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

Ali Dibadj - Sanford C. Bernstein & Co. Stephen Powers - Deutsche Bank Olivia Tong - Bank of America Merrill Lynch Bonnie Herzog - Wells Fargo Securities Dara Mohsenian - Morgan Stanley Lauren Lieberman - Barclays Bank Jason English - Goldman Sachs Group Andrea Teixeira - JPMorgan Chase & Co. Kevin Grundy - Jefferies

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. [Operator Instructions]. 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 Second Quarter Earnings Conference Call. Here with me today are Tom Falk, Chairman and CEO; Mike Hsu, President and Chief Operating Officer; and Maria Henry, our CFO. Here's the agenda for the call. Maria will begin with the review of second quarter results. After that, Mike will provide his perspectives on our results and the outlook for the full year. We'll finish with Q&A with Tom, Mike and Maria. As usual, we have a presentation of today's materials in the Investors section of our website. Now as a reminder, we will be making forward-looking statement today. Please see the Risk Factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements. Lastly, we'll also be referring to adjusted results and outlook. Both exclude certain items described in this morning's news release. The release has further 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. I'll start with the headlines for the quarter. Organic sales were even year-on-year as growth in international markets was offset by lower sales in North America. Margins and operating profit were impacted by significant commodity inflation. Helping to offset those headwinds, we delivered strong cost savings and reduced overhead spending and our adjusted earnings per share were up 7%. And finally, we're on track with our restructuring program. Moving on to the details of our results, starting with sales. Our second quarter net sales were $4.6 billion, that's up 1% year-on-year with a 1 point benefit from currency rates. Organic sales were even with the year ago. Mix improved by 1%, while volumes fell less than 1% and net selling prices were down slightly. On profitability, second quarter adjusted gross margin was 33.4%, down 270 basis points year-on-year. Second quarter adjusted operating margin was 16.8%, down 100 basis points. Commodities were a drag of $200 million in the quarter primarily due to higher pulp costs, and secondarily, inflation in other raw materials. We're now expecting that full year commodity cost inflation will be between $675 million and $775 million. On average, that's $250 million more than we assumed in April, and $375 million more than what we planned in our original plan in January. While commodities are higher than expected, our teams continue to do a great job delivering cost savings and tightly managing overhead and discretionary spending. We achieved $110 million of FORCE cost savings in the quarter, and we're now targeting $425 million to $450 million of savings for the year, that's $25 million to $50 million higher than our original target, including more value from negotiated raw material contracts. In addition, we delivered $40 million of cost savings from our restructuring program. We're accelerating actions where feasible, and we now expect full year savings between $100 million and $120 million. That's $50 million higher than our original target. In addition to the restructuring, we continued to reduce overhead costs. In total, between-the-lines spending declined by 180 basis points as a percent of net sales. All in all, adjusted operating profit was down 5%. On the bottom line, second quarter adjusted earnings per share were $1.59, up 7% year-on-year. That included about 7 points of earnings growth from a lower tax rate, along with benefits from lower interest expense and share count. We expect our full year adjusted effective tax rate will be at the low end of our 23% to 26% target range. Let's turn to cash flow and capital efficiency. Cash provided by operations in the second quarter was $787 million compared to $825 million in the year ago quarter. This decrease was in line with our expectation, and it includes cash restructuring payments and the benefits of lower taxes. We continue to allocate capital in shareholder-friendly ways. Dividends and share repurchases totaled approximately $575 million in the second quarter, and we continue to expect the full year amount will total $2.1 billion to $2.3 billion. Looking at our segment results. In Personal Care, organic sales were down 1%. Net selling prices declined 2%, while product mix improved 1 point. Overall Personal Care operating margins remained healthy at 20.4%, although down 50 basis points year-on-year. In Consumer Tissue, organic sales fell 1%. Volumes decreased 3%, while net selling prices increased about 2% and product mix improved slightly. Consumer Tissue operating margins of 14.1% were down 260 basis points. Significantly higher pulp costs and lower volumes were partially offset by cost savings, lower overhead spending as well as favorable selling prices and product mix. In our K-C Professional business, organic sales grew 2%, with gains in all major geographies. Volumes and product mix each increased 1%. K-C Professional operating margins of 19.2% were down 80 basis points compared to a strong year ago quarter. Results were impacted by commodity inflation, partially offset by cost savings and benefits from top line growth. In summary, our second quarter results were impacted by difficult environment particularly with significant commodity inflation. Nonetheless, we are achieving strong cost savings, we're making good early progress with our restructuring program and we continue to allocate capital in shareholder-friendly ways. With that, I'll turn the call over to Mike.

Thanks, Maria. Good morning, everyone. Today I'm going to focus my comments on organic sales, pricing and our full year outlook. As Maria just mentioned, organic sales were even in the quarter. That said, organic sales were up 1% year-to-date, which is right in line with our full year target. Let me spend a few minutes on our 3 main growth priorities for 2018. Our first priority is to strengthen and grow our core businesses. In North American consumer products, following the strong first quarter, organic sales were down 2% in the second quarter. Halfway through the year, which is a better indicator of our performance because of some changes in our promotional shipments, volume is up 2% and organic sales were even year-on-year. Our year-to-date market shares are up or even year-on-year in 5 of 8 product categories. We've launched a number of innovations and are supporting our brands with strong marketing and promotion programs. Overall, these initiatives are on track with our expectations. In our K-C Professional business, second quarter organic sales were up 2% in North America, with volume growth in all major product categories. K-C Professional organic sales increased 3% in developing and emerging markets, led by Asia Pacific. In developed markets outside North America, organic sales rose 1%. In South Korea, while our diaper business continues to be impacted by a lower birth rate, our other brands are growing nicely. Now let me turn to our second key priority, which is to accelerate Personal Care growth in developing and emerging markets. Second quarter organic sales for these businesses were even year-on-year. In China, organic sales were down about 10%. Competitive promotion activity in the diaper market has increased and we are responding appropriately. During the second quarter, we launched our upgraded Huggies premium diaper. And this quarter, we're rolling out an improved premium diaper pant. We continue to be optimistic about these innovations, although in the near term, we do expect market conditions will remain challenging. In Brazil, organic sales were up mid-single digits compared to a high single digit decline in the base period. Volumes were up slightly despite a modest impact from the country-wide transportation strike. Pricing has now turned positive following the increases we've implemented this year. In Argentina, organic sales were up mid-single digits. Price realization continues to be positive, while volumes for us in the category are down, which reflects the difficult economic conditions. In Eastern Europe, organic sales increased double digits for the third consecutive quarter. Volumes rose double digits on both Huggies and Kotex behind innovations, strong marketing programs and continued expansion outside of Russia. In terms of our market positions, trends are positive in most of these key markets. Shares are up in Brazil, Argentina and Eastern Europe, but down in China diapers. Regarding our third growth priority, which is to further build digital and e-commerce capabilities, we continue to make good progress. Our digital marketing programs, joint customer business plans and investments in tools are producing good results. Online sales continue to grow at healthy double-digit rates so far this year. Now let me switch to the topic of selling prices. In April, I outlined several of our actions to improve net realized revenue. That included sheet-count reductions in North American bath tissue, price increases in Latin America and other international markets and initiatives globally in K-C Professional. These actions are broadly on track and our pricing trends are improving. Net selling prices have gone from being down 2% in the fourth quarter last year to down 1% in the first quarter this year and down about 0.5 point in the second quarter. We expect overall pricing in the second half to turn modestly positive, mostly because of the actions we've taken in the first 6 months of the year. We will also be lapping elevated promotion activity in North America, especially in the fourth quarter. Still, given the headwinds we face, it's clear that we need more pricing. As a result, our businesses around the world, including North America, are closely evaluating further opportunities to increase net selling prices. We anticipate that nearly all the impact from any potential actions would start to show up in our results next year. Now let me turn to our outlook. Clearly, the near-term environment has become more challenging, and we are responding by aggressively reducing costs and increasing selling prices. At the same time, we continue to execute our long-term strategies to deliver balanced and profitable growth. We continue to innovate, support our brands with category-building marketing campaigns, pursue targeted growth initiatives and improve key capabilities. We also continue to focus on sustainable cost reductions, while we implement our global restructuring to make our company even stronger for the long haul. In terms of our specific targets for the year on the top line, we continue to target organic sales growth of approximately 1%. On the other hand, the outlook on foreign currency has gotten considerably worse since April, we now expect currencies will have a neutral to 1% negative impact on our net sales. 3 months ago, we expected a 1% to 2% positive impact. On the bottom line, we are now targeting full year 2018 adjusted earnings per share of $6.60 to $6.80. Our previous outlook was $6.90 to $7.20. To put that reduction in perspective, we're now expecting that commodities and currencies will be a combined year-on-year operating profit headwind of about 20% to 25%. Our original plan for the year included a net drag in the high single-digit to low double-digit range. We expect to offset approximately half the additional headwinds with more benefits from pricing, cost savings and spending reductions. In summary, we are aggressively managing our business to benefit near-term results in a challenging environment. At the same time, we're executing our long-term strategies to create sustainable shareholder value. 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 Bernstein.

So I have a few questions here. One is, you mentioned a couple of times in the release and in your prepared remarks about marketing spend being a help, whether it be on the growth to net or just pure advertising spend. Can you talk about where you are in marketing spend at this point? Obviously, the cynic in me says you need to cut marketing spend to make your bottom line numbers. Can you just give us some comfort there, please?

Yes, I'll start and maybe Mike can build on. I mean, I would say broadly if you look at our advertising and promotion spend in the quarter, it's pretty similar to the full year average for 2017. So it's down a bit from the prior year second quarter. And the thing that you're maybe not able to see is we are cutting nonworking pretty substantially and reinvesting those savings. And so if we look at our plan for the year embedded in our guidance is relatively flat marketing spend. So we're not cutting marketing spend broadly to make the number. Mike, maybe you want to build on that.

Yes, actually Maria and I were just huddling on it earlier and if you go line-by-line, all of our working lines are actually up versus the plan. If you see, it's the nonworking numbers that are down significantly. And maybe to give you a little of background, Ali, is when we went to our global restructuring planning, obviously taking a hard look at all lines of nonlabor was an important initiative for us. And we just found that there was a lot better ways to manage our nonworking spend or getting more efficient in terms of how we produce our copy or our promotional programs around the world. You can imagine the inefficiencies that might exist when you have these marketing initiatives distributed around the world. So we pulled some back, and we're really just getting out of some of the nonproductive spend.

Okay. And that's helpful. And then the corollary to that is, obviously, brand power and pricing, and you put a very helpful slide, thank you, Mike, I think you went through it on Page 20 in the presentation just around selling prices. I'm worried about pricing, you guys would probably know this from some of our last discussions or some of the pieces that we've written. What gives you confidence that you'll be able to take the pricing that you laid out, that you're not going to be promoting it back, that the competitive environment is going to allow you to take pricing in different parts of the world? I think it's a big controversy for the whole sector, but certainly for you?

Yes. No, I'd say, we know we've got to show you. So it's been a while since we've had commodities cost at this kind of level, and we were kind of going back through history. If you look at 2008, 2009, 2010, 2008 and 2010 both had commodity cost hits that were about in the range that we're in. I think in 2008, we took two price increases. 2009 was the recession, so we gave some of it back. 2010, we took another round of price increases. We came out of it with higher margins than we started. So we -- it takes us a while to get price and so we do suffer during the period of time while we're getting that embedded in the market, but we feel confident that with the commodity cost hit at this level that the cost structure for most of our competitors is similar and that there will be more broad scale price. But I don't know Mike if there's anything else you want to add to that one.

No, I guess the addition only is that we have made some pricing, taken some pricing actions around the world this year and we have progressed there. And so that's one piece. Second, as Tom mentioned, when you have a commodity impact as large and significant as it is right now, I think our customers understand that. And we do have to recover and improve our net revenue realization. And so we are going to take the appropriate actions. And we've seen maybe some evidence in the markets and various markets that would show maybe: one, the promotion intensity in markets is easing a bit; and second, we have seen some early indications of some pricing moves by competitors.

And so we're not leading it everywhere.

Okay. And then just related to that my last question is around the implications of that on EBIT, right? Because although you try to recover some of the commodity cost, doesn't seem like you're able to recover as much as you'd like, and so the pressure on EBIT, obviously, is very obvious and very clear here. And if you could comment on your EBIT trajectory, certainly in the context as well as what a lot of folks look at Q4, which is returning cash to shareholders. How should we think about the EBIT pressure you're facing and the challenging environment that you're facing in the context also of the sustainability of your dividend payout ratio and your share repurchases?

Sure, Ali, I'll take that. We gave a range on share repurchases of $700 million to $900 million for the year, and we're still tracking to do that and you know what the dividend is. We do expect that our leverage will be up slightly as we come out of this year versus where it was when we started into the year. And so if you put all those things together, I think we're still tracking to what we set on shareholder returns, which in total would be $2.1 billion to $2.3 billion for the year.

Our next question comes from Steve Powers with Deutsche Bank.

So I mean, can we just I guess pick up on that pricing theme because the -- you sounded very confident in your response to Ali's question about your ability to push through price. But at the same time, obviously, we haven't seen it in the first half. I think modest -- the call for modestly higher pricing in the back half doesn't sound that ambitious. And if I just go back to those benchmark you just talked about, 2008, '09, '10, it just seemed like the pricing came through, although it wasn't immediate, it did come through a lot more quickly and more robustly than I think we're seeing this cycle. So what's different? How much of the pricing pressure that, at least, I perceive you to be having right now do you -- if you agree, is temporary versus more -- something that might be more structural in your categories?

Yes, I'll let Mike elaborate on that. I would say it's probably fair to say that it may take a bit longer to get price, particularly if we're going to take price through either package counter sheet count, there is some supply chain implications to that, doing it in the middle of a big restructuring, we probably had some other people focused on other things. But it's probably takes us a bit longer to get price in the market. And typically, with your retailers you're 3 to 6 months out on promotion plans as well. And so I'd say, that's probably a fair push, but Mike maybe there's some other color you might want to add to that.

Yes. Steve, we've taken some actions year-to-date in most markets, including North America. I would say that they were not at the level because I think the commodity impact was, as we said earlier, far higher than what we were expecting it at the beginning of the year. So at this point, we're looking at another round of pricing. And I would say, a couple of big changes. We've made pretty good progress this year in the business like North American Consumer Tissue. Our pricing is up 2 points in Q2 after being flat in Q1. And that's all an artifact of the desheets that we've bundled with our product improvement there. And you might have seen, you could probably see in the numbers, in Personal Care we've lagged a bit. Our pricing was still down a bit from Q2. Part of that is also an artifact that we wanted to support our innovation on Huggies this year and in adult care. And we're doing that pretty well. That said, we also had some pretty strong promotion plans that were locked at the end of last year that we plan on adjusting and easing promoted depth and frequency as we go through the balance of the year.

Yes. I mean, so on the one hand I get it, and I get the cost pressure is building, but it -- and I guess just asking for your feedback on this. It feels like competitively, this -- the category, especially Personal Care and baby care that you're in are super important to the retailer right now. They're very focused on winning that consumer. And so there's a lot of pressure from them to keep prices low. They're pushing on private label. Your biggest competitor, I think, definitely wants to win and what for them is one of their biggest if not their biggest profit pool categories. So it feels like there are things that are, especially in Personal Care, that structurally are going to make pricing more difficult, not only in the back half of this year, but for the foreseeable future. Do you agree? Or am I overdoing it?

Well, I think it depends on the market. I'd say the thesis isn't wrong, although that hasn't changed all that much. I mean, baby care has always been an important category for our retailers for a long, long time. And so -- and they want to be competitive. And I think our customers, they understand industry price changes when the commodity cost shifts. They just want to be advantaged somehow. And so that's what we have to work with as we implement it. The good news is as you look at private-label shares and Personal Care broadly, they haven't moved very much. And so the -- in fact, if anything, they're down a tick in diapers, which has positively driven innovation and that's helped us on the mix front a bit.

Great. Okay, just one question on another topic, if I could, which is on the savings side. And I just I look at the SG&A reductions and especially appreciating your comments to Ali about not cutting into working media, just feels like the cuts that you're -- you've been making not only this year, but over the past really 3 years or so are pretty aggressive when it comes to that overhead or nonworking part of SG&A. So I guess the question is, where you're sourcing them from? How much of this is sort of belt-tightening that you want to get a little bit of relief you might have to put back into the business? Can you sustain this level of cutting? Because when I look out to the next year, it just feels like that source of profit growth or inflation offset may not be there for you. Just looking for some help to bridge that gap.

Yes, sure. We have a number of things going on, on that between-the-lines spending front. You saw in our results in the second quarter that we delivered $40 million of savings from our restructuring program, 80% of that fell between the line. So below gross margin, and that certainly has helped our ratios in the second quarter. Beyond that, we have been very tightly managing discretionary overhead spend and you saw that come through our results really starting in the second half of last year, and those are things like T&E, meeting expense, all of those types of those activities. We really have our whole workforce focused on taking out either unnecessary or less valuable types of spend so that we can protect the investments that we're making behind growth. Your question on, is it sustainable. I'm not going to say that the second quarter rate is going to be the rate every quarter, but you know from our guidance on the restructuring program that over the next couple of years, we will continue to work the cost structure hard. We've got $500 million to $550 million of savings associated with that program, and probably 1/3 of that is going to accrue to the SG&A part of our P&L. The area where you're seeing the biggest reductions when you look at where is it between the lines is really in the general and administrative side of the house. And that is, as I said, working the discretionary hard, working the restructuring hard, where we're looking to take work out of the system and leveraging various productivity programs. So we're hard at it, and our goal is really to fundamentally lower the cost structure of the business and continue to invest behind our brands to grow the top line.

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

I actually want to ask more about the go-forward beyond this year. Because clearly there's been a lot of focus around the growing and growing challenges across many companies, such as you guys ability to price, consumer's willingness to pay for premium priced product overall. And I was just hoping you could give us some color on how you view your ability to hit sort of your long-term algorithms going forward, and what you need to change to get there? Is -- we talk about cuts in the nonworking spending, but is there more investment necessary in another parts, more marketing in the working areas? Because right now, it seems like given what's happened already in the first half of the year that it would be pretty tough to get your longer-term expectations?

Yes. And so, Olivia, the quality of the line wasn't very good, so I think I heard most of the question was really kind of questioning how do we get back to our longer-term growth algorithm and when are you going to see signs of progress and what changes do we have to make to get there. Is that a good summary of the question?

Yes, you got it.

Okay. So I'll start, but I'll let Mike pile on. And we've talked about some of the factors, the lower birth rate in some markets, some of the things that are going on in Latin America where we've seen kind of double-digit unit volume declines and places like Argentina have made the headwinds a little stiffer, places like Korea where the birth rate is down 9% and our second largest diaper market, obviously aren't helping. On the other hand, we do see the best for baby as a powerful instinct all over the world, which is driving more premium products in places like the U.S. and in places like China. And we've got a robust innovation pipeline that we're investing behind, and we'll use that across our portfolio to drive that. But Mike, maybe you can comment a little bit more on that.

Yes. Olivia, we're very bullish on our categories. Obviously, we'll need some help from the categories in some of the markets to get back to that algorithm. But I think the big planks that we have that we believe that can help us grow is, one, in our core markets, our big markets we believe there's still a big opportunity to elevate our categories. We know there's a big value consumer and there's also big swathes of premium consumers. And part of the opportunity for us is we believe we make the best products in the world, but we still think there is plenty of opportunity to improve the fundamental performance across some pretty innovative dimensions that we're working on. And so we still think there's an opportunity to elevate the category and also bring more consumers into the category in big developed markets. And then there's, obviously, large and significant potential in developing emerging markets. As I've said multiple times, China is our largest market today, but it's going to be a multiple of what it is today in the coming years. And then we've got India and other markets to build as well. Obviously, we can say all that. We've got plans that we're working on to accelerate our growth, but we've got to show you, so -- and we know that.

I guess just -- that's all very helpful, and I guess just a follow-up one thing about developed markets in the U.S, right? You've had those or it sounds like those discussions have started maybe can you give a little bit of color as to what transpired or have -- has anything changed in terms of your plans because you talked about pricing by reducing package count, but price obviously worsened in Q2 and the track channel data that we've seen so far would imply that promotional levels are still pretty high. And then in China, you talked about innovation and new product rollouts and stabilization in pricing, but it doesn't seem like that's -- given the competitive challenges, it doesn't seem like that that's transpired the way that you had anticipated?

Yes, it has not, but I'll come back to China. Yes, North America, one is, there have been some pricing moves, some down counts competitively we've desheeted in our bath tissue products. And in some categories, we have started down back the promotional depth and frequency and have additional plans to do more. We have had some discussions with our customers about this. I think they also see in fixed consumption categories, the way to grow the category long term is to elevate it or to create more value add in the category. So we're not just talking, for us our strategy is not just to raise price indiscriminately. It's to creating value-added in our products that people would be willing to pay more for. So that's a little bit on North America. I think China, I think, has been a market that's in my mind been one of the most premium markets in the world. It is under a little bit of pricing pressure. We've launched a terrific new product this 5d core that delivers thinness, flexibility, breathability in ways that are superior to any other -- in our belief, any other major manufacturer in China today. That said, I think we've got off to a good start, but those results have been muted because pricing has come down in the most recent quarter, about double-digits overall in the market. And in some cases, we have matched on as we rolled this out, and that's muted our impact a little bit. So China right now, we expect it to be a bit challenging because it remains the single-largest opportunity that we have on the board to grow. All our competitors see that same opportunity, and they're going for it, too. But we're in China to win for the long haul, we've got a great team that knows how to make winning products and knows how to operate within a lean cost structure that delivers the margins that we need.

Our next question comes from Bonnie Herzog with Wells Fargo.

I wanted to go back on Consumer Tissue business and drill down a little bit further, you guys took some pricing in the quarter, it was up 2%, yet your volumes were down 3% on a somewhat easy comp. So I'd like to first hear your thoughts on price elasticity? And then maybe how your elasticity is changing in this environment? And then second, in thinking about the strong volume, you guys reported in that segment in Q1. How much loading occurred that might have also contributed to the weaker volume in Q2?

So bonnie, I'll start and I'll hand it over to Mike. I'd say, we typically don't load and customers really don't want to load tissue anyway, it's a very high tube. And so the strong promotional calendar in the first quarter that sold through. And then the second thing and Mike will give you a little more color, on the second quarter, whenever you do a desheet, you see negative volume and positive price. And so if your customers were holding 100 cases before it's got fewer sheets in it so you're going to show less volume and yes, there's some inventory decline in both the customer and consumer. We typically don't try to measure that or call that out, but it's not unusual to see some software volume in a desheet or a down count environment. And so that's something just to watch for and know that it exists. It's not an elasticity issue. It's just a facts of life that there's fewer standard units in each case that we ship. And so as we look at Consumer Tissue for the first half, we're more or less on track with the plan. Our shares are stable, and we've had positive organic growth. But Mike, I don't know if there's anything else you'd add to that.

No, I'll just speak on few numbers, Bonnie, our Q2 organic was down 4, and most of that was due to that shift in promotional timing that Tom talked about. Just to refresh your memory, back in Q1, I think our volume was up in North American Consumer Tissue 9%, and we said at the time that, that is not the run rate of the business. So it was a big shift. It wasn't a load, it was more volume that sold through in Q1 that was in Q2 of last year. So that's one big change. And as Tom said, year-to-date, our sales were up 1%, which is in line with our plan. The additional thing I'll tell you is our innovation in family care this year are off to a very good start, Kleenex wet wipes doing very well at launch. I think it's already at the velocity rate it is just the largest wipe in the marketplace right now. Cottonelle wavy ripple is selling very well, performing very well and getting great customer feedback. It's consumer-preferred product. And if you exclude kind of some of the promotional shifts, the base velocity is up mid-single digits. So we're pretty excited about the new items we have. We are getting some price realization in the family care business and looking forward to more.

Okay. That's helpful. And then I just wanted to go back to China with a follow-up question. I was actually in the market a few months ago, and it seems there is a perception from the Chinese consumer that the quality of your key competitors' brands, it's actually perceived to be better, but a lot of times they're priced more attractively. So just kind of love to hear your perspective on this? And then what changes you may be implementing to improve your positioning in that market? You touched on some innovation that you're bringing into the marketplace, but just wondering if more needs to be done there?

Yes, yes, definitely there's more that needs to be done, but I think we're off to a good start this year. The team has done a great job rolling out the new diapers -- Tier 5 diaper that came out at the end of the first quarter, beginning of the second quarter. And then also we're rolling out a similar diaper-pant that's also significantly preferred. I think there is a perception out there, our testing would show a strong preference versus all the multinational competitors with our new product. And so I think the team has responded to the consumer perception over the data, and they've developed a winning product. Part of the challenge on the China market right now though is people are being very aggressive on price, and we are in this for the long haul. And so right now, we are matching on price, although we don't want to win on price. And we want to return to winning on product, quality and brand positioning. And that's -- those are things that we're driving in the definitive market as well.

Our next question comes from Dara Mohsenian with Morgan Stanley.

So Maria, I just want to follow up on Steve's question earlier. You talked about what's driving some of the cost savings this year and in the back half of last year. But I'm wondering as we look out, is there any type of hangover when we look out to 2019 in terms of -- are some of these cutbacks more temporary in areas like discretionary travel, et cetera or incentive compensation that ramp back up in 2019. I know you'll be hesitant to speak to '19, but the question is more the 2018 cost savings, how much of that is sort of more discretionary and belt-tightening that may have to come back as you look out for 2019?

So I think there is a number of factors that will affect what our SG&A rates are within any given quarter. What we're fundamentally trying to do is run our company on a lower-cost structure. So finding new ways of working that didn't require us to spend as much money on lower-value added activities. And that's something that we're hitting hard in the restructuring. In terms of kind of the nonrestructuring reduction in discretionary spend, clearly, we are not on our target for the year, as you see, in what's happening in the macro environment and our guidance range adjustment. So we do have a comp benefit this year that will hopefully not repeat next year. But for the most part, the changes that we're making in the business are structural. Now the timing of these changes is going to vary quarter-to-quarter. So let me give you an example, we talked about the fact that in our restructuring program, we've accelerated certain actions, which is why we increased our restructuring savings number by $50 million within 2018. We are through our voluntary severance program and so we've had a lot of employees leave the business. The restructuring program and the savings that we've given is actually a net number. So I would say that we're probably a little ahead on the excess and a little bit lagging on the add-back in the business. So we may have some timing shifts there around headcount, that'll play itself out through the year. And I think, overall, the fact that our savings number has accelerated for 2018 is a good thing, and it's showing the hard work that the teams are doing to really help us offset some of the headwinds that we're seeing in this year. But, overall, the goal here is to fundamentally lower the cost structure of the business, and that's what that restructuring program is all about.

Okay. That's helpful. And then I wanted to return to the pricing front in Personal Care. I guess it sounds like it's more sort of business as usual in the back half of the year in terms of some typical pricing actions, stepped in frequency, et cetera. It doesn't sound like there has been a big change in mindset around pricing, and I'm just trying to understand that, given if you look over the last year, it looks like the combined impact of pricing and input cost in Personal Care is $200 million, it's a big number. So I guess just help me understand why it's not a bigger focus? Is it just the competitive environment that's limiting your ability? Does that competitive environment change going forward? And as we think about your own internal pricing actions, are these significant actions? Or is it more can you recover a lot of what you've lost? Or is it more moderate given the competitive environment?

Yes, I'll start and then let Mike build. I mean, I guess if we gave you the impression it was business as usual, that was probably the wrong impression. And so when we typically run the business assuming we're not going to get much price in a relatively stable commodity environment, that we can compete on innovation and execution. In this kind of commodity cost environment, we're looking to get price in lots of places, and some places that takes longer than others. But looking at it through lots of different vehicles, whether that the price count, promotion, trying to pull all those levers. And so I'd say the team is heavily focused on that, while not trying to take their eye of the ball and executing the innovation plan and getting the right winning products in the marketplace.

Yes. Just to add, I think last year, Personal Care at least, let's talk about diapers in the U.S. I think the promotional environment was -- had gotten more intense, and I think at this point in time, on this call last year, we're saying we were going to find some of our plans become a little bit more competitive in the marketplace, and that meant more depth and more frequency. I think there has been a significant change this year, and I think the market has, in my mind, maybe normalized back to kind of where it historically has been in terms of promotional intensity. So part of what I was saying is on the promotion side or the trade planning side, we're adjusting our price points to maybe back to where they had -- where been historically for us. That's one part. And then second, we're evaluating additional opportunities for pricing because we are taking some pretty significant increases to our input costs in the Personal Care business as well, and we feel like we need to make some moves there as well.

Our next question comes from Lauren Lieberman with Barclays.

So I just wanted to go to kind of the performance in D&E markets, Personal Care kind of...

Oops, we lost you, Lauren. [Technical Difficulty]

Tom?

Yes, we got you now.

You got me now. Okay, hold on let me put down my headset and speak before, okay, all right. So I was just looking at organic performance in D&E markets in Personal Care. So organic growth overall was flat this quarter, but when in the script you went through some of the markets sort of China down 10%, but everything else, the big chunky things, Brazil, up mid-single digits, Argentina mid-single, Easter Europe have doubled. I'm having trouble figuring how that all squares to the business being flat in the quarter. So what other markets maybe if there were other markets that were particularly weak. What am I missing to tie out to D&E having decelerated again kind of both sequentially and on a 2-year stack, because I look forward I think that's the thing that probably through now probably 4 quarters in to D&E markets not improving in a way that I might have expect even just based on the comparisons. So that's a piece of the puzzle. I'd love a little help understanding both dynamics in the quarter and how does things get better from here?

Yes. I think maybe Mike or Paul can give you a little more detail. I think probably the only other big piece that you're missing is the rest of Latin America was relatively soft, and that was a trend from the first quarter. And there's some positive signs, and we could go through the litany of what's going on in the Caribbean with recovery from hurricane or in Central America with issues going on in Nicaragua, there's some political upheaval in some of those spots that are part of it. And other parts of it, there is a little bit more competitive activity, but that's probably the biggest one. And then the relative size of China is the other factor, that's a pretty, pretty big number. And the other ones aren't as big to offset it.

Yes, and Lauren, if you've looked at Q2 versus Q1, you would see that Latin American total was pretty similar to similar performance. Argentina was a bit softer. Brazil was pretty similar and China was softer.

Okay. So on the go-forward look, what are the pieces as you are thinking through what kind of gets better? You've had this big product launch in China this is challenged by the pricing environment. Is Latin America just a hope for macro stability? Just a little bit of help on what -- how things go from here in some of these markets, where it's one of your big focus for 2018 is accelerating Personal Care and D&E?

Yes. Lauren, one, I think the -- some of the underlying performance I think we feel very good about. As I mentioned in Brazil, I think our market shares were up about three points in diapers and two in femcare. Similarly, in Eastern Europe, up a couple of share points in diapers and femcare. So I think some of the fundamentals of the things that the teams are working on in terms of improving our value proposition or improving our offering particularly both in the value tiers and the premium tiers, I think, it's working pretty well. I think part of the challenges we've got to work through is China is a challenging market right now with some of the pricing environment, and we're going to need to work through that. And as Tom mentioned, it's a pretty significant piece of our business. Year-to-date overall in D&E, we're up about 1%. And I think our developed markets are a little bit ahead and maybe D&E is a little bit behind. And so on our call for the year, our best call right now is probably the second half looks a little bit like the first half in D&E for the balance of this year. But we do think we've got share moving in the right direction in most major markets and D&E, and we're working on the right things.

Okay. And then if we could talk a little bit about profitability in Consumer Tissue. So understand the cost pressures we're seeing are primarily hitting this business more than any other, but 14% margins, I think is the lowest you've seen in probably probably 5 to 6 years now. So as you think about the kind of long-term structural profitability for Consumer Tissue, so once you've got the pricing and that you feel is appropriate, you've mentioned low-margin exits in your restructuring plans plus some things that have been kind of remembered in the press in terms of Europe. What do you think is the long-term run rate for margins in Consumer Tissue? Is it kind of high-teens? Is it low to mid-teens? I'm just -- does this 14% kind of jumps off the page a bit versus where we've seen the business get to over the last five years.

Yes, it's a good question, Lauren, you and I've been around long enough, but you and I remember high single-digits.

Tom, don't remind, everyone. Don't remind them how long I've been doing this.

And so when you go through a pulp price spike like this where it's $1,200 plus box a ton, that business is going to take it and it takes a little while to get price, especially if we're going to do it through sheet count. And so the good news is that the low point is a lot higher than the prior cycle lows. And so what we're hopefully doing is shifting that range up over time by improving the mix, by improving the innovation, by improving the cost structure. And if we can continue to do that, I think we'll be in that hopefully mid-teens to upper teens across the cycle. And we were up in the 18 plus range not long ago. I think the good news was in this kind of commodity costs cycle, you look at the KCP margins at 19 plus, and that shows you what's possible in a tissue heavy business. And you still see Personal Care hanging in at north of 20% in a fairly stiff commodity headwinds. So we're -- we know we've got some work to do in tissue, we've got to get some revenue realization. There's obviously some cost savings that will come from the restructuring, and that's a focus for us as we go through the balance of the year and into next year.

And what if anything do you think has changed from a consumer or competitive standpoint in Consumer Tissue, say, today versus the last cycle? So let's point to the 2008 cycle where margins got to what like sub 8% at the lows, I think. So in terms of consumer demand, openness and prevalence of private label, the things that everyone is worried about, how much do you think has actually changed? Has the threat gotten worse? Have shares really changed in this 10-year period? I could think that this would be helpful too.

Yes. That's a -- private-label shares have generally increased. And if you go back, I think, when you look at some data from 2012 over something like that, and I think there it's up 5 or 6 points in towels in the U.S., our share is flat, as we don't have a huge towel share, so it's not like little we've been the big donor, and past years I think are up 3-year or up 5 in that period and I think we're down a point or 2. So if you looked at Europe, you generally see private-label shares up. So I think the thing that's probably changed for us is we may be have a healthier portfolio, we went to the tissue restructuring since the last time that we talked that helped exit some less-profitable business. And so we've continued to kind of work that part of the portfolio. We've mix shifted more of our capacity in emerging markets, especially into the more premium tiers. And then choice will be about where we expand that business. And so I think we're trying to manage it to get growth where we can get profitable growth and to get margin where we should get margin. And overall, I'm not satisfied with where we are, but I'm pleased with the progress that we've made.

Our next question comes from Jason English with Goldman Sachs.

I guess I want to dig deeper on the dynamics in a couple of your core markets, and why don't we start with China. This persistent price competition in the market, is there any way for you to unpack it and give us a beat or give us your sense of how much is due to maybe tariff changes in the market? How much is due to just an aggressive stance from your major Japanese and U.S. competitors? And how much is due to just the broader proliferation in the market? And on the proliferation point, it's something you've highlighted in the past, and there's been some question about how much of the proliferation or proliferated products could actually stick and endure and whether or not there could be a shake out on the horizon that could make things a bit easier? I'd love an update on the thought process around that and what you're seeing in the market?

Yes. I'll start again and I'll let Mike build it. First of all, I don't think any of it's related to the tariff discussion. So all the products that we make -- that we sell in China are, for the most part, made in China. There is a bit that we import from Korea, but there is -- we don't import or export anything out of the U.S. We also make all the products for the U.S. market in the U.S. market. So it's not a big issue really for either of those. On the competitive front, I think -- everybody thinks the other guys started the fight usually. But I would also say is when you have 1 competitor like us launching some big innovation, if you don't have any innovation, sometimes you compete on price. And so -- and China is a big growth opportunity for everybody and no one wants to get left behind. And so it's also a big e-commerce market, probably half of our business is in e-commerce. There is a little bit more price transparency there. And you also have the e-tailers competing with each other to try to win in this category. So that also can make the pricing a bit more competitive. And so, as Mike said, I mean it's the biggest diaper category in the world. It's not our biggest diaper market yet, but it will be one day. And everybody else sees that as well. And we're up for the challenge, but it's going to be a volatile, exciting place to operate for a while.

Yes, Jason, I probably would do a better job answering this question after this week, I'm flying out to Shanghai this afternoon. So I'll be able to let you know more. But I would tell you my sense is, hey there's been some traction from some local players who've picked up a pretty nice chunk of share over the last couple of years or maybe over the last 18 months or so. And I think some of the price is in response to that growth. And some of the major manufacturers don't want to let their share growth. Our response has been to help beat them, out match them on product quality and innovation, which is why we had the big push we had this year with our 5d core. That said, the market has moved, and so we want to be competitive in the marketplace, and we are going to be competitive on price as well. So I think that's a little bit of what's going on. I think long-term, the right strategy for China is to create more value added. It's a market where the consumers demonstrated their want to get what's best for baby. And that market is, in my mind right now, the most premium market that we have in our business system. And I think there's still more potential to create more value-added going forward.

And while we've had some price cutting, the prices in China are quite attractive relative to other markets as well.

That's helpful. And then a couple of quick questions on North America. North America has been challenging I know for -- we've got -- it has to do with birth rate. We've also had retailers, brick and mortar retailers investing pretty aggressively and presumably pushing pressure back upstream to defend against e-commerce. If we look at the Nielsen data, it looks like brick and mortar seems to be winning that battle. The growth in diapers and training pants combined is sort of surprising to see there. So a couple related questions. One, are you seeing that channel shift to online sort of stall out? Or if not, what's driving that brick-and-mortar growth? And b, I know that a lot of the investment came last year with at least one major retailer sort of restaging private-label and pushing hard on price beginning in August of last year. Do you think we've found a floor that we can soon anniversary on some of that retail-led price investment? Or should we expect just another lag on top of it?

Yes, that's a complex set of questions. I guess I would say we tend to look at our all outlet share data, which includes e-commerce and club and the other thigs that aren't in Nielsen, and don't spend a lot of time slicing and dicing on Nielsen data so I don't know that necessarily be the correct person to answer that. I would say, broadly, I haven't seen any indication of slowdown in e-commerce trends. And so that continues to be a popular place for mom to want to shop. And as it relates to private-label, broadly, we haven't seen much movement in private-label shares in our all outlet data on diapers. And so while there has been some activity by some retailers in that space, it hasn't moved the needle overall at the consumer end, and you are seeing still some uptick in the super premium end of the segment, which has been a positive mix for us and others in the category. But Mike, I don't know if there's anything else you want to add to that?

No. The good news Jason is the headline and maybe the diaper category is that the overall mega category for the last quarter was up 1. And that's a big change from where it was this time last year, which was down 5. And I think part of that is, I think, when we saw the deflation in the category last year, I think the -- certainly we didn't like that, and I think may be it raises some concerns with our customers as well. So I think that's one piece a very good news. With regard to the channel, we don't try to pick winners. Our strategy is to support all of our customers and tailor kind of our tactics in market within the support of their strategies. And so our e-commerce business, both in pure-play and in -- through bricks and mortar is up pretty significantly. And I know both sides of that are very focused on it. And we're supporting them in different ways, but with the same objective, we're trying to serve our customers and consumers in the way that they want to be served.

Our next question comes from Andrea Teixeira with JPMorgan.

So I was hoping if you can elaborate more on the FORCE and the restructuring program. So you added some incremental cost cuts to guidance. So can you elaborate in your -- on your R&D level. So I was hoping you can describe a little bit more if those cuts include R&D from what you discussed that your working marketing spend is flat, but in terms of R&D, how you can look at this going forward? And what are the areas specifically, you spoke a little bit about D&E and also Travel. But what are the areas that you became more optimistic against previous plans? So two questions part of one, R&D and then areas that you see incremental cost cuts opportunities?

Sure. Well you've got it right that we have got 2 significant cost program in the FORCE and in our restructuring program. Let me talk about FORCE to start with. We had a good quarter in the second quarter. We were up compared to the first quarter. And with what we see through the remainder of the year, we were able to take our outlook up for the savings that we expect to generate from that program for the year. We're seeing savings across all 4 legs of that FORCE program, which include productivity and it includes product cost optimization and driving down spending across our facilities as well as savings that we achieve from negotiating lower material prices. So when you have an inflation spike, the discount that we've negotiated are worth more. And so we expect to have a good year on the FORCE cost savings front. On the restructuring program, I talked about the fact that we've accelerated some of the activities that we planned to take, and that's good news because the teams are being aggressive in getting the work behind us, and that's yielding more savings for 2018. On the R&D side, I think two things. One, R&D is covered in our restructuring program, and that has to do with really driving efficiencies and effectiveness of our R&D spend and our R&D programs that we have. So our R&D is an area that's very important to us. Innovation is a key plank in our growth strategy. What we are looking to do is become more efficient in the R&D spend that we have behind those innovation programs. So R&D is part of the restructuring program. The other thing I'd say is kind of the third piece on the cost savings that I talked about is a reduction in discretionary spend, and that's across the board. That's hitting all areas of our business, and that would include the money that we spend in the R&D organization on discretionary items. But I would emphasize, similar to what Mike said earlier, we are not reducing the fundamental investment in our business, and we've got a big innovation agenda, both in 2018 and in the future. And so R&D is a critical area, and any reductions there would either come from the benefit on the restructuring program or the benefit with the discretionary cost cuts that are affecting all lines of the P&L.

Yes, and maybe I'll just pile onto that. Each member of our leadership team have responsibility for one of the functional areas as part of their restructuring program. So Mike did the customer and sales organization, Maria had finance and IP, I had R&D. So my goal was to come out of the restructuring with better R&D capability than we had going into it and the right people in the right place with the right capabilities to drive our business even faster with better innovation. And so we will spend a little bit less, but we will have better innovation capability when we have this fully vetted down.

Yes, that's helpful. But in terms of the percentage of the products that are new, that are coming -- percentage of sales or products which are like say, less than 2 years old. Is that coming down because of this adjustment that you're making at this point? I think it's probably natural that it's coming down from where your organic growth is going to? Or is that something that you are not concerned?

Yes. We track innovation as part of our compensation goals. We look at 3-year rolling, and we look at year 1. And if you look at how we're tracking for our innovation goals this year, yes, we're on track with our year 1. So a lot of the innovation that we are going the market were supporting that the right level, we expect to deliver that. Some of the 3-year rolling looks a little behind, in places like Argentina where the categories have declined dramatically or innovation that you launched. Obviously the consumer doesn't have the money to buy it, you're going to underperform. But it's not far off track. And so, I'd say broadly on the innovation front, we're hitting. We got to make sure we're getting the base volume at the right level.

Our next question comes from Ali Dibadj with Bernstein.

I was wondering what you guys think in terms of anymore potential for structural change within your company to really getting out of most of diapers in Europe and then Halyard and obviously there's been some discussion about Europe overall being tough. Can you talk a little bit about how often you revisit those sorts of ideas? And whether it be surprised to us to see more structural change, whether that be Europe, whether that'd be breaking up Personal Care versus not. Some of these topics we've revisited, but the environment seems a little different now than it used to be?

Well, I mean number one, we're in the middle of a big restructuring. So we've got structural change going on at the company. And as you guys know, we've been good stewards of the portfolio over time, and I would expect that to continue. It's not something that we look at every year, but we look at it from time to time. And in the meantime, we are focusing on executing the restructuring plan flawlessly and getting price in the market. And we've got plenty on our plate to handle for the near term anyway.

So in the time to time, is this one of those times that you're looking at it, portfolio-wise?

I wouldn't say unusually so, not particularly. I mean, we're kind of beating around the bush as to whether I'll comment on the Reuters story, and our answer will be no comment just because we don't comment on rumors, so.

No, I'm just trying to getting a sense of where your cadence is and where your process is to make some those decisions.

It isn't as rigid as that. It's a periodic look at the portfolio. And I'd say broadly, we're pretty happy with the major segments that we're in, and I think we've got the right portfolio. That doesn't mean that we don't look to fine tune things from time to time.

Okay. And then a separate question, following up a little bit on e-commerce, which you touched on a few times lightly. Can you talk a little bit about how you guys think about your market share on in the U.S. specifically e-commerce? Where do you think you are? Are you still behind? We certainly see you showing up more than you used to. What did you do to get there? Just an update would be helpful.

Yes. I'd say e-commerce broadly is an important strategy, and I'll let Mike add some detail. In some markets, where we're ahead. And in some markets, where we were behind and caught up. And there's other markets that we were a little behind and we're catching up. And you've got that across the business. There's other markets that haven't emerged yet, where we're monitoring and working with early adopter partners just to see how it's going to shake out. And so in the U.S. in particular, we were behind. We're catching up. I'd say we'd say still that's the case. Overall, I think our total share on e-commerce in the U.S. is about fair share. But it should be higher than fair share because there's less private label in e-commerce. But Mike, I don't know if there's anything else you want to add anything, about what else you guys are doing specifically to drive it.

No. E-commerce it's -- e-commerce and then more broadly digital, our digital strategy is a big opportunity for us still, and I know we've been experiencing pretty good growth more recently. If you think about the big e-commerce markets, Korea, where I think, 3 or 4x the size of the next largest brand in our categories. And so we're ahead there. We're ahead in China. I think the area in North America, we'd say overall were fair share across all of our categories, but a little bit behind in the baby and child care category, and we're gaining ground fast, and we're improving our performance there. So -- but the broader thing is, I think, if you look at our category and you think about how our consumers behave in the category, Ali, it's a very high range annual purchases, it's -- they're using the products every day, and it's high frequency. And so believe we have a different opportunity that fits unique, and I think for a lot of CPG brands, which is to create a different relation with our consumer of which e-commerce can be a part. But the digital opportunity is even bigger for us in terms of how do we build a different one on one relationship. And so we're excited about the growth we're seeing, but that's not our entire strategy there.

I think, broadly, we're trying to just be present where mom wants to shop, and it's not any more complicated than that.

Our next question comes from Kevin Grundy with Jefferies.

I'll be brief. Quick clarification on China in the quarter, down 10% organically. What was the price mix and volume composition of that? And then a broader strategic question on private-label, which has been touched on in the past, I think it's less than 5% in the company sales. Strategically, do you think the company, the board would get to a point where that becomes a bigger emphasis philosophically? Are you opposed to that becoming much bigger than 5% of sales? Would you be comfortable if it reaches 10% or even greater than that over time? And sort of if so to help us think about that, can you talk about the margin and return differential for that part of the business?

Yes. So maybe I'll start with the private-label question first and then we'll come back to the first question. And Mike, I guess, I'd say this, we typically are doing private label with very few people and doing it in areas where we think it advantages our overall relationship. And so to that extent, I think there we continue to be the lens that we've looked at it through to decide what the what we wanted to do from that standpoint. And I'd say that's probably the -- where you'd say you're going to go with it. Mike, I don't know if you want to come back to....

Okay, in China. Yes, in China the pricing, we're low double-digits down on price mix or pricing China. I think our mix was a little favorable. And so does that reflect the competitive environment that we talk about. I think the overall category pricing came down, I don't know what the right term is Paul, mid-single -- mid-double digits and it's a little bit more than what we came down.

And the other mix in China total is our femcare business was up strong double digits in the quarter. So that blunted some of the price and volume hit in diapers.

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

All right, thanks for the questions this morning, and we'll wrap up with a comment from Tom.

Well, once again, challenging environment, and you can count on us to do the best job we can of delivering results in a challenging environment. And we appreciate your support of Kimberly-Clark. Thanks for dialing in today.

Thank you.

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