Q2 2023 Kimberly Clark Corp Earnings Call
Speaker 1: Good day everyone and welcome to the Kimberly Clark second quarter 2023 earnings call.
Speaker 1: At this time, all participants are placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation.
Speaker 1: It is now my pleasure to turn the floor over to your host, Christina Chang, Vice President of Investor Relations. Ma'am, the floor is yours.
Speaker 2: Welcome everyone to our second quarter 2023 earnings conference call. Before we begin, please note today's presentation will include forward-looking statements. Our results may vary maturely from those expressed or implied in our forward-looking statements, and you should not place undue reliance on any forward-looking statements.
Speaker 2: Please refer to our SEC filings for a list of factors that could cause our actual results to deviate materially from our expectations. Our remarks today refer to adjusted results, which exclude certain items described in our news release. We use non-GAAP financial measures to help investors understand our ongoing business performance.
Speaker 2: These consult are pressed release for a discussion of our non-gab financial measures in a reconciliation to comparable GAAP financial measures.
Speaker 2: We have published supplemental material which are found in the investor relations section of our website. Participating in today's call are our Chairman and Chief Executive Officer Mike Shue and our Chief Financial Officer Nelson Ordineta. Mike will start the discussion with our strategic priorities and provide an overview of our performance for the quarter.
Speaker 2: Nelson will provide a detailed discussion on our Q2 results in our outlook before we open the floor to Q&A.
Speaker 2: With that, I turn the call over to Mike.
Speaker 3: Thank you, Christina.
Speaker 3: We delivered another solid quarter with 5% organic growth while cycling 9% growth in the Yurgo Quarter.
Speaker 3: Organic sales were up across all segments with personal care and consumer tissue each up 4% and professional up 13%.
Speaker 3: Our growth strategy is working and our performance in the quarter reflects strong execution by our teams around the world. We continue to make strong progress in margin recovery. Adjusted gross margin was up 380 basis points and fueled a 17% increase in adjusted operating profit and a 23% increase in adjusted earnings per share.
Speaker 3: Given the strength of our first half, we are raising our full year 2023 outlook to 3-5% growth and 10-14% adjusted EPS growth.
Speaker 3: Our categories remain healthy. In North America, category sales were up 8%, and we continue to see robust growth in key developed markets, including the UK and South Korea, which deliver double-digit and mid-single-digit increases, respectively.
Speaker 3: While category growth across D&E has been more variable, we continue to see double-digit increases in Latin America.
Speaker 3: This growth reflects the essential nature of our categories. As category leaders, we remain focused on serving all our consumers and recognize that many are facing economic challenges.
Speaker 3: With our broad portfolio offering value to premium options, we're able to meet consumers where they need us, and we are well positioned with brands like Scott and Huggy Snug and Dry to serve the value-oriented consumer.
Speaker 3: Across markets we're strengthening our price tag offering, and that means enhancing large count packs and big box channels and making entry prices more affordable and small format channels.
Speaker 3: More importantly, we're accelerating innovation and cascading technology through our product offering to ensure we're delivering a superior value proposition to consumers.
Speaker 3: Growing market share continues to be its top priority.
Speaker 3: In the quarter, your over-year market share performance was soft, reflecting the relatively early actions we took to mitigate inflation.
Speaker 3: In the last six months, price gaps have begun to normalize, and we are encouraged to see sequential improvement in market share in key cohorts, including North America, where we've seen improvement in five of eight categories.
Speaker 3: Volume trends have improved, and we expect that to continue as we cycle inflationary measures and execute our strategy and commercial programs. Our enhanced commercial capabilities are enabling more real-time decision-making than dry sales, enhanced brand investment, and balanced value and volume.
Speaker 3: Furthermore, we expect increased brand investment and improved supply fulfillment to strengthen our market share performance over the balance of the year.
Speaker 3: Our commercial programs innovation are core to our strategy to elevate and expand our categories.
Speaker 3: We're pleased with our launches in the first half and enthusiastic about our second half plans. Here are a few highlights.
Speaker 3: Huggy's debut at its newest BabyBuds campaign this summer, celebrating Huggy's unique curved design which provides greater comfort and protection for babies on the move.
Speaker 3: Early results show excellent consumer engagement across our marketing channels.
Speaker 3: In China, we're raising the bar on skin health through a proprietary design that whisks away the baby's mess. Moving the mess away quickly from baby's skin is key to reducing diaper rash.
Speaker 3: We believe this kind of innovation will further differentiate us from the competition and is the reason Huggies continues to expand its market leadership in China.
Speaker 3: Lastly, our COTEX Intimate She Can Campaign in Latin America continues to resonate.
Speaker 3: We were recently recognized with a prestigious Cannes Lion Award for this initiative, reducing period stigma, as part of menstrual education.
Speaker 3: In China, CO-TEX introduced polar night and overnight pad with a proprietary design that prevents leakage with instant absorb technology.
Speaker 3: Overall, around the world we are seeing growth driven by the overnight segment.
Speaker 3: This is a great example of superior product performance coupled with effective brand strategy and communications.
Speaker 3: to drive share gain and strong brand equity.
Speaker 3: Now I'd like to briefly address the impairment charges to intangible assets we recognize this quarter.
Speaker 3: We purchased Softex Indonesia to expand our presence in one of the world's fastest growing personal care markets.
Speaker 3: Indonesia ranks among the top three markets for Newbursts and we expect continued economic development will create more demand for our products over time.
Speaker 3: As the second largest diaper player in Indonesia, representing over a quarter of the market,
Speaker 3: Soft Texas built a strong equity with local consumers.
Speaker 3: The impairment charges we took this quarter, which Nelson will discuss shortly, reflect our updated projections for the business.édédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédédéd instead of a dream.
Speaker 3: We have enhanced the team and taken actions to improve the business processes and our go-to-market approach. Indonesia remains an exciting growth market for Kimberly Clark and we're committed to this business for the long term.
Speaker 3: Now as we enter the back half, we expect continued progress in our journey to restore and eventually expand our margins.
Speaker 3: We are excited about our innovation and commercial plans and will invest more in our brands to improve our market share performance and grow up trajectory.
Speaker 3: This is how we will elevate and expand our categories to deliver balanced and sustainable growth.
Speaker 3: Now I'll turn it over to Nelson for more details on the second quarter.
Speaker 4: Thanks, Mike.
Speaker 5: Before I get into second quarter results, let me take a moment to discuss the divestiture of our Brazil tissue business and the impairment of intangible assets, this quarter.
Speaker 5: We closed the sale of our Brazil tissue business in June , which enables us to focus even more on growing personal care.
Speaker 5: As a result of this transaction, we recorded a pre-tax gain of $74 million and $30 million of related expenses.
Speaker 5: both of which are excluded from our adjusted results this quarter.
Speaker 5: I want to thank the many KCers who worked hard to complete this transaction.
Speaker 5: In addition, we conducted strategic reviews for casting and integration assessments as part of our business planning cycle. Based on updated financial projections, a pre-tax non-cash and payment charge of $658 million was recorded.
Speaker 5: primarily related to intangible assets linked to the soft tech's acquisition.
Speaker 5: The charges reflect revised projections for certain brands.
Speaker 5: due to modified consumer shopman behavior, post-COVID-19, inflationary pressures, and increased competitive activity in the region.
Speaker 5: We are confident in the prospects of the personal care market in Indonesia, and we are committed to continue investing in this business.
Speaker 5: Let me now turn to our second quarter results.
Speaker 5: That sales were 5.1 billion, up 1% year over year.
Speaker 5: Organic sales increased 5%.
Speaker 5: On a two-year basis, organic sales growth was strong across all three segments.
Speaker 5: Realization and Mixed Benefits.
Speaker 5: while volume trends continue to improve sequentially. That sales in the quarter were impacted by approximately 400 basis points of currency headwinds. Whether.
Speaker 5: volume trends continue to improve sequentially. That sales in the quarter were impacted by approximately 400 basis points of currency headwinds. Turning to our segments.
Speaker 5: Personal care, representing approximately half of the company's revenue, grew 4% organically.
Speaker 5: led by mid teen's growth in feminine care and mid single digit growth in adult care.
Speaker 5: Infant care delivered broad-based growth in the quarter.
Speaker 5: with the majority of regions grow in mid-single digits.
Speaker 5: Operating profit for this segment improved 1%.
Speaker 5: Organic growth in consumer tissue was 4%.
Speaker 5: led by a 7% growth in North America, where volumes have turned positive, up low single digits in the quarter, driven by Viva and Cottonelle.
Speaker 5: Operating profit for the segment was up 12%.
Speaker 5: Finally, our KC professional business posted a 13% organic growth.
Speaker 5: All geographies grew, and notably, volumes turned positive in North America after six quarters of decline.
Speaker 6: yeah.
Speaker 5: our focus on key commercial sectors,
Speaker 5: effective digital engagement and innovations in sustainability are fueling the momentum in KC professional.
Speaker 5: Favorable product mix and cost savings drove significant operating profit improvement in the quarter.
In quarter adjusted gross margin increased 380 basis points, the 34%.
Revenue growth management in addition to four savings of approximately 80 million more than offset cost inflation and currency headwind. Cost environment remains mixed.
Although energy prices have moderated in some markets, they remain elevated in others.
Labor costs are structurally higher, now do the cost of living adjustments and a tight job market in certain key geographies.
In addition, other manufacturing costs, which cover labor, were 85 million higher this quarter in line with our expectations.
Between the lines spending on an adjusted basis was 19.8% of net sales, up 190 basis points I would rate my hadn'tcm so much more. I would rate my hadn'tcm so much more.
driven by continued investments behind our brands and our capabilities.
as well as the impact from inflation on our cost base. Adjusted operating profit for the quarter increased 17%.
operating margin improved by 190 basis points to 14.2%.
For concurrency was a 16%-page point headwind on operating profit in the quarter, of which five points, or due to translation of earnings, from our non-US operation.
The balance was largely from transactional impacts. We have made good progress on our margin recovery over the last few quarters.
And we remain committed to restoring them to pre-pandemic levels and expanding them over time.
We achieve this. We are increasing our focus on productivity by building a long-term pipeline of opportunities that can generate significant end-to-end efficiencies.
Lastly, the adjusted effective tax rate for the quarter was 20.5%, compared to 22% in the year-ago period.
Strong overall performance, along with a lower tax rate, resulted in adjusted earnings increasing by 23% to $1.65 per share. For the first half of the year, we generated 1.4 billion in cash flow from operation. Capital spending was $389 million.
compared to 470 million last year. Here to date, we returned $850 million to shareholders through dividends and share repurchases.
Now let me say a few words about our outlook. With our continued momentum this quarter, we are raising our full year guidance for organic growth of 3% to 5% and adjusted EPS growth of 10% to 14%. As a reminder,
Our previous guidance was 2-4% organic growth and 6-10% adjusted EPS growth.
The Brazil Investiture, which is not reflected in our previous outlook, is expected to impact reported sales growth by approximately 100 basis points.
We continue to expect currency to impact full year of top line growth by approximately 200 basis points.
Based on the latest estimates for the year, we now expect input costs to be a headwind of approximately $100 million.
an improvement versus the midpoint of our prior outlook of 100 to 200 million.
In addition, we continue to project approximately $200 million from higher wages and other manufacturing costs.
Continued progress in gross margin recovery puts us in a great position to advance our commercial programs. We expect advertising spend to increase by approximately 100 basis points for the full year. This brings us to a projected operating profit growth in the low double-digit range.
And then operating margin increase of approximately 150 basis points at the midpoint of our guidance range.
We remain optimistic about the future and our ability to create long-term value for our stakeholders.
We are also very proud of how our teams continue to execute our exciting growth agenda across the globe.
With that, we will open the floor to questions.
Certainly, everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star one on your phone at this time.
We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality.
We do ask that participants please ask one question and one follow-up, then re-enter the queue.
Once again, if you have any questions or comments, please press star one on your phone. Your first question is coming from Lauren Lieberman from Barclays. Your line is live. Lauren, Lauren. Hi, Lauren. Good morning. Hey, I wanted to just ask a bit about divisional margins. One thing that jumped out to me.
in the quarter was actually that margins and consumer tissue decelerated sequentially, they were down sequentially and then also were up less on a year-over-year basis. So it was just curious kind of what's driving that, right, as you mentioned, there was some better volume performance in North America, the pricing's coming through, costs are easing. So...
Just some conversation around consumer tissue margins and the path to recovery would be really helpful. Thanks. Thanks.
Yeah, no, absolutely. So a few things. I mean, we don't we don't speak about gross margin, but just to give you a context, Lauren, year over year, we did have a meaningful gain in gross margins on the segment.
you know, over 200 basis points. We, you know, on a quarter over quarter, you're always gonna see a few puts and takes depending on mix and elements that flow through. But net net, I mean, we are seeing an upward trend. So I wouldn't get too hung up on the overall movement quarter to quarter for the segment.
areas and you've talked a lot about innovation and potential for elevate and expand to apply into issue as well as some of that feeding these investments or is it really just a matter of timing and mix?
Yeah, it's a few things. I mean, one, obviously we in North America have been doing the transition to the new artwork and some of the upgrades that we're doing in Cottonelle. So, part of the thing has been, you know, our transition on shelf is taking a little bit longer than what we had planned. So that's, you know, that's playing a little bit in the mix, but overall, I mean, that's progressing.
And in terms of the elevate, we're also having initiatives in the UK in Andrex where we're doing some upgrades on the product line and that's coming through. So that's progressing on that end, but Mike, I don't know if you want to add anything else on that end. Yeah, I mean, I think when we talk about elevating that holds for all our businesses around the world, and certainly...
you know consumer tissue personal care professional we're happy to invest in all those and it's paying out as Nelson just mentioned in the UK you know organic growth was up double digits share continues to be strong and robust on address week and part of that is because along with some pricing
we have upgraded the quality over the last couple years. And so we feel good about that where we stand there. And really proud, if you look at year on year, I think our between the lines investment we mentioned was up about 190 basis points over the prior year. And that reflects our commitment to the brands and our belief that we got great commercial programming to invest behind it.
topic that we've been getting a lot of questions of on late is
around pricing pressure in consumer tissues. Some of the discussion particularly in Europe and UK from retailers pushing back on pricing or looking to roll back in consumer tissue and we feel a lot of questions about a if that would be an issue for for Kimberly Clark and be in specific to Europe and be the risk of that dynamic materializing in the US.
So just maybe you can add perspective there as well. I think you've said a lot in terms of reinvestment and share momentum, but any perspective on pressure to quote, quote, give back pricing in that category in US and Europe would be helpful. Yeah, I'd say overall, Lauren, you know, pricing initiatives, you know, net revenue management initiatives are on track.
maybe in the prior six months. But I think thus far, it's not showing up in the results or dramatically impacting our results. For the quarter, we had a very solid quarter across Western Europe .
demand was up about double digits or organic was up about double digits volume hanging in there pretty well. And so we feel good about where we are, but also recognize that yeah, there's gonna be a competitive environment and we have to be prepared for that. The great thing is, you know, as you first talk about.
You know, we've invested in enhancing our revenue growth management and analytic capability. And so we feel like we'll be able to make the right investments at the right time that will be wise and not just overreact to things. Okay, great. Thanks. I'll pass it on. Okay. Thanks, Lauren.
Thank you. Your next question is coming from Javier Escalante from Evercore ISI. Your line is live. Hi, good morning. Hey, good morning, guys. I do like to understand a little bit better the I think that you could have between the line expanding the SG&A line, which you do not
And related to that, and if follow up to the Lawrence question.
You just did a strategic review and essentially exited Brazil.
Well down Indonesia.
What if you step back the main difference between Kimberly Clark and Proper is that this international T-Share business. Could you explain the role of the international T-Share business and whether the margin profile is materially lower?
to the consumer tissue in the US. Thank you very much. Yeah, maybe you want to start with between the lines and how you're just so you know, between the lines a big bucket for us so it includes both the advertising and as you point out some of our general administrative costs and so maybe Nelson comment, sure.
So yeah, to give you a sense of the increase that we're seeing in between the lines, about half of that would be on support behind the brands, the advertising and promotional activities, and it's largely advertising because of all the products that we've been not just launching, but upgrading and some of the campaigns that are underway.
Through the first half we are at about $190 million negative. So it has an impact so evidently what's going to happen is we're seeing about a $90 million give or take benefit as we go into the balance of the year.
We will see some of that coming in in Q3, and then the balance obviously in Q4, what we're seeing is.
Versus our prior outlook.
Overall fiber complex has gotten a little bit better and distribution costs have gotten a little bit better.
I will however.
Just highlight that on a year over year basis, we're still seeing bulb in the overall fiber complex inflationary for us.
Even though if you take it as a whole the latest outlooks have fiber being year on year down in the mid teens. If you aggregate everything so net net thats come down distribution is about flat now year over year for us and then the only the only big cost bucket that's down significantly.
Inefficiently continues to be the rest in complex, which again thats down overall for the quarter of 50%. So we're projecting about 40% down yes, Chris the headline for me is the cost environment for us.
Has stabilized and that's that's really really good news for us.
After cycling two.
<unk> 2021, and 2022, where we had record inflation for us while it's still.
Modestly inflationary we can operate very well on a stable cost environment and so we're seeing both input cost stabilized and also the supply environment, while we still have some sporadic outages and supply.
It's much improved and so we're bullish on the road ahead for us on the cost environment.
Okay. Thanks, so much.
Thank you. Your next question is coming from Dara <unk> from Morgan Stanley . Your line is live.
Hi, Dara <unk>, Hey, good morning.
So.
I just wanted to return to share for a bit I mean, your comments seemed more glass half full here in terms of sequential improvement in share.
But if we look specifically at U S scanner data some fairly pronounced year over year share losses in Q2 in consumer tissue in diapers. So was just hoping you could put the U S scanner data in context.
And then second plans to drive improved share trends going forward.
It sounds like perhaps there might be a bit more promotion, but not necessarily big focus innovation ramps up is that sort of the plans to drive improved share from here or how do you think about the share trends in the back half of the years specifically in the U S.
Yes, yes, definitely I believe ishares will improve we felt very confident in our programming and our innovation that's coming in.
Year to date, we feel we feel really good about what that's done in the marketplace I would say the recent softness as I mentioned earlier Dara.
Primarily related to the relatively faster pace of our price advantages last year price advantaged <unk>.
Advances last year.
So that kind of really is the primary effect, but I would also say in North America, specifically, we are facing a fairly tough comp just to refresh your memory I think personal care.
In personal care were up 14%.
A year ago quarter and across both personal care and tissue market shares were a bit elevated that that was an artifact and I think we've talked about this time, a year ago, which was.
Out of our supply was tight in.
In the first and second quarter of 2020.
One and so we had kind of restock impact and the kind of reselling impact.
In the year ago quarter, and we're cycling that now so we did see our shares were higher than the year ago quarter.
Than they historically were and I think that was related to the I would say coming back in the business.
In Q2 of 2022.
But that said, we're not satisfied with our share performance and definitely want to be up and offer even in over half and so we are committed we feel very good about our programming, especially in North America.
Mentioned are our baby.
Advertising in our in our product improvements in North America on Huggies, and so we feel good about where we are and we're going to continue to invest in the brands and make sure that.
We continue.
Continue to touch base with our consumers and encourage them to try our products.
And return.
Okay, Great and then on the innovation front you sound excited there any thoughts on if the contribution to sales growth should pick up significantly on innovation as we look out over the next couple of years versus the last couple of years any conceptual thoughts there would be helpful. Yes, I will just point out Dara I think.
I don't have the numbers for this year yet the last year, our contribution of sales from innovation was probably among the highest in the industry.
And so we do track we do have a couple.
Internal metrics around net incremental <unk>, and then and then percent of sales related to to the to the innovation and so we felt very strong last year.
<unk>.
And so we felt good about that but that said some of the things that I just showed on the slides in our in our in our presentation. This morning, we feel good about really good about the technology and the.
The product innovation on the premium side that we're having in diapers, especially in China.
In China organic was up nearly double digit against the backdrop, where the category is declining double digit and so.
And we've doubled our super premium mix over last year.
Or so.
Then as I mentioned on the slides, we've launched two really exciting products over colonnette tier six funnel that feature is really a two zone liner that one that handles the urine and one that handles the.
The solid waste right.
I'd like to say proof and then and then we have something that we're calling calling oxygen var pro which is really really high breathability diaper, which moms in China really love and so we feel good about that and we're bringing technologies like those around the world.
Okay.
Great. Thanks, Okay. Thanks Dara.
Thank you. Your next question is coming from Nik Modi from RBC capital markets. Your line is live.
Thanks, Good morning, everyone.
Hi, how are you.
Mike I wanted to just kind of stick on the innovation topic I mean, I think the messaging from you've got you've been very clear in terms of how active you are going to be later this year and probably even going into 2024, but one of the common.
Pieces of feedback I get from the retail community is that everyone is really going to be very very active in innovation. Because there was a lot of product that was not launched during the COVID-19 timeframe. So I just wanted to kind of get your reaction to that and thoughts on that and could we potentially see maybe some unexpected levels of spending just because youre going to have to compete with so.
Many other active innovation pipeline and shelf space is finite.
Yes.
We feel good about our investment levels I mean, they have ramped up significantly over the last five years and again as I. Just mentioned, we're up about 190 basis points year to date between the lines of which Nelson you said about half about half and half is on the advertising side.
And really the model as you know.
No.
We're investing in the advertising primarily to support the innovation.
And so.
We feel very good about our programming and as I've said on prior calls and Alison Our Chief growth Officer has said at Cagny presentations.
We're really focused on kind of big unmet needs or internally, we'll call those demand spaces, where we feel like hey, there is an important things that the consumers are looking for out of the category.
Cadillac category like diapers or adult here that may be around absorption or protection.
<unk> skin health earlier, which is something that hasnt been a big part of this category. We think is a very important part of the category.
Particularly as it relate.
It relates to solid waste.
And then comfort fit breathability are all big factors and so those are kind of big areas for us to get better and where I feel like the categories can do a much better job overtime, so and we shared a lot of our thinking around innovation with our with our customers over the long term and they remain very excited and we're receipt.
Very strong customer support for renovation so.
Your point is.
Is there going to be more innovation from from other manufacturers and across the category yes.
But.
Our focus on driving the big innovations that we have and making sure that we invest materially behind those.
Make sure that we can drive the conversion of the combined with the consumer.
Great. Thank you okay. Thanks, Nick.
Thank you. Your next question is coming from Anna <unk> from Bank of America. Your line is live.
Hey, good morning, and thank you.
You for the question.
Just as a follow up to Chris's question I wanted to ask on how youre viewing the health of that consumer you've mentioned and then advisor occasion. This year between the low and higher income consumers on their ability to absorb price and in the latest scanner data from this morning and implies.
We are continuing to decelerate, while youre getting on price.
So as a result I was wondering if we should expect softer volumes to continue in Q3 offset by better pricing.
Just how youre seeing these trends play out in the second half of the year between Q3 and Q4, yes.
Yes.
I would say consumer demand remains resilient.
Our categories, thus far remain healthy.
And demand has been robust I'll just to give you a few numbers I mean, north American consumer across our categories. It's not us just the categories up high single digit Western Europe , which is a big developed market for us up teens in Latin America double digits KC professional globally was up double digits and so I would say the category.
Overall demand remains pretty robust.
Are we aware of concerns around the corner.
Regarding related to the economy and economic pressures for sure and when we talk about all the time, thus fat thus far it has not materialized.
The second quarter, the elasticity impact has remained muted.
Not muted.
Just to give you an example in diapers.
Category for the quarter price was up six and volume was up one so that would probably say elasticity impact has not been.
As we typically model and so.
On that side.
It does reflect the essential nature of our categories.
Our volume trends.
As we kind of cycle, our pricing from year ago, we expect our volume trends to continue and improve.
<unk>.
We think should improve in the back half. In addition, driven by the commercial programming innovation that we've been talking about.
And so so I think overall I'd say healthy not seeing a whole lot of broad scale downturn, we do see it in pockets.
There is continued demand for premium in big development markets like the U S like China.
Even in Brazil, and Argentina, we're seeing actually the premium tiers start to grow and the value tiers.
On track a little bit.
There are some pockets of downturn, we're seeing that in southeast Asia Some markets in Latin America.
And two.
Managed through that we're going to continue to sharpen our value propositions I mean, we're very interested in serving all consumers as category leaders, we feel like we need to serve both the consumers are looking for premium products, but also the ones on the value side as well and so we have a broad portfolio.
That spans value to premium and we're doing things like adjusting accounts to make sure our large packs remain competitive.
And affordable we're.
We're sharpening our entry price points and small format stores to make sure that consumers can afford to be in the category and then probably most importantly in my mind is we've talked a lot about innovation, we are doing a better job of accelerating our cascading that innovation through our tears from.
From premium to value and so that's kind of how we will manage through it.
Thank you that's very helpful and you also talked a bit about promotion here I know youre not necessarily.
Interested in getting back to pre COVID-19 levels of promotion investing a little bit more on marketing.
With your current levels of marketing spend versus peers potentially spending more do you feel that your marketing spend here in the session.
First as others in the industry.
Well I'll answer the second of our firsthand.
I would say, we're highly efficient on the marketing side I mean, we've invested quite a bit over the last several years around.
Revenue management analytics marketing ROI, our analytics and so.
Maybe to a fault were perhaps overly analytical in terms of how we invest but in general I feel very good about the returns are getting we're getting which is why which is we'll also why it gives us the confidence to invest more.
Recognize we're not spending fully at the levels of some of our competitors.
But we've made significant progress over the last few years I think we're up several hundred or a few hundred basis points in advertising spending over the last five years and so so we're I would say pleased with our progress, but not satisfied and.
Part of our whole reason.
The reason why we're very focused on being disciplined about how we drive both revenue volume mix innovation is that we feel like it's important to continue and invest behind these brands.
Because that's the way that we can.
Drive category growth and serve our consumers better.
And then on another another point on the investment keep in mind that.
We have three segments and we don't invest at the same level in each segment. So what we disclose is a total number for the company. So if you take as an example, KC professional the level of investment behind KC professional is not going to be anywhere near what we're doing on personal care and if you look at consumer.
Issue it will vary by market. So we look at that very closely and as Mike said, we are very focused on return on investment and being efficient on those dollars that we spend per segment.
Great. Thank you very much.
Okay. Thanks Dana.
Thank you. Your next question is coming from Andrea Teixeira from Jpmorgan. Your line is live.
Good morning, good morning.
Uh huh.
Just first on the pricing I have a question for both you and Mike and also a clarification for Nelson.
On the pricing side, Youre, getting obviously strong realization, but lapping the.
The pricing that you mentioned like your.
Head of your competitors. So what are you embedding into the second half just to be clear it seems like the guide.
Can you guide the midpoint implies about 3% organic in the second half so how much do you expect and it sounds as if youre expecting any inflection in volumes at some point.
I mean, you said sequentially batter of course, you had negative.
In the quarter, so just to clarify what you're expecting for the third quarter and potentially the fourth.
And then on the gross margin side, the $90 million benefit from prior outlook.
My math is like about 45 basis points benefit for the year your tax benefit on the impairment is another I think Hyatt <unk>. So how should we be thinking of your EPS guidance range is 45 basis points benefit dilutive go inflow through EBIT It seems.
I think youre flowing into whole portion.
So in other words, you're not embedding additional promo pressure or marketing pressure in Europe .
In your outlook. Thank you.
Yes, yes.
Yes. Thanks for the question I don't know if I could how well I can answer it all because I don't think we outlook.
<unk> of price mix volume, However, I would say I am I expecting an inflection on volume for sure at some point.
I don't know when thats going to when that's going to be but at some point I want volumes to be positive and just to give you refresh our memory.
Pre COVID-19 I think for the three years, leading up to our.
A lot of our revenue growth was primarily volume driven and so.
I do expect US, which is why we're investing in innovation and commercial programs for the business to grow healthy long term, we need the volumes to be up and so so yes for sure I am expecting an inflection into point.
Im not calling the meeting in 2023, I'm, sorry to have to just to make sure.
Again, I said, our volume trends are improving I can't give you the inflection point and I'm not going to forecast it.
Or give guidance on an inflection point, however, I would point out.
The majority of our pricing initiatives were.
More front end loaded or front half loaded last year and so we are we are starting to cycle those and so I would expect R. R.
Contribution of revenue from price to diminish in the <unk> and hopefully the contribution to revenue from volume and mix to continue to improve.
So.
I would point to a drag to the following we've seen sequentially in the last couple of quarters, an improvement of about 200 basis points and volume. So we went from down 7% to down 5% to down three.
Now as Mike said, we're not we don't forecast or disclose the next quarter and its breakdown et cetera, but clearly youre seeing that the volumes have been improving sequentially.
And that has to do one with the pricing, but also with some of the innovation and the products, we have been putting out on the marketplace and the increased investments behind the brands.
So yes, we are expecting volumes.
Improve continuously.
That's our expectation we are expecting revenue growth management realization to be less of a driver and again that has played out over the last few quarters and as I explained earlier, so thats kind of the way to think about it as the year progresses, and yes, we will get back to positive volumes Thats the plan.
On that end.
In terms of the operating profit again I'll try to address the question. So your point around what are we flowing how is it going we've got a we've got a few things playing out in terms of operating profit I mean, one.
We have a slightly better performance in the first half and we're flowing part of that through because we.
That's coming through the actuals, but also we're having a better outlook on costs and Thats also equating to a better performance on the outlook for EBIT, which I believe that's a question you had.
For EPS there are a few puts and takes in the core.
Quarter, Yes tax rate was a bit of a driver, but we're still expecting the tax rate for the year to be in the 23% to 25%. So think of that more as a timing we're not moving away from the guidance in terms of tax.
And then between the lines there is really not much of a bigger driver apart from that that I would highlight at this point.
Thank you and I'll pass it on okay. Thank you Andre.
Sure.
Your next question is coming from Jason English from Goldman Sachs. Your line is live.
Good morning, Jason.
Hey, good morning folks congrats on a solid first half of the year.
A couple of comments, so far answers to the questions post.
Those deals where our market share of focused on.
Patterns are lagging your price increases.
You noted those price increases have been in place for pretty long now telecom for competitors to lag pricing by a couple of months, but it is common to have a lag for a couple of quarters would follow suit.
Managing your assumption in our assumption should be that they're just not.
And if thats the case.
<unk> do you accept these market share losses like can you just kind of live with it.
Or should we expect you to have to close those price gaps to try to regain that market share.
Yes.
Thanks, Jason.
Great point.
The thing I'll say is.
Generally at this point.
I would say we've seen list prices move.
But when I say quote unquote, scraping or Youre Award lagging.
I'd say, we have seen a little bit higher promotion in some markets, particularly in Latin America, and Brazil for instance.
We've seen continued promotional activity. So I think that that has been what we've observed more commonly the list prices has lagged for a period.
At this point I'd say.
A lot of the brands have had have.
Have moved as well and so so so overall I'd say the tactic is around the promotional side.
And as I've mentioned, Jason.
We're going to be smart about it it's not the way.
We think as the valuable way to build the business in these categories and so.
But we have invested in our <unk> capability, we do know the analytics and we can make wise investments around promotion. The bigger thing is and I think to your point, yes, I'm not going to live with.
We have to grow shares over long term to sustain the business just like we have to have volumes up and so market share is going to grow that's why our goal is to be upper offer even in more then.
About half or more.
And Thats the goal and so but that's also why you've heard us talk quite a bit about our innovation and commercial programs. That's why we spent a lot of time with consumers talking about them and spent a lot of time with our customers talking about them and we feel good about where we are but I think youre certainly pointing to.
The one area that I feel like we really need to improve and we're committed to doing that.
Okay. Okay. Thank you I'll pass it on thanks, Jason Thanks.
Thank you. Your next question is coming from Peter Grom from UBS. Your line is live.
Good morning, Peter Thanks, operator.
Hey, good morning, guys.
Hope you're doing well, so I guess I kind of wanted to get some more color on what's embedded in the outlook from a gross margin perspective, I think previously the expectation was 230 basis points you reiterated your outlook for an increase in AD spending over 100 beds. This morning. So is your expectation for 250 basis points now.
I think the premise of the question is we're just seeing is that that would imply that.
Gross margin improvement.
Taper off in the back half of the year and just given what youre seeing in terms of cost pressures and productivity that would seem somewhat conservative. So just if you could help us understand the outlook for gross margin today and any phasing in the back half of the year that would be helpful.
Yes, sure let me, let me walk a little bit through the outlook and some of the components that we have.
And as a reminder, Peter what I, what I stated at the last call was that our expectation was at least 230 basis points because it was a straight math.
Obviously, we've reached.
34% gross margins in the second quarter, we're very pleased with the progress that has been made.
We seek to recover back to pre COVID-19 levels of 35% and then expand from there.
So we've had two quarters of very strong gains in gross margin and obviously as we go into the back half of the year at stage two things one we do expect to have year over year gains in gross margins.
We do expect that gross margins.
Margins as a whole.
Gross operating profit should expand.
In the second half, but not at the pace that we saw in the first half.
So as Youre thinking about your numbers Thats the way I would think about it. So we would we would exit the year definitely stronger.
The implied number yes, as you say would be $2 50 on the gross margin, but that again thats at least that's the way I would characterize that.
Obviously, we've been we've been expanding ahead of that year to date.
As you think about the.
The balance of the year I would also like to highlight a few things on the outlook on costs, we have not changed the currency impact that we foresee we only took down cost by about $50 million, we still expect the full year to be around the $300 million to $400 million of inflation and currency and.
And the other costs.
Still expect around $200 million, it's been playing out in the first half.
Right around the level, we expected so net net.
Good progress on margins, we're pleased with how that's coming along we expect to continue to make gains but not at the same pace as what we did in the first half yes.
Yes, and maybe Peter I'll, just add just the outlook is up Nelson just teed up really does reflect the strength of our first half and our confidence in our underlying plan arc as I mentioned earlier, our categories. Thus far remain healthy and demand has been robust we have strong innovation and commercial lineup and we feel great to be investing more in that but.
Cost environment has been stable and so while it's still a headwind.
I would say, we're seeing glimpses of reversion and so thats a good thing.
But the other part of it and our outlook embedded in it as we do expect ongoing volatility and so certainly as you are well aware there is a lot of economic uncertainty in our major markets soft versus a hand, a hard landing and the implications for consumer spending first and foremost.
We're still dealing with a lot of political uncertainty, including the effects of the war.
And then as I mentioned earlier, we still have some sporadic supply challenges, while it's much improved versus where it was two years ago, we still have some outages and so so there is some inherent volatility, but overall, we feel very good about where the businesses and where we're going and feel very good about our outlook.
Thanks, that's really helpful. I guess, maybe one follow up on that.
I guess just given the.
You mentioned some reversion in the cost on the horizon, I mean, I guess based on where things stand today, how should we be thinking about <unk>.
Cost pressures looking out to 2024, I mean should we expect that this could remain a tailwind looking ahead and I guess the bigger question is how does this really inform your view on when you expect to return to that 35% gross margin target you have outlined.
Well certainly I'll start with I don't think im going to give you guidance on 'twenty four yet, but I think the.
I am definitely very pleased with our progress on margin recovery certainly as you saw our gross and operating margins expand I think we've done a great job with the revenue realization.
Managing the cost environment.
And so we feel very good about that.
Our goal is to restore our margins to where they were back in 2019, our gross margins.
I think we are making that progress, but we are going to stop there either.
So when I caught into this role back in 2019, I said at that time.
One of our goals is to expand our margins over time and so what we're trying to do Peter is one restore and then when we get there then we need to expand and Theres not two parts of the plan. There is one plant and so we're going to continue to work that all of the levers that we've talked about both from a revenue management perspective, and a cost management perspective to drive.
The ongoing margin expansion.
Thanks, so much for that and I'll pass it on okay. Thank you Peter.
Thank you that concludes our Q&A session I will now hand, the conference back to our host for closing remarks. Please go ahead.
Okay. Thank you all for joining US protocol today, we look forward to seeing you in Q3 at the end of Q3. Thank you.
Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.
Okay.
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