Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. It is now my pleasure to introduce today's first presenter, Brian Ezzell. Please go ahead.

Thank you, and good morning, everyone. Welcome to Kimberly-Clark's third quarter earnings conference call. With me today are Mike Hsu, our Chairman and Chief Executive Officer; and Nelson Urdaneta, our Chief Financial Officer. This morning, we issued our earnings news release and published prepared management remarks from Mike and Nelson that summarized our third 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 our latest 10-Q for further discussion of forward-looking statements. We may also refer to adjusted results and outlook, both of which exclude certain items described in this morning's news release. The release has additional information about these adjustments and reconciliations to comparable GAAP financial measures. And now, I'll turn it over to Mike.

All right. Thank you, Brian. Good morning, everyone. Our teams around the world continue to execute strongly in what remains a dynamic and challenging environment. I'm pleased with our continued organic sales growth momentum with 5% growth in the third quarter, reflecting broad gains in all of our segments. Our third quarter results also reflect ongoing volatility in the operating environment, which continues to pressure operating margin and earnings. Throughout the year, we've taken decisive action to offset persistent inflation with pricing and cost savings. We're making progress as those initiatives enabled sequential expansion of gross and operating margins in the quarter. As we near the close of 2022, we're maintaining our sales and earnings outlook for the year. We continue to manage our business with discipline and remain confident we'll restore our margins over time. We're executing our growth strategy to elevate our categories and expand our markets by putting the consumers front and center. We'll continue to invest in innovation and our commercial programs to continually sharpen the value proposition of our brands. We're committed to delivering balanced and sustainable growth over the long term as we work to fulfill our purpose of Better Care for a Better World. With that, we're ready to address your questions.

We'll take our first question from Lauren Lieberman with Barclays.

I would like to start with an update on the outlook for input costs. You've maintained the outlook for the year, and with one quarter remaining, we observe that pulp prices seem to be stabilizing based on market data, although some industry participants have reported differently. We have received numerous inquiries recently about European energy prices and their impact on your business. Any insights you could share would be appreciated. Additionally, I realize it's early, but I would also like to know about your expectations for 2023.

Yes. I'll start maybe and Nelson will give you his perspective. But overall, I'd say it's stabilizing but at a high level, and we're still experiencing some volatility. So I don't know if Nelson, you want to give a little more texture.

Sure. And Lauren, I mean, a few things there. I mean we've held our guidance for the full year in the $1.4 billion to $1.6 billion. And it's important to note that through the first nine months of the year, we've seen about $1.2 billion of these costs materialize. We did see sequential improvement in terms of the impact as we lap last year's $1 billion out of the $1.5 billion that impacted us in the second half of the year. So for the quarter, you would have seen a $360 million commodity impact versus $470 million in Q1 and $405 million in Q2. So the trend that we had talked about is playing out in Q3. Secondly, overall, we're not calling down because the reality is commodities remain elevated. The environment remains quite challenging, and we're maneuvering through it. We've seen overall a few dynamics that I'd like to highlight. First, on the pulp and fiber components, prices remain pretty elevated. Eucalyptus is trading today at around $1,600. That's an all-time high. And while the market is projecting for some easing at the end of this year, we have yet to see that play out. If we look at distribution costs, those remain challenging as well, especially on the international front. We have seen some giving up in prices on spot transportation in North America, but still, that's not offsetting the overall challenges we're seeing on a global basis. So net-net, we remain at the guidance that we had provided. And the messages I would say in terms of next year, right now, it's too early for us to provide any guidance on 2023. We'd still have the full year to play out. But a few thoughts that I'd share. One, we remain at historical highs in the whole commodity and cost structure. As a reminder, on a two-year stack, we're looking at $3 billion at the midpoint of our guidance today. And again, we have not seen any meaningful move versus our assumptions that we gave you back in July. Secondly, Foreign Exchange markets. We have seen volatility and challenges. As a reminder, we have about one-third of our profits coming from overseas. So that is something that we are taking into account in our outlook, but we will have to carefully watch as we think about next year. The underlying business environment remains volatile. As Mike said in his opening remarks, we're managing through it, but it's something we will take into account again over the next few months as we prep up to give you guidance in January when we talk about Q4.

All right, Lauren, you may have gotten more than you bargained for on that question.

No, it's great. I'll always take it. Thanks.

We'll take our next question from Kevin Grundy of Jefferies.

A question for me, just kind of zooming out a bit, Mike, just observations on kind of the elephant in the room, right? Observations on consumer demand and then elasticities. I guess as we kind of look at the quarter, elasticities are a bit better in tissue and towel, worse in Personal Care, at least versus our model. So maybe just comment on what you're seeing from a consumer perspective, any signs of consumer weakness that are at all worrisome to you? And then maybe you could just share your own thoughts on how the elasticities in the quarter came in relative to your own expectations and thoughts as we look ahead.

Okay, Kevin, I have a lot of thoughts to share. First, I want to highlight that I'm quite pleased with our effective implementation of our strategy despite the ongoing challenges in the market. Our organic growth momentum is strong. We did experience some softness in North American Personal Care, which I can elaborate on, but overall, consumption seemed fine. The fluctuations were more related to inventory changes and some supply issues we faced last year. On a positive note, our global pricing initiatives have been executed excellently and we've provided great brand support through our commercial efforts. As noted earlier, we saw high single-digit growth in all developed markets and high single to double-digit growth in key developing markets. In North America, we did see a decline due to the aforementioned supply changes. Additionally, our market share performance is reassuring; we're either maintaining or gaining in about half of our categories, particularly in Personal Care. We've been quick and decisive on pricing throughout the year, understanding that this might lead to some short-term share loss. However, our share performance seems to be improving in the latest quarter, which is encouraging. Regarding the market environment, we are experiencing some shipment volatility in North America, especially due to the impacts of last year's Texas storm. As for consumer behavior, I believe the overall consumer remains resilient, but we’re noticing a split in demand. We see two different patterns emerging mostly along socioeconomic lines. In developed markets like North America, many consumers still have higher savings than three years ago and are employed. While some may be cutting back on big-ticket purchases, particularly in our essential categories, there hasn’t been a noticeable shift in behavior. However, about 40% of the U.S. population is living paycheck to paycheck, which I personally understand. We are seeing changes in consumption patterns among this group, such as opting for lower count packs or trading down. It’s crucial for us to meet the needs of both consumer segments. Our premium offerings continue to flourish, and we must ensure we provide an appealing value proposition for more budget-conscious consumers. This bifurcation trend is something we’ve seen develop in many markets over the past three years, and it appears to be increasingly evident in developed markets as well. I'll stop there, Kevin, and see if you have any questions.

I'm sure there's a number of other questions in the queue, Mike. That's really helpful. I'll pass it on.

Our next question comes from Chris Carey with Wells Fargo.

I just wanted to follow up on that line of questioning around volumes, specifically in Personal Care, but perhaps from a bit different angle. It's harder for us to see, but just taking what you said about commodities and what we know about pricing, it doesn't look like you've experienced much notable volume deleverage to gross margins this quarter from the weaker volumes, but certainly, the operating margin performance was different. Can you just frame how do you think weaker volumes to the extent that sustains are expected to impact your P&L as you go forward, specifically between the gross and operating margin line? And just connected to that, how you would envision addressing some of the weaker volume performance that we've seen, whether in demand building? Or is it simply that your algorithm will change between pricing and volume such that you're still achieving your overall organic sales growth objectives?

Yes, I'll begin and then Nelson can provide additional details. Let me explain the volume performance, particularly regarding North American Personal Care, which I'm sure is on everyone’s mind. Our North America team has been effectively managing what I would describe as excess volatility in demand. As previously mentioned, consumption levels have remained stable. For context, in the third quarter, our total consumption increased by 4% in diapers, 9% in adult care, and 16% in fem care. It's important to note the impact of the storm in Texas last January and February, which temporarily halted our operations in early Q1 and resulted in significant shipment volatility. For instance, looking back at the fourth quarter of 2020, our consumption in December was up by 6%, followed by fluctuations of minus 7% in the first quarter, and then increases of plus 7%, 8%, 18%, 14%, and finally plus 6% last quarter. This clearly shows the significant variations we've experienced. It took us some time to recover from our supply constraints, as we faced material supply issues while being on allocation for much of last year. This quarter, our consumption stabilized, but we are comparing it to elevated shipment levels from the previous year when retailers were restocking after being on allocation. Overall, I am optimistic about our Personal Care offerings, as reflected in the consumption data. I do anticipate some ongoing demand volatility as we navigate various supply challenges and compare results from last year. Regarding volume deleverage, fixed costs are indeed a significant part of our financials. However, I don't foresee continuous volume issues in North American Personal Care; this should be more of a one-time occurrence. Globally, we feel positive about our volume performance, and our elasticities are aligning with expectations. In developing markets, we experienced a decline in volumes, primarily concentrated in Eastern Europe due to the current conditions there. Overall, we are pleased with our volume performance. Nelson, would you like to add anything?

Certainly. There are a few key points to highlight, Chris. First, the pricing realization we experienced this quarter has really accelerated, which is reflected in our margins as you mentioned. This aligns with what we discussed back in July regarding the pricing actions we took in the latter part of Q2 and into Q3. These actions are effectively counterbalancing some of the overall business deleverage. Second, we are beginning to compare against last year's commodity increases. While commodities are not decreasing, their year-on-year impact is becoming less pronounced. As a result, we are achieving, for the first time in several quarters, a favorable net pricing realization after accounting for commodities and foreign exchange. Regarding our segments, the only area where we observed a margin decline this quarter was in Personal Care. This was influenced by some one-time factors Mike mentioned, and while we've accounted for many of these moving into Q4, some will likely carry over. Additionally, there was a mix effect because North America Personal Care is our most profitable area within this segment, which played a role in those results. We're also maintaining a close watch on overall and fixed costs, with our teams taking all necessary actions to manage those effectively.

If I could just on just how you would address some of the volume pressure appreciating that there were certain dynamics in the quarter, which will fade as we go forward because of the base period, but just philosophy on addressing volumes. I know there's been some debate in recent quarters just around what is the right promotional levels and requirements for demand building. So perhaps you could just contextualize how you would look at supporting volumes over a sort of more medium-term horizon?

Yes, Chris, I am optimistic about our global commercial execution. This year has seen significant innovation, and I'm excited about our product lineup for next year, even though we're not discussing it yet. Our advertising is performing well, and our digital investments are proving effective. Our sales performance worldwide has been very strong, and overall, our commercial programs are functioning as planned. We'll continue to monitor the promotional landscape closely. In North America, I believe the current environment is fairly typical, having rebounded from the more suppressed conditions during COVID. Promotional frequency is now normal, though the depth might still be somewhat lower. However, we do not intend to drive our business through depth promotions, as it does not align with our high-road approach to brand building. We are well-prepared for various scenarios, and we are prudently creating action plans for different environments. Our strategy focuses on elevating and premiumizing our categories over time, which is the right long-term approach. We understand the environment we are in, and we have been effective at implementing value plays when needed, aiming to ensure they are productive and profitable while meeting consumer needs.

Our next question comes from Steve Powers of Deutsche Bank.

And apologies, you may have been talking a little bit about this with Chris. I got called away from the call for a brief second there. But just as you march from 3Q to 4Q, it implies, I think, either a lot of SG&A leverage or a really big step-up in gross margin sequentially and year-over-year. I guess I just want to play that back to you and figure out kind of what the main drivers are? Because I get that the inflation gets a little bit less impactful as you go through Q4, FORCE picks up. But it just seems like you need some other variables to really move the needle as much as I think is implied in the guidance. I just want to play that back to you.

Sure. So Steve, I mean, a couple of things I would highlight. I think first, I'd start by reiterating what happened in Q3, and you would have seen an acceleration in overall pricing realization. And as you mentioned, our expectation, which played out in Q3 of the year-over-year impact of commodities beginning to subside even though they remain elevated. So as we look into Q4, our outlook in which there is an implied step up like what we saw in Q3, the drivers behind it would be, first, is around pricing realization. As a reminder, we've implemented additional pricing actions in the third quarter, and those will be fully realized as we go into the fourth quarter. So we do expect in the fourth quarter another step-up in terms of price realization as we look at our overall outlook. Secondly, would be on our FORCE productivity savings. In the third quarter, we delivered $80 million of FORCE savings, which is an acceleration of around $30 million versus the average we were delivering in Q1 and in Q2. We expect this trend to continue going into Q4. And then last but not least, is stabilized input cost inflation. Again, this does not mean that we expect overall cost to come down. It's more of the year-over-year impact. As of today, we have a year-to-date impact of around $1.2 billion in commodities. And at the midpoint of our guidance of $1.4 billion to $1.6 billion for the full year, this would imply that for Q4, we should see another quarter of a reduction sequentially in terms of overall input cost inflation. So when you combine those three, that's what gives us the building blocks for the continued step-up sequentially quarter-over-quarter on EPS for the fourth quarter. I think it's also important to note that for the full year at the midpoint of our cost guidance, we are at around $1.5 billion of input cost inflation. And as we exit the year, we expect to more than fully offset not just the commodity impact, but also the Foreign Exchange based on our current assumptions and what we've modeled out. So that is something that will be playing out in Q4.

Okay, that makes sense. That's helpful. I wanted to ask about something else, and I understand that 2023 is still quite a distance away and you're not really discussing it much. However, consensus estimates suggest that the company will achieve above-average EPS growth next year. This seems to indicate that the price increases you mentioned are likely to remain effective, even as costs potentially decrease. I would like to know your thoughts on how comfortable you are with this assumption as you consider it. Additionally, I appreciate your previous comments about the timing effects in North America and how they influenced shipments. We are noticing that private label shares in Personal Care, particularly diapers, are gaining traction. I hope this improves, but as you implement further price increases and if consumer confidence declines, there are concerns that these share trends may not recover. This raises the question of whether, if a deflationary environment occurs next year, you would need to reduce some of these price increases. There’s a lot to unpack here, but I'm really considering consumer demand trends, your pricing strategies net of commodity costs, and your perspective on the consensus expectations being above-average for next year.

Yes, Steve, maybe my comfort level is probably not comfortable addressing what '23 looks like yet. And I hate to do that. But I think the underlying is because of what we're seeing right now in the marketplace, which is, one, the volatility in the marketplace, which we experienced in Q3 and it's going to continue; and then the other part is we're still rolling out our plans. And so I really feel would love to comment, but I don't feel like in a place where it would be reasonable for us to comment at this point. I don't Nelson, if you have a different...

Yes. No, I fully agree, Mike. As I said to Lauren in terms of her ask, one of the variables that, again, we're looking into today as we build plans and everything is where we stand today. The reality is commodities have not subsided. They remain pretty elevated, and Foreign Exchange is becoming and has become a bit of a challenge as we look forward. We've got three months to go for the year, but it's a variable that we're going to have to take into account, Steve, as we look forward, too. So again, too early for us to comment, but those would be kind of my thoughts in terms of where we stand today.

Yes, I want to add that we are managing our business with discipline and we are confident in our ability to restore our margins over time. As noted, we have faced $3 billion in inflation over the past two years, which accounts for a significant 1,500 basis points of gross margin. We have taken decisive action in response. The positive news for the third quarter is that our pricing fully offset both inflation and foreign exchange impacts. Therefore, we continue to expect sequential improvement. As many of you know, commodities will eventually return to more normal levels. While we are not relying on that for our margin recovery, it could potentially enhance our leverage. We are taking a comprehensive approach to address inflation and run our business effectively, and I hope you all understand this.

Our next question comes from Jason English of Goldman Sachs.

A couple of real quick housekeeping questions here. For guidance, I appreciate you reiterated EPS, but you didn't provide an update on your EBIT outlook. Can you provide that now? Has it changed at all?

No, no. In general, it remains where we're at.

Excellent. And then, productivity. You have a nice uptick in the fourth quarter implied by the full year guide here on FORCE savings. What's driving that? And would it be unreasonable for us to look at that and assume that, that run rate continues through next year, therefore, implying that what was under delivery this year is going to be followed by over next?

Certainly. FORCE does not follow a consistent trend. We haven’t observed that in the past, and I don't expect it to change in the future, as it fluctuates throughout the year with both increases and decreases. This is important to remember since it reflects a net number, which incorporates various challenges and costs we may encounter. As you noted, there is an expected increase in Q4. The key takeaway is what we achieved in Q3, where we reached $80 million compared to an average below $50 million for Q1 and Q2. This shows significant acceleration, leading to a year-to-date total of $175 million. We anticipate further growth in Q4 due to our strong global productivity pipeline. For next year, our teams are focusing on building gross productivity, and I want to emphasize that aspect. We will review the deliveries as we progress through next year. However, I cannot commit to projecting the run rate we’ll exit with this year or Q3 as a benchmark for the first quarters of next year. It is premature to make that determination.

I want to highlight that this is a net figure, and our gross productivity has consistently risen. Our teams are doing an excellent job in boosting productivity. However, inflation affects not just our inputs but all areas of the profit and loss statement, which unfortunately means that some of it nullifies our gains. While I could express concerns about the teams' overall effectiveness, it would be akin to complaining about trucking costs, which are beyond their complete control. We need to navigate these challenges, which is why increasing our gross savings is essential.

Our next question comes from Andrea Teixeira with JPMorgan.

I have a couple of questions. Mike, could you elaborate a bit more on the price elasticity included in your guidance for the fourth quarter? I understand that this suggests a significant decline in organic sales. I'm aware that the comparison for Personal Care was 11% for the same period last year. It appears that your pricing, at least according to the Nielsen data, looks somewhat lower than your competitors. Is there anything regarding promotions that we should consider? Additionally, with respect to your selling, general and administrative expenses, is there anything specific you would highlight for the quarter that might continue into the fourth quarter? Also, was there any shifting of expenses from the fourth quarter into the third? Lastly, can you clarify on the Suzano deal? Will you be receiving any proceeds from the sale of Neve and the Mogi plant? Is there anything related to that, or will royalties be paid over time, and how will that impact your HSC material, considering that the company has not provided you with materials relating to Suzano?

That's a great list of questions. Let me try to address a few points. First, regarding pricing compared to our peers, we've generally been quicker to adjust our pricing in most markets, which might explain any lag you're noticing as we've been adjusting our prices for over a year. Overall, we've implemented our pricing strategies early and aggressively. We've been ahead on pricing for Huggies until recently, perhaps in the last couple of weeks. In general, our pricing aligns with our strategy, and the good news is that the pricing in most markets is moving in a direction similar to ours. This doesn't apply everywhere, but that's my overall perspective. As for elasticity, in the first half, our volume growth outpaced the elasticity models, which reflects consumer confidence bolstered by factors like unemployment reports and stimulus measures. However, there's been a shift in some markets, and now the elasticities we're observing are more in line with our original models. Consequently, we're seeing more volume in relation to our pricing changes, which is noticeable. From my earlier comments about market segmentation, we're observing this more in our value-oriented products, such as Snug & Dry diapers, which represent our value tier in the U.S., or Scott 1000. These are areas we'll monitor closely to ensure we're effectively meeting consumer needs. That sums up my overall thoughts. I believe Nelson will address some additional questions. Did that cover the first part adequately?

Yes, that's very helpful. Regarding SG&A, as we aim to be more mindful of the consumers who are feeling stretched, is there anything we should know? Your gross margin performed better than expected, but your SG&A was somewhat higher. Should we consider any specific timing around promotions or marketing expenses, or is it primarily inflation affecting all areas?

Yes, Andrea, let me address that. First, it's important to consider the total spending for the third quarter across our SG&A and advertising and promotion, which was roughly consistent with what we observed in the first and second quarters. There was no significant increase or change throughout the year. What you would have noticed instead is an increase in the percentage year-over-year in these areas, primarily due to last year's one-time adjustment to incentive compensation that we discussed during the third quarter earnings call. That accounted for most of the change. It was a one-time event we were comparing against. Aside from that, as we've mentioned consistently throughout the year, we are committed to investing in our business, which we believe is essential. As Mike has pointed out, we are fully dedicated to sustainable and long-term balanced profitable growth. The only way to achieve this is by continuing to invest in our business. We are putting resources behind our brands, innovation, capabilities, and our people to ensure we are well-positioned for the future. Those investments are ongoing, and we've maintained them, but there was no notable increase in the third quarter compared to the second or first quarters.

Okay. That's fair, thank you. And on the Suzano deal?

Yes. I want to make some comments that relate to the tissue agreement. Overall, Andrea, I hope you see it aligns with our approach to managing our portfolio. I truly believe that we have significant growth potential in our categories and markets. We plan to focus on markets and adjacent areas that will enhance our growth and margins. I've mentioned for several years that we will consider exiting businesses that do not support our growth or margin goals. This specific transaction allows us to concentrate on our faster-growing, higher-margin Personal Care business in Brazil and creates a better future for both the Neve brand and the Brazilian tissue business. The Neve business, along with Suzano, will be better equipped to respond to the unique dynamics of the local market. We fully anticipate our strong partnership with Suzano will continue. I'll leave it to Nelson, as we aren't ready to discuss any details related to the transaction.

Yes, absolutely. Overall revenue from the transaction being divested is just around 1%, and profits are immaterial. Other than that, we are not going to disclose any terms at this stage.

Our next question comes from Anna Lizzul of Bank of America.

I wanted to follow up on your comment about consumer bifurcation in relation to their sensitivity to pricing. Are you observing that premiumization is performing well in certain categories compared to others? Additionally, are there any specific products that are maintaining momentum, indicating that consumers are still willing to pay for premium solutions despite the challenges posed by inflation?

Yes, I would say that overall, our premiumization strategy is working across markets, but it varies more by sub-brand or tier. The value tiers are typically more price sensitive right now due to inflation, which has affected many households in the U.S. It's more about specific sub-brands or tiers in our terminology, and we are focused on driving our premiumization strategy and offering more value through our premium products. We are confident in our innovation lineup for this year and have more exciting features coming next year that we believe consumers will appreciate. We're also making the necessary adjustments to prepare for a potential recession, which includes emphasizing the value our brands provide. In some situations, we may alter pack counts or sizes to ensure that consumers have access to affordable options.

Great. Any specific product lines you can call out as seeing resilience in those?

Well, Huggies. Again, I think we feel great about our diaper line up, our adult care line-up in North America. But if you go around diapers, China, we continue to have mid- to high single-digit growth, double-digit growth in feminine care. And so we feel good about that. Latin America, where consumers are very value-oriented because of what's happening in the economy the last few years and our organic performance was up strong double digits in the quarter. So overall, across our markets, we saw strong organic growth, and that's because we feel that we've continued to improve the products. At the same time, we are recognizing that we are taking price to offset the commodity headwinds.

Our next question comes from Javier Escalante of Evercore.

I would like to come back to the U.S. And if you can, Mike, comment on how you see retailers approaching pricing and the profitability of their own private label operations in tissue versus diapers? And I have a follow-up.

Yes, Javier, thank you for joining us. I've mentioned this before, but we maintain a very productive and collaborative relationship with our retail partners. Having spent 30 years in the industry and experienced various market cycles, we approach things with a long-term perspective. Over the last decade in the U.S., we realized the importance of getting our own operations in order. Our focus has been on growing product categories in collaboration with our retail partners, and we're proud to have been rated #1 as a customer organization in a recent survey, demonstrating that our partners view us as true collaborators. Interestingly, despite our service levels in diapers being quite low in the first quarter of last year, we were still rated #1 in logistics, which I believe reflects our partnership approach. We generally base our business planning on mutual growth objectives, prioritizing both our sales and profit growth while being mindful of our partners' margins as well. We're committed to creating win-win scenarios. In response to your question about diapers and private label, I don't see significant changes in their profitability strategies regarding distribution or product lines. However, we are focused on delivering an overall growth plan for the categories and taking ownership of our part in that process. Regarding price sensitivity, we acknowledge that there's been a lot of pricing pressure. Many of our customers cater to value-conscious shoppers, and we understand their need to adapt to the market. As prices have increased, it's essential to remember that we are all looking to achieve growth and maintain margins. We will continue to seek ways to ensure mutual benefits and drive category growth effectively.

That's great to know. And then basically, Mike, again, on tissue versus diapers, you feel I mean, from the outside, that Scott is very clearly positioned on the value side. Huggies has been premium, and I appreciate that you mentioned that I believe a competitor just follow price increases and that we do not have an all-channel view. But if you can walk again on the drivers of your confidence that Huggies didn't take too much pricing and you are competitive on the pricing front vis-a-vis your main branded competitor and private label because in our data, we do not see private label following price increases.

Yes, Huggies. I wouldn't say that we've priced ourselves too high. Our goal is to restore and eventually expand our margins over time, and we've set our prices with that in mind. We're very aware of our product offerings, our lineup, and our commercial strategies. One reason we've made these pricing decisions is our commitment to growing the category and driving growth, which requires marketing. In previous categories I've worked in, pulling back on investments led to commoditization, which is detrimental for brands. We've been disciplined in our approach. We noticed that we had advanced our pricing more than some competitors earlier this year and last year, creating a bit of a price gap. However, that gap has largely closed in the past few weeks. Therefore, we anticipate slightly improved performance for Huggies. We feel optimistic about our innovation lineup and the value we provide to consumers. Additionally, we will focus more on Snug & Dry, our value tier in the U.S., ensuring it has the right accounts and price points on shelves to compete effectively.

Our next question comes from Jonathan Feeney of Consumer Edge.

I would like to follow up on a point made earlier in the call regarding the return of promotional activity to pre-COVID levels. Looking at data from providers like Nielsen and IRI, it seems that merchandising across the U.S. is still a few points below normal, currently sitting in the mid-30s percentage range, down from a peak of around 20%. Could you provide some insights on how the resumption of promotional activity might affect demand? Additionally, Procter mentioned household inventory levels last week, and I know different companies measure this in various ways. Earlier, you referenced all channel consumption data, which I assume is still a relevant measure. I'd appreciate your perspective on the current state of household inventory both in the U.S. and globally, and its potential impact on demand for 2023. Thank you.

Yes. A couple of points to mention. I used to be one of the highest users of Nielsen throughout my career, and there are many variables connected to measuring promotions. As I mentioned earlier, the frequency in tissue products likely returned to normal around the third quarter of 2020, possibly by the end of last year. In the Personal Care segment, I'd say frequency has stabilized at the beginning of this year. The other important measure to note is depth, which is now shallower in both Personal Care and tissue than it has been historically. This change seems to be linked to the inflation that many companies are experiencing. When looking at the percentage of volumes sold on promotion, it's slightly lower than before, which aligns with what you were observing. Overall, I consider promotions to be 'normalized,' but they're probably still a bit below historical levels at this time. That covers part one. Do you have any follow-up, Jonathan?

No, that makes a lot of sense to me. I also confess to spending way too much time with syndicated data. So it’s nice to have a…

No, no. I'm proud. I feel like I invented half of these measures. But the other side that you asked about was inventories. I mean there are a couple of points. Certainly, I mentioned earlier that we are cycling some retailer inventory build back. At the same time, and I think we mentioned in our prepared remarks, there were some retail inventory reductions late in the quarter. That was a topic that came up at the last investment conference I attended. That remains a consideration. I would say it’s typically the case that every other year or maybe every year retail inventory changes, and that's part of what we get paid to manage. In terms of household inventories, we think they've returned to normal. There was significant relevance in Consumer Tissue, where there was quite a build-up. I would self-critically say that we weren't very good at predicting how household inventories would evolve. Over the past years, there has been a lot of volatility in tissue demand. In the second quarter of 2020, our tissue demand, specifically facial tissue, was up 30%. Then a year later, it was down 27%. Historically, facial tissue is very stable and its volume growth is highly correlated to population growth. At this point, we feel like it has returned to normalized levels. However, it might be fair to say that many people are carrying more facial tissue than they were three years ago.

Our next question comes from Lauren Lieberman of Barclays.

I'm back. It's okay. I can let it go. I'll follow up offline. Thank you.

No, we’re good.

We've approached this topic from various angles through different questions. How do you view the relationship between volume, pricing, and market share? One common inquiry I receive regarding your business is about the impact of private label products. My understanding is that this trend is typical within your categories and tends to emerge in various economic cycles. It's expected that private label will capture some market share and that consumer behavior will shift in that direction. As you navigate the ongoing high inflation and implement the additional pricing you've mentioned this quarter, should market share be the primary metric to assess the business's health at this time? Or should aggregate organic sales growth be the focus? What metrics do you use to determine if you've gone too far or not far enough?

Lauren, that's a great question. This highlights the ongoing challenge of management in the consumer sector. As we've stated for years, we are committed to achieving balanced and sustainable growth for our shareholders. It's been interesting as we've explored this issue within the organization, as many have questioned what balance and sustainability mean. We are focusing on four key metrics: organic growth, profit growth, market share, and cash flow. Internally, the team used to rely on this role to determine our priorities, but when I talk about balance, it's important to note that I want all four of these metrics to move positively. We're taking proactive steps to ensure the company is positioned for long-term sustainable growth. Given the supply and input cost challenges we've faced over the past few years, improving gross margins is currently my top priority. I am confident we will return to pre-pandemic margin levels, and we are making progress in Q3. However, we won't compromise the business to achieve this. While we are monitoring our market share, we acknowledge that during our recent transition, we moved ahead of the market, which may have resulted in some share loss. We feel this trade-off was necessary to foster margin recovery. At the same time, we are actively investing in innovation and enhancing our marketing efforts. I believe our marketing and digital initiatives have improved significantly, and we are proud of that progress. I am encouraged to see that we are performing well in about half of our markets, though it's slightly lower than the results we saw in 2020 and 2021. We recognize that our competitors are formidable as well, so we cannot expect the same results every year. It’s a complex balancing act, but I feel our organization is rising to the occasion and understands our objectives. We are focused on margin recovery while also being attentive to market share. That was a lengthy response, and I hope I addressed your questions.

And at this time, it appears we have no further questions. I'll turn it back to management for any additional or closing remarks.

Okay. Thank you all for joining. We look forward to sharing our fourth quarter and full year results with you in January.

This concludes today's call. Thank you for your participation. You may now disconnect.