Paul Alexander - VP, IR Tom Falk - Chairman and CEO Mike Hsu - President and COO Maria Henry - CFO

Olivia Tong - Bank of America Merrill Lynch Jason English - Goldman Sachs Ali Dibadj - Bernstein Bonnie Herzog - Wells Fargo Lauren Lieberman - Barclays Capital Dara Mohsenian - Morgan Stanley Stephen Powers - Deutsche Bank Wendy Nicholson - Citi Kevin Grundy - Jefferies Steve Garmaise - RBC Capital Markets Andrea Teixeira - JPMorgan Steve Strycula - UBS Jonathan Feeney - Consumer Edge

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 today's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you'd like to as 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 our conference call. Here with us today are Tom Falk, Chairman and Chief Executive Officer; Mike Hsu, President and Chief Operating Officer; and Maria Henry, our CFO. Today's call will focus on three things, our third quarter 2018 results, our full-year outlook, and this morning's announcement that Mike Hsu has been elected Kimberly-Clark's next Chief Executive Officer, effective January 1, 2019. This morning, you'll hear from Tom, Mike, and Maria, and then we'll finish with Q&A. As usual, we have a presentation of today's materials in the Investor section of our Web site. As a reminder, we will be making forward-looking statements this morning. Please see the Risk Factors section of our latest Annual Report on Form 10-K for further discussion of forward-looking statements. Finally, we'll be referring to adjusted results and outlook; both exclude certain items described in this morning's earnings news release. That release has further information about these adjustments and reconciliations to comparable GAAP financial measures. Now, I'll turn the call over to Tom.

Thanks, Paul, and good morning everyone. I'd like to be the first to congratulate Mike Hsu on his upcoming move to become Chief Executive Officer of Kimberly-Clark. So congratulations, Mike. The Board of Directors and I have been working on this succession plan for several years, and it was my recommendation that Mike is the right choice and now is the right time. So this is a carefully planned and natural transition. And I'm confident Mike is the right leader to build on Kimberly-Clark's nearly 150-year legacy of caring for the needs of people around the world while delivering top-tier performance. He is passionate about our people, our brands and our businesses, and he has a deep understanding of what it takes to win in the marketplace. Now, let me hand the call over to Mike.

Good morning, everyone. First, I'd like to thank you, Tom, for your tremendous leadership of Kimberly-Clark over the past 35 years, especially the last 16 years as CEO. And during your tenure, you really transformed KC into one of the world's leading consumer products companies. You've also been a great mentor to me, and I'm honored to lead this great company, and I'm excited about our future. So now, back to the business at hand, I'm going to turn the call over to Maria to talk about the third quarter results.

Okay. Well, congratulations, both Tom and Mike. Tom, your great leadership and mentorship since I joined in 2015, and Mike, looking forward to the future. So, as awkward as it is, I'm going to pivot to the headlines for the quarter, so let's get into it. Organic sales were up 1% driven by 3% growth in developing and emerging markets. Margins and operating profit were impacted by significant commodity inflation and negative foreign currency effects. Helping to partially offset those headwinds, we delivered strong cost savings and reduced overheard spending. And with the benefit of lower taxes, our adjusted earnings per share increased 7%. And finally, we continue to return cash to shareholders. Now, let's look at the details of the results, starting with sales. Our third quarter net sales were $4.6 billion, that's down 2% year-on-year with a three-point drag from currency rates. Organic sales increased 1% versus a year ago. Net selling prices and product mix each improved 1%, while volumes fell one point. Moving on to profitability, third quarter adjusted gross margin was 33.2%, down 250 basis points year-on-year. Third quarter adjusted operating margin was 17.4%, down 120 basis points. Commodities were a drag of $210 million in the quarter, primarily due to pulp and other raw materials. We're now expecting that full-year commodity inflation will be in the upper-half of our previous estimate of $675 million to $775 million. Foreign currencies were also a sizable headwind in the quarter, reducing operating profit by a high single-digit rate. On the other hand, we achieved $105 million of FORCE cost savings, including significant benefits from negotiated short-term raw material contracts. We also delivered $40 million of cost savings from our restructuring program. In terms of that program, we're making good progress overall, including closing a small consumer tissue converting facility in Latin America this quarter. In addition to the restructuring, we also continue to reduce our overhead costs. In total, between-the-line spending declined 150 basis points as a percentage of net sales. All in all, adjusted operating profit was down 8%. On the bottom line, third quarter adjusted earnings per share were $1.71, up 7% year-on-year. That included significant benefit from a lower tax rate, along with lower interest and share count. We now expect the full-year tax rate will be between 21% to 22%, which is better than our estimate of 23% from three months ago, largely because of some planning initiatives. I'm pleased that our effective tax rate is expected to be below target this year. Looking ahead at this point, I expect our rate in 2019 will move back up somewhere into the 23% to 26% range that we initially targeted for 2018. Therefore, we're expecting that the tax rate will be a pretty significant year-on-year earnings headwind for us in 2019. Now, let's turn to cash flow and capital efficiency. Cash provided by operations in the third quarter was $662 million, compared to $805 million in the year-ago quarter. The decrease included a $100 million U.S. pension plan contribution, restructuring payments, and the benefit of lower taxes. We continue to allocate capital in shareholder-friendly ways. Dividends and share repurchases totaled approximately $520 million in the third quarter. We expect the full-year amount will total $2.2 billion, in line with our $2.1 billion to $2.3 billion target. Looking at our segments; in Personal Care, organic sales were up 2%. Performance was led by developing and emerging markets, with organic sales up 5%. In terms of the highlights for D&E Personal Care this quarter, in Brazil, organic sales were up high-teens, including inflationary-driven prices increases and solid volume growth on diapers. In Argentina, organic sales were also up high-teens as price realization continues to accelerate, while our volumes, both for us and for the category, were down. In Eastern Europe, organic sales increased double-digits for the fourth consecutive quarter, with strong volume growth on Huggies and Kotex. In China, organic sales were down high-teens due to lower diaper sales and continued challenging market conditions. Elsewhere in Asia, [ASEAN] [ph], which represents about 3% of Kimberly-Clark sales across all of our business segments, ASEAN had strong double-digit organic sales growth in Personal Care driven by Huggies in Vietnam. Personal Care organic sales grew up 2% in North America. Infant and childcare volumes increased high single-digits compared to a mid single-digit decline last year. Pull-Ups training pants momentum remained strong, and Huggies diapers benefited from growth in e-commerce and the timing of promotional shipments. Adult care volumes were down mid single-digits, reflecting strong growth last year, changes in promotional timing, and competitive activity. Overall Personal Care segment operating margins continue to be healthy at 20.7% although down 40 basis points year-on-year. Switching to the Consumer Tissue segment, organic sales fell 2%. North America organic sales declined 5%, primarily due to lower promotional activity. Overall, our initiatives to improve net realized revenue led to a 2% increase in net selling prices, and a 1% improvement in mix. Developed markets outside of North America grew consumer tissue organic sales by 4% led by Western and Central Europe. Consumer Tissue segment operating margins were 14.4%. That's down 310 basis points, driven by commodity inflation and lower volumes, partially offset by higher pricing and cost saving. Lastly in our Kimberly-Clark Professional segment, organic sales grew 1%. In D&E market, KC professional organic sales grew 4%, driven by continued volume growth in Asia-Pacific. Organic sales were up slightly in North America, including volume growth in washroom products and wipers. KC Professional segment operating margins were 18.9%. That's down 160 basis points versus record performance last year. Results this year were impacted by commodity and currency headwind. In summary, our third quarter results were impacted by a difficult environment with depreciating currencies adding to continued significant commodity inflation. Nonetheless, we achieved higher net selling prices, delivered significant cost savings and reduced overhead spending, and we continue to allocate capital in shareholder-friendly ways. With that, I'll turn it back over to Mike to comment on our full-year outlook.

Okay. Thanks, Maria. As most of you know, while the overall environment remains challenging, especially the commodity inflation and currency volatility, in the near-term, we are responding by aggressively managing our business up and down the P&L. At the same time, we continue to execute our long-term strategies to deliver sustainable growth. As we mentioned in this morning's news release, we are confirming our previous outlook for our key top and bottom line financial targets. On the top line, we continue to target organic sales growth of approximately 1%. That's equal to our actual performance through nine months. I am encouraged that we are making progress improving net selling prices. Pricing went from being down 1% in the first half to up 1% in the third quarter, and that's consistent with what we said in July when we indicated that pricing should be modestly positive in the back-half of the year. And in mid-August, we announced price increases on the majority of our consumer business in North America. Many of those increases will start to go into effect in the first quarter of 2019. Realizing higher selling prices will be important next year given that recent commodity forecast and foreign currency rates imply pretty significant headwinds again in 2019. Now, looking at commodities and currencies for 2018, we expect these factors will negatively impact our adjusted operating profit by slightly more than the 20% to 25% range we assumed in July. That's mostly because of the recent weakness in many foreign currencies, especially in Latin America. In addition, our commodity inflation outlook is a bit higher on average, and so, as a result our teams are further reducing cost and raising selling prices. In addition, as Maria mentioned, our outlook for this year's tax rate has improved. All in all, we continue to target bottom line adjusted earnings per share of 660 to 680 for the year. That's up 6% to 9% year-on-year. So let me wrap up with the following. First, I am extremely proud of the 40,000 KC employees around the world who are committed to our vision to lead the world in who are committed to our vision to lead the world in essentials for a better life. We have a strong senior leadership team in place to help lead this company forward. Second, while the current environment is challenging, I'm optimistic about the long-term opportunities we have to grow our brands around the world. And third, our teams are focused on improving our business, winning in the marketplace, and creating long-term shareholder value. So, that concludes our prepared remarks. And now, we'll be happy to take your questions.

Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. [Operator Instructions] Our first question comes from Olivia Tong with Bank of America Merrill Lynch.

Thanks. Good morning. First, congrats Mike, and congrats Tom.

Thank you.

Thank you.

Wanted to ask you about the progress on price in Q2, particularly in Personal Care, obviously North America was still negative but less so. So as we go into Q4, should we expect it to swing positive as some of your price plans take hold, or are there still promotions still planned that could express that realization? And then in the developing and emerging markets, it's nice to see also that that swung positive, but how much more can you price even if it is cost-justified given the macro challenges across several of the key markets?

Yes, Maria, maybe I'll comment on the first part. I think overall -- well, I think globally I would say our pricing overall is on track and that we're cautiously optimistic about the progress we're making, and that we will make progress, and you're probably well aware, we've taken pretty significant actions, especially in North America, Europe, and Latin America. North America and Europe, I think generally mid to high single-digit price increases on the brands we have increased prices on, and in Latin America, generally double-digit. At retail in North America, we've had the wide range of discussions that you'd probably expect us to have, but I think we're all in agreement that we're going to try to move forward and minimize the potential disruptive impact on consumers. But we recognize that the market does need to move upward. And right now, we're cautiously optimistic that the market is moving in the right direction. With regard to the D&E, I think it is a challenge. I mean, one of the headlines is the Argentinean consumer is highly stressed, and we are raising prices double-digits to offset both the commodity impacts and also the currency impacts. I mean, year-on-year in the diaper category the diaper price will increase almost 100% for this year, while their wages have increased generally about a quarter of that. So it's a challenge, but we are doing what we need to do to manage this business.

Got it…

Thanks, Olivia.

Go ahead, Olivia.

Oh, thank you. So, on China, you didn't touch on that, but with all the talk about the opportunity there, particularly in recent conferences. Are you concerned about the decline in China now that the volume is also down in addition to price? Was there any change in launch timing because I think you mentioned last quarter that you had some innovation coming. And I assume you still think this is just part of a cycle rather than a long-term market change so what are you doing to sort of shift the trajectory and what are the mile markers you're using to indicate where things stand?

Yes, I'm trying to -- obviously we're not satisfied with our performance right now in China. It remains our biggest long-term opportunity, but it's also a complex market and it's got its challenges. I think the team is pulling on all the right levers that you would want them to pull. And that starts with improving the product. And we are excited about the product enhancements we've made in the line, but that said, pricing did come down in the middle of Q2, and we're going to be competitive on price in that marketplace, but we believe -- I don't really believe that market out in China is commoditizing. We are seeing consumers still interested in new products and product quality. That said, a number of manufacturers have pulled pricing down, and so we're going to need to be competitive. But I do view it as a challenge. It's going to be ongoing for a while in the near-term, but long-term it's a big growth market. Volume for the year-to-date has been up high single digits, the challenge has been the pricing.

Got it, thank you.

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

Hey, good morning, folks. Thank you for the question. Michael, you guys have clearly faced a lot of headwinds in the last couple of years, and both on competition and cost. And you've pulled a lot of levers to minimize sort of the pain at the bottom line, including reductions in a lot of discretionary spend as Hsu has highlighted once again in your release. Do you believe your reductions in discretionary spend have left you competitively vulnerable?

One, I think the simple answer, Jason, is no. I think we're doing a -- the teams are doing a great job getting more efficient at cost. We had a very big global restructuring that we announced in the beginning of this year that is proceeding very, very well. I think we are identifying a lot of good opportunities for us to improve our efficiency. But however, we're still going to spend and we are spending this year in the right areas, product innovation, marketing programs, and sales execution are critical growth drivers for us, and that we feel like we're invested in the right areas. But we also had identified opportunities for us where we weren't spending efficiently, and we're managing that better, but Maria, any additional…

Yes, I think that's certainly the headline, Mike. But if you look at where we're taking the biggest amount of cost out it's in the general administrative types of activities. And on the discretionary activities like travel, consulting, those types of things, really pulling back and working differently in order to get done what we need to get done. We've also had a big focus on reducing non-working advertising costs, and that has really paid off for us this year. So we're leveraging the restructuring program to structurally drive down the cost base of the company, and that portion of that will be sustainable.

Yes. I think I'll note further, Jason, is I think overall, I think our in-market performance in most geographies is improving, especially in big markets and our big businesses in North America Consumer I think are getting better in diapers and in parts of Consumer Tissue. I think in many of our D&E markets, with one notable exception, China being that one, are having a good performance in their markets. So I think we are investing in the right places.

Very helpful, thank you.

Thanks, Jason.

Thanks, Jason.

Our next question comes from Ali Dibadj with Bernstein.

Hey, guys. Congrats Mike and Tom. A few questions for me, first, I guess we were a little surprised by the margin disappointment even with the startups and pricing looking -- this looks like, and it looks like we're going to now see continued pressure on EBIT given your guidance has worsened a little bit here. And a lot of that pressure looks like it's coming from Consumer Tissues, so that's pulp. But it looks like FORCE is a little bit behind what we'd expected. Pricing clearly is still on the comp and you got to believe it's going to happen. So, can you talk a little bit about the trajectory you expect your margins to look like over the next few quarters given all those moving parts.

Yes, I mean the trajectory will go up in the next few quarters. I think the challenge has been we announced our pricing in mid-August. And obviously most of that has not taken root yet. We did have net selling prices in Consumer Tissue up a couple of points this quarter in North America, which was good progress. That was related to some of the innovation and the desheet that we made more at the beginning of the year. So we've got more price increases coming through, generally mid to high single digits in North America, and we'll start to see that generally take place in the first quarter of 2019. And that includes Personal Care as well. And then in developing and emerging markets we have made significant progress, particularly in Latin America, but we've got huge currency headwinds there, and in Europe.

Yes, and if I comment on the cost side, Ali, what I'd say for the quarter, that pulp was relatively stable if you look at the breakdown of what we gave on the 210, on inflation. In the other raw materials, polymer was worse than we expected in the third quarter, it was up 40% year-on-year, and we weren't expecting that coming in. On FORCE cost savings, that $105 million, I describe it as a solid number, but it was somewhat behind our expectation. We had some plant outages in our KCP business, and so we lost some momentum there on the FORCE cost savings within that segment in the quarter. And then the other big one is currency. And we had a significant drag from transactional currency in the quarter, particularly in Latin America, where we not only have the translational effect, but in those countries they're buying U.S. dollar-denominated pulp. And with the lower values currencies that's a double hit for that region of our business. So the transactional currency was a meaningful negative for us in the quarter.

Yes, interesting side note, I think if you add up and look at the quarter results, which that the breakdown is pricing and cost savings generally offset commodities. It was the unexpected hit in currency that probably left that a little soft there.

So, just to follow-up on that a little bit, another question. One is, look, the pressure was in Consumer Tissue specifically on margins. That's just personally domestic business, number one, and looks like pulp is -- to your point, kind of stabilized. So better understanding there. And then on Latin America pricing, I mean if we're doing our math right, Argentina, call it 2% to 3% of your sales, 40% to 50% price inflation, so the bulk of your pricing actually came from that, right, just Argentina. So those are the follow-ups there. And then just a broader question, Mike, for you, as you look forward given all these moving parts and challenges. Are there pieces of the business that you think you want to spend more time on as you look forward for your vision for KMB?

Yes, let me come back to -- I'll address the Argentina. I think in Latin America we've taken fairly broad price increases in many markets, and most notably also Brazil. So it's more than just Argentina. And then Ali, I wasn't clear about your question about North America consumer tissue.

Well, so I'm just saying your consumer tissue operating margins were where you really kind of had some pressure this quarter. And that's disproportionately in North America business. So you're taking the pricing in North America, it's not going to be resolved going forward by international pricing. So I'm trying to understand the trajectory of I guess the Consumer Tissue operating margin in particular as you go forward here was well.

Yes, I think in the quarter, obviously and the North America Consumer Tissue team has done a nice job trying to offset a lot of it. And it's a pretty big hit from a commodity impact. They've offset, I would say, about half of it. But obviously that's not good enough, and therefore -- which is why we did the initial price move in August, and we'll start to see that impact starting in January.

And Ali, I would just add that margins were up sequentially in that business by 30 basis points, and so that's in line with what we were expecting given that the pricing, as Mike has said a couple of times, hasn't come in to the market yet.

Yes. And then maybe with regard to your third quarter, strategic direction, I'll give you a couple of thoughts. Right now I'm still focused on the job I'm in, which is we got to finish '18 strong, and so that's kind of where the focus is. We will have plenty of opportunity to talk strategic direction as this transition occurs, so I'll share more then. But I'll give you just a couple of thoughts, a few things. Here's what's not going to really change going forward, which is, one, we're going to continue to manage the business in a shareholder-friendly way or the focus on our shareholders. We're going to continue to operate with the balance on long-term perspective on what drives shareholder value. And the core tenants, as you would expect, Ali, I mean, it's a CPG business, so we're going to focus on innovation, brand building, in-market execution, and cost savings. And those are kind of the four areas that every company kind of manages. I think it's kind of how you assemble them. And so when you talk about maybe where the strategic emphasis is, I will tell you a couple of thought-starters that we've been working on. One is we've got big businesses in big developed markets. And I think we have -- they're inherently slower growing, but I think we have a big opportunity to elevate those categories and premiumize those categories, and make those categories worth paying more for. And the great thing that we have in our categories is we've got actual performance differences, and where performance really matters. So elevate our core business is the key opportunity for us. The other big opportunity obviously is the developing and emerging market potential. We need to continue to lead the world in driving our Personal Care business across D&E markets. It's a multi-billion-dollar opportunity over a long time. And I think we can do a better job driving the weight of that in our portfolio, and also how we lead market development across the important markets for us. The third big area is on the digital and ecommerce front. I think it can have a transformative impact on our business. I think our business really matters to our consumers and our retailers because of the ring they're spending in our categories, the frequency they're using it, and the long duration they earn our categories. And so we're going to really look to focus on how we transform our business through digital and ecommerce. So those are a couple of thought-starters. I don't know if that answers your question.

It helps. And look forward to chatting more about it. Congrats again.

Thanks, Ali.

Thank you. Our next question comes from Bonnie Herzog with Wells Fargo.

Thank you. Good morning, and congrats to both Tom and Mike. I have a question on your 1% organic sales growth in the quarter. I'm wondering if this performance was better or maybe worse than your expectations internally. I guess I'm thinking about this in the context of your fourth quarter expectations, which imply that your organic sales growth won't accelerate sequentially for you to meet your 1% full-year guidance. So I guess I'm wondering why this is and how you guys are thinking about the impact of some of the pricing actions you've mentioned.

I think, Bonnie, overall, about on track for us. I mean, year-to-date we're up about 1%. We're expecting for the full-year to kind of be on that path. And the important thing is what I mentioned a little earlier. We are seeing improved performance in many of our key markets, including in North America and most of our D&E markets. In a lot of D&E markets we're up a few points on share in our key categories, and we are seeing good organic growth.

Okay. And then I had a couple of questions on private label. First, I was curious to hear from you why we're not seeing more trade-up into branded products from private labels especially given the current strength across the U.S. macro environment and the consumer. And then second, we're hearing a lot of the private label has followed on pricing. So could you guys confirm this? And then wondering how you see the relative price gaps narrowing, and if you think this should encourage more trade-up to your brands. Thanks.

Yes, I would love to see more trade-up faster. I think the recent private label trends are a little mixed. If you look at our categories, I think in the third quarter private label was up in three -- down in three, and flat in two, so overall kind of mixed. It was up a bit more across the Consumer Tissue categories for us. I think we are seeing though improved performance in parts of our tissue business, particularly bath tissue, both Scott 1000 and Cottonelle, Kleenex Premium side, and our towels business is also performing better. I think the focus there for us is we really are focused on the product experience and bringing innovation, and those are areas, particularly on bath tissue this year, we brought really good innovation on it. I think that's why we are seeing improved performance there. Now, as Maria mentioned, our overall organic in Consumer Tissue, North America, for the quarter was down five. A lot of that was associated with some promotion shifts that we had or decreases in promotional spending that we're making to try to improve profitability of the business. The underlying base performance of the business and the brands, particularly in bath, I think is improving.

Our next question comes from Lauren Lieberman with Barclays.

Great, thank you. Good morning. I was hoping you could talk a little bit about the adult incontinence category in U.S. So I think that when Procter reentered the category the conversation was sort of more activity more advertising raises awareness, raises the profile of the category and grows the category. So share wasn't really the right metric to be watching. But recently, and you mentioned in the release, but also is it in the Nielsen data that actually sales trends have turned negative. So can you talk a little bit about what's going on in that business, if there was something in the quarter in particular in terms of promotional timing that may have impacted it, or if in fact it's now not just a share game or not just share isn't the indicator we should be watching, it's actually the sales growth? Thanks.

Yes, Lauren. In North American adult care I think it's also a soft area for us that we want to improve our performance. And I think the team is addressing it. But one is, that's probably the one category in North America where competitive and promotional activity remains fairly elevated. We are still seeing some aggressive couponing out there. And so that's kind of the environment we're operating in. Also in that, I think the opportunities for us is we have had some negative distribution changes that the team is working to correct. And we're also working on some product improvements as well. So I think it's a competitive category, there is still growth inherent in that business, the focus for us going forward is to make sure that we are focused on driving category growth. I'll note that, you know, I think before our P&G reentered, we are growing low double-digits or even mid double-digits for a number of years, and that growth has slowed down with maybe a little more competitive activity. And my hypothesis would be a little bit more too much emphasis competing versus marketing message, driving category expansion, which is what we're getting back to, and we're going to focus on bringing consumers back into the category, we call new category entrance, back into the category.

Okay, that's really helpful. And then also with that as backdrop, and it feels like, Procter, primary competitor is behaving a bit differently in terms of in-store execution, may be working with retailers a bit differently to work on their display space and activity in store. So can you tell us -- talk about if in your businesses, you've already mentioned maybe some distribution losses on in continents, but if you feel like you are still getting your fair share of activity in the store, if there needs to be sort of a change in perspective on how you're working with retailers to get support for your innovation in store?

Yes, I would say that, well, we feel like we are getting our fair share of performances, as the opportunity for us is, we can still enhance and improve our in-store execution globally. That's a big opportunity for us, and given -- I spent some years in sales, I mean, I tend to be a little obsessed with our performance there, and still think we have an opportunity to improve. And so, well, we can respect what our competitors are doing, we see our own opportunities, and well, there's parts of our -- a lot of our performance, we're pretty pleased with. We know we can be a lot better, and we're going to focus there.

Okay, great. Thank you so much.

Thank you. Our next question comes from Dara Mohsenian with Morgan Stanley.

Hey, good morning. Congrats, Tom and Mike. So I have two main questions. First, I guess this is just more of a forward-looking version of Jason's question, but I'd love to hear about any plans going forward in terms of reinvestment by the business in marketing or other areas under your leadership, Mike, it's typical that a new CEO often chooses to take the opportunity to reinvest in the business, there's been some market share pressure recently, theoretically, you need to support the business post pricing. So just given those factors, should we expect more reinvestment by the business as you look going forward? Could it be significant, or are you pretty comfortable with the level of investment that you're planning for leaving 2018? And then also, Mike on 2019, I know you won't provide guidance today, but you did sort of go out of your way to cite the recent commodity forecasts and forward currency rates implies some significant headwinds. Maria mentioned the tax rates going back up significantly. It seems like some of those headwinds are worse than you would have expected a few months ago. So I'm just curious, are there additional areas you're sort of coming up with and help offset those pressures? Obviously, given also a lot of price increases, is it possible to get more going forward, you know, another round of pricing? Is there more room on the cost side where you've been effective for the last few years, beyond the specific programs you've outlined? It just feels like some of those headwinds could be pretty significant for next year. So I'm wondering about sort of some of the offsets the other way. Thanks.

Okay. Okay, maybe I'll start, and then maybe Maria, we could talk a little bit too, but…

Yes.

I think the first part is on the investment, and there's probably not a General Manager in any company that would say they're happy with the overall investment levels. And so, while we spend it, what's average for a CPG, what I like to put more behind good ideas, yes, and that's a big reason why we've done the restructuring, and that's to provide fuel for reinvestment, which we are doing in some cases. I think also if you think about what I just talked about with Ali, which is that the three kind of planks elevate the core of our business, lead a Personal Care development across D&E markets, and drive our digital e-commerce growth. I think those are areas that would be good candidates for investment. As we think about how do we build out our market positions in international markets and leading market development, I think that could -- there could be investment dollars well spent after that, or in terms of how we fund innovation, and so, we are going to do some of those things. I don't think we're ready to share the details of that yet, and that's still to come. So I think I think that's part -- maybe one. I think with regard to the -- what you're asking about maybe the outlook, one is, we are not -- our practice is not to give guidance on 2019, right now. We'll do that in January, and that's kind of how we do that and so we're going to stick to that. I will tell you a couple things, so just to kind of get -- since we are talking -- just to give you a little more context, we are going to continue focus on building a holistic plan, and that means focusing on the proven long-term drivers like innovation, brand building, and cost efficiency. So, we're going to do that. However, it's fair to say that near-term challenge has become more difficult with commodity inflation, and you should see that you can probably see that the commodity and currency impact has amplified over the last two or three months. Just for reference, I think in this year the commodity and currency combined is equal to about $1 of EPS negative impact on the P&L. So, we expect that commodity and currency to be further headwind next year. And part of that is some of our contracted terms, for some of our key commodities like pulp are probably unlikely to be as favorable as they are this year, given the current environment. And so, with that, and we got that to work through. Our tax rate is going to be a drag, but the pricing and the cost savings are obviously going to be a help for us next year. So we are going to give you more specific guidance as we get back to January, but those were a few thoughts.

Yes, I don't think I have any anything to add. Obviously, we will update you in January when we are together, and the comments that we are making on a couple of those items that are just in the spirit of transparency to make sure you know what we are thinking in a couple of areas as we all start to think more about 2019.

Okay, thanks.

Thanks Dara.

Thank you. Our next question comes from Stephen Powers with the Deutsche Bank.

Great, thank you. Mike, Tom, congrats. If we take a step back versus where we were a few quarters ago, it feels to me as though the broader discussion, not just for you for the industry as a whole has turned down a bit in terms of any potential tension between CPG suppliers and retailers, and I'm curious if you agree with that and if so also your perspective as to why? Because from the outside, it feels like the dialog is somewhat more constructive today, but I wonder, if that's just potentially rooted in the fact that the retailers themselves don't feel -- don't seem to be acting quite so aggressively towards one another. Amazon is arguably operating with more of a bottom line focus than a year ago when it was prioritizing pure customer acquisition. Our discounters haven't taken over the world, consumers are generally healthy spending, Walmart is doing well et cetera. And it feels like that has all helped to create a relative true sub retail, which in turn I'd argue has opened up a window for yourselves and other CPG players to pursue some pricing, and I guess I'm just trying to figure out, am I making things up, do you agree with that summary in broad terms? And then to the extent you do agree, I guess what is the more normal state of affairs, what we are living through now, which is arguably less intense or the more aggressive environment that we saw two, three, four quarters ago? Thanks.

Steve, maybe I'll start since I haven't answered the question for a while, and you have to listen to the sound of my voice a little while longer, but I guess I would say -- I'll let Mike build on this is that I don't think it was ever pointed as bad as investors thought it was, and I think every retailer that I've called -- I know Mike would probably echo this, they want to hear from you, how you are going to help them grow their category, and how you are going to help execute their strategies. And so, as long as you are bringing value to that conversation and bringing innovation and putting it behind brands that are important to consumers that shop in their stores, you are going to have a pretty constructive conversation, where you have challenges with retailers as if your innovation isn't working, your service is lousy or those kinds of things. Those are the most difficult discussions, and thankfully, we usually stack up pretty well on that front. I think most of the retailers, they read the business newspapers and know what's happening to commodity costs and know what's happening to exchange rates. And so, they aren't shocked when you when you come in with a pricing conversation. I think the -- where you really start to get their attention though is when you pivot to talking about innovation and what you are going to do to make the category bigger and how you are going to close the execution with a customer in their store, but Mike, maybe you can build on that.

I definitely agree with Tom, which is I think the tone of discussion with retailers has been consistent over the last several years, and I don't think last year was any different. I think it probably got bigger play in a few areas, and maybe part of what's maybe what you are perceiving as changes, the improved growth in the infant childcare category, as it relates to us. I think last year in the middle of the year, ICC was down about 5% in value. I think that was kind of a rude awakening and caused quite a concern amongst us and the retailers. And so what's changed this year is we were down five in July last year, the category now in this latest quarter is up three, huge swing, and I think that probably has changed what you might perceive as a tone, but I think the -- in the meeting discussions and the tone of discussions with customers has been consistent last year, this year, the year before.

Okay, that's great. And Tom thanks for weighing in, we did miss you so far this call. Maybe just one quick, one quick clean-up if I could, Maria, on the tax rate, the lower tax rate in 2018, is that -- to interpret that is benefiting free cash flow and cash -- is that a cash tax benefit or is it more just an income statement benefit?

No, it's also on cash side of the house. So we did have a nice benefit on cash taxes in the third quarter, and that helped to offset things like cash bet we spent on the restructuring and also held cover the lower operating costs that we had in the quarter.

Okay, perfect. And so, for '19, that step-up back to the more normal tax rate would also be a more normal cash tax step-up as well?

Yes, that's right.

Perfect, okay, thank you so much.

Fair.

Thank you. Our next question comes from Wendy Nicholson with Citi.

Hi, just as a follow-up on the question on the taxes, I mean, it feels to an outsider that the lower taxes are helping you make your earnings target for this year, which is great, but I'm wondering given how many categories or markets or situation specifically that you referenced, where competitive activity has intensified whether you debated internally, hey, let's take some of that benefit from those lower taxes, and plough them back into more competitive spending immediately. So forget the earnings guidance range, but just increase our competitive investment or promotion or advertising or whatever it is or hurry up on the new product activity to insulate some of your market shares, whether it's in China, whether it's in -- continents et cetera, et cetera. And then sort of bigger picture, you know, Mike, if you look at the business, advertising spending is down if you think 3.5% of sales maybe this year, down from almost 4% just a few years ago, and your business has shifted I would argue to categories and markets, where advertising spending is arguably more important than it was five years ago. So as you look forward over the next five years, do you think 3.5% of sales and advertising is right, do you think you need to migrate back up to the 4% maybe even higher given how intensive competitive these markets are et cetera, et cetera? Thanks so much.

Okay, Wendy, I will start on the et cetera, et cetera part, and then let Mike hold it. I guess I would come -- maybe coming back to the tax rate discussion, some of that is a discrete activity putting the extra $100 million in the pension plan, which we get to deduct that last year's tax rates created a tax benefit that was one-time deal, really as part of the whole new tax bill and figuring out what options you have under that to create shareholder value was clearly a separate discussion. As you look at the investment behind the business, I mean, we're more or less investing on plan behind the right innovation in the right market. So I would say let's show up and share, I mean I think we're up in high 50s of category country intersections that we track, and feel like we're generally investing at about the right levels. We're also generating a significant amount of non-working media savings as part of the restructuring, a lot of that's been reinvested in advertising and promotion activities. And so, I think the team is pivoted to driving price increases in the back-half which we need. There are times where you may be focused on that, and miss some other opportunities, but I still think that's the right thing to be focused on, but I'll let Mike build on that.

Yes, Wendy, overall yes, I would like to get the advertising spending. That said, at our number, you can't read too much into that number these days because it goes into a lot of lines. And so, for example, there is two things going on, which -- for example, digital online spend sometimes can be slotted into the promotion even though it may feel more like an advertising expense. So, there's a lot of differences going on there. The other thing is given all the innovation that's occurring in a digital media, our ROIs are improving significantly. And so we're really excited about that. And I think that has a big impact for businesses like ours that are more continuity based or that are consumers in the category for a long time every day. And so I'm pretty excited about that. But overall, if you think about the areas that I had mentioned earlier around elevating the core, D&E markets and digital, yes, I would like to get us to spend more.

I don't know if this will make you feel any better, Wendy, we are not going to -- I think we are not disclosing this, but in the quarter, our advertising spend was above the full-year average by a small amount. So we're spending at the right levels even in this quarter.

It does make me feel better. And thank you, Tom, it's been a pleasure knowing you, and congratulations on your retirement.

Thanks, Wendy.

Thank you. Our next question comes from Kevin Grundy with Jefferies.

Thanks, good morning, everyone, and congratulations, Mike and Tom as well. Mike, one question for you, broadly here, I was hoping to get your updated thoughts -- and we've touched on a lot of these issues throughout the call, which is balancing some of these pricing objectives given some of the margin degradation that you're seeing here with market share trends, which I'm sure you guys are a little bit disappointed, particularly in the U.S. in just one data point as we look at the Nielsen data, I mean, for the most recent four-week period, we have Kimberly-Clark losing market share in every single one of its major categories, which I'm sure can't be satisfying to you. So maybe you can talk a little bit about that. It also touches on an issue which was brought up earlier. Are you willing to sacrifice near-term profitability to restore lost market share, how important is some of this lost market share, particularly some of these losses to private label, in tissue and towels and then just broadly a discussion around market share, how worrisome this is and your level of confidence and we'll see this improve here in the near-term. So thanks for all that.

Yes. Kevin, let me start with like the foundational principle, which is like, we exist to deliver a strong proposition to our consumers and that's what we're focused on, and that's the only way you can win over the long-term and I fundamentally believe in that. And that does go along with market share over the long-term. I think in the quarter in North America I think our data given a lot of that is probably slightly different. And so I have us up or even in five out of eight categories. There's a lot of activity going on in the club channel and also in online. So I think that's one. And then what I was saying earlier, I think our performance is broadly improving across many markets in D&E. In Russia, I think, we were up three points in diapers and up a point or so in feminine care. In Latin America, including both Brazil and Argentina, we're up two or three share points in diapers and up a point or two in feminine care. So we are seeing improved performance and we are very focused on market share. And we have to recognize that we need to drive and you need to focus on driving the right value proposition which guides a lot of the pricing activity.

Thank you.

Thanks, Kevin.

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

Good morning, this is actually Steve Garmaise on for Nik, and we'd also like to echo congratulations to Tom and Mike, and then we were hoping just kind of building off that last question if you could talk about e-commerce and your market share positioning online versus offline and then what plans you had in place to further increase your share online? Thank you.

Yes, again, e-commerce, I think proceeding very well for us. Our online shares generally are ahead of our offline shares. We're even. The three big markets for us are China, Korea and the U.S. Although we are seeing some growth in some other markets as well. Overall, our business this year year-to-date is up double-digits as it was strong double-digits last year. And so we feel good about that. I think maybe the looking forward part, Steve, is -- we think we can leverage it even more effectively going forward. I mean, the teams are innovating in terms of how they deal with their e-commerce channel partners. Most recently, I think we were ranked number one in advantage in dealing with e-commerce in China which was off the press. I don't even think a lot of us is -- you know, some of our team internally have seen that data yet. But pretty exciting news and I know that teams are doing a great job around the world and also it's driving great efficiencies in terms of how they're spending and how they're driving their results.

And Steve, I will just add that we just want to be present with the right offer and the right product mix wherever mom wants to shop. And so, we are doing a lot of e-comm. We are also doing a ton of a lot of our brick and mortar retailers who are doing click and collect. And we're -- that's not really captured in any of our data, but every retailer we serve is working on that. And so, yes, we really want to make sure we've got the right part, the right offer wherever mom is looking to do her shopping and that's really overall strategy.

That's great. Thank you.

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

Thanks. Hi, good morning, and Tom, Mike congrats on the news. So Maria on the upper end of commodity headwinds what are your embedded assumption for pulp and oil prices? And on a separate question to all of you in the competitive environment particularly North America and China - and I appreciate all the comments, but had volume now 8% in North America in consumer tissue and also declines in China too. So what are you going to do in terms of continued volume share losses? Or you are just timing as your key competitive is putting more money behind innovation while you are cutting? And given the commodity tax headwinds into 2019, should we assume that you'll continue to be cautious on the investment in marketing or just broadly as you said before not commenting on 2019 but you expect that the investment in innovation to pick up as you progress into 2019? Thank you.

Sure. I'll ahead and start with some of that commodity questions that you have. Running through our assumptions on the key commodities, we are expecting that eucalyptus will be up about 20% for the full year. The same with polymer that we are expecting it will be up more than 20% for the full year. And then on SAM, super-absorbent, we are expecting that for the full year, it will be up low double digit. And so those are our commodity expectations. And I think something that worth noting is if you look at commodities and currencies combined for the full year, we are expecting that to be about just over a 25% drag on our operating profit. So, it is significant for the year.

Yes, on the - on the competitive front, Andrea, I think the I would say is in North America, I think it's mixed performance. But overall I think improving. And if you take North America infant and childcare, obviously I have mentioned that the category trends are improving, but the category trends were improving I think because of our performance. More recently our share is up about a poiny the quarter. Huggies volume was up mid-single digit, Pull-ups volume or childcare volumes were up low double digits. And so we feel good about where that is. And I think the category is responding well to innovation that we put out there. I think in consumer tissue one of the big things is that we have been dialing back in our promotional activity. And that does come with some volume and share impacts. The big challenge given all the commodity inflation this year, it's a significant headwind. And I think the team has a done a good job chopping that back. But one of the levers they have pulled is pricing both in terms of sheet count reductions but also including promotion reductions. And so that's what we are seeing some of the effects there. And then the other that I mentioned, yes, adult care has been challenge. I think it was down about 3 points in share. And that's kind of the big focus area for us where we need to improve.

Okay. That's helpful. Thank you.

Thank you. Your next question comes from Steve Strycula with UBS.

Hi, good morning. So, I had a question on China diapers. Wanted to know if you didn't say already, how did this business trend on the year-over-year basis? And competitively speaking where are we in the shakeout of the industry? Are you seeing new local competitors and regional entrants? Has that kind of reached an asymptote, or are we now seeing a point where there is a little bit of fallout in the industry? And then I have a follow-up.

Yes, I think, Steve, I would say the competitive intensity in China in the last few quarters or maybe the last couple of years has escalated. And just to give you some reference, our personal care organic sales in the quarter were down in the high teens. We had strong growth in fem care but that was not enough to offset some of declines in diapers for us. And so, diaper pricing dropped in the market by about 15 to 20% back in Q2. And so we are working our way through that. And that's kind of blown through our business and impacted our business right now. Overall, volumes as I mentioned earlier, I think volumes in the category were up high single digits so far this year. But with pricing, the category is about flat or even slightly down in terms of value terms. So despite all these price moves personally I don't believe the category is commoditizing. And some of the effects you are seeing are consumers that are trying new products local products that they perceive to be interesting or of high quality or have attributes that they are interested in. We have responded by upgrading our products. And we are really excited about the offering that we have out there. However, some of that impact is muted because of all the price activity. China is critical for us. It's the largest market in the world right now in diapers. It's going to continue to be, and we will continue to grow. And so, we are going to compete in China for the long term. And we are going to focus on the right value drivers, which includes a great product offering, the right marketing and obviously a competitive price.

Okay, great. And then I have a quick follow-up across your three -- top three diaper markets online, China, Korea, and United States, could you just comment for context what the penetration is roughly across this market? And on the last call you mentioned that private labels currently under indexing online. What's structurally is driving that in your view relative to brick and mortar? Thank you.

Maybe the first part, I think so overall in Korea very highly developed in terms of our overall diaper sales online -- it's almost 90% online development. And China tends to be that - the overall category is about 50 or slight over 50%. And the U.S. is little bit more behind. I would say right now it's in the mid teens overall. And part of the - when you talk to our retail partners across the country, they all say the same thing that the U.S. is still a car culture. And as long as they have cars, people are still going to want to shop in the store. But we are seeing very good growth in North America as well. And then sorry, Steve, I missed the second part of your question.

Yes, on the last call you mentioned a private label under indexing online relative to the share at brick and mortar order. So just curious what do you see as structurally driving that, and I imagine that fosters very good repeat rates purchase rates because this is almost a subscription-like business.

Yes. I don't have a good hypothesis right now as to why that private label is under indexing. I would say that the reason some of our business is not performing well online is there is a lot of online marketing activity and digital marketing activity that we put in place to drive that. And the tools are becoming increasingly sophisticated and our teams are getting better are managing and marketing through those tools. And so that might be a reason why you see lower development levels of private label…

And then, Steve, I'll chime in on that one. I would say two things, one is physical store environment, you get to interact with the product. And so you can see packaging. You may not be able to necessarily touch and feel the product, but you know what you are getting whereas online you know you are getting if you are buying a brand but may not know what you are going to get on private label. So it is little bit of a hurdle on that front. And then secondly, I mean a large super seller may have a 50 to 100,000 items in distribution, and e-tailer may have a couple million items on their distribution. So this is a complexity of managing private label across a number of different categories is not trivial and that could be another factor.

Yes, and also the failure rate issue, we are concerned that consumer have our product that you have think about what they are and what they do for the consumer that having a trusted brand is important. And when you are shopping online and you don't have that ability to interact with the brand that -- as Tom described, consumers tend to migrate in our categories to brands.

Great. Thank you. Congrats to both.

Thanks.

Thank you.

Our next question comes from Jonathan Feeney with Consumer Edge.

Good morning, and Tom, thanks, congrats on a great run. Mike, congrats and best of luck. A question on mix, I have three questions on that really. What is the biggest -- I noticed positive mix, not only broadly but in each of the segment is what are the biggest one or two sources of that positive mix would you say? Is there something that's intentional and maybe tactical this year as a way of another way of coping with higher commodity prices? And about how much of a positive factor in adjusted gross margin, if any, is mix because I know you think of the business in terms of total dollars. Thank you very much.

Yes, I'll start. Is it intentional? Absolutely. So, typically we would like all of our innovation to be mixed accretive. And to your further point about pricing challenges, and if you can't get price easily you try to give mixed. And so, the teams will try to up-sell the better value performing item. And so, our sales teams are absolutely motivated by that. Now sometimes you can see mixed drag as the business grows in some of the larger format packs, which can be a countervailing force on that, but by and large, we would hope day-in and day-out, we're doing some things that will give us some improvement on mix and offset some of the headwinds that we face from growth in other channels.

Yes. And on the profit question, the positive mix was definitely a contributor both in the third quarter and year-to-date.

Thanks very much.

Thank you.

Thank you. At this time, we have no further questions in the queue.

All right. We appreciate everyone's questions this morning. We'll conclude the call, and we look forward to speaking with you in January. Everybody have a good day.

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