Q2 2019 Earnings Call

July 23, 2019

Operator: Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of this morning's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you'd like to ask an audio question. It is now my pleasure to introduce Mr. Paul Alexander.

Ladies and gentlemen, thank you for your patience in holding we now have your presenters in conference. Please be aware that each of your lines is in listen only mode. At the conclusion of this morning's presentation. We'll open the floor for questions at that time instructions will be given as to the procedure to follow if you'd like to ask an audio question. It is now my pleasure to introduce Mr. Paul Alexander.

Paul Alexander: Thank you, and good morning, everyone. Welcome to Kimberly-Clark's second quarter earnings conference call. With us today are Mike Hsu, our Chief Executive Officer, and Maria Henry, our CFO. Here's the agenda for the call. Maria will begin with a review of second quarter results. After that, Mike will provide his perspective on our results and the outlook for the full year. We'll finish with Q&A. We have a presentation of today's materials in the Investors section of our website. As a reminder, we will be making forward-looking statements today. Please see the Risk Factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements. Lastly, we'll be referring to adjusted results and outlook, which excludes certain items described in this morning's news release. That release has further information about these adjustments and reconciliations to comparable GAAP financial measures.

Thank you and good morning, everyone welcome to Kimberly Clark second quarter earnings Conference call with US today are Mike Hsu, Our Chief Executive Officer, and Maria Henry Our CFO .

Here's the agenda for the call Maria will begin with a review of second quarter results. After that Mike will provide his perspectives on our results and the outlook for the full year.

Well finish with QNX.

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

As a reminder, we will be making forward looking statements today. Please see the risk factor section of our latest annual report on Form 10-K for further discussion of forward looking statements.

Lastly, we'll be referring to adjusted results and outlook, which exclude certain items described in this morning's news release that release has further information about these adjustments and reconciliations to comparable GAAP financial measures.

Paul Alexander: Now I'll turn the call over to Maria.

And now I'll turn the call over to Maria Thanks, Paul and good morning, everyone. Thanks for joining the call today.

Maria Henry: Thanks, Paul, and good morning, everyone. Thanks for joining the call today. Let me start with the headlines for the quarter. Organic sales increased 5%, driven by higher net selling prices. We achieved strong cost savings, margin improvements, and growth in adjusted earnings per share. Finally, we're broadly on track with our overall capital plan, and we continue to return cash to shareholders. Now let's cover the details of our results, starting with sales. Our Q2 net sales were $4.6 billion. That's even with year ago and includes a 5-point drag from currency rates. Organic sales were up 5% compared to flat performance in the base period. Net selling prices increased 5%, and product mix improved 1 point, while volumes fell slightly. Mike will provide some more color on our top line in just a few minutes. Moving on to profitability.

Let me start with the headlines for the quarter organic sales increased 5% driven by higher net selling prices, we achieved strong cost savings margin improvements and growth in adjusted earnings per share and finally, we are broadly on track with our overall capital plan and we continue to return cash to shareholders.

Now lets cover the details of our results starting with sales.

Our second quarter net sales were $4.6 billion, that's even with year ago and includes a five point drag from currency rates.

Organic sales were up 5% compared to flat performance in the base period.

Net selling prices increased 5% and product mix improved one point well volumes fell slightly.

Mike will provide some more color on our top line in just a few minutes.

Moving on to profitability.

Maria Henry: Q2 adjusted gross margin was 34.6%, up 120 basis points year-on-year. Adjusted gross profit increased 3%, with selling prices nicely ahead of commodity and currency headwinds. We also generated solid cost savings of $90 million, pretty consistent with our expectations. That includes $70 million of FORCE cost savings and $20 million of restructuring savings. Commodities were a year-on-year drag of $80 million in the quarter. This was a little better than we expected, and our full-year commodity outlook has improved. We now expect full-year commodity inflation of $150 to 250 million. On average, that's $150 million lower than our previous estimate. The reduction is driven primarily by pulp and, secondarily, other raw materials.

Q2 adjusted gross margin was 34.6%, up 120 basis points year-on-year. Adjusted gross profit increased 3%, with selling prices nicely ahead of commodity and currency headwinds. We also generated solid cost savings of $90 million, pretty consistent with our expectations. That includes $70 million of FORCE cost savings and $20 million of restructuring savings. Commodities were a year-on-year drag of $80 million in the quarter. This was a little better than we expected, and our full-year commodity outlook has improved. We now expect full-year commodity inflation of $150 to 250 million. On average, that's $150 million lower than our previous estimate. The reduction is driven primarily by pulp and, secondarily, other raw materials.

Second quarter adjusted gross margin was 34.6% of 120 basis points year on year adjusted gross profit increased 3% with selling prices nicely ahead of commodity and currency headwinds.

We also generated solid cost savings of $90 million pretty consistent with our expectations.

That includes $70 million of forced cost savings and $20 million of restructuring savings.

Commodities, where year on year drag of $80 million in the quarter. This was a little better than we expected and our full year commodity outlook has improved.

We now expect full year commodity inflation, a $150 million to $250 million.

On average that's $150 million lower than our previous estimate.

The reduction is driven primarily by Paul and secondarily other raw material.

Other manufacturing costs also increased in the quarter compared to a relatively modest level last year. These costs are expected to be a bit higher than we planned for for the full year.

Maria Henry: Other manufacturing costs also increased in the quarter compared to a relatively modest level last year. These costs are expected to be a bit higher than we planned for, for the full year. Moving further down the P&L, below-the-line spending was up 90 basis points as a percent of sales. That included higher advertising as we're investing more behind our brands, particularly in digital. G&A expense also increased, driven by higher incentive compensation. For the full year, because we've raised our sales and earnings outlook, we've also increased our incentive compensation estimate. The increase versus our original plan is equal to more than 1% of total operating profit. About half of that increase was reflected in our Q2 results. Foreign currencies were also a headwind in the quarter, reducing operating profit by a high single-digit rate. All in all, adjusted operating profit was up 2%.

Other manufacturing costs also increased in the quarter compared to a relatively modest level last year. These costs are expected to be a bit higher than we planned for, for the full year. Moving further down the P&L, below-the-line spending was up 90 basis points as a percent of sales. That included higher advertising as we're investing more behind our brands, particularly in digital. G&A expense also increased, driven by higher incentive compensation. For the full year, because we've raised our sales and earnings outlook, we've also increased our incentive compensation estimate. The increase versus our original plan is equal to more than 1% of total operating profit. About half of that increase was reflected in our Q2 results. Foreign currencies were also a headwind in the quarter, reducing operating profit by a high single-digit rate. All in all, adjusted operating profit was up 2%.

Moving further down the piano.

Between the line spending was up 90 basis points as a percent of sales.

That included higher advertising as were investing more behind our brands, particularly in digital.

DNA expense also increased driven by higher incentive compensation.

For the full year, because we've raised our sales and earnings outlook. We've also increased our incentive compensation estimates.

The increase versus our original plan is equal to more than 1% of total operating profit.

About half of that increase was reflected in our second quarter results.

[noise] foreign currencies were also a headwind in the quarter, reducing operating profit by a high single digit rate.

All in all adjusted operating profit was up 2%.

Maria Henry: Q2 adjusted operating margin was 17.2%, up 40 basis points versus year ago. That included broad-based margin improvements in all three business segments. On the bottom line, adjusted earnings per share were $1.67, up 5% year-on-year. In addition to the higher operating profit, the bottom line benefited from a slightly lower adjusted effective tax rate, higher equity income, and a lower share count. Let's turn to cash flow and capital efficiency. Cash provided by operations in Q2 was $609 million, compared to $787 million in the year-ago quarter. The decrease was generally in line with our expectations and driven by higher tax payments and increased working capital. Capital spending was $253 million in the quarter.

Q2 adjusted operating margin was 17.2%, up 40 basis points versus year ago. That included broad-based margin improvements in all three business segments. On the bottom line, adjusted earnings per share were $1.67, up 5% year-on-year. In addition to the higher operating profit, the bottom line benefited from a slightly lower adjusted effective tax rate, higher equity income, and a lower share count. Let's turn to cash flow and capital efficiency. Cash provided by operations in Q2 was $609 million, compared to $787 million in the year-ago quarter. The decrease was generally in line with our expectations and driven by higher tax payments and increased working capital. Capital spending was $253 million in the quarter.

Second quarter, adjusted operating margin was 17.2% up 40 basis points versus year ago.

That included broad based margin improvement in all three business segments.

On the bottom line adjusted earnings per share were one dollar and 67 cents up 5% year on year.

In addition to the higher operating profit the bottom line benefited from a slightly lower adjusted effective tax rate.

Higher equity income and a lower share count.

Let's turn to cash flow and capital efficiency.

Cash provided by operations in the second quarter was $609 million compared to $787 million in the year ago quarter.

The decrease was generally in line with our expectations and driven by higher tax payments and increased working capital.

Capital spending was $253 million in the quarter as expected that's up versus last year, driven by supply chain restructuring projects.

Maria Henry: As expected, that's up versus last year, driven by supply chain restructuring projects. We continue to allocate capital in shareholder-friendly ways. Q2 dividends and share repurchases totaled $520 million, and we continue to expect the full year amount will be between $2 and 2.3 billion. Looking at our segment results, in personal care, organic sales were up 8%. Net selling prices increased 5%, and volumes and product mix were each up 1 point. Personal care operating margins were 21.2%, up 80 basis points year-on-year. The improvement was driven by organic sales growth and cost savings. In consumer tissue, organic sales were up 4%. Net selling prices increased 5%, and product mix improved slightly, while volumes fell 2%.

As expected, that's up versus last year, driven by supply chain restructuring projects. We continue to allocate capital in shareholder-friendly ways. Q2 dividends and share repurchases totaled $520 million, and we continue to expect the full year amount will be between $2 and 2.3 billion. Looking at our segment results, in personal care, organic sales were up 8%. Net selling prices increased 5%, and volumes and product mix were each up 1 point. Personal care operating margins were 21.2%, up 80 basis points year-on-year. The improvement was driven by organic sales growth and cost savings. In consumer tissue, organic sales were up 4%. Net selling prices increased 5%, and product mix improved slightly, while volumes fell 2%.

We continue to allocate capital in shareholder friendly ways second quarter dividends and share repurchases totaled $520 million and we continue to expect the full year amount will be between two and $2.3 billion.

Looking at our segment results in personal care organic sales were up 8% net selling prices increased 5% and volumes and product mix were each up one point.

Personal care operating margins were 21.2% up 80 basis points year on year.

The improvement was driven by organic sales growth and cost savings.

In consumer tissue organic sales were up 4% net selling prices increased 5% and product mix improves slightly well volumes fell 2%.

Maria Henry: Consumer tissue operating margins were 15%, up 90 basis points versus year ago, with significant benefits from higher pricing. In KC Professional, organic sales grew 1%. Selling prices rose 3%, and product mix improved a point, while volumes were down 3%. KC Professional operating margins of 19.7% were up 50 basis points versus prior year. So all in all, we delivered very good results in the quarter while continuing to invest for future success. I'll now turn the call over to Mike.

Consumer tissue operating margins were 15%, up 90 basis points versus year ago, with significant benefits from higher pricing. In KC Professional, organic sales grew 1%. Selling prices rose 3%, and product mix improved a point, while volumes were down 3%. KC Professional operating margins of 19.7% were up 50 basis points versus prior year. So all in all, we delivered very good results in the quarter while continuing to invest for future success. I'll now turn the call over to Mike.

Consumer tissue operating margins were 15% up 90 basis points versus year ago with significant benefits from higher pricing.

In K C professional organic sales grew 1%.

Selling prices rose, 3% and product mix improved a point well volumes were down 3%.

KC professional operating margins of 19.7% were up 50 basis points versus prior year.

So all in all we delivered very good results in the quarter, while continuing to invest for future success.

I'll now turn the call over to Mike.

Michael Hsu: Okay, thanks, Maria. Good morning, everyone. Let me start by saying we made excellent progress in the second quarter. We're executing our 2019 plan well, with a strong focus on price realization to improve our margins. We're launching innovations, investing more in our brands, and pursuing growth priorities for longer-term success. We're also continuing to return significant cash to shareholders. As Maria just mentioned, we delivered 5% organic sales growth in the second quarter, and while that compares to a soft year ago, this was our best performance in over 3 years. Our pricing initiatives are on track. Our volumes are ahead of expectations, both in terms of the impact from price increases and from our growth initiatives. We also continue to improve mix, which was up 1 point for the second consecutive quarter. Let me share some of the top-line highlights, starting in North America.

Great. Thanks Maria.

Good morning, everyone.

Let me start by saying, we made excellent progress in the second quarter.

We're executing or 20, lurching, playing well with a strong focus on price realization to improve our margins.

We're launching innovation investing more in our brands and pursuing broke priorities for longer term success.

We're also continue to return significant cash to shareholders.

As Roger just mentioned, we delivered 5% organic sales growth in the second quarter and while that compares to a soft year ago. This was our best performance in over three years.

Our pricing initiatives are on track.

Our volumes are ahead of expectations. Both in terms of the impact from price increases and from our growth initiatives. We also continue to improve mix, which was up one point for the second consecutive quarter.

Let me share some of the top line highlights starting in North America.

Michael Hsu: Organic sales and consumer products increased 5% compared to a 2-point decline last year. Year-to-date, organic sales were up 3, which is likely a better reflection of our ongoing performance. Growth in the quarter was driven by 4% higher selling prices. Our pricing plans are on track. Volumes in North America were up slightly overall. Adult care volumes were up high single digits, and we recently launched innovations on both Poise and Depend to keep that momentum going. Earlier this month, we launched Huggies Special Delivery, our new super premium diaper. Special Delivery uses the best of our technology from around the world. This is our softest diaper. It's made with plant-based materials and provides ultimate skin comfort. It's also premium priced and a great example of our Elevate the Core strategy in action.

Organic sales and consumer products increased 5% compared to a 2-point decline last year. Year-to-date, organic sales were up 3, which is likely a better reflection of our ongoing performance. Growth in the quarter was driven by 4% higher selling prices. Our pricing plans are on track. Volumes in North America were up slightly overall. Adult care volumes were up high single digits, and we recently launched innovations on both Poise and Depend to keep that momentum going. Earlier this month, we launched Huggies Special Delivery, our new super premium diaper. Special Delivery uses the best of our technology from around the world. This is our softest diaper. It's made with plant-based materials and provides ultimate skin comfort. It's also premium priced and a great example of our Elevate the Core strategy in action.

Organic sales in consumer products increased 5% compared with two point decline last year year to date organic sales were up three which is likely a better reflection of our ongoing performance.

Rose in the quarter was driven by 4% higher selling prices.

Or pricing plans are on track.

Volumes in North America were up slightly overall.

Adult care volumes were up high single digits, and we originally launched innovations on both poison append to keep that momentum going.

Earlier this month to month, or we launched huggies special delivery or new superpremium fiber special delivery uses the best of our technology from around the World. This is our softest labor, it's made with plant based materials and provide ultimate student comfort.

It's also a premium price and a great example of our elevate the core strategy in action.

In North American consumer K C professional organic sales increased 2% driven by disciplined execution of our pricing initiatives.

Michael Hsu: In North American consumer, KC Professional, organic sales increased 2%, driven by disciplined execution of our pricing initiatives. Turning to developing and emerging markets, organic sales rose 9%, and that included 3.5 points of growth from Argentina, which is consistent with our plan. In terms of our key personal care businesses, in Brazil, organic sales were up double digits, driven by higher selling prices. While category volumes remained sluggish, we're driving strong growth through disciplined market execution and focused expansion efforts in baby wipes and adult care. In China, organic sales were up double digits compared to a soft performance last year. In diapers, our net price realization was helped by reduced and more targeted promotional spending. While Huggies total volumes were down, the product innovations we've launched are delivering growth in the premium end of our lineup and improving mix significantly.

In North American consumer, KC Professional, organic sales increased 2%, driven by disciplined execution of our pricing initiatives. Turning to developing and emerging markets, organic sales rose 9%, and that included 3.5 points of growth from Argentina, which is consistent with our plan. In terms of our key personal care businesses, in Brazil, organic sales were up double digits, driven by higher selling prices. While category volumes remained sluggish, we're driving strong growth through disciplined market execution and focused expansion efforts in baby wipes and adult care. In China, organic sales were up double digits compared to a soft performance last year. In diapers, our net price realization was helped by reduced and more targeted promotional spending. While Huggies total volumes were down, the product innovations we've launched are delivering growth in the premium end of our lineup and improving mix significantly.

Turning to developing and emerging markets organic sales rose, 9% and that included three to have points of growth from Argentina, which is consistent with our plan.

In terms of our key personal care businesses in Brazil.

Organic sales were up double digits, driven by higher selling prices while category volumes remained sluggish we are driving strong growth through disciplined market execution.

[noise] focused expansion efforts and baby wipes in adult care.

In China organic sales were up double digits compared with soft performance last year.

In diapers or net price realization was held.

By reduced and more targeted promotional spending.

Well huggies total volumes were down the product innovations, we watch for delivering growth in the premium end of our line up and improving mix significantly.

Michael Hsu: In fem care, we had another strong quarter, and we're on track to achieve 20%+ organic growth for the third consecutive year. In ASEAN, organic sales rose about 10%, with continued volume strength on Huggies diapers in Vietnam. In Eastern Europe, organic sales increased about 20%, driven by double-digit volume growth and positive pricing. Our momentum on both Huggies and Kotex reflects excellent sales execution, winning product innovation, and great marketing. Finally, in developed markets outside North America, organic sales were up 1%, with solid performance in South Korea and Australia. Beyond sales, I'm very encouraged with the margin improvement we've delivered while investing more in our business. Now, turning to the full year, we're raising our outlook on both the top and bottom line.

In fem care, we had another strong quarter, and we're on track to achieve 20%+ organic growth for the third consecutive year. In ASEAN, organic sales rose about 10%, with continued volume strength on Huggies diapers in Vietnam. In Eastern Europe, organic sales increased about 20%, driven by double-digit volume growth and positive pricing. Our momentum on both Huggies and Kotex reflects excellent sales execution, winning product innovation, and great marketing. Finally, in developed markets outside North America, organic sales were up 1%, with solid performance in South Korea and Australia. Beyond sales, I'm very encouraged with the margin improvement we've delivered while investing more in our business. Now, turning to the full year, we're raising our outlook on both the top and bottom line.

In September we had another strong quarter and we're on track to achieve 20% plus organic growth for the third consecutive year.

And I'll see you on organic sales rose about 10% with continued volume strength on huggies diapers in Vietnam.

In Eastern Europe organic sales increased about 20% driven by double digit volume growth and positive pricing.

Our momentum on both huggies on Kotex reflects excellent sales execution, winning product innovation and great marketing.

Finally in developed markets outside North America organic sales were up 1% with solid performance in South Korea and Australia.

Beyond sales I'm very encouraged with the margin improvement we've made we've delivered while investing more in our business.

Now turning to the full year.

We're raising our outlook on both the top and bottom line.

Michael Hsu: On the top line, we're increasing our organic sales outlook to 3%, and that's 1 point higher than our original plan and driven by stronger volumes. On the bottom line, we're now targeting adjusted earnings per share of $6.65 to 6.80, and that compares favorably to our prior outlook of $6.50 to 6.70. Our updated outlook reflects strong execution, the improving commodity environment, and higher reinvestment levels. We're encouraged that the commodity outlook has gotten better, and that's especially true for pulp, which has retreated from all-time high levels, although costs remain elevated from a longer-term perspective. We aren't expecting a significant increase in market promotion activity despite the improved commodity environment, but we'll continue to closely monitor competitive activity. We're increasing growth investments in our brands and commercial capabilities to position us better for the long-term success. Brand investments include more digital advertising.

On the top line, we're increasing our organic sales outlook to 3%, and that's 1 point higher than our original plan and driven by stronger volumes. On the bottom line, we're now targeting adjusted earnings per share of $6.65 to 6.80, and that compares favorably to our prior outlook of $6.50 to 6.70. Our updated outlook reflects strong execution, the improving commodity environment, and higher reinvestment levels. We're encouraged that the commodity outlook has gotten better, and that's especially true for pulp, which has retreated from all-time high levels, although costs remain elevated from a longer-term perspective. We aren't expecting a significant increase in market promotion activity despite the improved commodity environment, but we'll continue to closely monitor competitive activity. We're increasing growth investments in our brands and commercial capabilities to position us better for the long-term success. Brand investments include more digital advertising.

On the top line, we're increasing our organic sales outlook to 3%, that's one point higher than our original plan and driven by stronger volumes.

On the bottom line, we are now targeting adjusted earnings per share of 665 to 680 and that compares favorably to our prior outlook of 650 to 67.

Our updated outlook reflects strong execution, the improving commodity environment and higher reinvestment levels.

We're encouraged that the commodity outlook has gotten better and that's especially true for pole, which has retreated from all time high levels, although costs remain elevated from a longer term perspective.

We aren't expecting a significant increase in market promotion activity. Despite the improved commodity environment, but we will continue to closely monitor competitive activity.

We're increasing growth investments in our brands and commercial capabilities to position us better for the long term success.

[noise] brand investments include more digital advertising digital continues to improve marketing ROI and help us grow in many parts of our business. We're also going to invest to improve our commercial capabilities, including revenue management, which is a focus of KC strategy 2022.

Michael Hsu: Digital continues to improve marketing ROI and help us grow in many parts of our business. We're also going to invest to improve our commercial capabilities, including revenue management, which is a focus of KC Strategy 2022. Overall, we expect to bring some of the commodity benefits to the bottom line, while also reinvesting more for top-line growth. That's consistent with our balanced value creation model we outlined in KC Strategy 2022. So in summary, we've made excellent progress in the first half. We're raising our full year outlook and investing more for the long term, and we're confident in our ability to create shareholder value. That concludes our prepared remarks, and now we'll be glad to take your questions.

Digital continues to improve marketing ROI and help us grow in many parts of our business. We're also going to invest to improve our commercial capabilities, including revenue management, which is a focus of KC Strategy 2022. Overall, we expect to bring some of the commodity benefits to the bottom line, while also reinvesting more for top-line growth. That's consistent with our balanced value creation model we outlined in KC Strategy 2022. So in summary, we've made excellent progress in the first half. We're raising our full year outlook and investing more for the long term, and we're confident in our ability to create shareholder value. That concludes our prepared remarks, and now we'll be glad to take your questions.

Overall, we expect to bring some of the commodity benefits to the bottom line. While also reinvesting more for top line growth that's consistent with our balanced value creation model, we outlined in case he strategy 2022.

So in summary, we've made excellent progress in the first half.

We're raising our full year outlook and investing more for the long term.

And we're confident in our ability to create shareholder value.

That concludes our prepared remarks, and now we'll be glad to take your questions.

Operator: Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. If you would like to ask an audio question, you may do so now by pressing star one on your touch tone phones. If at any time you need to remove yourself from the questioning queue or your question has been answered, press star two. Again, to ask a question, please press star one now. Our first question comes from Ali Dibadj with Bernstein.

Thank you.

Ladies and gentlemen at this time the floor is open for your questions. If you would like to ask an audio question. You may do so now by pressing star one on your Touchtone phones. If at any time you need to remove yourself from the question in queue will your question has been answered press star two again to ask a question. Please press star one no.

Our first question comes from Ali Dibadj with Bernstein.

Hi, guys I'm too.

Ali Dibadj: Hey, guys,

Michael Hsu: Hey, Ali.

Ali Dibadj: A few questions for me, actually. One is on, free cash flow. Maria, you mentioned that, particularly on the working capital side, it was a planned change, but it's a pretty big reduction in free cash flow this year versus last year, even if you try to adjust for some sense of restructuring. So love a, a sense of why that shouldn't, worry us at all, in terms of that, that trajectory and what you think the trajectory looks like going forward on the free cash flow side.

Few questions for me actually one is on.

Free cash flow.

Hey, you mentioned that.

Principally on the working capital side. It was a plan change, but it's a pretty big reduction.

In free cash flow this year versus last year, even if you try to just for some sense of restructuring so love a a sense of.

Why that Shouldnt worry us at all in terms of that that trajectory and what you think the trajectory looks like going forward on the free cash flow side.

Maria Henry: Sure. We said coming into the year that we would that we were expecting operating cash flow to be down slightly year-over-year, and we still expect that. If you look at the quarter, the cash from operations of $609 was driven by higher cash taxes, and working capital was also a use of funds. So let me talk about both of those. On cash taxes, it really has to do with timing. If you look at the first part of 2018, we were in an overpayment situation, and so we were paying out less cash taxes last year than what would be kind of a normalized level. This year, we have the opposite.

Sure, we we said coming into the year that we would that we were expecting operating cash flow to be down slightly year on year, and we still expect Guy I. If you look at the corridor that cash from operations of six to nine was driven by higher cash taxes and working capital was also used to fund. So let me talk about both of those on cash taxes. It really has to do with timing you look at the first part Oh that 2018, we were in an overpayment situation and died so we were paying out less cash taxes last year than what would be.

Hi, I kind of a normalized level.

This year, we have the opposite we have but some catch up payments that we had to make in the first half of this year and in the second quarter and so that's what's going on with cash taxes. It just has to do with timing.

Maria Henry: We have some catch-up payments that we had to make in the first half of this year and in Q2, and so that's what's going on with cash taxes. It just has to do with timing. I wouldn't call anything unusual out there. In terms of working capital, there's a number of factors. Our cash conversion days were 13, which compares to what was a very strong 11 days in 2018. And you'll recall that in Q4 of last year, we had very strong cash flow benefits from working capital. We had very low cash conversion days. Part of that was driven by a higher payables balance, which got paid out in the first part of this year.

We have some catch-up payments that we had to make in the first half of this year and in Q2, and so that's what's going on with cash taxes. It just has to do with timing. I wouldn't call anything unusual out there. In terms of working capital, there's a number of factors. Our cash conversion days were 13, which compares to what was a very strong 11 days in 2018. And you'll recall that in Q4 of last year, we had very strong cash flow benefits from working capital. We had very low cash conversion days. Part of that was driven by a higher payables balance, which got paid out in the first part of this year.

I wouldn't call anything unusual out there.

In terms of of working capital there is that there's a number of factors are a cash conversion days worth 13, which compares to what was a very strong 11 days in 2018, and you'll recall that in the fourth quarter.

Oh last year, we had very strong.

Ah cash flow benefits from working capital, we had very low cash conversion days part of that was driven by a higher payables balance, which got paid out in the first part of this year.

Maria Henry: In terms of working capital and cash conversion days, we are expecting, and we are seeing inventory builds around our execution on the restructuring program. As we close down facilities or prepare to close down facilities and shut down lines and prepare to stand up new lines, we are building inventory so that we can maintain our service levels with customers, and we are seeing that. On the accounts receivable or DSO side, we've got in the second quarter some timing differences between the sales and collections, particularly with the quarter ending on a Sunday. So I would expect on the receivable side that to correct itself as we go through the remainder of the year.

In terms of working capital and cash conversion days, we are expecting, and we are seeing inventory builds around our execution on the restructuring program. As we close down facilities or prepare to close down facilities and shut down lines and prepare to stand up new lines, we are building inventory so that we can maintain our service levels with customers, and we are seeing that. On the accounts receivable or DSO side, we've got in the second quarter some timing differences between the sales and collections, particularly with the quarter ending on a Sunday. So I would expect on the receivable side that to correct itself as we go through the remainder of the year.

Yeah in terms of a working capital and cash conversion days, we are expecting and we are seeing.

Inventory builds around our execution on the side.

Restructuring program as we close down facilities or prepare to close down facilities and shutdown mines and prepare to stand up new lines. We are building inventory. So that we can maintain our service levels with customers and we are seeing that.

On the accounts receivable or D.S.. So side, we've got in the second quarter or some timing differences between the sales and collections, particularly with the corridor.

Ending on a on a Sunday so I would expect on the receivable side that you correct itself as we go through the remainder of the here.

Maria Henry: Finally, on payables, the team is executing some projects to get some benefits there, and that was a positive, helping to offset the drag on inventory and the timing differences on DSO. So it's a long answer, but I would expect for the second half, that we will have stronger free cash flow, and you know, that for the year, it will still be down a little bit, Ali.

And finally I'm not on payables that the team is executing some projects to get some benefits there.

Finally, on payables, the team is executing some projects to get some benefits there, and that was a positive, helping to offset the drag on inventory and the timing differences on DSO. So it's a long answer, but I would expect for the second half, that we will have stronger free cash flow, and you know, that for the year, it will still be down a little bit, Ali.

And that was a positive helping to offset the drag on inventory and the timing differences on not on T.S., though so it's a long answer but I would expect for the second half that we will have stronger free cash flow and.

You know that for the year, it will still be down a little bit alley.

Ali Dibadj: Okay. Okay, but improving from here. Okay, I appreciate the comprehensive answer, and we'll keep watching it. A couple other things. One is, I guess I was initially encouraged to see the emerging and developed markets growing 9% this quarter, saw China pricing a little bit better, and start to ask the question of, "Oh, gosh, are we back to kind of this high single digit type growth rate sustainably in the emerging markets for Kimberly-Clark?" But then I saw that, you know, you mentioned Argentina was 3.5 points of that 9% growth, Mike. Brazil probably helped you out a little bit as well. China, seems like you're investing a lot in that marketplace as well, particularly on the volume side.

Okay, Okay, but improving for me Okay. I appreciate that comprehensive answer and we'll keep watching it.

A couple of things one is I guess I was initially.

Encouraged to see the emerging and developed markets growing 9% this quarter.

Sought China pricing, a little bit better and started to ask the question Oh gosh are we back to kind of as high single digit type growth rates sustainably in emerging markets or for Kimberly Clark.

But then I saw that you know you mentioned, Argentina was three and a half points of that 9% growth like Brazil, probably helped you out a little bit as well China.

Seems like you're investing a lot in that marketplace as well I'm sorry on the volume side. So so just just.

Ali Dibadj: So, just, you know, that tempered my expectations and my hope to a return of improvement in Kimberly-Clark emerging and developed markets. Could you kind of rightsize our expectations on that on a sustainable basis, please?

So, just, you know, that tempered my expectations and my hope to a return of improvement in Kimberly-Clark emerging and developed markets. Could you kind of rightsize our expectations on that on a sustainable basis, please?

That tempered my expectations and I hope to a return of improvement and Kimberly Clark emerging and developed markets could you trying to rightsize our expectations on that on a sustainable basis. Please.

Michael Hsu: Yeah. Yeah, Ali, good point. I think, I'd say overall in D&E, you know, we're very encouraged, and we're making strong progress. You know, that 9%, it's robust, and I'd say it's the fourth consecutive quarter of accelerated performance. If you go back to the third quarter of last year, I think we were up 3%, then 4%, 7% in the first quarter, and then 9% this quarter. While Argentina is a chunk of that, about 3, a little over 3 points, we are seeing improved performance across many of the markets. You know, obviously, price mix is a big piece of it, but we are seeing certainly less volume impact from pricing, from some of the significant pricing we've taken, for example, in Brazil and Argentina, less volume impact than we originally expected.

Yeah, Yeah Ali good point I think.

I'd say overall and Danny you know, we're very encouraged we're making strong progress you know that 9%, it's robust and I'd say, it's the fourth consecutive quarter of accelerating performance. If you go to back to the third quarter of last year. I think we were up three them for seven of the first quarter and then nine this quarter well, Argentina as a chunk of that about three little over three points or we are seeing improved performance across many of the markets are you know obviously price mix is a big piece of it but we are seeing a certainly less volume impact from pricing or some from some of the significant pricing. We've taken for example in Brazil, and Argentina are less volume impact than we originally expected and then you know on the positive front in other markets I'd say see he continues to grow.

Michael Hsu: And then, you know, on the positive front, in other markets, I'd say CE continues to grow at a strong double-digit rate. We're seeing ASEAN growth at double digits, and then China, obviously returning to growth. Certainly aided by pricing, or maybe said a different way, some reductions in promotion spending in China, but we're seeing good volume growth in our premium tiers, and we're very encouraged by that, by that progress.

And then, you know, on the positive front, in other markets, I'd say CE continues to grow at a strong double-digit rate. We're seeing ASEAN growth at double digits, and then China, obviously returning to growth. Certainly aided by pricing, or maybe said a different way, some reductions in promotion spending in China, but we're seeing good volume growth in our premium tiers, and we're very encouraged by that, by that progress.

At a strong double digit rate, we're seeing obviously on growth at double digits, and then China, obviously, returning to growth certainly aided by pricing or maybe said a different way some reductions in promotion spending in China, but overall, we're seeing good volume growth in our premium tiers.

And we're very encouraged by that but that progress.

Ali Dibadj: Okay. And just my last question, maybe a little bit of a broader question. The discourse around Kimberly-Clark among investors is that I think people generally understand that pricing has been pretty good because the commodities, you know, commodity-driven pricing and the LCCs were better because P&G and GP and perhaps some of the competition in China was a little bit more stable. You know, Brazil seemed like it's getting a little bit better. Commodity costs were less than what we'd anticipated, and all those things in the kinda Kimberly-Clark ecosystem are doing pretty well. But the challenge-

Okay and just my last question, maybe a little bit of a broader question.

The discourse around Kimberly Clark among investors is that I think people generally understand that pricing has been pretty good because the commodities commodity driven pricing and they also see his work better because PNG and.

G.P. and perhaps some of the competition in China was a little bit more stable you know, Brazil seems like it's getting a little bit better commodity costs were less than what we'd anticipated and all those things in the kind of Kimberly Clark ecosystem are doing pretty well, but the challenge and often in the discourse is okay. So whats Kimberly Clarks itself doing what's company specific here that Kimberly Clark is doing that could benefit it differentially besides cost savings in particular.

Michael Hsu: Yeah

Ali Dibadj: ... often in that discourse is, okay, so what's Kimberly-Clark's itself doing? What, what's company specific here, that Kimberly-Clark is doing that could benefit it differentially, besides cost savings in particular? I think we all appreciate the cost savings has been quite good. But it's kind of like, you know, the ecosystem's going in Kimberly's favor, but we're not quite sure what company specifics are happening here. So if you could help us, you know, at least enlighten us on that, that'd be helpful. Thank you.

I think we all appreciate the cost savings has been quite good.

But it's kind of like you know the ecosystems going until at least favor, but we're not quite sure what company specifics are happening here. If you could help US you know at least enlighten us on that that'd be helpful. Thank you.

Michael Hsu: Yeah. Yeah, Ali, great, great question. It's certainly. I think one of the big things is the operating environment has improved, right? And I think that's significantly better than when we met maybe toward the end of January. You know, and I think the consumer demand is healthier than it was then, and, you know, I'd say our performance is better than it was then. One of the reasons why we're seeing less volume impact is not because elasticities are lower. In fact, as we do the analysis, the elasticities are pretty close to what we modeled. It is really more the market execution. And what we got is, I think, very strong innovation and new products coming out across, let's say, North America, particularly in personal care.

Yeah Ali Great Great question. It certainly I think one of the big things is the operating environment has improved right and I think that's significantly better than when we when we met me maybe towards the end of January or you know and I think of the consumer demand is healthier than it was then and you know I'd say our performance is better than than it was in one of the reasons why we're seeing less volume impact is not because elasticities are lower in fact as we do the analysis deal has to the cities are pretty close to what we model. It is really more the market execution on what we've got is I think very strong innovation and new products coming out across let's say North America, particularly in personal care.

Michael Hsu: We've got strong marketing in those markets as well, driving an improvement in consumption. I think the China business, I think is, you know, we're in China for the long haul, and I think the team really believes in innovation there, and I think the consumer is following. And so we are seeing strong growth in our premium tiers, behind, you know, we think, the best diaper in the marketplace right now. And so there's a lot going on there. And then if you look at, you know, Latin America, double-digit pricing, with almost minimal volume impact, it's not because there's low elasticity, it's 'cause there's really strong innovation, marketing, and actually terrific sales execution.

We've got strong marketing in those markets as well, driving an improvement in consumption. I think the China business, I think is, you know, we're in China for the long haul, and I think the team really believes in innovation there, and I think the consumer is following. And so we are seeing strong growth in our premium tiers, behind, you know, we think, the best diaper in the marketplace right now. And so there's a lot going on there. And then if you look at, you know, Latin America, double-digit pricing, with almost minimal volume impact, it's not because there's low elasticity, it's 'cause there's really strong innovation, marketing, and actually terrific sales execution.

Oh, we've got strong marketing in those markets as well driving an improvement consumption.

Oh, I think the China business I think is you know weren't trying to for long haul and I think the team really believes in innovation, there and I think the consumers bowling and so we are seeing strong growth in our premium tiers are behind you know, we think the best labor in the marketplace right now and so there's a lot going on there and then if you look at you know Latin America double digit pricing up with almost minimal volume impact, it's not because there's losses, it's because there's really strong innovation marketing and actually terrific sales execution.

Okay. Thanks, very much guys.

[Analyst]: Okay, thanks very much, guys.

Ali Dibadj: Okay, thanks very much, guys.

Michael Hsu: Okay. Thanks, Ollie.

Okay. Thanks for calling.

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

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

Lauren Lieberman: Great, thanks. Good morning. Just following on that, I think it's telling, like, how many times you just mentioned kind of terrific sales execution, and it feels like in some of your larger emerging markets, I'm curious to the degree to which, like I said, what's changed? So you've alluded to, of course, better operating environment, but the Kimberly-Clark specific piece, let's go back to maybe what was missing or not as strong over the last 2 to 3 years from a commercial execution standpoint. 'Cause I think that's the piece of the equation I'm still not grabbing onto, you know, and that it would be in so many markets at once, that the execution's driven, you know, has been like a step change. So anything further you could offer there would be great.

Great. Thanks, good morning.

Just following on that I think it's it's telling Mike how many times you just mentioned kind of terrific sales execution and it feels like.

In some of your larger emerging markets.

I'm curious the degree to which I guess like what's changed and so youve alluded to of course, better operating environment, but the Kimberly Clark specific piece.

Let's go back to maybe what was missing or not as strong over the last two to three years from a commercial execution standpoint.

Yeah, because I think that that's the PC question I'm still not grabbing onto you know and then it would be in so many markets at once and the execution driven you know has been like a step change. So anything further you could offer there would be great.

Michael Hsu: Yeah, Lauren, I think it's a combination of the factors I just mentioned, which is, I think the operating environment has improved in which I think the consumer can see the innovation and the product and the marketing and respond to it. And, you know, if you rewind a couple of years ago, it's tough to see innovation and advertising when you're going against a buy one, get two free, right? And so, you know, pouring advertising into a marketplace like that just is not effective. But I think where the teams, you know, and we always believe in, you know, elevating our categories or driving better product benefit by making the premium products worth it.

Yeah Lauren.

I think I think it's a combination of the factors I just mentioned, which is I think the operating environment has improved in which I think the consumer can see but the innovation in the product in the marketing and respond to it and and you know if you rewind a couple of years ago, it's tough to see innovation and advertising when you're going against a buy one get two free.

Right and so you know pouring advertising into a marketplace like that just is not effective but I think where the teams.

You know and we always believe and you know elevating our categories or for driving better product benefits by making you know the premium products worth it and so I think we've got plenty of innovation across markets that I. Just mentioned that's taken a hold and are getting the consumers' attention and works encouraged by that response and then obviously I think for all of Us and CPG. We all know when you have good innovation that allows your sales force to execute much more effectively and get the shelf space you need rather promotions, you need and all that kind of behavior flows with it. So I think I don't think there's a magic bullet there, but I would say that you know I think we are we're focused on in a disciplined way.

Michael Hsu: And so I think we've got plenty of innovation across markets that I just mentioned, that's taken a hold and getting the consumer's attention, and we're encouraged by that response. And then, obviously, I think for all of us in CPG, we all know when you have good innovation, it allows your sales force to execute much more effectively and get the shelf space you need, drive the promotions you need, and all that kind of behavior flows with it. So I think I don't think there's a magic bullet there, but I would say that, you know, I think we are more focused on, in a disciplined way, building our capabilities, both in innovation, in digital, which is a big space for us from marketing, sales execution, and revenue management.

And so I think we've got plenty of innovation across markets that I just mentioned, that's taken a hold and getting the consumer's attention, and we're encouraged by that response. And then, obviously, I think for all of us in CPG, we all know when you have good innovation, it allows your sales force to execute much more effectively and get the shelf space you need, drive the promotions you need, and all that kind of behavior flows with it. So I think I don't think there's a magic bullet there, but I would say that, you know, I think we are more focused on, in a disciplined way, building our capabilities, both in innovation, in digital, which is a big space for us from marketing, sales execution, and revenue management.

Building our capabilities both in innovation in digital which is a big space for us from marketing.

Sales execution and revenue management those are the big capability areas weve been focusing on and we're making a lot of progress.

Michael Hsu: Those are the big capability areas we've been focusing on, and we're making a lot of progress.

Those are the big capability areas we've been focusing on, and we're making a lot of progress.

Lauren Lieberman: Okay, great. And then now with the commodity environment being more benign, and you've adjusted your outlook, obviously, for this year, but even as we look forward to 2020, with that as a backdrop and thinking about the things you've laid out as core to your, you know, your tenure, you know, investing in selling capabilities, marketing, digital, revenue management, there's data needs to kind of get it at those sorts of, at those sorts of activities, how are you thinking about the greater flexibility you may well have today versus what you thought six months ago, and the reinvestment needs of the business, particularly with a new chief growth officer coming on, who, you know, may have sort of a different perspective on what can be done with your suite of brands?

Okay, Great and then now with the commodity environment being more benign and Youve adjusted your outlook, obviously for this year, but even if we look forward to 2020.

With that as a backdrop and thinking about the things you laid out is core to your you know your tenure.

You know investing in selling capabilities marketing digital revenue management their data needs to kind of get it those sorts of at those sorts of activities. How are you thinking about the greater flexibility you may well have today versus what you thought six months ago.

And the reinvestment needs of the business, particularly with the new Chief growth officer coming on here you know may have sort of a different perspective on what can be done with your suite of brown.

Michael Hsu: Yeah, I mean, I would. You know, Lauren, we're very bullish on our categories, both in the near term and long term, and I think that comes back to kind of the two of the core strategies we have, which is in big developed markets, you know, elevating the core or making, you know, premiumizing our categories by making the categories worth more to our consumers. And then, of course, D&E, you know, we're still in the very early stages of development. So I think with, you know, maybe the commodities have been a little lower than we expected at the beginning of the year, that does give us the flexibility.

Yeah, I mean, I I would warn where we're very bullish on our categories. Both in the near term or long term and I think that comes back to kind of that two of the core strategy that we have which is in big developed markets. You know elevating the core or making you know premiumizing our categories by making the categories worth more to our consumers and then of course. The you know we're still we're in the very early stages of development.

So I think what I thought you know maybe the commodities have been a little lower than we expected to begin the year that does give us the flexibility I think the when you add up the operating environment, which I think is more conducive to growth and and ER and consumer demand is healthier than we had seen maybe in the past year or so I think that gives us the confidence to invest or the other part of it is and we've talked about this back in January which is I think our you know with the innovation and the marketing initiatives in the sales initiatives working that gives us more confidence to put more money behind that and we're very excited about that.

Michael Hsu: I think when you add up the operating environment, which I think is more conducive to growth, and consumer demand is healthier than we had seen maybe in the past year or so, I think that gives us the confidence to invest. The other part of it is, and we've talked about this back in January, which is I think our, you know, with the innovation and the marketing initiatives and the sales initiatives working, that gives us more confidence to put more money behind that, and we're very excited about that.

I think when you add up the operating environment, which I think is more conducive to growth, and consumer demand is healthier than we had seen maybe in the past year or so, I think that gives us the confidence to invest. The other part of it is, and we've talked about this back in January, which is I think our, you know, with the innovation and the marketing initiatives and the sales initiatives working, that gives us more confidence to put more money behind that, and we're very excited about that.

Lauren Lieberman: Okay, that's great. Thanks so much.

Okay. That's great. Thanks, so much.

Michael Hsu: Thanks, Lauren.

Thanks Lauren.

Operator: Thank you. Our next question comes from Dara Mohsenian with Morgan Stanley.

Thank you. Our next question comes from Dara Mohsenian with Morgan Stanley .

Michael Hsu: Hey, Dara. You might be on mute.

Hey, there.

[noise].

You might want to mute your line may be on mute you maybe on mute ask your question.

Operator: Dara Mohsenian, your line may be on mute. You may need to unmute to ask your question.

Yes.

Michael Hsu: We can't hear you, Dara.

We can't hear you there.

[laughter].

Oh mid single digit pricing in the last couple of quarters, but that was predicated upon a much higher commodity environment and we're sitting at today. So curious if you're seeing any initial signs of pickup in promotion from either private label or branded competitors with the recent commodity pullback and as you look going forward. You commented that you don't expect to see a significant increase in market promotion.

Dara Mohsenian: ... mid-single digit pricing in the last couple quarters, but that was predicated upon a much higher commodity environment than we're sitting at today. So curious if you're seeing any initial signs of pickup in promotion from either private label or branded competitors with the recent commodity pullback. And as you look going forward, you commented that you don't expect to see a significant increase in market promotion. What gives you confidence behind that, and that you won't have to dial back some of this pricing eventually?

What gives you confidence behind that and then you won't have to dial back some of this pricing eventually.

Michael Hsu: ... Yeah. Hey, Dara, I think we only got the last part of it, so I'll try to answer, but maybe you can push me if I'm not kind of going the direction you were asking for. But I think it was related to pricing and what the environment looks like. You know, right now, I'd say overall, you know, our pricing initiatives overall across, you know, globally are on track. If maybe a little more focused on North America, they are also on track. You know, probably the big area for us was in North American consumer tissue. You know, I think, you know, the pricing was up, you know, as we expected.

Yes, Hey, Hey, there are I think we only got the the last part of it so I'll try to answer but maybe you can you can push me if I am not kind of going the direction were asking for.

But I think it was related to pricing and what the environment looks like.

Right now I'd say overall.

Our pricing initiatives overall across global we are on track.

Maybe a little more focused on North America. They are also on track.

The probably the big area for US was in North American consumer tissue.

I think.

The pricing was up.

You know as as we expected.

Michael Hsu: The big difference was private label, in general, still has not moved, but we are still seeing good volume growth from our brands and, you know, probably a little bit in excess of what we had planned. I think at this point, we have not seen an uptick in maybe competitive promotional pricing. Don't expect it, mostly because, you know, this is a multi-year issue for us, and we've had commodity inflation at record highs. It's still at a very high level. And so, you know, for us, you know, we are not planning, you know, or our plans don't have high promotion intensity. We're really focused on marketing the innovation that we have and driving the advertising. I'll pause there, and maybe is that what you were looking for or something else?

The big difference was private label, in general, still has not moved, but we are still seeing good volume growth from our brands and, you know, probably a little bit in excess of what we had planned. I think at this point, we have not seen an uptick in maybe competitive promotional pricing. Don't expect it, mostly because, you know, this is a multi-year issue for us, and we've had commodity inflation at record highs. It's still at a very high level. And so, you know, for us, you know, we are not planning, you know, or our plans don't have high promotion intensity. We're really focused on marketing the innovation that we have and driving the advertising. I'll pause there, and maybe is that what you were looking for or something else?

The Big difference was private label in general still has not moved but we're still seeing good volume growth from our brands and.

Probably a little bit in excess of what we had planned.

I think the at this point, we have not seen an uptick in maybe competitive promotional pricing.

Don't expected, mostly because you know this is a multiyear issue for us and we've had commodity inflation at record highs, it's still at a very high level and so.

You know for us.

No we are not plan or our plans don't have a high promotion intensity, we're really focused on marketing the innovation that we have and driving advertising I'll pause there may be.

Is that what you were looking for something else.

Dara Mohsenian: Yes, that's helpful. And then just if I could slip in a second question. The gap between North American reported results and the US scanner data looked like it widened pretty significantly to a few hundred basis points. Was there some inventory build at retail, particularly with the innovations that you mentioned? Or is that more just a function of very strong on track channel growth? And, and maybe while we're on the subject, you can give us a bit of an update on e-commerce, the club channel, and your sales growth and market share performance there. That'd be helpful.

Yes, Thats helpful. And then just if I can slip in the second question.

The gap between North American reported results in the U.S scanner data looks like and widened pretty significantly to a few hundred basis points was there some inventory build at retail, particularly with the innovations that you mentioned or is that more just a function of very strong on track channel growth and maybe while we're on the subject can you give us a bit of an update on E. Commerce in the club channel and your sales growth and market share performance. There that'd be helpful. Yes, yes, a little different they arrive at FICO said in our commentary that maybe the the plus three was probably a better if you look at year to date were plus three that's probably the best indication of where we think our businesses right. Now we did have a few field few differences I'm certainly non measured for us is generally stronger than measured.

Michael Hsu: Yeah. Yeah, a little different there. I think we said in our commentary that maybe the, the +3 was probably a better... If you look at year to date, we're +3. That's probably the best indication of where we think our business is right now. We did have a few, you know, a few differences. Certainly, non-measured for us is generally stronger than measured. So that's an ongoing refrain, and a good thing in some ways. Also, we had some spending changes that affected net revenue realization. Recognize we're still dialing back, to your prior question, we're still dialing back our promotion intensity, and so that affected it. And then we did have some minor retail inventory changes, but we have those in a lot of quarters, so.

So thats an ongoing refrain.

And a good thing in some ways also we had some spending changes that affected net revenue realization.

Recognize we're still dialing back to your prior question, we're still dialing back our promotion intensity and so that affected it and then we did have some minor retail inventory changes, but we have those and a lot of quarters. So.

Okay. That's helpful. Thanks.

Dara Mohsenian: Okay, that's helpful. Thanks.

Michael Hsu: Okay.

Okay.

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

Operator: Thank you. Our next question comes from Wendy Nicholson with Citigroup.

Michael Hsu: Hey, Wendy.

Wendy Nicholson: Hi. Good morning. There was just a comment in the North America commentary and personal care that caught my eye, which was, number one, that volumes were up high single digits in adult care. And I was curious what drove that, because I know that's been obviously a very high margin area for you, but it's an area that's been under pressure. So is that category growth, or is it innovation or more promotion that you're doing? And then, similarly, volumes down mid-single digits in fem care in North America. You know, what's the plan there? I know it's been, I mean, your, your Kotex restage that you did a few years ago was so successful. Are there any plans for a follow-up to that? You know, what, what are your plans in fem care to get that business growing again?

Hi, Hi, good morning.

There was just a comment in the North America commentary in personal care that caught my eye, which was number one that volumes were up high single digits in adult care and I was curious what drove that because I know thats been obviously very high margin area for you, but it's an area that's been under pressure so with that category growth or is it innovation or more promotion that you are doing and then.

Similarly volume is down mid single digits in Fem care in North America.

What's the plan there I know it's been I mean, you're you're Kotex re stage that you did a few years ago was so successful are there any plans for a follow up to that what are your plans and sun care to get that business growing again, and I'm I'm really focused on volumes not not not pricing. Thank John Yes, we're making progress on adult care Wendy.

Wendy Nicholson: I'm really focused on volumes, not pricing. Thanks.

I'm really focused on volumes, not pricing. Thanks.

Michael Hsu: Yeah. Yeah, we're making progress on adult care, Wendy, yeah, up high single digit. I think the category is up somewhere, probably about mid-single digit, in that range. I think really it's about innovation and category messaging, category building messaging that's gaining traction for us. Definitely our product enhancements that we launched last year are gaining traction. Discrete sizing, we've got FitFlex on Depend going out now and then Poise Active, and those are all working pretty well for us. And then we've got strong, brand investment, and more messaging, that's more category building. So I think those are the two things that are working in adult care and fem care. You know, it's a great category. We've got a great global franchise.

Yes up high single digit I think the categories up summer probably about mid single digit.

In that range and I think really it's about innovation and category messaging.

Category building messaging that is gaining traction for us definitely our product enhancements that we launched last year are gaining traction.

Discrete sizing, we've got flipped fit flex on dependents going out now and then poise active and those were all working pretty well for us.

And then we've got strong brand investment and more messaging that's more category building. So I think those are the two things that are working in adult care and Fem care. It's a great category. We've got a great global franchise, we know we need to strengthen the performance of the brand in the U.S.

Michael Hsu: We know we need to strengthen the performance of the brand, in the US, and the team's focused on product enhancements and improving our messaging.

We know we need to strengthen the performance of the brand, in the US, and the team's focused on product enhancements and improving our messaging.

And the teams focused on product enhancements and improving our messaging.

Perfect and then just going back to your comment on pricing generally on any I can't remember.

Wendy Nicholson: Perfect. And then just going back to your comment on pricing generally, I mean, I can't remember the last time, you know, companies like you got the benefit of favorable pricing and favorable commodity impact. It, it's just been a long time. Those usually work opposite. And so just as you think about, you know, the current commodity environment, I know you said you don't expect promotional levels to increase, which, you know, hey, I, I hope that's the case, but that would strike me as a surprise.

The last time.

Companies like you've got the benefit of favorable pricing and favorable commodity impact on it's just been a long time to easily work opposite.

And so just as you think about the current commodity environment. I know you said, you don't expect promotional levels to increase which.

Hi, I hope that's the case, but that would strike me as a surprise.

Wendy Nicholson: But as you look towards, you know, calendar 2020, the pricing that you've taken, you know, at what point in the cycle do you get to a point where you need to contemplate maybe rolling back some of the price increases you've taken, you know, particularly in categories where you still are struggling from a market share perspective?

But as you look towards, you know, calendar 2020, the pricing that you've taken, you know, at what point in the cycle do you get to a point where you need to contemplate maybe rolling back some of the price increases you've taken, you know, particularly in categories where you still are struggling from a market share perspective?

But as you look towards you know.

Calendar 20, the pricing that you've taken at what point in the cycle do you get to a point, where you need to contemplate maybe rolling back some of the price increases you've taken.

You know, particularly in categories, where you still are struggling from a market share perspective.

Michael Hsu: Yeah.

Wendy Nicholson: Why not, why not be the aggressor there, if you will? Thanks.

Why not why not be the aggressor, there if you well thanks.

Michael Hsu: Yeah, I think, well, if you sit on this side of the phone, you have a memory like an elephant, and so, like, last year, you know, I think our commodity inflation was $500 or $600 million more than our plan. And, you know, so this year it's a little more favorable, but not even close to that. And so again, as I said, you know, the commodity impact is a multi-year impact, and I think that's driving our behavior as we work to recover margins. And I think... And, you know, right now, I think, you know, we're seeing in the retail environment, consumer demand is healthy. You know, I think in this environment, consumers can be more responsive to innovation and marketing.

Yeah, I think well if said on this side of the of the phone you have a memory like an elephant and so like last year.

I think our commodity inflation was 605 or 600 million more than our plan and so this year, it's a little more favorable, but but not even close to that and so again as I said the commodity impact is a multiyear impact and I think thats driving our behavior as we work to recover margins and I think.

You know right now I think.

We are seeing in the retail environment consumer demand is healthy.

I think in this environment consumers can be more responsive to innovation and marketing.

Michael Hsu: I think that's a bit more value added for us and our competitors to grow the category, versus driving a down cycle promotion.

I think that's a bit more value added for us and our competitors to grow the category, versus driving a down cycle promotion.

And I think that's a bit more value added for us and our competitors to grow the category versus driving a doom cycle function.

Fair enough thanks very much.

Wendy Nicholson: Fair enough. Thanks very much.

Thank you. Our next question comes from Bonnie Herzog with Wells Fargo.

Operator: Thank you. Our next question comes from Bonnie Herzog with Wells Fargo.

Bonnie Herzog: All right, thank you. Good morning. I actually had a follow-on question on private label pricing, which, you know, has remained largely unchanged in some of your key track channel categories such as diapers. So just want to hear from you guys, you know, how concerned you are with private label choosing not to follow your pricing moves. And then, you know, separately, could you comment on whether you're seeing any stepped-up competitive pressures, you know, from some of your online retail partners with their own, you know, private label offerings?

All right. Thank you good morning.

I actually had a follow on question on private label pricing, which.

His remain largely unchanged and kind of your key track channel categories, such as diaper. So just want to hear from you guys. How concerned you are with private label choosing not to follow your pricing moves and then.

Separately could you comment on whether you're seeing any stepped up competitive pressures.

From some of your online retail partners with our own private label offerings.

Michael Hsu: Yeah, yeah, we're watching the private label pricing pretty closely. It hasn't moved notably in consumer tissue or specifically in the bath category, or in diapers yet. I do think our brand, our brands are performing very well despite that. And, and I think that speaks to kind of the iconic nature of Scott 1000, you know, our new advertising and our product enhancements with Cottonelle. So we feel good about that direction, but it's something that we've got to keep a sharp eye on.

Yeah, Yeah, we're watching the private label pricing pretty closely it hasn't moved notably in.

And in consumer tissue words, fiscally and not in the back category or in diapers, yet I do think our brands. Our brands are performing very well, despite that and and I think that speaks to kind of the iconic nature of Scott 1000.

Our new advertising and our product enhancements with Cottonelle. So we feel good about that direction, but it's something we got to keep a sharp eye on.

Michael Hsu: You know, obviously, you know, we're a volume-sensitive business, and so while we may fine-tune our promotional plans to make sure we get the volumes that we need, you know, we're, you know, we're gonna manage this category, our role in the category, very responsibly.

You know, obviously, you know, we're a volume-sensitive business, and so while we may fine-tune our promotional plans to make sure we get the volumes that we need, you know, we're, you know, we're gonna manage this category, our role in the category, very responsibly.

Obviously, where volume sensitive business and so while we may find tune our promotional plans to make sure we get the volumes that we need we're we're going to manage this category are our role in the category very responsibly.

Alright, Thanks, and then just a second question from me Neon on China could you drill down just a little further on your performance in that market and it seems like volumes still seem to be under pressure. So just wanted to understand from new when we could see that you know turn positive churn truetouch further.

Bonnie Herzog: All right. Thanks. And then just a second question from me on China. Could you drill down just a little further on your performance in that market? And it seems like volumes still seem to be under pressure. So just wanted to understand from you when we could see that, you know, turn positive or improved further.

Michael Hsu: Yeah. Okay, China, yeah, our biggest short-term opportunity and our biggest long-term opportunity, and I think we're. I think the team's working in the right direction, which is making the investment in innovation. And we, we feel like we have the best diaper in the market right now. Organic was up double digits with, you know, big contributions from both diapers and fem care. In diapers, we launched a breakthrough, what we call our 5D diaper, toward the end of middle of last year, and we think that's the best in the market, and that's really fueling the gains. We're up, we're up significantly in the premium tiers, still down a bit in the value tiers, but we're managing through that.

Yes, Okay, China are bigger short term opportunity our biggest long term opportunity I think we're I think the teams work in the right direction, which is making the making the investment in innovation and we feel like we have the best diaper in the market right now organic was up double digits with no big contributions from both diapers and Fem care.

In diapers, we launched a breakthrough will be call or five the diaper.

Before the end of last Middle last year, and we think Thats. The best in the market that is really fueling the gains were up were up significantly in the premium tiers still down a bit in the value tiers, but we're managing through that some of that is conscious because we've chosen to dial back the promotional price points or raise our promotional price points and so that drove some of the net price realization that we had in the category, but I would say we're growing in the tiers that arm.

Michael Hsu: Some of that is conscious because we've chosen to dial back the promotional price points or raise our promotional price points, and so that drove some of the net price realization that we had in the category. But I would say we're growing in the tiers that are very important to us, which is premium, and still declining a little bit in the value tiers. Bonnie, you still there?

Some of that is conscious because we've chosen to dial back the promotional price points or raise our promotional price points, and so that drove some of the net price realization that we had in the category. But I would say we're growing in the tiers that are very important to us, which is premium, and still declining a little bit in the value tiers. Bonnie, you still there?

Very important west, which is premium and still declining a little bit in the value tiers.

Bonnie Herzog: Thank you.

Sonys. Thank you.

Michael Hsu: Okay. Thanks, Bonnie.

Bonnie Herzog: Oh, yeah. Sorry. Thank you.

Thank you. Thank you.

Michael Hsu: Thanks, Bonnie.

Thanks Bonnie.

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

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

[Analyst] (Goldman Sachs): Hi, good morning, everybody. This is actually Cody on for Jason. Perhaps the biggest surprise to us was the 8% organic sales growth in personal care. Developing and emerging markets were led by price, which could be fleeting, but North America had a balanced contribution for the first time in many years. Can you provide more details and tell us what's driving this? Specifically, what do you think your end market growth is compared to what it was a quarter or two ago? How much market share do you think you're taking, and which categories are you seeing the most share gain in, and how sustainable do you think that is?

Hi, Good morning, everybody. This is actually Cody on for Jason perhaps the biggest surprise to US was the 8% organic sales growth in personal care.

Developing and emerging markets were led by price, which could be fleeting, but north America had a balanced contribution for the first time in many years can you provide more details and tell us what's driving this specifically what do you think your end market growth is compared to what it was a quarter or two ago. How much market share do you think you are taken and which categories are you seeing the most share gain in and how sustainable do you think that us.

Michael Hsu: Yeah, good point, Cody. I think, we are very pleased with the balanced nature of the growth in North America personal care. I think organic was up 6, and that was balanced between being up 3 in price and 3 in volume for us. And that really reflects, in our minds, strong product innovation and really strong in-market execution. You know, in diapers, you know, we just launched, we got great innovation coming out, and we just launched Huggies Special Delivery, which is gonna deliver ultimate skin comfort. And it's got a lot of features, and, you know, if you'll indulge me, you know, so our softest diapers delivers really trusted protection. It's got plant-based materials, free of parabens and other harsh chemicals, and hypoallergenic for babies' skin.

Yes, good point Cody I think we are very pleased with the balance nature of the growth in North America personal care I think organic was up six and that was balanced between being up three in price and three in volume for us and that really reflects in our mind strong product innovation and really strong in market execution.

In diapers, we just launched we've got great innovation coming out and we just launched Huggy special delivery, which is going to deliver ultimate skin comfort. There has got a lot of features and if you'll indulge me indulge me Suraj, our softest diapers delivers really trusted protection Scott plant based materials barrier Parabens, another horse chemicals, and hypo allergenic for babies skin. So it's got great great product, great designs and packaging and it's priced at a significant premium and Coty. That's been it's really a good indicator or a good example of our elevate the core strategy in action. So we're excited about that and adult care. Likewise, we've got as I just mentioned earlier.

Michael Hsu: So, you know, it's got great, great product, great designs, and packaging, and it's priced at a significant premium. And Cody, that's been a... It's really a good indicator or a good example of our Elevate the Core strategy in action. So we're excited about that. In adult care, likewise, we've got, as I just mentioned earlier, a number of product enhancements in Depend and Poise, and those are both working, those are all working well in the market.

So, you know, it's got great, great product, great designs, and packaging, and it's priced at a significant premium. And Cody, that's been a... It's really a good indicator or a good example of our Elevate the Core strategy in action. So we're excited about that. In adult care, likewise, we've got, as I just mentioned earlier, a number of product enhancements in Depend and Poise, and those are both working, those are all working well in the market.

A number of product enhancements and depend and poise and those are both working are those were all working well in the market.

Great. Thank you.

[Analyst] (Goldman Sachs): Great. Thank you. My other question was, your revised guidance calls for higher marketing spend and G&A costs. Can you just provide more details about your spending initiatives? What products is it behind? When should we expect it to hit? And then also, what caused you to increase your spending outlook? Was it just reinvesting the savings that you have from a lower commodity outlook?

My other question was your revised guidance cost for higher marketing spend and Gionee costs can you just provide more details about your spending initiatives what products is it behind when should we expect it to hit and then also what caused you to increase your spending outlook was it just reinvesting the savings that you have from a lower commodity outlook.

Michael Hsu: Yeah, it's Cody, it's a couple things. You know, one, certainly the outlook had a piece of it, but it's also, you know, given the robustness of consumer demand, and I think the improving conditions in the operating environment, gives us the confidence to invest. And then that said, some of the early returns from our innovation and our marketing thus far to date, I think gives us more confidence to invest further. So the big areas, I think, Maria mentioned, and digital is one big area for us that's working effectively for us in a lot of areas. It has strong ROIs, driving lots of parts of our business. What we would call direct digital marketing in North America, personal care and tissue, China, fem, diapers, and Russia, I think we've got multiple markets.

Yes, it's Cody its just a couple of things one.

Certainly outlook had a a piece of it but it's also.

Given the robustness of the consumer demand and I think the improving conditions in the operating environment.

It gives us the confidence.

To invest and then that said some of the early returns from our innovation and our marketing thus far to date I think gives us more confidence to invest further so the big areas I think Maria mentioned and digital is one big area for us that's working effectively for us and a lot of areas. It has strong or otherwise a thriving a lots of parts of our business. What we would call direct digital marketing in North America personal care and tissue.

China Diapers in Russia, I think we've got multiple markets and then from a capability perspective, we're also investing in.

Michael Hsu: And then, from a capability perspective, we're also investing in people, process, and tools to accelerate some of the capabilities I outlined, including our in-market execution, and our revenue growth management initiatives.

And then, from a capability perspective, we're also investing in people, process, and tools to accelerate some of the capabilities I outlined, including our in-market execution, and our revenue growth management initiatives.

People process and tools to accelerate.

Some of the capabilities that outlined including our in market execution.

And our revenue management initiatives.

Great. Thank you and if I can just sneak in one housekeeping item.

[Analyst]: Great. Thank you. And if I can just sneak in one housekeeping item. You guys have had strong cost savings so far year-to-date, even if commodities should come below your outlook for the $150 to 250 million, should we still expect you to hit that target range of $400 to 450 million in savings?

[Analyst] (Goldman Sachs): Great. Thank you. And if I can just sneak in one housekeeping item. You guys have had strong cost savings so far year-to-date, even if commodities should come below your outlook for the $150 to 250 million, should we still expect you to hit that target range of $400 to 450 million in savings?

You guys have had strong cost savings so far year to date, even if commodities should calm.

Below your outlook for that 150 to 250 million should we still expect you to hit that target range of 400 to 450 million in savings.

Maria Henry: We are tracking well on our way to delivering the $400 to 450 million savings this year. What I would say is the composition of that may be a bit different than what we were thinking. Our teams are delivering solid FORCE cost savings as they work to deliver productivity and cost reductions in our manufacturing operations. Our restructuring program is very much on track. At the end of the day, it's possible that our FORCE savings for the year may come in a bit light, and our restructuring savings may come in a bit better than we had anticipated coming into the year.

We are in New York.

Backing well on our way to delivering $415 million savings this year.

Well I would say is the composition of that maybe.

Different than what we were thinking.

Hi.

Teams are delivering.

Solid force cost savings as they work to deliver productivity and cost reductions in our manufacturing.

Operations.

Our restructuring program is is very much on track.

At the end of the day.

Hi, it's possible that our force savings for the year may come in a bit light and our restructuring savings may come in a bit better than than we had anticipated coming into the year, but in total on 400 450 million combined savings I think we're well on our way to deliver that.

Maria Henry: But in total, on the $400 to 450 million combined savings, I think we're well on our way to deliver that.

But in total, on the $400 to 450 million combined savings, I think we're well on our way to deliver that.

Great. Thank you very much I'll pass it along.

[Analyst]: Great. Thank you very much. I'll pass it along.

[Analyst] (Goldman Sachs): Great. Thank you very much. I'll pass it along.

Michael Hsu: Thanks, Cody.

Thanks Cody.

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

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

Michael Hsu: Hey, Andrea.

Andrea Teixeira: Thank you. Good morning. How are you? I have two questions. First, to Maria, on the new guidance. What are you assuming for pulp prices, and should we see commodities? I guess the spot prices have been rolling over by more than anticipated. In your outlook, as we progress through the year, and probably, as you said, in a multi-year effect, should we see the timing of these contracts finally having a bigger impact? And the level of, like, being conservative on this guidance and revised guidance is because you don't have visibility of how long it's gonna linger, these lower prices. And then the second question is about China. You had an impressive quarter.

Yes. Thank you good morning, how are you.

So I have two questions first to Maria.

On the new guidance, what are you assuming for pulp prices and should we see commodities I guess at the spot prices have been rolling over by more than anticipated.

So in your outlook as we progress for the year and probably as you said in a multiyear.

If fact should we see the timing of these contracts finally, having a bigger impact than the level of like being conservative on this guy innocent devices revised guidance, just because you don't have visibility of how long it's gonna it's going to linger. These lower prices and then on the second question is about China.

So you had an impressive quarter since the premium segment that finally more than offset the mid tier segment decline is it sustainable or you're seeing are you being able to increase the marketing in spite of these marketing spend that you alluded to for the fast growing channels, including online and baby stores. Thank you.

Andrea Teixeira: So in the premium segment, that finally more than offset the mid-tier segment decline, is it sustainable, or are you seeing, are you being able to increase the marketing as part of this marketing spend that you alluded to, for the fast-growing channels, including online and baby stores? Thank you.

So in the premium segment, that finally more than offset the mid-tier segment decline, is it sustainable, or are you seeing, are you being able to increase the marketing as part of this marketing spend that you alluded to, for the fast-growing channels, including online and baby stores? Thank you.

Alright, why don't I start with the commodity outlook I guess, a good place to start on on commodities is just a reminder, that commodities were inflationary in the in the quarter and.

Maria Henry: All right. Why don't I start with the commodity outlook? I guess a good place to start on commodities is just a reminder that commodities were inflationary in the quarter, and so that was still a headwind for us in the second quarter, to the tune of about 10% impact on our operating profit. But that said, they did come in a bit better than we expected, and while they were inflationary, it was the lowest level of inflation that we've seen in two years, so we are pleased with that. Costs on some of the resin-based materials, as well as pulp and recycled fiber, all eased versus our plan, mostly in North America.

So that's still a headwind for us in the in the second quarter.

To the tune of about 10% impact on our.

Operating profit, but but that said oh, they did come in a bit better than we expected.

And while they were inflationary it was the lowest level of inflation that we've seen in two years. So we are Ah Ah we're pleased with that.

Hi costs on some of the resin based materials as well as pulp and recycled fiber all east versus our plan, mostly in North America, We still do you see inflation outside of North America, particularly in a in Latin America.

Maria Henry: We still do see inflation outside of North America, particularly in Latin America. Distribution costs are also continuing to run high. There's no change in our view on that, but they do continue to run high. On your question around the contracts, those contracts, in general, are negotiated annually. So I'll remind you that we discussed the negotiations that we had coming out of 2017 when we got, I'm sorry, coming out of 2018 when we got on the call in January.

We still do see inflation outside of North America, particularly in Latin America. Distribution costs are also continuing to run high. There's no change in our view on that, but they do continue to run high. On your question around the contracts, those contracts, in general, are negotiated annually. So I'll remind you that we discussed the negotiations that we had coming out of 2017 when we got, I'm sorry, coming out of 2018 when we got on the call in January.

Distribution costs are also continuing to to run high Theres no change in our view on that but they do continue to want to run high.

On your question around the contracts those contracts in general are negotiated annually. So I'll remind you that we discussed the the negotiations that we had coming out of 2017, when we got a I'm sorry coming out of 2018, when we got on the call in January .

Maria Henry: So, we have nothing new to report on that, and we'll have to see where we land and where commodities are as we close out the calendar year and we get into our discussions with suppliers and set our contracts for next year. We'll update you on where all of that lands in January. And then the other thing I'd comment on is that, in general, our outlook for commodity assumes that costs are relatively consistent with the recent spot prices, except for pulp, which is forecast to move down a bit further from here. So that's kind of what's going on with commodities.

So, we have nothing new to report on that, and we'll have to see where we land and where commodities are as we close out the calendar year and we get into our discussions with suppliers and set our contracts for next year. We'll update you on where all of that lands in January. And then the other thing I'd comment on is that, in general, our outlook for commodity assumes that costs are relatively consistent with the recent spot prices, except for pulp, which is forecast to move down a bit further from here. So that's kind of what's going on with commodities.

So oh, we have nothing new to report on that and we'll have to see where we land and where commodities are.

As we close out the calendar year, and we get into our our discussions with suppliers and a and set our contracts for next year, We'll we'll update you on where all of that land in in January .

Oh and then the other thing I'd comment comment on is that in general our outlook for commodity assumes that costs are relatively consistent with the recent spot prices, except for pulp, which is forecast to move down a bit further from here. So that's a that's kind of what's going on with commodities, yes, Okay, and Andre and then on China.

Michael Hsu: Yeah. Okay, and Andrea, and then on China, you know, what I will tell you is, we're really encouraged by the progress the team's taking. Their strategy is to elevate the category, by driving sustainable long-term growth. And I think, you know, do we believe it's sustainable? I think, you know, that's our intent. And the way we're doing that is through product innovation that seems to be working very effectively in the marketplace. You know, we've got a diaper that we launched toward the end of last year, middle of last year, the 5D diaper, that's soft and flexible, breathable as much as any product out there, except that, the difference is in the marketplace, and while it's winning, is that it protects better than the other products in the category.

Well I will tell you is.

We're really encouraged by the progress of teams taking their strategy is to elevate the category.

By driving sustainable long term growth and I think.

Do we believe its sustainable I think that's our intent and the and the way. We are doing that is through product innovation that seems to be working very effectively in the marketplace. We've got a diaper that we launched towards the end of last year middle of last year, the fivea diaper that soft and flexible reasonable because as much as any product out there except that the differences in the marketplace and while its winning is that it protects better than the other products in the category at least that's our perspective, and so thats getting traction in the premium tiers.

Michael Hsu: At least that's our perspective. And so that's getting traction in the premium tiers. But just to be clear, our volume in diapers was down in the quarter. It's just that it was growing significantly in the premium side of the business. That said, organic was up because of volume differences and also because of some net pricing changes. So, I think the business is headed in the right direction. We think the work that we are doing is to drive long-term sustainable growth.

At least that's our perspective. And so that's getting traction in the premium tiers. But just to be clear, our volume in diapers was down in the quarter. It's just that it was growing significantly in the premium side of the business. That said, organic was up because of volume differences and also because of some net pricing changes. So, I think the business is headed in the right direction. We think the work that we are doing is to drive long-term sustainable growth.

But just to be clear our volume in diapers was down in the quarter. It's just that it was growing significantly in the premium side of the business that said organic was up of because of the volume differences and also because of some net pricing changes. So I think the business is heading the right direction. We think the work that we are doing is to drive long term sustainable growth.

Andrea Teixeira: ... And just, that's helpful. Just on the follow-up with Maria, now I understand the contracts are one year set, obviously, with the suppliers. But so can you kind of bridge to us, because the $800 million last year was obviously a big hit. This year, what is your assumption for pulp embedded in your revised guidance?

And just that's helpful. Just on the follow up with Maria No I understand the contracts are when you're sad, obviously with the suppliers, but so can you kind of bridge to us because 800 million last year was obviously, a big Kid. These Z or what is your assumption for Pope embedded in your revised guidance.

Michael Hsu: Andrea, this is Paul. I would say, in general, there's been no change in how we forecast commodities, and so we're using the forecasters that you know well, including RISI, and then we generally line up with what they forecast.

Paul Alexander: Andrea, this is Paul. I would say, in general, there's been no change in how we forecast commodities, and so we're using the forecasters that you know well, including RISI, and then we generally line up with what they forecast.

The cat Andrew This is Paul I would say in general were used theres been no change in how we forecast commodities.

And so we're using.

The the forecasters that you'd done well, including receipt and then we generally will line up with what they forecast.

And include the timing of the contracts right I'm, assuming that they don't roll over the way your contracts roll right. As you can't you can't have the spot prices because they're significant middleware now, but you can't embed it because of your contracts is that the way we should think.

Andrea Teixeira: Include the, the timing of the contracts, right? I'm assuming that they don't roll over the way your contracts roll, right? You can't, you can't have the spot prices because they're significantly lower now, but you can't embed it because of your contracts. Is that the way we should think?

Maria Henry: Well, we've got both things that affect us. Obviously, what the market price is, and then, as we've discussed, we also have contracts that affect what we report as commodity inflation for Kimberly-Clark. One you have visibility into, and the other one you don't.

Well, we've got we've got those things that affect us obviously, what the market prices and as we discussed we we also have Ah Ah contracts that affects what we report as a commodity inflation for Kimberly Clark.

When you have visibility into and the other one you don't.

Correct, yeah, but you're not ready to give us as you did in the past where you gave us exact the the price of the pulp at this point.

Andrea Teixeira: Correct. Yeah, but you're not ready to give us as you did in the past, where you gave us exactly the price of the pulp at this point?

Maria Henry: If you're after what we're thinking in terms of our fiber commodities, what I'd say is that on eucalyptus, which is a major input for us on the fiber side, we've reduced our outlook range to $1,050 to 1,100 per metric ton, and that's down $75 per metric ton.

If you're after what were thinking in terms of our fiber commodities, what I'd say is that.

On Eucalyptus, which is a measure input for us on the.

On the fiber side, we've reduced our outlook range to 10, 52, 1100 per metric ton and that's down $75 per metric ton.

Okay. That's very helpful. Maria Thank you.

Andrea Teixeira: Okay, that's very helpful, Maria. Thank you.

Maria Henry: Sure.

Sure.

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

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

Olivia Tong: Great. Thank you. You know, obviously, given your commentary around brand spend and initiatives, a few questions there. You know, clearly, that's helping support some of your pricing and mix initiatives, but when do you actually expect these initiatives to drive some improvement in volume? So that's the first question. Then second, just a little bit more around the new Huggies Special Delivery. You know, curious as to how you went about in terms of the thought process and the marketing around it, because it's conveying a very different message versus what both you and your competitors have done in the past, and it obviously stands out pretty dramatically on shelf. So, a little bit more color there would be helpful. Thank you.

Great. Thank you.

You know obviously given your commentary around brand spend initiatives a few questions there.

Clearly that's helping support.

Some of your pricing and mix initiatives, but when do you actually expect your these initiatives to drive some improvement in volume.

So thats. The first question and then second just a little bit more around the new huggies especial delivery I'm curious as to how you went about in terms of the thought process and the marketing around it because that's.

It's becoming a very different message versus what.

You and your competitors have done in the past and obviously stand up pretty dramatically on shelf. So.

A little bit more color that would be helpful. Thank you.

Michael Hsu: Yeah. Yeah, on the brand investment, I think maybe the overall say, Olivia, I think it has been working, and that's a piece of the reason why we're-- it gives us the confidence to increase the investment in the back half. You know, the example I'll give you maybe is, if you, you know, the talk about Brazil, you know, pricing is up in the teens. Volume is essentially, you know, a little bit less than flat. And so while, you know, our assessment is the elasticity has taken hold, but we've got a lot of other things going on that make that volume better than what the elasticity would have modeled, which is innovation.

Oh, yes.

Yeah on the minimum brand investment I think maybe the overall say Livia I think it has been working and that's that's a piece of the reason why we're it gives us the confidence to increase the investment in the back half or the example, I'll give you maybe is if you if you.

The talk about Brazil, you know pricing is up in the teens volume was essentially in a little bit less than flat and so while you know our our assessment is the elasticities taken whole, but we've got a lot of other things going on that makes that volume better than what the elasticity, what a model, which is innovation, we've got growth initiatives on adult care and baby wipes, that's getting very very strong growth and marketing behind those initiatives and then.

Michael Hsu: We've got growth initiatives on adult care and baby wipes, that's getting very, very strong growth, and marketing behind those initiatives. And then, increased advertising spend or improved advertising on the diaper products. So I think, you know, it's kind of one example, but I think we have seen that, and it's part of the reason why we are, have more confidence to spend more.

We've got growth initiatives on adult care and baby wipes, that's getting very, very strong growth, and marketing behind those initiatives. And then, increased advertising spend or improved advertising on the diaper products. So I think, you know, it's kind of one example, but I think we have seen that, and it's part of the reason why we are, have more confidence to spend more.

Increased advertising spend were improved advertising on on the type of products. So I think it's kind of one example, but I think we have seen that and it's part of the reason why we are have more confidence to spend more.

Paul Alexander: And then on Special Delivery, Mike?

And then on special delivery, Mike Yeah special delivery, but we're very excited about that.

Michael Hsu: Yeah, Special Delivery, yeah, we're very excited about that. Yeah, you could definitely see some different hands on the business. Very, maybe a contemporary look and feel. You know, we've got a great young team on it, that's kind of in tune with, I think, millennial mom and, you know, very well tested. You know, the technology is terrific. It's a showcase of, you know, I'd say, you know, maybe an enhanced approach from us, which is a partnership globally from a technology perspective.

Yeah, you could definitely see some different hands on the business very maybe a contemporary look and feel you know we've got a great young team on it that's kind of a tune in tune with the I think millennial mom and.

Very well tested the technology is terrific. It's a showcase of you know I'd say you know maybe an enhanced approach from US which is a partnership globally from a technology perspective, I mean, it takes the best of what we've been doing in North America.

Michael Hsu: I mean, it takes the best of what we've been doing in North America, China, Korea, and Latin America, and the team worked together to launch this product, and we're very excited about all the features it has, which is, you know, softness, skin protection, plant-based liner, you know, a lot of free froms that make it more attractive to the consumer, and then obviously the standout designs. Olivia? Okay.

I mean, it takes the best of what we've been doing in North America, China, Korea, and Latin America, and the team worked together to launch this product, and we're very excited about all the features it has, which is, you know, softness, skin protection, plant-based liner, you know, a lot of free froms that make it more attractive to the consumer, and then obviously the standout designs. Olivia? Okay.

China, Korea, and Latin America, and and the team work together to launch this product and we're very excited about all the features that adds which is you know softness skin protection plant based liner.

You know a lot of free from that make it more attractive to the consumer and then obviously the standout designs.

Okay. Okay.

Olivia Tong: Sorry, I was on mute.

Sorry, I was on mute.

Michael Hsu: Okay.

Olivia Tong: Just following up on Huggies Special Delivery. I know it's only been on shelf a short time, but any early color on retailer feedback so far? And did pipeline fill help at all in the quarter?

Just following up on on Huggies special delivery I mean, I know, it's only been on shelf a short time, but any early color on retailer feedback so far and the pipeline fill help at all in the quarter.

Michael Hsu: Yeah, there's probably a little bit of pipeline. We're still relatively early, so I wouldn't say the pipeline was huge and significant in the quarter. But retailer response has been very, very positive. I think they're very excited about, obviously, the look and the product quality, and so we've got big expectations for Special Delivery. We're excited about it.

Yes, there's probably a little bit of pipeline, it's still a relatively we're still relatively early so I wouldn't say.

The pipeline was huge.

And then again in the quarter.

But retailer response has been very very positive.

I think they're very excited about obviously look in the product quality and so we've got big expectations for.

Special delivery, we're excited about it.

Got it thank you.

Olivia Tong: Got it. Thank you.

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

Operator: Thank you. Our next question comes from Steve Powers with the Deutsche Bank.

Steve Powers: Hey, great. Thank you both. Hey, just a quick follow-up on pulp. Maria, you know, we've heard from others the idea of expected deflation from where we are now in the near term, followed by some level of tightening later in the year and into 2020. Is that your expectation as well, or do you have an alternative view on where the underlying commodities trend?

Okay, great. Thank you both hey, just a quick follow up on pulp Maria we've we've heard from others.

The idea of expected deflation from where we are now in the near term.

Followed by some some level of tightening later in the year and into 2020 is that your expectation as well or or do you have an alternative view on where the underlying commodities trend.

Michael Hsu: I mean, that would be consistent with what Reese is saying, Steve.

I mean that would be consistent with what we see as saying Steve.

Steve Powers: Okay. So, okay.

Okay, Okay, Hello, too early for us and talking about 2020, but but we see those same forecasts.

Michael Hsu: It's a little too early for us to talk about 2020, but we see those same forecasts.

Steve Powers: Okay. So, fair, just to be clear, so fair to assume that's sort of embedded in the planning process?

Okay.

Fair just just to be clear so fair to assume that's that's sort of embedded in in the planning process.

Michael Hsu: Yes.

Maria Henry: Yes.

Yes, yes.

Steve Powers: Okay. All right, great. And then, I guess, another follow-up on the reinvestments you're making, above and beyond the incentive comp that you called out. It, it sounds like for the year, it's, it's mostly marketing, with a bit more in people, processes, and tools to, you know, to further the ROIs you've been seeing and maybe counter some level of presumed competitive action as the industry benefits from lower costs. But, Mike, in the past, we've also talked about Kimberly-Clark maybe being in a position to make, you know, some more assertive investments, some assertive leading-edge investments in opportunity markets, you know, like India, going forward, just to position the company better for long-term growth. How are you thinking about that? Where does...

Okay.

Alright, Great and then I guess.

Another follow up on on the Reinvestments, you're making.

Above and beyond the incentive comp that you called out it sounds like for the year, It's it's mostly marketing.

With a bit more in people processes and tools to the further the ROI is you've been seeing and maybe counter some level of presume competitive action is as the industry benefits from low cost but.

Mike in the past, we've also talked about.

Kimberly Clark, maybe being in a position to make some more assertive investments some of sort of leading edge investments and opportunity markets like India going forward just to position the company better for for long term growth.

How are you thinking about that where does where do those types of initiatives rank in terms of the privatization for future investment dollars.

Steve Powers: Where do those types of initiatives rank in terms of the prioritization for future investment dollars?

Where do those types of initiatives rank in terms of the prioritization for future investment dollars?

Michael Hsu: Yeah. I mean, great question, Steve, and obviously, you know, I think as I mentioned earlier, I think what's changed over the past six months or so is the category conditions make investment, I think, more worthwhile or more productive. And we're seeing some of that across multiple markets. Most of the current investment that we're talking about for the second half is going into digital and capability building around, you know, revenue growth management and sales execution. So those are the near-term focus areas, but we do believe we have great opportunity to enhance our investment in categories, let's say, adult care globally, baby wipes, and then in markets like India.

Yes, Great question, Steve and and obviously you know I think as I mentioned earlier I think what's changed over the past six months or so is the category conditions may make investment I think more worthwhile are more productive and a and we're seeing some of that across multiple markets or most of the current investment that we're talking about for the second half is going into digital and capability building around revenue growth management and sales execution. So those are the near term focus areas, but we do believe we have great opportunity to enhance our investment in categories, Let's say adult care globally, a baby wipes and then in markets like India, and so working through those as a team and think we've got a lot of good opportunities to invest and to accelerate growth.

Michael Hsu: You know, working through those as a team, and think we've got a lot of good opportunities to invest in to accelerate growth.

You know, working through those as a team, and think we've got a lot of good opportunities to invest in to accelerate growth.

Okay.

Steve Powers: Okay. I'll, I'll pass it on. Thanks.

Ill pass it on thanks.

Michael Hsu: Thanks, Steve.

Thanks, Dave.

Operator: Thank you. Our next question comes from Steve Strickler with UBS.

Thank you. Our next question comes from Steve Strycula with yes.

Steve Strickler: Hi, good morning, and congrats on a good execution quarter.

Steven Strycula: Hi, good morning, and congrats on a good execution quarter.

Hi, good morning, and congrats on a good execution quarter.

Michael Hsu: Oh, thanks, Steve.

Thanks, Steve.

Steve Strickler: So, a few quick questions. For Maria, I think I heard you say that on manufacturing expenses, we're gonna be tracking a little bit higher than you expected versus the start of the year. What's driving that? I haven't heard a lot of other companies really speak to that.

Steven Strycula: So, a few quick questions. For Maria, I think I heard you say that on manufacturing expenses, we're gonna be tracking a little bit higher than you expected versus the start of the year. What's driving that? I haven't heard a lot of other companies really speak to that.

So a few quick questions for you.

Yeah, I think I heard you say that on manufacturing expenses were going to be tracking a little bit higher than you expected versus the start of the year.

What's driving I haven't heard a lot of other companies really speak to that.

Maria Henry: Sure. There's a number of items that affect what we call other manufacturing costs, which are general expenses that hit us in our manufacturing operations. They include things like fixed cost absorption, labor rate changes, and inflation, product improvement investments, and other one-time types of impacts such as write-offs or startup costs associated with new equipment. It's not unusual that this is an inflationary area for us, but it is running a bit higher than we expected when we came into the year. Specifically for the second quarter, we saw increases across all of those levers.

Sure there's die a number of items that affect what we call. Other other manufacturing costs, which are general expenses that hit us in our manufacturing operations. They include things like.

Fixed cost absorption labor rate changes and inflation.

Product improvement investments and other one time types of impacts such as write off or.

Start up cost associated with that with new equipment. It's not it's not unusual that this isn't inflationary area for us, but it is running a bit higher than we expected when we when we came into the year.

Specifically for the second quarter, we saw increases across all of those levers, we talked about our volumes being off a bit which lead to fixed cost absorption impact on with our.

Maria Henry: We talked about our volumes being off a bit, which leads to fixed cost absorption impacts with our labor rates, all the inflation that we're seeing, particularly out of Latin America, affects the cost there. And then one area, we just had the question on investment. One area where we are investing is in product improvement, and we're investing there behind the innovations that we've been talking about, and those increased investments in product quality and improvements and innovation flows through that line item. So that's what's going on there, and, you know, I'd point to the fixed cost under absorption and the product investments as two of the drivers.

We talked about our volumes being off a bit, which leads to fixed cost absorption impacts with our labor rates, all the inflation that we're seeing, particularly out of Latin America, affects the cost there. And then one area, we just had the question on investment. One area where we are investing is in product improvement, and we're investing there behind the innovations that we've been talking about, and those increased investments in product quality and improvements and innovation flows through that line item. So that's what's going on there, and, you know, I'd point to the fixed cost under absorption and the product investments as two of the drivers.

Labor rates all the inflation that we're seeing particularly out of Latin America effect, but the cost there and then when one area. We just had a question on investment one area, where we are investing is in product improvement and we're investing there behind the innovations that we've been we've been talking about and there is increased.

Investments in product, a quality and improvements and innovation plays through that.

Line item. So that's a that's what's going on there and.

I'd point to the fixed cost under absorption in the product investments as to the drivers.

Steve Strickler: Okay. And as a follow-up to that, if we think about the $150 million reduction to your initial inflation outlook, that's about 33 cents to earnings or 5 percentage points to EBIT dollars, and it feels like you're flowing through about 1/3 of that to shareholders. So is it, Mike, that we just-- this is a really good opportunity to address the wish list of things that you have that are actionable right now in the marketplace, including, you know, increasing bonuses and whatnot out there? Or is this just conservatism as we think about the back half?

Steven Strycula: Okay. And as a follow-up to that, if we think about the $150 million reduction to your initial inflation outlook, that's about 33 cents to earnings or 5 percentage points to EBIT dollars, and it feels like you're flowing through about 1/3 of that to shareholders. So is it, Mike, that we just-- this is a really good opportunity to address the wish list of things that you have that are actionable right now in the marketplace, including, you know, increasing bonuses and whatnot out there? Or is this just conservatism as we think about the back half?

Okay, and as a follow up to that if we think about the $150 million reduction to your initial inflation outlook Thats about 33 cents to earnings or five percentage points to EBIT dollars and it feels like you're flowing through about a third of that to shareholders. So is it Mike that we just this is a really good opportunity addressing the wish list of things that you have that are actionable right now in the marketplace.

Including.

Increasing our bonuses and whatnot out there.

Or is it just conservatism as we think about the back half.

Michael Hsu: Yeah, I mean, you know, I think by our math, we're somewhere between flowing through between a third to a half. But again, I think the part of it is, you know, the market opportunity, and we think, you know, the conditions are good for us to invest, the brands are responding, and it's gonna be productive for the long-term health of the business, and so that's why we're doing that. Some of the comp stuff is more formulaic. You know, last year we were cutting comp, and this year, you know, it, it's just a math formula that it goes back up, you know, so...

Yes, I think in all by our math, we're somewhere between.

You know flowing through between a third to a half.

But again I think part of it is that you know the market opportunity and we think.

You know the conditions are good for us to invest the brands are responding.

And it's going to be productive for long term health of the business and so thats, what we are doing that or some of the comp stuff is more formulaic and last year, we were cutting comp in this year.

No. It's just the math formula that it goes back up so but really the focus for US is about brand reinvestment in both as Maria said in products in the digital or in the marketing spending and then in some of the capability built.

Michael Hsu: But, you know, really the focus for us is about brand reinvestment in both, as Maria said, in products, in the digital, or in the marketing spending, and then in some of the capability build.

But, you know, really the focus for us is about brand reinvestment in both, as Maria said, in products, in the digital, or in the marketing spending, and then in some of the capability build.

Maria Henry: Yeah, and I think if you took compensation aside, it'd look a bit more like 2/3 flowing through.

Yeah, I think if you took compensation aside we it did it did look a bit more like two thirds flowing through.

Steve Strickler: Okay. And to close out, Mike, can you just walk us through a few of the key geographies as to what's happening on, like, a constant currency basis across Brazil, Argentina, and China? If you touch on, at a high level, a few of them, but just give us a little bit more texture as to what's happening in those markets.

Steven Strycula: Okay. And to close out, Mike, can you just walk us through a few of the key geographies as to what's happening on, like, a constant currency basis across Brazil, Argentina, and China? If you touch on, at a high level, a few of them, but just give us a little bit more texture as to what's happening in those markets.

Okay and to close out Mike can you just walk us through a few of the key geographies as to what's happening on like a constant currency basis across Brazil, Argentina in China.

You touched on at a high level in a few of them just give us a little bit more texture as to what's happening in those markets.

Michael Hsu: Yeah. Yeah, very, very solid growth. I think in Brazil, double-digit growth overall, net selling price and mix were up in the teens. You know, volume was about, you know, down slightly, I would say, almost even. You know, overall in Brazil, I think the market price has generally moved, although some local competitors have been lagging, the better than expected volume performance really is related to great execution. And, when I say execution, it is the whole ball of wax, meaning it's, you know, the innovation, it's the marketing, and then it's the selling, and all those things are working well for us.

Yeah, Oh, yeah, very very solid growth I think in Brazil double digit growth overall, net selling price and mix were up in the teens.

Volume was about down slightly I would say almost even.

Overall in Brazil, I think the market price has generally moved although some local competitors have had been lagging a better expected than than expected volume performance really is related the great execution and when I say execution. It is the whole ball of wax meeting, it's a you know.

The innovation, it's the marketing and then that's the selling and all those things are working well for US. In addition, I think in a market like Brazil, or Latin America more broadly we've got very developed plans to expand kind of the categories in adult care and wipes and that's that's paying off this year, Argentina, or I guess I would say.

Michael Hsu: In addition, I think in a market like Brazil or Latin America, more broadly, you know, we've got very developed plans to expand kind of the categories in adult care and wipes, and that's paying off this year. Argentina, I guess I would say, high double-digit organic growth. You know, the volume decline was in the mid-single-digit level, I think. So you could, again, you could chalk it up to the same thing, which is I think the consumer has kind of reset their expectations for price, but also very strong in-market execution of the teams to kind of reduce the volume impact that you would have expected from that level of pricing. So Latin America, you know, very strong performance from a revenue perspective.

In addition, I think in a market like Brazil or Latin America, more broadly, you know, we've got very developed plans to expand kind of the categories in adult care and wipes, and that's paying off this year. Argentina, I guess I would say, high double-digit organic growth. You know, the volume decline was in the mid-single-digit level, I think. So you could, again, you could chalk it up to the same thing, which is I think the consumer has kind of reset their expectations for price, but also very strong in-market execution of the teams to kind of reduce the volume impact that you would have expected from that level of pricing. So Latin America, you know, very strong performance from a revenue perspective.

Hi, a high double digit organic growth.

The volume decline was in the I think mid single digit levels. You could again you could talk about the same thing, which is I think the consumer has kind of reset their expectations for price, but also very strong in market execution the teams that kinda.

Reduce the volume impact than you would have expected from that that level of pricing. So so a Latin America.

Very strong performance from a revenue perspective, a central and eastern Europe up.

Michael Hsu: Central and Eastern Europe, up, you know, almost 20% or a little bit over 20%. Very strong performance in Ukraine and CIS. Russia continues to grow at a very good pace for us, although I will tell you, our shares are a little bit more under pressure there than we've experienced over the prior couple of years. But the formula there is also same, same thing, as it'll be a refrain, innovation, marketing and great in-market execution. ASEAN, up double digits, so we're feeling good about, you know, most of our D&E markets.

Central and Eastern Europe, up, you know, almost 20% or a little bit over 20%. Very strong performance in Ukraine and CIS. Russia continues to grow at a very good pace for us, although I will tell you, our shares are a little bit more under pressure there than we've experienced over the prior couple of years. But the formula there is also same, same thing, as it'll be a refrain, innovation, marketing and great in-market execution. ASEAN, up double digits, so we're feeling good about, you know, most of our D&E markets.

Almost 20% are a little bit over 20% very strong performance in Ukraine, and see is Russia continues to grow at a very good pace for us Although I will tell you our shares a little bit more under pressure there than we've experienced over the prior couple of years, but the formula. There is also same same thing all is it will be a refrain innovation marketing and greater in in market execution OCTEON up double digits. So we're feeling good about.

Most of our D. any markets.

Great. Thank you.

[Analyst]: Great. Thank you.

Steven Strycula: Great. Thank you.

Operator: Thanks, David. Thank you. Our next question comes from Caroline Levy with Macquarie Capital.

Thanks, David. Thank you. Our next question comes from Caroline Levy with Macquarie capital.

Caroline Levy: Good morning. Thank you so much. I have kind of a fun one first, which is, I was very surprised to see a black diaper package. Are young families no longer doing blue and pink for their babies' bedrooms and stuff? So if you could just talk about the logic behind black packaging.

Good morning. Thank you so much I have kind of a fun, one first which is.

I was very surprised to see a black die package, our our young families.

No longer doing blue and pink for the baby's bedrooms and stuff. So if you could just talk about the logic behind black packaging.

Michael Hsu: Yeah, Caroline. Interesting. Yeah. I was saying we've got some new hands on the business. I think that the team is attuned with kind of what millennial mom is looking for, but black packaging kind of is striking off the shelf. I will tell you, we've gotten strong retailer response to it. It is the first black packaging in the category and for us, in the diaper category. Obviously, we've been black for a while, in the fem care category. So, you know, and I think, it's so far, early returns would say, even though it's too early to really say, but it's doing its job, which is it's striking its shelf, and it's got a great shelf impression.

Yes, Carol interesting, yes, Alex I would say, we've got some new hands on the business I think that the team is a tune with kind of what millennial mom is looking for the black packaging kind of his strike an off the shelf I will tell you we've gotten strong retailer response to it. It is the first black packaging in the category and for Us and the diaper category, obviously weve been black for a while in the Fem care category. So you know and I think it's so far early returns would say, even though it's too early really say, but it's doing its job, which is it's striking at shelf and it's got a great shelf impression and I would say overall, a more contemporary look and feel and I think we're trying to.

Michael Hsu: And I would say overall, a more contemporary look and feel, and I think we're trying to you know, you know, address millennial mom and, and so far it seems like it's headed in the right direction.

You know you know address a millennial mom and so far it seems like it's set in the right direction.

Caroline Levy: Oh, excellent. Thank you. I wanted to just talk about birth rates. I mean, I remember maybe a year ago, you talking about a shocking decline in South Korea. We're reading about North America seeing birth rate declines, and yet you're able to put up some really good numbers despite that in some of your, you know, and certainly in North America. How-- What do you think is going on, and how do you deal with that as a long-term trend?

Excellent. Thank you. So I wanted to just talk about both right I mean, I remember maybe a year ago, you talking about a shocking decline in South Korea, We're reading about North America.

Seeing both rate declines.

And yet you're able to put up some really good numbers despite that in some of you.

In certainly in North America, what do you think is going on and how do you deal with that as a long term trend.

Michael Hsu: Yeah, still a decline, you know, maybe a little less shocking than the numbers that you may recall. South Korea, I think a couple of years ago, it was a low double-digit decline. I think this year it looks like maybe about a high single digit, so that's an improvement, but it's still down. And the driver in South Korea is slower family formation. I mean, in fact, marriages are still down. So I think, you know, that's one, you know, that's South Korea. In North America, similar, you know, birth rate has improved, but it's still down about, in 2018, our estimate's about down about 2%.

Yeah still still a decline.

So maybe a little less shocking that the numbers that you may recall, a south Korea I think a couple of years ago. We were it was a low double digit decline I think this year. It looks like maybe about a high single digit so thats an improvement, but it's still down and the driver in South Korea is slower family for formation I mean in fact marriages are still down. So so I think that's one that South Korea, and North America similar birth rate has improved but it's still down about in 2018, our estimates about down about 2% and so so.

Michael Hsu: So, you know, I think, you know, in big developed markets, I think that's a trend that we have to deal with, and that's why you're seeing Huggies Special Delivery or some of the things we're trying to address. The big thing about Special Delivery is it sells at a significant premium to all the other products in the category. And the reason we feel good about that, and it's pretty well tested, it's got a lot of benefits that consumers are looking for. And that falls in line with the strategy we're really driving, which is Elevate the Core, which is you gotta in the big developed markets, the way to grow them is to drive premiumization.

So, you know, I think, you know, in big developed markets, I think that's a trend that we have to deal with, and that's why you're seeing Huggies Special Delivery or some of the things we're trying to address. The big thing about Special Delivery is it sells at a significant premium to all the other products in the category. And the reason we feel good about that, and it's pretty well tested, it's got a lot of benefits that consumers are looking for. And that falls in line with the strategy we're really driving, which is Elevate the Core, which is you gotta in the big developed markets, the way to grow them is to drive premiumization.

I think you know in big developed markets I think thats a trend that we have to deal with and that's why you're seeing huggy special delivery or some of the things. We're trying to address the big thing about special delivery that sells at a significant premium to all the other products in the category.

And the reason, we feel good about that and it's pretty well tested its got a lot of benefits that consumers are looking for and that falls in line with the strategy, we're really driving which is elevate the core which is you got it you gotta in big developed markets. The way to grow them is to drive premiumization, but the only way to make Premiumization work is if you make the products worth more.

Michael Hsu: But the only way to make premiumization work is if you make the products worth more, and worth paying that premium for, and that's what we're trying to do.

But the only way to make premiumization work is if you make the products worth more, and worth paying that premium for, and that's what we're trying to do.

And worth paying that premium for and that's what we're trying to do.

Caroline Levy: Excellent. Thank you. On just retailer pushback, I mean, you've talked about the fact that you haven't seen competitor, you know, dynamics change around the price increases, but I think there's quite a bit of fear that as retailers continue to try to compete with Amazon, they may come back to the manufacturers as costs come down and push back. Can you just address that? Versus history, are you seeing anything different?

Excellent. Thank you I'm just return the push back I mean, you've talked about the fact that you haven't seen competitor.

Dynamics change around the price increases, but I think there's quite a bit of fear that as retailers.

Continue to try to.

Compete with Amazon They may come back to the manufacturers as costs come down and pushed back and can you just address that and this is history are you seeing anything different.

Michael Hsu: I don't know that we're seeing anything different. I think that's an ongoing issue, Caroline, in the industry, but it's also one that those of us who've been around for a long time have been dealing with for a long time. And so we're used to that, this dynamic and managing through it. I will say, you know, like most retailers that we, you know, that we deal with, you know, they're mostly interested in driving growth. And so while, you know, they may not like pricing in some, you know, in some categories or some retailers, they do like growth, and so that's where we're focused on working with them and partnering on to find the right way to grow the category.

Oh.

I don't know that we're seeing anything different I think thats, an ongoing issue Caroline in the industry, but it's also one that those of US who have been around for a long time.

Have been dealing with for a long time and so we're used to that this dynamic and managing through it I will say.

Like most retailers that we you know that we deal with you know, they're mostly interested in driving growth on and so while they may not like pricing in some in some categories or some retailers.

They do like growth and so thats, where were focused on working with them and partnering on the find the right way to grow the category.

Caroline Levy: Got it. And just my last one, on KC Professional, your Western Central Europe volume was down 8%. Can you just talk to what's going on there?

Got it and just my last one on KC professional you'll.

With some central Europe volume was down 8% can you just talk to what's going on there.

Michael Hsu: Yeah, you know, the biggest driver in KCP, and I'd say another solid quarter for KC Professional, organic overall was up 1, and North American, developing, and emerging markets were up 2. I think the biggest thing is we're leading price in, you know, with our leadership position in KCP, generally. Not all markets have followed, but we feel like this is the right move for us, and we recognize there's a little stickiness, competitively, and there's gonna be some volume impacts.

Yes.

The biggest driver and Casey P. and I'd say, another solid quarter for for K C professional organic overall was up one.

And North American developing in emerging markets were up to the I think the the biggest thing is we're leading price and you know with our leadership position and K CP generally.

Not all markets a follow but we feel like is the right move for us and we recognize there's a little sticky in us competitively and there's going be some volume impacts.

[Analyst]: ... So you think that's temporary?

Caroline Levy: ... So you think that's temporary?

So you think thats temporary.

Michael Hsu: Yes. Well, we'll see if it's temporary, but it's something that we're prepared to kind of deal with as we work through the year.

Yes, well, we will see if it's temporary but it's something that we are we're prepared to kind of deal with as we work through the year right Caroline I think.

Paul Alexander: Caroline, I think, what I'd add to that is focus on the net of price, mix, and volume, especially in that market. If you do that across developed markets, we were down about 1%.

What I'd add to that is focused on the negative price mix and volume, especially in that market and if you do that across developed markets, we were down about 1%.

[Analyst]: Got it. Thank you so much.

Caroline Levy: Got it. Thank you so much.

Got it thank you so much.

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

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

Michael Hsu: Hey, Kevin.

Kevin Grundy: Thanks. Good morning, everyone. Hey, Mike, congrats on a good result this quarter. Not to beat a dead horse, but I wanted to ask the question on the reinvestment a little bit differently. So, the context, you know, of course, company's results have not been what you've hoped over the past three years. So far, so good first half of this year. But even Mike, like, as we look at the Nielsen data, market share trends, I suspect in the US, still not quite where you'd hope.

Hey, guys. Good morning, everyone, Hey, Mike Congrats on a good result this quarter.

I would not know not to beat a dead horse, but I wanted to ask a question on the on the reinvestment a little bit differently. So the context of course companies' results have not been when you pulled over the past three years. So far so good first half of this year.

But even Mike as we look at the Nielsen data market share trends I suspect in the U.S. still not quite where you'd hope. So the question is as you're working through the quarter and thinking about how the business is progressing what the guidance is going to be with pulp prices rolling over was there any thought to investing all of the upside.

Kevin Grundy: So the question is, as you're working through the quarter and thinking about, you know, how the business is progressing and what the guidance is gonna be with pulp prices rolling over, was there any thought to investing all of the upside to try to sustain the top line, which arguably is gonna drive the most value for shareholders over time? So the question's really around the adequacy of the reinvestment and how you were thinking about that. Because, you know, when we met with you earlier in the year, the thinking was, you know, you were not gonna do any sort of earnings reset because you didn't necessarily see the innovation pipeline sort of justifying it. So sorry for going on a bit, but it's really around the adequacy of the reinvestment as you saw it, and balancing that with the earnings flow through.

So the question is, as you're working through the quarter and thinking about, you know, how the business is progressing and what the guidance is gonna be with pulp prices rolling over, was there any thought to investing all of the upside to try to sustain the top line, which arguably is gonna drive the most value for shareholders over time? So the question's really around the adequacy of the reinvestment and how you were thinking about that. Because, you know, when we met with you earlier in the year, the thinking was, you know, you were not gonna do any sort of earnings reset because you didn't necessarily see the innovation pipeline sort of justifying it. So sorry for going on a bit, but it's really around the adequacy of the reinvestment as you saw it, and balancing that with the earnings flow through.

To try to sustain the topline, which arguably is going to drive the most value for shareholders over time. So the question is really around the adequacy of the reinvestment in how you were thinking about that because when when we met with you early in the year the thinking was.

You are not going to do any sort of earnings reset because you didn't necessarily see the innovation pipeline sort of justifying it so sorry for going on a bit but it's really around the adequacy of the reinvestment as you saw it in balancing that with the earnings flow through and then I have one follow up.

Kevin Grundy: I have one follow-up.

I have one follow-up.

Michael Hsu: Yeah, Kevin, I'm really glad you raised that. You know, that is one area we've got to really focus on, and if there's one part of the quarter that we need to improve on, is our share results, and we're a little bit behind what our expectations are. You know, part of that is related toward leading price or, you know, being first mover on price in a lot of our markets and categories. And so we were, in some ways, expecting, you know, some share impact due to that. However, it's also a big reason why we wanted to drive this reinvestment here to shore up our share positions and make sure we're healthy for the long term.

Yes, Kevin I'm really glad you raised that.

That is one area, where we've got to really focus on and if there is one part of the quarter that we need to improve on is our share results and we're little bit behind what our expectations are part of that is related toward leading price or or being first mover on price and a lot of a lot of our markets and categories and so we were in some ways expecting.

Some share impact due to that however, it's also a big reason why we wanted to drive this reinvestment here to shore up our share positions and make sure were healthy for the long term.

Michael Hsu: You know, I think, you know, we laid out in our KC Strategy 2022, that we're gonna deliver a balanced value creation plan, and we think that this, you know, is an example of that.

You know, I think, you know, we laid out in our KC Strategy 2022, that we're gonna deliver a balanced value creation plan, and we think that this, you know, is an example of that.

You know I think.

We laid out our KC strategy 2022 that we're going to deliver a balanced value creation plan and we think that this.

You know is an example of that.

All right.

Kevin Grundy: All right. Fair enough. I can leave that, I guess, but and then separately, you guys, of course,

Yes.

Yes of course.

Okay.

Yes.

Q2 2019 Earnings Call

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