Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of this morning’s short remarks, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question. It is now my pleasure to introduce today's first presenter, Taryn Miller, VP of Finance and Interim Head of Investor Relations.

Thank you, and good morning, everyone. Welcome to Kimberly-Clark's second quarter earnings conference call. On the call with me today are Mike Hsu, our Chairman and CEO; and Maria Henry, our CFO. Earlier this morning, we issued our earnings news release, and we also published prepared management remarks from Mike and Maria that summarize our second quarter results and full year 2021 outlook. Both documents are available on the Investors section of our website. We hope you find it valuable to have prepared remarks ahead of this call. In just a moment, Mike will share a few opening comments and then we'll take your questions. During this call, we will make forward-looking statements. Please see the Risk Factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements. We may also refer to adjusted results and outlook. Both exclude certain items described in this morning's news release. The release has further information about these adjustments and reconciliations to comparable GAAP financial measures. Now I'll turn it over to Mike.

Okay. Thank you, Taryn. Good morning, everyone. Before we get into the Q&A, I'd like to offer some additional perspective on our performance. Clearly, our results did not turn out as we expected, and we knew it was a tough comp, given our strong growth and record profitability in the year-ago quarter. Now while we expected volatility this year, the external environment has proven to be even more volatile than our expectation at the beginning of the year and versus our April update. Since we spoke in April, commodity inflation has spiked higher and our supply chain has been challenged. These dynamics are impacting us and, more broadly, the industry. We're also navigating historic levels of demand volatility in consumer tissue. Last year, we worked really hard to support our consumers and our customers as demand increased at a record pace. While we expected the category to retract this year, that decline has meaningfully outpaced our expectations. This has been driven by reduced at-home consumption due to increased mobility and destocking of both consumer pantries and retailer inventory. Consumer tissue has historically been very stable and we expect demand to normalize over time. We remain confident in our brand fundamentals even as we acknowledge that the short-term tissue outlook has been difficult to call. We've taken decisive action to offset the impact of raw material inflation. We have announced pricing in key markets around the world. Our pricing actions are on track, and we expect to fully offset the effects of input cost inflation over time as we've done in previous cycles. We've also taken prudent steps to control and reduce discretionary spend across the business. We expect this to be reflected in our results as we continue to implement these actions. We view this level of input cost inflation and the COVID-driven demand volatility to be discrete issues. We will continue to take appropriate action to reduce the impact of volatility over time. At the same time, we remain confident and committed to our approach to building brands. Despite near-term challenges, we have plenty of bright spots in our business. Our strategy to invest in our brands is working. You can see this in our second quarter results broadly across personal care and especially in developing and emerging markets. Excluding North American consumer tissue, our organic sales were up 4%. Personal care organic sales were up 6% globally, driven by a 4% volume increase. In developing and emerging markets, personal care organic sales were up 8%, with very strong market share performance including in China, Brazil, throughout Eastern Europe, India, Peru, and South Africa. We've recently captured #1 diaper share positions in China and Brazil, which reflects the strength of our brand fundamentals with consumers. Importantly, we're starting to see green shoots in K-C Professional. The business grew year-over-year and sequentially as we saw strength in international markets and positive trends in washroom products. As more companies transition back to in-person environments, we expect KCP momentum to improve in the back half. We're encouraged by our underlying brand performance and have made significant progress in addressing the supply challenges we faced earlier this year in our North American personal care business. Looking forward to the second half, we are expecting better results across the business. We believe the major factors impacting this quarter do not reflect the fundamental health of our business. We remain committed to our strategy to deliver balanced and sustainable growth for the long term. We'll continue to execute K-C Strategy 2022 and we'll invest in our business for the future. This includes investments in innovation, commercial capabilities, and technology. Importantly, I also want to emphasize that we are acutely aware of the impact that this pandemic continues to have on our employees, our consumers, and our partners and the world. We will continue to prioritize the health and safety of our people and all that interact with Kimberly-Clark. Now with that, we'd like to address your questions.

Our first question comes from Lauren Lieberman with Barclays.

Wanted to first, to start with, I think, the biggest question, which is relatively short-term but is the guidance reduction for this year. And I think it'd be helpful for everyone to just hear a bit about your degree of confidence that like, this is it, right? The environment has been incredibly volatile, but as you look forward from here, to what degree have you built in flexibility for things to perhaps worsen. So I think that's sort of an important starting point. And along with that, within the inflation basket, what has been the biggest delta versus when you last communicated an outlook to the guidance to the Street back in April?

Thanks, Lauren. To start, my perspective on the outlook indicates significant changes in the external environment that we view as distinct issues we are managing. Specifically, two main challenges are raw material inflation and changes in consumer tissue demand, particularly in North America. When you look at these factors collectively, they contribute to over $3 of EPS on a year-over-year basis, which is substantial. While we are addressing a significant portion of this impact, we cannot cover everything this year. Regarding pricing, our implementation is on track, and we anticipate gradually offsetting inflation, though not all in this year. The volatility in North American consumer tissue is largely driven by COVID and I see it as temporary. Our team is effectively navigating these challenges, but it is more difficult to manage shortfalls in the category compared to the gains we experienced last year. Additionally, a significant factor that may not be visible to everyone is the situation with polymer resin in our business. While eucalyptus prices have remained stable, resin costs are anticipated to rise almost 100% for the full year, reaching historical highs. We initially expected these prices to decrease in the latter half of the year, but they seem to be staying elevated for longer. This impacts the pricing we've implemented. I want to emphasize that our brands remain fundamentally strong, and we are seeing robust global growth in both organic and market share. We are pleased with our North American personal care recovery; however, we are slightly behind in market share primarily due to supply issues. We significantly under-shipped orders in the last quarter despite positive organic growth. Overall, we are optimistic about our business and brand strength, and we anticipate a stronger Q3 in our personal care segment. Maria, would you like to add anything?

Yes, I'll address your first question, Lauren, regarding the full-year outlook. We have been mistaken twice now, and the environment we are operating in is extremely dynamic. The changes from our expectations are largely due to input costs and the unfolding of the consumer tissue category in North America. With six months remaining in the year and a guidance range of $0.25, I generally dislike reducing guidance. Since we have adjusted it twice, you can be assured that the guidance we provided is well-considered and based on observable trends, while allowing for some flexibility given the current dynamic situation. Regarding our outlook for operating margin compared to three months ago, I want to highlight a few factors: increased commodity costs, decreased volumes in consumer tissue, and the lower volumes affecting fixed cost absorption. The tissue business typically operates at very high utilization rates and incurs high fixed costs. The measures we have implemented to counterbalance this also factor into our outlook, which includes increased cost savings and reduced spending.

Okay, great. Maria, as I look ahead to next year, it may seem a bit early, but considering the challenges you've faced this year due to higher manufacturing costs, including the impact of storms in the first quarter and the more significant issue of negative operating leverage with tissue absorption, I believe that as we move into 2022 and if we return to a more normalized demand for tissue, those issues should resolve themselves. Am I overlooking anything regarding the potential effects on profitability from operating leverage and increased manufacturing costs as we look forward and begin to compare against these previous periods?

Yes. I'll say two things. It's very tempting to talk about 2022 given where we are with this year and the very unusual dynamics that we're facing. I'm going to resist that temptation as the environment has been quite dynamic. And I think we're best off waiting to see another six months before we call 2022, given that the macro factors are moving so much. But that said, Lauren, the way you're thinking about it is correct.

Our next question comes from Dara Mohsenian with Morgan Stanley.

So Mike, you mentioned you expect to be able to fully offset the cost pressures with pricing over time. Is that with just pricing alone, to be clear? Does that include other areas like cost savings, and just given the inflation's unprecedented this year, do you think you have pricing in place by year-end to fully offset those cost pressures or might it take a longer period of time to realize the pricing necessary and sort of a couple of rounds of price increases? How do you think about that? And I'm particularly focused on how you think about pricing just given the magnitude of that inflation is much worse than it typically is when you take pricing.

Yes, that’s a great question. I would say yes to both parts. We've implemented broad pricing actions globally, in most key markets, which has been quite extensive. The pricing adjustments vary from mid-single digits to high-single digits, with some reaching double digits. While we announced these changes in March and they were generally put into effect in June or early in the third quarter, we'll see about half a year of impact from these price adjustments and a full year as we move into next year. Although commodity prices continue to fluctuate, we are committed to using our revenue growth management capabilities to manage pricing effectively. There are multiple strategies we can employ beyond just list pricing. Additionally, we will be leveraging our cost savings program, which has been strengthened over the past year. Overall, I think the answer to your question is affirmative on both fronts. It's also important to note that we recognize the ongoing impact of raw material inflation. In our sectors, these costs can be quite volatile. A key aspect of our strategy is to improve margins, and to achieve this, we need to continuously offset inflation's effects over time.

Okay. And just one follow-up on the pricing front, where you have implemented pricing so far. What's the retailer reaction and receptivity been like? And it'd be early to judge consumer receptivity, but obviously, some pretty large price increases in your portfolio. So just any thoughts on the ability of consumers to handle that higher pricing and the impact on market share, and any thoughts there on what we might see going forward would be helpful.

Yes. Look, we never take pricing actions lightly, and we know they can be stressful for both the retailer and our consumers and their shoppers. So we think hard about that. I will say, we believe our pricing actions globally are generally on track. And I think broadly, the retailer conversations, though never easy, I would say have been largely constructive. And certainly, they understand what's happening in the cost environment and so we're working through that. And then I think from an execution perspective, our teams have done a phenomenal job executing rapidly around the world. I would say in terms of other brands, I would say generally, we've seen a lot of the other brands move in a similar direction. I wouldn't say identical but directionally in that same place. But the execution of other brands and private label tends to vary market-by-market. And so some will lag a bit more but I would say, generally, we feel like our pricing actions are on track.

Our next question comes from Kevin Grundy with Jefferies.

I have a question for you, Mike, regarding advertising and marketing. It seems that you chose to postpone some investments, which is understandable given the current environment. The original intention was clearly different. Could you elaborate on the areas where you decided to scale back and the reasons behind those decisions? Additionally, while I know this is a challenging topic, could you address how you are balancing the need for appropriate investment levels in your most promising ideas with the current costs of commodities? I have a follow-up after that.

Yes. Overall, while we face some challenges, particularly with inflation in North American tissue, our other markets are performing well and generally exceeding expectations. Despite these near-term challenges, we are focused on enhancing our long-term growth profile. We are confident that our balanced and sustainable approach to building brands is effective, and the fundamentals of our brands globally are strong, leading to improvements in our market positions. We have seen an increase in market share in about two-thirds of our category combinations this quarter, which is promising. Our brands have responded positively to significant investment, with notable gains in markets such as infant child care across China, South Korea, Australia, New Zealand, India, Indonesia, Eastern Europe, Argentina, Peru, and we experienced double-digit growth in Brazil. Because of this overall strong performance, we are maintaining investments in areas where we see success. However, we have reduced spending in certain markets, such as North American bath tissue, due to fluctuations in that category. We will continue to operate with discipline. As we've mentioned in previous quarters, our advertising strategy has both a mass and creative component, and we manage our consumer investments, including trade and marketing, very carefully, focusing on return on investment. Our teams are responding as expected. Maria, do you have anything to add?

Yes. The only thing I'll add is if you look at our full-year outlook, what's the thought on advertising is that it's down somewhat to 2020 for the reasons Mike just discussed but it's well ahead of 2019 on a dollar basis.

Got it. Thanks, Maria. One quick follow-up for both of you. Just on capital allocation and M&A, we saw that the buyback outlook came down with a lower earnings outlook. But when you're going through the type of environment you're going through now, you can't say pricing fast enough and even sort of leaning in and getting the organization behind productivity is still not enough to offset the sort of commodity cost pressure. Does it sort of give you pause with respect to the M&A strategy over time, and the school of thought that the company should look to diversify the portfolio away from some of these commodity-sensitive categories and do that in a disciplined and accretive way? So your thoughts there would be helpful then I'll pass it on.

Yes. We're always looking at acquisition or M&A opportunities, right, and whether that means additions to the portfolio or subtractions to the portfolio. Certainly, you saw that last year with Softex, which continues to be a really exciting opportunity for us and that business is performing very, very well, by the way, up in the teens, up multiple share points in the quarter. So we're super excited about that. Given where you are, I think we'll continue to look for opportunities to enhance the portfolio, and certainly, on both the plus, whether it's attractive markets or attractive categories. But also, we're going to continue to look hard at the performance of our existing categories and businesses that don't add to our overall growth profile or aren't going to be ongoingly accretive to our business, we're going to take a hard look at it. And so again, we manage capital with incredible rigor and discipline. And hopefully, that's what our investors will appreciate about our approach.

Yes. Regarding the buyback, at the midpoint of our guidance, our operating profit is now expected to decline by $450 million year-over-year. You'll remember that in January, as we were entering the year, we anticipated a slight increase in operating profit for our buyback target. With the decrease in cash flow into the business, this is the reason for the reduction of $250 million to $300 million in share buybacks. In terms of capital allocation, we have also cut our capital expenditure plans for the year by $100 million, and we remain dedicated to maintaining our single-A credit rating. We are making all of this work after our restructuring efforts and the acquisition of Softex, which helps us manage the numbers effectively.

Our next question comes from Chris Carey with Wells Fargo Securities.

I would like to discuss the outlook for consumer tissue in the latter half of the year. It seems that a key factor in shaping this outlook has been challenging to predict. I'm trying to understand the confidence you mentioned regarding normalization. It appears that market share peaked during COVID, possibly due to some capacity advantages, but we are now seeing a return to pre-COVID market share levels. If we compare this to two or three years ago, the situation seems unchanged. I'm interested in understanding the dynamics in that business and what specific indicators give you confidence for a rebound in the second half, as this seems crucial for achieving the overall annual outlook.

Okay. Yes, great question, Chris. And I'll try to unpack it and we can go back and forth on this a little bit. First, let me just say, I remain very confident in our North American tissue business. And we've got great brands, performed very well last year. I do think we have given back some share this year. What happened last year when the category spiked, and at this point last year, I think the category was up about 30% or so. Consumers were looking for tissue and our customers were looking for tissue. And so our organization really moved aggressively to try to serve our customers and consumers at a point where we felt like they needed us the most. And so we really pulled out all the stops. We probably did gain a little bit of share, particularly on a brand like Cottonelle, where we had a little more availability than maybe some of the other brands in the marketplace. And so it looks like to us, while our share is down a bit this year, I do think it's kind of reverted maybe to the prior year levels to some degree. And we'll continue to go forward and earn our share growth over time on that business. But we feel like our brands are healthy, but we are navigating what I would say is like the most volatile part of the demand curve that we experienced last year. So the front half is where all the spikes in demand. And so there are really two effects there. One is the spike in consumer demand and then there was a corollary effect on retailer supply. And so maybe the one disconnect that you might not have visibility to the data are the category in the quarter in North America, and I'm talking bath tissue specifically was down 12% in consumption, okay? And then our shipments were down about 27%. And so the difference between the 12% and the 27% is really, for us, we estimate as retailer inventory changes. And what happened last year on the inventory side was, I think exiting Q1 where there was the big spike, retailer inventories as a percent, if I index it to historical levels or 2019 levels, had dropped down to below 40% of what, I would say, the traditional turn inventory. And so retailers worked really hard to get back in the supply. And so by the end of the year or toward the back half of the year, they were well north of 100% of overall levels. And so as we entered into this year, our estimate would be retailer inventories were probably in the 130%, 140% range. And so that's dialed back in the first and second quarter this year. And so it explains kind of a big chunk of the delta here on demand. Looking forward, again, I'll stand by it. I mean, I looked at this category for a long time and it's one of the biggest categories. Obviously, if you think about bath tissue in particular, it's a very stable category. And so the logic for me is, in a post-COVID world, I think there will be more people at home on an ongoing basis than there were pre COVID. I don't think the office environment or the work environment is ever going back to 100% every day. And so logic would say consumption should be a little higher than the base level of '19. Now year-to-date, we're below '19 levels for the category, but we think I would say logic would say that that should kind of normalize over time. And I won't estimate whether that's at what point, but over the long term, this category has proven to be very stable. And our brands have proven them very, very stable and very healthy.

I understand you were specifically inquiring about consumer tissue, which indeed shows a significant difference between the first and second halves of the year. In the first half, our organic sales decreased by 5% and our operating profit fell by 26%. However, based on the midpoint of our estimates, we anticipate a second half with approximately 3% growth in organic sales and a 5% increase in operating profit. When considering our outlook for the second half, several key factors come into play. We expect to face easier comparisons, experience growth in volume and price realization, and believe that most of the consumer tissue destocking happened in the first half. Unlike the first half, we won't have the effects of winter storms. KCP washroom is predicted to see continued sequential improvements. Our pricing actions are now fully implemented in the market, and we anticipate building on our typical cost savings as they are usually more pronounced in the second half. Additionally, our other manufacturing cost challenges should decrease. However, we will be contending with increased commodity cost pressures. Taking this into account, our year-to-date figures and guidance suggest that the midpoint for the remainder of the year is 765. These are the factors influencing our outlook for the second half, with the dynamics within consumer tissue being a significant aspect.

We threw a lot at you and I threw a lot at you on tissue. I don't know if that answered all your questions or I'm happy to take a follow-up.

Yes, that was extremely helpful. The only quick follow-up would be regarding the level of retail inventory in tissue as you enter Q3. Given some percentages, where do you see it today? Additionally, I would like to ask how you are considering birth rates and their medium-term impact on volumes, and then I'll get back in the queue.

Yes, I'm going to provide a disclaimer regarding my inventory estimates, which we believe are close to historical levels. However, we're not entirely certain, and it seems retailers are uncertain about how to manage it at this time. Given the volatility in the category on a retailer-by-retailer basis, I anticipate some fluctuations will continue. For example, we were building inventory, but there was another spike in the fall and winter periods as well. I believe consumers recognize that tissue supplies are ample, but I've noticed many changes over the past 18 months, so we won’t be surprised if consumer behaviors continue to shift. Regarding the tissue side, we've also observed consumer pantry destocking. The North America team has done an excellent job researching this, though estimating it is as tricky as gauging market share from panel data. Consumer reports about their stock levels indicate they are reducing their stocks as confidence in tissue availability increases, but we’ll need further validation. As for the birth rate, our estimate for this year indicates a decline in the low to mid-single digits, which is slightly worse than the previous two years when it decreased by about 1% to 2%. The pandemic seems to have led some families to postpone starting their families. Nevertheless, we are optimistic about the recovery of our infant child care business and our supply situation. We are confident in our brand propositions, and we expect to be back on track in the third quarter in our infant child care business.

Our next question comes from Steve Powers with Deutsche Bank.

You provided a lot of information about the consumer tissue discussion, and I just need some clarification based on the exchange you had with Chris and the comments earlier today. I'm trying to understand if you anticipate any changes in consumer takeaway expectations for the remainder of the year. From what I gathered in the prepared remarks, it seems that the rebalancing of consumer pantry and retailer inventory happened more quickly than you expected in the second quarter. You reiterated that point, but I didn't catch any mention of a net decrease in consumer takeaway. So, were you not expecting any rebalancing during 2021 initially, and it just occurred sooner than you thought it would? Or is there a difference because I can see how the rebalancing moved forward in the first half, as opposed to being spread out throughout the year, which would not negatively impact the second quarter. However, I’m still unclear about a net negative effect on the full year that I can't quite identify. Could you clarify that for me?

Yes, there are several ways I could address that question. Let me start by comparing it to our original expectations for the tissue category at the beginning of the year. Reflecting on December, when vaccines were not yet rolled out, we anticipated that the category would be lower than in 2020, possibly experiencing a mid-single-digit decline, as we believed consumers would generally remain at home. However, as we prepared for our April update, it became clear that vaccine rollout was faster than expected, and our mobility data indicated we were returning to around 80% or 85% of historical levels, which was quicker than we thought. So, our expectations for the category had to be adjusted downward. After the second quarter, we noted the bath category was up about 22% last year, but we now expect it to decline at least in the mid-teens range. Overall, our expectations for the category appear to be worse than at the start of the year. Nonetheless, I still think it should surpass the base year of 2019 when considering the two years together. However, that remains unconfirmed. I believe there will be more people at home than in 2019, and if that is the case, consumption of at-home products should increase, although this still needs to be validated.

Yes, to clarify from a consumer perspective, overall demand is normalizing and is now below the levels seen during the pandemic. We expect our results to be slightly lower than at the beginning of the year, referencing last year's performance as noted by Mike. However, we do not anticipate a continuous downward trend. We expect to see a rebound moving forward. Additionally, retailers are managing their inventories based on consumer trends, which we will monitor to ensure normal consumption in the market. We continue to observe strong demand as we gain market share in consumer tissue.

Yes, that helps. I guess that leads into my next question. You sound quite satisfied and optimistic about the trajectory of the Professional business, likely due to the vaccination reopening trend. While that resonates with me, I was expecting a bit more regarding the second quarter, considering the dynamics you mentioned as an offset to consumer tissue. Could you provide more insight into how you see that business trending and what your expectations are for the second half? On KCP, I wouldn't say I'm extremely pleased, but I'm certainly proud of our team's response to various challenges. I'm cautiously optimistic about the category and do see some positive signs. Organic growth was up 2%, which shows improvement compared to recent quarters, driven by strong international growth despite a weak comparison from last year. Additionally, there is sequential improvement in the North American washroom business, which is significant for us. While it hasn't fully taken off yet, we are noticing the effects of more people returning to work in office and factory settings, which is encouraging. There are some offsets since we had substantial growth in our wipers and safety equipment last year due to increased COVID demand, and that is likely easing this year. Overall, we feel good about the KCP business. Our team has been working diligently, and we've made progress with our jet-air dry conversions and product offerings in the washroom sector. We have strong towel and dispenser products, and we are seeing successful conversions. However, as I mentioned in previous calls, we won’t see a true share increase until the products are utilized through the dispensers. We are positive about what the team is doing and remain cautiously optimistic.

Okay. Maria, you mentioned that around 770 at the midpoint of inflation is expected in the second half of the year. Can you provide any insights on how you see that affecting the third quarter compared to the fourth quarter? Is it likely to be significantly skewed towards one quarter or is it more evenly distributed? Any guidance on the timing would be appreciated.

Yes. I think the expectations are that the commodities will reach peak in the third quarter and then start to ease a bit as we get into the fourth quarter. So I'd use that as the kind of phase-in guidance.

Our next question comes from Peter Grom with UBS.

So you mentioned in your prepared remarks, and I was also pretty encouraged by the performance and commentary around developing and emerging markets. And so obviously, you have pockets of strength, pockets of weakness, and you mentioned strong share performance there. But I was just curious, has the consumer been more resilient in those markets than you would have anticipated, kind of given the COVID environment? Or is this strength really just Kimberly-specific?

It's difficult for me to make a general statement because it varies greatly. Some markets have been less affected by COVID, particularly in Asia. However, I need to emphasize that we're seeing resurgence in cases, especially in key markets for us like Indonesia. There is definitely some resilience, but our strategy to elevate the category and expand our reach is also key. Our teams are particularly focused on infant and child care with the Huggies brand and have developed excellent product offerings. Over the past two years, our diaper teams globally have aligned around a clear set of consumer benefits we're targeting and the technology platforms we're launching. For instance, we've gained 4 share points in the diaper market in Australia and New Zealand, where we are market leaders. The diapers have specific connections to our products in China; they aren't identical, but they are related. We've also secured share leadership in Argentina and Brazil, where the products are connected to our North American offering. The teams have shifted from emphasizing product features to focusing on consumer benefits, which is reflected in our market shares. In China, we increased our share by about 3 points this quarter, following a similar increase last quarter. We also saw 4 share points gained in Australia and New Zealand, Korea, and Peru, indicating broad-based share advancements. We believe these gains are earned rather than achieved through promotions, as we focus on delivering great products, strong digital execution, effective sales strategies, and solid customer partnerships.

No. That's super helpful. And then I just wanted to ask a couple of follow-up questions in regards to the commentary on second half organic sales growth. So first, I just want to make sure I heard the comment on volume growth correctly. Is that a total company comment or was that something specific to consumer tissue? I thought total company but I just wanted to be sure because I think Chris's question was on consumer tissue. And then just like anything you can share on phasing of that 3% growth between Q3 versus Q4, given the cycling of the accrual true-up in Q4 would be really helpful.

Sure. I was making the comment; I'm just bridging from the question on consumer tissue to the total company because consumer tissue is certainly part of the story in the second half when we look at the total company outlook. So to clarify, I was talking about total company in my remarks about first half, second half. And the phasing of the quarters, I'm going to stay away from quarterly guidance. Here, I think the things to consider are the year-over-year comps. I did make some commentary around phasing on the commodity headwinds. And beyond that, I think I'm going to stay away from the quarters.

Your next question comes from Jason English with Goldman Sachs.

I have a few questions, particularly about tissue and pricing. You had impressive price growth in North American tissue during the fourth quarter of 2020. I believe this was due to an over-accrual for trade spending throughout the year, which was corrected later. Given that we are now comparing against a period of over-accrued trade spending, I expected some pricing benefits from reduced trade spending, even though I understand that list price adjustments take time. However, despite these expectations, prices in North America have eroded on a two-year basis, and we are seeing deflation in prices in both developed markets outside North America and in developing and emerging markets. You've also reported the worst price/cost deficit I can find on record. This raises the question: what is holding back your pricing power right now, especially when you anticipate demand to be above the baseline of 2019? Why are we not seeing more net pricing benefits reflected in your profit and loss statements?

Yes. I will start, Jason. So part one is we have announced pricing in consumer tissue in many markets, in most of our tissue markets around the world, including in North America. I wouldn't say we've taken it across every product line. And so Scott 1000 is kind of a key product that we have. And so that's one area. Certainly, we did benefit, as you mentioned, from accrual differences at the end of last year. And the other thing that we benefited throughout last year was given the amount of demand in the marketplace, we reduced our promotional spending overall, right? And so we kind of earned maybe the same or higher volume levels without having to spend the trade. So that was a benefit last year that we are cycling this year, and so we are putting some investment back in trade. For reference, I would say, the category promotional intensity in a market like North America, still below historical levels but moving its way back to what I would say are more normalized levels, and so we recognize the need to do that. The thing that I will tell you is I think your point is on, which is we've got to get better price realization. I will say we don't necessarily view the additional spending on trade to be a negative profit driver in the sense of we've invested in a lot of tools and revenue management, and we expect our teams to be able to use those tools to drive volume and growth profitably. And so we're going to hold ourselves accountable to that. But with that, again, we recognize the need to get additional price realization, and there's many ways for us to do that in addition to the list pricing that we've taken. And there's also ways for us to do that through revenue management, through trade efficiency, price pack and other things that we'll continue to look at. I don't know if, Maria, you have any thoughts.

Yes, that's right.

Okay. So there's other mechanisms, we're just not going to see them yet. They're going to take time to see. Last time we had inflation in tissue, you guys ran a price/cost deficit for eight consecutive quarters before you flipped positive. Is there any reason to think that you could close the gap faster? Or given the environment that you're mentioning, with promotional activity actually picking up in the face of rising costs, could it actually even be more prolonged this time?

Well, again, I think we've actioned generally our pricing in the marketplace. And so I would think that, hopefully, the duration of that gap would be shorter. Certainly, we didn't like the gap through the first half of this year. And so that's one part. Second, again, we're going to continue to review kind of all the levers that we have on revenue management and make sure that we make the appropriate adjustments to our plans on a market-by-market basis.

Our next question comes from Andrea Teixeira with JPMorgan.

So I wanted to go back to pricing, I'm sorry to beat a dead horse here. But what is your read on the consumer elasticity, not only in the U.S. but also internationally as you obviously compete with players that oftentimes are private? But specific to the U.S., the dollar share that we're looking not only in tissue, in track channels, as you explained well through Chris' question before but also in diapers, are you seeing that the same decline across all channels? And is that an indication that consumers are probably down-trading now, that they see private label, for example, Scott 1000 is the one that competes more neck-to-neck with private label? So are you seeing any issue there or perhaps you're going to tweak a little bit of your price increase now that you know what you know about tissue, and then perhaps do more RGM where you barbell a little bit of these price increases? So any update on embedded in your guidance, if you were changing some of your pricing or any second rounds in North America that we may not be aware or you embedded in there? So any color there would be great.

Yes. Great question, Andrea. Maybe the short answer for me is I don't know yet. I think for reference, we took about a high single-digit price increase across our personal care businesses and then some selective price increases, for example, on Scott tissue in North America. And I would say those went into effect at the end of June. And so it's a little early for us to gauge that. If I go off the history though, I will say the last list price increase we took on these businesses actually in personal care was not list; it was more count, okay? But that said, I would say the consumer elasticity at that point back in 2018 was not, in my mind, a little lower than what we modeled in terms of elasticity. So what that implies, I think there's a couple of different factors. If I would say, more price-sensitive factors would be that I think consumers are facing broader inflation in this environment across all categories, right, beyond consumer packaged goods. So that may be one factor, right, that makes it a little more challenging. The other factor that I know talking to people in other industries is there have been reductions in other spending, consumer spending, which create a little more wallet for some of the more consumables, and so that's an offset. So for me, the answer is at this point a little theoretical ambiguous. And so it remains to be seen but we'll know as we work through this quarter. I don't see any significant changes, but it's still early for us to make an assessment. I agree with you, Andrea, that the dynamics in personal care were very different from tissue last year. There was some consumer engagement in the first quarter last year, but it was around mid-single-digit growth, possibly mid- to high single-digit, while consumer tissue in the same quarter was up about 30%. The behaviors were quite distinct. We reversed almost all of that in the second quarter last year. I believe the consumer behavior in personal care in North America has become a bit more stable. Additionally, regarding tissue, our pricing has been in the market for about three weeks now. It's a bit early for us to gauge the impact, but we remain cautiously optimistic.

Next, we have a follow-up from Lauren Lieberman with Barclays.

I wanted to ask about the growth in the personal care category in developing and emerging markets. You've mentioned market share gains, but I'm also curious about the resilience of certain categories in these markets. Could you share your perspective on why these categories have performed well, especially considering that your share growth suggests they are in a good position?

Yes. I'll provide an overview of our performance across different regions. Starting with Latin America, we've been encouraged by our results despite the challenging COVID environment. In Brazil, our organic growth in personal care exceeded 20% driven by both volume and price, and we implemented significant price increases while maintaining our market share. We hold a leadership position in this market. The team has done an excellent job adding value by shifting between premium and value offerings as needed. In Argentina, we lead in both the value and premium segments, making us the top brand overall. Our strategy adapts to local market conditions, focusing on what to promote based on consumer demand, which increasingly favors value products as consumers adjust their spending habits. We also successfully introduced innovative products in our value tier. In China, we gained 3 share points this quarter and are currently in the top share position, which we're proud of. Consumers are responding well to our product quality and innovation, although we're aware that declining birth rates may pose challenges in the future. Nevertheless, our team is confident in their ability to grow the business and collaborate effectively with major e-commerce partners. In Eastern Europe, we saw share increases across nearly every market, ranging from 1 to 7 points, thanks to our strong product offerings. Our products in China, the U.S., and Brazil are interconnected, and the teams are effectively driving these initiatives. However, we are closely monitoring regions like ASEAN, Indonesia, Vietnam, and India, as they are facing significant pressures from the pandemic. I'm not sure if I've fully addressed your question, so please let me know if you need more information.

No. That's super helpful. And then I just wanted to ask a couple of follow-up questions in regards to the commentary on second half organic sales growth. So first, I just want to make sure I heard the comment on volume growth correctly. Is that a total company comment or was that something specific to consumer tissue? I thought total company but I just wanted to be sure because I think Chris's question was on consumer tissue. And then just like anything you can share on phasing of that 3% growth between Q3 versus Q4, given the cycling of the accrual true-up in Q4 would be really helpful.

Sure. I was making the comment; I'm just bridging from the question on consumer tissue to the total company because consumer tissue is certainly part of the story in the second half when we look at the total company outlook. So to clarify, I was talking about total company in my remarks about first half, second half. And the phasing of the quarters, I'm going to stay away from quarterly guidance. Here, I think the things to consider are the year-over-year comps. I did make some commentary around phasing on the commodity headwinds. And beyond that, I think I'm going to stay away from the quarters.

Your next question comes from Jason English with Goldman Sachs.

I have a few questions, particularly about tissue and pricing. You experienced significant price growth in North American tissue during the fourth quarter of 2020, largely due to an over-accrual for trade spend throughout the year that was later adjusted. Now, we are comparing this period where there was an over-accrual, and while list prices typically take time to adjust, I, along with others, expected to see some pricing benefits from reduced trade. However, on a two-year basis in North America, prices have decreased. Additionally, prices are deflationary in both developed markets outside of North America and in developing and emerging markets, and you recorded the worst price-cost deficit on record. This raises the question of what is affecting your pricing power now, especially since you anticipate demand to exceed the baseline from 2019. Why is there a lack of net price benefits showing up in the profit and loss statement?

Yes. I will start, Jason. So part one is we have announced pricing in consumer tissue in many markets, in most of our tissue markets around the world, including in North America. I wouldn't say we've taken it across every product line. And so Scott 1000 is kind of a key product that we have. And so that's one area. Certainly, we did benefit, as you mentioned, from accrual differences at the end of last year. And the other thing that we benefited throughout last year was given the amount of demand in the marketplace, we reduced our promotional spending overall, right? And so we kind of earned maybe the same or higher volume levels without having to spend the trade. So that was a benefit last year that we are cycling this year, and so we are putting some investment back in trade. For reference, I would say, the category promotional intensity in a market like North America, still below historical levels but moving its way back to what I would say are more normalized levels, and so we recognize the need to do that. The thing that I will tell you is I think your point is on, which is we've got to get better price realization. I will say we don't necessarily view the additional spending on trade to be a negative profit driver in the sense of we've invested in a lot of tools and revenue management, and we expect our teams to be able to use those tools to drive volume and growth profitably. And so we're going to hold ourselves accountable to that. But with that, again, we recognize the need to get additional price realization, and there's many ways for us to do that in addition to the list pricing that we've taken. And there's also ways for us to do that through revenue management, through trade efficiency, price pack, and other things that we'll continue to look at. I don't know if, Maria, you have any thoughts.

Yes, that's right.

Yes. So there's other mechanisms; we're just not going to see them yet. They're going to take time to see. Last time we had inflation in tissue, you guys ran a price/cost deficit for eight consecutive quarters before you flipped positive. Is there any reason to think that you could close the gap faster? Or given the environment that you're mentioning, with promotional activity actually picking up in the face of rising costs, could it actually even be more prolonged this time? Well, again, I think we've actioned generally our pricing in the marketplace. And so I would think that, hopefully, the duration of that gap would be shorter. Certainly, we didn't like the gap through the first half of this year. And so that's one part. Second, again, we're going to continue to review kind of all the levers that we have on revenue management and make sure that we make the appropriate adjustments to our plans on a market-by-market basis.

Your next question comes from Andrea Teixeira with JPMorgan.

So I wanted to go back to pricing, I'm sorry to beat a dead horse here. But what is your read on the consumer elasticity, not only in the U.S. but also internationally as you obviously compete with players that oftentimes are private? But specific to the U.S., the dollar share that we're looking not only in tissue, in track channels, as you explained well through Chris' question before but also in diapers, are you seeing that the same decline across all channels? And is that an indication that consumers are probably down-trading now, that they see private label, for example, Scott 1000 is the one that competes more neck-to-neck with private label? So are you seeing any issue there or perhaps you're going to tweak a little bit of your price increase now that you know what you know about tissue, and then perhaps do more RGM where you barbell a little bit of these price increases? So any update on embedded in your guidance, if you were changing some of your pricing or any second rounds in North America that we may not be aware or you embedded in there? So any color there would be great.