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Kimberly-Clark Q2 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Christina Cheng
    Vice-President of Investor Relations
  • Mike Hsu
    Chairman and CEO
  • Nelson Urdaneta
    Chief Financial Officer

Presentation

Operator

Good day everyone and welcome to the Kimberly-Clark second-quarter 2023 earnings call. At this time, all participants are placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Christina Cheng, Vice-President of Investor Relations. Ma'am, the floor is yours.

Christina Cheng
Vice-President of Investor Relations at Kimberly-Clark

Welcome everyone to our second-quarter 2023 earnings conference call. Before we begin, please note, today's presentation will include forward-looking statements. Our results may vary materially from those expressed or implied in our forward-looking statements and you should not place undue reliance in any forward-looking statements. Please refer to our SEC filings for a list of factors that could cause our actual results to deviate materially from our expectations.

Our remarks today refer to adjusted results, which exclude certain items described in our news release. We use non-GAAP financial measures to help investors understand our ongoing business performance. Please consult our press release for a discussion of our non-GAAP financial measures in a reconciliation to comparable GAAP financial measures. We have published supplemental material, which are found in Investor Relations section of our website. Participating in today's call, are our Chairman and Chief Executive Officer, Mike Hsu; and our Chief Financial Officer, Nelson Urdaneta. Mike will start the discussion with our strategic priorities and provide an overview of our performance for the quarter. Nelson will provide a detailed discussion on our Q2 results and our outlook before we open the floor to Q&A.

With that, I turn the call over to Mike.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Thank you, Christina. We delivered another solid quarter with 5% organic growth while cycling 9% growth in the year-ago quarter. Organic sales were up across all segments with Personal Care and Consumer Tissue each up 4% and professional up 13%. Our growth strategy is working and our performance in the quarter reflects strong execution by our teams around the world. We continue to make strong progress on margin recovery, adjusted gross margin was up 380 basis points and fueled a 17% increase in adjusted operating profit and a 23% increase in adjusted earnings per share.

Given the strength of our first half, we're raising our full-year 2023 outlook to 3% to 5% organic growth and 10% to 14% adjusted EPS growth. Our categories remain healthy. In North America category sales were up 8% and we continue to see robust growth in key developed markets including the UK and South Korea, which delivered double-digit and mid-single-digit increases respectively. While category growth across D&E has been more variable we continue to see double-digit increases in Latin America. This growth reflects the essential nature of our categories. As category leaders we remain focused on serving all our consumers and recognize that many are facing economic challenges.

With our broad portfolio offering value to premium options, we're able to meet consumers where they need us and we are well-positioned with brands like Scott and Huggies Snug and Dry to serve the value-oriented consumer. Across markets, we are strengthening our price pack offering and that means enhancing large count packs and big-box channels and making entry prices more affordable and small format channels. More importantly, we're accelerating innovation and cascading technology through our product offering to ensure we're delivering a superior value proposition to consumers.

Growing market share continues to be a top priority. In the quarter Year-over-Year market-share performance was soft, reflecting the relatively early actions we took to mitigate inflation. In the last six months, price gaps have begun to normalize and we are encouraged to see sequential improvement in market share in key cohorts including North America where we've seen improvement in five of their categories. Volume trends have improved and we expect that to continue as we cycle inflationary measures and execute our strategy and commercial programs. Our enhanced commercial capabilities are enabling more real-time decision-making and drive sales, optimize brand investment, and balance value and volume.

Furthermore, we expect increased brand investment and improved supply performance to strengthen our market-share performance over the balance of the year. Our commercial programs and innovation are core to our strategy to elevate and expand our categories. We're pleased with our launches in the first half and enthusiastic about our second-half plan. Here are a few highlights. Huggies debuted its newest Baby Butts campaign this summer, celebrating Huggies unique curve design, which provides greater comfort and protection for babies on the move. Early results show excellent consumer engagement across our marketing channels.

In China, we're raising the bar on skin health through our proprietary design that whisks away the baby's mess moving the mess away quickly from baby skin is key to reducing diaper rash. We believe this kind of innovation will further differentiate us from the competition and is the reason Huggies continues to expand its market leadership in China. Lastly, our Kotex intimate She Can campaign in Latin America continues to resonate. We were recently recognized with the prestigious Cannes Lions Award for this initiative reducing period stigma as part of menstrual education. In China, Kotex introduced Overnight, an overnight pad with a proprietary design that prevents leakage with instant absorb technology.

Overall, around the world we are seeing growth driven by the overnight segment. This is a great example of superior product performance coupled with effective brand strategy and communications to drive share gains and strong brand equity. Now I'd like to briefly address the impairment charges to intangible assets we recognized this quarter. We purchased Softex Indonesia to expand our presence in one of the world's fastest-growing personal care markets. Indonesia ranks among the top three markets for new [indecipherable] and we expect continued economic development will create more demand for our products over time.

As the second-largest diaper player in Indonesia, representing over a quarter of the market, Softex has build a strong equity with local consumers. The impairment charges we took this quarter, which Nelson will discuss shortly reflect our updated projections for the business. We have enhanced the team and taken actions to improve the business processes and our go-to-market approach. Indonesia remains an exciting growth market for Kimberly-Clark and we're committed to this business for the long-term. Now as we enter the back-half we expect continued progress in our journey to restore and eventually expand our margins.

We're excited about our innovation and commercial plans and will invest more in our brands to improve our market-share performance and growth trajectory. This is how we will elevate and expand our categories to deliver balanced and sustainable growth. Now, I'll turn it over to Nelson for more details on the second quarter.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

Thanks, Mike. Before I get into the second-quarter results let me take a moment to discuss the divestiture of our Brazil tissue business and the impairment of intangible assets this quarter. We closed the sale of our Brazil tissue business in June which enables us to focus even more on growing personal care. As a result of this transaction, we recorded a pre-tax gain of $74 million and $30 million of related expenses both of which are excluded from our adjusted results this quarter. I want to thank the many KCers[phonetic] who worked hard to complete this transaction.

In addition, we conducted strategic reviews forecasting and integration assessments as part of our business planning cycle. Based on updated financial projections, a pre-tax non-cash impairment charge of $658 million was recorded primarily related to intangible assets, linked to the Softex acquisition. The charges reflect revised projections for certain brands. Due to modified consumer shopping behavior post-COVID 19, inflationary pressures, and increased competitive activity in the region. We are confident in the prospects of the personal care market in Indonesia and we are committed to continue investing in this business.

Let me now turn to our second-quarter results. Net sales were $5.1 billion, up 1% Year-over-Year. Organic sales increased 5%. On a two-year basis, organic sales growth was strong across all three segments, with approximately 7% average growth for the company. Effective revenue growth management delivered favorable price realization and mix benefits while volume trends continue to improve sequentially. Net sales in the quarter we're impacted by approximately 400 basis-points of currency headwinds. Earning to our segments personal care representing approximately half of the company's revenue grew 4% organically led by mid-teens growth in feminine care and mid-single-digit growth in Adult Care.

Infant care delivered broad-based growth in the quarter with the majority of regions growing mid single digits. Operating profit for the segment improved 1%. Organic growth in consumer tissue was 4% led by a 7% growth in North America where volumes have turned positive up low-single digits in the quarter driven by Viva and Cottonelle. Operating profit for the segment was up 12%. Finally, our KC Professional business posted a 13% organic growth. All geographies grew and notably volumes turned positive in North America after six quarters of decline.

Our focus on key commercial sectors, effective digital engagement, and innovations in sustainability are fueling the momentum in KC Professional. Favorable product mix and cost-savings drove significant operating profit improvement in the quarter. Turning to the rest of the P&L. Second-quarter adjusted gross margin increased 380 basis points to 34%. Revenue growth management in addition to four savings of approximately $80 million more than offset cost inflation and currency headwinds. Cost environment remains mixed although, energy prices have moderated in some markets, they remain elevated in others.

Labor costs are structurally higher now due to cost of living adjustments and a tight job market in certain key geographies. In addition, other manufacturing costs which cover labor were $85 million higher this quarter, in line with our expectations. Between the lines, spending on an adjusted basis was 19.8% of net sales, up 190 basis points versus a year ago driven by continued investments behind our brands and our capabilities as well as the impact from inflation on our cost base. Adjusted operating profit for the quarter increased 17% and operating margin improved by 190 basis points to 14.2%. Foreign currency was a 16 percentage point headwind on operating profit in the quarter, of whichfive point were due to translation of earnings from our non-US operations.

The balance was largely from transactional impacts. We have made good progress on our margin recovery over the last few quarters and we remain committed to restoring them to pre-pandemic levels and expanding them over time. To achieve this, we are increasing our focus on productivity by building a long-term pipeline of opportunities that can generate significant end-to-end efficiencies. Lastly, the adjusted effective tax rate for the quarter was 20.5% compared to 22% in the year-ago period. Strong overall performance, along with a lower tax rate, resulted in adjusted earnings increasing by 23% to $1.65 per share. Through the first half of the year, we generated $1.4 billion in cash flow from operations.

Capital spending was $389 million compared to $470 million last year. Year-to-date, we returned $850 million to shareholders through dividends and share repurchases. Now, let me say a few words about our outlook. With our continued momentum this quarter, we are raising our full-year guidance for organic growth of 3% to 5% and adjusted EPS growth of 10% to 14%. As a reminder, our previous guidance was 2% to 4% organic growth and 6% to 10% adjusted EPS growth. The Brazil divestiture, which was not reflected in our previous outlook is expected to impact reported sales growth by approximately 100 basis points. We continue to expect currency to impact full-year top-line growth by approximately 200 basis-points.

Based on the latest estimates for the year, we now expect input costs to be a headwind of approximately $100 million, an improvement versus the midpoint of our prior outlook of $100 to $200 million. In addition, we continue to project approximately $200 million from higher wages and other manufacturing costs. Continued progress in gross margin recovery, puts us in a great position to advance our commercial programs. We expect advertising spend to increase by approximately 100 basis points for the full year. This brings us to a projected operating profit growth in the low-double-digit range and an operating margin increase of approximately 150 basis points at the midpoint of our guidance range.

We remain optimistic about the future and our ability to create long-term value for our stakeholders. We are also very proud of how our teams continue to execute our exciting growth agenda across the globe. With that, we will open the floor to questions.

Questions and Answers

Operator

Certainly. Everyone at this time we'll be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Lauren Lieberman from Barclays. Your line is live.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Good morning Lauren.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

Hi Lauren.

Lauren Lieberman
Analyst at Barclays

Good morning. Hey. Wanted to just ask a bit about divisional margins, one thing that jumped out to me in the quarter was actually that margins in consumer tissue decelerated sequentially they were down sequentially and then also were up less on a year-over-year basis, so was just curious, kind of what's driving that right. As you mentioned there was some better volume performance in North America, the pricing is coming through. Costs are easing. So just some conversation around Consumer Tissue margins and the path to recovery would be -- would be really helpful. Thanks.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah, no, absolutely. So a few things. I mean we don't -- we don't speak about gross margin, but just to give you a context Lauren year-over year we did have a meaningful gain in gross margins on this segment over 200 basis-points. We -- on a quarter-over quarter you're always going to see a few puts and takes depending on mix and elements that flow through but net-net I mean, we are seeing an upward trend, so I wouldn't get too hung-up on the overall movement quarter-to-quarter for the segment. Because overall, we are seeing an upward trend in recovery on the margins.

Lauren Lieberman
Analyst at Barclays

Okay, because still yeah, okay, fine. Can I read into that, though, when you think about reinvestment in the business, any other particular areas I know you've talked a lot about innovation and potential for elevate and expand to apply in tissue as well as some of that seeding these investments or is it really just a matter of timing and mix.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

It is a few things. I mean, one, obviously we in North America have been doing the transition to the new artwork and some of the upgrades that we're doing in Cottonelle so part of the thing has been our transition on-shelf is taking a little bit longer than what we had planned. So that's playing a little bit in the mix, but overall I mean, that's progressing. And in terms of the elevate, we're also have initiatives in the UK in Andrex where we're doing some upgrades on the product line and that's coming through. So that's progressing on that end. But, Mike I don't know if you want to add anything else on that end.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah, I mean I think when we talk about elevating that holds for all our businesses around the world and certainly consumer tissue, personal care, professional we're happy to invest in all those and it's paying out as Nelson just mentioned, in the UK. Organic growth was up double-digits, share continues to be strong and robust on Andrex and part of that is because, along with some pricing we have upgraded the quality over the last couple of years and so we feel good about that, where we stand there and really proud -- if you look at year on year I think our between the lines, investment, we mentioned, it was up about 190 basis-points over the prior year, and that reflects our commitment to the brands and our belief that we got great commercial program to invest behind.

Lauren Lieberman
Analyst at Barclays

Great, because the genesis I guess the question also is, I feel like one topic that we've been getting a lot of questions of late is around pricing pressure in Consumer Tissue, some of the discussion, particularly in Europe and UK from retailers pushing back on pricing are looking to roll-back in Consumer Tissue, and we feel that a lot of questions about A, if that would be an issue for Kimberly-Clark and specific to Europe, and B, the risk of that dynamic materializing in the US. So just maybe you can add perspective there as well. I think you've said a lot in terms of reinvestment in share momentum. But any perspective on pressure to quote give back pricing in that category in US and Europe would be helpful.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah, I'd say overall, Lauren pricing initiatives. Net revenue management initiatives are on track generally across our business, personal care, professional and consumer tissue. We're cognizant of the same discussions and the similar pressure, and we will see, maybe a little bit more promotional activity than we've seen in the past maybe in the prior six months. But I think thus far, it's not -- it's not showing up in the results or dramatically impacting our results. For the quarter, we had a very solid quarter across Western Europe. Demand was up about double-digits or organic was up about double-digits. Volume hanging in there pretty well and so we feel, good about where we are but also recognize that yeah, it's going to be a competitive environment, and we have to be prepared for that.

The great thing is, as you've heard us talk about we've invested in enhancing our revenue growth management analytic capability and so we feel like we'll be able to make the right investments at the right time, that will be wise and not just overreact to things.

Lauren Lieberman
Analyst at Barclays

Okay, great, thanks. I'll pass the line.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

Okay, thanks, Lauren.

Operator

Thank you. Your next question is coming from Javier Escalante from Evercore ISI, your line is live.

Javier Escalante
Analyst at Evercore ISI

Hi, good morning. Hey, good morning guys. I do would like to understand a little bit better to I think that you called out between the line of spending, the SG&A line, which you do not breakout. So if you can explain to us how much is these labor inflation versus more kind of proactively investing in enhancing the products and the capabilities and related to that and a follow-up to Lauren's question. You just did a strategic review and essentially exited Brazil, wrote [phonetic] down Indonesia. What is if you step-back, the main difference between Kimberly-Clark and Procter is that these international Tissue business, could you explain the role of the international Tissue business and whether the margin profile is materially lower to the Consumer Tissue in the US. Thank you very much.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah, maybe just [indecipherable] start with between the lines and Javier, just so you know between the lines, the big bucket for us, so it includes both the advertising and as you point out some of our general administrative costs and so maybe Nelson can comment.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

Sure, so yeah, Javier. So to give you a sense I mean of the increase that we're seeing in between the lines, about half of that would be on support behind the brands. The advertising and promotional activities and it's largely advertising because of all the products that we've been not just launching but upgrading and some of the campaigns that are underway. The other half really relates to a couple of things, one, we've been increasing investments behind certain capabilities and that continues revenue growth management, our digital agenda, which includes upgrades that we're doing to some of our systems, including the migration to S4 HANA and some of the other capabilities that we're laying on a multiyear basis across the enterprise and then last but not least is, labor inflation which again hits on the overheads and some of the compensation increases that really impact us in April starting in the second-quarter so that because of the timing of our merit increase.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Okay and then maybe on the consumer tissue or maybe it's a portfolio question Javier, I'd say, hey, we love all our businesses and the segments that we operate in. Certainly and as we talk about elevate and expand, we're elevating and expanding all those categories and so we remain committed to that. That said, we are cognizant that performance of some businesses especially in Consumer Tissue is a little bit more variable and so I think we've been on the record in the past, our Consumer Tissue in the North -- in the North American -- North-America is a little bit more profitable than some of our international businesses. But we have very strong profitable international business as well and so the decision around exiting Brazil tissue I think is specific to the conditions in Brazil and what I've said in the past around portfolio was, hey, we're going to look to add businesses, with a greater focus on personal care I would say.

Internationally, where there's a lot of growth opportunity, Indonesia is one great example, where while we just reduced our medium-term expectations for that business with the impairment. We still see a very long and bright future in that country for us and we remain committed to Indonesia for a long-term, because at some point, that's going to be in the top three of largest hypermarkets in the world and it's probably around the corner for us and so we remain excited about that. But that said, there are other markets that are more structurally challenged and so Brazil tissue was one of those and that was driven by we would say some policies that encourage capital investment into tissue making and so there was a lot of capacity coming in and we felt like the Neve business and brand would have been in better hands with Suzano than with us and so we made that transaction.

So I think we're looking at -- we love -- we love all the sectors that we're in. But we're going to make decisions based on local market conditions and make sure our brands can be competitive for the long term.

Javier Escalante
Analyst at Evercore ISI

So then as a follow-up, this is very interesting, but as a follow-up, so we think that in countries where you have very large personal care businesses and so sort of ancillary tissue businesses like Brazil, for example, you may continue divesting things like that say in China or whatever, where you do have enough critical mass to run that business independently and do not need to have attached a lower-margin tissue business.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah. I guess it's always possible Javier. I wouldn't over read into it. I mean, we're comfortable with our businesses and how they're performing, where they are. But that said I think I would probably say we're going to stay close to local market conditions and make sure it's something I have talked about internally with our management, which is businesses need to perform for us and so while we love all our businesses they do need to perform and performance is part of the game for us. And so that's probably the bigger barometer for us.

Javier Escalante
Analyst at Evercore ISI

Well, thank you very much. Okay, very helpful.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Thank you Javier.

Operator

Thank you. Your next question is coming from Chris Carey from Wells Fargo. Your line is live.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Hey, good morning, Chris.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

Hi, Chris.

Chris Carey
Analyst at Wells Fargo & Company

Hey, good morning, everyone. Can you perhaps just frame your expectations for price-mix versus volumes for the full-year or specifically for the back-half of the year and perhaps just related to that, how you might be thinking about spending to reaccelerate volumes. Mike I heard you say promotions might tick up a little bit. I don't know if that was a comment on any specific region, but some context on how you see volumes trending from here and the types of actions that you might be taking to drive a little bit better volume performance would be -- would be helpful.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Okay, Chris, let me start and just maybe give you some more specifics around the volume versus price. But you know we're pleased with our volume trends. Certainly just to refresh your memory, Chris, we moved relatively early-on pricing. We move pretty quickly and so a lot of our pricing went in last year, may be in the front half of the year. We should start to cycle the price element of the P&L as we approach the back half and so what we would expect to see our volume trends improve and we are encouraged, because we have seen sequential volume improvement overall in the business and then specifically by sector, kind of, as we've gone through the year. And so we expect to continue to see that.

That said as I said on the call, our market share is a little soft, we were up or even in just below 40% of our -- of our cohorts, our market category combinations, which is a little less than we would prefer right. We want to be over 50% and so what are the big drivers behind that, Chris, I'd say, couple of things. One is we were quick on pricing and so in the parlance of one of our general managers, we're seeing -- we're seeing competition "scrape us" a little bit and that means kind of lagging the price to take advantage perhaps on the share momentum side and so that's one aspect. The other aspect is we are cycling a host of one-offs and supply challenges. This is also relevant to Lauren's question when she asked about tissue margin, there is a lot of noise in our numbers, just because we're now lapping the third order effects of the Texas Storm and still supply challenges, et cetera. But with that said, there is a bunch of one-off things related to both supply and the cycling that affect the business.

And then to be true we definitely have some competitive issues that are I would say, normal across our business and certainly we'd like to see performance improve in a few markets and that's why we want to continue to invest and we're committed to investing more behind our brands. We feel great about the innovation that we have coming generally globally and we feel great about our commercial programs and recognize that there is better opportunities for us to be felt that our investment to support the brands. Chris, I'd say, I'm not really focused on driving promotion to kind of earn back that share. Maybe we would respond certainly to competitive conditions, but I'm much more focused on earning here for the long-term and that means kind of driving consumers or encouraging consumers to try our products and then having them stay there because they like the quality of our products and so that's really our focus. Nelson, do you want to add.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

And then to add some flavor Chris, on the outlook and what we've seen in terms of volume. I mean, at some perspective. I mean, we've seen continued improvement in our volume trends. If you step back, Q4 of last year volumes were down 7%, Q1 of this year volumes were down 5%, Q2 the quarter we just closed volumes were down 3%. Many of the actions that we have to take to deal with the inflation go back to the first half of last year. The majority of them. So as we step into the third quarter of the year and the fourth quarter we will begin lapping some of them and what we would expect at this point, we're projecting is the volumes to continue to improve on a sequential basis as the year progresses and the overall revenue growth management actions should decrease in terms of the impact they're having on the topline growth.

We've already seen that from a sequential-quarter, Q1 to Q2 that came down, and that mix we've been doing about a point I would expect that to be the same as we progress.

Chris Carey
Analyst at Wells Fargo & Company

That's really helpful perspective. Just one follow-up from an input inflation perspective. Can you talk about what specifically improved relative to your prior expectations and if you have any comments on phasing clearly, we're getting into, it seems a bit deflationary to the back-half is that Q3 and Q4, does that all hit in Q4. Any context on the phasing would also be helpful. So thanks so much.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yes, so just to give you a context I mean, the latest guidance that we have on costs -- on input cost inflation is that it would be at around $100 million. So that's about $50 million better than what we were forecasting back in April when we last talked. Through the first half, we are at about $190 million negative. So it is an impact. So evidently, what's going to happen is we're seeing about a $90 million give or take benefit as we go into the balance of the year. We will see some of that coming in, in Q3 and then the balance, obviously in Q4. What we're seeing is versus our prior outlook. The overall fiber complex has gotten a little bit better and distribution costs have gotten a little bit better. I will, however, just highlight that on a year-over-year basis, we're still seeing pulp and the overall fiber complex inflationary for us.

Even though, if you take it as a whole, the latest outlooks have fiber being year on year down in the mid-teens if you aggregate everything. So net-net, that's come down, distribution is about flat now year-over-year for us and then the only -- the only big cost bucket, that's down significantly, continues to be the rest in complex, which, again, that's down overall for the quarter of 50%, so we're projecting about 40% down.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

I mean Chris, the headline for me is the cost environment for us has stabilized and that's really, really good news for us, after cycling I mean, 2021 and 2022, where we had record inflation for us. While it's still modestly inflationary. We can operate very well on a stable cost environment. And so we're seeing both input cost stabilize and also the supply environment. While we still have some sporadic outages in supply. It's much improved and so we're bullish on the road ahead for us in the cost environment.

Chris Carey
Analyst at Wells Fargo & Company

Okay, thanks so much.

Operator

Thank you. Your next question is coming from Dara Mohsenian from Morgan Stanley. Your line is live.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

Hi Dara.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Hi Dara.

Dara Mohsenian
Analyst at Morgan Stanley

Hey, good morning. So I just wanted to return to share for a bid. I mean, your comments seemed more glass half full here in terms of sequential improvement in share. But if we look specifically at US scanner[phonetic] data, some fairly pronounced a year-over-year share losses in Q2 in Consumer Tissue and diapers so was just hoping you could put the US scanner[phonetic] data in context and then second plans to drive improved share trends going-forward. It sounds like perhaps there might be a bit more promotion, but not necessarily big focus, innovation ramps up. Is that sort of a plan to drive improved share from here or how do you think about the share trends in the back-half of the year, specifically in the US?

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah, Dara definitely, I believe, the shares will improve. We feel very confident in our programing and our innovation that's coming, and year-to-date, we feel -- we feel really good about what that's done in the marketplace. I would say the recent softness as I mentioned earlier, Dara. Primarily related to the relatively faster pace of our price advantages last year -- price advances last year, and so that kind of really is the primary effect, but I would also say North-America specifically, we are facing a fairly tough comp, just to refresh your memory. I think personal care -- in personal care, we were up 14% in the year-ago quarter and across both the Personal Care and Tissue market shares were a bit elevated, that was an artifact and I think we've talked about it this time a year-ago, which was we are out of -- our supply was tight in the first and second quarter of 2021 and so we had kind of restock impact and the kind of reselling impact in the year-ago quarter and we're cycling that now.

So we did see our shares were higher in the year-ago quarter, higher than they historically were and I think that was related to I would say coming back in the business in Q2 of 2022. But that said, we're not satisfied with our share performance and definitely want to be up or even in over half. And so we are committed, we feel very good about our programing, especially in North-America. I mentioned our Baby Butts advertising and our product improvements in North America on Huggies and so we feel good about where we are and we're going to continue to invest in the brands and make sure that we continue to -- continue to touch base by consumers and encourage them to try our products and return.

Dara Mohsenian
Analyst at Morgan Stanley

Okay, great and then on the innovation front, you sound excited there. Any thoughts on if the contribution to sales growth should pick up significantly on innovation, as we look out over the next couple of years versus the last couple of years? Any conceptual thoughts there would be helpful.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Well, just to point out, Dara, I think and -- I don't have the numbers for this year yet. But last year, our contribution to sales from innovation was probably among the highest in the industry. And so we do track. We do have a couple internal metrics around net incrementally and then -- and then percent of sales related to -- to the new -- to the innovation. And so we felt very strong last year. And so we feel good about that. But that said, some of the things that I just showed on the slides in our presentation this morning, we feel good about -- really good about the technology, and the -- the product innovation on the premium side that we're having in diapers, especially in China. In China, organic was up nearly double-digit against the backdrop where the category is declining double-digit and so -- and we've doubled our super-premium mix over the last year or so and then as I mentioned on the slides, we've launched two really exciting products what we are calling that a tier six funnel that features really a two-zone liner that -- one that handles the urine and one that handles the -- the solid waste dry. As you know, I'd like to say poop and then we have something that we're calling oxygen bar pro, which is really, really high breathability diaper which moms in China really love and so we feel good about that. And we're bringing technologies like those around the world.

Dara Mohsenian
Analyst at Morgan Stanley

Great, thanks.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Okay, thanks Dara.

Operator

Thank you. Your next question is coming from Nik Modi from RBC Capital Markets, your line is live.

Nik Modi
Analyst at RBC Capital Markets

Thanks, good morning, everyone. Hi, how are you? Mike, I wanted to just kind of stick on the innovation topic. I think the messaging from you guys has been very clear in terms of how active you are going to be later this year and probably even going into 2024, but one of the common pieces of feedback I get from the retail community is that everyone is really going to be very, very active at innovation because there was a lot of product that was not launched during the COVID timeframe. So I just wanted to kind of get your reaction to that and thoughts on that. And could we potentially see maybe some unexpected levels of spending just because you're going to have to compete with so many other active innovation pipeline and shops maybe this [indecipherable]. Thanks.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah. I mean, Nick we feel good about our investment levels. I mean, they have ramped-up significantly over the last five years. And again as I just mentioned, we're up about 190 basis points year-to-date between the lines, of which, Nelson, you said about half -- about half is on the advertising side. And really the model is we're investing in the advertising, primarily to support the innovation and so we feel very good about our programmings and as I've said on prior calls and Alison, our Chief Growth Officer has said at CAGNY presentations. What we're really focused on kind of big unmet needs or internally we'll call those demand spaces where we feel like, hey, there is important things that the consumers are looking for out-of-the category, in the category like diapers or adult care that may be around absorption or protection. I mentioned Skin Health earlier, which is something that hasn't been a big part of this category, but we think is a very important part of the category particularly as it relates to solid waste.

And then comfort and breathability are all big factors. And so those are kind of big areas for us to get better in, where I feel like the categories can do a much better job over time, so and we shared a lot of our thinking around innovation with our -- with our customers over the long-term and they remain very excited and we're receiving, very strong customer support for our innovation, so I think your point, yeah is there going to be more innovation from other manufacturers and across the category? Yes. But with -- but our focus is on driving the big innovations that we have and making sure that we invest materially behind those to make sure that we can drive the conversion of the [technical issue] the consumer.

Nik Modi
Analyst at RBC Capital Markets

Great, thank you.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Okay, thanks, Nik.

Operator

Thank you. Your next question is coming from Anna Lizzul from Bank of America. Your line is live.

Anna Lizzul
Analyst at Bank of America

Great. Good morning.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Hi Anna.

Anna Lizzul
Analyst at Bank of America

Thank you for the question. Just as a follow-up to Chris' question. I wanted to ask on how you're viewing the health of the consumer, you've mentioned a bit of bifurcation this year between the low and higher income consumers on their ability to absorb price and in the latest scanner data from this morning, it implies some volumes are continuing to decelerate, while you're getting on price. So as a result, I was wondering if we should expect softer volumes to continue in Q3, offset by better pricing, and just how you're seeing these trends play out for the second-half of the year between Q3 and Q4?

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah, Anna I would say, consumer demand remains resilient. Our categories thus far, remain healthy and demand has been robust. Just to give you a few numbers. I mean, North American consumers across our categories [indecipherable] categories, up high-single-digit; Western Europe, which is a big developed market for us up teens, in Latin-America double-digits KC Professional globally was up double-digits, and so I would say the category overall demand remains pretty robust. Are we aware of concerns around the corner regarding related to the economy and economic pressures, for sure and we talk about at all the time, thus far, it has not materialized.

In the second quarter, the elasticity impact has remained muted -- somewhat muted. Just to give you an example on diapers the category for the quarter price was up six and volume was up one. So that would probably say the elasticity impact has not been as we typically model. And so I'd say on that side it does reflect the essential nature of our categories. So our volume trends, you know, as we kind of cycle our pricing from year-ago we expect our volume trends to continue to improve and we think should improve in the back half in addition, driven by the commercial program innovation, we've been talking about. And so I think, overall, I'd say, healthy, not seeing a whole lot of broad scale-down hearing. We do seek in pockets. There is continued demand for premium and big development markets like the US, like China.

Even in Brazil and Argentina, we are seeing actually the premium tiers start to grow and the value tiers contract a little bit. There are some pockets of down tiering, we're seeing that in Southeast Asia, some markets in Latin-America, but we're -- and to manage through that. We're going to continue to sharpen our value propositions. I mean, we're very interested in serving all consumers as category leaders, we feel like we need to serve both consumers who are looking for premium products, but also the ones on the value side as well. So we have a broad portfolio that spans value to premium. And we're doing things like adjusting accounts to make sure our large packs remain competitive and affordable. We're sharpening our entry price points in small format stores to make sure that consumers can afford to be in the category. And then probably most importantly, in my mind is we talk a lot about innovation, we are doing a better job of accelerating or cascading that innovation through our tiers from premium to value and so that -- that's kind of how we will manage through it.

Anna Lizzul
Analyst at Bank of America

Thank you. That's very helpful. And you also talked a bit about promotion here. I know you're not necessarily interested in getting back to pre COVID levels of promotion, investing a little bit more in marketing. With your current levels of marketing spend versus peers potentially spending more, do you feel that your marketing spend here is deficient [phonetic] versus others in the industry?

Mike Hsu
Chairman and CEO at Kimberly-Clark

Well part one -- I'll answer the second part, first, Anna. We are -- I would say, we are highly efficient on the marketing side. I mean, we've invested quite a bit over the last several years around revenue management analytics, marketing ROI analytics and so maybe to a fault we're perhaps overly analytical in terms of how we invest, but in general, I feel very good about the returns we're getting, which is why, which is also why it gives us the confidence to invest more.

We recognize we're not spending fully at the levels of some of our competitors. But we've made significant progress over the last few years. I think, we're up several hundred or a few 100 basis-points in advertising spending over the last five years. And so -- so we're, I'd say pleased with that progress, but not satisfied. And part of the whole reason why we're very focused on being disciplined about how we drive both revenue, volume, mix, innovation is that we feel like it's important to continue and invest behind these brands because that's the way that we can drive our category growth and serve our consumers better.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

And Anna, another point on the investment. Keep in mind that we have three segments and we don't invest at the same level in each segment. So what we disclose is the total number for the company. So if you take as an example KC Professional, the level of investment behind KC Professional is not going to be anywhere near what we're doing on personal care. And if you look at Consumer Tissue, it will vary by market. So we look at that very closely. And as Mike said, we are very focused on return on investment and being efficient on those dollars that we spend per segment.

Anna Lizzul
Analyst at Bank of America

Great, thank you very much.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Thank you, Anna.

Operator

Thank you. Your next question is coming from Andrea Teixeira from JPMorgan. Your line is live.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Good morning, Andrea.

Andrea Teixeira
Analyst at JPMorgan Chase & Co.

Thank you, good morning. Good morning, how are you? Just first on the pricing. I have a question for both you Mike and also a clarification for Nelson. On the pricing side, you're getting obviously strong realization but lapping the pricing that you mentioned like you are ahead of your competitors. So what are you embedding into the second half, just to be clear, it seems like the guided -- the new guide at mid point implies about 3% organic in the second half. So, how much you expect and it sounds as if you're expecting an inflection in volumes at some point, you said sequentially bad, of course, you had negative in the quarter. So just to clarify, what you are expecting for the third quarter and potentially the fourth. And then Nelson, on the gross margin side, the $90 million benefit from prior outlook. My math is like about 45 basis-points benefit for the year, your tax benefit from the impairment is another $0.05, so how should we be thinking of your EPS guidance raise, this 45 basis-points benefit would go in flow through EBIT, it seems. I think you're flowing the whole portion. So in other words, you're not embedding additional promo pressure or marketing pressure in your -- in your outlook. Thank you.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah, Andrea, thanks for the question. I don't know if I can -- how well I can answer it all because I don't think we outlook kind of the components of price-mix, volume, however, I would say, am I expecting an inflection on volume? For sure, at some point. I don't know when that's going to be but at some point, I want volumes to be positive. And just to give you -- refresh your memory, pre COVID, I think for the three years leading up to our -- a lot of our revenue growth was primarily volume-driven. And so I do -- I do expect us and which is why we're investing in innovation and commercial programs for the business to grow healthy, long-term, we need the volumes to be up. And so -- so yes, for sure, I'm expecting an inflection and a point I not [Speech overlap]

Andrea Teixeira
Analyst at JPMorgan Chase & Co.

But in 2023, I'm sorry to -- to just to make sure [technical issue].

Mike Hsu
Chairman and CEO at Kimberly-Clark

Again, I said our -- our volume trends are improving. I can't give you the inflection point and I'm not going to forecast it or give guidance on an inflection point, however, I would point out, the majority of our pricing initiatives were more front-end loaded or front-half loaded last year and so we are -- we are starting to cycle those and so, I would expect our -- the contribution of revenue from price to diminish and hopefully, the contribution to revenue from volume and mix to continue to improve.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

I would point you Andrea to the following. We've seen sequentially in the last couple of quarters an improvement of about 200 basis points in volume. So we went from down seven to down five to down three. Now, as Mike said, we're not -- we don't forecast or disclose the next quarter break-down, et cetera. But clearly, you're seeing that the volumes have been improving sequentially. And that has to do, one, with the pricing, but also with some of the innovation and the products we have been putting out on the marketplace and the increased investments behind the brands. So yes, we are expecting volumes to improve continuously.

I mean, that's our expectation. We are expecting revenue, growth management, realization to be less of a driver. And again that has played out over the last few quarters. And as I explained earlier so that's kind of the way to think about it as the year progresses. And yes, we will get back to positive volumes. That's the plan on that end. In terms of the operating profit. Again, I'll try to address the question. So if you point around what are we flowing? How is it going? We've got a -- we've got a few things that are playing out in terms of operating profit. I mean one, we have a slightly better performance in the first half and we're flowing part of that through because we -- that's coming through the actuals. But also, we're having a better outlook on costs and that's also equating into better performance on the outlook for EBIT, which I believe that's the question you had.

For EPS, there are a few puts and takes. In the quarter yes, tax rate was a bit of a driver, but we're still expecting the tax rate for the year to be in 23% to 25%, so think of that more as a timing. We're not moving away from the guidance in terms of tax and then between the lines, there's really not much of a bigger driver apart from that, that I would highlight, at this point.

Andrea Teixeira
Analyst at JPMorgan Chase & Co.

Thank you. I'll pass it on.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Okay, thank you, Andrea.

Operator

Thank you. Your next question is coming from Jason English from Goldman Sachs. Your line is live.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Good morning, Jason.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

Good morning Jason.

Jason English
Analyst at The Goldman Sachs Group

Hey good morning, folks. Congrats on a solid first-half of the year. A couple of comments so far or answers to the questions that have been posed to you around market share are focused on matters that are lagging your price increases. As you noted, those price increases have been in place for pretty long now. It's uncommon for competitors to lag pricing by couple of months, but it is not common to have them lag for a couple of quarters that follow. So I imagine your assumption and our assumption should be that [technical issue] and if that's the case, do you accept these market-share losses, like you just kind of live with them or should we expect you to have to close those price gaps to try to regain that market share?

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah couple of things, Jason. I think great point. Thing I'll say is generally, at this point, I would say, we've seen list prices move. But when I say "scraping" or your word lagging, I'd say, we have seen a little bit of higher promotion in some markets, particularly in Latin America, in Brazil for instance, we've seen continued promotional activity, so I think that -- that has been what we've observed more commonly. The list prices had lagged for a period. At this point, I'd say, a lot of the brands have had -- have moved as well. And so -- so overall, I'd say the tactic is around the promotional side and as I've mentioned, Jason, hey, we're going to be smart about it, it's not the way that we think is the valuable way to build the business in these categories and so.

But we have invested in RGM capability. We do know the analytics and we can make wise investments around promotion. The bigger thing is and I think to your point, not yet. I'm not going to live with. We have to grow shares over the long-term to sustain the business just like we have to have volumes up and so market shares need to grow, that's why our goal is to be upper -- up or even in more than -- in about half or more. And that's the goal. And so but that's also why you've heard us talk quite a bit about our innovation in commercial programs. That's why we spent a lot of time with consumers talking about them and spend a lot of time with our customers, talking about them and we feel good about where we are, but I think, you're certainly pointing to the one area that I feel like we really need to improve and we're committed to doing that.

Jason English
Analyst at The Goldman Sachs Group

Okay, okay. Thank you. I'll pass the line.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Thanks, Jason.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

Thanks.

Operator

Thank you. Your next question is coming from Peter Grom from UBS, your line is live.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Good morning, Peter.

Peter Grom
Analyst at UBS Group

Thanks, operator. Hey, good morning guys. Hope you're doing well, so I just wanted to get some more color on what's embedded in the outlook from a gross margin perspective. I think previously the expectation was 230 basis points, you reiterated your outlook for an increase in ad spend over 100 bps this morning, so is the expectation for 250 basis points now? The premise of the question is it just seems that, that would imply that gross margin improvement would kind of taper off in the back half of the year and just given what you're seeing in terms of cost pressures and productivity that would deem somewhat conservative. So just if you can help us understand the outlook for gross margin today and any phasing in the back half of the year that would be helpful.

Nelson Urdaneta
Chief Financial Officer at Kimberly-Clark

Yes, sure, let me -- let me walk a little bit through the outlook and some of the components that we have. And as a reminder, Peter, what I -- what I stated at the last call was that our expectation was at least 230 basis points because it was a straight math. Obviously, we've reached 34% gross margins in the second quarter. We're very pleased with the progress that has been made as we seek to recover back the pre-COVID levels of 35% and then expand from there. So we've had two quarters of very strong gains in gross margin and obviously, as we go into the back half of the year, I'd state two things, one, we do expect to have year-over-year gains in gross margins.

We do expect that gross margins -- margins as a whole grows [indecipherable] but it should expand as -- in the second half, but not at the pace that we saw in the first half. So, as you're thinking about your numbers that's the way I would think about it. So we would -- we would exit the year definitely stronger. The implied number. Yes, as you say, would be 250 on the gross margin, but that again -- that's at least that's the way, I would characterize that because obviously, we've been -- we've been expanding ahead of that year-to-date. As you think about the -- the balance of the year, I'd also like to highlight a few things on the outlook, on costs, we have not changed the currency impact that we foresee. We only took down costs by about $50 million. We still expect the full-year to be around $300 million to $400 million of inflation in currency and then in the other costs, we still expect around $200 million. It's been playing out in the first-half right around the level we expected. So net-net, good progress on margins. We're pleased with how that's coming along. We expect to continue to make gains, but not at the same pace as what we did in the first half.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Yeah and maybe, Peter, I'll just add, just the outlook as Nelson just teed up really does reflect the strength of our first half and our confidence in our underlying plan. As I mentioned earlier, our categories thus far, remained healthy and demand has been robust. We have strong innovation in commercial lineup and we feel great to be investing more in that. The cost environment has been stable. And so, while it's still a headwind I would say, we were seeing glimpses of reversion and so that's a good thing, but the other part of it, in our outlook embedded in it is, we do expect ongoing volatility and so certainly, as you're well aware, there's a lot of economic uncertainty in our major markets, soft versus a hard landing and the implications for consumer spending first and foremost. We're still dealing with a lot of political uncertainty, including the effects of the war and then as I mentioned earlier, we still have some sporadic supply challenges, while it's much improved versus where it was two years ago. We still have some outages and so -- so there is some inherent volatility. But overall, we feel very good about where the business is and where we're going and feel very good about our outlook.

Peter Grom
Analyst at UBS Group

Thanks. That's really helpful. I guess maybe one follow-up on that. I guess, just given the -- you mentioned some reversion in the cost on the horizon. I mean, I guess based on where things stand today, how should we be thinking about cost pressures looking out to 2024? I mean, should we expect that this could remain a tailwind looking ahead, and I guess the bigger question is, how does it really inform your view on when you expect to return to that 35% gross margin target that you have outlined?

Mike Hsu
Chairman and CEO at Kimberly-Clark

Well, certainly I'll start with. I don't think, I'm going to give you guidance on '24 yet, but I think the -- definitely very pleased with our progress on margin recovery. Certainly, as you saw, our gross and operating margins expand. I think we've done a great job with the revenue realization. Managing the cost environment and so we feel very good about that. Our goal is to restore our margins to where they were back in 2019, our gross margins. I think, we are making that progress but we're going to stop there either. So when I caught into this role back in 2019, I said at that time one of our goals is to expand our margins over time. And so what we're trying to do Peter is, one, restore and then when we get there then we need to expand and there's not two-parts of the plan. There's one plan. And so we're going to continue to work that all the levers that we've talked about, both from a revenue management perspective and a cost management perspective to drive ongoing margin expansion.

Peter Grom
Analyst at UBS Group

Thanks so much for that Mike. I'll pass it on.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Okay. Thank you, Peter.

Operator

Thank you. That concludes our Q&A session. I will now hand the conference back to our host for closing remarks. Please go-ahead.

Mike Hsu
Chairman and CEO at Kimberly-Clark

Okay, thank you all for joining us for the call today and we look forward to seeing you in Q3 -- at the end of Q3. Thank you.

Operator

[Operator Closing Remarks]

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