Okay.
All right.
Okay. We are going to get started. Next up this morning, we are excited to welcome Kimberly-Clark to the stage. We are joined by a whole collection of people. We have Mike Hsu, Chairman and CEO, Nelson Urdaneta, CFO, Russ Torres, President and COO, and Chris Jakubik, Head of Investor Relations. Before we get into our Q&A session, Mike, I know you wanted to spend a moment discussing progress against your strategy, the timing of Russ's appointment to his new role. Russ, it would be great if you can spend a few minutes talking about your background, broadly what's changed during your time running North America, and also the new leadership appointment in that division.
Sounds great.
Okay.
Okay. Thank you, Lauren. Good morning, everyone. I just wanted to make a few brief prepared remarks. I did want to open discussing our strategy that we laid out at our Investor Day, 18 months ago, Powering Care. Powering Care is powering our results. We've taken big steps to transform our portfolio. We're exiting the private label diaper business and entered into a venture with Suzano to jointly operate our international tissue and professional business. We're making strong progress, but we're just getting started. We're building strong momentum in each area of our strategy. We're transforming into a pure-play personal care and wellness company with $6 billion global brands and leading-edge capabilities. We've developed deep knowledge of the unmet needs that matter most to our consumers in our categories. We've developed a multi-year pipeline of proprietary pioneering innovation to expand our categories.
The world is just getting to see this new category innovation and our strength in brand propositions at every rung of the Good, Better, Best ladder. Now, to optimize our margins, we're beginning to leverage our global scale to unlock a higher level of efficiency gains. We're on track for another year of gross productivity of nearly 6%, which will continue to support strong reinvestment and profitable growth. In terms of wiring the organization for growth, the next phase of our strategy is focused on bringing our global expertise and proprietary technologies to every market as fast and effectively as possible. To accelerate our transformation, we elected Russ Torres to President and Chief Operating Officer earlier this year, and I'm delighted to have Russ here today to share his perspective on our strategy and our transformation. So, Russ.
Thanks, Mike. Thanks, Lauren, for having us. For those I haven't met, my name is Russ Torres. I'm the President and Chief Operating Officer of Kimberly-Clark. I've worked in the CPG industry for 25 years, and my experience is mainly centered on transformation, first at Bain & Company and then subsequent leadership roles at Mondelez back at the time of the split with Kraft Foods, and then most recently at Kimberly-Clark in the North America business, leading the $11 billion business, which is about two-thirds of Kimberly-Clark's revenues. Going back to 2021 when I took over the North America role, the mission was really to transform the business from a cash generator to an engine for growth in margin expansion. I'll talk a little bit about the things we did and the results to date.
Our focus was on building an organization and culture that's capable of delivering sustainable top-tier growth. We really focused on three key areas on the left-hand side of this slide. First, meaningfully accelerating marketing and innovation. Just some points to back that up, we tripled our forward-looking innovation funnel. We've significantly upgraded our marketing capabilities and the effectiveness of our programming. We expanded and premiumized our categories. One example of that is diapers and facial tissue. If you look back in time, the premium segment made up about 50% of the category back in 2019, and today it's 70% of the category. The second big thing on the left-hand side there is productivity and revenue growth management to drive margins. We accelerated productivity significantly. We've got a lot more runway ahead, and we put strong focus on improving mix and revenue growth management.
The third big thing was really building a world-class commercial execution engine. In digital, for example, e-commerce has expanded to more than 25% of our consumer sales. We have a 125 share index versus our U.S. national share, and we really transformed the way we approached our retail partners from being transactional to strategic. One of the things that really enabled this progress that most people really don't appreciate is the decision we made in 2021 to move our commercial headquarters from Neenah, Wisconsin, to Chicago. This enabled us to attract high-caliber talent in specialist areas like digital, social, revenue growth management, and brand building. In fact, about 70% of our commercial team members are new to Kimberly-Clark in the last three to four years and sourced from top-tier companies. We really are a new Kimberly-Clark.
The payoff on the right-hand side has been accelerating growth on both the top and the bottom line. In fact, since 2021, we delivered 4% net sales CAGR and transitioned to consistent volume and mix growth with sequential improvements over the last couple of years. As of the second quarter, we're gaining or holding share in seven of our eight consumer categories, led by our personal care segment with a weighted average market share gain of 60 bps. From a profitability standpoint, in the past two years, we delivered 300 basis points of improvement in operating margin while improving our marketing spending by 33%, increasing that by 33%. Lastly, from a cultural execution standpoint, we have been ranked number one in the Advantage survey across all of the players in consumer products for an unprecedented three years running in the U.S.
We're very proud of that because it reflects our progress. That said, while we're a very different business today, we're still in the very early innings of our potential, and there's a lot more to do. Because of that, we're excited to have John Carmichael, who's joining us from Nestlé to head our North America business in my old role. John brings decades of proven CPG leadership experience, and his decision to join our team underscores the strength of our strategy and the tremendous potential ahead. With that, I'll turn it over to you, Lauren.
Okay, great. Thank you so much for that. Not withstanding these long-range, I wanted to start near-term and talk a little bit about the consumer environment and organic sales growth. First, just, you know, Kimberly-Clark is one of the few companies that's been putting up positive volume mix growth while most other companies in HPC trends are kind of flattish. Just what are you seeing with your consumers that is allowing you to have that kind of performance?
Yeah, obviously, Lauren, good quarter, second quarter, good year-to-date performance. We're encouraged by that performance. We still see plenty of room to elevate and expand our categories. That's kind of the strategy that we've been operating under. Number one, it's clear consumers want better-performing products and are willing to trade up for them. Just to give you a couple of factoids, I think when I joined the company, our North American diaper business was 40% premium. Today, it's well over 70% premium, right? There's been a big shift there. China in 2019 was 6% premium, and that's grown over the last five years to 42%. There's been a big shift in nearly all our markets to premiumize, and that reflects that the consumer demand for better-performing products is there. We're excited about that, and we still think there's a long runway.
We'll get to innovation, but there's a lot of good stuff coming that will drive that further. I think part two is that there's a long runway of category development in D&E. Our categories, we see that our categories, because of the high frequency of use and the long duration of use, it requires about $4,000 of annual income for a household to participate fully in our categories. As you're well aware, in the markets like Indonesia has just gotten there, India is still coming. I think we believe we're still in the early stages of development across D&E markets, and we're excited about that.
The last thing I'll say, and this probably affected our results year to date probably the most, which is our strategy to cascade our innovation across all of our tiers, good, better, best, is really what's driving our growth this year, and we're really proud of that. I think we've been focused, we could see Lauren coming from a couple of years ago that consumers in developed economies like the U.S. were going to be, their pocketbooks are going to be tight. We did pivot a couple of years ago to make sure that we were sharpening our offering, not just in premium, but in the value tiers as well. I'd say those are the big things, but maybe I think Russ would probably like to comment as well.
Yeah, I would say we are seeing the consumer being under pressure, and we don't really see a catalyst for that to change meaningfully in the near term around the world. That said, to Mike's point, our strategy has really been meeting consumers where they need us at every tier and driving innovation and new benefits in the category. In terms of the numbers, our category growth rate in the second quarter was around 2% weighted average globally, so kind of in the zone. We don't really see a reason to evolve our strategy. We're going to continue to invest in the second half of the year in our programming, as well as driving innovation and new benefits to help meet consumers where they need us and drive premiumization.
Okay, great. I guess at the Investor Day in March of 2024, medium to long term, you talked about the expectation of categories growing in the 2% - 3% range. Russ, you just said we're around 2% right now, but the algorithm is to outpace categories. Can you just expand a bit on the drivers of that 2% weighted category growth that you're seeing now? What gets the market back to 3%, you know, it's the higher end of that range?
Yeah, I can comment on that. Certainly, others can weigh in, but I think it is running the play, and we're seeing this around the world of driving new benefits, new occasions, innovation, premiumization, and really expanding out every tier of the price spectrum. It really comes down to that.
Okay. Let's switch to innovation. You just mentioned good, better, best. You've talked about stepping up the pace of innovation across the three tiers, and you've also discussed focusing R&D and innovation efforts on problem areas that face consumers, like comfort, skin health, and absorbency as examples. I just want to talk about what the output of that should be. Do we expect to see a higher frequency of new product news, or should the impact of innovation be greater? Is it a fewer, bigger, better approach, or is it more?
Both, right? I'll click back, and I think our confidence in our innovation, Lauren, is really what leads us to ahead of category growth, right? That's kind of our mindset there. When I say both, I guess I'm not really joking, you know, and I think maybe what you should see is an accelerated pace of category-changing innovation. Internally, Chris, I'll say the internal language I use is you're going to see an onslaught of innovation. We don't say that externally because I don't want you to think we're crazy, right? That's kind of how we think about it inside, right? You know, what's working for us right now this year to date, I talked a little bit last year at Investor Day, hey, most of the industry in diapers or personal care is on this Gen 2 absorbent core.
I won't get into all the details there, but we rolled out a Gen 3 core in China in 2018. That's why we've taken over market leadership at China. We're now about almost just under a 20% share, which is almost double number two, right? I think we have a better mousetrap on the Gen 3 that's also driven our success in other markets like Korea, Australia. It's come to the U.S. this year, Brazil this year as well. We think we have product superiority on the Gen 3 core for personal care. I think we're able to produce that, we think, at a very, very competitive cost, in some markets the lowest cost. That's kind of the starting point, which is a great product now. We have stuff the world hasn't seen yet that we teased last year at Investor Day, a Gen 4 core, a Gen 5 core.
I talked about our vision to be natural forest-free. We've got a lot of, I would say, category-changing innovation in the works. Russ, you may talk Russ into sharing slightly more about that, but I'll let Russ decide.
Sure. Yeah, you know, just to underscore something that Mike mentioned, just to level set, product performance is really important in our categories. They're everyday categories. You might ask, why are you working on a Gen 3 core or a Gen 4 core? If I were to tell you what percentage of the diapers actually leak, any idea?
No, but probably all of them.
Yeah, no, it's in the high-mid single digits, the category. You think about that for a category that's been around for this long, to still have kind of one in 20 x, you know, mom or dad putting a diaper on a baby to have a leak occur, it's not that good. There's still tremendous room for improvement of performance in the core. That's why our focus on innovation is really important. Mike mentioned a couple of things. I'll expand on those. The next generation core he's talking about is really a much thinner proprietary technical advancement that allows us to create significantly thinner absorbent cores with the same or better absorbency. You can imagine what that does for both base core protection as well as comfort and flexibility and the other things that are really important to people across personal care, babies, and beyond.
The other one that Mike mentioned on the new-to-world fiber, something we've been working on for a long time. This is the history of the company, so we get excited about it. Mike, under his leadership, has really fostered a focus on these types of scientific breakthroughs, but new-to-world fiber that not only is more sustainable at an accessible cost and will help us achieve our forest-free fiber commitment by 2030, but also delivers superior performance in the tissue segment. These are the types of things we're working on that, over the medium to long term, are going to start really impacting how we bring new benefits to the consumers in our categories.
Okay, great. In terms of absolute investment levels, do you need to increase R&D spending or can you deliver the onslaught of innovation at the current rate of spend?
We're going to let Nelson decide.
Yeah, so when we think about R&D, we need to think of investments in both what we spend in R&D and what we spend on CapEx. In terms of R&D spend, we have a healthy level of spend at around 1.9% of our net revenue. We've been becoming very efficient on every dollar that we deploy as we have been driving the wiring of the R&D organization into our new operating model. If you then go into our CapEx investments, we have been stepping up our investments over the last few years, particularly our North America business and our new IPC segment, which we launched last year. As of 2024, our investments in CapEx were around 3.6% of net sales, and in the first half of this year, that was about 4.3%.
We expect to step that up to around 6% in the next few years as we drive the transformation of the supply chain, particularly in our North America business, where we had some big announcements a few months ago.
Okay, great. Let's switch and talk about advertising. Mike, last year you talked about a desire to have Kimberly-Clark get better at, in your words, like storytelling to increase consumer affinity for your brand. You talked about the Cannes Awards, the 2Q earnings call doubling the prior five years' worth of awards. Maybe you can talk a little bit about where you think the company is on that journey, the type of return you're seeing on that advertising investment, and then with the recast financials after the Suzano JV, advertising's at about 7% of sales. Is that the right long-term level for the company?
Yeah, we're making great progress on the advertising. I think we are accelerating our ability to be better storytellers. I think that was a big need for us, huge progress. What we're trying to do, Lauren, we want to create brand love by showing consumers how our products can improve their lives. That's really our focus. I'd say over the past five years, I think we also, and we've increased our advertising investment by $500 or $600 million, right, in the last few years. I would also say that's also come with higher ROIs because we've almost shifted to almost 100% digital, Lauren. That digital for us is a powerful model. Maybe our most advanced model in the world is in China, where, you know, it's almost like a CRM model. It's an incredibly efficient spend for us. The data is very, very good in helping us optimize our investing.
I'd say we've developed advanced models in markets like China, Korea. We're bringing those to markets like Brazil and Indonesia right now. It's also influenced, and Russ can talk more about this, how we've adapted that for the U.S., right? I think we feel good about kind of the investment and then how we're executing it. The other part that's equally important is this notion of brand love storytelling. I mean, brand love is not a phrase that people in Kimberly-Clark heard me walk around saying much because I'm not wired that way. It's something that I would say Patricia Corsi, our Chief Growth Officer, and Luiz Sanches, our Chief Creative Officer, have kind of brought that language to us and also made us at the leadership level understand how important that is.
I'd say what we're trying to do there is talk about the benefits of our products in a memorable way that consumers get and like, right? I think that's kind of behind some of the wins that we've had at Cannes this year. I couldn't even pronounce Cannes until I heard that we won some awards. I think that's where we're going. The unique feature, which I mentioned on the call, is we've in-house creative capability. This year we'll make 4,000 ads for Kotex in China. Obviously, a lot of that's AI, all done in-house. Luiz is our internal Chief Creative Officer. He's probably one of the most awarded advertising agency Chief Creative Officers in the world, right? Having that kind of knowledge in-house has kind of changed how we think inside and also dramatically improving our execution in the markets.
Maybe Russ may want to talk a little bit about that because he's been through some of it.
Yeah, sure. I can give you a few examples to bring it to life of what brand love really means. If you think about it, Luiz and Patricia have helped us work on this in the area of crushing the stigma. The GoodNites campaign with astronauts we talked about in the second quarter call is one example. The other one is the Poise's, Giggle Dribble, where the insight there was it's a stigmatized category, but a lot of people don't realize that leaks are a natural consequence of childbirth. We really highlighted that in that campaign and normalized it with humor. Those have been very successful in growing the category. Another example that those of you who have kids may relate to is the Huggies ad they may have seen. It started in the second quarter with the NBA star Giannis and his real-life daughter.
He was doing basketball moves, and she's mimicking her dad. Anyone who's got a child knows that that's like a really touching moment as a parent. Really creating that emotional connection that illustrates the product benefit of Little Movers being able to move with Giannis' daughter really helped us a lot. I think that was part of the reason why Huggies gained 160 basis points of share in the second quarter. There are a lot of other reasons. The last one I would highlight.
Russ, Nelson, and I would naturally not start with Giannis as a spokesperson for Huggies, but it evidently is working.
Kleenex is one more I'll just give quickly because, you know, I think the insight there is that when you give a Kleenex to someone, it's an act of care. By highlighting that, an example being we had a series of seasonal efforts on that of when mom's dropping her son off to kindergarten for the first time, and she brought Kleenex for him, but she ends up crying, and then he gives her the Kleenex. Those types of moments, you know, again, that really creates a connection that makes people realize the role our brands play in people's lives. That also led to growth. Kleenex has grown almost 8% in the last year, and the advertising is a part of that. These are examples of how it's really coming to life. I'm excited because I think we're just getting going.
Just to add, in terms of investment levels, I think it's important to highlight that since 2018, we have pretty much doubled our advertising spend. The run rate that we're projecting for our ongoing operations is right around that 7% level, as you stated. We feel that our investment level is healthy to your question. However, when we see the opportunity to invest more, we will. We did that in 2024 when we stepped up our investment in the back half, and we're planning to do so in the back half of this year as we stated our latest earnings goal.
Okay, great. Russ, wanted to talk a little bit about you taking on the COO role. I think we were talking earlier that you've just come back from an extensive road trip to visit some of your larger, higher growth IPC markets, and you already obviously know North America really well. Could you just talk a bit maybe about your biggest focus areas for change in your top three priorities for the next year?
Yeah, I'd summarize it by saying it's perform while we transform, Lauren. I think we're really focused on getting the wiring right around the world so we can execute today while setting the foundation for the future. That's what I saw on my trips. It was very exciting and energizing to see the speed with which the best of Kimberly-Clark is traveling around the world, both in terms of product innovation or creative ideas or storytelling, and that really came to life. That's really our focus, trying to make that happen.
Okay. Portfolio. Between the PP and private label exit, now the IFP JV with Suzano, a lot to reshape the portfolio, really accelerating the historic sort of path, but really accelerating the last two years. How should we think about further potential changes going forward? Whether it's North America tissues come up, I think a bit, professional comes up, any other parts of markets or portfolio that we should be thinking about as you continue to transform?
I'll say a couple of comments on the portfolio, which is one, why we did what we did. There's two things about it. One, we wanted to focus greater focus on higher growth, higher margin categories, personal care. The second thing is, Lauren, and you're going to be well aware of this, we really needed to structurally reduce slash eliminate our earnings volatility associated with fluctuations in fiber costs. I think we've accomplished both through this last transaction or venture with Suzano, right? Now our portfolio will be two-thirds personal care, and we're excited about that. To your question, there are other adjacencies we may be interested in in the future. We think we have developed great capability that could be applicable to other categories, but Nelson will keep us disciplined and focused on delivering the right shareholder value, right? We're going to be selective about that.
I think the other part, and it was very, very important, and it was a fundamental issue for the company when I became the CEO, was our earnings volatility was far higher than our peer set. The whole driver, almost all the driver was fluctuations in fiber costs, right? You could see with this transaction, the IFP team is super excited because, you know what, under this venture, they're probably not going to have very much variation in fiber costs, right? They're partnered up, we're partnered up with someone who provides, we think, the lowest eucalyptus costs in the world, right? That's part one. I'd say that the JV also structurally reduces the volatility of the IFP, International Family and Professional Business, but also as a nature of the joint venture with us, it gives us great visibility into our costs for North America as well.
We're really excited about that. As we develop these other fibers that Russ has talked about, we would expect over time our volatility related to fiber will approach zero. We're really, I think portfolio moves are a pretty strategic issue for us, and we're making great progress.
Okay, great. Let me ask about IPC and enterprise market. China and North America have been the lead markets for some time, and there's really opportunity, I would think, in the other four focus markets and some of the smaller enterprise markets. When should we expect to see this strategy that you guys have been discussing really take hold in those other markets? Are there any particular categories or countries where you're putting particular focus that are closer to that inflection point where we can see the strategy come to life?
Yeah, I'll say it's happening now. The new operating model that we rolled out, that we talked about on Investor Day, is bringing the best of Kimberly-Clark to all markets faster than ever before. Russ and I, Russ went on this global tour. He was in Asia with Nelson for a few weeks, and I hadn't seen him in about a month, even though our offices are next door to each other. We were meeting in Neenah with the whole leadership team two weeks ago. As we were coming in from breakfast, I said, "Russ, how was the trip?" He said, "You can tell them what you said, Russ.
I said it was phenomenal. It was inspiring just because you could really see the progress that the markets are making. I'll give you an example. You know, Australia moving heavily in the right direction. South Korea, Brazil, we gained share in the second quarter in diapers in Brazil. You're starting to see those quality improvements, the pulling products from other markets, the creative and storytelling execution pay off. We still have some work to do in parts of Southeast Asia and Latin America, but we are seeing, for example, our enterprise markets, our volumes are headed in the right direction, and we're hoping to get to flat to positive in the second half of this year. You're starting to see all these actions really start to have an impact.
Okay, great. North America. We've been seeing a contrast in the U.S. between traditional measured and then non-measured channel, and it really depends on your data provider and what you're seeing. Maybe you can just talk to us about sort of the share gains in North America, what we're seeing in terms of channel mix, e-comm and club versus innovation and marketing being the drivers. I think those are the two kind of ends of the spectrum.
Yeah, and I know we're short on time, so I'll be relatively brief, but I would say a few things. One is when I said we're trying to meet consumers where they need us, that includes channels. The consumer is migrating to e-commerce and club, and it's happening, it's lumpy and it's volatile, and it moves fairly swiftly, but there's a lot of growth happening there. If you don't have those in your models, it's really important to factor those in as we think about that. You mentioned the performance and how much that's linked. I'd say it's very broad-based in North America. If you look across the portfolio in the second quarter, we gained or held value share in seven of eight categories and eight of eight in volume. That's really a combination of things.
It's the execution of innovation, it's the storytelling, it's the advertising, and it's executing well in the channels where consumers are going, including e-commerce and club. We're really trying to serve consumers on a broad-based standpoint. I would also just highlight that in the third quarter, we did see fairly significant competitive promotional activity on the part of retail private label and some of the newer brands that are entering the market that drove pantry loading. As we're kind of progressing, that's caused us to reflow some of our programming into the fourth quarter and kind of balance things. We feel good about our position in the medium to long term in respect to those channels and where the consumer is shopping.
Okay. The outperformance at Costco, I just, one thing I wanted to ask you guys is the risk that Costco actually improves their private label. I think a big area of share gain for you guys has been at Costco, and you have exclusivity. What's the risk that they upgrade their private label?
I'm sure they're working on those types of things. As I said before, we're really focused on providing the best value propositions we can at all tiers. We like our chances because of all the things we're talking about in terms of the innovation funnel and those types of things.
Okay. Let's talk about productivity. At the Investor Day, like 18 months ago, you established a $3 billion productivity target, $200 million in SG&A, and then aspirations for a 40% gross margin and 18% - 20% operating profit margins, all by the end of the decade. How do these targets change in light of the IFP business moving to discontinued ops and then eventually into the JV?
Yeah, so we remain committed to our long-term algorithm in our ongoing operations. In fact, we are tracking ahead of our $3 billion five-year gross productivity program as we speak, as well as the $200 million of SG&A savings. We've been developing very strong capabilities on the productivity front, and we expect to continue to deliver at what we expect to be world-class levels for the foreseeable future, leveraging our integrated margin management approach, our new ways of working, as well as our renewed focus on costs for the long term. Having said that, a couple of things. We expect every single one of our segments, including IFP, to deliver at least their fair share of the savings. When the joint venture goes live sometime mid-next year, as we expect, we expect to continue to benefit from the savings that they'll generate.
In fact, we should see some further benefits as Suzano brings to bear their operational excellence and their fiber expertise, as Mike was sharing before. I would like to note that as we shared in our recast financials, we will be managing through about $150 million of stranded costs related to some shared services and global supply chain costs, as well as some of our unallocated corporate overheads. We have plans that are being developed for us to be able to deal with those costs in the immediate years after the JV goes live sometime middle of next year. We have the conviction that we'll overcome that over time, and it'll be shared with you guys over the next few months and early next year as we get closer to the closing of the JV transaction.
Okay. If we can just wrap up with one more financial question, maybe it's a little housekeeping, but important. How should we think about the earnings base for the base for earnings growth into 2026 and 2027, given the joint venture, the recast 8K, and the long-term algorithm, kind of to level set how everyone should be building their models for 2026 and 2027?
Yeah, so a couple of things. One, we are seeing the benefits of our more focused portfolio coming through NRP&L and the benefits of us having a renewed focus in our science-based technologies and right-to-win spaces. We expect our ongoing business, as I said, to grow in line with our long-term algorithm for the foreseeable future. For 2025, simplistically, three factors to take into account as you look at EPS. One, it will reflect our ongoing business of IPC and North America. Secondly, it will reflect 100% of the earnings of our IFP business because we will continue to own it this year. Lastly, there will be a one-time benefit of about $0.16 from having halted depreciation and amortization on our discontinued operations, which started as of June of this year.
As you think about 2026, 2027, EPS on a constant currency basis, assuming that the transaction closes midway through next year, should reflect a couple of things. One, our IPC and North America business ongoing operations growing at our long-term algorithm. We will need to take into account the dilutive impact of the transaction as we go through it, as well as the lapping of the one-time benefits from the depreciation and amortization by having halted it for the discontinued operations, which will be about seven months for 2025 and about half a year or so, assuming that the transaction closes midway through next year. We are working through the plans, which we will share as we get closer to the closing of the transaction and what the dilution would look like through the periods, as well as the mitigation actions.
We will keep you fully abreast of that as we get there.
Okay. Great. Glad that. Okay. I think we're going to break out or no break out?
Yeah, I think we're doing it.
Okay. Please join me in thanking Kimberly-Clark, and we're going to move to a breakout session.