to availability.

<unk> is up pretty good pretty substantially.

Substantially and we feel good about that although the category is down and then on towels, we're down about a little over a point.

The issue there is we given supply conditions, we have shifted.

Some of our supply of production from towels, two bath and Thats caused part of that so so overall you know I would say that the brands are moving in the right direction not all but.

We feel like we have the right plans in place and we're going to continue to make progress.

Got it got it. Thanks, Thanks, Mike and then a quick follow up for both of you just don't trade promotion like I think you made a comment that the between the lines spending.

It was down I believe that you said or maybe down sequentially just clarify on that I've brought equipment, it's not just Kimberly Clark, but broadly for CPG. They continue promotion levels are moving higher and understandably moving higher off of lower basis in the prior year.

But sort of triangulating that with with the cost environment, what is sort of the logic between the CPG companies and retailers at this point to move trade promotion higher like is there a right level is the normalization do you want to get back to pre pandemic levels and sort of if so why I mean, what what is the sense behind that particularly in the current environment and then I'll pass it on thank you.

Yeah, Okay, Kevin maybe I'll comment on the trade and Maria maybe you can comment on the between the lines, but one in North America in particular, I think the promotion levels have moved back to quote unquote typical levels.

The percent as measured by percent promo sold on or percent sold on promotion was down 50% to 75% last year.

As we all curtail promotions.

The demand.

At this point I'd say, it's returned to historical levels, both in personal care, which happened about the third quarter of last year and then in consumer tissue.

This quarter or the other.

Every quarter this year.

Yeah, and just philosophically why you know I do think retailers do believe brand switching occurs.

With brands and so promotions continue to be important or categories.

There is potentially some share shifting frankly.

My emphasis would be.

I call the high road approach to growing brands, which is growing brands through great innovation and marketing and using trade and promotion is a fundamental element of that to support what we're doing from a marketing perspective, but you know I don't really value share from promotion alone and so so you know in general you know, we're going to be focusing on being.

With how we spend our promotions and being disciplined about it.

Especially Kevin as you might imagine in this environment, where.

Certainly pricing and price realizations important given what's happening with the cost front.

Got it thanks, Mike.

And then on the the rest of it just just generally on between the lines for the quarter.

15, 6% that that well.

And the main driver of that is around incentive comp.

As you can imagine with the updated.

Forecast.

The incentive payments will be meaningfully lower.

And in the third quarter.

We not only step those down but we also had a basically an accrual adjustment true up from the first half. So there was that there was a sizable.

Hi benefit on incentive comp reflected in the third quarter.

And and I will call out that we expect in the fourth quarter that the between the lines well, we'll step back up and that's that's two things we won't have that.

Incentive comp.

Trip accrual.

And seasonally our SG&A runs higher in the fourth quarter.

And in the in the rest of the year.

Got it. Thank you both of its so seemingly Mike at the retailers that are driving more of this just not to put words in your mouth, but it seems like there's an appetite there among the retailers.

To normalize the categories is that fair.

Ah I don't I wouldn't put it all at retailers I mean, I think I think the manufacturers also rely on it as well.

Certainly.

<unk> kind of attitude or philosophy for it is.

I think I've said, it before I don't like to rent share through promotion.

If we can use promotion to drive the trial that we want on our innovation I'm supportive of that and so so that's a little but I may have a slightly different take than others, but I wouldn't lay it out as a bit of our customers. They are great partners.

Our categories matter to them and.

And obviously, they they matter a lot to us and so so it's a it's a symbiotic relationship.

Understood. Thank you for all the color I appreciate it good luck.

Yes.

<unk>.

Thank you. Our next question comes from Peter Grom with UBS.

Morning, Peter Hey, Good morning, Hey, Good morning, Murray, just kind of want to go back to the 2022 margin recovery maybe.

Maybe just a housekeeping one first that Mike following up on Gary's question, the halfway through the year or maybe a little bit longer is when do you expect margin expansion is that year over year or when do you expect margins to return to more normal historical levels and is that gross margin or operating margin my thought would be expansion in gross margin, but just wanted to confirm.

And then this is a bit more conceptual but I just want to understand how you think about adding back advertising next year, particularly as hopefully supply constraints get better.

Gross margin improves like how do you balance you know.

Recovery of operating margins back to the high teens versus reinvesting back in the business to set yourself up for growth in years to come, particularly given the lower spend you'll be cycling this year. Thanks.

Sure.

Peter I'll start and then Mike can can chime in.

So.

Net next year, we'll have some interesting dynamics and it's probably going to be a bit of a tale of two halves. When you look at the first half of this year and the second half of this year, that's going to drive some year over year.

Our comps that that will have have some different dynamics, but as I said.

We'll have to see really how commodities play play out and how pricing plays out.

And.

I would characterize it as will lift to recover margins overtime, we are very focused on margin recovery.

And exactly when that's going to happen I I'm not I'm not prepared to say, but we will have a lot more to say on that in.

In January when we have three months more of.

Visibility and three.

Three months more of additional actions that will take.

And at the management team, we're working through our 2022 planning cycle now and so we're pulling that together and.

Given the volatility and the lack of visibility that we've that we've had.

It's too early to call the year, but we'll give you our best view in.

In January and Mike I think you can probably comment on advertising and how you see that unfolding yeah.

Peter.

We've actually increased our advertising investments significantly over the last few years and we feel good about that and clearly I think that's showing up in the numbers in terms of the organic growth in the overall health of the brands that we as I talked about earlier on this call. So we feel good about that.

I would say at this point.

We will look to continue to build that we're probably operating kind of in the five plus or minus five 5% range of sales, it's still a little lower than our primary competitors I would like that to be higher over time, although we'll probably never will match some of our competitors at the same levels. They they will but I still think we can productively invest more.

And make that.

<unk>.

A win win for the brand.

While growing our margins at the same time that the unique thing about advertising of this in this environment or kind of as digital has unfolded as the returns are much better than they historically have been and so we continue to improve our efficiencies, we're getting better at that and so.

So for US we're going to continue to look for ways to grow the business and thats going to.

<unk> through advertising investment and at the same time.

Laurie and I will also work to deliver a balanced plan that will deliver.

As we just mentioned margin improvement over time.

While delivering improved organic growth.

Yes.

Thank you.

Even outside of advertising and when we look at between the lines spending I commented and I commented earlier, but embedded in there.

Yes.

I should note.

Beyond incentive compensation dynamics, we are reducing other discretionary spending including in the kind of core SG&A.

At the same time, we're continuing to invest primarily around.

Digital.

The types of investments in our commercial capability development. So on the P&L you didn't see the full net effect of the actions that we're taking there because we we are continuing to invest we are.

The commodity inflation ran up on us quickly at wise.

Hi.

Are in excess of what we expected.

In the third quarter.

But we are continuing to make investments in the company for the long term and we're very committed to what to doing that and focused on the long term health of the company and the brands.

Great. Thank you so much and best of luck.

Okay. Thanks.

Thank you our.

Our next question comes from Steve powers with Deutsche Bank.

Yeah, Hey, guys.

Hey, Mike So could you talk a little bit about force savings.

A little bit.

The lower end of your plan.

Against the rising cost backdrop, I guess I've been sort of talked to think of those those two numbers is positively correlated so as those cost inflation goes up your procurement savings tend to tend to also increase obviously, we're not seeing that right. This moment so is that.

What do I believe but should I gleaned from that in the near term.

Is it temporary.

Re force savings Reaccelerate into 'twenty, two so there's a timing issue or is it some kind of indication that you are.

And you're starting to starting to run out of run out of runway on force.

Sure, we're definitely not running out of runway on on force and we continue to see opportunities in the supply chain and some of the digital.

Digital supply chain investments that that I referenced earlier in the call.

Will help us unlock those opportunities.

The force cost savings for this year is really affected by the supply chain challenges that we've been facing which are a headwind for our cost savings and it's related to production and distribution inefficiencies caused by demand volatility and also the logistics issues that we've been.

Been talking about on.

The way that the force cost savings program works is I've been negotiated material price is a piece of it which I'll come back and talk about in a minute and then we have core productivity in our supply chain operations as well as.

Product.

Revisions to achieve design to value savings so in the quarter, we had a very good savings associated with the negotiated material prices. We also had benefits from productivity improvements and product changes.

But not as much as we were hoping and.

You have to net positive.

I in terms of total delivered costs for it to count as force cost savings.

As you have headwinds coming in there.

They offset the gross force cost savings that we would report and that that's really what we're what we're seeing now the headwinds that are flowing through manufacturing or I are dampening, but the net result of force, but theyre strong gross savings there.

The other issue that we've got on force is our supply chain folks are very focused on managing through this near term environment to get product produced and to get it to customers. So they can get in the hands of consumers and that leaves less time for them.

Pleased to be working on productivity initiatives within the supply chain. So it's really those two things that are lowering the poorest cost savings number for this year, but we have a healthy amount of room to go in terms of driving force.

By chain.

Productivity as we move forward.

Got it so playing it back as the bottlenecks on supply chain hopefully alleviate themselves. Then you have essentially some pent up force savings.

That should come to the surface.

We do it and I should go back to the other part of your question right. There's really two pieces of this force cost savings the negotiated material prices.

R R.

Savings are much higher this year given the contract structure is the first is <unk>.

Rapid inflation on the commodity side.

But those days.

Contracts get reset on a on a regular basis, though so it'll be reset at higher levels. So when I look forward.

I wouldn't expect as much benefit as we had this year.

Do you think about where we were coming into 2020 versus where commodities. When we got a sizable benefit in force Guy there. This year. So that's that piece of it.

But on the core productivity I would expect us to have more savings on that part of that as we move forward got it okay perfect and then.

If I could pivot.

You talked to incremental pricing and you Mike touched upon through the views on trade and promo and the conversation with Kevin but I was just I guess I was looking to think about next year in <unk>.

Whether the the.

The path to margin recovery is really.

List price focused or if there are sizable revenue growth management opportunities that you have around the list price.

What the balance balance of that is as you think as you start to think about.

Yes.

The building blocks into 'twenty two.

Yes.

It's all of that so a great question, Steve and great Great perspective, I think I would sure yours, which is it's I think it's a balanced deployment. Obviously this year, we went with list.

Because it can be a little quicker and a little more efficient to implement for both us and our customers that said you know I think long term and our categories I would say for us it'll be a combination of list.

Pack right pack count and.

And pack architecture, right sizing and then and then also.

Promotion strategy right and I think all of those are fertile ground for us.

When talking about our revenue growth management for a couple of years now we're still early in the journey and getting better at it but we have a lot of great tools globally that we're using to support our planning in.

We're getting more and more disciplined about it and again I think that balanced across the levers will be important for us.

For next year, but I think going forward.

Great. Thanks to you both I appreciate it thank you Steve.

Thank you. Our next question comes from Nik Modi with RBC capital markets.

Good morning, Nick Yeah. Thank you good morning, good morning.

So Mike just a question on pricing I think he's obviously things have looked pretty good for consumers in pretty good shape, but.

Stimulus kind of feeds all of that cash.

You guys are sitting on.

It's two <unk>.

<unk> into 2022, how are you guys thinking about.

Potential pricing and price elasticity.

I feel like more is going to need to happen because we all I think get the joke here that costs are going to continue to rise.

And so I just wanted to get an understanding do you have any strategies in place to kind of minimize the amount of price shock that somebody's consumers might feel that as we get into 2022.

Yes, I mean, Nick.

You're just talking about with Steve again, I think we are investing a lot of tools and so at this point I think our elasticity modeling is pretty good fairly accurate I would say given our categories Nick that the elasticity tends to be a little less when realized.

Then what predicted just just because.

Look back tissue the.

The consumption doesn't change that much maybe maybe the value tier you purchase at may shift a little bit and so so there's that dynamic, but we are sensitive to that and it's also wise, what's core of our strategy.

<unk> is developing a great value proposition to our consumer and so we're always cognizant of that and I think one of the things that we've done in many markets around the world.

Is offer a great proposition on both the value side and also the premium side and while our strategy generally is to elevate our categories and expand our categories I do think pricing in our categories with a premium innovation of our categories, a little less than some of the others that I have worked in the past and I still think there's room to grow.

However, you know we want to be able to shift.

And that's what we've done in a market like Latin America, and one of the reasons why.

We've grown share this year is because we've been able to pivot between our premium tier and our value tier for reference two years ago, we were making a student body left to go premium and we shifted a significant portion of our mix in Brazil from value to premium.

And over the past 18 months, we've been shifting it back the other way because thats, what the consumer needs and so we're really cognizant of that we're aware of the elasticities. Thus far I would say our volumes have held up although I think what's really happening is we're seeing the intended elasticity, but we do have brand growth initiatives that are offsetting some.

Elasticity impact.

Great. Thank you pass it on.

Thanks, Nick.

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

Morning, Jason.

Hey, good morning folks thanks for sneaking me in.

Two questions first just a follow up for clarification.

I thought Dara ads, when you expect price and cost to be effectively net neutral not I don't think es when do you expect margin recovery.

I think most of the answers have been around margin recovery, but so can you clarify you are not expecting price to be caught up with costs.

Until the back half of next year or not even like even that is too optimistic it's somewhere beyond the midpoint of next year when price actually catches up with cost centers paribus.

I think well well well hold on the 2022.

Comments until we get to January and and then we will we'll have more to say about that once we have three months more visibility into what's happening in the commodity market, what's happening with with price that's either in the in the market or.

We'll be in the market and and we'll give you our best view there I don't think it's.

Got it.

Productive to speculate on that right at this point given the volatility.

Yeah, I'm just trying to tell me what you actually said because I think I've heard like two different explanations on next year. So you are actually set a law in 2022 I'm just looking for clarification on what you actually did say.

But I appreciate if you don't want to add more.

So pivoting back to just the core business then.

Good momentum in personal care I mean, you are getting the price your market shares are holding up the businesses turn back to the degree of profit growth all pretty encouraging but the tissue business looks very different.

Especially on the margin degradation side and the lack of price momentum can you can you elaborate on what's holding you back on price and what actions have you taken what is in market now and why are we not seeing more momentum on price so far.

Yeah, again, I think what youre seeing in personal care, we did move.

Very early on when we had our our commodity forecast update in the first quarter and so we did move on that you know at the.

Time I think.

The.

Tissue side or the fiber side was less clear and so I would say, we probably moved a little slower on the tissue side, we have announced.

Some broad pricing actions in multiple markets. Since then and so that's why I said earlier, Jason that I would expect our tissue price realizations to continue to improve as the year progresses.

Have you raised prices in the U S.

In tissue.

We announced some price changes in August with our retailers.

Got it thank you.

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

Thank you good morning, everyone. So I have.

Two questions. One is a follow up on the supply chain disruption looking ahead on availability of raw materials and transportation lines do you believe those.

We will linger into the first half of 2022 setting aside the pricing commentary that you may not be ready to just in terms of availability.

All materials and transportation.

And then a second one on the category growth between tracked and Untracked channels do you just see brakes growing fast at any Congress because of the tough comparisons in the quarter and do you see this show you shouldn't that you alluded to in North America, mostly due to the fact that your competitors.

Took longer to take pricing or is that more of the availability issue. Thank you.

I'll start with supply chain disruptions I E.

I don't I don't see a near term catalyst for them, improving I think that the labor issues in the in the U S are very real and that's where we are feeling the brunt of.

The challenge is on the on the supply chain side.

More globally I mentioned, the U K market, but also with our global shipping.

That that is those issues are also quite quite challenging in a number of our eye in a number of our markets, but the.

The most acute issues and meaningful cut.

Cost increases first is what we had been expecting is in North America.

And that the labor market in the in the U S. I, just don't see a near term catalyst, though I think that.

The headwinds and the increased distribution cost.

We'll.

We will certainly be with us into 2022, and we'll have to see all of this plays out it's not just affecting us of course, it's affecting.

Companies quite broadly and are and where we're all dealing with these challenges.

And then Mike on category and share I'll turn that whenever you Andre.

Again online continues to perform very well for us and.

And then on tract as well and so I think thats, probably why theres, probably a discrepancy in our view of our market share performance, which we see is as a little stronger than maybe what you might see and so so overall, we feel we feel very good about that and the category growth.

Actually in both channels and I think our brands are performing well the issue that we've had on share a couple of different areas in North America, It's primarily been an issue around supply and so even though we've made substantial improvement.

And our fulfillment throughout the course of the year, we're still not meeting all orders out there and so our shares stole a little light from that dimension and then in a couple of other markets again I think it is as you point out maybe some relative price indices that have expanded a little bit in the short term.

We've moved on pricing in most markets and while we've generally seen.

Moves from branded competition, we haven't seen that in all markets and so there's still a little softness we're experiencing in western Europe and in some markets in Latin America.

And Mike just to and I. Appreciate you both but just on the track channels and non tracked e-commerce, how much. It grew this quarter vis a vis flashy and how much it represents now globally.

But that would be helpful.

Overall globally, we're probably in the mid mid to high teens at this point I don't have the growth rate off hand, but.

Yeah.

Double strong double digits is what I would say.

On top of like I was.

Also a very strong performance last year stronger language last year.

All right Great news being our fastest grower was our biggest market so that was good.

And so what you get online continues to be important and increasingly important and.

And we're operating very well there.

Okay, great. Thank you thank.

Thank you.

Thank you there are no more questions at this time.

Okay, well. Thank you all for taking the time to be with US today, we're working hard to drive sustainable brand growth and taking further action to ensure that we improve our margins and earnings profile. So thank you all.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

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Okay.

Okay.

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Yeah.

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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. At the conclusion of this morning short remarks, we will open the floor for questions and at that time instructions will be given after the procedure to follow if you would like to ask a question.

It is now my pleasure to introduce today's first presenter Terran Miller.

Okay.

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

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 we also published prepared management remarks from Mike and Maria the summarized our third quarter results and full year 2021 outlook.

These documents are available in the investors section of our website.

We hope you find it valuable to have our 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 may make forward looking statements.

Please see the risk factors section of our latest annual report on Form 10-K prefer the 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 there.

The release has further information about these adjustments and reconciliations to comparable GAAP financial measures now I'll turn it over to Mike.

Thank you Terry good morning, everyone before we get to your questions I'd like to offer some perspective on our third quarter and further actions. We're taking in response to this dynamic and challenging macro environment.

Organic sales were strong up 4% in the quarter and included the impact of pricing actions implemented in the second and third quarters.

In North America personal care organic sales were up 11% driven by mid single digit increases in both net selling price and volume.

And D&A markets personal care organic sales were up 7% organic sales increased double digits in Argentina, Brazil, China, India, Eastern Europe, and South Africa.

Our top line performance was strong despite the resurgence of Covid, which impacted growth in austere Latin American KC professional.

Our market positions remain strong and are improving reflecting strong innovation and excellent commercial execution in nearly all key markets.

Our share positions in North America remained solid with good sequential gains in personal care.

Our share performance in DNA markets remains robust, where we continue to strengthen our diaper leadership positions in key markets, including China and Brazil.

We also continue to focus on cost with our teams delivering solid savings of $150 million in the quarter in.

In addition, we reduced between the line spending.

Now clearly our margins and earnings were disappointing as higher inflation and supply chain disruptions increased our costs well beyond the expectations, we established just last quarter.

I'd like to highlight the effect of three areas of volatility that are most impacting our business.

First as we noted in July and on the basis of external forecast, we had expected commodity prices to ease in the second half of 2021.

Instead prices for resident pulp increased further in the third quarter and are now expected to stabilize at a meaningfully higher level than our prior estimate.

Second a tight U S labor market and disruption in domestic and international transportation markets are having an elevated impact on our supply chain as we work to get our products to the shelf and meet consumer demand.

Third energy costs were up dramatically in Europe, where natural gas prices have risen as high as six times a year ago levels.

Energy prices in North America are also up sharply although not to the same extent.

As a result, our margins are down we're down with declines only partially mitigated by the actions we've taken to date.

We're not pleased with our results and we're taking further action to mitigate the impact of higher input and labor costs.

These steps include further pricing actions additional initiatives to ensure we achieve our cost savings goals and tightening discretionary spending.

At the same time, we remain committed to investing in our brands and commercial capabilities.

While we expect to see some benefit from these actions in 2021, we have further reduced our outlook for the year.

This reflects our third quarter performance and our expectations for the fourth quarter.

And while we're not ready to call our outlook for 2022, I will offer a perspective on key variables that will affect our plan next year.

First we continue to build topline momentum in.

In addition, our pricing actions brand investment and commercial program should provide further benefit in 2022.

Second some discrete headwinds we faced this year will be behind US. This includes the U S winter storm and presumably consumer tissue destocking.

Third some headwinds we faced this year may become more persistent we're now expecting further inflation on several key commodities were also expecting continued tightness in the labor and transportation markets, which will continue to impact our global supply chain, all the way to our customers.

In addition, the going forward impact of Covid on both demand and supply remains very unpredictable.

We will continue to move decisively and navigate changing market conditions.

We'll also continue to invest in our brands and capabilities to maintain brand momentum.

Our strategy is working and we remain confident in our future and are confident in our ability to create long term shareholder value.

Now 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 star key followed by the one piece that is star one on your Touchtone phone now questions will be taken in the order in which they are received is that any time you would like to remove yourself from the question in queue. Please press star two.

Again that is star one if you would like to ask a question.

Thank you. Our first question comes from Dara <unk> with Morgan Stanley.

Dara.

Hey, guys how are you.

Yeah.

Good been better.

Yes, yes, well tough environment.

So you mentioned further pricing actions, Mike could you just be a little more specific there maybe review what you've done globally in terms of percent of portfolio magnitude of increases generally where you've taken increases.

And maybe just some insight in terms of the forward pricing are you looking at it more on a product category basis geographic basis, but just as you think about the forward pricing any more insight would be helpful.

Okay, if youll indulge me Dara, maybe I'll start a little bit philosophically.

I would say based on our strategy and our improving margins as a core asks a K C 2022 for us and so we've taken further actions to offset inflation, I mean and I believe.

Margin improvement is a fundamental pillar of what we need to do for the company and so we expect to fully offset inflation with both pricing and cost reduction so a combination.

We expect to fully offset that over time, so we announced some further actions in Q3 the year to date, our actions are fairly broad.

Reaching every region every business.

Generally.

Actually not every single business, but generally across most markets.

And so in Q3, we've announced.

Our actions in North America.

Professional and consumer.

Latin America.

And other markets selectively so so I would say pretty far reaching.

I will tell you Dara our earlier pricing actions are generally on track as you saw kind of in the release.

Had three points of price factor in organic in the quarter.

We have seen some other brands move, particularly in north.

With America, I Havent seen significant movement in private label yet.

Although I'll note that that typically occurs a little bit later, and we've had a little share softness but in general I think our volumes are holding up well.

Okay.

And on the advertising side, certainly you've cut back a bit this tire commodity environment.

Is there a point when you get concerned that maybe you've cut back a bit too much. Obviously you mentioned the market share results remained healthy.

But how do you sort of think about flexing that line item and we're sure of voices today in the categories you are competing in.

Yes.

You could probably see it in the release I mean, we feel very good about our organic performance I think our private brands.

Our very fundamentally healthy and I think our investment in both innovation and commercial programming, especially advertising are working very hard for us. So we're going to we're going to obviously work hard to make sure our margins improve but we want to maintain that investment in the brands.

Especially where it's working that said we have made some adjustments in some categories, where it felt like it was perhaps a little less effective in the current environment and so to that extent, we've done that we have trend are between the line spend a little bit, but I would tell you that's been more on the.

On the G&A front than on the HCP front in the quarter. So I don't overreact to something yes, I think I describe it as we're being.

Were being very pragmatic here, we had some challenges.

<unk>.

Side that are affecting us and.

So we have challenges getting the product to our customers.

And where we've got.

Higher demand than we can fulfill at the moment because of the supply chain challenges.

We're really looking at what what are the near term returns on our investments and we've been.

Prioritizing knows.

As we look at the current situation.

And so we trend we've trimmed the.

Advertising investment a bit but that's on the back of significant step ups over the last few years and when I look at the year, our expectation is that on a dollar basis.

We will be up nicely from where we were in 2019.

Okay.

And then last question just as we look out obviously theres a lot of volatility from a commodity cost standpoint.

And things have been moving in the wrong direction, and you're taking a lot of pricing to help offset that is there a certain point you can look out to where you think the year over year pricing at least based on the plans that are in place today as well as spot commodities, where we are today, where you are able to fully offset it on a year over year basis.

Obviously, there is still a big gap, leaving this year, but I'm wondering sort of more of a go forward basis is it more in the middle of next year. When you think you have enough pricing to offset year over year commodity increases could it be earlier than that how do you sort of think through that conceptually understanding there will be some gap, leaving this year, but went on a year over year.

Basis, do we sort of get to an ability maybe to offset some of these cost pressures from your vantage point.

Dara.

Why we have been saying what will offset.

Our get our margins back in line and improving over time.

Both pricing and cost reduction I think the middle of next year is probably a good kind of perspective for us because obviously what happened this year was.

Yes.

We saw the change in the commodity line, obviously coming out of the first quarter and so we announced pricing.

That was effective or we announced that at the end of the first quarter and it was effective in our second quarter of this year.

Certainly commodities have moved significantly since then and so we've made additional actions and and Thats.

Going to take us time to implement fully so.

That's one component the other component I will tell you that looking forward is.

I think we indicated this about 2022 as the global supply chain is under pressure and we do expect costs to remain elevated for a period not not all costs.

I think there're some fundamentals in the eucalyptus market that would say hey, there's more capacity coming on line, so that should come back a little bit.

But the.

The polymer based products seem like they're gonna remain elevated for a little while we mentioned.

U S labor costs and pressures on transportation globally, I think thats going to remain elevated for a while because I don't see a fundamental catalysts to change that in the near term and so that's why we're making some of our most yes.

Yeah, and I would add it will depend on the.

Sure.

Where commodities go and.

Any any pricing actions that.

That would take from here.

Uh huh.

So so.

I might be a little bit more cautious than the middle of next year.

In terms of merch margin.

Margin recovery, but.

We'll have to see how the dynamics play out I think at this point.

It's too early to call what.

What I would say is we understand the situation we understand what the drivers are and we'll manage through it with an eye toward recovering our margins overtime.

That's helpful. Thanks, I'll get back in queue.

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

Good morning, Laurie good morning.

I wanted to just focus in a little bit on the supply chain disruption.

You mentioned briefly in the prepared remarks, and you guys just spoke to the bedpost, Ken. It's also impacting your sales outlook for this year. So was hoping you could give us a little bit more color on what categories are we talking about is it youre not able to procure inputs or is it about not being able to get from your.

Factory to the store effectively which element to supply chain, that's under pressure and what category should we be looking for that pressure and particularly next quarter.

Yeah Okay.

Maybe I'll start with Morris, probably got much more detail, but I would just not to be flip learned but it is affecting almost kind of all areas of our operation I mean, certainly I think you can clearly see.

On fiber and resin based the commodity challenges and so I think that's kind of well established and visible for you. All I think maybe what maybe is a little less clear is kind of how it's rolling through and what I mentioned.

Labor markets and the transportation market as it ripples through and my take would be it looks like.

Covid appears to have increased the demand for goods over the past year or so.

Shifting of spend a little bit from services to goods and so you know.

With that the other effect of Covid is and you've read all the articles about the great resignation, whether thats the case or whether it's more that there are a lot more options for aldi work. It has really tightened the hourly labor supply.

And so because of that.

Pressure on both sides.

Increased demands means much more demand for containers or trucking less labor means fewer drivers to drive the trucks and because of that.

As you noted in our third even in our third quarter, while our service levels are improving significantly we were not able to get all our app orders out the door on the timeline that we wanted and and because of that that rolls through in multiple ways. One is.

We pay higher rates for employees.

Higher wages, we're paying higher rates for transportation.

It's rolling through.

Some cases, our employee tenure is shortened dramatically. So it changing how we staff because we have to staff more people to get the product out the door.

We've got production outages.

Miss deliveries and that ripples through with fines and everything else with customers and so there's just the many ways that I think both this pressure on the labor side.

The transportation market is kind of ripples through the cost and Thats kind of why you're seeing a little softness in our in our force delivery most of that was because of the elevated costs.

Randy you have more of that yes, no I think that was pretty pretty thorough it's basically.

Has the board getting supply into into our mills getting supply out of our mill getting.

The product moved around the distribution network.

Lots of lots of challenges on the on the warehouse side.

We need to hire in a normal time, if we have 30 people given the inefficiencies with the labor turnover.

We might need to have 40 people just to get the same amount of product out the door as an example, so it's.

Across the board primarily in North America, although in the UK. There was also distribution challenges, it's another market where it impacted our sales in the quarter and that also has to do with labor related to Brexit. So if it's a.

I've never seen a supply chain environment like.

Like this and it's it's affecting us across the P&L.

One thing I'll add is I don't know that there's a I think we said in the notes.

A short term solution here because it does feel like it's based on fundamentals, which is theres more demand for goods and I think we're seeing that many categories beyond consumer.

And then and then there is it does feel like there's more options for hourly employment and because of that thats, putting pressure on the labor markets.

And hiring for the roles that we need right yes.

Okay and so when you also mentioned about I think it was in the prepared remarks that investing in the supply chain to meet demand. This is what we're talking about just it just absorbing these higher costs its not.

Structural capex type investment its investment, meaning an incremental workers and so on.

Yes, right into the P&L in depth and then.

<unk>.

I think I've mentioned that before in terms of overall investment in Capex and where are those dollars going on.

Going to that part of the investment is in.

In digital supply chain and that's been.

That's been a driver of our Capex and we will continue to be for several years and.

Even when we look at things like the <unk> upgrade we've wrapped a lot of supply chain digital capabilities into that program.

But that's not new news.

Okay, Great I'll leave it there because it was a lot that you gave me sir thanks very much okay. Thanks Loren.

Thank you. Our next question comes from Chris Carey with Wells Fargo Securities.

Good morning, Chris.

Hey, good morning, Thanks, so much.

A couple of category questions actually.

On the personal care side can you just maybe.

A bit on the strength that we're seeing in the business.

There's been a lot of commentary.

Around challenged birth rates and yet the business continued to see strong growth I think North America might have been killed your volumes this quarter.

Our forecast is wrong and the growth rates. This year are certain income class is doing better.

As stimulus offset the impact of the job losses.

Just any perspective, you might be able to provide around why that business seems to be doing better and then I'll just add on the second kind of category of question here I appreciate that the tissue business.

Consumer tissue business, we see difficult constant continued destocking, but there has been some.

Bosses I Wonder if you could just.

Spanned up upon that as well so that's one on the.

On the personal care side, and then on the tissue side as well please.

Yeah. So overall.

Chris.

Brand fundamentals are strong and really improving and I think it's really based on differentiated.

<unk> differentiated innovation and excellent local commercial program.

Really the driver and I think our our brands are about as healthy as ive seen as far as long as I've been here.

Obviously, not all of them are working the way that we would like to work, but in general our brands are performing quite well the birth rate.

You mentioned in diapers is real.

Although there is a couple of different dimensions of that which is one certainly a big decline in birth rate in China.

Five years ago, there were about 17 or $18 million worse than this year. It looks like there'll be about 10 ish right somewhere in that range and that said its still going to be a big market right. It is still our largest tobacco market in the world for a long time. So that's one thing that's one.

On the downside the U S. On the contrast, because there was a little bit of decline in versus last year that accelerated because of COVID-19 actually slightly up this year and.

Actually we're seeing through the first couple of quarters and the projection is moving towards modest growth in the second half.

As so.

That's a bit of positive news, but the overall I think the reason why youre seeing a strong performance in personal care is more of what I've talked about previously which is strong innovation pipeline and strong strong local programming on the commercial side.

And with the teams we will say, it's not any one thing it's the combination of a plan, meaning great innovation backed with great marketing great.

Great sales plan and local execution all working together.

And I think the numbers you may have seen but personal care.

It is accelerating globally. It was up nine in the quarter with a strong recovery in North America that was up 11.

And then we're continuing to see that strong performance across DNA and most markets, making good progress in K C professional as well that was up 12 with North America being up 16, and a healthy balance of both price and volume.

And then.

And then consumer tissue, although still down in the quarter was down six and down nine in North America, I'd say that was stabilizing our consumption in North America was better than our organic and Thats, because we are cycling a big yearago customer or consumer inventory build that happened in the third quarter little bit happened in the fourth quarter last year as well.

So we're cycling that but I would say I would say the good news on consumer tissue globally. It feels like its stabilizing.

We have given up a little share in North America, we probably picked up a little share last year on bath tissue, because we had a little more availability our teams were scrambling to.

Put out as much output it will it could as we felt like there was a lot of consumer need for our products last year and so we did that and we probably gave back a little share.

But again I think overall, we feel like consumer tissue.

Stabilizing versus what we saw in the first and second quarters.

If I could just thanks for that if I could just have one follow up just on the pricing in consumer tissue I was surprised to see it come in.

Relatively low given the magnitude of the inflation that is historically as you mentioned number of times today is that just a function of timing with zero promotional event in the quarter that offset some of the pricing do you expect that to build significantly from here just any perspective or is that a function of sort of the market share issues youre seeing and maybe not pricing as much as just yet.

Any perspective, you might be able to provide around the pricing and you.

In the consumer tissue business, and maybe how you see that shaping up in the very near term. Thanks for that yes, yes, consumer tissue, particularly in North America will build as the year goes on into next year.

Yes, so there was not that much in this year and then we did have a little additional trade investment versus year ago, and so that offsets some of it but we expect that to continue to build as the year goes.

Okay. Thanks, so much.

Great. Thank you Chris.

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

Good morning, Kevin.

Good morning, Mike Good morning Maria.

Good morning, Mike I wanted to.

I wanted to come back just on market share you touched on a moment ago and you didn't seem overly concerned about the U S. As we look at the Nielsen data.

It's down across the board for the most part in the most recent four weeks and 12 weeks and to your point, Mike. It has been more pronounced in tissue and towel, but it is not entirely tissue Intel so I just wanted to kind of.

Get your get your opinion your view on where you stand in the U S. Your relative satisfaction. How you believe your supply chain may or may not be more impacted or impacted to a greater degree by some of the supply chain issues out there.

And how youre thinking about just broadly to a question earlier just pulling back on spending in light of some of the some of the market share trends, which I suspect, you're probably not where you'd hope they would be but I can start there and then I have a follow up.

No. Thank you for keeping us for.

Honest on the shares, but what I would say, we're improving from a tight supply situation and so.

That's probably the big thing and so we're recovering really well I think we have for the year.

Or even in four of eight categories in North America, that's a little less than kind of what I would like but seven of eight sequentially. So we're making progress and so if you remember Kevin we had really.

Tight supply situation at towards the end of the first quarter and that flowed through the whole second quarter, we were down.

Mid single digit share points I think in diapers at that point and so the team has really done a nice job recovering I think in diapers were up 340 basis points sequentially in the quarter.

And just a little just about even maybe a little bit.

Less than even on share overall.

In the quarter. So we feel good about the recover I think we're making good progress in adult care tissue as I mentioned on the Bath tissue side were a little soft because we had maybe a little elevated share that I was hoping to hold onto.

But we haven't held onto it but that was more due to availability.

<unk> is up pretty good pretty substantially.

Substantially and we feel good about that although the category is down and then on towels, we're down about a little over a point.

The issue there is we given supply conditions, we have shifted.

Some of our supply of production from towers to back and Thats caused part of that so so overall.

I would say that the brands are moving in the right direction not all but.

We feel like we have the right plans in place and we're going to continue to make progress.

Got it got it. Thanks, Thanks, Mike and then a quick follow up for both of you just on trade promotion like I think you made a comment that between the line spending.

It was down I believe that you said or maybe down sequentially just clarify on that broader it's not just Kimberly Clark, but broadly for CPG. They continue promotion levels are moving higher and understandably moving higher off of lower basis in the prior year.

But sort of triangulating that with the cost environment, what is sort of the logic between the CPG companies and retailers at this point to move trade promotion higher.

Is there a right level as the normalization, we want to get back to pre pandemic levels and sort of if so why what is the sense behind that particularly in the current environment and then I'll pass it on thank you.

Okay, maybe I'll comment on the trade and Maria maybe you can comment on the between the lines, but one yet in North America in particular, I think the promotion levels have moved back to quote unquote typical levels.

The percent as measured by percent promo sold on or percent sold on promotion was down 50% to 75% last year.

As we all curtail promotions.

Because of the demand.

At this point I'd say, it's returned to historical levels, both in personal care, which happened about the third quarter of last year and then in consumer tissue.

This quarter or the.

Third quarter of this year.

Philosophically, what I do think retailers do believe brand switching occurs.

With brands and so promotions continue to be important or categories.

There is potentially some share shifting frankly.

My emphasis would be.

What I call the high road approach to growing brands, which is growing brands through great innovation and marketing and using trade and promotion is a fundamental element of that to support what we're doing from a marketing perspective, but I don't really value share from promotion alone and so so in general we're going to be focusing on being <unk>.

<unk> with how we spend our promotions and being disciplined about it.

Especially Kevin as you might imagine in this environment where <unk>.

Certainly pricing and price realizations important given what's happening with the cost front.

Got it thanks, Mike.

And then on the the rest of it just just generally on between the lines for the quarter at 15, 6% that that well and the main driver of that is.

The incentive comp.

As you can imagine with the updated.

Forecast.

The incentive payments will be meaningfully lower.

In the third quarter.

We not only step those down but we also had basically an accrual adjustment true up from the first half. So there was there was a sizable.

Benefit on incentive comp reflected in the third quarter.

And I will call out that.

We expect in the fourth quarter that the between the lines will will step back up and that's a that's two things we won't have that.

Incentive comp.

Trip accrual.

And seasonally our SG&A runs higher in the fourth quarter than in the in the rest of the year.

Got it. Thank you both so seemingly Mike at the retailers that are driving more of this just not to put words in your mouth, but it seems like there is an appetite there among the retailers.

To normalize the categories is that fair.

Yeah.

I don't I wouldn't put it all at retailers I mean, I think I think the manufacturers also rely on it as well.

Certainly.

<unk> kind of attitude or philosophy for it is.

I think I've said, it before I don't like to rent share through promotion.

If we can use promotion to drive the trial that we want on our innovation.

Supportive of that and so so that's a little but I may have a slightly different take than others, but I wouldn't lay at the feet of our customers they're great partners are.

Our categories matter to them.

Obviously, they matter a lot to us and so so.

It is a symbiotic relationship.

Understood. Thank you for all the color I appreciate it good luck.

Sure.

Thank you. Our next question comes from Peter Grom with UBS.

Good morning, Peter Hey, Good morning, Hey, Good morning, Murray, just kind of want to go back to the 2022 margin recovery.

Maybe just a housekeeping one first that Mike following up on Dara is question the halfway through the year or maybe a little bit longer is when do you expect margin expansion is that year over year.

You expect margins to return to more normal historical levels and is that gross margin or operating margin.

That would be expansion in gross margin, but just wanted to confirm and then this is a bit more conceptual but I just want to understand how you think about adding back advertising next year, particularly as hopefully supplies constraints get better.

Gross margin improved is like how do you balance.

<unk> operating margins back to the high teens versus reinvesting back in the business to set yourself up for growth in years to come, particularly given the lower spend you'll be cycling this year. Thanks.

Sure.

Peter I'll start and then Mike can can chime in.

Net next year, we'll have some interesting dynamics, then it's probably going to be.

A bit of a tale of two halves. When you look at the first half of this year and the second half of this year, that's going to drive some year over year.

Comps that that will have have some different dynamics than as I said.

We'll have to see really how commodities play play out and how pricing plays out.

And.

I would characterize it as will lift to recover.

<unk> over time, we are very focused on margin recovery.

And exactly when that's going to happen.

I'm not prepared to say, but we will have a lot more to say on that in <unk>.

In January when we have three months more of.

Visibility and.

Three months more of additional actions that will take.

As at the management team, we're working through our 2022 planning cycle now and so.

We're pulling that together and.

Given the volatility and the lack of visibility that we've that we've had.

It's too early to call the year, but we'll give you our best view in.

In January and Mike I think you can probably comment on advertising and how you see that unfolding.

Peter.

Actually increased our advertising investments significantly over the last few years and we feel good about that and clearly I think that's showing up.

The numbers in terms of the organic growth and the overall health of the brands that as I've talked about earlier on this call. So we feel good about that.

I would say at this point.

We will look to continue to build that we're probably operating kind of in the five plus or minus five 5% range of sales.

A little lower than our primary competitors I would like that to be higher over time, although we'll probably never will match some of our competitors at the same levels. They will but I still think we can productively invest more and make that.

A win win for the brand.

While growing our margins at the same time the unique thing about advertising of this in this environment or kind of as digital has unfolded as the returns are much better than they historically have been and so we continue to improve our efficiencies, we're getting better at that and so.

So for US we're going to continue to look for ways to grow the business and thats going to.

<unk> through advertising investment are at the same time.

And I will also work to deliver a balanced plan that will deliver.

As we just mentioned margin improvement over time.

While delivering improved organic growth.

Yes.

Thank you.

Even outside of advertising and when we look at between the lines spending I commented and I commented earlier, but embedded in there.

Yes.

I should note.

Beyond incentive compensation dynamics, we are reducing other discretionary spending including in the kind of core SG&A.

At the same time, we're continuing to invest primarily around digital.

Types of investments in our commercial capability development.

So on the P&L you don't see the full net effect of the actions that we're taking there because we we are continuing to invest.

The commodity inflation ran up on us.

Quickly at wise.

Far far in excess of what we expected.

In the third quarter.

But we are continuing to make investments in the company for the long term and we're very committed to what to doing that and focused on the long term health of the company and the brand.

Great. Thank you so much and best of luck.

Okay. Thanks.

Thank you.

Our next question comes from Steve powers with Deutsche Bank.

Yeah, Hey, guys.

Hey, Mike So could you talk a little bit about force savings.

A little bit.

The lower end of your plan.

Against the rising cost backdrop, I guess I've been sort of talked to think of those those two numbers is positively correlated so as those cost inflation goes up your procurement savings tend to tend to also increase obviously, we're not seeing that right. This moment so is that.

What do I believe but should I gleaned from that in the near term.

Is it temporary.

Reaccelerate was force savings Reaccelerate into 'twenty two so this timing issue or is it some kind of indication that you are.

You're starting to starting to run out of runway on force.

Sure, we're definitely not running out of runway on force and we continue to see opportunities in the supply chain and some of the digital.

Digital supply chain investments that I've referenced earlier in the call.

Will help us unlock those those opportunities.

The force cost savings for this year is really affected by the supply chain challenges that we've been facing which are a headwind for our cost savings and it's related to production and distribution inefficiencies caused by demand volatility and also the logistics issues that we've done.

Been talking about.

The way that the force cost savings program works is I've been negotiated material price is key.

Keith a bit which I'll come back and talk about in a minute and then we have core productivity in our supply chain operations as well as.

Product.

Revisions to achieve design to value savings so in the quarter.

We had a very good savings associated with the negotiated material prices. We also had benefits from productivity improvements and product changes.

Not as much as we were hoping.

<unk>.

You have to net positive.

In terms of total delivered cost for it to count as force cost savings.

As you have headwinds coming in.

Offset the gross force cost savings that we would report and that's really what we're what we're seeing now the headwinds that are flowing through manufacturing.

<unk> are dampening, but the net result of force, but theyre strong gross savings there.

Other issue that we've got on force is our supply chain folks are very focused on managing through this near term environment to get product produced and to get it to customers. So we can get in the hands of consumers and that leaves less time for <unk>.

Pleased to be working on productivity initiatives within the supply chain. So it's really those two things that are lowering the poorest cost savings number for this year, but.

We have a healthy amount of room to go in terms of driving.

By chain.

Productivity as we move forward.

Got it so playing it back as the bottlenecks on supply chain hopefully alleviate themselves. Then you have essentially some pent up force savings.

That should come to the surface.

We do and I should go back to the other part of your question right. There's really two pieces of this force cost savings the negotiated material prices.

Our.

Savings are much higher this year given the contract structure is the first is they are.

Our rapid inflation on the commodity side.

Hi.

Alright.

Contracts get reset on a on a regular basis, though so it'll be reset at higher levels. So when I look forward.

I wouldn't expect as much benefit as we had this year because if you think about where we were coming into 2020 versus where commodities when we got a sizable benefit in force.

This year so that's.

That piece of it.

But on the core productivity I would expect us to have more savings on that part of that as we move forward got it okay perfect and then.

If I could pivot.

Can you talk to the incremental pricing.

Mike you touched upon through the views on trade and promo and the conversation with Kevin but I was just I guess I was looking to think about next year and.

Whether the.

The path to margin recovery is really.

List price focused or if there are sizable revenue growth management opportunities that you have around the list price.

What the balance balance of that is as you think as you start to think about.

Yes.

The building blocks into 'twenty two.

Yes.

It's all of that so a great question, Steve and great Great perspective, I think I would sure yours, which is I think it's a balanced deployment. Obviously this year, we went with lyft.

Because it can be a little quicker and a little more efficient to implement for both us and our customers that said I think long term and our categories I would say for us it would be a combination of list.

Pac Pac count and.

And pack architecture, right sizing and then and then also.

Promotion strategy right and I think all of those are fertile ground for us.

I've been talking about our revenue growth management for a couple of years now we're still early in the journey and getting better at it but we have a lot of great tools globally that we're using to support our planning in.

I think we're getting more and more disciplined about it and again I think that balanced across the levers will be important for us into next year, but I think going forward.

Great. Thanks to you both I appreciate it thank you Stephen.

Thank you. Our next question comes from Nik Modi with RBC capital markets.

Good morning, Nick Yeah. Thank you good morning, good morning.

So Mike just a question on pricing I think he's obviously things have looked pretty good for consumers in pretty good shape, but stimulus kind of feeds all of that cash.

Tumors are sitting on.

Starts to.

Dwindle off into 2022, how are you guys thinking about.

Potential pricing and price elasticity.

I feel like more is going to need to happen because we all I think get the joke here that costs are going to continue to rise.

And so I just wanted to get an understanding do you have any strategies in place to kind of minimize the amount of price shock that some of these consumers might be as we get into 2022.

Yes.

Nick.

Just talking about with Steve again, I think we are investing a lot of tools and so at this point I think our elasticity modeling is pretty good fairly accurate I would say.

Our categories, Nick that the elasticity tends to be a little less when realized.

Then what predicted just just because.

Look back tissue the.

The consumption doesn't change that much maybe maybe the value tier you purchase it may shift a little bit and so so there's that dynamic, but we are sensitive to that and it's also wise, what's core of our strategy.

<unk> is developing a great value proposition to our consumer and so we're always cognizant of that and I think one of the things that we've done in <unk>.

Many markets around the world.

Is offer a great proposition on both the value side and also the premium side and while our strategy generally is to elevate our categories and expand our categories I do think pricing in our categories with a <unk> of our categories a little less than some of the others that I've worked in the past so I still think there's room to grow.

However.

We want to be able to shift.

And that's what we've done in a market like Latin America, and one of the reasons why.

We've grown share this year is because we've been able to pivot between our premium tier and our value tier for reference two years ago, we were making a student body left to go premium and we shifted a significant portion of our mix in Brazil from value to premium.

And over the past 18 months, we've been shifting it back the other way because thats, what the consumer needs and so we're really cognizant of that we're aware of the elasticities. Thus far I would say our volumes have held up although I think what's really happening is we're seeing the intended elasticity, but we do have brand growth initiatives that are offsetting some.

Elasticity impact.

Great. Thank you.

Tom.

Alright, Thanks, Nick.

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

Good morning, Jason.

Hey, good morning folks thanks for sneaking me in.

Two questions first just a follow up for clarification.

Dara as when you expect price and cost to be effectively net neutral not I don't think es when do you expect margins for recovery.

Most of the answers have been around margin recovery, but so.

Can you clarify you are not expecting price to be caught up with costs.

Until the back half of next year or not even like even that is too optimistic it's somewhere beyond the midpoint of next year when price actually catches up with cost centers Paradise.

I think we'll we'll hold on the 2022.

Comments until we get to January and then we will we'll have more to say about that.

Once we have three months more visibility into what's happening in the commodity market, what's happening with with price that's either in the in the market or.

We'll be in the market and we'll give you our best view there I don't think its.

Productive to speculate on that right at this point given the volatility.

Yeah, I'm just trying to tell me what you actually said because I think I've heard like two different explanations on next year. So can you actually settle on 2022 I'm just looking for clarification on what you actually did say.

But I appreciate if you don't want to add more.

So pivoting back to just the core business then.

Good momentum in personal care I mean, you are getting the price your market shares are holding up the businesses turn back to the degree of profit growth.

Operating encouraging, but the tissue business looks very different.

Especially on the margin degradation side and the lack of price momentum can you can you elaborate on what's holding you back on price and what actions have you taken what is in market now and why are we not seeing more momentum on price so far.

Again, I think what youre seeing in personal care, we did move.

Very early on when we had our our commodity forecast update in the first quarter and so we did move on that.

Time I think.

The.

Tissue side or the fiber side was less clear and so I would say, we probably moved a little slower on the tissue side, we have announced.

Some broad pricing actions in multiple markets. Since then and so that's why I said earlier, Jason that I would expect our tissue price realizations to continue to improve as the year progresses.

Have you raised prices in the U S.

In tissue.

We announced some price changes in August with our retailers.

Got it thank you.

Thank you. Our next question comes from Andrea Teixeira with Jpmorgan.

Thank you good morning, everyone. So I have.

Two questions. One is a follow up on the supply chain disruption looking ahead on availability of raw materials and transportation lines do you believe those.

We will linger into the first half of 2022 setting aside the pricing commentary that you may not be ready to just in terms of availability of.

All materials and transportation and then a second one on the category growth between tracked and untracked channels do you just see brakes growing fast at any commerce because of the tough comparisons in the quarter and do you see the share issues that you alluded to in North America, mostly due to the fact that your competitors.

It took longer to take pricing or is that more of the availability issue. Thank you.

I'll start with supply chain disruptions I E.

I don't see a near term catalyst for them, improving I think that the labor issues in the in the U S are very real and that's where we are feeling the brunt of.

The challenge is on the on the supply chain side.

More globally, I mentioned, the U K market, but but also with our global shipping.

Those.

Those issues are also quite quite challenging in a number of our <unk> in a number of our markets, but the.

The most acute issues and meaningful cut.

Cost increases first is what we had been expecting is in North America.

And that the labor market in the in the U S. I, just don't see a near term catalyst, though I think the.

The headwinds and the increased distribution cost.

Will.

We will certainly be with us into 2022, and we'll have to see all of this plays out it's not just affecting us of course, it's affecting.

Companies quite broadly and.

And where we're all dealing with these challenges.

And then Mike on category and share I'll turn that whenever you again.

Again online continues to perform very well for us and <unk>.

And then on tract as well and so I think that's probably why there's probably a discrepancy.

And our view of our market share performance, which we see as is.

It's a little stronger than maybe what you might see and so so overall, we feel very good about that and the category growth.

Actually in both channels and I think our brands are performing well the issue that we've had on share a couple of different areas in North America, It's primarily been an issue around supply and so even though we've made substantial improvement.

And our fulfillment throughout the course of the year, we're still not meeting all orders out there and so our shares still a little light from that dimension and then in a couple of other markets again I think it is as you point out maybe some relative price indices that have expanded a little bit in the short term we've moved on pricing.

In most markets and while we've generally seen.

Moves from branded competition, we haven't seen that in all markets and so there is still a little softness we're experiencing in western Europe and in some markets in Latin America.

And Mike just to.

And I appreciate you both but just on the track channels and non tracked e-commerce, how much. It grew this quarter vis vis last year and how much it represents now globally.

Number that'd be helpful. Overall globally, we're probably in the mid <unk> mid to high teens at this point I don't have the growth rate off hand, but.

Yes.

Double strong double digits is what I would say.

On top of like Oh.

Also a very strong performance last year stronger language last year.

Brian what the Great news being our fastest grower was our biggest market so that was good.

And so what you get online continues to be important and increasingly important and.

And we're operating very well there.

Okay, great. Thank you thank.

Thank you.

Thank you there are no more questions at this time.

Okay, well. Thank you all for taking the time to be with US today, we're working hard to drive sustainable brand growth and taking further action to ensure that we improve our margins and earnings profile. So thank you all.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.