Kimberly-Clark Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2022

Key Takeaways

  • Kimberly-Clark delivered 5% organic sales growth in Q3 2022, reflecting broad momentum across all segments.
  • Persistent inflation drove approximately $1.2 billion of input cost increases YTD, with pulp prices at record highs and ongoing volatility.
  • Decisive pricing actions and cost-savings initiatives enabled sequential expansion of gross and operating margins, with Q3 pricing fully offsetting inflation and FX headwinds.
  • The company maintained its full-year sales and earnings guidance, confident in its ability to restore margins over time.
  • Consumer demand remains resilient but shows bifurcation, as premium tiers hold up while value segments gain traction among budget-constrained households.
AI Generated. May Contain Errors.
Earnings Conference Call
Kimberly-Clark Q3 2022
00:00 / 00:00

There are 13 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 lines is in a listen only mode. At the conclusion of this morning's short remarks, we will open the floor for questions. At that time, instructions will be given As to the procedure to follow, if you would like to ask a question.

Operator

It is now my pleasure to introduce today's first presenter, Brian Ezell. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to Kimberly Clark's 3rd quarter earnings conference call. With me today are Mike Hsu, our Chairman and Chief Executive Officer and Nelson Ordinotta, our Chief Financial Officer. This morning, we issued our earnings news release and published prepared management remarks for Mike and Nelson that summarized our Q3 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 our latest 10 Q for further discussion of forward looking statements. We may also refer to adjusted results and outlook, both of which exclude certain items described in this morning's news release. The release has additional information about these adjustments and reconciliations to comparable GAAP financial measures.

Speaker 1

And now, I'll turn it over to Mike.

Speaker 2

All right. Thank you, Brian. Good morning, everyone. Our teams around the world continue to execute strongly in what remains a dynamic and challenging environment. I'm pleased with our continued organic sales growth momentum with 5% growth in the 3rd quarter, reflecting broad gains in all of our segments.

Speaker 2

Our 3rd quarter results also reflect ongoing volatility in the operating environment, which continue to pressure operating margin and earnings. Throughout the year, we've taken decisive action to offset persistent inflation with pricing and cost savings. We're making progress as those initiatives enable sequential expansion of gross and operating margins in the quarter. As we near the close of 2022, We're maintaining our sales and earnings outlook for the year. We continue to manage our business with discipline and remain confident we'll restore our margins over time.

Speaker 2

We're executing our growth strategy to elevate our categories and expand our markets by putting the consumers front and center. We'll continue to invest in innovation and our commercial programs to continually sharpen the value proposition of our brands. We're committed to delivering balanced and sustainable growth over the long term as we work to fulfill our purpose of better care for a better world. With that, we're ready to address your

Speaker 3

questions.

Operator

Thank you. At this time, we will open the floor for Questions will be taken in the order in which they are received. We'll take our first question from Lauren Lieberman with Barclays.

Speaker 4

Good morning, Lauren.

Speaker 5

Great. Thanks. Good morning.

Speaker 2

Hi, Lauren.

Speaker 5

Hey, I was hoping If we could just start out with an update on the input cost outlook. You've held the outlook for the year. There's 1 quarter to go. But just we see what we see it looks like pulp is kind of flattening out in terms of market data, but there are industry participants that Sort of said otherwise, we've gotten a lot of questions in the last few weeks about European energy prices, how that impacts your business. So Any color you can provide would be great.

Speaker 5

And also I know it's early, but looking into 2023 as well. Thanks.

Speaker 2

Yes. I'll start maybe and Nelson will give you his perspective. But overall, I'd say it's stabilizing, but at a high level and we're still experiencing some volatility. So I don't know if Nelson you want to give a Dexter?

Speaker 6

Sure. And Lauren, I mean a few things there. I mean, we've held our guidance for the full year in the $1,400,000,000 to 1,600,000,000 And it's important to note that through the 1st 9 months of the year, we've seen about $1,200,000,000 of these costs materialize. We did see sequential improvement in terms of the impact as we lapped last year's $1,000,000,000 out of the 1.5 in the second half of the year. So for the quarter, you would have seen a $360,000,000 commodity impact versus $470,000,000 in Q1 $405,000,000 in Q2.

Speaker 6

So the trend that we had talked about is playing out in Q3. Secondly, overall, we're not calling down because the reality is commodities remain elevated. The environment remains quite challenging and we're maneuvering through it. We've seen overall a few dynamics I'd like to highlight first on the pulp and fiber components. Prices remain pretty elevated.

Speaker 6

Eucalyptus is trading today at around $1500 that's an all time high. And we while the market is projecting for some easing at the end of this year, we have yet to see that play out. If we look at distribution costs, those remain challenging as well, especially on the international front. We have seen some Giving up prices on spot transportation in North America, but still that's not offsetting the overall challenges we're seeing on a global basis. So net net, we remain at the guidance that we had provided.

Speaker 6

And the messages I would say in terms of next year, Right now, it's too early for us to provide any guidance on 2023. We'd still have the full year to play out. But a few thoughts that I'd share. 1, we remain at historical highs in the whole commodity and cost structure. As a reminder, on a 2 year stack, we're $3,000,000,000 at the midpoint of our guidance today.

Speaker 6

And again, we have not seen any meaningful move versus our assumptions that we gave you back in July. Secondly, ForEx markets. We have seen and you see it in our in the deconstruction of our numbers. ForEx has become more volatile and challenging. And as a reminder, we have about a third of our profits coming from overseas.

Speaker 6

So that is something that we are taking into account in our outlook, but we will have to carefully watch as we think about next year. The underlying business environment remains volatile. As Mike said in his opening remarks, we're managing through it, but it's something that we will take into account. Again over the next few months as we prep up to give you guidance in January when we talk about Q4.

Speaker 2

Lauren, you may have gotten more than you bargained for on that question.

Speaker 5

No, it's great. I'll always take it. Thanks.

Speaker 2

All right. Thank you, Lauren.

Operator

We'll take our next question From Kevin Grundy of Jefferies.

Speaker 2

Hey, Kevin. Hey, Kevin.

Speaker 7

Good morning, guys. Question for me, just kind of zooming out a bit, Mike, just observations on kind of the elephant in the room, right? Observations on consumer demand and then elasticities. I guess, as we kind of look at quarter. Elasticities are a bit better in tissue and tau, worse in personal care, at least versus our model.

Speaker 7

So maybe just comment on what you're seeing from a consumer Any signs of consumer weakness that are at all worrisome to you? And then maybe you could just share your own thoughts on how the elasticities in the quarter came in relative to your own And thoughts as we look ahead. Thanks.

Speaker 2

Okay. Yes, Kevin, you have to guide me a little bit. I got a lot of thoughts here. So I'll give you a few things. I mean, one, I do want to emphasize, I feel very good about our strong execution of our strategy in what remains a very challenging dynamic environment.

Speaker 2

The continued organic momentum, I feel very good about. Obviously, we were a little soft in North American Personal Care, which I can come back But that was I think consumption was fine. It was more around some inventory changes, cycling, some supply constraints that we had last Sure. But overall, I think we had excellent execution of our pricing initiatives globally and great brand support through our commercial programs. I think it was in the prepared remarks, but high single digit across all developed markets, high single to double digit growth across all key D and E markets.

Speaker 2

And then North America, as you saw was down too because of some of the supply changes. On top of that, I'd say We feel very good about our share performance. We're up or even in about half our categories, a little bit more than that in Personal Care. And We were very fast on pricing. We've been very decisive on pricing all year.

Speaker 2

And so we knew we're going to give up a little share in the near term. And it does look like our share Performance is improving in the latest quarter and so we like where the trends are going and feel good about that. And then lastly, I'd say On the overall environment, we're navigating some shipment volatility, particularly in North America because of the Texas storm and everything that happened So that's kind of the overall on us. And then with regard to the consumer, I would say overall I feel like the consumer remains resilient, But we are increasingly seeing some bifurcation in demand. And I don't know if I like that word, but it's I'm Just trying to describe that we're seeing 2 different patterns emerge.

Speaker 2

And it's mostly along as you would expect Kevin socioeconomic lines. I mean certainly As we do the research, in a developed market like in North America, there's a broad swath of consumers that their savings are still higher than they were Years ago, they're employed and while they may be curtailing some big ticket purchases In our categories, which are essentials, we're not seeing a discernible change in behavior there. However, there's about 40% of the population in the U. S. That is More living paycheck to paycheck.

Speaker 2

I grew up in one of those households and I know what it's like. And so we are seeing some changes In consumption patterns, whether that is buying lower count packs or trading down a bit. But I would say, The important thing for us is to recognize that we're trying to serve our consumers and meet them where they need us and that's both sets of consumers. And so our premium business continues to grow and do well. And then we've got to pay we've got to make sure that we're addressing the right value having the right value proposition For the value more value oriented consumers.

Speaker 2

So there is some I would say bifurcation, we saw that happen About 3 years ago in a lot of markets in D and E, but we are seeing a little bit more of that in developed markets. I'll pause there. Kevin, anything else?

Speaker 7

No, I'm sure there's a number of other questions in the queue, Mike. That's really helpful. I'll pass it on. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 2

Hey, Chris. Hi, Chris.

Speaker 8

Hi, good morning. I just wanted to follow-up on that line of questioning around Volume specifically in personal care, but perhaps from a bit different angle. It's harder for us to see, but Just taking what you said about commodities and what we know about pricing, it doesn't look like you've experienced much notable volume deleverage gross margins this quarter from the weaker volumes, but certainly the operating margin performance was different. Can you just frame how Do you think weaker volumes to the extent this sustains are expected to impact your P and L as you go forward specifically between the gross and operating margin line. And just connected to that, how you would envision Addressing some of the weaker volume performance that we've seen whether in demand building or is it simply that your algorithm will change between Pricing and volume such that you're still achieving your overall organic sales growth objectives?

Speaker 2

Yes. Let me start and maybe Nelson could talk Give you some more of the texture, but I'll start with let me unpack the volume performance, particularly I think it's probably We probably got a question about North American Personal Care. And I'll say our North America team is doing a great job navigating What I would call excess volatility in demand, and really, I think we put this in the remarks, consumption remains stable. And so just for reference, Chris, in the Q3, our all outlet consumption, which I don't think you see, We were up 4 in diapers on consumption, 9 in adult care and 16 in fem care. And the real fact is and I mentioned The storm that occurred in Texas last January, February shut us down for a few weeks in early Q1 and created a lot of volatility in shipments.

Speaker 2

I'll give you a sense of the volatility. If I go back to Q4 of 2020 and then give you the quarters, just in diapers, Our consumption in December of 2020 was or the Q4 was plus 6, then we were minus 7 in the Q1, plus 7, plus 8, plus 18, plus 14 and then plus 6 last quarter. So you could see there's been a lot of movement. And I would say It took us a while to recover from our supply constraints. You would think that being down for a couple of weeks, there was more of the roll through it because We had material supply issues as well.

Speaker 2

And so we were on allocation for most of last year. And so what happened in this quarter is you can see our consumption We're stable, but we are cycling, I would say, elevated shipments in the year ago period as retailers were rebuilding their So overall, I feel very good about our offering across personal care as you can see by the I do expect some ongoing volatility in demand as we continue to work through various supply challenges and cycle some of the things that happened last year. And then in terms of the volume deleverage, yes, certainly, yes, we're fixed costs are a big component of our P and L, so we're close to that. Again, I would say, I'm not expecting in Personal Care North America ongoing volume issue. This is, I would say, more of a one timer.

Speaker 2

And then globally, we feel very good about our volume performance and our elasticities have held up to the model In general, D and E, our volumes were down high single digit. We think most of that was concentrated understandably in Eastern Europe, given the conditions And so overall, I think we're feeling good about our volume performance. But Nelson, you want to give us some more text?

Speaker 6

Sure. No, absolutely. So a couple of things

Speaker 1

there That I would highlight Chris.

Speaker 6

I mean, one, the pricing realization that we had in the quarter Really accelerated. So that's flowing through and you can see that in the margins which you rightfully point out. And that is something that we were talking about back in July based on the pricing actions that we had taken midway in the latter part of Q2 and also in Q3. So that's More than helping offset some of the deleverage that you would see on the overall business. Secondly, we begin to lap Some of the commodity increases from last year, not that commodities are deflating, but they begin to not be as high in terms of the impact year on year.

Speaker 6

And those 2 are playing out for us to have for the first time in several quarters a net pricing favorable realization net of commodities and ForEx. That's one thing. Secondly, if you look at our segments, the only segment where we saw a drop in margins for the quarter It was really personal care. And that had to do with 1, the one offs that Mike's talked about. And we factored in some of those as we go into Q4 because Some of those we do expect to maintain as we go there.

Speaker 6

But then secondly was the fact that yes, we had a little bit of a mix as well in there because North America Personal Care is our most profitable region within the segment in Personal Care. So that factored in into that one, which Obviously, we continue to be very watchful of overall cost and fixed costs and The teams are doing all the actions necessary to ensure we address that.

Speaker 8

Thank you very much for that. If I could just On just how you would envision addressing some of the volume pressure, appreciating that there were Certain dynamics in the quarter, which will fade as we go forward because of the base period, but just philosophy on I know there's been some debate in recent quarters just around what is the right promotional levels and requirements for demand building. So perhaps you could just contextualize how you would look at supporting volumes over sort of more medium term horizon? Thanks.

Speaker 2

Yes. Chris, again, I feel very good about our commercial around the world. I mean, we have we had strong innovation this year. I feel great about our lineup for next year even though we're not talking about next year yet. But and I think we feel very good about our advertising.

Speaker 2

Our digital investments are working very hard for us. And then our sales execution has been very, very strong around the world. And so overall, I think Our commercial programs overall are working as intended. We're going to keep a close eye on the promotional environment though. I'll comment in In terms of North America, I would say the environment at this point remains fairly typical, and that's kind of it.

Speaker 2

It's rebounded from being, I would say, more suppressed During the peak years of COVID, and is now, I would say, normalized in terms of promotional frequency, maybe still a little lower on depth. And frankly, we're not going to drive our business by driving depth. It doesn't fit with our high road approach to building the brand. And so but we're prepared. And one thing I'll add though too is, I think we're being prudent in developing the right Kind of action plans in the case of a more recessionary environment.

Speaker 2

And so as I mentioned, we're going to our strategy is to elevate and Premiumize our categories over time, that is exactly the right long term strategy and I think that's going to be our strategy for a long time to come. That said, We recognize the environment we're operating in and we've been very good at running, I would say, more value into plays when necessary. But our goal is to make those productive and profitable for as well, while addressing the needs that the consumers have.

Speaker 8

Okay. Much appreciated. Thank you both.

Speaker 2

Okay. Thanks, Chris. Thanks.

Operator

Thank you. Our next question comes from Steve Powers of Deutsche Bank.

Speaker 2

Good Morning, Steve.

Speaker 4

Yes. Hey, good morning. Good morning. And apologies, you may have been talking a little bit about this with Chris. I got called away from the call for A brief second there, but just as you march from 3Q to 4Q, it implies I think either A lot of SG and A leverage or really big step up in gross margin sequentially and year over year.

Speaker 4

And I guess I'm just I guess, I want to play that back to you and figure out kind of what the main drivers are because I guess that The inflation gets a little bit less impactful as you go 3Q to 4Q force picks up. But it just seems like you need some other variables to really move the needle as much as I think is implied in the guidance. Just want to play that back to you.

Speaker 6

Sure. So Steve, I mean a couple of things I would highlight. I think first I'd start by Reiterating what happened in Q3 and you would have seen an acceleration in overall pricing realization. And As you mentioned, our expectation which played out in Q3 of the year over year impact of commodities beginning to subside even though they remain elevated. So as we look into Q4, our outlook in which there is an implied step up like what we saw in Q3, The drivers behind it would be, 1st, is around pricing realization.

Speaker 6

As a reminder, we've implemented Additional pricing actions in the Q3 and those will be fully realized as we go into the Q4. So we do expect In the Q4, another step up in terms of pricing realization as we look at our overall outlook. So that should be playing out in the quarter. Secondly would be on our forest productivity savings. In the Q3, we delivered $80,000,000 of forest savings, which is an acceleration of around $30,000,000 versus the average we were delivering in Q1 and in Q2.

Speaker 6

We expect this trend to continue going into Q4. And then last but not least is stabilized input cost inflation. Again, this does not mean that we expect overall cost to come down. It's more the year over year impact. As of today, we have a year to date impact of around 1,200,000,000 in commodities.

Speaker 6

And at the midpoint of our guidance of 1.4 to 1.6 for the full year, this would imply that for Q4, we should see another quarter of a reduction Sequentially in terms of overall input cost inflation. So when you combine those 3, that's what gives us the building blocks for the Continued step up sequentially quarter over quarter on EPS for the Q4. I think it's also important to note That for the full year of the midpoint of our cost guidance, we are at around $1,500,000,000 of Input cost inflation. And as we exit the year, we expect to more than fully offset not just the commodity impact, but also the ForEx based on our current assumptions and what we've modeled out. So that is something that will be playing out in Q4.

Speaker 4

Okay. Yes, that makes sense. That's helpful. I guess the other thing that I wanted to ask about, and I appreciate that 23 is a long way away, you're not really talking about it. But consensus estimates have the company delivering above algorithm EPS growth next year, which I think implies The price realization that you just spoke to continues to hold even as you get some hopeful relief on costs.

Speaker 4

And I wanted to get your perspective on just your comfort level with that level Assumption as you look at it and especially in the context of I appreciate what you said earlier about sort of the Timing impacts in North America and how that impacted shipments, but we are watching those private label shares in Personal Care, specifically diapers Pickup, hopefully that gets better, but as you push through more price and the consumer potentially degrades From a confidence perspective, concerns about that, both those share trends not rebounding. And it just it speaks to if the deflationary backdrop does play out next year, do you have to roll back some of this price? So A lot in there, but just really thinking about the consumer demand trends, your pricing trends, net of commodities and just some perspective on Your comfort level with consensus being above algo next year?

Speaker 2

Yes. Steve, maybe my comfort level is probably not comfortable addressing what 3 looks like yet. And I hate to do that, but I think the underlying is because of what we're seeing right now in the marketplace, which is 1, the volatility in the marketplace, which we experienced in Q3 and it's going to continue. And the other part is, we're still rolling up our plans. And so I really feel, would love to comment, but I don't feel like in a place where it'd be Reasonable for us to comment at this point.

Speaker 2

I don't know, Allison, if you have a different

Speaker 6

Yes. No, I fully agree, Mike. And as I said to Lauren in terms of her ask, One of the variables that again we're looking into today as we build the plans and everything is where we stand today. And the reality is commodities have not They remain pretty elevated and ForEx is becoming and has become a bit of a challenge as we look forward. We've got 3 months to go for the year, but it is a variable that we're going to have to take into account, Steve, as we look So again, too early for us to comment, but those would be kind of my thoughts in terms of where we stand today.

Speaker 2

The thing I'll add, Steve, though is we are We continue to manage our business with discipline and we remain confident we'll restore our margins over time. And as Nelson pointed out, we've taken on over the last 2 years $3,000,000,000 of inflation, That's 1500 basis points of gross margin, which is a lot and we've taken decisive action. And the good news is and we For the Q3, our pricing fully offset inflation plus FX in the quarter. And so we do continue to expect sequential improvement. Commodities also, as people who have been following us for a long time commodities will eventually revert.

Speaker 2

We're not counting on that for our margin recovery. But when that does happen, that will likely accelerate our recovery. So we're taking a thoughtful holistic approach to mitigating inflation and running our business And hopefully you all appreciate that.

Speaker 4

Okay. I appreciate it. Thanks so much.

Speaker 2

Thank you, Steve. Thanks, Steve.

Operator

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

Speaker 2

Good morning, Jason.

Speaker 8

Hey, Jason.

Speaker 9

Hey, folks. Hey, all. Thanks for slotting me in. A couple of real quick housekeeping questions here. For guidance, I appreciate you reiterated EPS, but you didn't provide an On your EBIT outlook, can you provide that now?

Speaker 9

Has it changed at all?

Speaker 6

No. No. And in general, it remains where we're at.

Speaker 9

Excellent. Thank you. And then productivity, you have a nice uptick in the 4th quarter Sorry, implied by the full year guide here on forced savings. What's driving the uptick? And would it be unreasonable for us to look at that And assume that that run rate continues through next year, therefore implying that what was under delivery this year is going to be followed by over delivery next.

Speaker 9

Thank you.

Speaker 6

Sure. So quick one there, Jason. As we've said in the past, force is not necessarily a straight line. We We've never seen that in the past and I don't project that that's going to happen in the future, because it just builds up over the year and we do see ups and downs, because remember it is a net number. So it does build some of the some headwinds and costs that we might be facing.

Speaker 6

As you indicated, there is a step up in Q4. And to me, the key to look at is what happened in Q3. In Q3, we delivered $80,000,000 versus an average for Q1 and Q2 that was below 50. So the acceleration was there and we delivered year to date 175,000,000 We expect to see further delivery in Q4 based on the strong pipeline of productivity that our teams have across As we look into next year, yes, the teams are building up the gross productivity pipeline and I'll stress that gross productivity pipeline. And again, we will be walking through the delivery as we go Through next year, but I can't and I would not commit to whatever run rate we have exiting this year in Q3 being what we see in the 1st couple of quarters of next year.

Speaker 6

It's too early to say, Jason.

Speaker 9

Yes, understood.

Speaker 2

The thing I'll emphasize is, yes, it is a net number. And so our gross productivity has I think our teams are doing really a fantastic job driving the productivity. The issue we have is The inflation isn't just on our inputs. It happens in all places of the P and L. And so some of it unfortunately gets nets out.

Speaker 2

So I could complain My teams around their overall net productivity, but that's kind of like complaining about like trucking lane rates or something. I mean, we don't like them, but some of that is It's not fully in their control and so we have to navigate that. That's why we have to drive our gross savings higher.

Speaker 9

Yes, totally understood. Thanks a lot guys. I'll pass it on.

Speaker 2

Thanks, Jason.

Operator

Thanks. Thank you. Our next question comes from Andrea Teixeira with JPMorgan.

Speaker 2

Hi, Andrea. Good morning.

Speaker 10

Hey, good morning. Thank you. Just a couple of questions, Mike. And also, If you can elaborate a little bit more on the price elasticity that you're embedding in your guidance for 4Q. I understand that obviously it implies a huge Decline in organic sales.

Speaker 10

And I do understand the comp for Personal Care, I believe it was 11% last year in the same period. So So I was wondering if you can comment. And it does look like your pricing, at least in the Nielsen data, seems a bit below So I was wondering if there is anything embedded there in terms of promotions or and part of the also question on promo Is your SG and A, is there anything that you'd call out specific in the quarter? Is that recurring into the 4th quarter? And then or if there is any phasing or timing of it that you pulled from the 4th into the 3rd?

Speaker 10

And then lastly, Just a clarification on Suzano's deal. Are you getting any proceeds from the sale of Navi and the sale of the Mogi Plans. So I was wondering if there is anything that related to that or the royalties will pay off over time and you are going to Puts and takes on those, or it's just immaterial, so none of the companies are provided immaterial for you and for Susano.

Speaker 2

Okay. That's a great list of questions. And so let me we'll try to tackle them between Ellis and I will tag team here. First of all, on the I think on the pricing versus peers, I think probably what you're seeing is the fact that we were out fastest generally in pricing in most markets. And so if you're seeing a lag there, it may be because we've already started cycling our pricing year ago.

Speaker 2

I mean the reality is, I think in general, we've priced, I would say very early, we moved very quickly on pricing last year. And I would say we also moved at higher levels than a lot of our competitors. And so and the reference for that is, I think we've had a price gap, meaning we've been ahead on price on Huggies all year until I would say recently, maybe in the last couple of weeks or so. So overall, I think our pricing is in line with where we set it. And I think the good news, Andrea, is that in general in most markets, we are seeing The market rest of market pricing kind of move generally in the direction that we've moved.

Speaker 2

That's not the case in all areas and but generally that's kind of my overall take.

Speaker 6

In terms of elasticity,

Speaker 2

I'd say in the first half, I think the volume performance really outdrove the elasticity models. And I think that's where I think the consumers are feeling confident. You remember all the unemployment reports and stimulus and all those other things that were driving I have seen a change in that in some markets. And so at this point, the elasticities that we're seeing are more normalized or what we originally modeled. And so we are seeing a bit more volume come out in relation to all the pricing.

Speaker 2

That's Notable and I would from our earlier comments on maybe the bifurcation, it's coming out a little bit more on more the value oriented tiers, let's Say snug and dry diapers for us, which is our value tier diaper in the U. S. Or Scott 1000. So those are Things that we're going to pay closer attention to and make sure that we're managing the business the appropriate way to serve our consumers where they need us. So again, that's the overall take.

Speaker 2

And I don't know if I know there's a couple of other questions. I think Nelson will address some. But did that answer Anna, the first part?

Speaker 10

Yes. No, absolutely. That's super helpful. And the SG and A part, the component That is just understanding as you try to scaffold and be more kind of conscious about that consumer that is stretched. Is there anything that we should know of like I think the SG and A your GM your gross margin came in I think better than anticipated, but your SG and A was a bit higher.

Speaker 10

Is that anything that we should be aware of in terms of phasing Of promo or marketing spend that's or is just inflation in general across all lines?

Speaker 6

Yes, Andrea, let me address that. So first, I think the important thing to look at is spending in absolute dollars For the Q3 for between the lines, which includes our SG and A and our advertising and promotion was roughly in line with what we saw in Q1 and in Q2. So there was really not a big step up or change sequentially throughout the year. The thing that would have that you would have seen is an expansion in terms of percent year over year in terms of the between the lines. That was really driven largely because of last year's one time adjustment to incentive compensation, which we talked about at the 3rd quarter Earnings call.

Speaker 6

So that was a lion's share of the change. It was a one timer we were lapping. Absent that, as we've been saying all year long, We are continuing to invest behind the business. It's the right thing to do. As Mike has said, we are fully committed to sustainable and long term balanced profitable growth.

Speaker 6

And the only way to achieve this is to continue to invest in the business. We are investing behind our brands. We're investing behind innovation. We're investing behind capabilities and our people to ensure that we're there to go forward. Those investments are there and we've continued to make them.

Speaker 6

But there was no particular step up in Q3 versus Q2 or Q1.

Speaker 10

Okay. That's fair. Thank you. And then, Susanna, do you?

Speaker 2

Yes. I'll be able to make a couple of comments. Not exactly your question, but I did want to address a couple of things related So the results of tissue agreement, overall, Andre, hopefully you'll recognize it's consistent with our overall approach that we've been talking about on portfolio management. I really believe we have a long runway of growth ahead of us in our categories and our markets and we're going to pursue on the plus side markets adjacencies that are going to be accretive to our growth and margin. And I've always said for a few years now that we'll consider exits in businesses that are not accretive to our growth and or margin profile that we expect.

Speaker 2

So this transaction specifically enables us to focus On our faster growing, higher margin personal care business in Brazil and creates a better future for both the Neve brand and the tissue business, the Brazilian tissue business. The Neve business in combination with Suzano is really going to be better positioned to adapt to the unique dynamics of the local market. And we fully expect our partnership strong partnership with Suzano to continue well. I'll defer to Nelson. I don't think we're ready to comment on any specifics related to this transaction and Yes, no, absolutely.

Speaker 2

And again, the only thing

Speaker 6

I would say is overall revenue From the transaction that's being divested is just around the 1% levels and profits are in So but other than that, we're not going to be disclosing any terms at this stage.

Speaker 10

That's helpful. Thank you.

Speaker 2

Okay. Thank you.

Operator

Thank you. Our next question comes from Anna Lezold of Bank of America.

Speaker 2

Good morning, Anna. Hi, Anna.

Speaker 11

Hi. Good morning and thanks so much for the question. Just regarding the consumer Sitsivity to pricing at this point, I wanted to follow-up on your comment on consumer bifurcation. Are you Seeing premiumization holding up well in certain categories versus consumers trading down in others? And Are you seeing any specific products holding up well, which indicate consumers are willing to continue to pay for premium solutions despite a more challenging inflationary environment?

Speaker 11

Thanks.

Speaker 2

Yes. I would say, and it's less Differences by category, I would say in general, where we're driving premiumization It is generally working across markets. And so not specific there. I think it is more typically by Sub brand or sub line or what we might call internally are tiers, right? Like the value tiers tend to be a little bit more price sensitive in this environment because As I was mentioning earlier, there are a significant number of households, let's say, in the U.

Speaker 2

S. That are have less to spend now, given all the inflation that's occurred over the last couple of years or so. So I think it's more on a Sub brand basis or a tier basis in our vernacular, and that's where I say, we're going to continue to drive Premiumization strategy or creating more value through our premium products, we feel great about our innovation lineup this year. As I mentioned, we've got a lot More coming next year with great features that I think consumers are really going to like. That said, we're also making the right adjustments as we As we said earlier that to prepare for a recessionary footing if needed and that means that emphasizing the great value that our brands offer.

Speaker 2

And in some cases, We will make some adjustments whether that's related to pack count or sizing or something along those lines to make sure that consumers have the right Pack and affordability that they need.

Speaker 11

Great. Any specific product lines you can call out as Seeing resilience in those?

Speaker 2

Well, Huggies, again, I think we feel great about our diaper lineup, Our adult care lineup in North America, but if you go around diapers, China, we continue to have Mid to high single digit growth, double digit growth in Feminine Care, and so we feel good about that. Latin America, where consumers are Very value warranted because of what's happened in the economy last few years. Our organic performance was up Strong double digits in the quarter. So overall, across our markets, we saw strong organic growth and that's because we feel That we've continued to improve the products. At the same time, we are recognizing that we are taking price to offset the commodity headwinds.

Speaker 11

Okay. Thanks very much.

Speaker 2

Okay. Thank you. Thank you.

Operator

Thank you. Our next question comes from Javier Escalante of Evercore. Good morning, Javier. Hi, good morning.

Speaker 2

Hi, Javier. Good morning.

Speaker 3

Good morning, everyone. I would like to come back to the U. S. And if you can my comment on how you see retailers Approaching pricing and the profitability of their own private label operations in tissue versus diapers? And I have a follow-up.

Speaker 2

Yes. Javier, welcome to our coverage And we appreciate it. And this is something I've talked about over the years. We have a very productive and collaborative relationship with our partners and I've been doing this for 30 years now and been through many cycles. And so we approach it and notably let's say in the I think the big change that's occurred for us at KC over the last 10 years is we recognize we had to clean up our own house.

Speaker 2

We've been very focused on growing the categories and working with our retail partners to grow the categories the right way. And that's reflected. I mean, we're really proud to note that in the Advantage survey for the first time, we are rated number 1 as a customer organization and number 1 across most Because I think our customers view that we've been working with them in a partner like fashion. Funny aside, I will say, in the Q1 of last Sure. I think our service levels in diapers was below far below 50% and somehow another these publications rated us number 1 on logistics last year.

Speaker 2

And so I think that does reflect kind of the way we work with them. And so when you take that, I would say, we generally approach business And so for us, we're working for win wins. And so I wouldn't say regarding, let's say, For your question, whether it's diapers or private label, anything different that we're seeing in terms of the profit play Of them trying to change distribution or emphasize different lines, but we are very cognizant that we're trying to deliver an overall category growth plan and own our part of that. And because of that, that's kind of how we manage the plans. And so, and then with regard to price sensitivity, yes, I mean, there's been a Yes, I mean there's been a lot of price coming at it.

Speaker 2

We have a fair number of customers that skew more toward value shoppers and it's their role In their minds serve their shoppers well and so we understand that and so we're willing to work But we recognize also there has been a lot of price in the marketplace out of necessity. And so the important thing is we feel like we have to recover our margins. They recognize That they need to deliver margins and growth the same way that we do. And so we're going to continually work for ways to find the win win and grow the categories the right way.

Speaker 3

That's great to know. And then basically, Mike, again, on tissue versus diapers, It feels as if I mean from the outside that Scott is very clearly positioned on the value side. Hoggies has been premiumized, and I appreciate that you mentioned that I believe a competitor just follow Price increases and that we do not have an all channel view. But if you can What again on the drivers of your confidence that Huggies didn't take too much pricing and that You are competitive on the pricing front vis a vis your main branded competitor and private label because In our data, we do not see private label following price increases. And thank you very much.

Speaker 2

Yes. On Huggies, yes, I wouldn't say again, I would correct. We've priced as I said, our goal is to restore margins and eventually expand margins over time. So we've priced accordingly with the right discipline and we're very cognizant of our product offering Our lineup in our commercial programming and one of the reasons we've priced this with that and I think we've talked about this with our customers is We feel like it's our role to help grow the category and drive category growth and that requires marketing. I've worked in other categories That when they pulled back the category is commoditized and that's not a good place for brands.

Speaker 2

And so we've been very Discipline about that. So what I did say is that we felt like we had a price gap or we advanced pricing further and faster than Our other competitors earlier this year and last year as well. And so there was a bit of a gap. That gap is now I think that's basically closed over the last few weeks. And so we would probably see anticipate slightly better performance on And again, we feel very good about our innovation lineup, the value we're offering to consumers.

Speaker 2

We are going to pay a little more attention to Snug and Dry, which Javier is our value tier in the U. S. And so make sure that that has the right counts and the right price points on shelf that Can compete effectively.

Speaker 3

Thank you very much.

Speaker 2

Okay. Thank you, Javier.

Operator

Thank you. Our next question comes from Jonathan Feeney of Consumer Edge.

Speaker 12

Hi, thank you very much. Hi, how are you doing? Just for a quick follow-up. Earlier in the call, you mentioned that you thought promotional activity was back to something like normal, but let's say a pre COVID normal. And I look at The syndicated data providers, Nielsen and I have this measure of merchandising that would seem to indicate across the company in the U.

Speaker 12

S. Anyway that, That merchandise was still several points. So it's like mid-30s, but the measure they use and now it's like high-20s or something like that, granted awful low of like 20% when Yes, the peak of demand. So any comment you can give us about the likely shape of that and impact restored promotional activity might have on Man, and secondly, that's a follow-up. And secondly, related question maybe.

Speaker 12

Procter talked last week about household inventory. And I know different companies have different ways of measuring that. Earlier you mentioned something about all channel consumption. I'm thinking that's still a takeaway data measure. But if you have any color about where you think household inventory stand in the U.

Speaker 12

S. Globally and what impact that's having on potential future demand in 2023? Appreciate it. Thank you.

Speaker 2

Yes. So a couple of things in there. I mean and I would say, well, if you go to Nielsen and I'm not longer, but I used to be the highest user of Nielsen throughout my career. So there's so many variables related to promotional Measuring promotion. And so what I said earlier, Jonathan, was frequency kind of returned to normal.

Speaker 2

In tissue, probably in 2020, the Q3 were But maybe by the end of last year and then in Personal Care, I would say at the beginning of this year and that's in terms of frequency. The volume and I would say the other key measure is depth. And I would say depth is shallower both in personal care and tissue than it historically had been And remain so and I think that's an artifact of all the inflation that all the companies are seeing. And then if you look at the percent of volume sold on promotion, it's a little bit Lower, right, slightly lower, which is I think corresponds to what you were looking at. So overall, that's why I say I put promotion normalized, but it's probably still a little bit lower than historical at this point.

Speaker 2

So that was, I think part 1. And then, any follow-up to that, Jonathan?

Speaker 12

No, that's makes a lot of sense to me. I also confessed to spending way too much time with syndicated data. So it's nice to have a compatriot.

Speaker 2

No, no, no. I'm proud. I feel like I invented half of these measures. So but in any case

Speaker 12

You probably did.

Speaker 2

The other side that you asked about was inventories. I mean, there's a couple of points. Certainly, I mentioned earlier, we are cycling some retailer inventory build back and at the same time and I think we mentioned in our prepared remarks, there was some Retail inventory reductions late in the quarter. And so that was a topic that came up at the last investment conference that I was at. And so That remains out there.

Speaker 2

And I would say that it's typically the case. Every other year or maybe every year, retail inventory changes and that's part In terms of the household inventories, we think they've reverted back to normal. There was And the really where it was really relevant was on Consumer Tissue. There was quite the buildup. I would say So critically, I don't know that we were very good at predicting how the household inventories were going to evolve.

Speaker 2

But I think over the past years and there was a lot of volatility in tissue demand. I think in the Q2 of 2020, I think our tissue demand was up, back tissue was up 30% and then a year later it was down 27%. So again, back tissue historically is very stable and goes with Certainly volume growth goes with highly corded correlated to population growth. At this point, we feel like it has reverted back to normalize But it might be fair to say that there's a lot of people carry more back tissue than they were 3 years ago.

Speaker 12

Okay. Thanks very much. Helpful.

Operator

Thank you. Our next question comes from Lauren Lieberman of Barclays. I'm

Speaker 11

back. I'm

Speaker 5

back. No, it's okay. I can let it go though.

Speaker 11

I'll follow-up offline.

Speaker 4

We're good. Thank you.

Speaker 5

Okay. Then I guess we've come out a couple of different ways through different series of questions and so on. But I guess, how do you think about volume versus pricing versus market share? Because I think one thing that I get asked about quite a bit

Speaker 4

with regard to your business in particular is sort

Speaker 5

of, hey, but don't you see private to your business in particular is sort of, hey, but don't you see private label And my read is that, yes, that's a dynamic of your categories. It Always is in economic cycles. It's what you'd expect to happen is that private label would gain some share. There's going to be some change in consumer behavior. So I don't know how you could answer this, but as you look at How to manage through the continued high levels of inflation as you put in the incremental pricing that you mentioned this quarter.

Speaker 5

Is market share the right gauge for you To judge kind of the health of the business at this point, is it aggregate organic sales growth? What are the metrics by which Q Gauge if you've gone too far or not gone far enough.

Speaker 2

Lauren, such an awesome question.

Speaker 5

And then I'm glad we waited.

Speaker 2

No, no, no. This The age old problem of management in the consumer business. And that's why it goes back to what we've been saying for years now. We remain committed to delivering balanced and sustainable growth for our shareholders. And so and it's been interesting as we've unpacked this for the organization Well, the key things we're managing against organic growth, Right, profit growth, market share and cash.

Speaker 2

And so those are the 4 things. And I would say internally, I think a lot of your organization used to look to this role to decide what we're going to prioritize. But again, when I say balanced, I want all four of those metrics to go in the right direction. I think So we're taking what I would say are high road actions to position the company to grow for the long term sustainably. And right now, Given the I would say the supply shocks or the input cost shocks that we've taken on last 3 years, as I mentioned before, 1500 the equivalent of 1500 basis points of gross margin.

Speaker 2

Margin improvement right now this year remains my top priority. I'm We'll return to pre pandemic levels and we're making progress as evidenced in the Q3. But at the same time, we're not going to Harvest the business to do that. And so at the same time, we're still watching shares, but we recognize that when we moved decisively on price, Both in terms of pace and level, we were out ahead of the rest of market for a period of time. And so we recognize that we were going to leak a little share.

Speaker 2

But in our sense, I think that was the necessary trade off to make sure that we can get the margin recovery. That said, at the same time we continue to invest in innovation. We continue to support our brands with great marketing. I think our marketing has gotten better and our Digital execution has gotten better. And so we're really proud of that.

Speaker 2

And so that's what we're trying to walk the fine line. I mean, I'm very encouraged that we're up and even in about a half our market. It's a little bit lower than we experienced in 2020 2021 where we were up in 2 thirds. I would say we're really proud of that, but we also recognize our competitors are pretty good too. And so we can't expect that every year.

Speaker 2

And so if you get the sense, it's a complex trade, but it's something I feel like our organization has really That's up to and they know what we're trying to do. And we're doing the margin recovery, but we're paying close attention to shares as well. So that was a long reply. I don't know if I answered anything that you asked.

Speaker 5

It was great. It was a long question. So thanks very much.

Speaker 2

All right.

Operator

Thank you. And at this time, it appears we have no further questions. I'd like to turn it back to management for any additional or closing remarks.

Speaker 2

Okay. Thank you all for joining. We look forward to sharing our Q4 and full year out results with you in January.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

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