Good day, everyone, and welcome to the Kimberly-Clark Third Quarter 2025 Earnings Call Question-and-Answer Session. It is now my pleasure to hand the floor over to your host, Chris Jakubik, Vice President, Investor Relations. Sir, the floor is yours.

Thank you, and good morning, everyone. This is Chris Jakubik, Head of Investor Relations at Kimberly-Clark, and thank you for joining us. I would like to remind everyone that during our comments 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 during these remarks, 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. With that, I will turn it over to Mike for a few opening comments.

Okay. Thank you, Chris. Good morning, everyone. Our third quarter results underscore the strong progress we're making to transform Kimberly-Clark into an industry-leading personal care company. Despite a dynamic external environment, Powering Care continues to drive our performance. It's enabling us to deliver solid results and importantly, better care for a better world. Our inflection to volume plus mix-led growth that began last year continued into the third quarter. Q3 marked Kimberly-Clark's seventh consecutive quarter of volume plus mix-led growth even as volume growth has been somewhat challenging to achieve across the broader CPG industry. We're growing volume and mix because we're meeting consumers where they need us across the good, better, best spectrum, and we're well positioned to post similar growth in the fourth quarter. We held global weighted market share despite an uptick in competitive promotional activity in the quarter. We're leveraging our scale to deliver more consistent profitability in a challenging environment. In the third quarter, we delivered consistent operating margin expansion and another quarter of industry-leading productivity, our strongest of the year to support reinvestment and profitable growth. Our rewired organization is fast-tracking the best of Kimberly-Clark across our markets. The promotion of Russ Torres to President and Chief Operating Officer is accelerating our momentum. I'm pleased to have Russ with us today for his first earnings call as Chief Operating Officer. We're in the fourth quarter, and we're playing to win. We have sustainable momentum and the discipline and ingenuity to effectively execute our innovation-led volume plus mix-driven growth strategy. We're confident in our ability to unlock our long-term potential and deliver more value for our consumers, our team, our partners and our shareholders. So with that, I'd like to open the line for questions.

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

Congrats on the strong results. I wonder whether you could give us an update on the competitive dynamics in U.S. diapers. When you spoke in early September, you indicated delays in marketing plans because of increased competition from retailers' private label and their Chinese imports despite tariffs. So did you resume marketing plans in Q4? What's the consumer and retailer reaction to it? And in a bigger sense, is there something you can do to steer the market away from a price war given that the U.S. diaper market will likely trend volumes flattish given low fertility rates?

Javier, great question. I would tell you, we saw increased competitive activity and an uptick in activity earlier in the quarter. I would say our teams navigated it pretty well. And I would say your point around how we want to drive the business, I think I said it in my prepared remarks, our strategy is totally innovation-led. And so we're really focused on making our products better at every tier of the good, better, best spectrum. And I think that strategy, as you can see in our results, is paying off pretty well. But I'm going to ask Russ to comment because I think he's kind of closer to the action in North America and having just come out of that role. And so maybe, Russ, you may want to give him a little bit more detail.

Sure. Sure. Absolutely. Javier, yes, I would say, overall, as the quarter played out, you're right, we did make the decision to move some promotional activity from the third quarter to late in the third quarter, mainly the fourth quarter. And so just the update on that is we are seeing solid performance in diapers in North America. And so I think that has worked out thus far. So we gained 10 basis points of share in diapers in the third quarter, which frankly was maybe a little better than what we had expected, and we're up in share 90 basis points year-to-date. But I would maybe unpack a couple of topics just that I think are notable that may give you a little bit more insight to what you and everyone else might be seeing in the scanner data, and that's promotion activity and club would be the two things. So let me start with the promotional activity. Just to remind everyone, I think we mainly see promotion as a tactic to drive trial for innovation. To Mike's point, we're very focused on driving innovation and brand building and cascading that innovation across every tier of the good, better, best spectrum. And we would say that overall promotion in across all of our categories within North America, and that includes diapers, is well down versus our 2019 levels. But you may see the promotional levels tick up as a result of that trial activity I talked about. And the reason for that is we've got a great lineup on innovation. We have probably the most active lineup we've had in quite some time across the good, better, best tiers. And just to remind everyone, we launched the blowout blocker earlier this year, HuggFit 360 and our Little Movers tier, which is doing quite well. And then, of course, we have a very significant improvement in the value proposition in our mainstream lineup in Snug & Dry where we've made great product improvements to improve softness and comfort and have introduced a superior core, Generation 2 core that will improve protection, and that's off to a great start from ratings. So our strategy had been to really use promotion to drive trial because we know when people try the product, they're going to love it and come back. And so what you're seeing is probably an uptick in that promotional activity. But I would also point out that our promotional activity in general in diapers is lower than the category. And we'd expect that as we get through the trial period, that promo activity to normalize as we get through the fourth quarter and towards the end of the year. And so that's just a little bit of an explanation behind what you might be seeing there. And then on the club mix piece, I just wanted to talk for a second about that. That you may see coming through as a little bit of negative mix headwind in U.S. diapers. And what's happening there, as everyone knows, is we've been experiencing double-digit growth in the club channel. And that really is in response to both the consumer shifting to the club channel as well as some changes in assortment that have positively impacted our business in certain retailers. And so we are also, in parallel, driving premiumization. And so that's important, like the HuggFit 360 that I mentioned is going to drive continued premiumization and positive mix over time. So hopefully, that sheds a little bit more light on the situation.

Yes. Yes, it does. I have a follow-up.

You'll be proud to know that Chris' team sent me that chart that you drew up 3 times.

I'm sorry for that. But the one thing that I would love to hear is driving positive mix because this has been your focus for a long time, right? And from the retailer standpoint, what they're doing with the Chinese diapers is a positive mix, but not necessarily to you. So what are you seeing in terms of consumer reaction to the Chinese diapers versus your intro? Is there anything that you have learned so far that gives you encouraging? Or does it make it more challenging driving positive mix?

I may start.

Go ahead, Mike.

Just the one thing I'll say overall that we're starting to see is I think the brand interaction tends to interact more with private label. And so there's kind of a swap in and out at the same tier, but Russ, you may want to comment further.

Yes, I believe we are taking several steps to achieve a favorable mix. Overall, I feel confident due to our global experience, including in China, that we produce excellent products that resonate with consumers. The testing data supports this, and it seems to reflect in the market's response to our current position. Retailers recognize the need to balance their assortment, and broadly speaking, there is a value-seeking consumer that retailers are adjusting to serve, and we are doing the same. This is contributing to our positive volume mix growth. We are comfortable with our strategies and are exploring options like pack sizes, although we are still early in this development. We will monitor how this evolves, but given our global and North American experience, we are optimistic about our plan.

Yes. The confidence in our plan, Javier, comes from the fact that we're very confident in our technology and our product quality. We're competing with the low-cost diapers that you mentioned in other markets, particularly in Asia. And our products are superior, and we believe our costs are very, very competitive, if not better. So we feel good in our plan.

Your next question is coming from Lauren Lieberman from Barclays.

In the prepared remarks that you guys published this morning, you opened the door a little bit to '26 and talked a little bit about momentum into next year. So I wanted to know if you could talk a little bit about the shape of the P&L in '26 and '27. I know you've spoken about the dilution assuming that the IFP JV kind of goes through as planned. But I think numbers are a little bit all over the place. So anything you could do to shed some light on shape of the P&L '26 and '27 would be really helpful.

We're still in the process of working through it, Lauren. I think it's a bit early for us to share too much, but Nelson may have a few comments to add here.

Sure. So Lauren, just to provide some perspective. And again, without getting into specifics on point estimates because we'll be providing a thorough outlook when we report our Q4 and full year results early next year. It is important to highlight that we continue to target organic growth ahead of our categories, consistent with our long-term algorithm. At operating profit, we are in the midst, as Mike said, of building plans for the next few years that should deliver our long-term constant currency operating profit growth in line with what we committed to and looked at as our long-term algorithm. And this includes the mitigation of the stranded costs that will result from the IFP transaction that, again, we expect to close sometime in the middle of next year. I'd also point out that we continue to be targeting to achieve our milestone on gross margin of at least 40% and an operating profit of at least 18% to 20% before the end of the decade, and we're tracking fairly well in that terms. And as you say, and as we get into the details of the outlook and how we think about it, first, EPS. And in the next couple of years, we need to distinguish between EPS from continuing operations, which exclude discontinued operations from EPS attributable to total KC, which includes earnings from discontinued operations. So that's the first step. So for constant currency adjusted EPS growth from continuing operations in the next couple of years, all else equal and assuming that we close the transaction sometime in mid-2026, we should see a step-up in growth in EPS, in EPS from continuing ops as income from equity companies would increase by approximately 30% year-on-year, and we'd also benefit from the use of proceeds for share buybacks. Then the second item is adjusted EPS attributable to total KC, which, again, assuming that we close the transaction in mid-2026, then constant currency growth should be somewhat more muted as we see about half of the discontinued ops income go away. And then as we go into '27, all of it go away. In the near term, we're going to continue driving underlying growth consistent with the long-term algorithm, and we will see a partial offset because of the dilution that we've been talking about.

Your next question is coming from Peter Grom from UBS.

So I wanted to ask on North America. Just the performance in the quarter relative to what we can see in the track trends, it was a bit stronger. So I know in the prepared remarks, you talked about some hurricane shipment dynamics. But can you just talk about what drove the gap in the quarter? And then maybe as we look ahead, would you anticipate a similar gap as we continue to monitor the data here in the fourth quarter?

Peter, that's an interesting topic. From our discussions, I believe the data sources you rely on are quite different from ours, and various analysts utilize different sources. A key aspect of our business is that we have a few larger customers that are either untracked or not tracked well. Therefore, even if Russ's club is documented in the system, the data you see could vary based on whether you're using panel data or the live feeds that Russ receives.

Absolutely.

And then let me maybe just unpack a little bit the numbers. And I think two things from there. I mean both scanner and the reported results, we are seeing sustained momentum from all the innovation and activation that we're doing across the markets in the U.S. and the categories. Focusing specifically in North America, I think it's important to highlight that from a year-to-date standpoint, shipments are largely in line with consumption. And as we've said, you're always going to see some noise quarter-on-quarter. And specifically for Q3, as we stated in our prepared remarks, what you're seeing is two things playing out. The first one is lapping last year's hurricane-related impacts on shipments, which drove around 50 basis points year-on-year. And then the second item, and we've been talking about it and Russ mentioned it a little earlier today, is the timing of the promotional expense, particularly year-on-year. And that drove a timing on the realization of those promotional activities. So those are largely the two items that would have had overall shipments or organic growth ahead of what we would have seen in consumption for the quarter, but the year-to-date numbers are largely in line.

Yes. To build on what Mike mentioned, we're concentrating on engaging consumers at every price level and across all channels. As Mike pointed out, there is a notable shift of consumers towards e-commerce and membership clubs. If these changes are not adequately tracked, it may lead to a disconnect and overlook some of the ongoing growth. For example, in digital channels in North America, 99% of last year's growth came from digital, and this year it's at 100%. We also have a 7-point share advantage in digital compared to brick-and-mortar. This creates a significant disparity, and the tracking of these volumes can be inconsistent and somewhat volatile. I understand that this tracking aspect might introduce additional challenges, but the growth is robust, and we are committed to executing our plans and meeting consumer needs across all channels.

Your next question is coming from Chris Carey from Wells Fargo.

So I wanted to come back to the promotional activity in North America and how you're responding. But I specifically wanted to dig a bit deeper on the comment that North America is kind of tracking well quarter-to-date. It's not really about a quarter-to-date question per se, but you've shifted promotional activity into Q4. I'd love to get a bit more detail on how you think that's doing? How is that improving your competitiveness? And Nelson, just any margin implications that we should be thinking about from this increased promotional activity?

Yes. I would start maybe with a broader statement there on just what's going on in North America overall. We're growing volume and mix, as you see in our results because we're focused on meeting consumers where they need us. And clearly, what you see right now is that consumers are really under pressure and their purchasing power is under pressure. We don't really see candidly a catalyst for that to change anytime in the near term. However, our categories are essential categories with low substitution, and they're very important to people's lives. And so that's what I think why you see the demand remain relatively resilient. And from a promotional standpoint, that's exactly why we tend to view promotion as a tactic to drive trial. It doesn't really expand our categories. I think our retail partners understand that as well. And so our focus is really on strengthening our offerings by investing in value propositions and differentiated innovation at every rung of the good, better, best ladder, especially cascading those innovations across the portfolio, and that's exactly kind of what we're doing. So that shows up in the form of strengthening the value offerings like I just talked about with Snug & Dry a minute ago for value-seeking consumers, improving the product quality, so they're getting more value for money as well as elevating benefits to drive trade-up and premiumization. And we see the premium segment of the category healthy and still growing kind of across our portfolio. And one more thing I would note is just the volume/mix growth in North America, I think, is the proof point that, that is working. If you look at North America, we're kind of getting volume/mix growth on top of volume/mix growth. So year-to-date, our volume/mix growth in North America was about 2.2%. And if you looked at that on a 2-year stack basis, it would be 2.9%. And so that really is kind of how things are unfolding. So the promotional dynamics, our strategy was really to really focus on executing the play that I just described.

Yes. Earlier in the quarter, we noticed some increased discounting from competitors, deeper than we had experienced previously. However, it probably didn't affect us as significantly as we initially expected. Additionally, our efforts to promote our new innovation are paying off. As Russ mentioned earlier, our focus has been on promoting the brand to encourage trial of this innovation, and it appears to be gaining traction. Overall, I would say our brands are quite resilient, especially in the current environment.

To your question about margins, Chris, there are a few developments we anticipate for Q4 concerning gross margin. Due to the timing of our investments in the supply chain and the realization of our efforts to mitigate tariffs, we expect gross margins to begin expanding as we approach the fourth quarter. However, regarding operating profit margin, we are increasing our marketing investments significantly this quarter to support all of our initiatives. Therefore, we expect the operating profit margin to be fairly similar to what we experienced in the same quarter last year, with our goal being an overall expansion of operating profit margin for the full year.

Okay. One quick follow-up. I couldn't quite tell, but did your commodity outlook, if you exclude the impact of tariffs come up a bit today? Maybe I'm misreading that. And if so, what's driving that? And maybe just more broadly, how you see the cost outlook evolving here? If you'd like to add a bit of thoughts on how the tariff backdrop is evolving, that may also be helpful.

Yes. So before I get to tariffs, one thing is I think I said versus prior year. So versus prior year, we would see an expansion in operating profit as well. I was referring more to quarter-on-quarter, it would be not too dissimilar. It would be largely a little bit below because of the investments. In any case, getting to tariffs, two things that have played out on tariffs. One, on the gross element of tariffs, we are down and improved about $70 million. So we were about $170 million. We're down to about $100 million gross tariffs. On the mitigating actions, we're still mitigating around $50 million because of the timing of that, and we do expect to be able to largely mitigate them all as we get through last year. So that should play out. Obviously, on the tariffs front, there's a lot of moving pieces, Chris, and we're staying attuned to what's happening on that front. But overall, the good news is that we are seeing the mitigating actions coming through. We expect that to play through as we go into Q4 and early 2026, and our teams are activating all the elements in the toolkit to offset.

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

Mike, so just maybe you could just give some clarity on the full 2025 guide just on the top line. Obviously, over delivery this quarter, but it looks like there's a little bit of a step back in 4Q. So I just wanted to just understand, is there something you're seeing? Or is it just the environment is volatile, so you're just kind of appropriating your guidance accordingly? And then just I'll ask my follow-up now. Procter & Gamble talked about some exclusions on tariffs or some inputs. And I'm just curious if you're seeing that as well.

Yes. I'll comment briefly on the last point. Some of our products are daily essentials, and there is an exclusion for Brazilian eucalyptus, which is an important factor for us. We're pleased to have been able to receive that. Do you want to comment on it?

I can provide guidance on the top line, Nik. There are a few points to consider. Year-to-date, our organic sales are up 1.6%. Currently, we anticipate that the categories will grow around 2%, and we expect our growth for the full year to align closely with these categories. Essentially, we expect to see an acceleration in Q4, or at least maintain the same growth level that we experienced in Q3, thanks to all of our programs. Does that clarify things?

Yes, that does, thank you, so much.

Nik, and one more thing I'll add is just, as you know, we always talk about driving the virtuous cycle in our business and so we have seen a little strength, and we started off the year well. Third quarter came in good. So we're going to continue to reinvest in our brands and make sure that we can drive ongoing momentum as we get into next year.

Your next question is coming from Anna Lizzul from Bank of America.

I was wondering if we could take a step back on the diaper category. We're seeing the category evolving here with certain ultra-premium players expanding the market on the top end. I was wondering how you see Kimberly competing in this environment where we're seeing growth but also increased competition at the mid-tier and value ranges, but more robust growth on the ultra-premium side with some newer brands in the U.S. So I was wondering, is this an area in ultra-premium where Kimberly could compete through innovation or potentially through M&A? And then how do you see the overall category dynamics developing from here?

Yes. The positive aspect of the diaper category, as well as all our categories, is that performance truly matters. We are very confident in having the best technologies and a strong technology pipeline for future years. Innovations next year will surpass those of this year, and innovations in 2027 will be better than in 2026. Our strategy, as we've often mentioned, is to excel in every tier of the good, better, best framework. This focus on global expansion and premiumization within the category is driven by offering enhanced features and products that provide greater value. For instance, in North America, our premium product mix has increased from 40% of our business to just under 70% over the past decade. In China, it has risen from 6% five years ago to over 40%. This reflects our core strategy. Nonetheless, we understand the need for a strong value proposition in the value tiers. We do not want to position ourselves solely as a niche premium brand, which is why we are working on integrating our best innovations and features into mid-tier products to ensure a superior offering across our entire range. Russ, would you like to share some additional insights?

Yes. I'd just add something. You mentioned super premium. I think we're excited about that, and that's consistent with what we're seeing just because I think it illustrates that there's plenty of room for us to continue to premiumize the category. And you see that demand on the premium and super premium side is out there. And so continue to look for us to both drive that, as Mike just talked about, the premiumization success we've had, both in the United States and other markets, including China. We're going to continue to focus on that in addition to bringing great value at the mainstream and premium tiers.

Great. And just one follow-up on the cost side. You did mention in early September, your expectation to reduce your volatility to fiber, and that would approach 0 following the JV agreement. So I was wondering if you could elaborate on that more and the efforts that you're making towards that so far.

Yes. I'll begin. Volatility has been a major focus for us because it was a distinguishing feature of the KMB stock compared to other companies. Historically, our cost of fiber was more volatile, and one of the reasons for that was fiber prices. Our recent partnership with Suzano in the international family and professional business helps stabilize our fiber costs, as they are one of the most efficient fiber producers globally. This partnership provides significant advantages. Additionally, by reducing our stake in the international business through the joint venture, we inherently decrease our volatility. Since Nelson joined us, we've implemented a risk management approach similar to what we used at our previous company to mitigate input cost volatility. We hope you can observe these changes reflected in your models.

And just to build on what Mike is saying, the transition that we've been doing over the last 2.5, 3 years to integrated margin management, Anna, has really percolated across the entire organization. The notion of pricing net of cost at least neutral in the mid- to long term is gaining hold across the organization, and that's really a way of working that has allowed us to have more proactive management of the volatility separate from all the other actions that we're taking. So that is a big, big cultural change across the organization, and we're seeing that play out over the last 2 to 2.5 years, and that's what also gives us the confidence of being able to attain our milestone margin targets before the end of the decade, both on the gross margin and the operating margin as we continue to progress in this Powering Care transformation journey.

Okay. I think we'll end it there for today. For anybody that has any follow-up questions, the IR team will be around all day to take them. I know there are other calls that people need to get to. So thanks, everybody, for joining us, and have a great day.

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