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

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

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

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

Your first question is coming from Chris Carey from Wells Fargo. Your line is live.

Good morning, Chris.

Hi, Chris.

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

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

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

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

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

Yes, Chris, I want to add that we are continuing to invest in our brands to ensure long-term balance and sustainable growth. We're aiming to create a positive feedback loop, and this year presents a great opportunity for that. The strong start gives us more confidence to increase our investments. We are looking for additional opportunities beyond what we initially anticipated at the start of the year because we are excited about our innovations. I mentioned some highlights in our prepared remarks, especially our new offerings for 2023, which I believe will be impactful. We're also focusing on enhancing our categories, which our retail partners appreciate. We aim to increase trial and penetration through advertising, which will be a significant part of our investment strategy. We see a tremendous opportunity to expand our reach even in established markets like bath tissue, as many consumers remain unsatisfied with the current options. We believe we are improving our brand propositions and are excited to invest more behind our brands this year.

Okay. All right. Thanks so much.

Okay. Thank you.

Thank you, Chris.

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

Great. Thanks. Good morning, everyone. Congratulations on the strong start to the year. I wanted to shift our focus to your organic sales growth guidance. You've chosen to keep it steady at this point in the year. Nelson, you mentioned the impact of previous pricing changes, which suggests a slowdown compared to the strong beginning of the year, estimating growth of about 1% at the lower end. The upper end would indicate around 3% to 4% for the rest of the year. Could you share your thoughts on the pacing of growth and how it divides between pricing and mix? Mike, I would also appreciate your updated insights on trade-down risk, which we've noticed in some of your categories. How does that inform your outlook? I have a follow-up as well.

Let me begin with the outlook for organic growth and how we anticipate it will develop throughout the year. Pricing has been the primary factor driving our top line growth over the last three quarters. In this quarter, our performance exceeded our initial projections due to stronger category dynamics than expected, and the impact of elasticities on volume was less pronounced than we projected. This contributed positively. However, pricing remains the key driver of our top line growth. As we move forward, we will begin to cycle through the pricing actions we implemented, particularly since we took the lead in many markets with these actions starting in Q4 2021. As we exit Q2, we will start to see the effects of lapping those price increases. We expect that the volume impacts we've experienced—7% decline in Q4 and 5% in Q1—will start to diminish as the effects of pricing fade. Simultaneously, as we move past the carryover pricing, we anticipate pricing itself to decrease, leading to a more balanced growth algorithm. We maintain our guidance of 2% to 4% growth and are aiming for the higher end, considering the performance in Q1 and stronger category performance due to the resilience of our consumers and ongoing innovation in the marketplace. Overall, we target the upper end of our guidance while outlining our expectations for the evolution of volume and pricing throughout the year. Mike?

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

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

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

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

All right thank you.

Thank you.

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

Hi Andrea good morning.

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

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

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

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

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

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

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

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

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

All right thank you, Andrea.

Thank you. Your next question is coming from Jason English from Goldman Sachs. Your line is live.

Good morning, Jason.

Hi Jason.

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

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

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

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

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

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

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

Thanks, Jason.

Thanks, Jason.

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

Hi Lauren.

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

Yes.

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

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

From a profitability perspective, margins in consumer tissue made significant progress this quarter. Historically, the story for KC in this category has been understanding the cyclical nature of the cost environment. By raising the bar, both the highs and the lows in margin percentage have improved. As we continue to innovate, could there be an opportunity for this business to achieve peak margins of 19% or 20%, which is an increase from the prior peak of around 18%? While not considering this year specifically, it's important to think about the potential impact on long-term profitability in this category.

Yes. When I took on this role in 2019, I mentioned that margin expansion was a goal. However, I wasn't expecting to face an additional $3.7 billion in costs and currency challenges at that time. The team has done an excellent job managing to offset many of these issues, as you may have noticed this quarter. Around the period from 2017 to 2020, our tissue margins in North America reached certain levels, and our current aim is to return to that range. With the strategy I outlined and the overall company approach to enhance our categories and broaden our markets, our long-term objective remains to achieve margin expansion through innovation and category development.

Okay. That's great. Thanks so much.

Thanks Lauren.

Thank you.

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

Hi, good morning, everyone. I was wondering if you could provide an estimate of the pricing adjustments you've implemented, particularly in relation to the $3.7 billion in costs. How much pricing have you taken in the past 18 months?

Yes, that's a great question. To explain the current situation and our recovery path for margins, based on our outlook for this year and the guidance we're providing, we expect to realize revenue growth management of around 85% of that $3.7 billion, give or take, by the end of this year. Clearly, this will not directly translate into a one-to-one recovery for margins. This is why our ongoing cost-saving initiatives will be vital, alongside our innovative efforts that align with our value design and other initiatives from the commercial team. I hope that gives you some perspective.

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

Well, I'm not exactly sure, but I suspect you're also seeing some timing issues related to pricing. As Nelson mentioned earlier, we priced relatively quickly compared to other manufacturers. So, if you look at it quarterly, you might see our pricing starting to decrease, possibly from next quarter compared to others. In many categories, we are at least one, and in some cases, like with diapers, three quarters ahead of the competition. If you consider it that way, it's not truly an apples-to-apples comparison. Regarding Scott, we have implemented significant price increases over several rounds, including double-digit increases from late 2021 through 2022, and we also took another round of pricing overall in the first quarter. So, the pricing has been extensive. I haven't checked on that specific issue, and we might need to follow up with you on that one.

I have another question regarding the Professional business. I noticed in the presentation that it's returned to 2019 levels. I assume this is related to sales or pricing. Can you provide an estimate on a volume basis, considering the current issues with vacancies? If the volume is still significantly below 2019 levels, does that create opportunities for optimizing the size of that business? Thank you very much.

Great question. Yes, revenue has surpassed pre-pandemic levels, primarily due to pricing, although volume remains below what it was in the 1980s. When comparing to 2019 levels, I don’t expect the volume to fully return, as we can all observe that offices are not filled to capacity and remote work is now common. However, we do anticipate regaining volume over time, albeit in different ways. We need to explore new channels and different markets to rebuild that part of the business. Do I expect to see growth in volume from its current state? Yes. Regarding structural changes, there might be some adjustments on our end. During that period, we relied heavily on external capacity to support our operations, so the impact of fixed costs is likely not as significant as you might think.

Thank you very much.

Okay. Thank you, Javier.

Thanks Javier.

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

Good morning, Steve.

Hi Steve.

Good morning. Thank you. I have a question, but I'll keep it brief due to time constraints. I want to clarify something. You've mentioned several positive factors from the first quarter that seem promising for the year ahead. However, the guidance increase seems to primarily consider the $100 million reduction in your commodity cost outlook. It appears that other potential upsides are either expected to balance out or suggest that you plan to reinvest in them. I wanted to confirm if this understanding is correct. It seems cautious, but I want to ensure that I'm accurately interpreting your outlook.

Yes, we definitely prefer to reinvest, especially in our strong commercial programs this year, which we are all very enthusiastic about. As I mentioned to Jason, let's see how things unfold in the second quarter, and we will keep the option open to reconsider our plans.

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

You're correct, and it's an important issue for us to concentrate on. Overall, we're satisfied with our start, and I'm particularly happy about the recovery in margins. However, we are not pleased with our market share performance. In Personal Care, our performance was even in about half of the categories, which is a bit softer than we would prefer. When looking at the business overall, it was slightly below that level. We had come off of 2020 and 2021 where we saw growth in more than two-thirds of our categories, so we're not satisfied with being at about half or just under half. We realize we need to improve. I would also say, Steve, that the softness in share is linked to our aggressive pricing strategy. Our pricing moves have been ahead of our competitors, who have lagged significantly. For instance, in some categories like North American diapers, we didn't align our prices until nine months post our initial price increase. Some competitors have taken advantage of that lag to gain market share. Additionally, we are still addressing some challenges. Not everything is operating smoothly within the company. We identified some areas in Southeast Asia last quarter, and the ongoing ramifications of the war in Eastern Europe are affecting our recovery efforts in Ukraine. While there's some softness in certain markets, we're addressing it. We're committed to achieving long-term market share gains, which remains a key goal for us. Although our market share performance was acceptable this quarter, we were not satisfied with it.

Understood. Thank you very much.

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

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