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. And 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.

Thank you, and good morning, everyone. Welcome to Kimberly-Clark's Third 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. The summaries are third quarter results and full-year 2021 outlook. Both documents are available in the investors section of our website. We hope you find it valuable to have our 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 may 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 which 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.

Thank you, Taryn. Good morning, everyone. Before we get to your questions, I would like to offer some perspective on our third quarter and further actions we're taking in response to this dynamic and challenging microenvironment. Organic sales were strong, up 4% in the quarter, which included the impact of pricing actions implemented in the second and third quarters. In North America, Personal Care organic sales were up 11% driven by mid-single-digit increases in both net selling price and volume. In developing and emerging markets, Personal Care organic sales were up 7%. Organic sales increased double-digits in Argentina, Brazil, China, India, Eastern Europe, and South Africa. Our top-line performance was strong despite the resurgence of COVID, which impacted growth in ASEAN, and Latin American K-C Professional. Our market positions remain strong and improving, reflecting solid innovation and excellent commercial execution in nearly all key markets. Our share positions in North America remain solid with good sequential gains in personal care. Our share performance in developing and emerging markets remains robust, where we continue to strengthen our diaper leadership positions in key markets including China and Brazil. We also continue to focus on costs, with our teams delivering solid savings of $150 million in the quarter. In addition, we reduced expenditures significantly. Now, clearly our margins and earnings costs well beyond the expectations we established just last quarter. I'd like to highlight the effects of three areas of volatility that are most impacting our business. First, as we noted in July, based on external forecasts, we had expected commodity prices to ease in the second half of 2021. Instead, prices for resin and pulp increased further in the third quarter and are now expected to stabilize at a meaningfully higher level than our prior estimates. Second, a tight U.S. labor market and disruption in domestic and international transportation markets are having an elevated impact on our supply chain as we work to get our products to the shelf and meet consumer demand. Third, energy costs are up dramatically in Europe, where natural gas prices have risen as high as six times year-ago levels. Energy prices in North America are also up sharply, although not to the same extent. As a result, our margins are down, but were down with declines only partially mitigated by the actions we've taken to date. We're not pleased with our results and are taking further action to mitigate the impact of higher input and labor costs. These steps include further pricing actions, additional initiatives to ensure we achieve our cost savings goals, and tightening discretionary spending. At the same time, we remain committed to investing in our brands and commercial capabilities. While we expect to see some benefit from these actions in 2021, we have further reduced our outlook for the year. This reflects our third quarter performance and our expectations for the fourth quarter. And while we're not ready to finalize our outlook for 2022, I will offer perspective on key variables that will affect our plan next year. First, we continue to build top-line momentum. In addition, our pricing actions, brand investment, and commercial programs should provide further benefits in 2022. Second, some discrete headwinds we faced this year will be behind us. This includes the U.S. winter storm and presumably consumer tissue destocking. Third, some headwinds we faced this year may become more persistent. We're now expecting further inflation on several key commodities. We're also expecting continued tightness in the labor and transportation markets, which will continue to impact our global supply chain all the way to our customers. In addition, the ongoing impact of COVID on both demand and supply remains very unpredictable. We will continue to move decisively and navigate changing market conditions. We'll also continue to invest in our brand capabilities to maintain brand momentum. Our strategy is working, and we remain confident in our future and in our ability to create long-term shareholder value. Now we'd like to address your questions.

Thank you. At this time, we will open the floor for questions. Questions will be taken in the order in which they are received. Thank you. Our first question comes from Dara Mohsenian with Morgan Stanley.

Morning, Dara.

Hey, guys. How are you?

Good. I've been better.

Yes. It's a tough environment. So you mentioned further pricing actions, Mike, could you just be a little more specific there? Maybe review what you've done globally in terms of the percent of the portfolio, magnitude of increases generally, where you've taken increases and maybe just some insight in terms of the forward pricing, are you looking at it more on a product category basis, geographic basis? But just as you think about the forward pricing, any more insight would be helpful.

Okay, let me start a little bit philosophically. Based on our strategy, improving margins is a core aspect of K-C 2022 for us. We've taken further actions to offset inflation. Margin improvement is a fundamental pillar of what we need to do for the Company. We expect to fully offset inflation with both pricing and cost reduction, so a combination. We've announced some further pricing actions in Q3. Year-to-date, our actions are fairly broad-reaching across every region and most businesses. In Q3, we announced broader actions in North America, professional and consumer Latin America, and other markets selectively. So I would say our earlier pricing actions are generally on track as you saw in the release. We had a 3 point price factor in organic in the quarter. We've seen some other brands move, particularly in North America. I haven't seen significant movement from private label yet. Although typically that occurs a little later, and we've experienced a little softness in share. But overall, I think our volumes are holding up well.

Okay. And on the advertising side, certainly you've cut back a bit in this tight commodity environment, is there a point when you get concerned that maybe you've cut back a bit too much? Obviously, you mentioned the market share results remain healthy. But how do you sort of think about flexing that line item and reinforce your voices today in the categories you're competing in?

Yes. You can see it in the release, we feel very good about our organic performance. Our brands are fundamentally healthy. Our investment in both innovation and commercial programming, especially advertising, is producing good results. We want to maintain investment in the brands, especially where it's working. We've trimmed the advertising investment a bit, but that's on the back of significant step-ups from the last two years. Our expectation is that we will still be up nicely from where we were in 2019.

Okay. And then last question, just as we look out, obviously, there's a lot of volatility from a commodity cost standpoint. And things have been moving in the wrong direction, and you're taking a lot of pricing to help offset that. Is there a certain point you can look out to where you think the year-over-year pricing, at least based on the plans that are in place today, as well as spot commodities where we are today, where you are able to fully offset it on a year-over-year basis? Obviously, there's still a big gap leaving this year, but I'm wondering on a more go-forward basis, is it more in the middle of next year when you think you have enough pricing to offset year-over-year commodity increases? Could it be earlier than that? How do you think through that conceptually? Understanding there will be some gap leaving this year, but when on a year-over-year basis do we get to an ability to offset some of these cost pressures from your vantage?

Dara, that's why we've been saying we'll offset and get our margins back in line and improving over time with both pricing and cost reduction. I think the middle of next year is probably a good perspective for us. What happened this year was we saw the change in the commodity line coming out of the first quarter, and so we announced pricing that was effective in our second quarter. Certainly, commodities have moved significantly since then. We've made additional actions, and that's going to take time to implement fully. Another component looking forward is the global supply chain is under pressure, and we expect costs to remain elevated for a period. Certain fundamentals in the eucalyptus market may suggest there will be more capacity coming along, so that should come back a little bit. However, polymer-based products seem like they'll remain elevated for a while. We're also expecting pressures on transportation globally will continue to be elevated because I don't see a fundamental catalyst to change that in the near term.

I would add it will depend on the commodity trends and any pricing actions from here. So I might be a little more cautious than the middle of next year in terms of margin recovery. But we need to see how the dynamics play out, and it's too early to call.

That's helpful. Thanks. I'll get back in queue.

Thank you. Our next question comes from Lauren Lieberman with Barclays.

Good morning, Lauren.

Thank you very much, and good morning. I would like to focus on the supply chain disruption that was briefly mentioned in the prepared remarks, which you've also touched upon. It is impacting your sales outlook for this year, and I hope you can provide more details on which categories are affected. Are you facing difficulties in procuring inputs, or is it a challenge to transport goods from your factory to the store? Specifically, which part of the supply chain is experiencing pressure, and what categories should we be monitoring for that pressure, especially in the next quarter?

Yes. I would say it's affecting almost all areas of our operation. Certainly, you can see the commodity challenges around fiber and resin. Labor markets and transportation market disruptions ripple through the supply chain. Increased demand has led to a labor supply squeeze. We had challenges getting our orders out the door on time due to production outages and missed deliveries, resulting in higher rates for transportation. Overall, this pressure on both sides influences our costs and impacts our ability to fulfill demands.

No, I think that was pretty thorough. It's across the board getting supply into our mills, getting supply out of our mills, and getting the products moved around the distribution network. We need more staff and we require higher hiring than in normal times to fulfill demand. It's primarily affecting us in North America, and the UK also faces distribution challenges. I've never seen a supply chain environment like this, and it's affecting us across the P&L.

Lauren, I don't see a short-term solution. It feels like the pressure on labor and the demand for goods is resulting from several fundamental factors.

Okay. And so when you also mentioned that investing in the supply chain to meet demand, this is what we're talking about—absorbing these higher costs. It's not structural Capex type investment. It's investment meaning in incremental workers and so on.

Yes.

The investment is primarily P&L focused. We're also focusing on digital supply chain, which has driven some of our Capex. We're continuing to invest in digital capabilities like the S4 HANA upgrade. But that's not new information.

Okay. Great. I'll leave it there because that was a lot that you gave me. Thanks very much.

Sure. Thanks, Lauren.

Thank you. Our next question comes from Christopher Carey with Wells Fargo Securities.

Morning, Chris.

Hey, good morning. Thanks so much. So a couple of category questions actually. On the Personal Care side, can you just expand a bit on the strength that we're seeing in the business? There's been a lot of commentary around challenge birth rates, and yet the business continues to see strong growth. Think North America might seem entailed in this quarter. Our forecast was wrong for the birth rates this year. My understanding is that our income is doing better, offsetting the impact of job losses. Just any perspective you might be able to provide around why that business seems to be doing better. And then I'll just add on the second kind of category question here. I appreciate that the tissue business—the consumer tissue business is seeing difficult continued destocking, but there have been some market losses. I wonder if you could just expand upon that as well.

Overall, Chris, our brand fundamentals are strong and really improving. It's a combination of differentiated innovation and strong local commercial programming. I've seen our brands performing quite well. The decline in birth rate in diapers is real, especially in China, but in the U.S., we've actually seen a slight uptick in births this year and modest growth in the second half. So, the reason for the strong performance in personal care revolves around a solid innovation pipeline and effective local execution. Personal Care global sales were up 9% in the quarter, with a strong recovery in North America at 11%. We are seeing progress in K-C Professional as well, and consumer tissue, while still down, seems to be stabilizing.

If I could just thank you for that. If I could just have one follow-up. Just on the pricing in consumer tissue, I was surprised to see it come in relatively low given the magnitude of the inflation that has been mentioned a number of times today. Is that just a function of timing? Was there a promotional event in the quarter that offset some of the pricing? Do you expect that to build significantly from here? Are the share issues you're seeing somewhat due to your competitors taking longer to implement pricing, or is it more an availability issue? Just any perspective you might be able to provide on the pricing and the consumer tissue business, and how this shapes up in the near term would be appreciated.

Consumer pricing, particularly in North America, will build as the year progresses. There wasn't much this year. We had additional trade investment versus a year ago, and so that offsets some of the pricing. However, we expect that to continue building. We've announced price changes in August with our retailers.

Okay. Thanks so much.

Great. Thank you, Chris.

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

Good morning, Kevin.

Great. Good morning, Mike, morning, Maria. Mike, I wanted to come back just on market share. You touched on it a moment ago, and you didn't seem overly concerned about the U.S. As we look at the Nielsen data, it's down across the board for the most part in the most recent four weeks and 12 weeks; and to your point, Mike, it has been more pronounced in tissue and towel, but it's not entirely tissue and towel. So I just wanted to get your opinion on where you stand in the U.S., your relative satisfaction, how you believe your supply chain may or may not be more impacted, or impacted to a greater degree by some of the supply chain issues out there.

We're improving from a tight supply situation, which is the big thing. We're recovering well, even up in 4 of 8 categories in North America. That said, it's a little less than I'd like. Seven of eight categories are showing progress. We've made considerable recovery as team has done well overcoming prior mid-single-digit share point drops. We're feeling positive overall, and I believe we're making progress with our share performance.

Got it. And then a quick follow-up for both of you on trade promotion. Mike, I think you made a comment that the between-the-line spending was down, that you said or maybe down sequentially. Just clarify on that. Consumer promotion levels are moving higher and understandably so off of lower basis in the prior year. What is the logic between the CPG companies and retailers at this point to move trade promotion higher?

In North America, promotion levels have returned to typical levels. As measured by percent promo sold, that was down 50% to 75% last year due to demand. It's now back to historical levels in Personal Care and consumer tissue. I think retailers understand that brand growth occurs with effective promotions, so they remain important for our categories. My emphasis has always been on growing brands through great innovation and marketing while being disciplined with promotions. In the current environment, the pricing realization is integral to the cost front.

On the rest of it, just generally, between-the-lines for the quarter is at 15.6%, which is low. The main driver of that is around incentive compensation; with the updated forecast, incentive payments are significantly lower. We also had an accrual adjustment true-up from the first half. In the fourth quarter, we expect the between-the-lines to step back up due to the absence of the incentive comp true-up accrual and seasonally higher SG&A.

Got it. So seemingly, Mike, it's the retailers that are driving more of this. Just not to put words in your mouth, but it seems like there's an appetite there among the retailers to normalize the categories. Is that fair?

I wouldn't put it all on retailers. Manufacturers rely on effective practices as well. My perspective is focused on growing brands through innovation while using promotions to support our marketing in a symbiotic relationship with our retailers.

Understood. Thank you for all the color. I appreciate it. Good luck.

Thank you. Our next question comes from Peter Grom with UBS.

Morning, Peter.

Hey, good morning. Maria and Mike, I just want to go back to the 2022 margin recovery, and maybe just a housekeeping one first. I'd like to follow up on Gary's question, the halfway through the year or maybe a little bit longer is when you expect margin expansion; is that year-over-year, or when you expect margins to return to more normal historical levels? Is that gross margin or operating margin? My thought would be expansion in gross margin, but just wanted to confirm.

Next year, we will have some interesting dynamics, and it's probably going to be a tale of two halves when you look at the first half of the year and then the second half. That's going to drive some year-over-year comps that will have different dynamics. We'll have more to say in January when we have visibility into what's happening in the commodity market and pricing. We'll also provide our best view there.

We've increased our advertising investment significantly over the last few years, and feel confident in its impact on organic growth. We're still at a lower average than our top competitors. Our goal is to grow advertising efficiently going forward while maintaining margin improvements.

Beyond advertising, we're looking at between-the-lines spending. We're reducing discretionary spending while making continued investments primarily around IT digital initiatives.

Commodity inflation ran up quickly; however, we're committed to long-term health for the company and our brands.

Hey, guys.

Hey, Steve.

Could you talk a little bit about FORCE savings? It's coming in at the lower end of your plan. As costs go up, your procurement savings tend to also increase; however, we aren't seeing that right now. Is this temporary, or does it indicate that you're running out of runway on FORCE?

We're definitely not running out of runway on FORCE. Our supply chain has faced headwinds related to production and distribution challenges caused by demand volatility. The bottom line reflects these inefficiencies.

Our FORCE cost savings for this year is affected by the supply chain challenges we have been facing. We've experienced good savings from negotiated material prices and productivity improvements, though they're not as high as we anticipated. The labor issues are limiting our employees' time to optimize productivity initiatives.

So as the bottlenecks on supply chains alleviate, will we see pent-up FORCE savings surfacing?

Yes, the savings will rebound. However, I would note that our material prices' rapid inflation means we shouldn't expect as many benefits from that aspect moving forward.

Perfect. And if I could pivot, we talked to incremental pricing, and your views on trade and promotion. But I was just looking to think about next year and whether the path to margin recovery is less price-focused. Or if there are sizable revenue growth management opportunities around list price—what's your balance moving into '22?

It's a balanced deployment. We'll focus on pricing that can be implemented quickly, while also improving yield across pack architecture and trade strategies to maximize revenue growth.

Thanks, Mike. Good morning. I'm curious about price elasticity; things have looked good, but as stimulus fades and consumer cash dwindles, how are you preparing for pricing and minimizing consumer price shock in 2022?

Our elasticity modeling is good and tends to be a bit less than predicted. We're keenly aware of consumer needs regarding value. We've shifted our offerings in different markets to meet those needs. Price realization has been stable, and brand growth initiatives are offsetting some elasticity impact.

Thanks for fitting me in. Quick follow-up on 2022—your pricing actions still don't catch up with inflation until later in the year; any confirmation on timelines?

We'll have to see what happens with the commodity markets to provide clarity on our outlook for the back half of next year. I wouldn't offer speculation at this point given volatility.

Yes, our tissue pricing came in a bit low because we had a trade investment. However, we’re hoping to see better results moving forward.

Thank you. There are no more questions at this time.

Okay. Thank you all for taking the time to be with us today. We're working hard to drive sustainable brand growth and are taking further action to ensure that we improve our margins and earnings profile. Thank you all.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.