Greetings. Welcome to Kimberly-Clark's Third Quarter 2024 Question-and-Answer Session. I will now turn the conference over to your host, Chris Jakubik, Vice President, Investor Relations. You may begin.

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 third 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 discuss some non-GAAP financial measures today. 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, for a few quick opening comments.

Thank you, Chris, and good morning, everyone. I want to let you know our team has made great strides advancing our Powering Care strategy, bolstering our confidence to deliver above our long-term growth algorithm in 2024. To be global category leaders, we must lead growth in our categories. We're executing and making steady progress on our strategy to achieve this. We're driving consumption and growing our share across categories and markets driven by our acceleration in innovation and enhanced commercial execution. Our productivity is fueling our investments in innovation to support our growth initiatives while delivering our bottom line growth aspiration. We've achieved key milestones and our transformation is on track with no disruptions. And notably, on October 1st, we successfully completed our new organizational structure to become a better, faster, and stronger organization. We're rapidly transforming Kimberly-Clark to thrive in an increasingly complex and competitive global environment. However, there are some discrete headwinds that are creating pressures on growth in the near term. These include retail inventory reductions as our service levels improve, lower demand in private label businesses that we're exiting, and weaker than anticipated demand in North American professional channels along with some pockets of deceleration in Asia and Latin America. The actions we're taking as part of our transformation strategy are positioning us to navigate a dynamic consumer and retail environment, accelerate investments across the enterprise so we can lead market growth and enhance the value of Kimberly-Clark for all of our stakeholders. So with that, I'd like to open it up for questions.

Certainly. At this time, we will be conducting a question-and-answer session. Your first question for today is from Lauren Lieberman with Barclays.

Hey, good morning, Lauren.

Hi, Lauren.

Hey, good morning. So I wanted to just touch first on retail inventory because you had talked about before the quarter some expectations, you were lapping some rebuild last year. But this has really been, I guess, a source of volatility. So I was curious if you could talk about kind of how you think about it, where service levels stand today. And also, is there anything going on from a shelf space standpoint because, again, the disconnect between shipments and consumption has been such a source of volatility? Thanks.

Yes, thanks, Lauren. There’s no disconnect from shelving. We feel confident about our distribution growth, and our SKU count remains strong. We have a solid innovation pipeline that will continue to support this growth. The retail inventory reductions may be somewhat localized to us and reflect the supply challenges we faced last year. Just to remind you, we had a packaging supplier that was unavailable for a couple of months last year, which affected most of our Personal Care brands in North America. As we resumed supply, we fully returned to supply in the third quarter of last year. You may have noticed a spike in inventories in that quarter, and we are dealing with the effects of that this quarter. That’s the main driver behind the situation. With restocking last year, reductions this year, and the hurricane impact, we've experienced about an 80 basis point headwind to global net sales year-to-date, primarily in North America. At the end of the quarter, retail inventories appeared consistent with historical levels. We should be nearing the end of this situation, but we acknowledge that there is some volatility in the environment. If this continues at similar levels in Q4, we could be looking at around 3% organic growth for the full year.

Yes. And a few things just to add on, as we think about the inventory, the hurricane impacts, and what we had in Q3, Lauren, the quarter, consumer offtake in North America is pretty strong, both in Personal Care and Consumer Tissue combined, it grew 3.2%, so ahead of the category. The disconnect, if you will, is really with the shipments, and that was impacted by a couple of factors. One, transitory factors, and that's the retail inventory changes, which, again, we lapped a bit last year. We had a slight reduction in inventories again in Q3 of this year. Then we had the impact of the hurricane at the end of the quarter with shipments out of the Southeast. Lastly, some drops in private label volumes on both businesses we are exiting as well as some business we'll exit next year. The other bit to consider is there was some underlying demand weakness in professional and some international markets that Mike referred to. But the key is the shortfall in Q3, about two-thirds is attributable to the transitory factors that I just referred to. The North America business in particular faced about a 280 basis point headwind in North American Personal Care, whereas in Consumer Tissue, that was around 350 basis points.

Okay. Great. Thanks so much. And I was just curious, just in the Nielsen data, for what it's worth, we've seen a surge in some of your categories in and around Port Strike. There's been questions around consumer takeaway ahead of the hurricanes. So did you see anything to just consider in terms of shipment dynamics and anything to think about for 4Q that will be helpful?

Yes, Lauren, I would say we're not really expecting any benefit from any stock-up behavior by consumers. I'd say, yes, we did see a little bit of it related to both the hurricane and potentially the Port Strike. I'd say it’s not meaningful at an enterprise level. We would expect to kind of work through that in the quarter.

Okay, perfect. Thanks so much.

Thanks, Lauren.

Thank you.

Your next question is from Nik Modi with RBC Capital Markets.

Good morning, Nik.

Hey, Nik.

Good morning, guys. So Mike, maybe you can just talk about market shares. In the release you suggested things looked pretty good from that standpoint. So I wanted to kind of get your thoughts on that and just the competitive environment in general. But just kind of tagging on to that on innovation. I mean, some of the data we've seen out of Numerator on some of your innovation like Skin Essentials suggests there's a very high cannibalization rate. So I just wanted to get your thoughts on kind of how you think about innovation and the role it's going to play. Is this really about market share gains or is this about kind of expanding the value pool as you've been suggesting with some of the price tier opportunities that you have in the US and other markets?

Okay. I'll try to answer all of that, Nik. You may have to steer me depending on how I answer. But the short answer is, hey, we're after growing our market shares overall, and we're off to expanding the category. So it's both of those. I'd say I feel very good about the overall progress we are making on market share. For the quarter, I think we are globally about flat on a weighted basis. On a cohort basis, I'd say we're slightly more than half, which is an improvement versus this time a year ago, a pretty significant improvement. Importantly, I think in the US, where we're making strong progress, we have a discrepancy in consumption. Consumption is very solid and we were up or even in seven of eight categories versus a year ago in the quarter and eight of eight sequentially. I think overall, we're making good progress on the market share front. That's driven by the strategy we've been talking to you all about, Nik, where we're investing to make better products in pioneering innovation, driving stronger advertising and commercial activation. Your question on innovation is overall, as we look to premiumize or drive up in our categories, our preferred path is to do that in a margin-accretive way. If you're driving premium innovation, that should be at a higher margin. The overall goal is to delight the consumer in whatever way that we need to. So in a lot of ways, like Skin Essentials, I feel great about the product that delivers really great benefits from a skincare perspective. That's a new feature in the category, and I'm excited that consumers see that worth investing in. We're also focused on the good, better, best spectrum, bringing cascading innovation throughout all of our tiers to make all of our products better. The short answer, which may frustrate some of my organization sometimes when they ask me if I want us to trade up or do you want the value, I say yes, because our job is to deliver across all tiers of that spectrum.

Thanks so much. I'll pass it on.

Okay. Thanks, Nik.

Your next question for today is from Anna Lizzul with Bank of America.

Good morning, Anna.

Hi, Anna.

Hi. Good morning. Thank you so much for the question. I was wondering if you could talk about the private label businesses. You did exit certain private label businesses, which impacted this quarter. So can you give us more detail on where you are now in that process? Maybe what we should be expecting moving forward and just how is this overall helping you get to your longer-term gross margin goal of at least 40% by 2030? Thank you.

Yes. Thanks, Anna. Yes, I think the overall strategy behind the private label shift for us is we're really focused on proprietary science-based innovation in right-to-win spaces behind our brands. So we want to focus our capacity and technology investment in the brands to drive further differentiation. We've been moving out of some private label businesses for the past 18 months. That has enabled us to step up our growth in our branded business, for example, Kleenex, which was up almost 500 basis points in share this quarter or last quarter. Part of that is because we've expanded some of the capacity behind the brand. Last quarter in Q3, it's the first time that the exit combined with maybe some weaker private label sales that some customers was material enough for us to call out. In 2025, we noted that we’ll cease production for a large club private label diaper business in the US, and that's going to create a headwind of about 2% for us next year. As a result, our private label mix will shrink from about 4% in 2023 to about 2% next year, and I expect that to decline further over time.

Great. Thank you so much.

Okay. Thanks, Anna.

Your next question is from Bonnie Herzog with Goldman Sachs.

Good morning, Bonnie.

Good morning, Bonnie.

Good morning. I wanted to ask about your gross margin, which has expanded pretty meaningfully year-to-date and is tracking ahead of pre-COVID levels. So just wondering how we should think about the sustainability of these margin levels, especially given the soft organic sales and probably the possibility that promos need to step up given pressures on the consumer and to limit down trading. I guess what's the right level of support you see from a benign input cost environment and considering also your ongoing productivity savings. Thank you.

Yes. So a few things, Bonnie. Overall, we're pretty pleased with the trajectory of our gross margins, operating profit margins, and more importantly, gross margin dollars. I mean that's our focus at the end of the day because that's what really funds our ability to invest in the business, invest behind the brands and drive sustainable innovation that we've been putting in the marketplace, which Mike was just talking about. For the year, what we've seen is we're right around an average of 37% gross margin, which is a pretty healthy gain. We've been doing consistently for the last eight quarters or so gains on gross margin quarter-after-quarter, year-over-year. We still expect, as we exit the year to continue to have gains on gross margin on a year-over-year basis. A few things have played out in terms of what's driving the gross margin and why we still have strong confidence in our ability to get to our long-term stated goal of at least 40% gross margin or operating margin in the range of 18% to 20% before the end of the decade. One is our focus on driving meaningful innovation, and we are shifting to managing our cost basket in a different way than what we did, say, three to four years ago. We're much more proactive around risk management strategies, which allows us to have more visibility into what's coming our way. The third element is our transformation in the supply chain. We've delivered very strong productivity through the first three quarters of the year. This past quarter was $130 million just in our gross productivity from manufacturing and supply chain, not including procurement, and we have a very strong pipeline going forward as part of our Powering Care strategy over the next few years. We see that as very sustainable over time. A key point to take into account is margin progression is not linear. There will be ups and downs quarter-to-quarter. The important thing is what's happening on a year-to-year basis and over time. Overall, we are very pleased with where we stand right now.

Yes. And Bonnie, maybe you touched on pricing or the promotion environment. I'll just say the overall, we're really focused on volume and mix-driven organic growth. And to do that, I think we're also very focused on driving what we call PNOC or price net of commodity discipline. And if we had that discipline on PNOC then the productivity drives the margin expansion on its own. I'd say pricing to offset cost inflation is proceeding as planned throughout the year. We want to be, as I had just mentioned, better value at every rung of the good, better, best ladder. Our focus is on building the brands with innovation and strong commercial execution. We do use promotion, but primarily as a trial driver with our pioneering innovation.

Okay, very helpful. Thanks for the color.

Okay. Thanks, Bonnie.

The next question is from Chris Carey with Wells Fargo Securities.

Hey, Chris.

Hey, Chris.

Hey, everyone. So I just have a question about the new organizational structure and category growth. Regarding the new organizational structure that's in place as of October 1st, you also have an expectation for category growth to decelerate, or at least to be at the lower end of your long-term range. I think I saw that in the prepared remarks. How do these two things fit together? The outlook for Q4 is, I think, similar to Q3, maybe even a bit below that global category growth rate, and yet you have the new organization in place. How long before this organization is really driving the outcomes you're looking for? And specifically with an eye on 2025 where perhaps you'll have a little bit less pricing than you've had this year, how do you see that top-line trajectory coming together? Also, if I could just sneak in, is the operating profit being muted in Q4? Is that really a discretionary decision behind investment? How would you characterize the differences between Q4 gross margin and the more offensive investments you're making?

Okay. Chris, you're up earlier. There's a lot of questions to unpack in there. I will say, I'm really pleased with the progress that our organization is making in implementing our wire for growth organization. We have been operating that on an informal basis. I think it's gone off very well, and we're starting to see benefits from that structure. I'd say the overall categories remain resilient. Underlying category growth, I think, remains very healthy. Consumer interest in better-performing products remains strong, especially in developed markets and developing markets as well. We're still mindful about affordability and our need to strengthen our brand value propositions. The categories are growing in dollars and units. The underlying demand drivers remain healthy, and that includes penetration, which is stable and a long-term opportunity for us. We're seeing some markets like lower births in South Korea and China, but that has slowed down. Our businesses are still performing well. We have many markets with categories that are at the early stages of development, and this aging population is a strong tailwind for our Adult Care business across developed markets. Trade-up remains a big driver of the category in developed and emerging markets, and we still see demand for premium products continue to grow. I think frequency is where we see some softness right now, especially in Latin America and Southeast Asia where consumers tend to stretch their money a little. Our full year weighted category growth is likely to be closer to 2% versus the 2% to 3% range highlighted previously. That said, we remain on algorithm. Our goal is to lead category growth, which we will continue to do while being flat to slightly up on share across our businesses globally.

Let me unpack the top line trajectory and then we can discuss the Q4 margins. A few things regarding the top line trajectory. Absent the transitory factors, one, pricing has been decreasing as we lapped the pricing actions taken across the category. The impact of pricing on our organic growth has come down, as expected. For the quarter, we were only 1% pricing, down from 4% in Q1. This trend will continue into Q4 due to pricing in hyperinflationary economies decreasing. Overall, we'll remain disciplined around our approach to manage volume consumption. We focus on consumption, not chasing volume. In North America, consumption remains strong amidst a disconnect with shipments.

What did we miss, Chris?

That was as comprehensive as I could have hoped for. Thank you for covering all of that. Good luck.

All right. Thanks, Chris.

Your next question for today is from Kevin Grundy with BNP Paribas.

Hey, Kevin.

Hey, Kevin.

Hey, good morning, guys. Good morning, Mike. Good morning, Nelson. Question for you on, as a follow-up on Chris' question, a bit of a different angle. Just as it pertains to visibility on results, sort of the mix, Mike, all this organizational change that you've been pushing through in what is still a pretty dynamic environment. The quarter fell a bit short of your internal expectations, and some of the factors evolved throughout the quarter. The inventory build was known, but when you're speaking with analysts recently, it did seem some factors were amplified such that the Street braced for the magnitude of it. I can appreciate the volatility of the environment. Nelson, your point on what the organization has done around productivity and visibility further down the P&L certainly well taken. My question for both of you really speaks to the visibility you have as you're contending with this organizational change and why investors should not be concerned that this is a setback quarter in terms of visibility and guidance.

Yes. I think I'll start, Kevin. One, I'm really pleased with the strong execution globally that we have from the team around the world. Overall, I'd say, I'm pleased we are managing the controllables very well. What happened in the quarter was certainly a transitory impact, primarily retail inventory. Some softness in certain markets is something we are all aware of. Management has not changed significantly in any of the markets. We have good visibility into product and marketing performance. This allows us to identify areas needing attention, such as Kotex in China, our fem care business in Brazil, and bath tissue in South Korea. Also, Huggies in some parts of Latin America presents more product improvement opportunities. Overall, I feel good about the visibility and reorganization.

Yes. Just to add, Kevin, we will remain steadfast on how we manage our bottom line and profitability. We're generating strong profits for reinvestment. We're proud of what our teams have accomplished and their focus on executing our Powering Care transformation. Market dynamics will exist but our objective is to lead category growth in a profitable and sustainable manner.

Right. Very good.

I think we have one more question.

Okay.

Your final question is from Javier Escalante with Evercore ISI.

Good morning, Javier.

Hi, Javier.

Hi. Hello, guys. Good morning, everyone. I'm going to revisit some of the items discussed. The external one, the bigger one is this inventory destocking which you've discussed with your peers. Can you talk about what's driving it? Is it just the mechanics of COVID? Is it the shift to e-commerce? Also, could you detail the impact on Q3? The real question is about the internal piece. You're shifting away from private label. Can you tell us the process? At the beginning of the year, the percentage of global sales in private label. Where are they now? What's the plan for next year? Also, will S/4 HANA help you manage volatility? Lastly, there's news about evaluating options for international tissue and professional businesses, contributing 7% of profit. How is the organization responding?

So Javier, let me reconcile the numbers for you just to give a sense of what that 80 basis points for Q3 is. As you stated, there are externalities around inventory movements. Last year's quarter saw a bill that affected our supply chain in the US. We experienced a bit of destocking in Q3 following what happened in Q1 and Q2. Also, the hurricane impacted shipments near the end of the quarter for three to four days. Lastly, the exit from some contracts in private label and softer demand affected us. Those three elements we referred to as transitory factors added slightly over one point of growth, roughly 1.3 points for the enterprise overall in growth. That's how we got to the 80 basis points that Mike referred to for the year.

Thank you. Yes. The real question is how during all these changes, will the organization manage so there is less volatility?

First, I want to complement our Digital Technology Service organization. We successfully implemented North American S/4 HANA in late July without disruption. We've done a good job managing the transition. With regard to international family care and professional segments, we are taking steps to drive growth and returns for us. I'm not going to comment specifically on rumors. We like the categories we're in and will continue to explore ways to add value. However, in places lacking a right-to-win, we will optimize our participation in those assets. For example, we had some challenges in Brazil but made decisions with prudent results. We continue to monitor our performance closely and will update you if there’s more to share.

Thank you very much, guys.

Okay. Thank you, Javier.

Thank you.

Thanks, everybody, for joining us today. For anybody who has follow-up questions, Investor Relations will be around to take your calls. So thanks very much and have a great day.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.