Thomas Falk - Executive Chairman, Chief Executive Officer, President and Member of Executive Committee Mark Buthman - Chief Financial Officer and Senior Vice President Paul Alexander - Director of Investor Relations

Ladies and gentlemen, thank you for your patience and holding. We now have your speakers in conference. [Operator Instructions] It is now my pleasure to introduce Mr. Paul Alexander. Mr. Alexander.

Thanks, David, and good morning, everyone. Welcome to our first quarter earnings conference call. Here with me in Dallas are Tom Falk, Chairman and CEO; Mark Buthman, Senior VP and CFO; and Mike Azbell, Vice President and Controller. Here's the agenda for the call. Mark will begin with a review of our first quarter results, followed by a brief overview of our full year outlook. Then Tom will then provide his perspective, and we'll finish with Q&A. As usual, we have a presentation of today's materials in the Investors section of our website, which is www.kimberly-clark.com. Before we begin, let me remind you we'll be making forward-looking statements today. There can be no assurance that future events will occur as anticipated or that our results will be as estimated, and I'd refer you to the Risk Factors section of our latest annual report on Form 10-K for a further discussion of forward-looking statements. I'd also like to point out that we will be referring to adjusted results and outlook. For 2010, adjusted results exclude a loss related to the move to highly inflationary accounting in Venezuela. For 2011, adjusted results and outlook exclude costs for the pulp and tissue restructuring and a nondeductible business tax charge in the first quarter related to a law change in Colombia. For further information and reconciliations to comparable financial measures determined in accordance with GAAP, please see today's news release and additional information on our website. And now, I'll turn it over to Mark.

Thanks, Paul, and good morning. We start with three key headlines for the quarter. First, we delivered organic sales growth of more than 2% and made good progress with our targeted growth initiatives. Second, we returned a significant amount of capital to shareholders. And third, while cost inflation is weighing on our near-term profitability, we're taking a number of actions to ensure we deliver on our commitments for the year. Now let's cover the details of the quarter. Overall sales increased 4% to $5 billion. Organic sales rose more than 2%, on track with our full year plan. Sales volumes improved 2% while the combined impact of changes in net selling prices and product mix was slightly positive. Volumes benefited from innovation and targeted growth initiatives. On the other hand, we experienced lower volumes in Venezuela and category demand remained soft in parts of North America. First quarter adjusted operating profit fell 14%, with an operating margin of 13.1%. Benefits from top line growth and $60 million of FORCE cost savings were more than offset by input cost inflation of $195 million. First quarter adjusted earnings per share were $1.09 compared with $1.14 last year and included benefits from a decline in the tax rate and a lower share count. Cash provided by operations for the quarter was $250 million compared to $464 million in the prior year. Looking forward, I expect our cash generation to build throughout the year as earnings grow and we complete nearly all of our pension plan contributions in the first half of the year. First quarter capital spending was $234 million compared to $184 million last year. We're off to a strong start supporting our growth, innovation and cost reduction programs. We repurchased 13.1 million shares of KMB stock at a cost of about $850 million in the quarter, and we're on track to execute our $1.5 billion share repurchase plan for 2011. In total, we allocated more than $1.1 billion to share repurchases and dividends in the first quarter as we continue to allocate capital in shareholder-friendly ways. Now I'll highlight a few areas of our segment results for the quarter and as usual, further details are in this morning's news release. In Personal Care, organic sales were even with last year. Sales volumes improved 2% offset by changes in net selling prices and product mix. In North America, we delivered double-digit volume growth in feminine care for the fifth consecutive quarter and high single-digit growth in adult care. Momentum also remained strong in our targeted growth initiatives across K-C International. On the other hand, volumes fell significantly in Venezuela, and the baby and child care categories in North America remain relatively soft. Personal Care operating margins of 17.8% were impacted by cost inflation, primarily for oil-based materials and a higher level of promotional activity in North America. There were also a few smaller items, including some machine startups and supply-chain disruptions, which I wouldn't expect to recur going forward. Now turning to Consumer Tissue, organic sales grew 3%. Net selling prices were up 2%, led by cost-driven price increases in K-C International and Europe. Changes in product mix improved sales 1%. Sales volumes were even with last year as gains in bathroom tissue and Kleenex facial tissue in North America were offset by declines elsewhere. Operating margins of 9% were below prior year levels as higher net selling prices and cost savings were more than offset by cost inflation, mostly fiber costs. Moving to K-C Professional & Other. Organic sales increased 4%. Sales volumes grew 3%, including double-digit growth in our safety business in North America and a mid-single digit gain overall in K-C International. On the other hand, relatively soft market demand continued to impact our washroom sales in North America. Operating margins of 13.5% were down slightly, though remain solid despite the challenging environment. And lastly, Health Care organic sales were up 5%, driven by higher sales volumes of 6%. Volumes of high-margin medical devices were up high-single digits, paced by I-Flow and our airway management business. Supply volumes grew mid-single digits and benefited from a modest improvement in category demand in the North American market. Operating margins were down somewhat compared to last year, and it's mostly due to cost inflation and ongoing litigation expenses related to the I-Flow acquisition. So that wraps up the review of the quarter. Before I hand it over to Tom, I'd like to briefly comment on the updated outlook that was provided in this morning's news release. We widened our estimate for 2011 adjusted earnings per share, which we now expect to be between $4.80 and $5.05 a share. There's been no change to the top end of our previous guidance range, but we've lowered the bottom end by $0.10 a share. A wider range reflects a significantly higher cost inflation assumption of $450 million to $550 million for the year. That's more than double our previous assumption and represents an incremental headwind of more than $0.45 per share compared to our previous plan. We're responding to the significant pickup in cost inflation in three primary ways: First, we're raising selling prices across a number of our businesses; second, we're accelerating or implementing additional FORCE cost savings programs; and third, we're focused on managing our overhead spending aggressively. Now Tom will talk more about our specific plans in each of these areas. All in all, we expect these actions, along with other modest changes to our plan to offset most, if not all, of the incremental inflationary headwinds we're now anticipating compared to our previous plan. So that wraps up my review. To recap, we achieved top line growth, in line with our plan for the year, with further progress on targeted growth initiatives, we delivered on our commitment to return significant capital to shareholders, and we're taking actions to combat the inflationary headwinds facing our business. Now I'll turn it over to Tom.

Thanks, Mark, and good morning, everyone. I'll share my perspectives on the state of our business after the first 3 months of 2011, and more importantly, what we're doing to overcome the headwinds we face. And then we'll get to your questions. In short, we're executing our Global Business Plan strategies, and we're taking aggressive actions in a challenging near-term environment. Looking at our organic sales growth and our market positions, we're on track with our plan in the first quarter. Our volume growth was the best we've delivered since 2009. And as you heard from Mark, we continue to make good progress with our targeted growth initiatives, particularly in K-C International, our K-C Professional Safety business and our Health Care Medical Device business. We're also getting good returns in our innovation and marketing investments. This is especially true in feminine care and adult care in North America where the initiatives we began last year on U by Kotex, Poise, and Depend continue to deliver volume and share growth. And looking more broadly at our share positions, we held or increased market share in 7 of our 8 key consumer categories in the U.S. That included share gains of 4 points in feminine care, 3 points and adult care, 2 points in baby wipes and 1 point in both child care and facial tissue. And we're growing ahead of category rates in a number of markets in K-C International, such as Brazil. In terms of overall market demand, portions of the North American market are still relatively soft, but there are early signs that conditions are starting to improve. And most importantly, we have a number of innovations coming to market in the next few quarters to further improve our brands. We're launching an improved Huggies diaper in North America in the second quarter, and Jeans diapers will be hitting the store shelves in the near future. We'll also be introducing an exciting Huggies diaper line extension later this summer. Outside of diapers, we'll be launching improved Pull-Ups training pants, new and improved U by Kotex and Poise products, some upgraded COTTONELLE bathroom tissue offerings and new Kleenex facial tissue offerings. And we have plenty of innovation coming in K-C International as well. So our innovation pipeline is healthy. We're executing strong marketing programs, and we continue to do what's right for the long-term success for the health of our brands. Now turning to the cost environment and what we're doing to improve our profitability. Clearly, the environment is much more challenging since we talked to you last at the beginning of this year. Market pulp costs did not fall in the first quarter like we and most others had assumed. Instead, costs rose in March, and over the next few months, are likely to hit or potentially even exceed the peak levels that occurred last summer. In addition, as we all know, oil prices have risen rapidly to over $100 a barrel, this is well above what we planned for and it's caused prices for many of our oil-based cost inputs to increase considerably. For example, polymer costs are up about 20% both year-over-year and sequentially from the fourth quarter of 2010. Similarly, superabsorbent costs are up 15%, and costs for both of these key materials are expected to increase further in the near term. Now it's our job to manage through these headwinds, and that's what we're working very hard to do. As Mark mentioned, we're focused on increasing net realized revenue, implementing additional FORCE cost savings programs and reducing overhead spending compared to our previous plans. Let me share some more details on each of these areas. First on the revenue front. Many of our businesses are increasing selling prices. Last month, we announced increases from most of our North American consumer products businesses that will go into effect over the summer. We're also in the process of raising prices in many areas of K-C International, particularly in Latin America. And our B2B businesses are also taking pricing action, including a North American K-C Professional price increase that we announced last week. So as a result, we now anticipate that price and mix improvements will deliver 1 to 2 points of revenue growth in 2011. That's up from our original assumption of about 1%. Second, we're aggressively identifying and implementing incremental FORCE cost savings programs. Our global procurement organization and our lean/continuous improvement capabilities will help us deliver even more savings in the current environment. So all together, we now expect FORCE cost savings of $250 million to $300 million in 2011, and that's $50 million more than our original planning assumption. And third, we'll be reducing overhead spending compared to our original plans. We're using lean/continuous improvements to reduce the costs of our back office operations, and we're closely managing our spending on discretionary items. As a result of our control of SG&A spending, we're now targeting for total between-the-lines expenses to grow in line with, or potentially slower than, the rate of sales growth in 2011. So all in all, the benefits from our actions to improve revenue realization and reduce costs will be more visible in our results in the back half of the year. I also expect our innovation and growth initiatives to build momentum as the year progresses. All of these actions require strong focus and discipline, and I'm confident in our team's ability to execute these plans while we continue to build an even brighter future for our company. So to summarize, we're continuing to execute our Global Business Plan strategies for the long term success of Kimberly-Clark, we are aggressively managing those factors we can control to deliver solid results in the near term and we're firmly convinced that a successful execution of our Global Business Plan will improve shareholder value over time. So that wraps up our prepared remarks. And now we'll begin to take your questions.

[Operator Instructions] Our first question comes from Ali Dibadj with Sanford Bernstein.

I just had a question to talk -- if you could talk a little bit about what's different this time versus last time from a commodity -- in the environmental commodity increases. If you look at Personal Care, for example, last time, in '07, '08, the margins held in pretty well. This time, it sounded like -- Mark, you mentioned there some one-off things, but [ph] 17.8% operating margins were, as far as I could tell, kind of the worse you've seen in, gosh, at least a decade, as I look at the model. What's different now versus last time on that metric in that segment and along a number of dimensions, whether it be competitive environment, whether it be just these one-time really driving it, et cetera? And then on Consumer Tissue, similarly, I guess high-single digits is what one would expect at these levels? How do you describe that environment right now as well as from a competitive environment, and what's different versus last time?

Yes, I'd say, in some -- the reasons why the commodity costs are higher are different. So I think that's part of it. But we had a pretty big hit on margins on Tissue when pulp spiked over 1000 the last time as well. So I'd say, yes, we're a little below where our low watermark is for Personal Care margins, and some of that was the one-time -- some of it was -- the pricing environment globally was a little bit more aggressive, so we had a little bit bigger trade spend in the first quarter. So that's probably part of it. So timing of promotion activity is part of it. We certainly expect our margins to improve from where they are over the back half of the year.

Yes, I would say also the makeup of cost inflation is probably, if you think about it, is 2/3 oil and oil-related costs, 1/3, fiber. That's a little different mix than we've experienced in the past, and oil and oil-related costs tend to impact Personal Care a little bit more than you'd see in Tissue.

I also think some of the underlying commodities are adjusting quicker now than they may be used to. So polymer is reacting more quickly as well as superabsorbent.

And by the same token, you are, it sounds like, trying to react more quickly as well or...

Yes, absolutely.

In that context, I guess, how do we think about your guidance? And how much confidence do you have in your guidance? Why should we kind of believe in your guidance in a sense? And it was kind enough that you went through the incremental $275 million in commodities roughly and how that sort of breaks out in terms of pricing in FORCE and overhead, but could you put a few more numbers behind some of that? And let us know your confidence in each one of them, particularly around the competitive environment going forward.

Ali, I think you know us well enough. We try to tell you how we really think it's going to turn out every time we do this call. So our guidance, our confidence level around guidance is always pretty high or we wouldn't guide it to this level. Now we're not always right, and sometimes things happen that we didn't expect. So certainly, based on the assumptions that are in there that we share with you in terms of input costs and cost savings, we're pretty confident we can deliver in all of those areas.

Okay, and last one is, something you generally do have control about is buybacks. Can you give a sense of the pace of that as we go forward?

Yes. As we said in the January call, Mark can give a little bit more color, but we expect to have most of our planned buybacks done for the year in the first half of the year.

Yes, I think that's fair to say. We'll have some to do in the back half. But we got a significant amount out the first quarter. We'll take that pace down just a little bit in the second quarter. But the majority will be done by the time we've finished with June. And nothing incremental planned at this point.

So we already had a big step-up in this year's planned buyback activity. So we'll see how cash flow looks though later in the year. But at this point, we're pretty comfortable with the plan.

Okay, thanks very much, guys.

Thanks, Ali.

Your next question comes from Chris Ferrara with Bank of America.

So I guess I just wanted to follow on a little more specifically on that first line of questioning. And I guess the specifics are Consumer Tissue, North America, Personal Care, globally, it seems that pricing is a little bit more challenged, right? I mean, you have deeper levels of promotional spending in Personal Care, yet you’re turning around today and saying that pricing realization is going to be a little bit better, right? And your volume assumptions aren't changing much, I guess. So what gives you the confidence that volume won't drop off more, particularly in Personal Care, I guess, now that the competitive environment is already difficult? Now you're going to price on top of that difficult competitive environment, and you don't see a lot of volume fall off? Or maybe you do and it's just embedded in a bigger number? I guess if you can give a little color around that, it will be very helpful.

Yes, sure. Well, on Tissue in particular, last year in the first quarter, we were on allocation on Scott tissue. So we had constrained promotional spending somewhat, and it returned to more normal levels late in the year. So it's not as big of a jump if you look at the average for 2010 versus where we spent in the first quarter. So we'd say, part of it is the comparison. A different set of issues, but a similar story on Personal Care where last year's first quarter was a little lighter promotional calendar. We had Jeans diaper coming in the second quarter and spent a little bit more aggressively on that. And so we had a little bit more promotion. In the first quarter, we also had some competitive activity in the first quarter that we were matching up to that ramped up in the latter part of last year, particularly in K-C International. So from that standpoint, you know some of it's in the quarterly comparison, was probably the toughest in the first quarter if you look at it versus the year average. It would it be up by as much. And then to the second question about demand, on the baby care, it's really more of a function of the birthrate than consumers deciding to constrain purchases of diapers. And so we've seen a relatively depressed birthrate really since the economic downturn began in 2008, 2009, and have actually seen probably a 5% decline in the total number of annual live births over that cumulative period. So we're expecting that to start to tick up in the second half of the year and kind of level off in the first half. And so we'll see how the data progresses. But we don't think industry price changes will have a big impact on that. We'll obviously watch private label share and pricing gaps to see what happens in that standpoint, to see if there's any category down trade. But with all the innovation we have coming, with an improved Huggies diapers that starts to ship, with Jeans diapers in the second quarter, we've got some exciting news on Huggies that we'll be talking about later this year, all those factors we feel pretty good about, our innovation plan for the year. And Tissue, you'd see a similar story. We've got pretty good momentum going on COTTONELLE. And as we see the pricing take hold in the market, we don't expect to see a big hit there.

So it sounds like -- and then if I could just characterize it, you're saying that the higher levels of promo that you guys cited in the back of pricing, I think, in North American pricing, decelerated sequentially in a couple of the categories. You're saying that the comp issue, you don't feel that the competitive environment is particularly more heated right now than it was over the last six months? Is that right?

Yes, that's what the caveats said in some markets where we talked about principal competitors in baby and child care in particular, that heated up last year. That's abated somewhat, but not substantially. But not as much in the U.S.

Okay, that's helpful. And then just, I guess, on pricing geographically. North America, obviously, you've already made the big announcement. Can you just talk a little bit about elsewhere? I mean, nothing -- we haven't heard anything on Europe and in China. Is there any chance of taking -- what about Asia? In general, is there any chance of taking pricing? And in Europe, I guess, also?

Yes, and I think what you'd want to look for is where you had very strong currencies. You're probably not going to see much opportunity for price, because you're not going to actually have the same impact on their local currency cost structure. And in markets like Latin America, we'll probably be getting more price where their currencies haven't appreciated that much relative to the dollar. So we'll be aggressive there and other markets like Australia, which just had a very strong move against the U.S. dollar. Probably not a big move on price there because it's not really going to be justified on a local currency market. In other markets like Vietnam, has been very high inflation. So obviously, you see pretty high price realization there. China, there's a lot of launch activity going on, so it's a pretty competitive market. So probably not as much of an opportunity to gain pricing in China. But that's one we'll continue to watch and try to drive mix and innovation there to get revenue realization.

Thanks a lot for the time.

Thanks, Chris.

Your next question comes from Gail Glazerman with UBS.

Can you talk a bit more about the Personal Care volume in international markets? I know you said Venezuela was a big impact on that. Is that something you could quantify? And are you seeing any sense of pressure and resistance to price increases in this market?

Yes, I think Venezuela was -- Paul, what was it? A couple of points of drag in the Personal Care numbers overall?

Correct. It took about a half of point out of our total consolidated volumes and it more skewed to Personal Care obviously.

So we saw broadly good results across most of the international markets, probably not as rapidly growing as in prior quarters. It's a little slower for us in Eastern Europe. We still had double-digit gains in China and high single-digit growth across Latin America, x Venezuela.

Okay, great. And is it possible to break out and quantify some of the operating and one-off costs that you had in Personal Care in the quarter?

No, I mean that was -- we had several startups and some of them didn't go as well as planned. And so there wasn't any one thing that was as big of a deal. The bigger factor driving the margin was cost inflation and higher trade spending.

And Tom, you had mentioned, I guess, some early signs of economic recovery. Is that something you can elaborate on? Where are you seeing it? Is it a change in buying patterns? Is it in K-C Professional?

Yes, a couple of areas. I mean, obviously, we expect the birthrate to stabilize and start to pick up in the U.S. in the back half of the year. And we look at lots of long range forecasts on that. A lot of it is related to consumer confidence and so forth. So we're seeing small positive signs there. In our KCP business, we saw -- we had double-digit volume growth in safety in the quarter, which is good. But manufacturing-related stuff is starting to move again. On the other hand, office vacancies are still bumping along the bottom. So not a lot of improvement in that segment. Lodging as well is at near historical lows. So it's kind of a mixed bag. But in some of the manufacturing segments, we're starting to see decent growth. We actually had decent volume growth in KCP in Europe, which -- Germany is heating up and recovering nicely. And then in the emerging markets, we saw, still, pretty solid volume growth in KCP. On Health Care as well, had decent volume growth this quarter, which has been a pretty stable performer. So we're past the H1N1 comps and are back to more normal growth in Health Care, which was positive.

Okay, and just one last question. You've touched on some of this, but in terms of the price increases that you have announced, mainly for the North American market, can you give any sense of color to both the competitive and the customer response to that? And any areas that you did, particularly concerned about risk of trade down? I mean, [indiscernible] markets like paper towels seem to be still pretty weak for you. Are you concerned that this will just make that issue -- aggravate that issue I guess?

Yes. And I think our announced price increases were in bathroom tissue, diapers, baby wipes. And so I think there's been some competitive announcements on paper towels that we'll obviously be evaluating. I think that, like anything else in these things, you announce your price increase. I don't think I've ever seen a customer yet that said thank you for that, and so just as we don't want our suppliers to hand us cost increases. And so it's a competitive environment, and we'll see what happens in the marketplace. It was, I think -- recently, we had confirmation that one of our principal competitors is going to follow in the KCP front. Actually, a couple of other competitors lead price increases that we recently followed. So yes, I think it's not surprising. When you look almost across every category out there, you're seeing the impact of higher commodity costs show up in higher selling prices for everything.

Okay, thank you.

Our next question comes from Wendy Nicholson with Citigroup.

Two questions. First, I know you don't like to give specific quarterly guidance. But I wanted to get a feel, I hope I didn't miss it, for any of the moving pieces in the second quarter. If most of the pricing isn't going to go into effect kind of until the summer months, I assume the second quarter is going to feel more gross margin pressure. But maybe you're going to get a volume bump as some retailers take inventory prior to the price increase? So can you comment on that sort of generally?

Yes. Well, we don't give any quarterly color on that. But I'd say you're thinking about the right variables. So in the second quarter, we'll not have much benefit from any selling price moves, at least certainly not in North America. And we do try to manage the amount that customers forward buy on pricing because it just screws up everybody's supply chain. So I wouldn't be looking for too big of a volume move there.

Wendy, the other thing I would add is in the near term, costs are going up sequentially. Although with the amount of shares that we bought back in the first quarter, that should start to benefit the bottom line number more going forward.

But fair to say, most of the FORCE savings will probably be back half loaded as well?

I think we're pretty steady implementers of those programs. So I think you should start to see those build as the quarters go.

Okay, fine. And then on currency, I know you sort of shifted the expectation there of 1-point benefit to a 2-point benefit on the top line. But I'm surprised you didn't call that out in terms of something that was going to insulate your earnings maybe a little bit more than expected. And can you remind us kind of what the translation is, or if there is a multiplier effect in terms of -- if currency is going to benefit the top line by 2 points, what's the impact on your operating margin or your operating profit? Is it the same 2 points or is it a little bit more?

It's roughly about that. It always depends on what currencies are moving. But essentially, the change from the 1-point benefit to 2 points of benefit on the top line translation to the bottom line is about $25 million or $30 million of operating profit. So it is one of those other items that is a bit better than we planned originally.

Perfect, okay. Thank you very much.

Thanks, Wendy.

The next question comes from Chip Dillon with Credit Suisse.

First question is, sort of just a dive in a little bit into the higher cost. It looks like the midpoint of your expectations are up about $275 million, but FORCE will offset $50 million of that. So I get to $225 million. And I hate to go sort of faster than the math, but that looks like about $0.35 to $0.40 a share after tax. And I suppose you'll get also some benefit from currency. But all added in, it looks like to offset that, you need about 2% higher average pricing over the second half of the year, which certainly seems reasonable given your announcements if you can get them. Am I on the right track there?

You're a little high on the price front. So basically, our cost inflation, we went up from $200 million to $250 million to around $450 million, I think. And so it was about a couple of hundred million move. If you get an average, about a 1/2 point more price, that's $100 million. Some additional FORCE cost savings. There's another $50 million. And then some benefits from currency and between the line spending and those kinds of things is roughly how you'd get there.

Okay, I'm sorry. I'm meant 2% for the half. So that would be about 1% for the year. I see. And of course, currency helps you as well. Now since you you've out both in the U.S. market on disposable diapers and on retail tissue, have you seen anything in the marketplace? Any movement from other competitors so far?

I believe that one of our principal competitors has confirmed that they're going up on diaper pricing and on roll tissue.

Got you. Okay. Got you.

You'll be able to ask them questions later this week.

Got you. Okay. That's pretty good. So for one that actually does answer your questions. That's good to know. And the last question, this is more for Mark, not to put you on the spot, I just wanted to get an update on the -- this is note 2 from the K. But when you look at the timber notes you all got back years and years ago, I think even carried about $615 million give or take on your balance sheet, which kind of overstates your debt and your assets, is that number still about right? And do you see that changing much in the next year or two?

No, I think we've got -- I think the disclosure sort of speaks for itself. We've got financing out there, the secured financing around the timber that we sold. And…

This is more of a tax planning strategy. So nothing's really changed on that. Still remains in force, and we hadn't had to pay the tax yet, based on how it's been structured.

Yes, there's two notes in there, Chip, and we paid one of those off. That may be the movement that you're seeing.

Yes, so is it now below $617 million or is that...

Yes, it's about $400 million.

And was that paid off in the first quarter?

No, it was last year.

Yes.

Last year, got you. And last question, again, I understand how...

Hey, Chip, you're really getting into the 10-K. That's good.

We try to do our homework. Well, listen, the last question is, I know that a lot of these structures allow you to kind of -- obviously, the longer you can push this out, the better it is. Is this something that you believe you can keep pushing out, say, for more than 5 years?

I don't think we're going to go there on this one, Chip.

Yes. We're pretty deep in the dirt here, side. I think the disclosures sort of stands for itself.

Got you, I totally understand. Thank you very much.

Our next question comes from Lauren Lieberman with Barclays.

I just wanted to ask a question or 2 about marketing spending because there were sort of no specific mention in the press release. And I know, coming to the year, the plan was your strategic marketing to increase faster than sales. Is that still the plan as we think about it as being more of an in line with sales, kind of year or even below?

Yes, no, I would expect to see absolute spending go up this year, but probably by about the same or slightly less than sales. And so we're getting pretty good returns on our innovations spend. We've got a lot of innovation coming. And we're also getting some efficiency in how we spend the money. So we think we're adequately funding the innovation, which is our near-term strategy.

Okay, and then on paper towels, you guys -- I know you notably did not initiate pricing there in North America. But as we think through the fact that the volumes have been challenged for quite a while now, both category and your shares, what is the plan? I mean, is there innovation coming in towels? Is there efforts to regain some shelf space for Scott Towels? How do you guys thinking about the strategic outlook for that business?

Yes, no, we continue to drive innovation and gain distribution back on both Viva and Scott Towels. So we're back on air with Viva this year with Mike Rowe, our celebrity spokesperson for Viva. So we've actually -- that's out, and the team is making some headway with that. And so, yes, I expect to see us continue to support both those brands.

Okay. And then finally, just on curtailment. So there was some curtailment expense in the quarter. Where did that leave you at the end of the quarter? Is there an expectation of further curtailment in Tissue in Q2 or 3? Or you think you're pretty clean from here?

Well, I think the way you should think about it is that we're really focusing on managing two variables. It is customers service levels and days inventories outstanding. And so we're taking curtailment as we need to, to hit those variables. And so I think part of the comparison to last year is that, because we were on allocation, our customer service wasn't where we wanted it to be. So we ran everything we had in tissue, particularly flat out in the first quarter last year. And this one was probably more normal sequentially to where we were in the fourth quarter.

Yes. And Lauren, so for the full year, curtailment really shouldn't be a positive or a negative. It should be pretty neutral.

Yes.

I'm sorry, so does the $25 million in this quarter -- does that sort of work its way through the system so it actually ends up being a positive from here? Or is it just there's no further impact?

Yes, it could be a small positive.

Okay, great. I'll leave it there. Thank you so much.

Thanks, Lauren.

Our next question comes from Bill Schmitz with the Deutsche Bank.

A couple of things, one is kind of housekeeping. But if you look at your cost of goods sold breakdown and you kind of disclose pulp and polypropylene and some other things, that's only about 1/3 of your total cost of goods sold. So kind of what's going on with the other 2/3 that we really can't track as closely?

That should be more than 2/3.

Yes. I mean, our costs are going up, Bill, on packaging materials, adhesives. Really, just about everything that's going into our products are going up. Individually, they may be smaller. So we don't disclose them. But then they all add up.

And so you assume similar inflation as some of the oil-based stuff and the pulp?

Yes. But basically, if you look at everything from polymer packaging material, adhesives, superabsorbent, they all use the petroleum molecule in some fashion. And so they're related to that.

Okay, great. That's helpful. And then, again, Wendy asked the question about the second quarter. But if I look at some of the variances like, I think, last year, you had $105 million of FORCE savings in the quarter. You had a restructuring benefit. How do you lap all that stuff ?

Again, we're more focused on hitting the full year guidance at this point than trying to manage any one individual quarter to have a quarterly comparison that's favorable or unfavorable.

Yes. And last year, FORCE was pretty consistent across the year. So the big restructuring benefit we got was in the third quarter of '09. So year-on-year, we don't have the same comparison issue maybe that we wrestled with in the third quarter of last year.

Okay, I got you. And then in terms of elasticity on some of this pricing -- I mean, are you seeing historical trends prevailing? Or has it gotten worse? I mean, how has it been trending?

Well, the other thing, when you look out there at every category, you're seeing this kind of pricing popping up. So it's certainly happening in food. It's happening in other non-food categories. It's happening at the gas pump. And so I suspect what you're seeing is the consumer potential is less sensitive. I think we're also getting more sophisticated in our pricing ability, in terms of targeting price points and understanding consumer shopper behavior. So where we're doing it with count versus list is more sophisticated as well. So we're intentionally trying to avoid having big elasticity challenges.

Okay, great. Thanks very much.

Our next question comes from Doug Lane with Jefferies.

Just looking at the gross margin trend last year. You saw the commodities went off. You saw sequential deterioration in the second quarter and the third quarter. And then in the fourth quarter, it really evened out. And frankly, if I remember right, it was pretty substantially better than what I was looking for. And then it looks like it's kind of reversed in the first quarter. So I'm wondering, what is the main difference in the gross margin landscape, which looked like it, at least on the margin, improving in the December quarter, and now it looks like it's going the other way in the March quarter?

Yes. I mean, sequentially, our gross margin was down about 170 basis points from Q4. A lot of that is going to be -- pulp and polymer in particular are up year-on-year. But I don't know if Paul can add any color on that.

Yes, Doug, the two main factors are first, as Tom mentioned, inflation, especially in the oil-based materials. They moved up quickly in Q1. And then the other thing is promotion activity. We had more trade promotion in the first quarter.

So are we going to see that sort of promotional give-and-take as prices go up so that we really won't get the full benefit of the price increase maybe, adjusted for promotions until they get really into the third or even fourth quarter?

Yes, I think we've got some activity in K-C International that you'll start to see in Q2. But the reality is, the big price increase in North America doesn't start to go into effect until the end of Q2.

Okay, thank you.

Thanks, Doug.

Our next question comes from Erin Lash with MorningStar.

Obviously, comp pressures aren't unique to Kimberly-Clark. But I was wondering if you could discuss or provide some additional details on your conversations with retailers, both domestically and abroad, in terms of the cost pressures and the pricing actions that you've been taking.

Yes, I think retailers certainly understand what's going on, because they're hearing it from every supplier. So whether you're selling cornflakes or Kleenex, you're seeing the impact of higher commodity costs show up in pricing discussions. And so retailers understand it. But they also want to understand how you're going to help them drive their business overall, and how you're going to make it relevant to the consumer and handle it in the shopping environment. So I think every one of those discussions goes a little differently, but that's basically the nature of it.

And switching gears, beyond your share repurchase program that you've already announced, could you talk about your priorities for cash use and what you are appetite for potential acquisitions are in this environment?

Yes, sure. We continue to -- the dividend is important. We've increased our dividend at a rate faster than earnings for the last several years and have a top-tier dividend payout. So that's important to us. And then obviously, providing enough capital to invest in our business, to continue the innovation growth and top line growth in emerging markets that we've seen. So we'll spend close to $1 billion on capital spending this year. So that's obviously a key priority. And then where we see tuck-in M&A opportunities, we would obviously look for those. We're disciplined and approach it in that fashion. But I don't see anything substantial that's on the horizon at this stage.

All right, thank you.

Thank you.

Our next question comes from John San Marco with Janney.

Could you drill down into the quarter's K-C International volume growth? Specifically, did it disappoint you at all? And I know there's both inelasticity and some Venezuela issues in those numbers, but presumably, neither of those are going away. So I'm looking for a reason to believe we'll get a recovery there as the year progresses and get something back to normal volume-wise.

I'd say you've seen a little bit slower category growth, growing out of China, for example, we've been growing in last year in the 25% to 30% range in Personal Care. We were double-digit this quarter, but lower double-digit. We've got a lot of aggressive expansion going on there, expect that to continue. But these are all competitive environments as well. And so the if Chinese economy slows a bit, you could see a little slower rate of category penetration in some of these markets. Latin America is going to be pretty solid. So we had x Venezuela, had volume growth in Personal Care that was high-single digits. That's pretty consistent with where it's been with good category penetration. Eastern Europe is probably the one that's been more of a challenge for us, and some of that's just going to take more competitive environment than more competitive pricing pressures. So that market actually dips in volume in the quarter, and we'd expect that to turn around and return to growth with some of the activity that we have planned there for the balance of the year.

Got it. So were you pricing ahead of your category in Eastern Europe, I take it?

It was more a competitive activity with pricing below us, and we were probably a little slow to come down.

Okay, and just one last question. You commented, I think, in your prepared remarks, that you're expecting live birth growth starting in the second half of this year from what's been a pretty severe decline. I guess my first question is, is that a global expectation? And how does that sort of add up geographically? And then secondly, can you share what data you're basing that expectation on?

Yes, the kind was really related to the U.S. market. And we've looked at various consumer confidence surveys to get a projection on that and use the same types of sources. We can get you the specific details if you're interested.

I'd love to. Thank you very much for taking my questions.

You're welcome, John. Thanks.

Our next question comes from Javier Escalante with Weeden & Co.

A couple of questions actually. One is clarification. If you could please revisit what's happening in North America diapers, right, Huggies' prices were down in the first quarter. I understand because of trade spending, right? And now you expect to a put price increase in place in the 3% to 7% range in the third quarter. But is this change in pricing has to do with preexisting promotional plans you had in place, meaning that it was sort of self-inflicted? Or was it in response to consumer trade down to Luvs, to the midyear pricing from Procter & Gamble?

No, I think two things. One is that there was a -- I think a principal competitor had made a count change to an effective bonus pack to add some diapers to the pack. Rather than do that, we decided to match on a price-per-diaper basis through higher trade spend. And so you saw that impact in the first quarter. Probably the other impact was looking at it versus first quarter last year. We had relatively fewer events scheduled as we we're getting ready for the Jeans diaper launch that happened in the second quarter last year. So there was more of a normal event calendar in the first quarter this year.

I see. Because I mean, my question relates to the price increase that Proctor announced -- is announcing to the retailers. My understanding is it limits only to Pampers, not to Luvs. So the fact that the price increase is only in Pampers, does it in any way, change your -- the attainability of the price increase for Huggies in the summertime?

Well, I think a couple of things. First of all, when we announced what we're going to do on price -- and then we see what shakes out in the marketplace and so I think the information on competition is emerging at this point in time. And we'll see what happens in the marketplace. Obviously, what private label does or other competitors do. And the second thing is, we've got a very strong innovation plan coming, with improved mainline Huggies that's beginning to roll-out as we speak. Jeans diaper coming in the second quarter, and then some strong infant care category innovation in the last half of the year. And so I think when you're coupling pricing moves with better innovation, that typically has a smaller impact on the category.

Understood. And finally, more strategic in terms of your global pricing strategy. By raising pricing in North America, but less so in Europe, which is understandable, right, because you -- I mean, the strength of private label there, you have sort of a disadvantaged market share position. Wouldn't you be pushing growth by leaving prices flat in Europe? Wouldn't you pushing growth in a business that is lower margin at expense of the North America business and therefore, hurting shareholder value? Is this like -- North America, certainly, is higher pricing. You have a better competitive position but at the same time -- if you can't revisit the whole European strategy there, because in the end -- if there's no growth in North America, there's even less growth in Europe.

So is there a question there, Javier, somewhere?

Yes, there is a question.

Okay.

The question basically is, why don't you just exit Europe?

Okay. Well, that's a different question. I thought you're going to ask -- no, I think the way the pricing strategies play out is that in every individual market, you look at the dynamics of cost and competition and you try to get as much net revenue realization as you can. And you do that through a multiple of ways. Some involve innovation, some involve list price, some involve promotion strategy. So we did some price realization in the U.K. on Andrex last year where we have a very strong brand, really by just adjusting our promotional depth and frequency. And didn't do anything with list price, and we're able to improve our revenue realization by reducing the depth and reducing the frequency. And so every one of our teams around the world is trying to improve their margins as much as they can by using all the tools that they have available to them. And so sort of a separate question long term is, where is Europe from an attractive standpoint? Overall, Europe generates substantial amount of cash. They delivered on their plan fully in 2010. And we know they're working hard to deliver on their commitments in 2011 as well.

You understand that what I'm saying is that basically you're subsidizing Europe by taking prices in North America and leaving Europe prices flat. And therefore, you are basically pushing growth in the market that has lower operating margins. And therefore, you're basically destroying shareholder value by doing that.

No, no. I mean, you really look at it market by market. So we're taking price in the U.S. because of the innovation strength, the competitive dynamics and the cost dynamics. In some markets in Europe where we can get price, we'll take price there as well. But it's really more about optimizing each individual market as opposed to a global pricing strategy.

Okay, thank you.

The next question comes from Linda Bolton-Weiser with Caris.

Listen, just kind of a big picture question about -- you've had commodity cost pressures pretty on and off for several years now, and you've been really good about finding cost savings and increasing your cost savings. And you're talking about more overhead cost reductions now. I mean, how does that affect your employees and morale? I mean, they're just constantly in a cost-cutting, cut this, cut that type of environment. Can you just kind of address that question about morale and giving them the idea that there's growth and not just cutting?

Yes, absolutely. And I'll be going from this call unto a call with our top 1000 leaders, and we're going to talk about our innovation plans for the back half of the year and the exciting things that we have coming in Huggies and U by Kotex and Poise and Depend and the great opportunity we have to continue to drive our KCP, wiper and safety business and all the exciting things coming in Health Care and how rapidly we're growing in international markets. And so it's not about cutting for the sake of cost cutting, it's managing those things that we can control so that we can invest in the long-term future growth options for our business. And where we're also telling, hey, we're not going to be victims see here. This is the way the world is everywhere. Everybody's got to be good on -- sharp on cost. We've got to be good at pricing. We've got to be good at innovation. And so we're going to make those tough trade-offs to do the most important things. And the nice-to-have stuff isn't going to get done. So you see, you get a little warm-up of my speech that's going to come to the employees in a few minutes.

Okay, thanks.

Thank you, Linda.

Our next question comes from John Faucher with JPMorgan.

Thanks. So want to talk -- I know you talked a little bit about, potentially, the prices of the inputs continuing to move up a little bit sequentially from here. As it has been mentioned before on the call that the gross margin performance year-over-year last year was a little bit volatile. So my math would say you guys had roughly a 6% cost of goods sold per unit inflation, basically taking the 10% COGS inflation, subtracting that unit growth, subtracting that FX. Should we assume a similar level for the second quarter? And then since the comps change year-over-year in the back half of the lesser level of COGS per unit inflation in the back half on an FX neutral basis, if that makes sense?

Yes. I mean, I think, directionally, without doing all the math in my head, that sounds right. But if you look at -- pulp is likely to go up again in April. Polymer is going up in April from where it was in the first quarter. So I think we'll probably have more relatively more cost pressure in the second quarter than we -- and the comps get a little easier in the back of the year.

Especially on pulp.

Yes.

Yes, okay. Great. And then not to sort of pick at this, but I thought it was interesting if you guys simply lowered the bottom end of the range of the guidance. And given the level of pessimism surrounding the numbers today, can you talk a little bit about -- if you we're to sort of hit the midpoint, or above from that standpoint, what do you think would need to go right in order to have a more positive outlook relative towards getting close to the higher end of your guidance?

Yes. Part of the reasons for widening the range was -- when you think about it, just our cost estimate alone swung by $0.45 a share from our last guidance to you. And today, we are operating with a $0.15 annual guidance range. So widening, it seemed appropriate. So how would you get to the top end of the range? If costs wind up being a little bit more positive in the back half of the year, if things settle down in the Middle East and oil, it wasn't that long ago, it was $85 a barrel. We're not predicting that. But if you saw some break in commodity costs in the second half, that would be a plus. Obviously, full realization of price and innovation and particularly in the back half of the year would get you north of the top end of the range and then delivering the kind of cost savings in SG&A that we talked about. And so we're aimed at doing all that, at least on the things that we can control, and think we still got a shot at the guidance range this year.

Okay, great. Thanks.

Thanks.

Our next question comes from Alice Longley with Buckingham Research.

I have some follow-up questions on the promotional activity for diapers in the U.S. and bath tissue in the U.S. I think those were highlighted in your press release too. And your net selling prices in the U.S., or North America, were a negative 3%, and net selling negative 2% for bath tissue. Was that about in line with the industry? Or would you say that, that net selling number, in both cases, was a deeper negative than the industry?

Well, I think, because of the factors that I talked a little bit about, is probably a little worse for us from a comp standpoint on the tissue front. As I said, in some areas, we had some supply challenges in the first quarter of last year. So have basically pulled back in promotions. And so now that we are back to more of a normal promotion environment in Tissue, that's a bigger negative for us than it would be for some other competitors. On the diaper front, part of our increase in trade was, again, getting back to a more normal, or a more robust promotional calendar. So that's probably going to be more our issue. And then we're matching up with some competitive activity with trade spending versus with other tools. What one in the U.S. where you put a bonus pack in that shows up as a different -- shows up as volume growth, not us higher trade spend.

All right. But on the price per unit basis, would you say that in diaper child care, if you were to look at the numbers that way, would net selling prices be going down similarly throughout the industry?

Again, as I think, because of the timing of promotions, we're probably going to be at a little higher drag than the industry.

You'd see competitive pricing on shelf.

Yes.

It's more of a comparison issue.

All right. And then should we expect the same sorts of numbers in both cases in the second quarter because the price increases won't come through yet?

No. I mean, I think the case of Tissue, our supply issues were stabilized about the second quarter of last year. So it shouldn't be as big of a drag.

But in child care, it might be similar?

I would say, because we were launching the Jeans diaper last year, we'll be doing that again this year. So again, the comparison should be a little easier in the second quarter.

Okay, and then once we get to the second half and we get these price increases, but maybe you'll also have incremental trade spend more than you did a year ago? I mean, are we going to see those price increases you said actually come through in the net selling prices that we see? Or are they going to be -- are the announced price increases going to be offset with incremental trade spending?

Well, that's obviously our focus, is to make sure that those announced list price increases do translate into higher net realized revenue in the back half of the year. If you take you list up and spend it all back, you know you won't have accomplished anything. And so we'll see what happens in the marketplace. But we certainly believe that pricing is justified based on the costs. And if you look at other categories, it's happening in lots of other categories around the grocery store.

Okay, and then the final piece of that is just to circle back to a former question. You are not assuming much elasticity, so you're going to take this pricing and you don't think volume is going to be hurt?

Yes. I mean, you can see some short-term volume impacts, particularly if there's some consumer loading ahead of the price change or trade loading ahead of the price change. You can see some volumes swings. But we're not assuming any major volume drag at this point in time.

So the only volume impact would be retailers loading up or not, not the consumer responding?

At this stage, that's our expectation.

Okay, thanks a lot.

Our next question comes from Jason Gere with RBC.

Just a couple of questions. I guess, the first one, just talking about fem care and adult care. So while the diaper business, and I hate saying this, has been sagging. And I know you're starting to lap some of innovation. How come there hasn't really been any pricing here? Can you talk about that and just your expectations in North America for volume growth, that is?

Pricing in fem, adult. Yes, in some cases, the U by Kotex stuff was already by premium-priced. And so as we've seen our share grow, sort of we've been getting the benefit of mix on feminine care and really have seen good momentum. And, again, with much higher gross margin categories, the cost impacts have a lower relative impact on the overall cost structure. So we're really focused on driving our growth and return, based on our innovation there. Adult care, a similar story with both Poise and Depend. Categories are growing rapidly. That's probably our most sensitive consumer from a price-elasticity standpoint. The primary competitor's private label, where we know that there'll be a lag on pricing. And so we've got strong innovation and mix-accretive innovation coming, and are really going to get our net realized revenue improvements there through mix and volume.

Okay. And just, I guess, going back to one of the earlier questions, just on the cost inflation assumption. I know you guys have confidence with what you're forecasting. But can you just lay out, like the worst-case scenario? What if pulp goes much higher than what you're anticipating? I mean, can you -- similar to what happened a few years ago, will you be more aggressive again, leading the charge, taking more price? Can you lean more on FORCE this year? Are you borrowing from next year's FORCE savings? And I just wanted if you could put -- lay out hypothetically a worst case scenario for us?

I think pricing is always set based on expectations. So we're looking at the forwards for oil. We're looking at all the industry forecasts for pulp. And if we saw that there was a much bigger spike coming, we wouldn't be shy about taking pricing where we need to, to recover that. I think the challenge has been that the commodity costs have not performed as forecasted. No one expected the Middle East to melt down here in the first quarter, which has driven oil up at a much more rapid pace. And so I think we're looking at all the same forecasts that we have in the past and that most of our principal competitors are. And as we see those expectations changing, we won't be shy about adjusting price going forward.

Okay, and just a last question. I know you guys have given all your color on volumes staying intact in 1 and 2, not seeing consumers responding. I'm just wondering -- and just on the KCP side obviously that came in, it seems like it's doing better than maybe what we anticipated. So I'm just wondering how much the volume is better expectations just on the B2B business to kind of help out along the way, Health Care obviously lapping some of the H1N1. Can you just put a little context around that?

Ye. Certainly, both B2B businesses were strong volume performance in the quarter, probably have easier comps because of both of the economic downturn impact on KCP last year and then the H1N1 impact on healthcare last year. So that will help, I think, our overall volume performance. And I do think that you're seeing signs in some segments of the economy, that things are starting to get marginally better. So we'll look for that to be a volume boost for us this year.

Okay, great. Thanks.

Thanks, Jason.

Our next question comes from Chip Dillon with Credit Suisse.

Hey, Chip. Did you find something else in the 10-K you want to talk about or you...

No, we've done enough 10-Ks for 1 morning. But on the retail tissue side, we've seen a lot of activity from your competitors, your 2 big ones and even private label, on adding basically newer variants of Thru-Air Dried technology. And I was just wondering if there was something you can give us, some insight in terms of how you think about that and what maybe Kimberly might be doing going forward, especially as you realign your retail tissue footprint?

Yes. I mean, there's more TAD capacity out there, but it's also a lot more difficult to make a high-quality premium Thru-Air Dried sheet than just buying a machine and starting it up. So I'd say, both us and P&G have substantial experience in both the fabrics on those machines, as well as the chemistry to deliver an advantaged based sheet performance. And you'll expect to see some improvements in COTTONELLE that we think will be a step change in performance improvement on COTTONELLE, which we'll continue to make it the premium product that deserves the market pricing that we're going to have on it this year.

And do you think you have enough capacity to handle growth in the next, say, 2 or 3 years? Or will you need to address that?

Well, I think in the near term, we're getting good productivity growth through our lean/continuous improvement. And so certainly, for North America, we should be in pretty good shape from a capacity standpoint.

Thank you.

Thanks, Chip.

And at this time, we have no further questioners in the queue.

All right. Thanks, David. We'll turn it back to Tom for a closing comment.

Okay. Once again, it's a challenging environment. But we've laid out a plan that we think is aggressive, but will help us stay on track with our Global Business Plan. Thank you for your support of Kimberly-Clark.

Thank you.