Thomas Falk - Executive Chairman & CEO Maria Henry - Senior VP & CFO Michael Hsu - President and COO Paul Alexander - VP, IR

Lauren Lieberman - Barclays Jason English - Goldman Sachs Ali Dibadj - Bernstein Stephen Powers - Deutsche Bank Olivia Tong - Bank of America Merrill Lynch Bonnie Herzog - Wells Fargo Kevin Grundy - Jefferies Nik Modi - RBC Capital Markets Jonathan Feeney - Consumer Edge Research Andrea Teixeira - JPMorgan Caroline Levy - Macquarie

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

Thank you and good morning everyone. Welcome to Kimberly-Clark's First Quarter Earnings Conference Call. With us today, are Tom Falk, Chairman and CEO; Mike Hsu, Chief Operating Officer; and Maria Henry, our CFO. Here's the agenda for the call; Maria will start with a review of first quarter results and provide a brief update on our global restructuring program. After that, Mike will share his perspectives on our results and the outlook for the year. We will finish with Q&A, with Tom, Mike and Maria. We have a presentation of today's materials in the Investors section of our web site. As a reminder, we will be making forward-looking statements today. Please see the Risk Factors section of our latest Annual Report on Form 10-K for further discussion of forward-looking statements. Finally, we will also be referring to adjusted results and outlook; both which exclude certain items described in this morning's news release. The release has information about these adjustments and reconciliations to comparable GAAP financial measures. And now, I'll turn it over to Maria.

Thanks Paul. Good morning everyone. Thanks for joining the call today. Let me start with the headlines for the quarter. We returned to delivering organic sales growth, with a solid increase of 2%. Margins were impacted by significant commodity inflation. Helping to offset that, we delivered strong cost savings and reduced overhead spending, and our adjusted earnings per share increased 9%. And finally, we are on track with our restructuring program and our overall capital plan. Now let's look at the details of our results. Let me start with sales; our first quarter net sales were $4.7 billion. That's up 5% year-on-year with a three point benefit from currency rates. Organic sales grew 2% in the quarter, led by improved performance in North America. Mike is going to provide some more color on our top line in just a few minutes. Moving on to profitability; our first quarter adjusted growth margin was 33.8%, down 310 basis points year-on-year. Commodities were a drag of $175 million in the quarter, primarily due to higher pulp costs and secondarily, inflation and other raw materials. We are now expecting the full year cost inflation will be between $400 million and $550 million. That's a $100 million to $150 million more than we assumed in January. Meanwhile, our FORCE cost savings program continued to deliver strong results. First quarter savings were $90 million. Moving down the P&L, adjusted operating margins was 17.4%, down 140 basis points. Between-the-lines spending fell 140 basis points as a percent of net sales, as we continue to tightly manage overhead and discretionary spending throughout our company. In a few minutes, Mike will talk about what we are doing to improve margins from the first quarter levels. All in all, adjusted operating profit was down 3%. In addition to the factors that I just mentioned, results benefitted from volume growth and $20 million of favorable currency translation effect, but were also impacted by lower net selling prices. On the bottom line, first quarter adjusted earnings per share were $1.71, up 9% year-on-year. That included about seven points of earnings growth from a lower tax rate, along with benefits from lower interest expense and share count. Turning to cash flow and capital efficiency; cash provided by operations in the first quarter was $542 million compared to $436 million in the year ago quarter. The increase was in line with our expectations and driven by lower tax payments. We continue to allocate capital in a shareholder friendly way. Dividends and share repurchases totaled approximately $550 million in the first quarter, and we expect the full year amount will total $2.1 billion to $2.3 billion. Looking at our results by segment; in Personal Care, organic sales were even year-on-year. Volumes and product mix, each improved 1%, offset by lower net selling prices. Overall Personal Care operating margins remain healthy at 20.4%, although down 120 basis points, including impacts from commodity inflation and lower selling prices. In Consumer Tissue, organic sales rose 5%, volumes increased 7%, while product mix was down two points. Consumer Tissue operating margins of 15.8% were down 340 basis points. Significantly higher pulp costs were partially offset by top line growth, cost savings, and lower between-the-lines spending. In our K-C Professional business, organic sales grew 2%; volumes increased approximately 2% and price and mix were both also slightly positive. K-C Professional operating margins were 19%, that's up 10 basis points, as our team continued to manage well in this environment. Now let me share a brief update on our 2018 Global Restructuring Program. Initial implementation steps are underway, and we are on track with our plan. In terms of our administrative and overhead organizations, in North America, we offered a voluntary severance plan to most of our salaried employees in the first quarter, and that plan is now closed. Soon, we will begin to share more specifics with our workforce, primarily in North America, about our redesigned organization and the resulting implications. We have also announced our intention to move our European shared service center from the U.K. to Poland, in order to reduce our labor costs. In terms of manufacturing facilities, we have announced our intention to close our Consumer Tissue facility in California, and are planning to close our nonwovens facility in Wisconsin. We continue to expect $50 million to $70 million of restructuring savings in 2018, with the vast majority of these savings occurring in the second half of the year, as our workforce reductions ramp up. With that, I will now turn the call over to Mike.

Thanks Maria. Good morning. I am going to focus my comments this morning on organic sales and our full year earnings outlook. As Maria just mentioned, organic sales grew 2% in the quarter, which is a good start to the year. Performance included benefits from targeted growth initiatives, innovations launched over the past 12 months, and increased investments in our brands. On our conference call in January, I had talked about our three main growth priorities for the year. Let me now spend a few minutes on each. Our first priority is to strengthen and grow our core businesses. In North American consumer products, organic sales increased 3% in the first quarter, behind volume growth of 6%. Market shares were up or even year-on-year in five of eight product categories, and up or even sequentially compared to the prior quarter in every category. In Personal Care in North America; volumes increased 3%, net selling prices were down 2%, reflecting increased investment levels that helped our volume performance. In terms of innovation, in the first half, we are launching product improvements on Pull-Ups training pants, premium Huggies diapers, Huggies baby wipes, Poise pads, and Depend underwear. In Consumer Tissue in North America, volumes rose 9% compared to a decline of 7% in the year ago period. Results benefitted from increased promotion support, a severe cold and flu season and promotion timing differences compared to last year. Product mix was down three points because of the promotion activity. Now in terms of product news, we are introducing new Kleenex wet wipes, and bringing major bath tissue improvements to Cottonelle, and part of our Scott line-up. The bath tissue upgrades are shipping now, and come with sheet count reductions. This will improve net realized revenue high single digits on nearly $1 billion in annual sales. In our K-C Professional business, volumes were up 2% in North America, with growth in all product categories led by wipers. K-C Professional volumes increased 4% in developing and emerging markets, led by Asia-Pacific. In our developed markets outside North America, organic sales rose 2%. In South Korea, our diaper business continues to be impacted by lower birth rate. However, this was offset by strong results in our other consumer businesses there. Now let me turn to our second priority, which is to accelerate Personal Care growth in developing and emerging markets. First quarter organic sales for these businesses were even year-on-year. Looking at some of our key markets; in Brazil, organic sales were up mid-single digits, driven by broad based volume growth. Market shares were up nearly three points in diapers and two points in feminine care. Elsewhere in Latin America, organic sales were down low single digits. That included lower volumes in Argentina, Chile and Colombia. That said, our market positions are holding up well, including in Argentina, where Huggies share is up 1 point. We expect our sales to pick up in Latin America. We have a number of product innovations launching throughout the region, and we are implementing selling price increases to help offset inflation. In China, organic sales were down mid-single digits. A strong growth in feminine care was more than offset by lower sales in diapers. We just started to introduce a significantly upgraded Huggies premium diaper, and we have more innovation coming later in the year. We expect these innovations will improve our volume trends in the coming quarters. In Eastern Europe, organic sales increased mid-teens. Our momentum continues to be strong in this part of the world, with another quarter of double digit volume growth, and share gains on Huggies and Kotex. Regarding our third growth priority, which is to further build digital and e-commerce capability; we continue to make good progress. Our targeted digital marketing programs, investment in tools to improve capabilities, and customer joint business plans are producing strong results. That was especially true this quarter in North America. So to summarize our top line, I am encouraged with our start to the year. We know we have more work to do, because we continue to operate in a competitive environment. That said, our first quarter results and our plans going forward give me further confidence in our 1% organic growth target for the year. Now, let me turn to our earnings outlook. We continue to target full year 2018 adjusted earnings per share of $6.90 to $7.20. That's a year-on-year growth of 11% to 16%. Our teams are taking actions to improve net realized revenue and reduce costs to offset the commodity headwinds we are facing. We expect these actions will help improve our margins from first quarter levels, especially in the second half of the year. On the revenue front, we are taking steps in several layers of our business. Key actions include the sheet count reductions in North America, and the price increases in Latin America that I just mentioned. In addition, our consumer businesses in other international markets will be raising prices and our K-C Professional team has begun to do the same in most regions. While many of these initiatives were included in our original plan for the year, our overall expectation for selling price increases has improved slightly from three months ago. In terms of our focus on costs, more savings should be built from first quarter levels. In addition, as Maria noted, restructuring savings will occur mostly in the back half of the year, and our teams are moving with urgency to accelerate actions. We are also redoubling our efforts to reduce discretionary spending. In total, we expect these actions, combined with our volume growth initiatives, a slightly better currency outlook, and some flexibility that we built into our original 2018 plan, will enable us to deliver our earnings guidance for the year. So to summarize, we are off to a good start to the year on the top line and with our market positions. We are taking steps to improve our profitability, and we are broadly on track with our 2018 plan. Overall, we remain very optimistic about our opportunities to create long term shareholder value through successful execution of our strategies. That wraps up our prepared remarks, and we will begin to take your questions.

[Operator Instructions]. Our first question comes from Lauren Lieberman with Barclays.

Hey, good morning Lauren.

Hey good morning. Thanks for the question. So I wanted to just ask a little bit about pricing. So I think the sheet count reductions on Consumer Tissues, something where you should probably have very good visibility, have done it many-many times before, and the math is pretty easy to do, thank you for that detail Mike. I was curious though on the Personal Care business, particularly in North America and in Brazil. So one is that in North America, I think we have heard and we heard last week from a major competitor about things just getting a lot tougher on the private label end of the world, in terms of retailers all kind of reacting to each other, will say and the pressure that's putting on the lower end pricing in their portfolio. So I was wondering about your visibility on pricing on North America diapers, how much pressure there is there, and if you really think you can move things up a bit more? And then in Brazil, some chatter about some deflation in Brazil, on it being a difficult place to get pricing, and I was wondering, to what degree that was critical to your forecast? Thank you.

I am going to let Mike elaborate on it, and I guess, I'd say just kind of broadly, as you look at private label shares in North America, they really haven't moved around a lot. Our estimated first quarter private label market share for diapers in North America is about the same as the full year average last year, and actually down slightly from fourth quarter. So maybe we have a little bit different view of it than others might, but I don't know Mike, do you want to add anything else to that, other than comment on Brazil and what's going on with pricing there?

Yeah. I think, diapers specifically I think was maybe up half a share point in the quarter in North America. I think, maybe the opportunity for us is, we are evaluating some count reductions on diapers and then the other lever for us in pricing in North America would be fine tuning our trade promotion plans, right? And so, there is always an opportunity for us to adjust our frequency and our depth, and that's what we are evaluating right now. With regard to Brazil, we had a good start to the year in Brazil. Sales and volume and share were all up pretty good. I will say, we are taking pricing and have taken pricing in Brazil and that feels like that has gone through and the market has responded accordingly.

Okay. And in North America, the frequency and depth, I mean, is that something that you are seeing competitors move to what's the retailer receptivity to that; because it feels like if anything, retailers are looking at diapers as, whether you [indiscernible] calling it a loss later [ph], but something to drive traffic, bringing in families and etcetera. So I think, that's a category in particular, where they'd be wanting more and more support from their suppliers, rather than less promotional activity?

Obviously Lauren, the baby category and mom is very important to retailers, and so they are very focused there. But I do maybe have a different take, which is I think a lot of the pricing activity you are seeing, may have been promotion driven versus retailer strategies. And while I think they all want to be competitive on the diaper business, I think it's, in some ways up to us, to make sure we are managing the business appropriately in the long term. And in this category, I think, innovation, and creating value add and then premiumizing the category over time is really the best way to grow our fixed consumption category, and that's where we are focused on, and I think a lot of the retailers will understand that strategy and approach.

Okay. Thank you.

Thanks Lauren.

Thanks Lauren.

Our next question comes from Jason English with Goldman Sachs.

Hey good morning Jason.

Hey, good morning folks. Thank you for allowing me to ask a question. Michael, I guess in your prepared remarks, early on, you talked about increased investment in brands to drive growth. You referenced in the press release kind of pulling back, and if we look at the last few years, if you continue to sort of pull back, it looks like this will be the fifth year in a row, that as a percentage of sales, advertising, if not marketing overall, has shrunk. It begs the question of whether or not, you may be underinvesting behind your brands, particularly in the competitive environment. Can you shed your perspective or share your perspective on that, and why we shouldn't be concerned that you may need to reinvest going forward, particularly given the weakening top line, especially in emerging markets? Thank you.

Yeah, thanks Jason. Obviously, I think as a long term driver, we do want to grow our investments behind the brands. I think that investment comes multiple ways however, and so I think overall, I think, we are very balanced on our advertising spend. We have increased our promotional spend, and as we saw the markets kind of get competitive towards the back half of last year, we did show some funds in the both consumer and trade promotion. And as we go forward this year, I think we have got very strong investments, both in terms of product and innovation in China and North America and in Latin America, and we strengthened our execution or merchandising investments in the brand.

Jason, just to build on that. I mean, everything we move to digital coupons winds up being a reduction in net sales and showing up as negative price, even though we might argue, that that's a strategic targeting of an individual consumer.

Okay. That's helpful. And then, real quick, if you could delve in a bit more into China, the decline there this quarter is a bit surprising. Can you talk a little bit more about what's going on? You are talking about innovation -- you have been talking about innovation. It seems like you have a pretty full product cycle for quite a few years there, like your position in the market has kind of been eroding. Are there more structural reasons that you could be losing ground, perhaps with the Made in China stamp that's on your product? Maybe it's the marketing posture? I am not sure, I am hoping you could shed light on that?

Yeah. I have viewed a couple of headlines, Jason, that Mike can build on. I mean, pretty much all the big international branded players lost share in the last quarter, and so, it has been the local Chinese brands that have actually probably picked it up through e-commerce. And so, that's really just in BCC and in fem care, we had a great quarter with strong growth. And so China is a tough competitive market, it's a huge market with huge potential. Where we have got lots of innovation coming and we still believe in the opportunity there, but it's a tough competitive place in the short term. I don't know, Mike, if there is anything else that you want to add to that?

Just as Tom said, Jason, I think the China diaper category is under a little bit of pressure from the local players, and we are addressing that with the major launch of a significant product improvement on Huggies. China overall remains our single largest growth opportunity, both in the near term and over the long term. Pricing has been competitive, but I think that's stabilizing, and I really believe, fundamentally in China, well it's not structural, its product, performance and features are still the key driver of brand choice, and that's still what's driving that marketplace. And so, we are launching our best ever diaper, that delivers a really significant improvement in both thinness, softness, breathability, and absorption. I mean, it's a pretty impressive product. We are excited about it. It's certainly better than what we had out before, and outperforms all major competitors. So we expect that's going to improve our performance, as we get into the back half of the year. Just starting to ship now.

It's going to be a competitive market for a long-long time, just given the opportunity there.

Sure. Thanks a lot guys.

Thanks Jason.

Our next question comes from Ali Dibadj with Bernstein.

Good morning Ali.

Hey, how are you? I have a few things; one is, just to talk a little bit more about the negative price mix dynamics in this quarter, and then kind of going forward, in particular, in North America. Because you guys just said a second ago, the retailers aren't the ones pushing you on price, they kind of have all the more buy-ins from a de-sheeting perspective and tissue at least, and maybe even on a reduced count in diapers that sounded like. But private label, seeing the Nielsen data, and you guys mentioned it, has gone up actually quite a bit, the 50 basis points is not small in the past quarter. And so, let's just even assume the retailers get it? I mean, they are getting private labels in their choice. Let's assume, even the retailers get it, how come you have more confidence that the competitors are getting? PG for example, gets it, that pricing should be more benign going forward, more positive, as opposed to you guys losing lot of share? I am trying to dig into that incremental confidence you have?

Maybe I will give you some macro view, and then Mike can give you some details. I mean, number one, if you look sequentially, price for us was negative 2 in the fourth quarter, it was negative 1 in the first quarter. So it did ease a little bit, not a lot, and we have some initiatives in the marketplace, that roughly track commodities, and you see commodities move at this level historically. You typically see some finished product, price recovery, either a pull back in trade, a little bit less depth, and you are starting to see some of that play out in different markets around the world. And so I think, that's not surprising, and we will see how the rest of the year plays out. I don't know, Mike, if there is anything else you want to add to that?

No, I mean, Ali, we are trying to be balanced. And obviously, we want to drive the organic growth, but we also want to deliver our margin commitments, and so we are walking that balance. And so the opportunity for us is, we have evaluated opportunities for count reductions and have a few -- quite a few in the plan, but the other opportunity for us is to get more efficient with our trade spending. And you know, we are looking at the competitive marketplace and our field teams have a good sense of what is required to drive the promotional list that we need, and we think we have an opportunity to fine tune it.

So just continuing on that, are you leading the planned price increases?

I'd say in general, we are probably matching up globally with competition. And just as an example, we didn't lead it, to be clear.

You did not?

We didn't. And some large market examples that have happened recently, we did not lead it.

Okay. And then, from a -- production on pulp pricing, I know you guys are very loyal to the RISI numbers. Can you give us an update on what that's looking like going forward? Last quarter, we all talked about the RISI numbers being perhaps a little bit too positive in terms of pulling the pulp prices down, at least on NBSK, it seems like, towards the end of this year. Can you tell us where that is and how you guys are modeling the prices at this point, on pulp?

We use RISI, because they have been the best forecaster out there. I don't know that we are in love with any of them, and I think every pulp forecast that I have ever gotten in my career, just about always had a positive upwards slope and they are only right half of the time. So at this point, every forecast we get lately, pulp prices look like they are going higher than the last one we got. And so, you are certainly -- having seen pulp markets in the past, they can get a bit frothy, as the producers are disciplined on taking downtime and you get some Chinese demand. You can definitely see some upward moves in pulp price, and that's certainly showing up in some of the RISI data we have seen lately, and that's kind of the high end of our forecast range. It's kind of the worse case of what we have seen from RISI lately.

So not tailing off until lower by the end of the year, effectively, what you are saying?

I think that's what the current outlook would look like.

Okay. And then my last question is, just this mix between -- I think between the lines, as you call it, or A&P, I guess, spend, as part of between the lines, versus trade spend. I get that you can shift from A&P to an online coupon, and you get a response, it's a transactional response. But is that building brand or are you training the consumer to be more looking for and seeking of deals, so you are actually hurting the brand over the long term? And this is the bait [ph] we have had with many other companies to --

This is a very philosophical question this morning, Ali. I'd say, first of all, every coupon is a company with some other kind of a brand message, and you want to click through -- get the consumer to click through and see your other brand equity building messages. And it is one of the things that we do think about, is that are you building equity in the right places, and to Mike's earlier comment, we believe, product innovation and having winning products, talking about in the right way, and in some cases, providing an incentive to try, is the way you build brands long term. But we are -- I think we are all trying to figure out, how do we build a one-to-one relationship versus a mass media blast, way of building brands.

Yeah Ali, we are pushing a big shift in the digital. It gets more complicated, because some of it goes into consumer promotion. A lot of it actually goes into trade, because we do some of -- quite a bit of it for our customers, with online media. And it may not necessarily even be a coupon, it could be a pure add, and we are getting a lot of efficiency in terms of ROI on it, because it's allowing us to target our consumer with a lot more precision. I would just put our Asia Pacific team out last month, and they were showing that, the hits on target more than doubled over the past year, in terms of reaching our target audience, versus the spillover that you might get on TV.

Okay. Thanks very much guys.

Thanks Ali.

Thanks Ali.

Our next question comes from Stephen Powers with Deutsche Bank.

Good morning Stephen.

Thanks. Good morning. So I guess, a little bit more on pricing, if I could. So I guess, if the environment is as constructive as it -- I guess, it sounds like you are implying with branded and private label pressures, maybe less severe than many of us perceived. Haven't we seen more pricing to-date, and why should things change, going forward? Just because gross margin is down 300 basis points year-over-year, it's a pretty -- just implies a pretty difficult backdrop. So just a little bit more kind of clarity between what we are seeing in the actual data, and then what you are -- just like the qualitative communication today seems to be implying. There seems to be a disconnect there. So just any color you have there would be great?

The only misread that we are saying it's an easy pricing environment, and it's not. It's a challenging competitive environment. As we would look at our gross margins, it's down significantly year-over-year, it's down about 100 basis points sequentially. So it's not that far off from where it was in the fourth quarter. Some of the pricing actions we talked about are just going into the market now, or they have been announced and we will roll in, in the second quarter. So we didn't get a lot of it in the first quarter results. And I think, like everybody else, pricing has certain expectations, and as commodity cost expectations have increased during the quarter, that's caused some of our teams to go back and relook at their plans for the year, and see, where else we can generate more revenue. Mike, I don't know if you want to --

Yeah, I wouldn't Steve -- I don't think we are trying to imply whether the pricing environment is difficult or very easy or -- all we are trying to suggest is, these are the actions we are taking; which is, we have taken some account reductions. We are managing our trade budget to be much more efficient, and we are looking at the frequency and depth of our promotions.

Okay. Maybe just it would help. On the sheet count reductions, specific that you mentioned in North America, is that an issue that you have led or are you following someone else's action in the market?

I believe that our key competitor has already taken that in 2017, and so -- and we are coupling with a significant product improvement, because it's also -- it's much easier to get price or revenue recognition, when you have got innovation to package it with. It's a whole different conversation with the retailer, if you have got a better performing product. And yes, they cost a little bit more, so even a different conversation with the consumer. It's a straight list price change, that's a little harder for them to swallow sometimes. So some of the pricing actions are tying into innovation activities that we have planned, as the year rolls out.

For example, Steve, on Cottonelle, we have got a terrific product improvement superiority versus other brands, and it's a breakthrough type product for us, and that did come with a sheet count reduction, high single digit, in fact.

Okay, great. I guess -- and one last one if you could, given the way you've guided commodities, which effectively is below current spot and below year-to-date run rates. I guess, in the context of pricing, I am just trying to understand, how you frame that? What's the pitch to retail partners; because it seems on the surface, a bit muddled, but we have faced a lot of pressure. We think commodities will trend lower, but we need some pricing. I'd just love some commentary there?

Well, they are still going to be higher significantly year-over-year I think, and they are all watching it and they are seeing it across other categories as well. So it's not enough dialog.

Thank you very much.

Thanks Steve.

Our next question comes from Olivia Tong with Bank of America Merrill Lynch.

Good morning Olivia.

Thanks. Good morning. Can you talk about how you are feeling about your market shares and relative strength? Where you are seeing some improvement; because your commentary is clearly more optimistic than some of your competitors, and obviously you are looking to price. So just would love to hear a little bit about market share specifically, in Tissue and Personal Care?

Yeah. Mike can give you a little bit more detail. I mean, I would say, we weren't satisfied with our market shares in 2017, and we had a better start to the year and the first quarter. And so, I think -- and we track the major markets and major categories, and I think we were up in almost 60% of those in the first quarter. But we'd still say, you know, that's kind of bouncing back from a tougher year in 2017. So we are pleased, but we are not satisfied, I guess is a way to describe it.

I'd characterize it as maybe a good start to the year, but we want to continue to focus on it. Overall, North America, up about a share point, up in five of eight of our overall categories. Up in Brazil significantly; Argentina, Eastern Europe up a couple of points as well. I think the one area that we need to improve, and that's where we are bringing innovation, is in China, where we are down a couple of points in diapers.

[indiscernible].

Got it. And that sort of leads into my question about emerging markets, because it's surprising to see that your sales were worse in emerging markets versus developed markets. But typically you don't see that. So you mentioned earlier a lot of the local competitors kind of getting better in online, but I thought your shares were better or your shares were higher online than off. So can you talk about the disconnect there?

That's still true. I think online is a place where you probably have fewer barriers to entry, and so there is more players coming into that space. If you could trial in a category, you can drain off some of the growth in that category.

Is most of that new product -- most of the innovation that's launching in China, is that primarily going to be in Q2, or is it more equitable through the year?

We will have a big push in Q2. But then, there is more coming later in the year.

Got it.

A lot of it is shipping right now.

Got it. Thank you.

Our next question comes from Bonnie Herzog with Wells Fargo.

Thank you. Good morning.

Good morning Bonnie.

Good morning. I have a question on private label. I know you guys are somewhat confident about your position against private label; but some of the channel data we look at, suggests that private label continues to make inroads into some of your larger categories. So curious to hear if you guys are noticing instances, where you might be losing shelf space to private label at retail, or possibly these share gains coming at the expense of some of your competitors products?

Okay, Bonnie. Yeah, we are following the private label trends very carefully, particularly in North America. And our focus is really on differentiating our brands with value added innovation and partnering with the customers, to focus on category growth. But the overall penetration levels over -- if you looked over the past five years, had been at similar levels. Down overall in Personal Care and up a bit in Consumer Tissue. We are focused on differentiation, and we have done that well, we have been able to grow our share and that's occurred in categories like adult care, diapers, and wipes. What we need to a better job is in the bath tissue category, where private label penetration has grown a bit over the last couple of years, and that's what, we are bringing in some significant innovation this year, with Cottonelle and Scott Comfort Plus.

Okay. That's helpful. And then I just had another question on your supply chain. Some of your peers have talked about steps they have taken across the supply chain to really, I guess, adapt to the changing retail inventory, [indiscernible] patterns, and I guess in a sense to more rapidly products to reduce system inventories. So I guess I am curious to hear what steps you might be taking to reduce system inventories thus far, and whether there are still improvements you can potentially make? Thanks.

That's a great question. I will have Maria build on that. And really, we are trying to keep our retailers in stock, while minimizing system inventory. There is a lot of stuff that we are working on. Maria, I know you can give them some color on that?

Yeah. I think there is a couple of points there. As you know, we have got significant activities in our company to improve our overall supply chain. One, just generally through our FORCE cost savings program, and two, with our restructuring there, we have taken that global view of our manufacturing network and are taking some steps to improve our advantages there. In terms of the retailer inventory, I do think it's worth noting that that was not an issue that we saw this quarter, and so, we are working the supply chain overall, clearly it's evolving as new channels are evolving and we are working with our key customers on how to make all of that work and continuing to improve what we have got.

Okay. Thank you.

Thanks Bonnie.

Our next question comes from Kevin Grundy with Jefferies.

Thanks. Good morning.

Hey Kevin.

Hey, good morning. I wanted to drill down on gross margins a bit if we could. So if I am not mistaken here in looking at our model, it's the lowest gross margin you have delivered since the first quarter of 2012, and of course, we understand that the environment is difficult and input costs have moved higher. But how should we think about this now, particularly two pieces to it? Number one, the near term, the progression for the balance of the year, input costs clearly higher, you talked about some pricing you could potentially get. But then also the longer term component of it, so your ability to restore gross margins to current levels, I guess, I asked it in the context of a couple of things. Number one, street expectations seem to suggest something in the 36%, or even close to 37% range looking out to 2020. Is that a feasible number? You delivered something close to that, looking back to 2016. But is the environment different now, and the market sort of discussion here is not lost on you guys [indiscernible], just in terms around CPG brands strength [ph] ability to take pricing maybe perhaps impaired. So a commentary there would be helpful. Another one, the near term, the cadence here on the gross margin for the balance of the year, and then the second piece, sort of longer term, what's your confidence now that we can come off of this sub-34% level and restored something closer to where expectations, street estimates currently are in the 36%, 37% range?

Yeah. I think those are all important questions. And I'd say if you -- we have got a pretty significant commodity exposure. And so, you are going to see some swings in our gross margin when commodities are relatively low, gross margins will spike up a little bit and vice versa, which is what we are going through right now. If you kind of look at the quarter, virtually, all of the decrease in our gross profit, if you net it all out, was the negative price item. All the other stuff, commodity costs, net of cost savings, net of currency benefit kind of washed out, and the price kind of fell through to the bottom line. So as we roll forward, we hope we have more positive pricing comparisons, as we get some price in the market. This is probably the toughest commodity costs year-on-year comparison in the quarter. So commodity costs, we will start to lap those increases, that started to happen in the second half of last year. We expect our cost savings to build, both from our FORCE cost savings program, and our FORCE cost savings program, and our restructuring cost savings, some of which will hit gross profits, some of which will hit in between the lines. So we have got a lot of levers pulling, that should improve our gross profit perspective, as we work through the year, and that's kind of what our guidance is built around. If that's helpful?

I mean, directionally it helps. I mean, like more specifically, because I guess like, the market concern would be that, 2015 and 2016 were sort of peak margins for this business, the environment has now changed, particularly in the U.S., there is a balance of power shift to retail, that pricing is going to become more difficult, that those levels are just not something that can be attained to get. It will be increasingly difficult. Would you agree with that characterization on, just specifically on quantifying that number? Is that a realistic number?

I would say, if you look at our margins over a long period of time, they are going to oscillate around the commodities cycle. I mean, there is usually a lag between when commodities go up and when you get price. And then, when commodities hit bottom, there is a lag before your price adjusts downward, if it's going to. So my goal, is that there is still a positive upward slope to the line, and that hopefully over time, we are getting more efficient, we are driving more innovation, we are improving our product mix and if we can do that, we should see long term positive trend on gross margin. You can have pretty big swings, as we have seen this quarter, from commodities in any one period of time.

That's helpful. I appreciate. If I could just squeeze in one more on [indiscernible] topic, just around balance sheet flexibility and capital deployment decisions. So the Group has obviously been weak and Kimberly included in that, with the market increasingly concerned around competitive dynamics, the mode of these businesses, etcetera, and you guys haven't traditionally looked at M&A, and your balance sheet is in good shape. So have you considered potentially buying the stock back more aggressively, would you add half a turn of leverage or so, and implement and accelerate share repurchase program? Is that something that you think about, given the pullback in the stock price?

Well, I'd say a few things. We have a very balanced view on capital allocation, where we are looking to invest in our business, grow our dividends and beyond that, then we look at whether M&A opportunities and what's the excess cash flow that you have in the business to look at how much is allocated to share repurchases. From a leverage standpoint, I like our position, just around two times leverage, and maintaining our A credit rating is important to us, because it does provide flexibility, it provides assets to lower cost commercial paper, and in a competitive environment, it's important to have a strong balance sheet, so that we can deliver against our model, really in any economic cycle and also, not be competitively disadvantaged, where we have got large global competitors that also have strong balance sheets. I would say that, while we haven't done a lot on the M&A front, we do look at it. We actively look at M&A opportunities. We have got a team of folks, and as you can imagine, given our size in the space, if something is moving, we are probably looking at it. But we are very disciplined in how we allocate our capital, and so you haven't seen us pull the trigger on M&A, because we haven't found something that makes economic sense, that we believe will create long term shareholder value. But we do like the flexibility that the balance sheet gives us, and there are advantages to having that flexibility.

Kevin, the only other build I'd add for you, is that we have just kicked off this big restructuring program. And over the next couple of years, we are going to be spending more than normal on capital spending, and maintaining a healthy share repurchase program. So that is going to put a little bit of pressure on our debt in the near term. But we think investing in our core business, with the work that we are doing, with all the restructuring program, is a very high return approach for us, relative to other things that we could do with the money.

That's great. Good luck guys. Thank you for the questions.

Thank you, Kevin.

Thanks.

Our next question comes from Nik Modi with RBC Capital Markets.

Good morning Nik.

Yeah, thanks. Good morning everyone. Good morning. Just two questions for me; the first one, just broadly on category growth, just would love to get your perspective on some of the major markets, particularly, North America. And then, the other question is, how does Kimberly-Clark measure consumer value equations, and how has the methodology changed? I guess, I am asking, because there is so much change going on in the marketplace. Like how do you make sure that you have the right value propositions relative to the peer group, just given what's going on with private label online, emerging brands, etcetera, etcetera. Thanks.

Yeah okay, hey Nik. One, on the overall category; North America I think, maybe the headline was -- the big change was in diapers, for the infant child care category, which was flat across all outlooks last quarter, which was the first time it was flat since 2016. So that was a big change. You may know that was down mid-single digits, most of last year, so that was a big change for us. And then most of the other categories in North America were generally consistent or slightly improved from prior quarters. So I think, green shoots I think on the category front in North America, and then in most other markets, I think in Brazil, we are encouraged with -- and also GDP is expected to grow about 3% this year. Unemployment was down a little bit less than we had expected in Q1. So we are off to a very good start in Brazil this year. China, I think the diaper category overall continues to grow. It's just the -- I think, the competitive situation has gotten a little tougher, due to some product innovation from the local competitors. Any other?

And the consumer value equation question, Nik, is another philosophical question. It's one that's probably more opaque, because you don't have visibility of what everybody is doing in the digital space. But it's one that, we are continuing to trying to refine our measures and test different things to see how to assess that. I don't know Mike, if you have got anything else, so you can share that's not proprietary on that.

Nik, I think we are pretty disciplined. I mean, it's the -- the equation side is like, what are the brand benefits, product quality, the brand impression, all those -- the bundle of features and benefits that we are offering, and we are pretty disciplined about assessing our -- what we call product acceptability, or how good a product is, in absolute terms, relative to both brands and private label. And then the denominator of that equation, obviously, is the price, and our strategy is, we want to be superior on the benefits and competitive on the price, which is why you are seeing, when we talk about fine tuning promotions, I think last year I was talk about fine tuning and getting a little bit more competitive on price, and then this year, I think the fine tuning, given the commodity environment is headed the other way.

Great. Thanks Mike. Appreciate it.

Our next question comes from Jonathan Feeney with Consumer Edge.

Good morning, Jonathan.

Good morning. Thanks. Hey good morning. Thanks very much. I wanted to follow-up on a discussion that Bonnie started, with a couple of specifics. When I look at -- was volume and North America particularly better than your expectations this quarter? And I wanted to maybe parse out, how in general, when you are making big supply chain moves, you approach that volume price balances? On one hand, you want the absorption to be right, that would tend to emphasize volume, but you also want the price to be right? Or does that supply chain move and form your strategy, in North America, specifically, at all? Thanks.

Yeah. I mean, I think, maybe to simplify it, is we really want our supply chain to track closely consumer demand and consumer takeaway. So we want -- the consumer is the boss, and want her and her purchase patterns to drive our supply chain, and we need to be able to react to that. And then our teams are planning the business in six month buckets, as to when they have promotional activity planned and we are trying to get better and better at our ability to forecast that, and make sure we deliver outstanding customer service, and can fulfill everything that we committed to our customers to go do. So we plan to have a better start to the year in North America, and I'd say, Mike had even started a little better than we would have expected, but our supply chain was able to adapt to that.

Okay. Thank you very much.

Thanks Jonathan.

Our next question comes from Andrea Teixeira with JPMorgan.

Thank you for squeezing me in. So my question is on the cost and expense savings program. First, if you can elaborate on the discretionary marketing spend reduction, you called in since the guidance in the last quarter. And examples of the cuts you have implemented, is that [indiscernible]. And the second part of the same question, on the manufacturing footprint, the closure of the California plant that Maria referred on the prepared remarks, that seems to coincide with increasing the imports from Kimberly Mexico, which you have a minority interest. Is that a plan for you to increase to do this cost based [ph] agreement with Kimberly Mexico? And the reason why I ask, is that, you had $90 million in cost savings this quarter, as far as I understand, which is tracking below your $460 million for the year, the midpoint of the guidance. So I want to just see if you can elaborate on those two points? Thank you.

Sure. I will start with your last point, just pickup on some of the comments that Tom made on the $90 million of FORCE cost savings. That's a good first quarter for us. We expect that their savings will ramp through, as the year goes on throughout the year, and we are still holding to the $400 million target that we got for the year. In terms of the manufacturing footprint, and specifically, the plant related actions, that we are taking as part of the restructuring, as we laid out our restructuring program, we did a lot of detailed planning on, how we would fulfill demand, as we move through the restructuring, and then longer term, and we look to optimize that. What I would say is K-C de Mexico is a great partner for us, and a very strong company. They had nice results this quarter, and it's certainly an option, but as we looked at our overall footprint optimization, the majority of the sourcing comes from Kimberly-Clark plants. And then your -- the first part of your question was around our lower SG&A expenses, and I think it was particularly around advertising. And what I'd say there, is that, we have done a deep dive on our advertising expenditures in all of our major markets, and what we have found is that, we had an opportunity to reduce the amount that we are spending on non-working advertising activities, and redeploy some of those funds to working advertising. And so that's an area that we are focused on, and that is, we talked about earlier, there is a shift between doing mass advertising and doing more specific targeted activities, some of which, such as digital couponing, end up as part of the advertising lines. So when I look at our overall investments, I think we are in a good place, even though you see the advertising line on the P&L, a little later than it was last year.

Yeah, maybe just to put that in perspective; I mean, it's going to be roughly 10 basis points down from the average of last year. First quarter was the high watermark last year. Some of this also has to do with timing of innovation and when new products will launch. So I mean, we are still committed to supporting our brands at the right level, both with advertising and as well as promotion.

Yeah, go ahead. Sorry.

I will just note, when we look at focusing on the cost reductions and the discretionary spend that I talked about, there is an intense focus, more around the general expenses, on the general and administrative expenses, on the P&L. And I think when you look at the numbers, you saw some really good progress there again in the first quarter.

This is very helpful. Just one quick fact check on what Maria said, $90 million obviously tracks well with the FORCE. But then this quarter, I don't think you had much of the other restructuring program savings, are you still tracking to that amount, for the full year?

Yes. But we have got, in addition to the FORCE cost savings, we are targeting $50 million to $70 million for benefits from the restructuring program, and those are expected to come in the second half.

Basically in the first quarter, we announced the plan to our employees and got organized to implement it. And so, as Maria mentioned, we did a voluntary severance program in North America, that is now closed and those job reductions will start to take place in the second quarter. So we will start to get savings more in the back half of the year from that effort.

Okay, great. Thank you very much.

Thank you.

Thanks.

Our next question comes from Caroline Levy with Macquarie.

Good morning. Thank you --

Hey Caroline.

Hi. Having just got back from many different cases in Asia, the commentary on the local competition in China was really brought home when I was there. And I am just trying to understand, how a product that can be substantially below your quality, which I believe it really is in these local cases; how the innovation is going to drive the local players out of the market; because it seems to me they are not really competing on product quality there, kind of beating on something else. That was my first question. The second is, please, if you could address, whether you are doing any private label production, if so, if it was meaningful to the first quarter, and what percentage of your sales goes online in the U.S. right now versus China? That's three, sorry.

Okay. Yes, we can -- between Mike and I, can probably cover those. I mean, I think in China, competitors, you raise an interesting point, and there is lots of interesting products available over there, some are good and some are not. Some are very high priced, even well above the price that you pay for a premium or super premium international product. And if they get trial, they might not get repeat, but they can still pick up some market share, and our hope is that, over time, we are building loyal consumers that want to stay on our franchise. But moms, especially moms in China who want the best for baby, are exploring new ideas and trying new things and so, there is just a lot more competitive offerings in that market. And so our belief is, product performance matters, if we do a great job of delivering on that, and talking to the consumer about it in the right way and having it in the place where you can find it, that we are going to win in any market, including China. I think private label production, I mean, is a tiny part of our business overall, it's less than 5%. So I mean, I think, I wouldn't really comment too much on that. And then e-commerce in China, Mike what it is probably --

Overall, it's about a 50% penetration in China. About north of 70% in Korea, depending on the category we are talking. And then North America, mid to high single digit, but that varies quite a bit amongst categories, with diaper being significantly higher than that.

The diapers double digit in terms of market share online in U.S.?

Yes.

Yes. Well market share and also penetration rate.

Also just to be clear, the data is not as robust as other data we would give you, because there is a ton of retailers that are doing click and collect. Virtually, every retailer is doing some form of click and collect, and none of that is counted anywhere in an e-commerce measurement, because no one collects the data that way. So they are probably as bigger than any number we would quote you in North America, but we don't have any way to measure it really.

And I'd add Caroline, we are doing well in e-commerce. I think we grew strong double digits overall globally last year, and we are expecting similar results this year.

And last one, did you grow double digits in China e-commerce or was that down quite substantially? I guess, it must be actually?

I don't have that number right now.

All right. Thank you so much.

Our next question comes from Lauren Lieberman with Barclays.

Thank you.

Hi Lauren.

Just one quick question on freight costs. It's just a topic kind of across the industry, there is nothing that we have talked about much. So what are you guys seeing in terms of freight inflation? Is it generally kind of in line going into your expectations, or is that something we should just be thinking about as well?

Yeah. It's an issue, and we ship high tube [ph] low value items, so freight is a big cost for us. But we probably -- we are less of a spot freight buyer and more of a contract freight buyer because of that, and so, we probably have been buffered from some of the spot gyrations that may be some that are structured a little differently or freight is a smaller part of their costs, they might manage it in a different way. So in our high volume freight lanes, we have contractual relationships, that we pay higher diesel, but we aren't paying some of the other costs. I mean, we may eventually have some pass-through, when those contracts are renegotiated. But for the moment, we are not suffering quite as much as others.

That's very helpful. Thank you so much.

Our next question comes from Ali Dibadj with Bernstein.

Hey Ali.

Hey guys I have a follow-up as well. So two things, one is, North America e-commerce clearly is one of the focus areas for you. Can you give us a sense of your online share versus your offline share, and sense of the pace of that closing, if at all?

Yeah. I mean, I'd say, broadly, in total our online share is pretty similar to our offline share. In fact, it might even be a little bit higher, because there is no private label typically in your online share. But it can vary a little bit by category. But I would say, we are competitive, because there is less private label online, we would probably want it to be even higher than our offline share.

And that would vary by category. So a little bit ahead maybe in -- in maybe Tissue and adult and fem care, and maybe we got off to a little bit of a slow start years ago on the diaper category. But we are gaining ground in diapers as well.

Okay. And no private label, except the private label that you guys might be making or might not be making for Amazon.

You couldn't resist that one, Ali, I guess? You trying to chum the water and see if I take the bait, is that the strategy this morning?

No, no, look, you guys are very good with that stuff. On private label in general, look I get it's for you guys, I guess it's less than 5% of sales. Can you give us a sense of the growth of that less than 5%?

I mean, I wouldn't say it has been something that we would feel like we needed to talk about or we would have talked about it. So it's one that -- we have got a very small number of customers that we do that for, and we are happy with the business, I think they are happy with the business, and -- but we really are focused on driving innovation behind our brands, and winning with that total bundle.

But it's growing much faster than your underlying business. Is that a fair assumption?

I don't think I would agree with that statement. It hasn't changed much as a percent of sales, let me put it that way over time.

Okay. Thank you.

Yes. Thanks.

At this time, we have no other questioners in the queue.

All right. Well then we will wrap up with a comment from Tom.

Well once again, we are off to a good start in the first quarter relative to our plan for the year. And so it's a challenging environment, but you can count on your Kimberly-Clark team to try to manage through that as best as we can. Once again, we appreciate your support of Kimberly-Clark. Thank you very much.

Ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines and thank you for joining us this morning.