Good day and welcome to the Kimberly-Clark Third Quarter 2023 Earnings Call. It is now my pleasure to turn the floor over to your host, Christina Cheng. Ma'am, you may proceed.

Welcome, everyone, to our third quarter 2023 earnings conference call. Before we begin, please note today's presentation will include forward-looking statements. Actual results may vary materially from those expressed or implied in our forward-looking statements and you should not place any undue reliance on our 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 materials which are found in the Investor Relations section of our website. Participating in today's call are our Chairman and Chief Executive Officer, Mike 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 on our Q3 results and our outlook before we open the floor to Q&A. With that, I will turn the call over to Mike.

Thank you, Christina. We delivered another quarter of strong results. I'm proud of how our teams around the world are executing our growth strategy. Our innovation and commercial programs are contributing to the top line momentum with improving volume and market share trends and strong gross margin expansion. Based on the strength of our year-to-date performance, we are raising our full year outlook. Third quarter and year-to-date organic sales increased 5%, with growth across all segments. Personal Care, our largest business, led the way with 7% organic growth and importantly, 2% volume growth. Further gains in price and mix were enabled by strong revenue growth management capability, while volume improved sequentially for a third consecutive quarter. We expect volume trends to continue improving as we cycle prior pricing actions and continue to invest in our brands. We also continue to make excellent progress on margin recovery. Gross margin was up 530 basis points and exceeded 2019 levels, an important milestone in our commitment to restore our gross margin. Operating profit was up 18% and adjusted earnings per share grew 24%. Given the strength of our year-to-date performance, we're raising our 2023 outlook. We now expect organic sales to grow 4% to 5% and adjusted earnings per share to increase 15% to 17%. Global demand in our categories and for our brands remains resilient. In key markets, we're seeing a healthier balance of growth in both price and volume. In North America Consumer, organic sales were up 7%, with volume up 3%. Dynamics were similar in EMEA. In China, organic sales and volume were both up double digits despite ongoing category softness. While growth across D&E continues to be mixed, consumption increased double digits in Latin America. In our largest markets, our market shares are improving. In North America, we saw a sequential improvement in 6 of 8 categories. This was enabled by strong commercial execution, marketing activation, and a significant easing of year-to-date supply constraints in personal care and facial tissue. In the U.K., new performance-enhancing designs, price pack offerings and digital initiatives have resulted in over 200 basis points of year-over-year share gains for Andrex. And in China, we're continuing to see strong market share momentum with Huggies share up nearly 200 basis points in the quarter. As market leaders, we're raising the bar by elevating and expanding our categories with superior products and advantaged technology to address unmet needs. We're also committed to meeting consumers where they need us by offering a comprehensive range of products across the value spectrum. I'll highlight a few examples. In China, we introduced a breakthrough design for Huggies with innovation that whisks away both forms of baby mess to reduce the frequency of diaper rash. This is a foundational element of our global skin health platform. In North America, we launched new Poise 7-drop ultra absorbency pads and 8-drop overnight. These higher-capacity designs provide better absorbency in protection than daytime pads. Also in North America tissue, Scott 1000 lasts longer and dissolves faster and this has been core to Scott's powerful proposition among value-oriented consumers and that's why Scott continues to deliver robust growth in this important daily use segment. We believe our ongoing investment in advantage technology and brand communications will attract more consumers, increase usage occasions and ultimately grow our categories. I'm proud of the progress we've made to offset the multi-year impact of inflation on our P&L. Restoring margins to pre-pandemic levels was a milestone and not our end goal. We will continue to expand margins by executing our commercial and productivity programs to deliver balanced and sustainable growth for the long term. I'll now turn it over to Nelson to provide more details on our third quarter and outlook for the remainder of the year.

Thanks, Mike. We delivered another quarter of strong results across the company. Net sales were $5.1 billion, up 2% versus last year. Organic sales increased 5%, led by high single-digit growth in the Personal Care segment and in North America. Volume improved sequentially for the third quarter in a row to minus 1%, while price realization was 5% and mix contributed 1 point of growth. Currency negatively impacted net sales by approximately 200 basis points. The exit of our Brazil tissue business had an additional impact of 100 basis points, primarily on Consumer Tissue and our Professional business. Let me spend a few minutes on each of our segments. First, Personal Care organic sales increased 7% this quarter. Price realization drove 4 points of growth and mix contributed 1%. Volume turned positive for the first time in 5 quarters, with an increase of 2%. North America and developing and emerging markets organic sales grew in the high single digits, with volume increases in North America. Developed markets grew low single digits. Within Personal Care, each of our subcategories grew high single digits. Operating margin for the segment improved 250 basis points versus a year ago, driven by gross margin improvement, while we continue to increase our investments in our brands. Second, organic growth in Consumer Tissue was 2%. Within Consumer Tissue, North America delivered 4% organic growth, driven by healthy demand in dry bath and towels. Outstanding results from the U.K. drove 2% growth in the developed markets on top of last year's 11% increase. Operating margin for the segment was up 320 basis points versus a year ago, driven by revenue growth management and improved service levels. Finally, our K-C Professional business posted 4% organic growth despite challenging comparisons against last year. On a 2-year average, organic sales growth was 7%. Demand for our washroom business remains healthy and new commercial programs drove share gains in North America. Strong revenue realization was partially offset by lower volumes which were partly driven by the timing of select planned price adjustments. Operating margin for Professional improved by 550 basis points which was broadly in line with the first half of 2023. Turning to the rest of the P&L. Third quarter gross margin increased 530 basis points to 35.8%. Revenue growth management, input cost tailwinds, and about $90 million in FORCE savings more than offset other manufacturing costs and currency headwinds. The cost environment remains mixed. With favorability in raw materials offset by higher energy prices, currency headwinds, and higher labor costs. Other manufacturing costs were $30 million higher than last year. Between the lines spending was 20.7% of net sales, up 310 basis points versus a year ago, reflecting year-on-year inflation and investments in our brands, our people, and our capabilities. These results also reflect higher year-on-year incentive compensation accruals. Operating profit for the quarter increased 18% and operating margin improved by 210 basis points to 15.1%. This includes a currency headwind of $135 million or a 21 percentage point profit impact, of which 4 points were due to the translation of earnings from non-U.S. operations and the balance was largely driven by transactional costs. Lastly, the adjusted effective tax rate for the quarter was 22.5%, in line with last year's 22.3%. Our operating results, coupled with lower net interest expense and gains in equity income drove a 24% growth in adjusted earnings per share to $1.74 in the third quarter. Turning to balance sheet and cash flow highlights. Through the first 9 months of the year, we generated $2.3 billion in cash flow from operations. Capital spending was $549 million compared to $679 million last year. We expect to end the year with CapEx of approximately $800 million. Year-to-date, we returned $1.3 billion to shareholders through dividends and share repurchases. Now let me say a few words about our outlook. Based on our strong results, we are raising our full year guidance. We now expect organic sales growth of 4% to 5% and net sales growth of 1% to 2%, reflecting the impact of unfavorable currency and divestitures. We also now expect adjusted earnings per share growth of 15% to 17%. Currency headwinds continue to worsen given the recent strengthening of the U.S. dollar against the Argentine peso and other key currencies. Based on recent currency forward curves, we are projecting that currency will have a negative top-line impact of approximately 300 basis points and a bottom-line headwind of approximately $450 million, up from our previous assumption of $300 million to $400 million for the year. On input costs, we now expect headwinds of approximately $50 million versus the previous outlook of $100 million. Other manufacturing costs are now expected to increase by approximately $250 million compared to $200 million in our prior outlook. With gross margins returning to pre-pandemic levels in the quarter, we remain focused on driving cost discipline and productivity to create more fuel for growth. For the full year, we project FORCE to deliver $300 million to $350 million, reflecting favorable results from ongoing negotiations of our materials purchases. Continued progress in gross margin recovery puts us in a great position to advance our commercial programs and we continue to expect advertising spend to increase by approximately 100 basis points for the full year. Overall, we now expect operating margin to increase 170 basis points at the midpoint of our guidance compared to an increase of 150 basis points in our July guidance. Below the line, net interest expense is expected to decline in the high single digits. We have also updated our assumption for adjusted tax rate to 23% to 24%. These improvements result in our full year outlook for adjusted earnings per share growth of 15% to 17%. In closing, while we continue to operate in a volatile environment, we remain focused on executing our growth strategy, including continued investments in our brands and capabilities for long-term value creation.

So one question just around commodities. So clearly continuing to see favorability but we have seen some firming of late. And I just wonder how you see things over kind of near- to medium-term horizon from specifically the commodity basket? So basically trying to balance the fact that you're seeing favorability this year, you have hedges and there's timing impacts that aren't really going to impact this year but just how you're watching this overall commodity environment. I'm really asking this in the context of the potential need to take pricing against volumes and how that balance is going to work over the medium term?

Yes. I'll start with a quick comment and then ask Nelson to provide more context and detail. Chris, we finally saw a change in the cost environment for us. As you know, we've absorbed significant inflation over the past few years, and this year was expected to add about $500 million in impact from currency and commodities. In our first quarter, costs actually worked in our favor, which is a significant change for us. I do expect input costs to offer a modest advantage going forward, but I don't anticipate a substantial shift beyond that. Importantly, we believe it's our responsibility to improve margins over time, and we see plenty of opportunities to achieve that through both increasing revenue and managing costs.

Yes. To clarify what Mike discussed, we've seen developments in the quarter align with our projections from July. The savings are primarily due to pulp, distribution, and other commodities. However, we've noted increases in resin-based materials and energy costs as we look ahead. We recorded our first benefit of $75 million this quarter, following a negative impact of around $190 million in the first half of the year. Currently, we expect to be favorable in the fourth quarter by an amount similar to last year's fourth quarter. For the year, we anticipate a negative impact of about $50 million from commodities. Additionally, our FORCE program has been generating benefits, particularly through negotiations for materials without clear hedging markets. This has also contributed positively, as it involves our negotiated material prices. While we don't foresee significant tailwinds in the future, we are satisfied with our current overall cost position.

That's very helpful. And then 1 follow-up just on Personal Care and specifically the North America part of the Personal Care division. The volume growth there, can you just talk to the durability, what year ago comps had to do with that? And then within the North America business. I wonder if you can talk about what categories are driving this?

Yes, great question, Chris. I'll give you maybe a view and a couple of different components. One, I'd say overall North America consumption remains robust. And I think that really does reflect the essential nature of our category. Our consumption in North America for K-C was up mid-single digit with solid growth across all categories. And then, I think one thing I did mention in the prepared remarks is we are coming off some fairly significant supply constraints that affected most of our Personal Care businesses and our Kleenex business mostly throughout the year. And so we did have shipments that were a little higher than consumption. And I'll give you an example on Baby Care. Organic shipments were up in the teens, low-teens, while consumption was up about between 3% and 4%. And so that really reflects, I think, retailers getting their inventories back in position. We had been allocating shipments on Huggies since the beginning of the year. And we had a pretty significant supply situation with a supplier outage that has constrained our volume, is actually kind of constrained our share throughout the course of the year on a number of brands. And so we came out of that, we came off allocation across all brands at some point in mid-September. And so that's kind of why shipments probably ended up in the quarter a little bit higher.

And on the comp, Chris, also remember last year in Q3 in September, we had a bit of a destock; so that's also kind of weighing in. But very pleased with where we ended up. And more importantly, the underlying consumption in North America.

I also had a question on the better gross margins which clearly benefited from the lower input costs. I was wondering are you seeing a reversal of that recently with the input costs like the higher oil prices? Just to follow up on Chris' question. And also, if you can elaborate on what drove the better cost savings in FORCE this quarter?

As we move into the second half of the year, we maintain our expectation for favorable commodity conditions in the fourth quarter based on current assumptions. In the first half, we faced a negative impact of around $190 million, but reported a favorable $75 million in the third quarter. For the full year, we are estimating a net headwind of $50 million, so we still anticipate a favorable outlook for the fourth quarter. However, we are monitoring the oil markets closely, as changes there could indirectly affect resin prices. Although we have seen resin prices plateau, there are signs of slight increases, which we are observing. Overall, we expect commodity prices to remain down in the upcoming quarter. Regarding gross margin, we achieved strong savings from our FORCE program this quarter, totaling $275 million year-to-date. We have increased our full-year savings target to between $300 million and $350 million. We are pleased with these overall cost savings. It's important to note that gross margins do not grow in a straight line from quarter to quarter due to various factors that can influence them. Nevertheless, reaching a gross margin of 35.8% is a significant milestone as we look to enhance margins in the future.

Anna, I would like to add a comment. It seems that there is some underlying volatility in input costs, and we have been addressing this significantly over the last few years. In the long term, we believe it is our responsibility to continue improving margins, so we will stay disciplined with our revenue and cost management strategies.

And again, another item to add, Anna, as you think about the next few quarters is currency. Currency has gotten more volatile. I mean we've seen the strengthening of the U.S. dollar. And as you would have seen in our outlook, we did take up our expected headwinds from currency on our operating profit. And again, we're watching that carefully as we think about 2024.

Great. That's very helpful. And just as a follow-up, you did have the benefit from better-than-expected pricing in the quarter, while volumes were soft. So you did see a nice sequential improvement in the change of volumes from Q2 to Q3? I was wondering how we should think about the sequential improvement potentially from Q3 to Q4 in volumes?

We've experienced four consecutive quarters of improving volume. We were down by 7, then 5, then 3, and finally down by just 1. Importantly, Personal Care volumes increased this quarter, indicating solid progress and momentum. I mentioned in the prepared remarks that we expect this improvement to continue. While we are not ready to make predictions for 2024 yet, we have cycled through most of our major pricing actions from last year. Therefore, we anticipate that volume trends will keep improving as we implement our commercial programs and invest in our brands.

Your next question is coming from Javier Escalante from Evercore ISI.

My question is about pricing, especially in North America where you derive 80% of your profits and have more visibility. The pricing appears to be positive for private label, and promotional levels are lower than in 2019. However, we observed a slight increase towards year-end, particularly in tracked channels. Can you discuss what promotions are happening, which categories they involve, and if this is related to some of your categories coming out of allocation? I also have a broader strategic question to follow.

Yes, regarding your question, I’ve mentioned this before, and I believe we see trade promotion as a way to encourage trial, particularly for new products. That's how it fits into our marketing strategy. I'm not in favor of using promotions merely to temporarily gain market share. While it's true we're promoting below the levels seen in 2019, we've still been involved in some promotions. However, one aspect that complicates the analysis is the use of equivalent units as a metric. For instance, in the tissue categories, an equivalent unit consists of 10,000 sheets, while for diapers, it's 1,000 diapers. Specifically for our consumer tissue business, the Scott 1000 toilet paper contains 1,000 sheets, which is significantly more than what other brands offer, skewing the pricing analysis and making us appear slightly underpriced when evaluating the equivalent units. Overall, we have raised our prices, potentially quicker than other brands, and I believe our usual price differences have started to stabilize.

Very helpful on the note. Given the setup, do you think there’s a possibility that gross margins going forward could be higher than in 2019, considering the mix? If you add volume and mix year-over-year and we are running flat, do you believe it’s possible that we will operate at gross margins above 2019 levels, or is that something structural that cannot happen?

I'll start and then I'll let Nelson correct me. But I would say it's our job. From my perspective, we need to do it. When I came into this role, the three things we aimed to accomplish were to accelerate organic growth, reduce our earnings volatility, and importantly, enhance our margins. This was a fundamental goal for me. A challenge we faced during this time was COVID, along with demand shocks, supply shocks, and inflation. Over the past couple of years, we established an interim goal of restoring our margins, and I believe this quarter marks a significant point for us as we have returned to pre-COVID or 2019 levels. However, as we discuss internally, it's still our responsibility to enhance margins from here. We must maintain discipline in our commercial programming, innovation, revenue management, and also in our cost program, and I still see opportunities to expand our margins. Now, I'll ask Nelson to provide more specifics regarding the near term.

Yes, Javier, to expand on what Mike mentioned, we have been discussing this since we recorded our lowest gross margin of 29.8% about five quarters ago. Our goal has been to return to 35%, which is a milestone rather than a final destination. We've been making significant investments to build our organizational capabilities, focusing on revenue growth management, including pricing strategies and providing the right product packs, sizes, and formats for our diverse global customers. Additionally, we have prioritized strengthening our gross margin productivity pipeline, which remains robust. Our innovation efforts have also intensified, accounting for 60% of our revenue growth last year and contributing positively. By focusing on these three areas, we aim to improve our gross margins over time, which will ensure balanced and sustainable growth for years to come.

So two questions. The first one, just Nelson, maybe you could expand a bit on the other manufacturing cost inflation and the higher call for the year that you've made today? Just maybe a little bit of further detail as to the drivers there and where we are in that cycle as we look forward?

Sure. So as you indicated, we took our call from $200 million to $250 million through the first 3 quarters of the year were close to $200 million, just a tad below. And what's really driving this is a few things. One, keep in mind that a lot of the service inflation and lease inflation, et cetera and some cost inflation flow through this number. And it's being weighed in by some of the hyperinflationary economies that we deal with. So we're being impacted on that end because we've seen some costs accelerate outside of the U.S., Steve. So that's part of what's driving that $250 million based on where we're at, at this stage.

Okay. Mike, looking at the bigger picture, you mentioned the increased A&P and marketing spending this year. In general, there have been many strategic growth initiatives and commercial investments that you've undertaken. Considering the total investment you've made over the past few years in this area, how do you see your position in relation to your long-term strategic goals? Do you believe there is an opportunity or a need to continue investing at an accelerated rate as we approach next year? Will it be an investment year, or will you align investments more closely with sales growth? Or are you at a stage where you can start to leverage the investments made over the past few years for margin expansion?

Yes, I'm really pleased with the team. We are achieving our goal of balanced and sustainable growth. The organic momentum remains strong, and we have restored margins to pre-COVID levels, which is encouraging. We've made significant progress in our investments, enhancing our capabilities and innovation pipeline over the past five years. Our advertising investment has increased by a couple of hundred basis points, and we're now approaching 6% of overall sales, which is competitive in our industry. While it's less than our main global competitor, our strategy focuses on driving excellent innovation and commercial programming rather than simply outspending them. I don't anticipate that we'll consistently increase advertising investment indefinitely. There are opportunities for continued investment, but we also need to leverage our previous investments more effectively.

Your next question is coming from Andrea Teixeira from JPMorgan.

This is Shabana on for Andrea. I just wanted to ask you, can you please add color on your views regarding carryover pricing into 2024 and how to think about the possibly the need to roll back some of this pricing into 2024, especially with the retailers seeing some commodities coming in better? I mean I understand you just elaborated that pulp is lower but resin may potentially go up, especially with oil coming in higher. If you could just like, in aggregate, give us a little bit more picture?

Yes, I'll begin. Most of our pricing adjustments were made last year, and we did implement some pricing changes this year, so there will be a small carryover. However, I wouldn't say it will significantly impact our plans for next year. As we discussed regarding the cost environment, costs this year are still elevated after significant increases in 2021 and 2022, and we are not witnessing a substantial amount of deflation. We are starting to see some modest improvements that might last for a few quarters, but I don't anticipate significant inflation in the near term. We have adjusted some pricing, particularly in Europe’s Professional segment, due to rising energy costs that have since decreased. We will continue to modify pricing in certain markets where it makes sense. Overall, I believe our pricing is aligned with the cost environment we expect, and that environment is developing as we anticipated. I am proud of the team for successfully developing and delivering balanced and sustainable growth. Thank you for your interest in Kimberly-Clark, and we look forward to seeing you next 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.