Q3 2022 Kimberly-Clark Corp Earnings Call
Please stand by your program is about to begin.
Ladies and gentlemen, thank you for your patience and holding.
We now have your presenters in conference.
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.
At that time instructions will be given as to the procedure to follow if you would like to ask a question.
It is now my pleasure to introduce today's first presenter Brian <unk>. Please go ahead.
Thank you and good morning, everyone welcome to Kimberly Clark's third quarter earnings Conference call.
With me today are Mike <unk>, our chairman and Chief Executive Officer, Nelson, Our Chief Financial Officer.
This morning, we issued our earnings news release, and published prepared management remarks from Michael Nelson that summarized our third quarter results and 2022 outlook.
Both documents are available in the investors section of our web site.
And just a moment, Mike will share 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, and our latest 10-Q for further discussion of forward looking statements.
We may also refer to adjusted results and outlook, both of which exclude certain items described in this mornings news release.
The release has additional information about these adjustments and reconciliations to comparable GAAP financial measures and now I'll turn it over to Mike.
Alright, Thank you Brian good morning, everyone.
Our teams around the world continue to execute strongly in what remains a dynamic and challenging environment.
Pleased with our continued organic sales growth momentum with 5% growth in the third quarter, reflecting broad gains in all of our segments.
Our third quarter results also reflect ongoing volatility in the operating environment, which continue to pressure operating margin and earnings.
Throughout the year, we've taken decisive action to offset persistent inflation with pricing and cost savings.
We're making progress as those initiatives enabled sequential expansion of gross and operating margins in the quarter.
As we near the close of 2022, we're maintaining our sales and earnings outlook for the year.
We continue to manage our business with discipline and remain confident we will restore our margins overtime.
We're executing our growth strategy to elevate our categories and expand our markets by putting the consumer is front and center.
We will continue to invest in innovation and our commercial programs to continually sharpen the value proposition of our brands.
We're committed to delivering balanced and sustainable growth over the long term as we work to fulfill our purpose of better care for a better world.
With that we're ready to address your questions.
Yeah.
Thank you.
At this time, we will open the floor for questions.
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We'll take our first question from Lauren Lieberman with Barclays.
One of our great. Thanks.
Hey, Lauren.
Hey, I was hoping.
We could just start out with an update on the input cost outlook.
A <unk> held the outlook for the year Theres one quarter to go.
But just we see you know what we see it looks like pulp is kind of flattening out in terms of market data, but there are industry participants it is sort of set otherwise.
We've gotten a lot of questions. The last few weeks about European energy prices, how that impacts your business. So any color you can provide would be great and also I know, it's early but looking into 2023 as well. Thanks you.
I'll start maybe and Nelson, who will give you his perspective, but overall I'd say its stabilizing but at a high level and we are still experiencing some volatility. So I don't know if you want to give them a little more texture sure and.
Laura I mean, a few things there I mean, we've held our guidance for the full year in the one four to one 6 billion and it's important to note that through the.
The first nine months of the year, we've seen about $1 $2 billion of these costs materialize. We did see sequential improvement in terms of the impact as we lap last year's $1 billion out of the one and a half that impacted us in the second half of the year. So for the quarter you would've seen a 300.
$60 million commodity impact.
Versus 470 in Q1 and $405 million in Q2, so the trend that we have talked about is playing out in Q3.
Secondly.
Overall, we're not calling down because the reality is commodities remain elevated.
The environment remains quite challenging and we are maneuvering through it we've seen overall a few dynamics.
Like the highlight first on the pulp and fiber components prices remain pretty elevated eucalyptus is trading today at around <unk> hundred that's an all time high and we while the market is projecting for some easing at the end of this year, we have yet to see that play out.
If we look at distribution costs, those remain challenging as well, especially on the international front, we have seen some.
Giving up of prices on spot transportation in North America, but still that's not offsetting the overall challenges we're seeing on a global basis. So net net we remain at the guidance that we have provided.
And the messages I would say in terms of next year right now it's too early for us to provide any guidance on 2023, we'd still have the full year to play out, but a few thoughts that I chair.
One we remain at historical highs in the whole commodity and cost structure. As a reminder, on a two year stack with $3 billion at the midpoint of our guidance today and again, we are not seeing any meaningful move versus our assumptions that we gave you back in July .
Secondly, Forex markets, we have seen and you see it in our in the deconstruction of our numbers Forex has become more more volatile and challenging and as a reminder, we have about a third of our profits coming from overseas. So that is something that we are taken into account in our outlook, but we will have to carefully watch as we think about next year.
<unk>.
The underlying business environment remains volatile as Mike said in his opening remarks, where we're managing through it but it's something that we will take into account again over the next few months as we prep up to give you.
Guidance in January when we talk about Q4.
Lauren you may have gotten more than you bargained for on that question [laughter], that's great I'll always take it. Thanks.
Alright, Thank you Arne.
Okay. Thank you once again, if you would like to ask a question. Please press star one.
We'll take our next question.
From Kevin Grundy of Jefferies.
Hey, Kevin Hey, Kevin.
Good morning, good morning, guys.
A question for me just kind of zooming out a bit Mike just observations on the kind of the elephant in the room right observations on consumer demand and then elasticities I guess as we kind of look at the quarter.
This is a bit better in tissue and towel worse in personal care at least versus our model. So maybe just comment on what youre seeing from a consumer perspective any signs of consumer weakness that are all worrisome to you and then maybe you could just share your thoughts on how the elasticities in the quarter came in relative to your own expectations and thoughts as we as we look ahead okay.
Yes, Kevin you have to guide me a little bit I got a lot of thoughts here. So I'll give you a few things I mean, one I did want to emphasize I feel very good about our strong execution of our strategy and what remains a very challenging and dynamic environment continue.
Continued organic momentum.
Very good about obviously, we were a little soft in North American personal care, which I can come back to but that was I think consumption was fine it was more around.
Some inventory changes cycling.
Some supply constraints that we had last year, but overall I think we had excellent excellent execution of our pricing initiatives globally.
Great brand support through our commercial programs.
I think it was in the prepared remarks, but high single digit across all developed markets high single to double digit growth across all key markets and then North America.
As you saw was down was down two because of some of the supply changes.
On top of that I'd say, we feel very good about our share performance.
Upper even in about half of our categories, a little bit more than that in personal care.
And we were very fast on pricing, we've been very decisive on pricing all year and so we knew we're going to give up a little share in the near term and it does look like our share performance is improving in the latest quarter and so we like where the trends are going and feel good about that.
And then lastly, I'd say on the overall environment, we're navigating some shipment volatility, particularly in North America because of.
The Texas storm and everything that happened last year. So that's kind of the overall on US and then with regards to the consumer.
I would say overall I feel like the consumer remains resilient, but we are increasingly seeing some bifurcation in demand and I don't know if I like that word but it's.
Trying to describe that we're seeing two different patterns emerge.
And it's mostly along as you would expect Kevin socioeconomic lines I mean, certainly.
So we do the research.
Developed market like North America, there was a broad swath of consumers that they are.
The savings are still higher than they were three years ago.
They are employed and.
And while they may be curtailing, some big ticket purchases in our categories, which are essentials, we're not seeing a discernible change in behavior there how's.
However, there was about 40% of the population in the U S that is more living paycheck to paycheck I grew up in one of those households, and I know, what it's like and so we are seeing some some changes in consumption patterns, whether that is buying lower count packs or trading down a bit but I would say.
Important thing for US is to recognize that we're trying to serve our consumers and meet them, where they need us and thats both sets of consumers and so our premium business continues to grow and do well.
And then we've got to we've got to make sure that we're addressing the right value, having the right value proposition for the value more value oriented consumers. So so there is some you know I would say bifurcation, we saw that happen in about three years ago, and a lot of markets and DNA, but we are seeing a little bit more of that in developed markets.
Pause there.
Kevin anything that.
I'm sure there's a number of other questions in the queue, Mike that's really helpful. I'll pass it on thank you. Thank you.
Thank you. Our next question comes from Chris Carey with Wells Fargo, Hi, Chris Hi, Chris Hi.
Hi, Good morning, I, just wanted to follow up on that line of questioning around volume specifically in personal care, but perhaps from a different angle.
It's harder for us to see but just taking what you said about commodities and what we know about pricing it doesn't look like you've experienced.
Much notable volume deleverage to gross margin this quarter from a weaker volumes, but certainly the operating margin performance.
It was different.
Can you just frame how do you think weaker volumes to the extent. This sustains are expected to impact your P&L as you go forward specifically between the gross and operating margin line and just connected to that.
How you would envision addressing some of the weaker volume performance that we've seen in weather and demand building or is it simply that your algorithm will change between pricing and volume such that Youre still achieving your overall organic sales growth objectives.
Let me start and maybe Nelson could talk I'll give you some more of the texture, but I'll start with let me unpack the volume performance in particular I think.
<unk>, probably got a question about North American personal care and I'll say, our North America team is doing a great job navigating what I would call excess volatility.
Man.
And really.
I think we've put this in the remarks consumption remained stable and so just for reference Chris in the third quarter are our all outlet consumption, which I don't think you see.
We were up four in diapers on consumption nine and adult care in 16 in Fem care.
And the real fact is and I mentioned before the storm that occurred in Texas last January February shut us down for a few weeks in early Q1 and created a lot of volatility in shipments I'll give you a sense of the volatility if I go back to fourth quarter of 2020.
And then give you the quarters just in diapers.
Our consumption in December of 2020 was or the fourth quarter was plus six then we were minus seven in the first quarter plus seven plus eight plus 18, plus 14, and then plus six last quarter. So so you can see there's been a lot of movement and I would say it took us a while to recover from our supply constraints.
You would think that being down for a couple of weeks. There was there was more of the roll through it because we had material supply issues as well.
And so we were on allocation for most of last year and so what you know what.
Happened in this quarter.
You can see our consumption was was stable, but we were cycling.
Elevated shipments in the year ago period as retailers were rebuilding their inventories following being on allocation. So.
So overall I feel very good about our offering across personal care as you can see by the consumption numbers I do expect some ongoing volatility and demand as we continue to work through various supply challenges and cycle. Some of the things that happened last year.
And then in terms of the volume deleverage certainly yes.
Fixed costs are a big component of our P&L. So we're close to that.
Again, I would say I'm not expecting in personal care in North American ongoing volume issue. This was I would say more of a one timer.
And then globally, we feel very good about our volume performance and our elasticities have held up to the model in general DNA. Our volumes were down high single digit. We think most of that was concentrated understandably in eastern Europe , given the conditions that are happening there and so overall I think we're feeling good about it.
Performance, but belsen, you wouldn't want to give him some more text no absolutely. So so a couple of things there that I would highlight Chris I mean, one.
<unk>.
The pricing realization that we had in the quarter really accelerated so that's flowing through and you can see that in the margins, which you rightfully pointed out and that is something that we were talking about back in July .
Based on the pricing actions that we had taken midway in the latter part of Q2 and also in Q3, so thats more than helping offset some of the deleverage that you would see on the overall business. Secondly, we begin to lap some of the commodity increases from last year and not the commodities are deflating, but.
They begin to not be as high in terms of the impact year on year and those two are playing out for us for us to have for the first time in several quarters.
Net pricing favorable realization net of commodities and Forex. So that's one thing secondly, if you look at our segments. The only segment, where we saw a drop in margins for them for the quarter was really personal care and that has to do with one.
The one offs that Mike talked about and we factored in some of those as we go into Q4, because some of those we do expect it to.
To maintain as we go there, but then secondly was the fact that yes.
We had a little bit of a mix as well in there because north America personal care is our most profitable.
Region within the segment in personal care, so that factored in into that one which would have been that obviously, we continue to be very watchful of overall costs and fixed costs and.
The teams are doing all of the actions necessary to ensure we address that.
Thank you very much for that if I could just.
Just how how you would envision addressing some of the volume pressure appreciating that there were certain dynamics in the quarter, which which will feed as we go forward because of the base period, but just philosophy on addressing volumes I know theres been some debate in recent quarters just around what is the right.
Promotional levels.
And requirements for it.
Demand building, so perhaps you could just contextualize, how you would look at.
Supporting volumes.
Over a sort of more medium term horizon.
Yes, Chris Chris I again, I feel very good about our commercial execution around the world. I mean, we have we had strong innovation. This year I feel great about our lineup for next year, even though we're not talking about next year, yet, but you know and I think we feel very good about our advertising our digital investments are working very hard for us and then our sales execution.
It has been very very strong.
Round the world.
And.
So overall I think our commercial programs overall are working as intended.
You know, we're going to keep a close eye on the promotional environment, though I'll comment in terms of North America I would say the environment at this point remains fairly typical.
And that's kind of it has rebounded from being I would say more suppressed during the peak years of Covid.
And as now I would say normalized in terms of promotional frequency, maybe still a little lower on depth.
And frankly, we.
We're not going to drive our business by driving depth.
It doesn't fit with our hybrid approach to building the brand.
And so, but we're prepared and the one thing I will add though to us.
I think we're being prudent and developing the right kind of action plans in the case of a more recessionary environment and so as I mentioned, we're going to.
Our strategies to elevate and premium wise of our categories over time that is exactly the right long.
Our long term strategy and I think that's going to be our strategy for a long time to come that said, we recognize the environment, we're operating and we've been very good at running I would say more value added plays when necessary, but our goal is to make those productive and profitable.
Profitable as well, while addressing the needs of the consumers have.
Okay. Much appreciated. Thank you both okay. Thanks, Chris Thanks.
Thank you our next.
Question comes from Steve powers of Deutsche Bank.
Good morning, Steve.
Hey, good morning, good morning.
And I apologize you may have been talking a little bit about this with Chris I got called away from the call for a brief second there, but just as you as you March from <unk> to <unk>.
It implies I think.
Either.
A lot of SG&A, SG&A leverage or a really big step up in <unk>.
Gross margin sequentially and year over year.
I guess I'm just.
I guess, what I would play that back to you and figure out kind of what the what the main drivers are because I get that.
Inflation gets a little bit less impactful as you go through <unk> forest picks up.
But it just seems like you need some other other variables to really move the needle as much as I think is implied in the guidance just wanted to play that back to you.
Sure. So Steve I mean, a couple of things I would highlight I think first I'd start by.
Reiterating what happened in Q3, and you would have seen an acceleration in overall pricing realization and.
As you mentioned, our expectation, which played out in Q3 of the year over year impact of commodities beginning to subside, even though they remain elevated.
So as we look into Q4, our outlook and which.
There is an implied step up like what we saw in Q3 the drivers behind that would be first is around pricing realization.
Reminder, we've we've implemented additional pricing actions in.
The third quarter and those will be fully realized as we go into the fourth quarter. So we do expect in the fourth quarter. Another step up in terms of pricing realization as we look at our overall outlook, so that should be playing out in the quarter.
<unk> would.
It would be on our force productivity savings in the third quarter, we delivered $80 million of <unk> savings, which is an acceleration of around $30 million versus the average we were delivering in Q1 and in Q2, we expect this trend to continue going into Q4.
And then last but not least is stabilized input cost inflation again. This does not mean that we expect overall cost to come down it's more of the year over year impact as of today, we have a year to date impact of around $1 2 billion in commodities and at the midpoint of our guidance of one four to one six for the.
Full year. This would imply that for Q4, we should see another quarter of a reduction sequentially in terms of overall input cost inflation. So when you combine those three that's what gives us the building blocks for the.
Continued step up sequentially quarter over quarter on EPS for the fourth quarter I think it's also important to note that.
For the full year.
For the full year at the midpoint of our cost guidance. We are at around one $5 billion of input cost inflation and as we exited the year, we expect more than fully offset not just the commodity impact, but also the forex that based on our current assumptions and what we've modeled out so that is.
And that will be playing out in Q4.
Okay, Yes that makes sense. That's helpful. I guess, the other thing that I wanted to ask about.
I appreciate the 20 threes, along way away Youre, not really talking about it but.
Consensus estimates have the company delivering above algorithm EPS growth next year, which I think implies.
The price realization that you just spoke to continue.
<unk> continues to hold even as you get some some hopeful relief.
On costs and I wanted to.
To get your perspective on just your comfort level with that level of assumption as you look at it and especially in the context of.
I appreciate what you said earlier about the timing impacts in North America, and how that impacted shipments, but we are we are watching it.
Private label shares in personal care, specifically diapers pick up.
Hopefully that gets better but as you as you push through more price.
And the consumer potentially the grades.
Confidence perspective.
Concerning about about that both those share trends, you'll not rebounding and it just speaks to the deflationary factor.
Backdrop does play out next year do you have to roll back some of this price. So a lot in there, but just really thinking about the consumer demand trends youre pricing trends net of commodities and just some perspective on.
Your comfort level with consensus being above I'll go next year.
Steve maybe.
Maybe my comfort level is probably not comfortable addressing what 23 looks like yet.
And I hate to do that but.
But I think the underlying is because of what we're seeing right now in the marketplace, which is one the volatility in the marketplace, which were which we experienced in Q3 and it is going to continue and the other part of it is we're still rolling of our plants and so.
So I really feel.
We'd love to comment, but I don't feel like you're in a place where it would be it would be reasonable for us to comment at this point I don't know if you have a different full.
Fully agree Mike and as I said.
Laura in terms of her ask.
One of the variables that again, we're looking into today as we build our plans and everything is where we stand today.
The reality is commodities have not subside they remain pretty elevated and Forex is becoming and has become a bit of a challenge as we look forward. We've got three months to go for the year, but it is a variable that we're going to have to take into account Steve.
Steve as we look forward to.
So again too early for us to comment, but those would be kind of my thoughts in terms of where we stand today. The thing I'll add Steve though is we are continuing to manage our business with discipline and we remain confident we will restore our margins over time I mean as I also pointed out we've taken on over the last two years $3 billion of inflation, that's 500 basis.
Points of gross margin, which is a lot and we've taken decisive action and the good news is and we.
For the third quarter, our pricing fully offset inflation plus FX in the quarter and so we do continue to expect sequential improvement.
Commodities also.
As people who've been following us for a long time commodities will eventually revert we're not counting on that for our margin recovery, but when that does happen that will likely accelerate our recovery. So we're taking a thoughtful.
Holistic approach to mitigating inflation in running our business and hopefully you all appreciate that.
Okay I appreciate it thanks, so much.
Thank you Steve Thanks, Steve.
Thank you. Our next question comes from Jason English Goldman Sachs.
Good morning, Good morning, Hey, Jamie folks.
Thanks for sneaking me in.
Couple of real quick housekeeping questions here for guidance I. Appreciate you reiterated EPS, but you didn't provide an up.
On your EBIT outlook can you provide that now has it changed at all.
No no in general remains at where we're at.
Excellent. Thank you.
And then productivity you have a nice uptick in the fourth quarter.
So the implied by the full year guide here on force savings whats driving the uptick and would it be unreasonable for us to look at that and assume that that run rate continues through next year. Therefore, implying that what was under delivery. This year is going to be followed by over delivery next thank you.
Sure.
So quick one there Jason as we've said in the past for US is not necessarily a streamlined we've never seen that in the past and I don't project that that's going to happen in the future because it just builds up over the year and we do see ups and downs because remember it is a net number so it does build some of the some.
Some headwinds in costs that we might be facing.
As you indicated there is a step up in Q4 and to me. The key to look at is what happened in Q3, and Q3, we delivered $80 million versus an average for Q1 and Q2 that was below 50%. So the acceleration was there and we delivered year to date of $175 million, we expect to see.
Further delivery in Q4 based on the strong pipeline of productivity that our teams have across the globe.
As we look into next year, yeah. The teams are building up the <unk>.
Those productivity pipeline and I'll stress that gross productivity pipeline.
And again, we will be.
Walking through the delivery as we go through next year, but I can't and I would not commit to whatever run rate. We have exiting this year and Q3 being what we see in the first couple of quarters of next year.
Too early to say Jason Yeah.
I understood. The thing I'll emphasize is yes. It is a net number and so our gross productivity has continued to climb and I think our teams are doing a really a fantastic job driving the productivity that the issue. We have is the inflation isn't just on our inputs. It happens in all places of the P&L and so some of it. Unfortunately, it gets nets out so.
Complaining by teams around their overall net productivity, but that's kind of like complaining about like trucking lane rates or something.
Like them, but some.
Some of that does not fully under our control and so we have to navigate.
Navigate that that's why we have to drive our gross savings higher.
Yes totally understood. Thanks, a lot guys I'll pass it on thanks, Jason Thanks.
Thank you. Our next question comes from Andrea <unk> with J P. Morgan.
Good morning, Hey, good morning, Thank you.
Just a couple of questions Mike.
Can you elaborate a little bit more on the price elasticity that are you embedding in your guidance for <unk> I understand that obviously implies a huge decline.
In organic sales.
And I do understand the comp for personal care I believe it was 11% last share in the same period. So I was wondering if you can comment and it does look like your pricing at least in the Nielsen data seems a bit below peers. So I was wondering if there is anything embedded there in terms of.
Promotions or and part of it. They also question on promo.
SG&A is that anything that you would call out specific in the quarter, if thats recurring into the fourth quarter.
And then if there is any phasing or timing of it that you pulled from the <unk> to the third.
And then lastly, just say.
Just a clarification on Susana steel.
Are you getting any proceeds from the sale of Navy and to say of the Wuxi.
So I was wondering if there is any.
Saying that related to that or the royalties will pay off over time and you are going to be puts and takes on dose arm should see materials. So none of it none of the companies provided immature for you and choices on them.
Okay Alright.
Great list of questions.
We'll try to tackle them between Allison and I will tag team here first of all on the <unk>.
I think on the pricing versus peers.
I think probably what youre seeing is the fact that we were out fastest generally in pricing in most markets and so if youre seeing a lag there maybe because we've already started cycling our pricing year ago. I mean, the reality is I think in general we've priced.
I'd say very early.
We moved very quickly on pricing last year.
And I would say, we also moved at higher levels than a lot of than a lot of our competitors and so and the reference for that is I think we've had a price gap, meaning we've been ahead on price on huggies all year until I would say recently.
Maybe the last couple of weeks or so so.
So overall I think our pricing is in line with where we said it and I think the good news andrea's.
In general in most markets we are seeing.
The market rest of market pricing kind of move generally.
Generally in the direction that we've moved.
The case in all areas in the.
But generally that's kind of my overall take.
In terms of elasticity I'd say in the first half I think.
The volume performance really all drove the elasticity models and I think that's where.
I think the consumers are feeling confident you remember all the unemployment reports.
Stimulus and all those other things that were driving consumer confidence I have seen a change in that in some markets and so at this point are the elasticities that we're seeing are more quote unquote normalized.
Or what we originally modeled and so we are seeing a bit more volume come out in relation to all the pricing that is notable.
From our earlier comments on maybe the bifurcation.
Coming out a little bit more on more of the value oriented tiers, let's say snug and dry diapers for us, which is our value tiered diaper in the U S or Scott 1000. So those are some things that we're going to pay closer attention to make sure that that we're managing the business the appropriate way to serve our consumers where they need us.
So again, that's the overall take.
And I don't know if you know.
I know Theres a couple of other questions Ignacio will address some but did that answer.
The first part yes, no absolutely that's super helpful and the SG&A part the components of that is just understanding.
As you try just careful then be more kind of conscious about that consumer that is stretched is that anything that we should know us like I think the SG&A. Your GM gross margin came in I think better than than anticipated by your SG&A was a bit higher is that anything that we should be aware of in terms of.
<unk> of promo or a marketing spend that or is just inflation in general across all lines.
Yes, Andrea let me address that so first I think the important thing to look at is spending in absolute dollars for the third quarter for between the lines, which includes our SG&A and our advertising and promotion was roughly in line with what we saw in Q1 and in Q2. So there was real.
Not a big step up or change.
<unk> throughout the year.
I would've thought you would've seen is a an expansion in terms of percent.
Year over year in terms of the between the lines and that was really driven largely because of last year's onetime adjustment to incentive compensation, which we talked about the third quarter earnings call. So that was the lion's share of the change it was a one time or we were lapping apps.
Absent that.
As we've been saying all year long, we are continuing to invest behind the business. It's the right thing to do as Mike said, we are fully committed.
To sustainable and long term balanced profitable growth and the only way to achieve this is to continue to invest in the business. We are investing behind our brands, we're investing behind innovation innovation, we're investing behind capabilities and our people to ensure that we are there to move forward. Those investments are there and we've continued to make them, but there isn't.
No particular step up in Q3 versus Q2 or Q1.
Okay. That's fair, thank you and on the Susanna to you.
Yes, I'll make I'll believe me it makes it a couple of comments on it's not exactly your question, but I did want to address a couple of things related to <unk>.
A result tissue agreement overall, Andre hopefully youll recognize it's consistent with our overall approach that we've been talking about on portfolio management.
I really believe we have a long runway of growth ahead of us in our categories in our markets and we're going to pursue on the on the plus side markets and Adjacencies that are going to be accretive to our growth and margin and I've always said for a few years now that we will consider exiting businesses that are not accretive.
Two our growth and our margin profile that we expect.
So this transaction specifically enables us to focus on our faster growing higher margin personal care business in Brazil, and creates a better future for both the <unk> brand in the tissue business, the Brazilian tissue business, but.
Business in combination with Susana.
It was really going to be better positioned to adapt to the unique dynamics of the local market.
We fully expect our partnership strong partnership with Susana to continue well.
Sure.
I'll defer to Nelson I don't I don't.
I don't think we're ready to comment on any specifics related to this transaction.
Yes, absolutely and again, the only thing I would say is overall revenue from from this.
From the transaction Thats been divested is just around the 1% levels and profit during material, so but other than that we're not going to be disclosing any terms at this stage.
That's helpful. Thank you okay. Thank you.
Thank you. Our next question comes from Anna <unk> of Bank of America.
Good morning Ana.
Hi, good morning, and thanks, so much for the question.
Just regarding the consumer sensitivity to pricing at this point I wanted to follow up on your comment on consumer bifurcation are you seeing premium as Asian, holding up well in certain categories versus consumers trading down and others and.
Are you seeing any specific products holding up well, which indicate consumers are willing to continue to pay for premium installations. Despite a more challenging inflationary environment. Thanks.
Yes, I would say.
And it's less.
Differences by category.
I would say in general.
We're driving premium amortization is generally working across markets.
And so.
So not specific there I think it is more typically by sub brand or sub line or what we might call internally, our tears right like the value tiers tend to be a little bit more price sensitive in this environment because as I was mentioning earlier there are a significant number of households, let's say in the U S.
That are have less to spend now.
Given all the inflation that's occurred over the last couple of years or so so so I think it's more on a N a.
Sub sub brand basis, or a tier basis in our in our vernacular.
And that's where I say working to continue to drive our premium position strategy or creating more value.
Through our premium products, we feel great about our innovation lineup. This year as I mentioned, we've got a lot more coming next year with great features that I think consumers are really going to like.
That said we're also we're also making the right adjustments as we said earlier that to prepare for a recessionary footing if needed and that means that emphasizing of the great value that our brands offer and in some cases, we will make some adjustments whether that's related.
To pack count or sizing or something along those lines to make sure that consumers have the right pack and affordability that they need.
Great you know any specific.
Lines, you can call out is.
Seeing resilience in those.
Well huggies.
Again, I think we feel great about our diaper lineup.
Our adult care lineup in North America, but if you go around diapers, China, we continue to have.
Mid to high single digit growth double digit growth in feminine care.
And so we feel good about that Latin America, where consumers are.
Very value oriented because of what's happened in the economy last few years, our organic performance was up.
Strong double digits in the quarter so overall.
Across our markets, we saw strong organic growth and that's because we feel that we've continued to improve the products.
At the same time, we all recognizing that we are taking price to offset the commodity headwinds.
Okay. Thanks, very much okay. Thank you.
<unk>.
Thank you. Our next question comes from Javier Escalante of Evercore.
Good morning, Hi, good morning.
Good morning.
Good morning, everyone I would like to come back to the U S and if you might comment on how you see retailers approaching pricing.
And the profitability of their own private label operations in tissue versus diapers.
And I have a follow up.
Yeah, Yeah yeah.
Yes.
Welcome to our coverage and we appreciate it and and this is something I've talked about over the years, we have a very productive and collaborative relationship with our retail partners and I've been I've been doing this for 30 years now and been through many cycles and so we are approaching notably let's say in the U S.
The big change that's occurred over for US Casey over the last 10 years as we recognized we had to clean up our own house, we've been very focused on growing the categories and working with our retail partners to grow the categories the right way.
And that just reflected I mean, we're really proud to note that in the advantage survey for the first time, we were rated number one as a customer organization and number one across most disciplines, because I think our customers view that we've been working with them.
<unk> life fashion funnier side, I will say in the first quarter of last year I think our service levels in diapers was below far below 50% and somehow another of these publications rated US number one on logistics last year and so I think that does reflect kind of the way we work with them.
And so when you take that I would say, we generally approach business planning with our customers on a growth basis for both.
Their sales growth and their profit growth and we pay attention to their margins as much as we pay attention to ours and so for US we're working for win wins and so I wouldn't say regarding let's say.
For your question, whether its type diapers or private label anything different that we're seeing in terms of the profit play of them trying to change distribution or emphasize different lines.
But we are very cognizant that.
We're trying to deliver an overall category growth plan and own are part of that and because of that thats kind of how we manage the plans and so.
And then with regard to price sensitivity, yes, I mean, theres been a lot of price coming at it. We have we have a fair number of customers that skew more toward value shoppers and that's their role.
In their minds.
Serve their shopper as well and so we understand that and so we're willing to work with them, but you know we recognize also there is there has been a lot of price in the marketplace out of necessity and so the important thing is we feel like we have to recover our margins they recognize that they need to deliver margins and growth. The same way that we do and so we're going to continually work for ways.
<unk> defined the win win and grow the categories the right way.
That's great to know.
Basically Mike again.
On tissue versus diapers.
You feel safe.
Hi.
Cott is very clearly positioned on the value side.
Huggies has been premium I assume then I appreciate that you mentioned I.
I believe a competitor just follow price increases that we do not have an old channel view.
If you can walk again.
The drivers of your confidence that huggies.
They didn't take too much pricing.
And then.
You are competitive on the pricing front when you say would be your main branded competitor private label because in our D that we do not see private label following.
Price increases on thank you very much.
Yeah, Yeah on huggies here.
Wouldn't say.
Again, I would correct.
If priced.
As I said our goal is to restore margins.
And eventually expand margins over time, so we've priced accordingly, with the right discipline and we're very cognizant of our product offering in our lineup and our commercial programming and one of the reasons we've prices.
And I think we've talked about this with our customers as we feel like it's our role to help grow the category and drive category growth and that requires.
Marketing I've worked in other categories.
When they pulled back the commodity categories commoditize and Thats not a good that's not a good place for brands and so we've been very disciplined about that.
What I did say is that we felt like we had a price gap or we advance pricing further and faster than some of our other competitors earlier this year.
Last year as well and so there was a bit of a gap that gap is now I think thats right.
Basically closed over the last few weeks and so.
So we would probably see anticipate slightly better performance on huggies and again, we feel very good about our innovation lineup the value we're offering to consumers.
We are going to pay a little more attention to snug and dry which javier as our valued here in the U S and so make sure that that has the right <unk>.
<unk> and the right price points on shelf.
Can compete effectively.
Thank you very much okay. Thank you Javier.
Thank you. Our next question comes from Jonathan Feeney of consumer edge.
Alright, Thank you very much.
How're you doing.
<unk>.
Just a quick a follow up you know earlier in the call. You mentioned that you thought promotional activity was back to something like normal by let's say, a pre COVID-19 normal and I look at.
The syndicated data providers Nielsen IRI have this measure of merchandising that would seem to indicate.
Across the company in the us in any way that that merchandise was still several points. It looks like mid thirty's, but the measure they use and now it's like high twenty's or something granted awful low with like 20%.
At the peak of demand. So any comment you can give us about the likely shape of that an impact restored promotional activity you might have on demand and secondly, that's a follow up and secondly related question maybe.
Mark you talked last week about household inventory.
And I know different companies have different ways of measuring that earlier, you mentioned something about all.
All channel consumption I'm thinking that's still a takeaway data.
Sure, but if you have any color about what you think household inventories stand.
Globally, what impact that's having on potential future demand at 23.
Appreciate it thank you.
Yes, so a couple of things in there I mean, and I would say well if you go to Nielsen.
<unk>.
No longer but I used to be the highest user of Nielsen throughout my career. So theres. So many variables are related a promotional measuring promotion and so so what I said earlier, Jonathan was frequency kind of returned to normal.
In tissue probably in 2020.
Third quarter.
Right.
But maybe by the end of last year, and then and then in personal care I would say at the beginning of this year and that's in terms of frequency the volume.
I'd say the other the other key measure is depth and I would say that the shallower both in personal care and tissue than it historically had been and remains so and I think that's that's an artifact of all the inflation that other companies are seeing.
And then if you look at the percent of volume sold on promotion, that's a little bit lower slightly lower which.
Corresponds to what you're looking at so.
Overall, Thats why I say I put promotion quote unquote normalized, but it's probably still a little bit lower than historical at this point.
So that was I think part one and then.
Any follow up to that Jonathan.
No.
That makes a lot of sense to me.
<unk> also confessed to spending way too much time with syndicated data. So it's nice to have our compatriots. Nonetheless, I'm proud I feel like an invented half of these measures so but.
You probably did.
The other side that you asked about was inventories.
A couple of points certainly you know I mentioned earlier, we are cycling some retailer inventory build back and then at the same time and I think we mentioned in our prepared remarks, there was some retail inventory reductions late in the quarter and so that was a topic that came up at the last investment conference that I was at and so that.
That remains out there and you know I would say that it's typically the case you know every every other year or maybe every year retail inventory changes and that's part of what we get paid to manage on in terms of the household inventories.
We think they reverted back to normal there was and there really were it was really relevant was on consumer tissue there was quite the buildup.
I would say self critically I don't know that we were very good at predicting how the household inventories were going to evolve, but I think over the past years and there was a lot of volatility in this tissue demand I think in the second quarter of 2020, I think our tissue demand was up Bath tissue was up 30% and then a year later was down 27% so.
So again.
Fat tissue historically.
Very stable and goes with certainly volume growth goes with its highly quoted correlated to population growth.
At this point, we feel like it has reverted back to normalized levels, but.
It might be fair to say that there's a lot of people carrying more bath tissue than they were three years ago.
Okay. Thanks very much helpful.
Thank you. Our next question comes from Lauren Lieberman of Barclays.
Our relatively low again I'm back.
I can let it go that I'll follow up offline.
Oh yeah.
Okay.
And then I guess.
We've come in a couple of different ways through different series of questions and so on but.
I guess, how long do you think about volume versus pricing versus market share because I think one thing that I get asked about quite a bit with regard to your business. In particular is terrific, but don't you see private label Dot Dot Dot and my read is that.
That's a dynamic of your categories.
Always is in economic cycles, it's what you would what.
You would expect to happen is it private label would gain some share there will be some change in consumer behavior. So I.
I don't know how you would.
Could answer this but.
As you as you look at.
How do you manage through the continued high levels of inflation as you've put any incremental pricing that you mentioned this quarter.
Market share the right gauge for you to judge the health of the business at this point is it aggregate organic sales growth what is it that.
The metrics by with Q gauge, if you've gone too far or not not gone far enough.
Lauren it's such an awesome question.
I am glad we waited.
This is the age old problem of management in the consumer business.
And that's why it goes it goes back to what we've been saying for years now.
We remain committed to delivering balanced and sustainable growth for our shareholders.
And so and it's been interesting as we've unpack this for the organization because they're like well what do you mean by balance of sustainable well.
The key things, we're managing against the organic growth right.
Profit growth.
<unk> share in cash and so those are those are the four things and.
You know I would say internally.
I think a lot of amortization used to look to this role to decide what we're going to prioritize but but again when I say balanced I want all four of those metrics to go in the right direction.
I think so we're taking what I would say our high road actions to position the company to grow for the long term sustainably and right now given the I would say the supply shocks or the input cost shocks that we've taken on in last three years as I mentioned before 500, the equivalent of five.
Basis points of gross margin.
Margin improvement right now this year remains my top priority I am confident we will return to pre pandemic levels, and we're making progress as evidenced in Q3.
But at the same time.
We're not we're not going to.
Harvest the business to do that and so at the same time, we're still watching shares, but we recognize that when we moved decisively on price both in terms of pace and level.
We're out ahead of the rest of market for a period of time and so we recognize that we were going to leak a little share.
But but.
And our sense.
That was the necessary trade off to make sure that we can get the margin recovery that said, but at the same time, we continue to invest in innovation, we continue to support our brands with great marketing I think our marketing has gotten better in our digital execution has gotten better and so we're really proud of that and so that's what we're trying to walk the fine line I may have a very encouraged that were.
Up and even insurer in about a half of our markets, it's a little bit lower than we experienced in 2020 in 2021, where we were up and two thirds I would say, we're really proud of that but we also recognize our competitors are pretty good too and so we can't expect that every year.
And so if you get the sense, it's a complex trade, but it's something that I feel like our organization has really stepped up to and they know what we're trying to do and.
We're doing the margin recovery, but we're paying close attention to shares as well.
That was a long reply I don't know if I answered anything that you asked.
It was a long question. So thank you very much alright.
Thank you and at this time it appears we have no further questions.
Turn it back to management for any additional or closing remarks. Okay. Thank you all for joining we look forward to sharing our fourth quarter and full year results with you in January .
This concludes today's call.
Thank you for your participation you may now disconnect.
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