Thank you all for waiting. We now have our presenters ready for the conference. It's my pleasure to introduce our first presenter, Taryn Miller. Please proceed.

Thank you, and good morning, everyone. Welcome to Kimberly-Clark's Second Quarter Earnings Conference Call. With me today are Mike Hsu, our Chairman and CEO; and Nelson Urdaneta, our CFO. Earlier this morning, we issued our earnings news release and published prepared remarks from Mike and Nelson that summarize our second quarter results and 2022 outlook. Both documents are available in the Investors section of our website. In just a moment, Mike will share 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 and the second quarter 10-Q 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 the call over to Mike.

Okay. Thank you, Taryn. Good morning, everyone. I'm proud of our team's execution as we closed our first half with 9% organic sales growth in the second quarter. We delivered robust gains in all segments, our growth strategy is working, and our teams are executing with excellence in what continues to be a volatile operating environment. Clearly, our results reflect this ongoing volatility. For the year, we're now anticipating $300 million of additional input cost inflation. We remain committed to recovering and eventually expanding our margins, and thus, we've taken further action to realize additional pricing and cost savings to mitigate these headwinds. We continue to expect pricing and cost savings to fully offset the effects of inflation over time. Based on the strength of our top line, we're raising our full-year organic sales outlook to increase 5% to 7%. We're maintaining our adjusted EPS guidance. However, based on current conditions, including our updated input cost outlook, we now expect to be in the lower end of that EPS range. We'll continue to manage our business with discipline as we navigate near-term headwinds. Based on the pace and breadth of our pricing actions, we anticipate some volume impact over the balance of the year. Still, we're encouraged by the overall health of our categories and our brands. Our brands remain essential. We also know consumers are seeking greater value, and we'll continue to sharpen our offering to enhance our market position. We remain committed to delivering balanced and sustainable growth. In the near term, we're taking necessary action to recover margins. We're also continuing to invest in our brands to enable us to grow sustainably now and for the long term. Now we'd like to address your questions.

Our first question will come from Dara Mohsenian with Morgan Stanley.

So first, just a couple of clarity questions. The increase in your full year organic sales growth guidance for 2022, is that driven by higher pricing or a higher volume assumption? And then second, with the $300 million in higher cost pressures now expected for the full year, you obviously mentioned a combination of pricing and cost savings to help offset that. Can you just be a bit more specific if you're planning additional price increases, specifically in the back half of the year? Does that offset a good amount of the cost pressures? How should we sort of think about the pricing outlook changing in response to the cost outlook, specifically in the back half of the year?

Yes. Thanks, Dara. I'll start and maybe Nelson can provide some additional color. But overall, I think the organic outlook and the increase in the outlook reflects both volume and price. Overall, we feel like our pricing execution is going very well. We are driving the realization. You can see it in the numbers. But the second part of it is also the volume is holding up a little bit better than we originally planned. And I think that reflects, one, what we said before, which is resilience in the consumer overall, but also the strength of our brands. We feel really great about the commercial execution that we have around the world. That includes launches of innovation, improvements in product quality, our digital marketing programs, the execution we're driving at shelf. And so overall, that's still working despite the necessity for us to price our products to recover the costs and the margins. So overall, I'd say it's a pretty good balance of both volume and price on the organic outlook. And then on the cost front, yes, we're going to need it. We have taken additional pricing actions and that's globally. And we've taken a few actions since the beginning of the year. Actually, we announced another action in North America just last week. And so we continue to execute. And again, overall, philosophically, I've said in the past, Dara, that we expect pricing to generally offset the effects of inflation over time. It gets tougher as the increases come toward the middle or end of the year to kind of catch up to it. But again, we are expecting our teams to be able to offset inflation over the long term. Nelson, do you have something to add?

Absolutely. And I would add, Dara, a couple of things there as well. I mean, one, yes, as Mike said, pricing is one of the key levers as we're seeking to offset the pricing pressures that we're having. But also, we've got to keep in mind our cost-saving FORCE program, which will accelerate as we go into the second half. So the combination of those two will help us offset as we exit the year.

Okay, that's helpful. And then maybe taking a step back and thinking about the broader pricing environment in general, geographically. First, just in the U.S., there's obviously been some very public margin pressures that are playing out at some of your larger retailer partners. There are worries about consumer pressure points and macros. You mentioned internally, the historical pricing has gone well. The volume elasticity has been limited. But have you seen any change in retailers' receptivity in the U.S. to pricing, given some of the dynamics I mentioned earlier? Does that sort of require a more judicious approach to pricing on your part in the U.S. specifically? And then second, just in some of your key emerging markets, maybe you can give us an update on consumer demand elasticity there to higher pricing and what you're seeing from a competitive standpoint.

Yes. Those are great questions, Dara. We've discussed this before. From my perspective, retailer behavior remains consistent with historical patterns I've observed over my 30 years in this industry. This consistency stems from our aligned interests. Both sides aim for the long-term growth of our respective categories. For retailers, it's about their store sales, while for us, it's about our overall business growth. We are focused on sustainable growth. Additionally, we strive to provide consumers with great value, which can manifest in various ways. This includes setting competitive price points that reflect the value consumers want, as well as innovating product quality to meet their needs. Given these foundational ideas, we are mindful of pricing pressures, and we understand the necessity of achieving profitable growth in the long term. We are aware of the external pressures, and we monitor similar news reports. We've engaged in discussions with our customers and have adjusted our prices, doing so thoughtfully. Regarding the D&E question, I believe our pricing and volume strength highlight consumer resilience and the essential nature of our categories. In developed markets, consumers seem to be showing more resilience, with high single to low double-digit growth across those markets and multiple share growth in many of them. We've observed some price lagging from competitors in D&E, which has resulted in a slight decline in our shares there. Although we have increased prices, we realize this might have been done more rapidly than some competitors. We will need to keep a close watch on this situation. Moreover, we notice a bit more trade-down behavior in D&E compared to developed markets, though not significantly. In Latin America, we hold both the leading value and premium offerings, which enables us to adapt to consumer preferences effectively. Overall, we feel optimistic about our position and are monitoring price gaps in D&E as well as in North America, remaining sensitive to these factors.

Our next question will come from Lauren Lieberman with Barclays.

So just following actually on that thread around some sensitivity and watching for trade-down and the mention of the portfolio breadth you have in Latin America. I was curious on what, if anything, you are doing in terms of shelf sets, merchandising of the more value or mid-tier products in the portfolio versus the premium end. Are there things that you are doing proactively rather than reactively to shift the mix of what you are supporting? And if not, why not? Because your categories do, over time, tend to feature on the higher end of the list of those that can see trade-down and be more sensitive not in terms of overall consumption but rather what is being consumed.

Yes, that's a great point, Lauren. We've talked about this before, and I would say that particularly in developing and emerging markets, we are seeing a shift toward more value-oriented offerings. Just a few years back, we had a strong focus on premium products, and there was a significant move to premiumize our offerings. The market was receptive to this change, and we made great strides in improving pack counts, product quality, merchandising, and more. We substantially increased our premium mix in places like Brazil. However, as the economy began to soften two years ago, we adjusted our strategy and shifted our focus back toward value. This decision proved beneficial, as we were able to establish ourselves as leaders in both value and premium categories last year. We are confident in our approach, which functions well across both developing and developed markets. Our diverse portfolio allows us to adapt to changing demand. In the short term, we are prioritizing margin recovery, which has led to price increases. We are closely monitoring price gaps and will make necessary adjustments as the year progresses.

Okay, great. Regarding the cost savings, as Nelson mentioned, there seems to be potential for increased FORCE savings in the latter half of the year. It appears that, similar to many of your industry peers, achieving productivity improvements has been challenging in the current environment, whether that involves negotiating better pricing with suppliers or implementing new cost-saving initiatives at the plants. I am curious about your level of confidence in this acceleration. What changes do you anticipate that will enable you to achieve greater FORCE savings in the second half of the year?

Sure, Lauren. So I'd start by reminding us that FORCE isn't necessarily a straight line. I mean, it tends to build throughout the year and that's kind of our historical trend. In particular, for H1 of this year, I mean, we continued to drive solid savings from our productivity initiatives on a gross basis. But these savings were somewhat offset by some of the cost headwinds that we've been facing, particularly in North America, as we've been investing heavily over the last couple of quarters to improve overall service levels, which we're pretty pleased that we're getting back to more normal levels as we exited Q2. So having said that, as we go into the second half, I'd say a couple of things. We're going to have some of these incremental expenses behind us or largely behind us. And then secondly, we're going to have the pipeline, which is pretty strong at this stage, come through. So overall, that gives us the confidence of seeing around a little over $200 million of delivery in FORCE as we go into the second half.

Our next question will come from Kevin Grundy with Jefferies.

First one for Nelson. Just kind of taking a step back, I would be interested to get your early impressions and perhaps maybe your two to three biggest priorities over the course of the year to ensure a smooth transition. Maria was, of course, very well thought of, but a fresh perspective can always bring to bear some new ideas and potentially some opportunities for shareholders. So I think your early observations would be helpful. And then I'd like to pivot to the cost outlook.

Sure. Overall, there are a few key points I would like to emphasize. I'm quite impressed by the team, their resilience, focus, and strategic priorities. I've witnessed this firsthand while working through various challenges in the field. This organization shows a strong capability, which has enabled us to achieve the results we've seen in the first half of the year, particularly in Q2. One of my main priorities while collaborating with the team is to continue advancing our margin recovery, as this is crucial for us. We are committed to addressing this from all angles and will approach it intelligently. We will keep investing in the business, as we've done in the first half of the year, because this is essential for driving sustainable, profitable growth moving forward. In terms of capital allocation and other elements, my opinion remains unchanged from where we are today; I believe we are focusing on the right areas. As we move forward with our plans for the coming years, we will share further updates.

Got it. The quick follow-up is maybe just sort of go through your commodity exposures around energy, packaging, et cetera. Walk through your updated assumptions for us. What's driving the worst outlook there from a commodity perspective? And then relatedly to that, just your view on the level of conservatism in the guidance. I think it's obviously been an extraordinary environment, so it's not necessarily fatigue as much as sort of an observation just in terms of maybe a greater level of conservatism to offset what continues to be a volatile environment. So kind of two parts there on the guidance. I'll pass it on after that.

Sure. First, I want to provide an overview of the current commodity update. As mentioned in our remarks, we are now forecasting a range of $1.4 billion to $1.6 billion for the year, with the midpoint set at $1.5 billion. This reflects an increase of $300 million. We're experiencing record-high prices in fiber, particularly in Yook, where we observed sequential growth in prices through June, culminating in historical highs for that month. Additionally, we're seeing elevated prices in other pulp grades, which is a key factor in our forecasts. Regarding energy, particularly natural gas, prices in Europe have surged tenfold compared to last year. This is particularly impactful for our Western European U.K. business, which has a substantial tissue segment that is energy-intensive, and it influences our projections. We also see rising distribution costs, primarily on the international side, affecting our cost expectations. On a positive note, we are beginning to see a decrease in resin prices, which is a significant element within our cost structure. It's worth noting that over the past two years, we've faced an incremental cost increase of $3 billion, which translates to a reduction of over 1,500 basis points in margin that our business has to navigate. This brings me to your question regarding the conservatism in our guidance. We have made our best estimate based on current market conditions. Our cost-saving initiatives, such as FORCE, have been factored into these projections. Lastly, our pricing performance has been encouraging; our teams effectively executed pricing strategies in the second quarter, showing improvement compared to the first quarter. This pricing success will also influence our outlook for the second half of the year.

I'll just add to that, Kevin. Regarding the guidance, it's challenging since Nelson is still new and doesn't yet have a full understanding of our addition process. However, for the future outlook, we are confident that we are in that range, though it currently leans towards the lower end. There are two major factors to consider. One is the unpredictability of input costs, which we are assessing based on what Nelson mentioned. This could vary significantly. The second factor is related to volume. We've noted that volumes have performed slightly better than we initially expected despite the pricing changes. We may see some improvements in the second half, but that remains uncertain due to various factors, including weather events and COVID-related disruptions. Overall, we believe we are estimating appropriately and feel confident we are within the expected range.

Our next question will come from Chris Carey with Wells Fargo Securities.

Nelson, you commented on margins being a key focus of yours going forward. In KCP, we saw some sequential deterioration there, again despite the top line. I was wondering if you can give some insights on what you think is needed based on your early analysis of the business there to return to historically what is more of a mid- to high teens margins or whether that target even looks realistic anymore.

Sure, Chris. Our targets and the way I view it are that the mid to long-term target margins for KCP remain unchanged at the high teens. We are committed to achieving that and have plans in place. It's essential to remember that our KCP business has been most affected by COVID, due to reduced travel and the shift to remote hybrid work. This has impacted our business, but we have seen a recovery with high single-digit top line growth, and washroom sales are already over 90% of pre-pandemic levels. In North America, we're at the very high end of that recovery. However, margins did slide a bit in Q2 due to two main factors: the acceleration in commodity costs affecting tissue during that period, and the timing of our pricing changes, which took effect in late May in North America, while we acted sooner in Europe. It's worth mentioning that on a sequential basis within the quarter, we observed an increase in gross margins in June, indicating that as the pricing adjustments take effect, our margins are recovering in the latter part of the quarter. We anticipate this trend to continue into Q3 and Q4. Looking to the second half of the year, we expect the impact from commodities to lessen compared to the first half, despite the additional costs we’ve implemented. Another critical aspect is productivity; our team is focused on rightsizing and managing the business properly, and we have a robust pipeline of productivity initiatives that should yield positive results. I remain optimistic about what the team is accomplishing and our commitment to restoring the business to the high teens margins we have seen in the past.

KCP is an important business for us and I believe it continues to present a significant growth opportunity. We are currently experiencing demand fluctuations in the short term. However, the global professional market is large, diverse, and contains many underserved areas. We've faced some noise in our demand due to various factors. The washroom segment is recovering, but we are comparing ourselves to last year's substantial increases in PPE and gloves, as well as other segments of our safety business and wipers. Despite these challenges, we still see a strong growth opportunity. Regarding offices, where we have some exposure, that segment may not fully recover to its previous levels, as I don't expect everyone to return to the office full-time. This will lead to changes, but we view that as our starting point for growth. There remain numerous opportunities for us to innovate and better serve our end users.

That's very helpful. I just have a couple of questions on Europe and I'll jump back in. Just in the personal care business, it's the first quarter in a while, maybe five years, excluding the Texas storms, where volumes have gone negative. But it looks to be happening all almost entirely in Eastern Europe within the overall global personal care business. Can you just comment on what's going on in that market specifically and whether you think that headwind could persist here? And then just secondly, on the cost side in Western Europe, Nelson mentioned tissue businesses being very energy-intensive. Comment well taken. Just with natural gas availability looking like it could get even worse, given some news this week, can you maybe just talk about how you're framing or preparing for potential risk of force majeure because of lack of energy or paying any surcharges to procure low availability of natural gas? Just these types of situations seem to be coming ahead, so just curious your thoughts there.

I'll begin with personal care and then Nelson can discuss the energy and supply aspects. Overall, D&E showed strong pricing performance this quarter, with 8% organic growth. We're paying closer attention to volumes because they are slightly declining in our market shares across D&E. The primary impact on volume in D&E came from Eastern Europe, largely due to the effects of the war impacting Russia and Ukraine. Despite these challenging circumstances, we continue to operate in the region, including in Ukraine, and are working on rebuilding our business there. Organic growth has decreased in low double digits as we've reduced operations in Russia. While we are focusing on growing our presence in Ukraine, we are also ensuring compliance with all sanctions, which does have some impact on volume. I hope this addresses your questions regarding volumes.

Yes, that was very helpful.

Right. And then to address the energy question, Chris, I mean, a couple of things. I mean, one, as we all know, the energy situation in Europe is pretty dynamic. And yes, the natural gas situation is something we're staying on top and developing contingency plans as we speak, and the team is really working thoroughly through it. We don't have details to share today but our teams are really on it, and it is a priority for us. I will highlight, I mean, in Germany, we only have one factory. So again, it's not like we have a concentrated risk just in one of the key markets where this could be one of the biggest challenges at this point.

Yes, in Western Europe, the operating conditions remain quite challenging and volatile. Our pricing and organic volume increased in the low double digits, with price rising by double digits and volume growing by high single digits. Despite being a developed market, the consumer has shown resilience. Our teams are doing an excellent job navigating this difficult environment. We are closely monitoring the situation, and the team is effectively managing operations in these tough conditions.

Our next question will come from Steve Powers with Deutsche Bank.

Sorry. Thanks, I was on mute there. So I guess, just maybe you could build a little bit on the costs just to clean it up a little bit. So given where we are in the year, natural timing lags in the supply chain, your hedge positions, I guess my inclination is to say that your line of sight to the $1.4 billion to $1.6 billion in higher cost is now fairly well locked in. Is that the case? Or is it more that you still see realistic risk that the $1.4 billion, $1.6 billion could still shift around if we saw further cost volatility? And if so, is it the energy bucket that's the biggest swing factor? Or is it equal across energy and pulp and distribution?

Yes, I might say locked-in is an interesting term because some of our biggest commodities, there's not a traded market for. Yes. That's the issue.

The key point is that some of our main commodities aren't as liquid as others we trade, so not everything is locked in at this moment. Currently, based on our projections for the $1.5 billion midpoint, we anticipate that $875 million will be recognized in the first half of the year, and another $625 million will be recognized in the second half, depending on what we know right now. There are various factors that could change this. We expect fiber prices to stay high based on current market conditions, as indicated by the indices, but some easing is anticipated in the second half of the year, particularly in Q4. This is our current projection, although the situation remains fluid.

Okay, so as your contract for the next year regarding pulp and fiber comes up, it seems there’s a contracting season. At this point, you're hoping for some relief during that season because current prices are likely much higher than what you contracted in 2021.

Yes, Stephen. I'll jump in here. We have mentioned before that we have negotiated material prices, but we don't disclose the details of those contracts. It's reasonable to expect that fiber prices will remain high in Q3 before easing somewhat later in Q4. Energy and distribution costs, especially international distribution, are where we are seeing more volatility, and we will monitor this for the rest of the year.

Yes, that's helpful color. If I can just pivot on a different topic, we've talked a decent amount already at the start about consumers having or being expected to have a sharper focus on value going forward. And I guess maybe you talked about how that manifests in your categories and how you're pivoting to meet the consumer intersection of enhanced value. I guess, just to get underneath that a bit more, do you see that more in consumer tissue versus personal care? And as you're moving in that direction and theoretically, competitors are moving in that direction, how do you balance the desire to kind of go where the puck's going versus pushing so hard on the value side of things that you actually entice trade-down and kind of create a problem that you might not have had if you and the whole industry had moved in that direction? Just how you think about that balance of going where the consumer is going but not necessarily enticing them to go there.

That's a great point, Steve. The situation is quite clear. When we listen to the earnings reports from our large customers, it's evident that there's a segment of consumers in developed markets like the U.S. who are opting for lower-priced options, but this doesn't apply to all consumers. In developing markets, there might be a higher number of price-sensitive consumers, especially in places like Brazil where government subsidies during tough times like COVID were less prevalent compared to the U.S. Consumers in those areas may feel more pressure. We're observing this trend in personal care and tissue products. Typically, in the U.S., a consumer trading down may not swap brands entirely but instead choose smaller pack sizes to make purchases more affordable in the short term. There are various strategies we implement with our customers to effectively adapt and merchandise for consumers. However, we need to remain mindful of not shifting the entire market in that direction. There are still many consumers who, despite economic challenges, find our categories affordable and are interested in premium options, allowing us to maintain growth. We see this reflected in the continued strong performance and innovation in our high-end products. For instance, we've achieved double-digit organic growth in China, even in a category facing declines, thanks to enhancing consumer benefits. Over the past couple of years, we've upgraded our product lines significantly, which is evident in our momentum in diapers across developed markets. We are gaining significant market share in key areas, including a three-point increase in the U.S., nearly two points in China, and four points in South Korea, which is our second-largest market. We aim to meet consumer needs effectively—some consumers seek premium quality, while others are looking for better value, and we're addressing both needs.

Our next question will come from Jason English with Goldman Sachs.

Congrats on that market share momentum that you just referenced in personal care.

Jason, I want to point out that we are slightly behind our goal of growing market share in over half of our markets. In recent years, we have been successful in two-thirds of our markets, but currently, we are falling just below half, a couple of points under 50%. We are monitoring this closely. While we are performing well in developed markets, we are experiencing some pricing challenges in developing and emerging markets, leading to wider price gaps. We are paying close attention to this situation.

I appreciate that observation. It seems that you are experiencing a slight lag in that area of the business. Additionally, there appears to be a decrease in the Pro business as well, which I would like to revisit. You mentioned some fluctuations related to COVID comparisons. However, even when looking back to 2019, your current volume seems to be lower, now in the 20s compared to the high teens previously. This indicates a decline relative to 2019. While I understand that offices are a factor, it appears that office occupancy has improved sequentially. Why then is your volume decreasing sequentially? Can you help clarify what is occurring within that segment?

Yes. Several factors are at play. Firstly, I would say that professional demand is improving overall. For the quarter, organic growth was in the high single digits. Specifically, North America saw an 8% increase, while our Dispenser and Equipment segment grew by 6%. The washroom segment is making a recovery, although a significant part of that growth can be attributed to pricing. Washroom sales increased by 30% this quarter, and when considering dollar amounts, we are at 98% of pre-pandemic levels; however, in terms of volume, we're still lagging. This reflects the substantial price increases we've seen in the Professional segment over the past couple of years, but volume remains soft. I don't expect the demand from offices to return instantly, but that's our current mix, and we need to build from there. We have a strong team, excellent innovations, and good momentum, with our market share increasing in the washroom business. Our ICON dispenser has been very successful with end users, and we have an enhanced towel offering, contributing to strong business momentum. However, it's important to recognize that we need to rebuild our business. Another factor to consider is that we are comparing against strong pandemic-related sales in categories like wipers and PPE, particularly gloves, which were significant sellers for us in 2020 and 2021, and those numbers have decreased this year. There are additional dynamics in play as well.

For sure, for sure, which is why I'm trying just to like look at 2019 and look at the volume of that because I appreciate the noise. And back to your comment on some areas where you've got some price gaps that you're trying to manage. Are we at a point where you would expect to start to maybe give some of the pricing back to get a little more promotional juice into the market to try to manage those price gaps? Or is it not meaningful enough to have to start to do some of those activities?

I wouldn't say that yet. I mean, again, overall, the way I'll say it, Jason, is I'm prioritizing and Nelson is prioritizing margin recovery in the near term. And what I will tell the teams internally, the conversation is like, I'm not after renting hollow share, right? And so I don't really want to jerk our teams back and forth. We're trying to deliver balanced and sustainable growth for the long term. We have to get pricing to improve the margins and restore our margins. That's part one. We want to grow our shares over the long term sustainably. Over a long term, and so we're going to monitor that. But again, I'm not ready to shift back and forth quite yet.

Our next question will come from Andrea Teixeira with JPMorgan.

So first one for Mike on pricing, and I know we obviously spend a lot of time on this call on this. But can you provide the magnitude of the new pricing announced in the U.S. last week? And if you embedded also more pricing in D&E where you took a pause now, given the elasticity is higher there, or even perhaps in Western Europe where the natural gas prices have been higher? And one for Nelson and Taryn, a clarification on the cost outlook. Are you using mostly the contracted prices that Taryn mentioned? And then what's floating is based on spot prices because I think she also spoke and Nelson spoke about potentially using some declines ahead on the forward curve. So just making sure that we have the assumptions that you're working with.

Okay. I'll start on the pricing, Andrea. Yes. If you track or go with the fact that we expect pricing to offset inflation over time, obviously, we'd like to get as much of that as soon as possible. And so if you looked over the course of the year, some of the pricing or inflation impacts hit outside of the U.S. earlier this year. And then more recently, there have been more impacts in the U.S. And so I'd say our pricing around the world has kind of followed where the inflation is around the world more directly. We did announce pricing in the U.S. last week. It was typical for what we've done in prior rounds, which is about a mid-single-digit increase. And again, we're still in the early stages of execution on that. And then we've announced similar actions at different times throughout the year in the rest of our markets.

Of similar magnitude, I'm assuming, or a higher magnitude? I'm assuming that TAM was higher?

Yes. I would say Latin America, generally, overall, we're up double digits on price and so significantly higher. That reflects what's going on in the local market there.

Okay. And then on the question around what prices are we reflecting in terms of our outlook. I mean, we based it off industry forecast, Andrea. I mean, that's the best view we've got for whatever we haven't covered. So that's there. I mean, and that's what we're seeing and what we will reflect in the forecast at this stage.

And Nelson, how much does it cover now, would you say, to track these prices and contracted prices? Or how much is floating, how much is saved? What change do you see?

Andrea, we don't disclose that bit so we don't get into disclosing that.

Right. And one last question about China. How much was the negative impact in the quarter for D&E? With the reopening, how much has improved, or has it not been significant? Are you still able to service the demand, considering your advantage over other competitors?

I'm not certain if I'm fully grasping the question, but I want to emphasize that China was a significant contributor to our success in the quarter. Overall, our performance there improved by double digits, driven by excellent diaper technology and effective digital execution. We gained a couple of market share points, with organic growth in the mid-teens, especially noteworthy considering the category has experienced a high single-digit decline over the past couple of years. This improvement is largely due to a strong combination of volume, mix, and pricing strategies. We have a positive outlook on our business in China, as our team has done a fantastic job despite challenging market conditions. While everyone faced challenges from COVID lockdowns, we were less affected because our manufacturing operations were not located in lockdown areas, and we have a flexible local team that created alternative supply solutions. Overall, we are very pleased with our performance in China during this quarter.

Yes. Congrats to the team.

Our next question will come from Peter Grom with UBS.

I wanted to clarify how we should view the timing of margin improvement in the second half of the year, specifically how much of the remaining $625 million we can expect to impact the third quarter versus the fourth quarter. I appreciate the insights on margin improvement, but there seemed to be an earlier expectation of potential margin expansion in the latter part of the year. While I understand that it will take time to fully recover the margin, based on the current situation, when do you anticipate seeing margin expansion?

Maybe I'll start, Peter. Right now, we're focused on restoring our margins. I remain confident that we can restore and eventually expand our margins over time. I mentioned this in January, but that was before we factored in an additional $800 million of inflation in our forecast. My confidence is still strong that we will be able to expand margins eventually, but the timeline may shift a bit due to the greater challenge we face in achieving that.

Yes. And adding to that, I mean, Peter, a couple of things. One, we did expand gross margins in Q2 by 40 basis points. I mean, we realized significant pricing already versus Q1. So we saw that sequential improvement in Q2. And as we head into the back half, and we don't give guidance on quarterly margins, but we remain confident that based on what we know today, we will continue to expand margins. I mean, the plans are in place. As a reminder, we will continue to realize pricing. And based on what we've got today and what we saw in Q2, that will play out in the second half. Secondly, we've got our FORCE cost savings, which will accelerate in the back half versus what we saw in the first half, and that's the second component. And then, as you said, there is a more subdued year-over-year impact of the commodities in the back half. So we'll see, as you mentioned, $625 million, which I'm not going to give the breakdown between Q3 and Q4, but we'll see that in the back half versus the $875 million that we saw in the first half. So that gives us the confidence based on what we see that we will see progressive margin improvement in the second half.

Yes. And I feel like, Peter, that our team has made great progress on pricing and margin recovery, even if it may not show up on the operating number. But for the quarter, our pricing didn't offset inflation overall, and I think that was strong progress. Now the additional work for us is, yes, the inflation forecast got bigger for the balance of the year, and so we've got to solve that as well. But overall, we feel good about our progress. We know there's more work to do. We're still confident we'll be able to expand our margins over time. And then, in addition, we all know commodities are going to revert and they always do. And when we do that, we're not going to rely on reversion for our margin expansion. But when it does do, it will accelerate our timeline.

That's super helpful. And then I guess maybe following up on that. I wanted to ask about how we should think about pricing and promotion, should we actually reach a deflationary environment. And I know historically, you've kind of held on to pricing as you don't typically price to peak inflation. But I just would be curious, just given the amount of pricing that's been taken over the past year, one and a half years, and kind of layering in that retail pressure that Dara was alluding to earlier, I mean, what, if anything, do you think could be different this time around?

Well, I think, Peter, the big thing is pricing promotion, there's a lot of things going on. But one, you're using it to support the brands. And for me, typically, that would be to support great innovation that you're launching that I find tends to grow the category a little bit more effectively. And what we're really after is overall category growth, and that's what the retailers are after as well. And so for me, pricing and promotion is a component, not an end-all. It's a component of an overall strategy or growth strategy for the business. That said, there are fixed costs in this industry, and so volume does matter, and so there's a tactical application of that. But if you look at the market, I think the input cost levels are so high. While promotion is, I would call it, at typical level, the depths are probably a little shallower than historically they've been. And I think that's reflective of the cost environment that the industry is working in. I don't know if that really addresses what you're asking.

No, that's helpful. I appreciate it.

There are no further questions at this time. I will turn the call back over for closing remarks.

Great. Thank you, operator, and thank you, everyone, for joining us today on the call, and this will conclude our call for our second quarter earnings release.

Ladies and gentlemen, this concludes today's event. You may now disconnect.