Good day, everyone, and welcome to the Kimberly-Clark First Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Christina Cheng. Ma'am, the floor is yours.

Welcome, everyone, to our first quarter 2023 earnings conference call. Before we begin, please note, today's presentation will include forward-looking statements. Our actual results may vary materially from those expressed or implied in our forward-looking statements and you should not place undue reliance on any forward-looking statements. Please refer to our SEC filings for a list of factors that could cause our actual results to deviate materially from our expectations. Our remarks today refer to adjusted results, which exclude certain items described in our news release. We use non-GAAP financial measures to help investors understand our ongoing business performance. Please consult our press release for a discussion of our non-GAAP financial measures and reconciliations to comparable GAAP financial measures. We have published supplemental material, which can be found in the Investor Relations section of our website. Participating in today's call are Chairman and CEO, Michael Hsu; and our Chief Financial Officer, Nelson Urdaneta. Mike will start the discussion with our strategic priorities and provide an overview of our performance for the quarter. Nelson will provide a detailed discussion of our Q1 results and our outlook before we open the floor for Q&A. With that, I turn the call over to Mike.

Thank you, Christina. I'm encouraged by our solid start to the year. We delivered organic growth of 5%, cycling 10% growth in the year-ago quarter. Category growth remain healthy, pricing execution was strong, and costs have begun to stabilize. These primary factors enabled us to continue improving gross margin resulting in a 25% increase in adjusted operating profit and a 24% increase in adjusted earnings per share. Given our Q1 performance and increasing confidence in our underlying operating plan assumptions, we're raising our 2023 EPS outlook to 6% to 10% growth. Margin recovery continues to be a top priority, and I'm pleased with the strong progress we're making. This quarter we expanded gross margin by 340 basis points versus year ago building on our momentum from the second half of 2022. While we are encouraged with our progress, we're still operating in a challenging environment, input costs have stabilized, but continue to trade well-above 2019 levels. With adjusted gross margins nearly 200 basis points below pre-pandemic levels, we'll continue to operate the cost and financial discipline. We're leaning harder into productivity and taking aggressive action to secure supply to better meet the needs of our customers. We remain committed to returning our margins to historic levels, and eventually expanding from there. We've taken a thoughtful and holistic approach to mitigating inflationary pressures, carefully balancing price realization with our focus on offering a superior value proposition. This is to enable us to meet our enduring goal of growing market share. In Q1, we continue to gain or hold share in approximately 50% of our Personal Care cohorts. We've invested in building strong revenue growth management capability and that has been critical to our agile and effective price deployment globally. Category growth has remained healthy and broad-based as the elasticity impact on volume continues to be somewhat muted. This reflects the essential nature of the categories we read. While our categories continue to grow, we see bifurcation in consumer demand. We've observed resilience and higher-income developed markets like the U.S., but also increasing demand for value in lower-income geographies, especially within D&E markets. We're meeting our consumers where they need us. As category leaders, we have a broad offering that spans value to premium. While we're continuing to see momentum in the premium tiers of our business, we're accommodating tighter budgets and more rapidly cascading innovation and product features through our portfolio, including our value offerings. Our brands offer excellent value. For parents economizing through usage, superior products like GoodNites XL overnight diapers enable their children to get a better night sleep with 35% less leaks. GoodNites serves an important need and we're stepping up our brand communications with breakthrough campaigns that highlight the superior performance and value of our offering. Advantage product technologies are key to our brand value propositions and over the past few years concerted investment in innovation has resulted in an exciting pipeline that will help us elevate and expand our categories. I'll highlight a few that you'll see later this quarter. We're refreshing Cottonelle Ultra Comfort and Ultra Clean in North America, behind a powerful insight. Half of the users in the category are dissatisfied with their existing "Soft & Strong bath tissue". We're focused on delivering a superior clean and we'll launch this initiative with some fairly provocative advertising that highlights down their care and we're talking about the real down -- their issues that we all face. Our suite of products will help address these unmet needs. In China, we're launching Kotex POLAR NIGHT, our best-ever overnight feminine pads. POLAR NIGHT offer superior protection from back leaks, one of the biggest issues for overnight users. Internationally, KC Professional is debuting our new icon collection, our most advanced towel dispensing system. ICON has fully customizable panels and ultra-high reliability enabling end-users to be more productive with labor and waste. ICON has been a hit in North America and we are excited to roll it around the world. We have more innovations to launch later this year, including exciting news on Huggies. Our teams are working hard on the innovation pipeline, we're confident we'll bring more value to our consumers while elevating our categories, and expanding our markets. In closing, we are encouraged by our strong start to the year and our momentum on the top and bottom line. We serve essential categories and demand for our brands remains healthy. We have a long runway of growth ahead of us and we're committed to delivering balanced and sustainable growth to create long-term value for all of our stakeholders. So now, I will turn it over to Nelson.

Thanks, Mike. I'm pleased to report a solid start to the year. First quarter net sales were $5.2 billion up 2% year-over-year. Organic sales increased 5% compared to last year's 10% increase. On a two-year basis, organic sales growth was consistent across all three segments, with approximately 8% average growth for the company. Strong revenue growth management delivered favorable price and mix benefits with a better-than-expected elasticity impact on volume. Organic growth for our Personal Care business, representing approximately half of the company's revenue grew 3% with a healthy contribution from price and mix and healthy underlying consumption. Growth was negatively impacted by approximately one percentage point by the exit of a private-label contract in North America. All Personal Care major geographies contributed to organic growth. After lapping a particularly strong Q1 last year, with North America setting a new quarterly sales record. Feminine care and adult care grew at healthy rates, and we continue to focus on the tremendous growth opportunities created by the aging population and ongoing innovation in women's health. In baby and child care, gains from product innovation moderated the impact of lower birth rates in China and South Korea. Operating profit for the segment improved 3% in the first quarter. We are confident in our strategy to address significant unmet needs, we'll continue to unlock a long runway of growth for our Personal Care business. Organic growth in Consumer Tissue was 7%, with broad-based growth across all geographies. We continue to improve the profitability of our Tissue business with operating profit for the segment up 40% for the quarter. Finally, our KC-Professional business posted 11% organic growth. All geographies grew, with North America and developed markets, delivering double-digit organic growth. Although volume remains below pre-pandemic levels, we remain focused on opportunities where we can deliver value and growth. Operating profit for our Professional segment grew 77% in the first quarter of the year. And we are continuing to make investments in the business to drive long-term sustainable growth. First quarter gross margin increased 340 basis points to 33.2%. Pricing, in addition to FORCE savings of approximately $105 million more than offset the impact of input costs of approximately $160 million, which represented a roughly 300 basis point impact this quarter. Between the lines spending on an adjusted basis was 18.1% of net sales, up 60 basis points versus year-ago, driven by higher investments in our business. Adjusted operating profit for the quarter increased 25% and operating margin was 15.1%, an increase of 280 basis points versus last year's adjusted operating margin. Foreign currency was a 12 percentage point headwind on operating profit in the quarter of which five percentage points was due to the impact of translating our foreign subsidiary earnings into U.S. dollars, and the balance impacting input costs. We have made good progress on our margin recovery over the last few quarters. However, our gross margins are, still approximately 200 basis points below pre-pandemic levels. We remain committed, to restoring and expanding our margins over time. The effective tax rate was 24.5%, compared to an adjusted effective tax rate of 21% in the year ago period. Better than expected top-line and margin performance resulted in earnings per share of $1.67 up 24%, versus adjusted results last year. This quarter also resulted in strong cash generation. Cash provided by operations was approximately $600 million driven by our healthy increase in operating profit and management of working capital. Capital spending was $201 million compared to $253 million last year. During the first quarter, we returned $425 million to shareholders through dividends and share repurchases. Now, let me say a few words about our outlook. We are raising our full year earnings guidance to reflect our Q1 performance and the moderation of commodity headwinds, increasing it to a range of 6% to 10% growth, from our prior guidance of 2% to 6% growth. We've maintained a full year outlook for organic growth of 2% to 4% as we lap last year's pricing actions against a softer economic backdrop. We are committed to investing behind our brands and people, and we'll methodically assess incremental opportunities to drive near-term returns. As we scaled recent innovations to more markets and advance our commercial capabilities, we expect to step up brand investments in the second quarter and the rest of the year, as we said last quarter. We are optimistic about bringing superior value propositions that will increase household penetration and market share over time. With the success from our innovation pipeline and brand investments, we have increased confidence in our ability to deliver in the top half of our guidance range for organic growth. Our input costs, assumptions for the year have improved, but remain a headwind of $100 million to $200 million. In addition to the $200 million headwind from higher wages and other manufacturing costs as stated last quarter. Most of the, impact of input costs, have been realized in the first quarter. And we expect headwinds to dissipate throughout the year. Bear in mind that, the outlook for commodities remains mixed, and cost levels continue to hover significantly above 2019 levels. Our revised input costs assumptions take into account benefits from lower transportation and energy costs. However, beyond these, we have not seen material changes in other commodities versus our prior outlook and markets remain volatile. For example, oil prices have reversed the downward trend with the recent round of supply cuts. And supply restrictions have contributed to higher prices and other raw materials. Global logistics are improving. However, the labor market remains tight. Certainly, we hope to see commodity abatement in the future. But we cannot count on it to recover the significant impact of inflation in the last three years. We are going to focus on what we can control, which is continuing to offer consumers, superior products, maintain our focus on revenue growth initiatives, accretive innovation, and sustained productivity delivery. We are raising our outlook for operating profit growth to a low double-digit percent range and for operating margin to increase by approximately 130 basis points at the midpoint of our guidance. Currency is expected to impact operating profit by $300 million to $400 million, the majority of which will impact our costs. Based on these assumptions, we have increased our outlook for earnings per share growth to a range of 6% to 10%. While we do not provide quarterly guidance, let me remind you that we are lapping tough sales comparisons and expect to have continued currency headwinds in the second quarter. As Mike said, we have a full slate of commercial programs coming off. And our teams are laser-focused on executing with excellence. I am proud of our team's execution leading to a strong start to the year, and we are committed to delivering balanced and sustainable growth that will create shareholder value. With that, we will open the floor for questions.

Certainly. [Operator Instructions] Your first question is coming from Chris Carey from Wells Fargo. Your line is live.

Good morning, Chris.

Hi, Chris.

Hi, good morning. So, I just wanted to start on the gross margin line clearly your strong expectation this quarter. If anything, the debate will be like you continue to sequentially decline from here as pricing remains strong and commodities continue to deflate. So, I wonder if you have any thoughts on just the sequential cadence of gross margin development here. And perhaps any of the investments into that line item that might be, a bit more atypical relative to what seems a pretty sequential cyclical recovery in your gross margin. I have a follow-up?

Okay Chris, I'll start and I'm sure Nelson will want to give you some more color and texture definitely encouraged by - what I would say, it's excellent progress on margin recovery just for reference. I'm really proud of the team, the organization we're accelerating growth and restoring margins, while still investing to drive long-term balanced and sustainable growth. So, that's kind of what our overall play is. But on the margin recovery, yes, in the margin we said on the prepared remarks, gross and operating margins were each up about 300 basis points. We had excellent price execution, and I'd say our pricing has been commensurate with what our expectations for cost net of our ramped-up productivity would deliver. And so I think teams have really done an excellent job around the world there. Input costs, has stabilized and I pick actually for the past two quarters, and this is about the most ability we've seen. I think the call is about the same as it was back in January and so for that, we've had probably seen about 16 weeks of stability, which gives us something good to aim for, and I think the teams have done a great job kind of work in the productivity. We are seeing some green shoots transportation being a current area. But our current view is that the overall cost environment, it's going to be fairly consistent what we said overall. I mean it's going to be about $0.5 billion. We're going to pick up a little bit of favorability we think. I would add though Chris, I definitely see reversion around the corner, the costs were up to now three-point. We expect to be over the last three years, $3.7 billion of inflation. I would expect the history of these categories in - our commodities that we buy it generally comes back out. I don't really see that thus far this year, but we will see maybe some moderation in the second half of this year. But Nelson, you want to give him a little more texture?

Sure. Just to build on what Mike was saying, Chris, a few things. So the majority of our cost headwind, and that's just the now $100 million to $200 million, would have hit us in Q1. We don't expect it to be too significant for the balance of the year. In fact, we do expect that to begin subsiding as we go into the back half of the year. And to your question specifically on are we going to see further gross margin gains as the year progresses, the answer is yes. I mean, we expect gross margin to continue to gain as we go through the year. This marks the second quarter in a row that we expand gross margins, and by not an insignificant amount versus the prior year. And as a reminder, the last time that had happened had been eight quarters ago, if you step back in time. So we are very encouraged by the progress made. A couple of things to keep in mind are the fact that we were early in terms of pricing. So we will begin to lap some of the pricing as we go into the second half of the year. Hence, why some of the increases that we've seen in last quarter and this quarter in gross margin in terms of absolutes, we don't expect that to remain. We do expect to exit Q4 at a higher gross margin than what we delivered in Q1. And that really puts us on good track to get back to our pre-pandemic level gross margin of roughly 35% that we saw in 2019. In addition to that, we continue to have a very healthy pipeline of productivity, and the team is focused on managing through all the levers to drive the margin recovery that we've committed to and then start expanding from there.

Thank you so much for that perspective. Just one quick follow-up. Your gross margin historically have recovered in quite a linear fashion in the same way that they've actually gone down during times of pressure. Is there any reason why your gross margin should step up kind of each quarter through the year in context of your Q4 exit rate being higher than Q1? And I just wonder if you have that level of sequential gross margin progression. Can you just remind about your overall investment philosophies and your willingness to, or desire, to put more spending back into the system as opposed to letting this flow to the bottom line, that could be for this year or going into next year as well. So thanks so much for that.

Sure. So a couple of things. We have seen an acceleration in the last two quarters, and it's been fairly strong. So I don't expect that to sustain because, as I said, two things. One, costs will subside as we go into the second half, but pricing will also subside because we'll lap it. The good news is we do expect to be continuing to gain as the year progresses. So yes, it will continue to be a straight line, but the slope will change, and it will get a little bit more muted, and it's as expected. But going to the investment philosophy, I think it's important to highlight that this quarter, we increased our investment behind the brands and innovation versus prior year, 60 basis points. And as you remember, when we gave the outlook back in January, we said that for the full year, we were expecting at least about 100 basis points of investment. You would have seen in our prepared remarks that we have a very strong pipeline of innovation that's been put into market, and we are supporting it as we speak. And this is really the key. And our philosophy, even with all the headwinds that we were facing last year and the prior year has been that we're in this for the long run. We don't go for the quarter. So we go for the long run, and we've been around for 150 years and counting. And the key has been, we've been very disciplined about investing. We've been disciplined about our costs. But we do expect, Chris, as the year progresses to step up our investments. Hence, why I'm highlighting the fact that we saw 60 basis points of investment increase. But for the full year, we are expecting about 100 basis points when it's all said and done.

Yes. Chris, just to tack on, we're continuing to invest in our brands to drive long-term balance and sustainable growth. We're trying to create the proverbial virtuous cycle, right? And so we definitely see that this year, in that opportunity this year. Certainly, I think the good start gives us a little more room and confidence to be able to invest further. And so even beyond kind of what we had thought during the start of the year, I think we would probably look for additional opportunity because, one, we really are excited about our innovation. I highlighted a little bit of that in our prepared remarks when we have great stuff for 2023. I think there's magic coming in poop, and kind of what we can do with poop. I talked about Cottonelle with the superior clean comfort protection on diapers. So we got great news. The other thing that we're really focused on and our retail partners, I think value, is we're really focused on expanding the categories, right? And so driving trial and penetration in these categories through advertising, and that's what some of the investment will be earmarked for. And so -- and we think there's great opportunity to expand penetration, even in the most highly developed category in the world, which is bath tissue, as I highlighted. Because a lot of consumers are still unsatisfied with what the category does. So we feel like we're improving our brand propositions. We have great news. And so putting more money behind the brands, I think, will work very hard for us, and we're excited to do that this year.

Okay. All right. Thanks so much.

Okay. Thank you.

Thank you, Chris.

Thank you. Your next question is coming from Kevin Grundy from Jefferies. Your line is live.

Great. Thanks. Good morning, everyone. And congrats on the strong start to the year. I thought we'd pivot to your organic sales growth guidance. So you decided to maintain it at this juncture of the year. Nelson, you talked about cycling some of the pricing taken, although -- so the guidance does imply a deceleration relative to the strong start to the year, call it, up 1% for the balance at the low end. The high end would imply something closer to 3% to 4% for the balance of the year. Comment maybe just on how you're thinking about the cadence and how that breaks down between price and mix? And then Mike, it would be great to get your updated thoughts on how you view trade-down risk, which we've seen in some of your categories. And what's reflected in your outlook? And then I have a follow-up.

So let me start, Kevin, with the organic growth outlook and how we see it evolving in the course of the year. So obviously, we've seen that pricing has continued to be the big driver behind our top line growth over the last three quarters. And in this particular quarter, as we stated, our performance was better than what we had initially projected, and that had to do largely with the category dynamics. Categories were stronger than what we expected, and the impact of elasticities on volume was more muted, frankly, than what we had projected. So that helped. But despite that, pricing continued to be the big driver of top line growth. What we expect to happen as we cycle many of the pricing actions that we took, because remember, we were one -- we led in many of the markets, the pricing actions dating back to Q4 2021. So we will be -- we'll start to lap many of those as we exit Q2. So our expectation as the year progresses is that the volume impacts that we've seen, and we saw 7% in Q4, we saw a 5% drop in Q1, will begin to taper off because the impact of the pricing will go away. But by the same token, as all the carryover pricing is lapped, we will also expect pricing to subside. So it will turn into a more balanced algorithm in terms of top line growth as we progress through the back half of the year. And then yes, we did hold to our guidance of 2% to 4%. We highlighted that we're aiming for the top end of the guidance in light of the performance that we had in Q1. And also, because we're taking into account the stronger category performance that we've seen, given the resilience of our consumers and the innovation that's being put into the marketplace. So overall, we are aiming for that top end of the guidance, as I just stated. And I've just given you a little bit of flavor of how we see the evolution of volume and pricing as the year goes by. But Mike?

Yes. And then, Kevin, I'll category -- I'll comment on the categories, and you mentioned the down trading risk. One, I'd say, through the first quarter, the categories remain healthy and the consumer remains resilient. The strong Q1, right, and probably stronger than we had anticipated at the start of the year, really on the back of category health. Just to give you a few numbers, in the North American consumer categories, overall, our categories were up about 9, so high single digit. Western Europe was up teens in consumption. Latin America was up double digits. And KC-Professional organic was up double digits in every market. And so again, I think the categories are performing well. As Nelson mentioned, the volume elasticity impact has been somewhat muted. And here's a few factors, just to give you a flavor for it. In the U.S. diaper this is category numbers, not brand numbers, category, price was up six, volume was down two. In U.S., bath tissue price was up 11 and volume was down one. And in U.S. adult care, price was up seven and volume was up four. So you can see the - I guess, the definition of any – relatively - if elasticity is below one, right? And so these - clearly, at least in the recent period, it's kind of in that range. And I think the notion is, Kevin that overall brand elasticities are higher than category elasticities, but our categories are generally relatively inelastic. And I said this example before. But if - the price goes up on bath tissue, generally doesn't mean you're going to use the bathroom less, right? And so, I think we do operate in essential categories that have less elasticity. There is some down tiering out there, but I'd say it's not broad-based. And if I can use this word appropriately, it's not necessarily monolithic either. We're definitely maintaining momentum in the premium business, in the premium tiers of our business. Especially and that's especially true in developed markets. In China our mix continue to be up high single-digit, and that's all shifting to - internally, we call our premium tiers, Tier 6 and 7. And so that momentum is proceeding. Similarly, in the U.S., we have strong momentum on our premium side. Even in a market like Brazil, the market is actually premiumizing, if you look at the mix and volume. There's more going into premium than there is, and - value is actually declining a little bit. There is - definitely is down tiering and we see that in U.S. I think private label shares were up in, I think, four of the category, which was a tick up from the prior quarter. In markets like Argentina and Peru, which is a big market for us, we are seeing some additional down tiering. So we're sensitive to it. And so for us, as I mentioned in our prepared remarks, we're going to meet the consumers where they need us. And we're really focused on improving our value proposition, first by hitting the price points that consumers need us to be at, and that's through price pack changes. But also cascading, our innovation more rapidly through our portfolio, especially into the value tiers. And so, that's kind of where we are. I'll pause there and see if you have any follow-up.

Yes. Mike, a quick follow-up, and I'll try to be brief with this, because that was a lot of fantastic color from you and from Nelson. It's just on trade promotion, right? So the narrative, it's remarkable how quickly it can change. It was sort of drinking out of a fire hose with commodity costs and now things moderate a bit. And the narrative is now a lot more worried about trade down and what's the potential for trade support to ramp significantly? What's the potential for some of the competitive players, maybe who do not play nicely in the sandbox, whether this is in Europe with private label? What are your thoughts around that, that competitive intensity ramps here significantly as commodity costs moderate? And then I'll pass it on? Thank you.

Yes. Great question you're on it, Kevin. I mean we're seeing that in spots and so in Latin America, we're seeing a little ramp up promotion from both local players, and other multinationals, similarly in parts of Africa, for us and in a few categories in North America. Childcare pull-ups is one. Periodically, there's a secondary or tertiary brands that make a distribution push and we see that from time-to-time. And so, we see a little ramp up promotion from time-to-time. Our thing is we've priced - I mean our margins are not whole yet from pre-pandemic levels. And so, we know what we need to get to. We're prioritizing margin recovery, and we're going to be disciplined about it. And we've priced commensurate to our expectations for both input costs and what our net productivity is going to be. We've got invested a lot, a lot over the last few years in building a great revenue growth management analytic capability. And so, we're going to continue to be really agile and disciplined in our spending. But maybe the color commentary I'll give you and this is philosophical, or my business philosophy is, I'm not a fan of renting share through promotion. I mean we've seen that movie. I've seen that over-and-over in a lot of categories, including in food and everything else. And I've always got out of the renting of share business. And what I mean by that is over-promoting brands to kind of pick up shares. I'd rather earn it through the base business through advertising innovation and making the products better. And so that's kind of what our high road - internally, we call our high road strategy, which is, hey, we want sustainable growth. We're going to earn our share through a better brand value proposition, and we're going to grow category penetration over time. That doesn't get done well through trade promotion. So it will be out there. Obviously, we're going to want to be competitive. But I think for us, I think investing in advertising to grow the category and innovation is our preferred path.

Okay very good. Thanks for all the time, I appreciate it. Good luck.

All right thank you.

Thank you.

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

Hi Andrea good morning.

Thank you, good morning everyone. So I just wanted to go back to what you both talked about in terms of pricing, having obviously rolling over or the comparison is getting tougher. But also, as we think about it, we stepped back in cycles, right two things. One is on utilization and consumers having to make tough choices in a number of diaper changes. I'm sure it's not happening as we speak now, but in some countries where, definitely it's not the only performance that drives choice, but also at the end of the day, what they can afford? So the premiumization sometimes also happens when you have to use a better diaper at night, and that's going to be the only change. And number one, so is that something that you're positioning now as we go into rougher times? And then second, when you think about like what happens to private label, which is - which has - so pulp prices obviously declining a bunch. We see local competitors in China obviously not sitting on their hands? When you think about - when you think what's going to happen to the cycle, where some of the private label contracts automatically also passes through the way down, how to think - I'm not saying it's going to happen now, but in six months from now, is that something that you embed in your guidance for margins and so, how to think of that? And in particular, I would say, diapers is not so much of a category, but perhaps even tissue as we go through for this phase. So I was wondering how to think of those?

Yes. Okay yes. First of all, I think on the - yes I mean, you're exactly right on the usage front. I mean, we do see in some markets, and I'd say it tends to be more developing in emerging markets where incomes are a little - budgets are a little tighter that you see the trade down. And that's occurred - that occurred starting three years ago, four years ago now with COVID, and we saw that extensively in Latin America where people were stretching out usage. And if they were using, let's say, three diapers a day, they had gone down to two. And so - and in some cases, I think that would explain, to your point exactly, Andrea, we're trading up to a higher quality, maybe higher capacity diaper, we've seen some of that behavior. But I think in Latin America, in particular, we've seen behavior shift. We had seen in the prior two or three years ago, some shift from premium to value. As I mentioned, we're now seeing some shift from value to premium the other way, but we've seen that usage change before. A little less - I think we would observe that behavior a little less in developed markets like the U.S., but it still does occur nonetheless. So that's kind of factored into our approach, and that's why you'll see from us, and I highlighted it in the prepared remarks. I mean we're really going to emphasize our advertising, the value of our products and the performance of our products. And so, we're really - we'll address it that way, and also by cascading better features through our product line. So I think that's - maybe that's the first part. And on the private label front, I think your question is correct. And certainly, as costs come down in the category, we might expect some pricing to come down. We're still working through that. At this point, we're still operating at the peak, even though we have a little bit of relief. We're still operating at the highs and you can look at the forecast. I mean some of our costs have come down a bit, but costs remain still well above billions over what they were two or three years ago. And so, but we will plan for that. Nelson, anything to add?

No. I think you've said it all, Mike okay.

Just as a quick one, Mike, and this is super helpful. When you say it's going to take a while, so we're looking at probably early next year where we might see things kind of leveling off or lapping on an inflation perspective?

Well I mean, I would hope that it comes really fast, but it's not in our call right now. And so, we have - in the past, as you covered this category for a while now, and we've seen a more rapid reversion in the past. If you recall, I think 2018, we went to a record high and then on let's say, eucalyptus. And then by 2020, we're down to maybe a 10-year low. And so, it does move around quite a bit. We haven't seen that action yet in a significant way, but I would anticipate it, so right.

Okay.

And just to build on that last point, Andrea. For this year, still taking into account only commodities and ForEx at the midpoint of our guidance, we're talking of another $0.5 billion. So it's not an immaterial amount, albeit if we look at the prior two years, we were talking $3.2 billion. So net-net, based on the outlook for this year, when it's all said and done, we have about $3.7 billion of headwinds that we've had to manage over the last three years when the year is done. So they remain high. Commodities remain elevated. ForEx remains volatile. Again, we're seeing green shoots, but that's the watch out. We still have disruptions in Europe. We still have items that we're maneuvering through, but we are seeing some of the items also improve in things like transportation and energy to some extent. So again, we need to take it in strides in a quarter at a time as we progress.

Yes. But that $500 million and that's an average, but if you think about like how it's front-loaded, right? So it's the $500 million on average, I'm just making it up numbers. But let's say, it's $1 billion in the first half and then it's plus $500 million in the second half, reversing back. So what I'm saying is that, okay, retailers are smart enough to know because they own the private label and they know their contracts. So they will not immediately have to - that benefit or have to pass through that impact? But what I'm saying is that it will coincide that you're going to lap the pricing and you're going to start to see your inflation going the other way. So you're starting to see deflation, not on an annualized basis, but you're going to see on a quarterly basis. So I think what does that do with your - when you're sitting down in the fall, to talk about pricing into spring of the following - or into the beginning of next year?

Yes. I mean I think you're exactly right, and we'll definitely take that into account as we plan. Obviously, I don't want to sit here and telegraph what we plan to do on pricing in the second half of next year.

Yes, that's fair. All right thank you so much. Appreciate the time.

All right thank you, Andrea.

Thank you. [Operator Instructions] Your next question is coming from Jason English from Goldman Sachs. Your line is live.

Good morning, Jason.

Hi Jason.

Hi, good morning folks, thanks for having me in. So perhaps I missed it, which is totally possible, lots of distractions over here. But where are you expecting gross margins to land for the year?

Yes, so for gross margins, Jason, at the very least, we're expecting to expand them around 230 basis points year-over-year. Because remember, we're expanding at the midpoint of our guidance, operating margin by 130 basis points. We took that up 50 bps versus our prior outlook. And we are putting in the incremental on 100 bps at least of investments into the brands. So that would put the year-on-year gain in gross margins at about 230 at the bottom.

Got it. So that suggests that you've - you're going to go kind of sideways from here. So you've reached another level, but you're plateaued up here at this level with no more sequential progression. What does it take then to like find the next level? You mentioned in your prepared remarks, you're still a couple of hundred bps below where you started. Is that - would we need commodities to come back in? Is that the enabler to get you next leg? And until that happens, sideways is the baseline expectation?

That's a good follow up, Jason. So the thing would be - it wouldn't be necessarily sideways. Because as I said, I mean, we do expect to see continued progression in gross margin. I wouldn't call it linear. I don't expect it to be a straight line between now and Q4, because we have a few puts and takes with how commodities and pricing and FORCE will play. But we do expect to exit the year above the average for the full year. Does that help?

Yes, or exit the full year at the rate you just delivered in the first quarter. I mean that's what that 230 implies?

Well, let me just - I'll give you a little more perspective, Jason, because here's the deal. Look, we updated the outlook - I think it definitely reflects the strength of the first quarter relative to our expectations at the beginning of the year and our growing confidence in our underlying plan assumptions. I think we're off to a good start. And so the unset part of it is, I would say, Nelson and I, we probably had more muted expectations for our first quarter, closer to what you guys were all thinking and so hey, we had a very strong start. As I mentioned, the other underlying category performance has been healthy. The cost environment has been stable. But that said, but I would say also in the first quarter, the shape of the P&L has performed very well. And I'd say the cost - the quarter, I think, exceeding our own internal expectations pretty healthy in a way that I would say the primary drivers were volume, price and cost. So if you take those three factors, those are pretty good quality factors. Could it continue to get better? It could. But I think we've made our call on the outlook and generally it feels a little soon to call - revise our guidance up after the first quarter. But based on the strength of the first quarter, we felt like we should. But is there more room as we go through the year? There could be. But there's also a lot of volatility that remains, which is kind of why we call it the way we've called it. And so what are the down factors on volatility? We're all seeing the same reports about recessionary risk in the second half. We don't exactly know what's going to happen to the cost - input costs and currency. And so, there are a lot of factors on both the plus side and the negative side. And so we're - we feel like this is a good call for now. And we were - I think I will retain the right to change our mind later.

Understood makes sense. And I agree with all your comments on the first quarter. Congrats on a strong start and I'll pass it on.

Thanks, Jason.

Thanks, Jason.

Thank you. Your next question is coming from Lauren Lieberman from Barclays. Your line is live.

Hi Lauren.

Great thanks. Hi, how are you? I wanted to talk about consumer tissue innovation. I know it's a topic that we've touched on before without going back into the detailed poop conversation?

Yes.

But you guys have talked for a long time about the ability or the intention to elevate the category and bring innovation there, and this seems like the big - the first kind of like, big chunky move in that direction. I was curious your view on kind of category development, right? If I think about it, I would argue that you're probably the only player that's really focusing on innovation and premiumization in the category in this demonstrative way? How are you going to see the category evolving over time, right? Is there a higher margin profiles that's structurally more interesting? Does this kind of raise the innovation game for everyone, more bifurcation between private label and branded? I'm just - yes, curious on views on what your initial research and maybe test markets have shown you, if you've done that on them, and how the category could evolve things with this move on innovation?

Yes, I mean Lauren we definitely think it's the right thing to do. I mean, this category is - I mean, we invented the category. Scott Paper invented roll bath tissue over 120 years ago, and it hasn't changed that much fundamentally since then. And we all know the category talks about the attributes of soft and strong and every bath tissue is a version of that. But the reality is as our team has done a harder digging, and the 50% of the consumers are dissatisfied what the products deliver for them. And so we think - the core of the issue is around a better clean. It turns out, and you may not be surprised to know this, but the vast majority of the consumption of bath tissue is female. And just by that, you can see the category doesn't set itself up that way. And so, we definitely think there's a lot of ways to innovate from a product perspective and a communication perspective to deliver better clean. You're going to see some of that in advertising. We have shared some of that with our customers. They're very excited. I think we're just on the - I think, at the beginning stages of this approach. But I think it's the right one for the category. Because it's a huge category, and there's a lot of different ways to build. But I think creating more value added and giving consumers a better way to clean is a good one.

And then just from a profitability standpoint with this, right? So margins made a big step up this quarter in consumer tissue. But if I think back, the story in this category for KC for a long time has been recognizing the cyclicality of the cost environment that you'll see here. But making the -- raising the bar, right, the highs are higher and so are the lows, right, in terms of margin percentage. But as you push forward on innovation here, I mean, is there a scope for this business to have peak margins that are, I mean, call me crazy, like 19%, 20%? I think prior peak is maybe around 18%. But just not thinking this year, obviously, but over a multiyear horizon, what this means, could mean structurally for profitability in the category.

Yes. Well, let me go back broader, Lauren. I mean when I came into this role back in 2019, I think I started off with saying, hey, margin expansion is a goal, right? And so we got pushed back because when I said that, I wasn't anticipating $3.7 billion of additional cost and currency headwinds. But I think the team is doing an excellent job working to offset a lot of that. And I think you saw it this quarter. And -- but right around that '20 -- I'd say, 2017, 2018, 2020 period, our tissue margins in North America did kind of hit those rates. And so our goal right now is to get back into that range. But certainly, with the strategy that I just outlined and with the overall strategy of the company, to elevate our categories and expand our markets, I think the long-term goal remains margin expansion through innovation and building up the categories.

Okay. That's great. Thanks so much.

Thanks Lauren.

Thank you.

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

Hi, good morning. [indiscernible]. Hello, good morning, guys. Question is, I wonder, perhaps Nelson, if you guys have an estimate on how much pricing have you taken, which is put us kind of like a one-on-one basis relative to the cost that took $3.7 billion in cost. Do you have any estimate how much in the past 18 months, how much pricing you have taken?

Yes. Let me -- Javier, that's a great question. And if it helps, build a bridge as to why where we're at right now and the recovery path that we've had on margins. So based on our outlook for this year and the guidance that we're providing, we would have -- we will be pricing -- we will be realizing revenue growth management of around 85% of that $3.7 billion, give or take, just to give you a sense of what we've put in place when this year is done 36 months through. So obviously, that doesn't get you there on a one-to-one basis to recover margins. And that's why our cost-saving initiatives in force come into play in addition to our accretive innovation, which is part of our design to value and the other initiatives that we have in place with the commercial team. But I hope that provides some perspective.

Yes, that's absolutely, very helpful. And then I'm going to have a little follow-up. If you look at, kind of data, particularly in U.S. tissue, you see private label and Proctor, your main competitor, realizing more price mix. Is that real pricing? Or it's just basically that because you have the Scott business, you are seeing trade down within your portfolio under for - you are realizing less pricing than what so for your competitors and private label?

Well, I think, Javier, I'm not exactly sure, but I suspect what you're also seeing -- you're going to see is also timing of pricing issues. I mean I think Nelson mentioned earlier, we priced relatively fast relative to other manufacturers. And so if you compare on a quarterly basis, I think you're going to see our pricing start to diminish maybe starting next quarter relative to others. But in a lot of categories, we are at least one, and in some cases, like diapers, three quarters ahead of the competition. And so I think if you line it up that way, I think it's a tough -- it's not really an apples-to-apples comparison. On Scott, we have taken significant pricing. A few rounds, including double-digit pricing over the course at the end of 2021, all the way through 2022. And including -- and I think -- well, in the first quarter as well, we took another round of pricing overall. And so I think the pricing has been extensive. I haven't looked at that specific issue, and so we may have to follow back up with you on that one.

And I do have a third one, if you don't mind. And it goes back to the Professional business. I saw in the presentation that you said that the business is back to 2019 levels. I believe that probably is sales or price, so pricing -- exactly. So if you can give us similarly, do you have an estimate on a volume basis, how much are you back given all these issues about vacancies and stuff like that? And if the volume is significantly -- still significantly below 2019, does it open opportunities for optimizing the size of that business? And thank you very, very much.

Great question. Yes, so revenue is now above pre-pandemic levels, mostly because of pricing volume is still below, I would say, in the '80s, right? As a percentage, if you say, hey, the comparison is versus 2019 levels. A couple of things. One is I don't -- I think I said this in a prior call, I think it was before you started covering this. But I don't expect it to come all the way back because we all can see our own workplaces that the offices are not full. And with work from home, I don't expect that in the near term. Do we expect to get that volume back over time? Yes, in a different way, though. We have to pursue other channels and class of trade to build that business back. But do I expect to get that back over time? Or not even back, to grow our volume from where it is today? Yes. In terms of structural changes, we -- there may be some tweaks for us. But the thing for us is we were using a lot of external capacity to kind of support our business during that period. And so I would say the fixed cost overhang is probably less than you might imagine.

Thank you very much.

Okay. Thank you, Javier.

Thanks Javier.

Thank you. And the last question is coming from Steve Powers from Deutsche Bank. Your line is live.

Good morning, Steve.

Hi Steve.

Morning. Thanks, hi. So I might just ask one because we're short on time. But the one I want to ask first, just to clarify. So you talked about a lot of good things that I think we all see as evident in the first quarter, working in your favor and promise boding well for the year. But the guidance raise really only contemplates the $100 million relief in your commodity cost outlook. All the other levers of upside really, implicitly in the guide, are either implied to mean revert lower or, I guess, provide you allowance to invest back against them. I just wanted to play that back and make sure that -- I'm not sure it's the wrong outlook. It seems prudent, but I just wanted to make sure that, that that's sort of the right characterization.

Yes, definitely a preference to invest back, especially behind strong commercial programs and stuff that we have for this year, so -- which we're all very excited about. And as I was mentioning to Jason, let's see how it goes in the second quarter and definitely reserve the right to think about it again.

Yes. Okay. And maybe just real quick, just your perspective on market share, you talked about it earlier. I think it's clear you're prioritizing margin recovery, probably especially so in consumer tissue. You seem pleased overall. I think you mentioned Personal Care shares on a global basis were essentially holding or gaining in about half, half year category country combinations. But we've seen, I guess, softer trends in the track data, which has created some intra-quarter controversies. So just maybe some perspective on that and where you see trends being a bit softer than you'd like or being a bit stronger, just to kind of help round us out relative to the data we all see?

You're exactly on the right, a great issue for us to focus on. I mean we're pleased overall with our start. And I'm definitely very pleased with the margin recovery. We're not pleased with our market share performance. And so in Personal Care, we were up an even in about half, a little softer than we would like overall. And then if you say, hey, that was personal care. For the business overall, it was a little bit below that, right? And so we were coming off of 2020 and 2021 where we're up in over two-thirds. And so we kind of get used to that. So we're not that pleased with about half or just slightly under half. And so we know we got to get better. I would say though, Steve, it definitely comes with -- or the share softness definitely comes with moving fast on pricing. And what's happened is we've been -- other manufacturers have lagged significantly our pricing. I was just mentioning to Javier in some categories in North America diapers, for example. We didn't equalize on price until nine months after our price -- our first price move. And so I think there's been that lag effect that some competitors have used that interim period to kind of pick up a little share. That's part one. And then I'd say we're still working through a few hotspots. I mean, not everything is working perfectly within this company. And so we flagged last quarter. Hey, we've got some businesses in Southeast Asia. Certainly, you might understand with Eastern Europe and the ongoing effects of the war, we're still building our business back in Ukraine. And so there has been some softness in some markets. We're on it. But definitely, we earn the game for long-term market share gains, and that's an ongoing goal for us. And while the market share was okay in the quarter, we weren't happy with it.

Understood. Thank you very much.

Okay. Thank you all for taking the time to be with us today. Again, we feel very good about our solid start to the year, and we look forward to seeing you in the second quarter.

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.