Kimberly-Clark Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2022

Key Takeaways

  • Kimberly-Clark delivered 9% organic sales growth in Q2 and raised its full-year organic sales outlook to 5–7%, citing robust gains across all segments.
  • The company now expects an additional $300 million of input cost inflation in 2022 (totaling $1.4–1.6 billion), pressuring margins despite prior assumptions.
  • Management has implemented further pricing actions—including mid-single-digit increases in North America and double-digit in Latin America—and anticipates modest volume impacts this year.
  • Kimberly-Clark’s FOREST cost-savings program is set to accelerate in H2, with over $200 million of productivity gains expected to help offset inflation.
  • Professional (KCP) margins were down in Q2 due to COVID-related shifts (e.g., office occupancy) and timing of price increases, but executives expect sequential margin recovery as pricing and cost initiatives take hold.
AI Generated. May Contain Errors.
Earnings Conference Call
Kimberly-Clark Q2 2022
00:00 / 00:00

There are 12 speakers on the call.

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 line is in a listen only mode. It is now my pleasure to introduce today's first presenter, Taryn Miller. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to Kimberly Clark's 2nd quarter earnings conference call. With me today are Mike Hsu, Our Chairman and CEO and Nelson Urdineta, our CFO. Earlier this morning, we issued our earnings news release and published prepared remarks From Mike and Nelson, the PUT summarized our 2nd quarter results and 2022 outlook. Both documents are available in the Investors section of our website.

Speaker 1

In just a moment, Mike will share opening comments and then we'll take your questions. During this call, we may make forward looking statements. Please see the Risk Factors section of our latest annual report on Form 10 ks and the Q2 10 Q for further discussion of forward looking statements. We may also refer to adjusted results and outlook. Both exclude certain items described in this morning's news release.

Speaker 1

The release has further information about these adjustments and reconciliations to comparable GAAP financial measures. Now, I'll turn the call over to Mike.

Speaker 2

Okay. Thank you, Taryn. Good morning, everyone. I'm proud of our team's execution as we closed our first half with 9% organic sales growth in the 2nd quarter. We delivered robust gains in all segments.

Speaker 2

Our growth strategy is working and our teams are executing with excellence And what continues to be a volatile operating environment. Clearly, our results reflect this ongoing volatility. For the year, we're now anticipating $300,000,000 of additional input cost inflation. We remain committed to recovering and eventually expanding our margins And thus we've taken further action to realize additional pricing and cost savings to mitigate these headwinds. We continue to expect pricing and cost savings to fully offset the effects of inflation over time.

Speaker 2

Based on the strength of our top line, we're raising our full year organic sales outlook to increase 5% to 7%. We're maintaining our adjusted EPS guidance. However, based on current conditions, including our updated input cost outlook, as we navigate near term headwinds. Based on the pace and breadth of our pricing actions, we anticipate some volume impact over the balance of the year. Still, we're encouraged by the overall health of our categories and our brands.

Speaker 2

Our brands remain essential. We also know consumers are seeking greater value and will continue to sharpen our offering to enhance our market position. We remain committed to delivering balanced and sustainable growth. In the near term, we're taking necessary action to recover margins. We're also continuing to invest in our brands to enable us to grow sustainably now and for the long term.

Speaker 2

Now we'd like to address your questions.

Operator

Thank you. At this time, we will open the floor for questions. Our first question will come from Dara Mohsenian with Morgan Stanley. Your line is now open.

Speaker 2

Good Good morning, Dara.

Speaker 3

Hi, Dara. Hi, guys. Good morning.

Speaker 4

So, first just a couple

Speaker 3

of clarity questions. The increase in your full year organic sales growth guidance for 2022, is that driven by higher pricing or higher volume assumption? And then the second with the $300,000,000 in higher cost pressures now expected for the full year, You obviously mentioned a combination of pricing and cost savings to help offset that. Can you just be a bit more specific if you're planning additional price increases Specifically in the back half of the year, does that offset a good amount of the cost pressures? How should we sort of think about the pricing outlook changing in response To the cost outlook specifically in the back half of the year?

Speaker 2

Yes. Thanks, Dara. I'll start and maybe Nelson can provide some additional But overall, I think the organic outlook and the increase in the outlook reflects both volume and price. Overall, we feel like our pricing execution is going very well. We are driving the realization.

Speaker 2

You can see it in the numbers. But The second part of it is also the volume is holding up a little bit better than we originally planned. And I think that reflects, 1, what we said before, which resilience in the consumer overall, but also the strength of our brands. And we feel really great about the commercial execution We have around the world and that includes launches of innovation, improvements in product quality, our digital marketing programs, I think the execution we're driving at shelf. And so overall, that's still working despite the necessity for us To price our products to recover the costs and the margins.

Speaker 2

So overall, I'd say it's a pretty good balance of both volume and price On the organic outlook. And then on the cost front, yes, we're going to need it we have taken additional pricing actions That's globally. And we've taken a few actions since the beginning of the year. Actually, we announced another action in North America just last week. And so we continue to execute.

Speaker 2

And again, overall philosophically, I've said in the past, Dara, that We expect pricing to generally offset the effects of inflation over time. It gets tougher as the increase Come toward the middle or end of the year to kind of catch up to it. But again, we are expecting our teams to be able to offset inflation over the long term.

Speaker 5

Yes. Great.

Speaker 6

Absolutely. And I would add there are a couple of things there as well. I mean, one, yes, as Mike said, I mean, pricing is one of the key levers as we're Seeking to offset the pricing pressures that we're having, but also we got to keep in mind our cost savings The forest program, which will accelerate as we go into the second half. So the combination of those 2, will help us offset So as we exit the year that bid.

Speaker 3

Okay, that's helpful. And then maybe taking a step back and thinking about the broader pricing environment in general Geographically, first just in the U. S, there's obviously been some very public margin pressures that are Playing out at some of your larger retailer partners, there's worries about consumer pressure points and macros. You mentioned internally the historical pricing is going well. The volume elasticity has been limited.

Speaker 3

But have you seen any change in retailers' receptivity in the U. S. To pricing, given some of the dynamics I mentioned earlier? Does that sort of require a more judicious approach to pricing on your part in the U. S.

Speaker 3

Specifically? And then second, Just in some of your key emerging markets, maybe you can give us an update on consumer demand elasticity there to higher pricing and what you're seeing from a competitive standpoint?

Speaker 2

Yes. Great questions, Dara. A couple of things and you and I have talked about this in the past. I'd say that The retailer behavior is I know there's a lot being said out there. I find it to be consistent with what it's been historically over my 30 years Of working in this industry.

Speaker 2

And I think it starts with the fact that I think we've learned over time, our interests are generally aligned. I mean, and what do I mean by that? And one is, we're both after the long term growth of our categories, right? We jointly run these categories together. For them, it's in their store and for us, it is our business overall, but we're after kind of long term sustainable growth And that's one big thing.

Speaker 2

2nd big thing we're after is delivering consumers a great value. And that comes in many different ways. In some ways that comes With solid price points that reflect the value consumers are seeking. In a lot of ways, especially in our categories, it reflects It means the right kind of innovation and product quality, that delivers to consumers The benefits that they're seeking. And so I think with those two foundational points, we are sensitive to The pricing, but we also do both I'd say on both sides understand that we need to be able to profitably grow for the long term.

Speaker 2

And so again, we're sensitive to the pressure that's out there. We read the similar news reports. We've had the discussions with our customers and we have been taking price, but we are doing it, I would say thoughtfully And planfully. So maybe that's part 1. And then on the D and E question, yes, I think overall price The pricing and volume strength really reflects the consumer resilience and the essential nature of our categories overall.

Speaker 2

I would say, Dara, that Consumers appear to be somewhat more resilient in developed markets. Our performance High single, low double digit growth across all of our developed markets, multiple share point growth, multi point share growth in most of our developed markets. I think we have seen some price lagging in D and E from competitors. And so our shares have softened a bit in D and E. And While we have been driving price, we recognize that we've advanced pricing maybe further and faster than some of the competition.

Speaker 2

So we're going to have to continue to monitor that The other thing that we're seeing a little bit more in D and E than we are in developed markets is a bit more trade down. I wouldn't say significantly more, but there is a difference there. And I think I've talked about this in past calls. In Latin America, we have a leading the leading value offering and the leading premium offering. And we're really glad we have the breadth That scope because that allows us to pivot our business appropriately when the consumers looking for that.

Speaker 2

So overall, we feel good about where we stand. We are watching price gaps in D and E a little bit in North America as well and we're sensitive to that.

Speaker 3

Great. Thanks guys.

Speaker 2

Appreciate it. Thank you, Dara.

Operator

Thank you. Our next question will come From Lauren Lieberman with Barclays. Your line is now open.

Speaker 2

Good morning, Lauren.

Speaker 7

Great. Thanks. Hi. Thanks so much. So just following actually on that thread around some sensitivity and watching for trade down and the mention of the portfolio breadth you have in Latin America.

Speaker 7

I was curious on what if anything you are doing in terms of shelf sets, Merchandising of the more value or mid tier products in the portfolio versus the premium end. Are there things that you are doing proactively rather than reactively to shift the mix of what you are supporting? And if not, why not? Because your categories do over time tend to feature on the higher end of the list of those that can see trade down and be more sensitive not in terms of overall consumption, but the rather what is being consumed? Thanks.

Speaker 2

Yes. Hey, look, yes, great point, Lauren. And at this point, we have discussed this in the past and I'd say, yes, particularly in D and E, you're seeing Student body shift to the left, right? And we shifted to the right just a few years ago. And I think I talked a couple of years ago, we were Highly developed value business and very small premium business and this is made about 3 or 4 years ago we were down and there was A big shift to premiumize at that point I think the market was receptive to it.

Speaker 2

So we made a lot of progress, all the things you talk about, the appropriate pack counts, The improvements in product quality, the merchandising and everything else. And so we made a huge shift in terms of our premium mix in a market like Brazil. That said, 2 years ago when the economy started softening, we started shifting back and we're glad we And that yielded us last year the leading position in both value and the leading position in premium. We feel great about that. And so and those are all the tactics That play out for us, not just in developing and emerging markets, but we do that in developed markets as well.

Speaker 2

And you're absolutely right. And we think again our broad portfolio of premium through value offering enables us to flex with demand. And as I point out, in the near term, we are prioritizing margin recovery and so our pricing is advanced. And so we are Watching the price gaps and we'll make the appropriate adjustments as we go through the year.

Speaker 7

Okay, great. And then on the cost savings, As Nelson, you mentioned, there's significant it looks like there'll be more for savings in the back half of the year. And just knowing that not just for Kimberly Clark, But for many of your peers in the industry, getting it productivity has been pretty tough in this environment, whether it's asking suppliers for better pricing, whether it's getting into the plants and working on putting in place new cost savings mechanisms or projects. So Frankly, degree of confidence in that acceleration, what is it that you expect to change that should allow for you to See greater force savings in the back half of the year.

Speaker 6

Sure, Lauren. So I'd start by Reminding us that force isn't necessarily a straight line. I mean it tends to build throughout the year and that's kind of our historical trend. In particular for H1 of this year, I mean, we continue to drive solid savings from our productivity initiatives on a gross basis. But these savings were somewhat offset by some of the cost headwinds that we've been facing, particularly in North America.

Speaker 6

As we've been investing heavily Over the last couple of quarters to improve overall service levels, which we're pretty Pleased that we're getting back to more normal levels as we exited Q2. So having said that, as we go into the second half, I'd say a couple of things. We're going to have some of these incremental expenses behind us or largely behind us. And then secondly, we're going to have The pipeline, which is pretty strong at this stage, come through. So overall, that gives us the confidence of seeing Around a little over $200,000,000 of delivery in force as we go into the second half.

Speaker 7

Okay, great. Thanks so much. I'll pass it on.

Speaker 5

Thanks, Lauren.

Operator

Thank you. Our next question will come from Kevin Grundy with Jefferies. Your line is now open.

Speaker 5

Good morning, Kevin. Great. Thanks.

Speaker 8

Good morning, everyone. First one for Nelson, just kind of taking a step back, I would be interested to get your early impressions, and perhaps maybe your 2 to 3 biggest priorities Over the course of the year to ensure a smooth transition, Maria was of course very well thought of, but a fresh perspective Can always bring to bear some new ideas and potentially some opportunities for shareholders. So I think your early observations would be helpful. And then I'd To pivot to the cost outlook.

Speaker 6

Sure. So Kevin, I mean overall, a few things I would highlight. I mean, I'm pretty impressed By the team and the resilience of the team and the focus in their priorities and the strategic imperatives, I've been able to see that as I've been getting out there in the field and working through all the difficulties and challenges that we've been seeing. I think It's a very resilient organization and there's very strong capability and muscle that's been built, which has allowed us to deliver the kind of results we're delivering as of first half of the year in Q2. Secondly, I mean, one of my key priorities working with the team is to continue to push forward on the margin Recovery, I mean this is something that is critical for us and we're very focused on it from all angles and we're going to do it in a smart way.

Speaker 6

We will continue to invest in the business. That is something that we've done in the first half of the year and we've got to keep Doing that because that's what will allow us to drive forward a sustainable profitable growth as we progress. So overall, I'd say those are my key priorities at this moment. In terms of capital allocation and other elements, I don't have A different opinion versus where we're at today. I believe those are the right buckets where I stand today.

Speaker 6

And as we progress over the plans what we've got for the future years, I mean, I'll come we will come back with what we've got.

Speaker 8

Got it. Thanks, Nelson. The quick follow-up is maybe just sort of go through Your commodity exposures around energy, packaging, etcetera, walk through your updated assumptions for us, what's driving

Speaker 5

the worst

Speaker 8

extraordinary environment, so it's not necessarily critique as much as sort of an observation just in terms of maybe a greater level of conservatism to offset What continues to be a volatile environment? So kind of 2 parts there on the guidance. I'll pass it on after that. Thank you.

Speaker 2

Sure. So first, I

Speaker 6

mean to cover the to give you a walk through the commodity update that we've got right now. And So as we pointed out in the remarks, I mean, we are calling now for the year a range of $1,400,000,000 to 1.6 The midpoint is $1,500,000,000 This is an increase of $300,000,000 And what we're seeing is really, first On fiber, fiber we're hitting all time highs in Ute as we exited June. We saw sequential growth in prices for Ute through the month of June hit historical high in June. We're also seeing in other pulp grades elevated prices and That's one of the key drivers behind what we're calling. Secondly, it's energy.

Speaker 6

If we think about energy And natural gas in particular, we've seen in Europe a 10x versus year ago in prices. And in our Western European, U. K. Business, which has a sizable tissue business, it is energy intensive and that's bearing in kind of what we're projecting At this stage. And then the other one is distribution costs.

Speaker 6

Overall, we're seeing distribution costs also increase. And I'd say this is more largely on the international side of the house and this is reflecting and bearing on what we're showing in terms of Our expectations at the midpoint of our guidance for costs. A green shoot or a benefit We're beginning to see is in resins. I mean that's probably the only big element within our cost bucket that we're beginning to see prices to come down on a sequential basis. And again, this is the one I'd highlight as I look at it.

Speaker 6

Overall, I'd like to I It's also important to highlight that in a 2 year stack, we're staring at a $3,000,000,000 overall incremental cost, which is North of 1500 basis points of margin that we're taking a hit as a business in Atlantic in 24 months. So It's quite sizable that we're managing through. And then that takes me to your point around conservatism on the guidance. The first thing is we Overall, in the bottom line on the EPS, we've made our best estimate based on what we're seeing today And what's playing out in the market. We've also taken into account all of the cost saving initiatives as I just talked about before force And that's embedded in what we have here.

Speaker 6

And then lastly, it's also our pricing. We were very encouraged by how our pricing came through. Our Teams did pretty well in terms of executing the pricing in the Q2, which sequentially was much better than what we had in the Q1. And that's the other element that would bear in how we would see the second half playing out.

Speaker 5

I'll just

Speaker 2

pipe in there Kevin. I'd say on the guide and it's tougher since Nelson's still brand new. He doesn't have a calibration of how we got added or What kind of relative, but I'd probably say for the rest of our outlook, We feel confident that we're in that range. It is at the lower end of the range at this point. And we feel that it's more likely to be in the lower end of the range.

Speaker 2

I would say there's probably there's 2 probably big puts and takes though. On the one end, there's 1 wallet card which is additional input cost And so we're calling it based on what the input cost that Nelson just kind of talked about, right? So that's one big thing. And so that could shift up or down, Right. And then the other wildcard probably is the volume side.

Speaker 2

And again, I think we I've said that the volumes have come in slightly better than our original expectation given all the pricing that we've taken. We could do a touch better in the second half, but that remains to be seen. There's been a lot going on in our volumes with likely in a winter storm in North America, COVID in and out, lockdown, all that. And so it's a little bit tough to call. But again, I'd We feel like we're calling it down the middle here and we feel confident we're in the range.

Speaker 5

Okay. Very good. Thanks for all the

Speaker 8

color guys. I appreciate it. Best of luck.

Speaker 2

Thanks Kevin. Thank you.

Operator

Thank you. Our next question will come from Chris Carey with Wells Fargo Securities. Your line is now open.

Speaker 2

Hey, Chris. Hi, Chris.

Speaker 9

Hi, good morning, everyone. So, Nelson, you commented on margins being a key Focus of yours going forward. In KCP, we saw some sequential deterioration there, Again, despite the top line, I was wondering if you can give some insights on to what you think is needed Based on your early analysis of the business there to return to historically what is more of a mid to high teens margins or whether that target even looks realistic anymore?

Speaker 6

Sure, Chris. And yes, absolutely. Our targets and the way I've been looking at it, our mid long term target of margins for KCP remains unchanged at the high I mean we are aiming for that and we will get back. The plans are in place. I think it's important to recall that Our KCP business has been the most impacted by COVID, I mean, including the reduced travel, the shift to remote hybrid work And that's been bearing on the business.

Speaker 6

The business has continued to recover with high single digit top line growth and washroom sales are already over 90% Of pre pandemic levels. In fact, in North America, it's even at the very high end. We're almost there in full time full recovery. However, margins as you said, I mean did slide for Q2 a bit, but this was really a combination of 2 factors. 1, We had the acceleration in commodities, lots of it impacting tissue, which hit us in Q2.

Speaker 6

And then it's the timing of the pricing. I mean we enacted pricing in Europe, North America went into effect in May, late May. And I think it's important to highlight that on a sequential basis within the quarter, we actually saw an acceleration in gross margins in June. So, this is really pointing to as the pricing is landing, we're seeing that the margins are recovering already in the latter part quarter and we expect this to continue as we head into Q3 and Q4. Also as we go into the second half of the year And based on our current assumptions and what we know, we do expect the impact from commodities to tone down in the second of the year versus what we saw in the first half of the year, even with the incremental costs that we've put in place.

Speaker 6

The other bid is also important. I talked about it in productivity. The team has been focused very much in terms of rightsizing, managing the business And doing it the right way, there is a strong pipeline of productivity that should be coming through. And again, I remain Encouraged by what the team is doing and our commitment to getting the business back to the high teens and where it's been in the past.

Speaker 2

Yes. I'll just tag on there, Chris. KCP is a great business for us, and I believe it remains a great growth for us overall. We are cycling demand volatility in the near term, but that professional market globally is big, it's fragmented and it's got a lot of underserved segments. There's been a lot of noise in our demand because we got a couple of things going on.

Speaker 2

Washroom is recovering, but because of COVID spikes and everything else, we're lapping Big increases in PPE and gloves in the year ago period and also our other parts of our safety business and wipers, right? So there's a lot of things going on. But overall, we still think there's a great growth opportunity. I do think if you look at offices where we are a little have a bit more exposure, That business is probably not going to come all the way back to where it is. I don't think everybody's going back to work full time 100% in office.

Speaker 2

And so that's going to change, but our attitude is, well, that's the base and we got to grow from there. And there's still a lot of opportunities for us to innovate And to serve our end users in a better way.

Speaker 9

That's very helpful. I just have a couple of questions on And I'll jump back in. Just on in the Personal Care business, it's the Q1 in a while, Maybe 5 years excluding the Texas storms where volumes have gone negative. But it looks to be happening all almost entirely In Eastern Europe, within the overall Global Personal Care business, can you just comment on what's going on In that market specifically and whether you think that headwind could persist here? And then just secondly on the cost side in Western Europe, Nelson mentioned that your tissue businesses being very energy intensive, comment well taken.

Speaker 9

Just with natural gas availability, looking like it could get even worse given some news this week. Can you maybe just talk about How you're framing or preparing for potential risk of force majeure because of lack of energy or paying any surcharges to Your low availability of natural gas, just these types of situations seem to be coming ahead. So, just curious your thoughts there. So thanks for those.

Speaker 2

Hey, Chris. Yes, maybe I'll start on the Personal Care and then maybe Nelson will cover a little bit On the energy and supply side. But overall, D and E, again, very strong price execution in the quarter, 8% organic. I think we are paying a little bit closer attention to the volumes because they are a little softer and our market shares across D and E. The majority or the bulk of the volume impact in D and E was Eastern Europe.

Speaker 2

And really, Chris, It's as straightforward as it's the effects of the war and the impact on Russia and the impact on Ukraine. And so we are still operating Well, under those circumstances, but as you can imagine, the circumstances are pretty challenging. We remain operational across the region, Including in Ukraine and building our business back in Ukraine, our organic is down Low double digits has been curtailed operations in Russia. And we're actively building the business back in Ukraine, but we are actively and proactively compliant with all the sanction activity and that obviously takes a And with all the sanction activity and that obviously takes has a bit of a volume impact on the business. So I don't know if that Chris addresses kind of what you're asking on On the volume side?

Speaker 9

Yes. That was very helpful. Thanks.

Speaker 6

Okay. Right. And then to address the energy question, Chris, I mean, couple of things. I mean, one, as we all know, the energy situation in Europe is pretty dynamic. And yes, the whole natural gas situation is And we're staying on top and developing contingency plans as we speak and the team is really working thoroughly through it.

Speaker 6

We don't have details to share today, but our teams are really on it. And it is a priority for us. I will highlight, I mean, in Germany, we only have one factory. So again, it's not like we have a concentrated risk just in one of the Key markets where this could be one of the biggest challenges at this point. So Yes.

Speaker 2

The thing I'll tack on there though, Chris, In Western Europe, again, the operating conditions remain very challenging and volatile. I would say that Our pricing and the volume and the organic was up low double digits with price up double digits and volume up high single digits. So again, that's a developed market. I think the is proven to be resilient. Our teams are doing a terrific job executing and what you're I'm sure you're familiar with being a very Challenging environment.

Speaker 2

So again, we're paying close attention and the team is doing a very good job running in a tough environment.

Speaker 9

Okay. Thanks so much.

Operator

Thank you. Our next question will come from Steve Powers with Deutsche Bank. Your line is now open.

Speaker 2

Hey, Steve. Hi, Steve.

Speaker 5

Hey, sorry. Thanks. I was on mute there. Hey, good morning. So, I

Speaker 4

guess, just maybe to build

Speaker 5

a little bit on the costs, just to clean it up a little bit. So, Given where we are in the year, natural timing lies in the supply chain, your hedge positions, I guess My inclination is to say that your line of sight to the $1,400,000,000 to $1,600,000,000 and higher cost is now Fairly well locked in. Is that the case or is it more that You still see realistic risk that 1.4, 1.6, it could still shift around if we saw further cost volatility? And if so, is it the energy bucket that's the biggest swing factor? Or is it equal across energy and pulp and distribution?

Speaker 2

Yes. I might say locked in is an interesting term because some of our biggest commodities is not a traded market anymore. So That's the issue. Right. So yes,

Speaker 6

the thing there is there is not I mean some of our key commodities are not as liquid as we'd have The CME. So the reality is not all of this is locked in today. I think one of the important things to highlight is right now based We're at and at the $1,500,000,000 midpoint, our forecast would call for $875,000,000 already hit us in the first And then $625,000,000 would hit us in the second half based on what we know today, Steve. Again, there's moving pieces. I mean, we do expect fiber to remain elevated based on what's out there and what's public.

Speaker 6

You can see it in the indices. And we would expect some easing as we go into the back half Q4 of the year on the fiber side. That's what we're projecting at this moment. But again, It's a moving situation overall.

Speaker 2

Okay.

Speaker 5

And so just so you're as you Well, I guess that means that as your contract my impression is you contract for the next year on things like Pulp and fiber, disproportionately, there's a contracting season. So you're at this point, you're hoping for expecting some relief into that contracting season because assuming that current prices are well above where you contracted in 2021.

Speaker 1

Yes. Steven, maybe I'll jump in here. We don't we do we have shared before that we have Negotiated material prices, we don't reveal the specifics or disclose the specifics of those contracts. I think what's Fair to say, reasonable to assume in the cost outlook, building on what Nelson said is that, again, based on our Current assumptions, the fiber prices, we expect to remain elevated in Q3 before easing somewhat in the later Q4, I think energy and distribution, particularly international distribution are the 2 that we're seeing some of the more volatility and we'll look through the balance of the year. And it sounds like

Speaker 5

Yes, that's helpful color. Thank you. If I can just pivot on a different topic. We've talked These are not already at the start about consumers having or being expected to have a sharper focus on value going forward. And I guess, you talked about how that manifests in your categories and how you're pivoting to meet the consumer Intersection of enhanced value.

Speaker 5

I guess just to get underneath that a bit more, do you see that more in Consumer Tissue versus Personal Care? And As you're moving in that direction and theoretically competitors are moving in that direction, how do you balance the desire to kind of Go where the puck is going versus pushing so hard on the value side of things that you actually Entice trade down and kind of create a problem that you might not have had if you had if you and the whole industry hadn't moved in that direction. Just How you think about that balance of going where the consumer is going, but not necessarily enticing them to go there?

Speaker 2

Right. Great, great push, Steve. I mean, That's exactly the issue. And I think if you and when you listen to the earnings call from some of our big customers, I mean, I think they'll say the same thing, which There is a segment of consumers, let's say, in a developed market like the U. S.

Speaker 2

That is trading down, but it's not all consumers. There may be a few more consumers and that are more price In a developing market where there is not the government subsidy in a tough time like COVID in, let's say, in Brazil as much There was in the U. S. So consumers are a little more affected there, but I think that's right. We do see it across personal care and tissue.

Speaker 2

Typically, in the U. S, in a market like the U. S, what you'll see is maybe the trade down means maybe not trading the brand out, But moving to a smaller count pack, right, to make it more affordable in the short term. And so and Lauren mentioned it earlier. So there's a host of moves that we make in partnership with our customers to kind of Shift and merchandise what's appropriate for the consumer.

Speaker 2

But again, I think we also want to be very cognizant that we don't want to move the whole market And there are plenty of consumers that I'd say despite some of the Impact on the of the economy, the affordability in our categories remains strong. And again, they're still looking to trade up. And we're seeing the growth. It's kind of the old barbell description. We're seeing great growth on the high end as well.

Speaker 2

And we're continuing to innovate and promote our brands and advertise our brands on the high end. And that's what's been driving China. I'd say, Again, super strong performance on mix, double digit organic growth in the quarter against a category that's down multiple share point growth On diapers, and that's all driven by value added consumer benefits. We've really upgraded our line over the last couple of years And feel great about the technology that we have in all of our key markets. And I think that's reflected in the momentum that we're seeing, let's say, in diapers.

Speaker 2

When you look at all developed markets, I mean, we have multi point share gains in our biggest markets. U. S. Was up Huggies was up 3 points in the U. S.

Speaker 2

In the quarter, China was up almost 2 points, South Korea for us, which is our 2nd largest market was up 4 share points in the quarter. So again, I think we're skating to as you say, skating to where the puck is, we want to be able to meet Consumer where they need us to be and some are still looking for better quality and premiumization and others are looking for us to extend them a better value and we're doing both.

Speaker 5

Great. Thank you very much.

Speaker 2

All right. Thank you, Steve.

Operator

Thank you. Our next question will come from Jason English with Goldman Sachs. Your line is now open.

Speaker 10

Hey, Jason. Hi, Jason. Good morning. Good morning. Thanks for slotting me in.

Speaker 10

Congrats on that market share momentum that you just referenced in Personal Care.

Speaker 2

Jason, I did want to note though, it's a little more slug. I mean, we're under our goal because our goal is to be growing share in more than half of our markets. And last couple of years, we're up in thirds of our markets. And so we're a little bit under half, right, just a couple of points under 50. And so we're watching it closely.

Speaker 2

Well, we're up in developed. As I mentioned, we're seeing some pricing lagging across D and E and so we're our price gaps have widened a little bit. And so We're keeping close attention to that.

Speaker 10

No, I appreciate that flag. Thank you. And So you're actually lagging a little bit on that side of the business. It certainly seems like you're lagging on the pro business too, which I want to come back to. I know you reference Some choppiness in terms of like COVID comps, but even comparing to 2019, I think your volume is down now in the 20s versus high teens before.

Speaker 10

So we're kind of falling away and eroding versus 2019. I appreciate the offices are component, but it seems like office occupancy It's gotten better not worse. Why is your volume sequentially getting worse? What's can you help us understand what's happening within that business?

Speaker 2

Yes. A couple of things going on, Matt. One, I would say professional demand overall is improving. And so for the quarter, and I don't know if you saw the facts, but the organic was up high single digits overall. North America was up 8% and our D and E was up 6%.

Speaker 2

The washroom is recovering. I would say though there's a big component Pricing in that. So washroom sales were up 30% in the quarter. And if you add on a dollar basis at 98% years in professional. So it reflects significant pricing, but the volume is still soft.

Speaker 2

And again, I think As I would say, I don't think all that office demand is coming back in a minute. But that said, that's where we're that's where our mix has been And we've got to go from there. And so we have a great team. We have great innovation. We have strong momentum And our share is up across the washroom business.

Speaker 2

We have a Icon Dispenser, which is a home run with end users. We have an improved towel offering. And so we're seeing strong momentum on the business. But I think you're right. I think we've got to build our business back.

Speaker 2

The other thing that's amplifying maybe The numbers that you're looking at Jason is we are cycling strong pandemic related volume that was in wipers and PPE. I mean, and Glauz was a very significant seller for us in 2020 2021, And that's gone the other way this year. And so we have other effects going on as well.

Speaker 10

For sure, for sure, which is why I'm trying just to like look at 2019 and look at Volume of that, because I appreciate the noise. And back to your comment on some areas where you've got some price gaps that you're trying to manage. Are we at a point where you would expect to start to maybe give some of the pricing back to get a little more promotional juice into the market To try to manage those price gaps or is it not meaningful enough to have to start to do some of those activities?

Speaker 2

I wouldn't say that yet. I mean, again, overall, the way I'll say it, Jason, is I'm prioritizing and Nelson is prioritizing margin recovery in the And what I will tell the teams internally the conversation is like I'm not after renting hollow share, right. And so I don't really want to jerk our teams back and forth. We're trying to deliver balanced and sustainable growth Long term, we have to get pricing to improve the margins and restore our margins. That's part 1.

Speaker 2

We want to grow our shares over the long term sustainably over a long term. And so we're going to monitor that. But Again, I'm not ready to shift back and forth quite yet. Yes, makes sense. Thanks a lot.

Speaker 2

I'll pass it on. Okay. Thanks, Jason. Thanks.

Operator

Thank you. Our next question will come from Andrea Teixeira with JPMorgan. Your line is now open.

Speaker 2

Good morning, Andrea. Hi, Andrea.

Speaker 11

Good morning. Thank you. So first, one for Mike on pricing, and I know we obviously spend a lot of Time on this call on this, but can you provide the magnitude of the new pricing announced in the U. S. Last week?

Speaker 11

And if you embedded also more pricing in D and E, or you took a pause now given the logistics is higher there Or even perhaps in Western Europe where the natural gas prices have been higher. And one for Nelson and Terry, A clarification on the cost outlook. Are you using mostly the contracted prices that Carrie mentioned and then what's floating is based on spot prices? Because I think She also spoke and Nelson spoke about potentially using some declines ahead on the forward curve. So just Making sure that we have the assumptions that we're working with.

Speaker 11

Thank you.

Speaker 2

Okay. I'll start on the pricing, Andrea. Yes. If you Track or go with the fact that we expect pricing to offset inflation over time. Obviously, we like to get as much of that as soon as possible.

Speaker 2

And so, if you looked over the course of the year, Some of the pricing or inflation impacts hit outside of the U. S. Earlier this year. And then more recently, there have been more impacts in the U. S.

Speaker 2

And I'd say our pricing around the world has kind of followed where the inflation has hit us around the world more directly. We did announce pricing in the U. S. Last week. It was typical for what we've done in prior rounds, which is about a mid single digit increase.

Speaker 2

And again, we're still in this early stages of execution on that. And then we've announced similar At different times throughout the year in the rest of our markets.

Speaker 11

Yes. Of similar magnitude, I'm assuming, or higher magnitude, I'm assuming. Our TAM was higher.

Speaker 2

Yes. I would say, yes, Latin America Generally, overall, we're up double digits on price and so significantly higher. That reflects what's going on in the local market there.

Speaker 11

Okay.

Speaker 6

Okay. And then on the question around what prices are we reflecting in terms of our outlook. I mean, We base it off the industry forecast, Andrea. I mean, that's the best view we've got for whatever we haven't covered. So that's there.

Speaker 6

I mean, and that's what we're seeing and what We will reflect in the forecast at this stage.

Speaker 11

And now so how much is it covered now? Would you say it's a 3rd is covered in contracted price Or how much is running? How much is saved?

Speaker 6

Andrea, we don't disclose that bid. So I We don't get into disclosing that.

Speaker 11

Right. And one last if I can on China. And sorry if I missed that. How much was the drag in the quarter for D and E? And what is with the reopening, how much has been improving or hasn't been That big you'll continue to be able to serve it given that you're more spread.

Speaker 11

Well, I'm not sure. I'm

Speaker 2

not sure if I'm understanding the question correctly, but I'm saying I would say China was not a drag, it was a star in the quarter. It was up overall double digits in the quarter and that was based on Great diaper technology, great digital execution. Our share was up a couple of points. Organic up in the mid teens and that's against the backdrop of a category that's been down high single digits over the last couple of years. And that what's really driving it is robust Balance of volume, mix and price.

Speaker 2

And so we feel really great about our China business. Team is doing an excellent job executing in a tough market. We were not impacted as much by the COVID lockdowns. I mean everybody was impacted, We have a very locally agile team that develop backup options for supply. Incidentally, our manufacturing operations We're not in locations that were locked down, and so that may have been a little bit different for us than for others.

Speaker 2

But again, we feel great about our China performance in the quarter.

Speaker 11

Yes. Congrats to the team. Thank you. I'll pass it on.

Speaker 2

Thanks, Andrea.

Operator

Thank you. Our next question will come from Peter Grom with UBS, your line is now open.

Speaker 5

Hey, Peter. Hey, good morning, everyone.

Speaker 4

So, yes, I just kind of wanted to understand how we should think about the phasing of margin in the back half of the year or specifically how much of that remaining 625,000,000 Should hit in 3Q versus 4Q. And then I guess I just I appreciate the commentary around margin improvement, but previously there seemed to be some sort of expectation that we could Potentially get to margin expansion at some point in the back half of the year. And I know it will take time to fully recover margin. But based on where things stand And today, when do you expect to see kind of margin expansion? Thanks.

Speaker 2

Maybe I'll start Peter. 1, I would say, yes, right now we're I still remain confident that we'll be able to restore our margins and eventually expand our margins over time. I think I said that in January as well, but that was before we had additional, I don't even know, dollars 800,000,000 of additional inflation in our forecast. And so again and I think that my confidence is still high that we'll be able to expand margins over time, but I guess I think the timetable shifts a little bit because there's A bigger nut to crack on that front.

Speaker 6

Yes. And adding to that, I mean, Peter, a couple of things. 1, We did expand gross margins in Q2 by 40 basis points. I mean, we realized significant pricing already versus Q1. So we saw that sequential Improvement in Q2.

Speaker 6

And as we head into the back half and we don't give guidance on quarterly Margins, but we remain confident that based on what we know today, we will continue to expand margins. I mean, the plans are in place. As a reminder, we will continue to realize pricing and based on what we've got today and what we saw in Q2 that will play out in the second half. Secondly, we've got our forest cost savings, which will accelerate in the back half versus what we saw in the first half and that's a second component. Then as you said, there is a more subdued year over year impact of the commodities in the back half.

Speaker 6

So we'll see, as you mentioned, 625,000,000 which I'm not going to give the breakdown between Q3 and Q4, but we'll see that in the back half versus the 875 So that gives us the confidence based on what we see that we will see progressive margin improvement in the second half.

Speaker 2

Yes. And I feel like, Peter, that our teams made great progress On pricing and margin recovery, even it may not show up on the operating number, but for the quarter, Our pricing did offset inflation overall and I think that was strong progress. Now the additional work for us is, yes, the inflation forecast got bigger For the balance of the year and so we've got to solve that as well. But overall, we feel good about our progress. Know there's more work to do.

Speaker 2

We're still confident we'll be able to expand our margins over time. And then in addition, we all know commodities are going to revert And they always do. And when we do that, we're not going to rely on reversion for our margin expansion. But when it does do, it will accelerate our timeline.

Speaker 4

That's super helpful. And then I guess maybe following up on that, I wanted to ask about how we should think about Pricing and promotion should we actually reach a deflationary environment? And I know historically you've kind of held on to pricing as you don't typically price to peak inflation. But I just would be curious, just given the amount of pricing that's been taken over the past year, year and a half and kind of layering And that retail pressure that Darryl was alluding to earlier, I mean, what if anything do you think could be different this time around?

Speaker 2

Well, I think Peter the big thing is pricing promotion there's a lot of Going on, but one, you're using it to support the brands. And for me, typically, that would be to support great innovation that you're launching that iFind tends to grow the category a little bit more effectively. And what we're really after is overall category growth, and that's what the retailers are after as well. And So for me pricing and promotion is a component, not an end all. It's a component of an overall strategy or growth strategy That said, there are fixed costs in this industry and so volume does matter.

Speaker 2

And so there's a tactical application of that. But if you look at the market, I think the price the input cost levels are so high. While promotion is at, I would call it, a typical level, The depths are probably a little shallower than historically they've been and I think that's reflective of the cost environment that the industry is working in. I don't know if that really addresses what you're asking.

Speaker 4

No, that's helpful. I appreciate it. Thanks so much.

Speaker 2

Okay. Thanks, Peter. Thanks, Peter.

Operator

Thank you. There are no further questions at this time. I'll turn the call back over for closing remarks.

Speaker 1

Thank you. Great. Thank you, operator, and thank you everyone for joining us today on the call and this will conclude our call for our Q2

Speaker 7

earnings release.

Operator

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

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