Good morning, and welcome to Kimberly-Clark's Second Quarter 2024 Earnings Question-and-Answer Session. I'll now hand the conference over to Chris Jakubik, Vice President, Investor Relations. Please go ahead.

Thank you, and hello, everyone. This is Chris Jakubik, Head of Global Investor Relations at Kimberly-Clark, and welcome to our Q&A session for our second quarter 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 in our filings with the SEC. We will also make some non-GAAP financial measures today or discuss some non-GAAP financial measures today. And these non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. And 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'm going to hand it to our Chairman and CEO, Mike Hsu, to offer a few quick opening comments.

Thank you, Chris. Before we jump into the Q&A, I would like to start by saying thank you to my colleagues at Kimberly-Clark, who are working diligently on the augmentation of our comprehensive innovation and growth strategy, and delivered strong results for the first half. We're excited about the opportunity to accelerate investments to build our powerhouse categories and brands and our pipeline of innovation. We are effectively navigating external dynamics while driving our consumer-centric culture. We're making the company better, stronger, and faster, and we are turbocharging our ability to provide better care to consumers around the globe. I'm very proud of our progress to date. It bolsters our confidence in delivering our outlook for the year and our ability to ramp up our investments to further leverage our core strengths and 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'd be happy to open it up to questions.

Certainly. At this time, we will begin the question-and-answer session. Your first question is from Lauren Lieberman from Barclays. Your line is live.

Great, thanks. Good morning. I wanted to check in and talk a bit, Mike, about market share trends because the organic sales growth this quarter was really solid. Volumes were up, although there was an unexpected challenge from inventory destock. I also wanted to get your thoughts on market share trends, especially in relation to the competition and what you are observing with private label products. Thank you.

Okay. Good morning, Lauren. Yeah. Thanks for the question. Overall, I feel good about the progress we're making on market share. I do expect further improvement as we progress through the year. We were overall globally even on a weighted basis and up or even in about half of our cohorts around the world. That is progress versus the past couple of years where, if you recall, this time last year, I think we were up or even in about 40% of our cohorts. So, I think we've made solid progress, but there still remains plenty of work for us to do. As you may recall, Lauren, North America was a bit soft last year. That is improving. That softness last year was primarily due to supply constraints. The first half in North America on a weighted basis was flat and then up or even in about six of eight categories, and that continued in the second quarter. I expect further improvement in North America as we cycle some of those constraints from last year. We also had pretty solid gains on market share in certain brands across our focus markets or our other big five markets beyond North America. In China, Huggies was up 180 basis points in share. In the UK, Andrex, which is the leading brand, was up 350 basis points. In South Korea, Huggies has been up over 800 basis points since 2019 and was up over 300 basis points in the quarter. In Brazil, I think we were up about 100 basis points as we work to improve the brand proposition. So we're making progress, but as I pointed out, we're about flat on a weighted basis which signals that there's plenty of work for us to do.

Okay, great. I'm just curious, I know you mentioned a couple of market share positions outside of North America and China that have been very strong. But when do we start to see that translate into growth? Because I think one of the interesting parts of this strategy you've laid out is the shift in focus a bit, so that we can get more visibility into other areas of your business. But when should we start to see growth become more material in a way that moves the needle more in markets outside of the US and China?

Yes, I mean, you know, Lauren, I'd say we have a very proven playbook that we're really proud of and we're implementing that more systematically behind this wiring for growth initiative that we have. We've got great technology that you all haven't seen yet, which we're rolling out and we're excited about our launch that I mentioned in our opening comments on skin essentials in the US. So we've got a great technology portfolio. We’ve been investing in the past five years to build the right commercial and supply capabilities to accelerate performance. You're going to see a sharper focus on what we're calling our focus markets, right? Those are the US plus the next five markets for us. That said, I would say local conditions remain dynamic. And so, there's plenty of opportunity to tighten up our brand propositions on a market-specific basis. For reference, I'll just tell you. So Huggies, as I mentioned, was up in share in China. Kotex was flat, but grew high single-digits in the quarter. We'd love to get more share growing in China on femcare. In Brazil, Huggies was up. Kotex is the leading brand, or we call it Intimus in Brazil, the leading brand in Brazil. But share was a little soft and down about just a little bit less than 100 basis points. So we have some work there. South Korea, I said Huggies was up over 300 basis points, but bath tissue was down a little bit. So we have work to do around the world. Part of our strong start is going to afford us the ability to make surgical investments to get our good, better, best offerings where we think they need to be in the local markets.

Great. Thanks so much. I'll pass it on.

Okay. Thanks, Lauren.

Thank you. Your next question is coming from Dara Mohsenian from Morgan Stanley. Your line is live.

Hey, good morning, guys.

Hey, Dara.

So a pretty sizable margin and EPS beat in Q2, but it does sound like investments are going to increase in the back half of the year. So, Nelson, can you just discuss a bit the cadence of margins and EPS in the back half, how we should think about Q3, Q4, margin performance, particularly as the divestiture impact ramps up in the back half of the year?

Sure, Dara. Let me start by echoing what Mike said. I mean, we're very proud of our teams that have executed in the first half of the year, and we've gained momentum on a number of fronts in relation to our power and great care strategy. As a reminder, as we think about margins, our main focus is on driving profit dollar growth for margins, as we've stated, our milestones, and we're moving on that progression. Growth in the second quarter and the first half reflected solid volume mix-driven gains. Importantly, in some of our largest, most profitable geographies like the U.S., China, and the U.K., we saw solid volume mix growth, which is something we've been focusing on. As Mike said, it's key for our long-term algorithm. We delivered more than half of our profit objectives for the year in the first half, and this actually gives us flexibility for the second half to further invest in strengthening our brands and our innovation pipeline, especially as we manage through some of the challenges in the macro environment and some of the increased consumer pressure that we're all seeing. As we think of the cadence of the first half versus the second half on the top line, we would expect the second half to grow at a similar pace to what we saw in the second quarter with, again, volume and mix being key drivers of growth, while pricing will continue to play a lesser role sequentially. At the profits, four things to keep in mind: first, productivity delivery. It's been solid in the first half and ahead of our original plans, given the timing of some of the projects. We do expect a lower absolute dollar of productivity delivery in the second half, but still very strong overall for the year. Secondly, pricing net of costs has been strong and favorable in the first half due to the timing of pricing actions relative to costs, and you've got to take into account Argentina, where a lot of the hits we took on the currency were in the second half of last year. We're going to be lapping that as we head into the second half of this year. For the balance of the year, we expect pricing net of cost benefits to taper off. However, it's important to reiterate that on a full-year basis, we expect to be at least net pricing neutral in relation to costs. The third aspect is the timing of investments. In the back half of the year, we expect to step up investments behind our brands, given the timing of some of the innovation programs that we have. As a reminder, on the first half of the year, our spend on our brands was approximately 6% of sales. Heading into the second half, this number will be closer to 7%. As we take advantage of our strong first half and strengthen our overall investment profile, setting up for continued sustainable growth in years to come. Lastly, the divestiture of our personal protective equipment is expected to be a headwind for profits of around 180 basis points in the second half of the year. We didn't have that in the first half.

Great. That's very detailed and helpful. And if I could slip in one more question. You talked about pricing in relation to the second half outlook. Can you give us an update on the North American pricing environment in both personal care and consumer tissue? A, is there ability to drive mix to a greater extent in the back half of the year? How do you think about that? B, the promotional environment? And how should we think about pricing realization from here in North America in a more normalized environment? Thanks.

Hey, yes, thanks, Dara. Yes. Overall on the pricing environment, particularly in North America, I'd say it remains stable. As you may recall, since the COVID environment or the pandemic-related environment, we did see a reduction in promotional activity in our categories. Over the past two years, that has returned and normalized post-pandemic. I'd say it remains at that level. We are seeing a touch of promotion in some categories and some retailers. But overall, again, our strategy is to remain focused on volume and mix-driven growth. We're maintaining what we're calling PNOC, or pricing net of input cost, discipline. Overall, as you're well aware, pricing to offset cost inflation is following as expected. We really want to be more valuable at every rung of the good, better, best ladder. One of the great things about our portfolio is that we do serve all consumers from value to up to premium, even though premium is really the big growth driver for us. We're focused on ensuring that our value propositions all along the value spectrum remain strong. Our focus on building brands with advertising, great storytelling, and pioneering innovation is key. However, we also recognize that in some categories, promotions are very important, and we're going to be competitive where we need to be. But again, we're focused on driving the category's growth through advertising.

Great. Thank you.

Okay. Thanks, Dara.

Thank you. And your next question is coming from Nik Modi from RBC Capital Markets. Your line is live.

Thank you. Good morning, everyone.

Good morning, Nik.

Good morning, Nik.

Good morning. So I have two questions. One on the organizational design changes that are going to take place in a few months' time. I remember when Procter & Gamble did a similar type of thing, not the exact structure, but they had a transitionary kind of era or moment between the old structure and the new structure. I'm curious if that is something happening right now within Kimberly, which will make that transition much smoother when we get to October. That's the first question. The second, I was hoping you could give us your thoughts since the Analyst Day; you've hired two new people, one as Chief Growth Officer with a consumer healthcare background, and then a new head of R&D. I was hoping you can provide some words on how they fit into the new strategy.

Yes, great. Nik, you're on it. I think that's a great question. As I mentioned in the prepared script, we made an interim move effective July 1 that changed some of the reporting in our global supply chain in North America and then Brazil, moving into International Personal Care on an interim basis. I would say your observation around an interim structure shows we've made some significant shifts there already. It aligns with my past experience during corporate transitions, where having an interim model in place before making official moves helps a lot. I'm very excited about the progress the teams are making, and I appreciate all the hard work they are putting in to make this happen. I feel great thus far about our wider growth initiative or organizational change. With regard to Patricia and Craig, I'm excited to have them onboard. Allison Lewis, our Chief Growth Officer, and Robert Long, our Chief Innovation Officer, have done great work for us and have advanced the agenda in these areas very strongly. I knew I intercepted them at a point in their careers where they wanted to pursue other opportunities eventually. I believe we have an excellent transition period between these four leaders. Patricia has extensive experience working for companies such as Kraft, Unilever, and Heineken before Bayer and brings marketing and advertising expertise, which is a significant asset for us. Craig, a great transformational leader with Unilever and a proven track record at Campbell's, will also bring valuable skills to Kimberly-Clark, especially in terms of organizational development and expertise to advance our power and care strategy.

Helpful. I’ll pass it on.

Okay. Thank you, Nik.

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

Hi, good morning, everyone. I'd like to see whether I can get more color on the savings. I see at least three buckets, so basically you're announcing something in North America. My understanding is that the supply chain is involved. If you can talk about the benefits of what you're attempting to do there, you are exiting two small markets. When I look at the P&L, it feels as if the SG&A is where we get better numbers relative to consensus. So if you can expand that, I have a follow-up. Thank you.

Thank you. Maybe I'll just start, and I think Nelson will provide more detail on the savings. Regarding the small market exits, fundamentally, our overall aim is to make our categories and markets robust and predictable contributors to growth and return. We like our positions in most markets. However, in places where we don’t feel we have a long-term winning strategy or where market conditions are not conducive, we will be disciplined and methodical. We made the difficult decision to announce our plan and exits in Nigeria and Bolivia. It does impact our employees there, but I believe it's the right long-term move for Kimberly-Clark. I don't think those exits will contribute significantly to savings, but they do reduce risk related to our ongoing performance. I will defer to Nelson for more insights on savings.

Yes. In terms of, Javier, the sources of savings, there are two aspects to this. First and foremost, the lion's share of the savings will derive from our supply chain transformation. As a reminder, this encompasses three strategies. First, our value stream simplification involves product specifications and a few other items that will drive significant savings over time. The second is optimizing our network, which focuses on our physical footprint. You're seeing some actions taken today and they will continue over the next few years. The third bucket is scalable automation, which includes automating supply chain processes in our factories and warehouses, as well as digital automation tools to optimize our procurement capabilities and supply and demand operations. We are in the early stages of this transformation journey, especially in the supply chain, and we're pleased with our progress made in the first half of the year. Productivity delivery is ahead of our original plans, and we are at about $255 million in supply chain productivity year-to-date, not including procurement. We will provide updates annually on procurement savings, but we are on track to deliver $3 billion over the next five years. Specifically, conversion and waste reduction is a significant contributor. This falls under the value stream first point. We're starting product material specification standardization, and lastly, we're seeing transportation and warehousing cost reductions. This summarizes what's driving the savings on the supply chain. Regarding overheads, we aim for about $200 million in savings over the next two to three years. Most of those savings will kick in only after the full organizational model is in place in the latter part of the year. Therefore, we won't see significant savings this year from overheads. On the P&L, what you're observing is that despite overheads being largely flat sequentially, we're driving a lot of discipline in terms of spending and costs, which flows through to the P&L at this stage.

That's great color. I do have a question because we got scanner data today, including Costco, which is an important retailer, and Amazon. The data shows that volume accelerated at the end of the quarter. We have around 2%, which is two to three points better than what you reported. So with your commentary regarding inventory reduction and uncertainty, given that volumes accelerated in the last four weeks ending July 7th, should we expect a more consistent retail sales performance in North America versus where you are when I report going forward? Thank you very much.

Yes. Maybe I'll start with that, Javier. I think my adage is that in the end, shipments must track with consumption. I tend to focus more on the consumption numbers. We feel great about our progress in volume and mix. I think in the quarter, if you sum both, it was up about 2 combined. That's the progress we're making. We are glad to have cycled many pricing moves taken to offset inflation. However, we think the underlying momentum in our categories remains solid. These are essentials and daily use categories; hence, the volume progression encourages us. There may be some fluctuations due to retail inventory changes in North America; you have two effects there as we're comping a soft quarter last year due to supply issues, which likely contributed additional inventory in personal care. On the tissue side, we noted stronger organic consumption than shipments, which indicates an expected reduction in tissue inventory. Such shifts are typically common from quarter to quarter, but we remain very encouraged with the volume trends.

Thank you. Your next question is coming from Anna Lizzul from Bank of America. Your line is live.

Hi, good morning.

Hi Anna.

Morning. Thank you so much for the question. I was wondering if you could just elaborate more on the volume improvement that we observed in the quarter, specifically where you're seeing gains across the categories? Additionally, there is an expectation of additional cost inflation in the back half, which you mentioned. I would appreciate it if you could touch on the balance of pricing and investing in innovation to help offset this? Thank you.

Okay. Yes, overall, I’d start with a statement that we're witnessing resilience in demand across our categories globally. The underlying growth in our categories remains healthy. I just mentioned that we provide daily essentials, therefore, category substitution remains low. We believe there's much room for us to expand penetration as well as revenue per user in our markets. While we are mindful of the consumer environment, we're sharpening our positioning across the good, better, best value spectrum. More specifically, in North America, demand remains resilient though we note some value sensitivity, particularly among mid to lower-income households across a few of our categories. Overall, our categories grew mid-single digits, with positive volume. This reflects the essential nature of our categories. We're closely monitoring consumer health and see sensitivity among mid to lower-income households within some of our categories. Overall, we're well-positioned with a robust offering across the value spectrum, and we're proactively working with our customers to better serve consumers and maintain strong propositions as we move forward. Regarding volume expectations and inflation, we're observing positive volume progression in the second quarter. For the back half, we expect volume and mix-driven growth while pricing impact continues to subside, particularly due to recent pricing actions in Argentina. We've already noted a step down in Argentina's contribution from the first quarter to the second, and we expect this to be the trend as we progress through the second half. This brings us to discuss pricing net of costs. We maintain a minimal goal of pricing net of costs being neutral annually. With good visibility today, we can affirm this will likely be achieved this year barring any market disruptions similar to those in 2021-2022. Pricing net of costs has been notably favorable in the first half due to timing of pricing realization, again largely with Argentina, and the timing of cost inflation. Overall, we anticipate being at least neutral, if not positive, on pricing net of costs for the year. As for overall inflation, we don't foresee any significant changes from prior discussions.

Great. Very helpful. Thank you so much.

Okay. Thank you.

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

Hi, good morning, everyone. So I wanted to revisit the North American tissue discussion. I understand volumes were down 3%, and there was about 250 basis points due to retail destocking. However, on the other hand, you're likely shipping more Kleenex. I was wondering, looking ahead, with the lapsing of the supply chain issues, should we anticipate that underlying volumes will remain negative? On the personal care side, if I can squeeze that in, what was the exit rate in the quarter in North America and globally?

Yes. Let me start with tissue in North America. Overall, as I mentioned, there was some retail inventory fluctuations. Our organic numbers differ from consumption numbers. In the quarter, consumption was up three, which slightly lags the overall category. The tissue categories in North America remain robust and healthy. Share-wise, we're making strong progress with Kleenex, which was up nearly 500 basis points in the quarter. This reflects improved supply conditions compared to last year. In bath tissue, our share decreased slightly, reflecting some supply constraints. However, we are seeing increased promotional availability for private labels affecting Scott 1000. The brand remains very healthy and is a power brand, especially for value consumers. Overall, we're optimistic about our progress. The inventory fluctuation was not as projected going into the quarter, but I believe we are nearing a conclusion to those fluctuations.

Regarding Personal Care, your question about growth, Andrea, is that we grew mid-single digits solidly in North America, driven by volume and mix. The trade destocking in the quarter primarily affected Consumer Tissue in North America.

This is extremely helpful. The exit rate of personal care. Do you think you shifted merchandising dollars from Consumer Tissue into Personal Care, or is this basically kind of flow-through? Now, as your regular supply chain improves, will you merchandise more in the second half? Or just any insights regarding the exit rate of Personal Care in June?

Yes. Andrea, I'm not sure how to answer the question on exit rate. I think about it differently. However, I can affirm that we’re greatly encouraged by our start to the year. Volume and mix are trending in the right direction. I feel confident in our trajectory. We might experience some noise regarding inventory, particularly in personal care, since we had supply constraints last year. It’s also worth noting that our investment focus remains on growing categories through advertising and introducing the right kind of innovation.

Thank you very much. I'll pass it on. Thank you both.

Okay. Thanks a lot.

Thank you.

We'll take one more question.

Certainly. The next question is coming from Bonnie Herzog from Goldman Sachs. Your line is live.

Good morning. I just had maybe a quick follow-up question on your tissue business. As you mentioned, promotions have really started to step up there. How much do you think you will need to or be willing to increase promotions to drive volumes in the back half of the year, possibly resulting in a net negative price contribution similar to what we saw in Q2? And do you expect continued retail inventory destocking impact in the back half as well?

Yes. Let me start with the last part, Bonnie. I tend to focus a little more on consumption numbers, which remain healthy. I don't anticipate regular inventory contractions, but minor fluctuations may arise, which are out of our control. However, our customers typically collaborate with us closely to plan these matters over the long term. I feel confident in our current inventory positions but can't predict with certainty what will happen moving forward. Regarding the promotional environment, I acknowledge broader price sensitivity. Thus, presenting the right value proposition is paramount. The crucial change in these categories over the past 10-15 years is the analytics we've invested in to drive decision-making. While there's much talk about the promotional environment, we've put significant effort into tools for informed promotion choices. We will leverage trade promotions as part of the overall brand strategy but won’t rely solely on that. Our goal remains focused on achieving profitable growth; thus, we will ensure product affordability and competitiveness while fostering overall category growth.

That's helpful. Just maybe one final clarification. Is it fair to assume, or can I ask it this way? Is it your expectation that volumes will inflect in the back half in tissue based on everything you've said, and how you expect things to play out?

Yes. We've shifted our emphasis to volume and mix-driven growth. Therefore, over time, we expect all our businesses, including North America tissue, to drive positive volumes.

Perfect. Thank you.

Okay. Thank you, Bonnie.

Thank you.

All right. Thanks to everybody for joining us. If anyone has follow-up questions, we'll be available to take them today. Thank you very much for your time.

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