Good morning everyone and welcome to Kimberly-Clark’s First Quarter 2024 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 Chris Jakubik. Sir, the floor is yours.

Thank you and hello everyone. This is Chris Jakubik, Head of Investor Relations at Kimberly-Clark, and welcome to our Q&A session for our first quarter of 2024 business update. During our remarks today we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures today and these non-GAAP financial measures should not be considered a replacement for, and should be read together with GAAP results. You can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at investor.kimberly-clark.com. Before we begin, I am going to hand it to our Chairman and CEO, Mike Hsu, for a few quick opening comments.

Okay, thank you Chris. Hey, before we get into the Q&A I would like to start by saying thank you to all my colleagues at Kimberly-Clark who worked really diligently over the past few years to build our strong foundation and to deliver these Q1 results that provide a very good start to our next chapter of growth. Our strategy to elevate our categories with breakthrough innovation and expand our markets is working. We are effectively navigating the ever-changing external dynamics of today’s new normal while driving our consumer-centric culture. We are making the company better, stronger, and faster. I am very proud of our progress to date and I am confident that we are going to continue to leverage our core strengths to achieve our potential. We are on an exciting path and are well-positioned to deliver durable growth and sustainable shareholder returns. So with that, I would like to open it up for your questions.

Your first question is coming from Bonnie Herzog at Goldman Sachs. Your line is live.

Good morning Bonnie.

Hi, good morning. Hope you are all well. First, I have a quick question on your guidance. You reported a better than expected Q1 so curious to hear why you didn’t pass through the full Q1 beat? And then also hoping for a little more color on the better than expected volume growth you saw in the quarter, what were the key drivers behind this, and ultimately how sustainable is this moving forward and curious, was there any pull forward for instance or should we expect to see continued volume improvements as the year progresses? Thank you.

Sure, Bonnie, I'll begin and then Nelson can explain our reasoning behind the decision not to pass through the full Q1 improvement. Overall, I'm pleased with our strong start. Our organization is functioning well in what we now consider our new normal. This is the first year in several where we've maintained a stable business despite various geopolitical challenges. The solid performance this quarter can be attributed to a few key factors: one, an increase in volume, which you noticed, and there was no pull forward of sales; in fact, the opposite happened, as we saw a reduction in retail inventory during the quarter. However, the inherent strength and consumption levels exceeded expectations, compensating for that reduction. Additionally, market shares are shifting in a positive direction, contributing to our favorable outlook regarding volume momentum. Furthermore, with stable input costs, the strong productivity this quarter has a more substantial impact on our bottom line. This drive is what underpins our robust Q1 results, and we're very optimistic about it. The team has done an excellent job managing operations despite ongoing global conflicts, particularly in volatile regions like Argentina. We're confident in our ability to navigate through this new normal. Nelson?

I'm pleased with the start of the year, as Q1 was notably strong, benefiting significantly from our Chinese New Year execution in China. Specifically in March, the positive trends continued, with double-digit volume growth in China for the quarter. In North America, although we experienced the expected trade de-stocking in January, March brought improved consumption, which positively impacted the quarter's volume. Looking ahead for the rest of the year, we are cautiously optimistic despite ongoing geopolitical challenges and a slight uptick in some commodity prices. In Q1, we observed a single-digit increase in pulp and fiber costs compared to Q4. For the full year, we anticipate total net input costs to reflect around $250 million in inflation, which aligns with our January guidance but remains a point of attention. As we enter the latter half of the year, we expect an $0.08 profit headwind from the divestiture of our Personal Protective Equipment division, which is new information compared to our January outlook. Additionally, we plan to increase our investments as the year continues. Our advertising spending has already risen by 50 basis points year-over-year, consistent with Q4, and as we boost our innovation efforts starting in Q2, we expect to see another 50 basis points increase in investments for the remainder of the year.

Alright, thank you.

Good, thanks, Bonnie.

Thank you. Your next questions come from Anna Lizzul from Bank of America. Your line is live.

Hi, good morning, and thank you for the question.

Good morning, Anna.

I was wondering if you can comment on market share. A competitor mentioned a misstep on their part with a lack of innovation at the lower end of the pricing ladder in toilet paper, which caused some pressure there. So, I was wondering if that helped you to pick up share and if you can comment on how you're progressing in terms of market share also on a weighted category basis, that would be helpful? And then as a follow-up, volumes were clearly better than expected despite some retail inventory reductions in the quarter that you had anticipated for Q1, so I was just wondering to what extent this ended up impacting the quarter and how should we be thinking about it for the full year? Thank you.

Thank you for the question, Anna. I'm really encouraged about our market share progress. I anticipate further improvements as the year unfolds. In the last quarter, we saw an increase in nearly 60% of our market category combinations, though on a weighted basis, it remained flat. We evaluate market share through both of these metrics. Notably, North America showed improvement, with increases or stability in 6 out of 8 categories. We faced challenges in 2023 largely due to supply constraints, but this is now the second consecutive quarter we've had unconstrained supply. This performance indicates our improved ability to deliver products and resume promotions. For instance, Kleenex saw over a 400 basis point increase in market share, driven by a successful social media campaign focusing on cold, flu, and allergy season, alongside the return of merchandising efforts that had been paused for several months. We still believe we are under-indexed in merchandising compared to the overall category, but we're returning to more typical merchandising practices, which gives us confidence in our overall performance. In markets like China, we experienced a couple of hundred basis point increase in share, particularly with diapers during an excellent execution for Chinese New Year, resulting in double-digit volume growth despite the overall category being down about 10% in that region. Overall, we feel very optimistic about our business performance and the volume delivery.

And just to build on Mike's point and to your question on what to expect on volumes for the balance of the year. As we said in January, 2024 should mainly reflect the pacing of our innovation pipeline and in-market programming. We still have the innovation and a lot of the programming coming into place as we go into Q2 and the second half of the year. Hence, why, from an overall perspective and volume plans, we don't see any changes versus what we had planned back in January and we're taking into account the volume over delivery that we had in Q1.

Thank you, very helpful.

Okay, thanks Anna.

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

Hi Lauren.

Hey, good morning. Hey, guys. So first thing I wanted to ask about was the productivity in the release. In the prepared remarks you called out $120 million realized this quarter. And I was just curious how to think about that in the context of the $3 billion in productivity and also $200 million of SG&A savings that you articulated at the Investor Day? So that's just my first question.

Nelson will comment. I will say a good start and we're tracking well.

Yes. And just to give a little bit of color on the $3 billion and the $200 million Lauren. So overall, first, it's based on the integrated margin management process that we unveiled at our Investor Day at the end of March. This has really given us a new enterprise-wide visibility, discipline, accountability, end-to-end across the whole value chain. It's about a focus on driving lower costs at a total delivery cost, which is a very different approach than what we had in the past, and we've been working on it for the last year or so. As you said, we had a strong start to the year on gross productivity. I'll reiterate, this is non-procurement-related savings, the $120 million that we discussed in the release and in our prepared remarks. We also had additional savings that were delivered from the procurement side of the house, and that's embedded in our net input costs, which again were not that much of a headwind in the first quarter because of these efforts. As we think about the cadence and what we expect to have on the $3 billion, we're off to a good start on that number. We would expect that to be roughly linear over the next few years as we deliver the whole $3 billion. In terms of the $200 million of SG&A savings, as a reminder, we will go live with our new operating model on October 1st of this year. So we don't expect much of that $200 million in savings in SG&A to materialize this year. That will really come into play more in 2025 and 2026. But again, really a good start to the year in productivity and procurement-related savings.

It’s great to see the operating leverage on SG&A this quarter, especially with a 50 basis point increase in advertising as a percentage of sales, which indicates solid performance in that area compared to the past few years. In light of that, where do you stand on reinvestments? Following discussions from the Investor Day, many were curious why certain initiatives haven't been implemented yet. I think it might be related to the necessary investments to develop capabilities for future growth. Is it accurate to say that the current level of reinvestment is sufficient for us to expect operating leverage on SG&A, excluding advertising, before realizing the $200 million savings by 2025 and 2026?

I’ll start by saying that we are pleased with our investments in advertising, and we have made notable progress, with improvements of 200 to 300 basis points since I took on this role. However, we likely still have room to increase our spending compared to our peers. I mentioned during Investor Day that while it's not necessary to match their expenditures, I do want to continue ramping up our investment. You're right that there were two main factors influencing our investment strategy. Back in 2018 and 2019, I didn't believe we had the capabilities necessary for substantial spending, which is why I hesitated to increase our investments at that time. Over the last five years, we've developed what I would call world-class commercial capabilities, largely thanks to Alison's contributions. Our returns on advertising investment, especially in digital, which we have transitioned to over the past decade, are significantly improved. Additionally, we faced two years of extreme inflation, which affected our operating profits. During that time, we were focused on recovering margins, alongside addressing various geopolitical challenges. There’s a lot happening, and while we’re moving in the right direction, we still have work to do. We believe we can manage the business effectively to achieve a strong top line and bottom line while also investing in the long-term growth of our business.

Okay, great. Thanks so much.

Your next question is coming from Nik Modi from RBC Capital Markets. Your line is live.

Good morning. Just a quick clarification, if you could just provide context on the destocking in terms of where you saw it? And then the actual question is obviously, the feedback broadly speaking has been the consumer is under pressure though your results today obviously, you seem to have outperformed a lot of that backdrop or commentary. So just Mike, would love to get your perspective on kind of category health, consumer health, kind of what you guys are seeing. I sense part of the guide and not flowing everything through is because maybe there is some uncertainty but I'd love your thoughts on that?

Yes, thank you, Nik. Those are great questions. We did experience a reduction in retail inventory in the first quarter, which was anticipated, and we were prepared for it. It resulted in about an 80 basis point negative impact on global sales and around 170 basis points for North America sales. This behavior is typical, as retailers usually seek to optimize their inventory levels during the December and January period. We have a strong partnership with retailers, and they appreciate our logistics capabilities. We are generally among the first to adopt new inventory management systems that retailers implement. We are well aware of the situation and it has been incorporated into our full-year outlook. I don’t expect significant changes going forward, as what we anticipated for Q1 came to pass. Additionally, our volume was slightly better than we had expected, which more than compensated for the inventory impact. Was that clear enough regarding your question on retail inventory, Nik?

Yes, Mike, can you specify which categories you are referring to? Was it Femcare that T&G mentioned? I am trying to get a clearer perspective on desock.

No, for us, everything seems typical and normal. Regarding the consumer environment, particularly in North America, I would characterize it as resilient. There's still a division in consumer behavior, but this division is contributing to category growth. Overall, category demand remains strong, with our categories in North America seeing an average increase of about 5%. Given that we focus on daily essentials, there’s low substitution in our categories, which is evident in the overall demand. It’s worth noting that premium products are growing significantly, especially in developed markets like the U.S., China, the UK, and South Korea, and we’re also seeing demand for premium products developing in emerging markets like Brazil. However, it’s clear that middle to lower-income households appear to be more financially constrained based on the economic data. The trade down to lower-cost options is limited in some categories, particularly in adult care and certain household towels, but we have a detailed tracking system across every category, monitoring various dimensions closely. While trade down is limited at this moment, we aim to provide more value to consumers at all levels of the quality spectrum. This means that we are improving all of our products. Long-term growth for us will come from enhancing our products, strengthening our premium offerings, and elevating our categories. We also want to cater to value-oriented consumers, and we have major brands like Scott, Bath, and Kleenex Mainline that serve this audience effectively.

Excellent, thanks Mike.

Okay, thanks Nik.

Thank you. Your next question is coming from Chris Carey from Wells Fargo. Your line is live.

Hey, Chris.

Hey, good morning. Just a couple of follow-ups. Just on China and the U.S., right. So in China, clearly good numbers but I also think one of your peers delivered quite good numbers as well. And I guess the question in a way is, are we seeing the category turn in China benefits from perhaps Chinese New Year, are you both just gaining relative market share? Clearly, it's a strong number, so I'm just trying to understand this like a bit deeper, I guess? And then secondly, on the U.S. it's really the same question on relative outperformance to category. I know you've mentioned it a bit more, and I'm more interested in the China comment, but if you can just expand there because that stood out to me as well? Thanks.

Yes. I'll start with China. Our China team is excelling, having consistently achieved double-digit growth over the past five years, making it one of our top-performing businesses. There are several factors driving this performance, including effective execution during Chinese New Year. We produce an exceptional product, which I believe is the best available, and consumers are enthusiastic about what we offer. Our strong digital strategies also enhance our relationship with consumers. To address your question, we're primarily gaining market share. The category itself appears to have declined by about 10% this past quarter, reflecting birth rate trends and other factors. We are the market leader in China, but our current market share stands at a mid to high-teens percentage. We are optimistic about our position, although the category remains fragmented, presenting opportunities for further share growth. Additionally, we are making strides in our mainstream business. Our strategy is to excel across all tiers—good, better, best—by accelerating innovation at the top and quickly integrating it throughout our product lines. We are actively doing this, and we can see it reflected in our results in China and similarly in the U.S.

And then if I could just one follow-up, it would be clearly, pulps are on the move. It's a bit more on the front end of the curve than in the back half of the year 2025. This is going to be perhaps the first moment to really kind of show the ability to work through this cycle. Just any thoughts on the moves that you're seeing and the types of actions that you might defer to if these moves prove durable and even accelerate between pricing, productivity, and whether you see any potential kind of margin issues on the horizon or if this feels very much manageable at this point? Thanks.

I will start by saying that this situation seems manageable at the moment. I consider this to be a more normal year for Consumer Packaged Goods than we've seen in the last three or four years, characterized by a stable input cost environment. While it isn't deflationary yet, it's slightly inflationary but remains relatively stable, which is a departure from recent years. We have strong productivity plans in place, and if input costs stay stable, we can perform well in this environment and benefit from that productivity. Additionally, after experiencing a lot of demand volatility due to COVID and other factors, we are beginning to see demand stabilize. With these two elements, I believe we can operate effectively. We are aware of demand signals concerning various environmental changes, and we believe we have accounted for these in our current forecasts.

Sure. To build on what Mike was saying, Chris, I want to highlight a few things. We've developed substantial capabilities over the past five years to navigate fluctuations. If we experience a shock similar to what occurred two to three years ago, it’s a different scenario to manage. However, as Mike mentioned and we indicated in January, we find the current situation manageable. To reiterate what we discussed in January, we projected net input costs of $200 million to $250 million, which included currency, other costs, and commodities, where we still anticipate deflation for the full year. Currently, we are looking at the high end of that range, which we also find manageable. It's important to note that core commodities like bulk resin-based materials and energy costs in dollar terms are slightly less favorable today than in January due to some increases expected for the year, yet they will still provide a tailwind. We expect distribution, logistics, and labor costs to remain inflationary this year. For our non-U.S. operations, currency will pose a headwind since they purchase pulp and many inputs in hard currency. Overall, this explains our position. Additionally, we anticipate input cost inflation will be less pronounced in the first half of the year, following the trends we observed in Q3 and Q4 of 2023, and extending through Q2. We do expect an increase as we move into the latter half of the year, but it is all incorporated into our outlook. The main difference now is that we are leaning toward the upper end of the range we previously provided.

Yes, Chris, just to calibrate you. I think, Nelson when we're looking at a couple of hundred million of inflationary impact, just to calibrate you in 2021 and 2022, we took on $1.6 billion and $1.7 billion, respectively. That’s kind of why we feel like it's manageable. The scale is totally different. The other thing is, as Nelson points out, we've changed how we manage the business in some ways to try to become a little more predictable. We have better tools than we had maybe five years ago.

Totally. Just to build on Mike's point on the tools, as a reminder, we have a very strong pipeline of productivity initiatives. We're looking out three years and I've been chatting about this for the last few quarters. That pipeline remains strong. You would have seen that non-procurement-related productivity was very strong getting out of the year, and the team is very confident in our ability to continue to deliver, not just in this year, but in the following two to three years, which builds on our ability to deliver on the $3 billion commitment of overall gross productivity in the next five years or so. That’s built into how we're looking into cost and inflation for the next few quarters.

Thank you very much. Very helpful.

Okay, thanks Chris.

Thank you. Your next question is coming from Steve Powers from Deutsche Bank. Your line is live.

Good morning, good morning, thank you. Hey, two questions if I could. The first one builds on the conversation just having with Chris around commodities and managing it through the cycle. I guess I'm curious as to the steps you've taken to better maneuver through input cost cycles and essentially better protect this year. Does that include different ways of sourcing and contracting and hedging but in effect, pushes out the cost curve as we would typically know it for Kimberly-Clark? I guess what I'm thinking about is that in the past, if we saw reinflation like we have year-to-date, we'd be thinking about that kind of flowing through and impacting the latter third about a quarter of the current fiscal year, kind of a six-month, maybe six to nine month lag. It sounds now like you've got better visibility. I'm wondering how much of that has just pushed out that reinflation into 2025?

Hey, maybe I'll say a couple of things. One, Steve, is I think the analyst community and the investor committee made it very clear to me when I came into this role that one of the issues they had with KMB is the earnings volatility. I've been very cognizant of that fact. Over the past five years we've worked pretty hard to reduce some of the underlying volatility in our business. Nelson, with an outside perspective, has really worked hard to bring some different kinds of tools into our thinking. We've been applying that over the last couple of years and we feel very good about that. Certainly, there is inherent volatility in our business certainly in pulp. One would think, at some point with the super cycle of inflation that we have on pulp, it's still elevated and at some point, it needs to come back. That said, I think we've built the right tools. Nelson, you may comment about what we're doing there.

Sure thing. Just to build, the integrated margin management approach, Steve, that we've been working on for the last year or so really addresses part of this volatility. It is end-to-end as we chatted on March 27th, and it looks at all the elements that drive total delivery cost as well as margins. It starts with building muscle around revenue growth management, and that's very important. What price backs do we have for the different channels, and how do we tackle that, including promotional activity, etc., which is crucial across all the geographies we work in. Secondly, are the tools that Mike was talking about on how do we handle costs. We don't reveal what the contract structures are that we have in place or the hedging activities, but we have gotten into much more proactive risk management to be able to have visibility into costs and give us time to react. What do we react with? We react with productivity initiatives and elements of revenue growth management. That’s a big difference in how we were approaching it five years ago and we've been building that muscle over time. That drives visibility into the productivity element, which right now we've split, and we're being very clear of this as the productivity within the four walls. That's the $120 million that we talked about. And then we have productivity and procurement, which is embedded in our net input costs. That clearly gives accountability across the supply chain on how to drive lower total delivery costs or at least manage through the margins. Yes, I'd say it’s muscle we've been building over the last five years. We’re not immune to moves in commodities, but the visibility we have today and the ability to react is different than what we had in the past.

That's very helpful. The next question may be brief since you've already addressed it; feel free to tell me to read the transcript if needed. I apologize for joining late. In the prepared remarks, you mentioned your plans to exit some private label businesses. I understand those plans are still being developed, but you did mention potential impacts for 2025. If you have any further details to share on that today, I would appreciate it.

Just to clarify, Steve, that question wasn't asked, but it's an important one. I wanted to highlight that we are strategically focusing on differentiating our brands through proprietary, science-based innovation. This was a key theme we discussed at our Investor Day. For context, our private label production accounted for about 4% of our global sales last year. The initiatives we announced today are expected to reduce that figure by about half by the end of 2025. It's important to note that decision-making involves multiple parties, so I won't get into specifics, but as we prioritize science as our competitive edge, the investments we're making in new personal care core technology for our diapers, feminine care pads, and adult care, as well as our efforts to shift towards natural forest-free materials, will require significant capital. We are making substantial technology and capacity investments, which means we need to be more selective moving forward about where we allocate that capital. This underpins some of our decision-making, and we expect our exposure to private label could decrease further in the future.

Just to add further color on what we would expect from a bottom line standpoint, Steve, it should be consistent with what you're seeing in the top line. We’re working through supply chain transitions, repurposing, and related cost opportunities within the context of our whole network optimization initiative, which is one of our three strategies in the supply chain strategy that we unveiled at Investor Day. We will have more to say as we go into 2025 guidance period.

Okay, that is good color. Thank you. Thank you both.

Thanks. If you could take maybe one more question, that would be great.

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

Javier, how are you?

Hello Mike, good morning everyone. I do have kind of like a quick clarification to Lauren's questions first because it's in the context of guidance versus what is incremental in terms of the restructuring and whether it's sensitive to me from the outside is kind of like coming through earlier. Basically, the $120 million in savings that you flagged, are they part of the $3 billion that you spoke of a month ago or not, and then we can address the other piece if you don't mind?

Yes, the short answer, Javier, is yes, it is part. We said that our new chapter started in Q1 of this year, and that's part of the five years commitment to deliver that. The 120 is part of that and then there's an element of procurement savings that we're not disclosing today. We are committed to disclosing the entire savings, including procurement, annually, so you get a perspective of how we're tracking against the $3 billion that we committed to.

Congratulations on the early start. It seems the new organization will be launching in October, which I initially thought would be in 2025. If savings are coming in sooner, why is the guidance indicating otherwise? Your transcript mentions faster revenue realization from FOREX and significant savings of $3 billion from restructuring. While I understand the desire to be conservative, if we interpret your numbers literally, it appears that projections for the remainder of the year should decrease. Is that the consensus you're aiming for?

Well, I'd just say, Javier, we're still early in the year, and we feel really good about our start. We feel very confident in our performance this year. But that said, there's still a lot of uncertainties in the world right now, both in terms of the geopolitical situation and the effects that could have on global demand. I probably would say, yes, we're taking a prudent approach to make on our call. But certainly, encouraged by our start to the year and would love to drive to a very strong result this year. Nelson?

Yes. Just to build on Mike's point, Javier, a couple of things. We're focused, obviously, on margin trajectory over time. Margins will move quarter-to-quarter. They have to do with country and category mix, timing of our innovation pipeline, as well as changes in absolute productivity delivery. Productivity delivery is not linear. The timing of when projects come online and how quickly we realize the benefits, we have an estimate, but again, you got to get them through. We have a full outlook for the year, and that's embedded there, and we're very encouraged by how the whole year started, but we have a lot of activities still coming our way, including a very strong innovation pipeline for which we're going to be putting back money into the business. We're going to be stepping up investments at least 50 basis points for the balance of the year. If we see opportunities to invest more in the business and more in our transformation to accelerate it, we will. So we're taking all of that into account and also considering the sale of our PPE business, which we've built into the forecast, which is about a headwind of $0.08 for the balance of the second half of the year.

Well, I will take that as a conservative guidance. Thank you very much, okay.

Thank you, Javier.

Thanks, Javier.

Great. Well, thank you everyone for joining us today. For those of you who have follow-up questions, Aishwarya and myself will certainly be available for follow-ups. So thanks again, and we look forward to seeing you going forward.

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