All right, so we're going to get started. Next up, we have Kimberly-Clark, and we've got Mike Hsu, company's Chairman and Chief Executive Officer, and Nelson Urdaneta, the company's Chief Financial Officer. We're going to just do it. Mike.
Well, thanks for having us.
Thank you.
Great to see you.
Thanks for having us.
So, Mike, I went back, and we reread the transcript of your first call as CEO. I can't help myself.
Yeah. Feels like a long time ago.
I know.
It wasn't that long ago.
You have, you had a lot to deal with since then. But, you know, back then, category growth was really challenged, across geographies. A lot's changed, you know, so maybe we could just start really big picture and think about your view of category growth from here forward.
Yeah.
Next 3-5 years, let's call it.
Yeah. I'll start with my expectation, Lauren. I, I mean, one, going forward, what do I expect? I would expect a period of stable growth. Now that's in the context of the last 3-5 years, where, you know, I think on part of the company, we accelerated our growth. I think we were growing organically about 1% for about 5 years before I became the CEO, and then we've been growing at about 4% since then. So I think we've accelerated, but how we got there, as you well recognize, it's been a very bumpy ride. I think the good news as we think about the next 3-5 years, you know, we've had some unique macro headwinds, related to operating in a global pandemic, a war, global supply chain disruption, all those things.
I would say at this point, they're not fully behind us, but they're largely behind us. So I think that's one component. The second part, though, and the bigger part is, you know, I love our categories, and I think they are attractive growth categories. You know, I think 3 out of our categories are in the top 10 projected to grow in the next 10 years globally. I think you're well aware, you know, we still think there is a lot of headroom for penetration, especially in the developing and emerging markets.
You know, I, I, in my shorthand, I tend to say, we're, like, in the early innings, there is a long runway of growth because the categories, you know, it's, it's expensive to participate in our categories because if you're in diapers, you may spend somewhere between $500-$2,000 a year in the category. And so it requires a, a pretty sizable income to be able to participate in the category. So a lot of markets, like Indonesia or, you know, still Brazil, too, are still coming up in terms of the affordability. So there's still inherent growth and penetration. And then I would say the bigger opportunity for us is in the premiumization. On a value per baby basis, developed markets on average across the category, you know, consumers may spend about $500 per baby. In developing and emerging markets, it tends to be somewhere between $100-$200, and so there's still a lot of headroom, I would say, to help serve the consumers better with better products. So with that, I would say that should add up to, hopefully, a period of more stable growth for us.
Okay. And more stable growth to the categories, so you think the categories globally are 2-3 kind of growth?
Yeah. Yeah. And I would say, you know, low single digit range, and, and hopefully, we like, because we want to grow share, we want to do slightly better than that.
Okay. Do you think the macro backdrop has changed also? As I think back to that, that first call, like, there were, you know, considerable macro headwinds in Latin America, your birth rate declines in the U.S., the U.K., South Korea at the time, price competition in China. Like, there was a, there was a lot happening when you became CEO. So again, knowing we've had this crazy 3-4-year period, but how much has the macro backdrop helped accelerate category growth?
Well, well, I'd say overall... Well, there's two buckets. I'd say the macro, the ones I just clicked through, pandemic, war, global supply chain disruption, I would say those are truly the macro, global macros. And I think they've been, you know, being in this industry for over 30 years now, I would say historic. You know, I, I'd say historic in their difficulty. I have directors who've been in this industry for 50 years who would say, "Whoa, we've never operated in an environment as difficult as this." And I think that's probably true, because if you just reflect going back, I mean, in March of 2020, we flew back from Uzbekistan, of all places, went right into a meeting at the airport and decided to close our offices globally, right?
And at the time, since we didn't know how COVID was transmitted, you know, we didn't know if we could operate safely. And you, as you recall, there were companies that were shutting down, not as many in our industries, but we had all those choices. And then, and then you go, you know, through all the disruption around supply chains, and then now operating in this war, you know, which, you know, on this scale has been unprecedented, at least in the last 20 years, you know, for, you know, I'd say a global CPG company. I think those have been very, very difficult, I think, macros to work through, and I'm really proud of how our company and our organization has navigated, you know, and I think we've navigated that well.
Now, maybe some of the other things that you talk about, which I might characterize as, like, microeconomic challenges for our business. Birthrate, good news, you know, or the bad news is, hey, birthrates have declined. That's been a kind of a demographic phenomenon. I think it comes with incomes rising in the developing and emerging world. The good news is, I think that, you know, I think that's gone to where it has, it tends to go. Meaning, I would say a lot of birthrate declines are behind us. You know, when I entered this role, I think there were 17 million babies being born in China. I think this year there'll be about 9, and so I think, our China business has managed that birthrate decline very, very well. Korea, I think, is...
I just saw an article; it's the lowest birth rate country in the world, you know, which happens to be our second largest business. I think our care business has grown share substantially in that period to kind of offset the birth rate declines. So I think we've navigated some of that well. I'd say some of the other things like that I would characterize as micros, entry, competitive entry of, of, let's say, local small players or from price competition, either driven by other manufacturers or retailers. I think that comes with the category, and so I think we've been able to navigate those well. I think the... So, you know, while I say I don't think the macros have helped us on that sense or the micros, it goes back to what I was just saying earlier, the long-term opportunity for us, which is, hey, essential categories that have a lot of penetration and I would say value growth opportunity to serve our consumers better, is really a great opportunity for us.
Maybe we could talk a little bit about how the Elevate and Expand strategy has made the company arguably more in control of its own destiny. You know, the example of birth rates.
Yeah.
You know, it feels like that's been maybe a bigger change than I think is appreciated by a lot of the investment community, maybe. So maybe you could talk a little bit about that.
Yeah. Well, I think you and I have talked about this, Lauren, and it just goes back to the underlying philosophy of what's the right way to build a business. And so you can look at Elevate and Expand, and we use those words because I think elevate means elevate our categories or premiumize our categories. Because I think the, you know, what I said when I came into the role was, hey, the spread between the lowest-priced diaper and the highest-priced diaper is a very narrow spread. And if you compare that to other categories and consumer products that have premiumized over time, we have a lot of opportunity to make better products that consumers think they should be willing to pay for.
Expand means taking kind of the proper leadership role in ensuring that markets like Indonesia or markets like Brazil or markets like Peru develop appropriately and, you know, versus waiting for it to happen. So I think that's the core of our strategy. But if you really reflect on it, it's kind of like, almost like what every CPG, you know, should do. And so, so we're really not doing it to offset macros. It's more about, hey, I believe there are bigger needs that, you know, that we can fill and fill better. Me, and, and what are those? Well, I feel like everybody thinks tissue is a commodity category. I don't. I think it provides a really valuable service to our consumers. And, you know, what's the need that's still unmet? A, a better clean.
You know, and I would say, give me a shower fresh clean, and, you know, then I'll say we'll be getting there. But, you know, we're not there yet, right? Or if I think about diapers, definitely protection was the core reason for why, you know, diapers were created. We do a pretty good job of that. I wouldn't say we're doing a perfect job of that yet, and so I still think there's opportunity to do a better job of protection. But then if you climb the order, the hierarchy of needs, what comes next? Comfort. You know, your baby or if you're a senior, you're wearing the diaper 24/7. It's not comfortable, right? I don't think it's comfortable.
And so I think there's still way better opportunities to make our products better for somebody who's kind of wearing it all the time. Let's keep climbing the ladder. The next one is health, and how can we help and have health? I said on a conference call earlier, "Sure, oh, we got magic coming in poop." And, you know, I think that you can have, technically we call it BM or bowel movement, you know, a runny BM, that we can separate that from the skin of the baby, and we have products out there that can do that. And I'll talk maybe more about that in subsequent quarters. So, I think creating more valuable innovation for consumers is really kind of our calling, and I think why we believe we can grow the business and you know continue to expand margins over time. We're not gonna be immune to macro or micro headwinds, but you know I think if we run these plays, that's how we'll navigate them.
That's great. Last question, back to my pre-read of your transcript. Strategy is called K-C 2022.
Yeah.
2023. So can we stay tuned for kind of updated thoughts on the financial algorithm? I know there's still one way to get back to higher margins, but just thoughts on, is there another strategy variated out there?
You're a great analyst. You got us on the 2022.
Yeah. High level math there.
Let me tackle it. So when we launched K-C Strategy 2022 back in January of 2019, we were clear that it was a medium-term strategy. Really, our objective was to reframe our teams in balanced and sustainable growth. There were three key tenets of the strategy, which remain true today. One was about growing our portfolio of iconic brands by elevating our categories and expanding our markets. Second was about leveraging our cost structure and being able to continue to be very disciplined around costs and have a financial discipline. And then the third key pillar of the strategy was around capital deployment in ways that would generate returns that would be accretive to the overall enterprise. So those remain true today.
Little did we know at the time of the launch of the strategy, that we would be facing a global pandemic, a war in Europe that's still underway, which both of which caused significant disruptions in supply chain and also significant spikes in costs that we've had to deal with in the last few years. At the time, we said that for this transition period, our top line growth objective organically, was to be 1%-3% annually, and as Mike just said, we've actually grown in the last 4 years at about 4% every year. However, on EPS, we said it was gonna be mid-single digits, and given all of the disruptions we had to deal with, we fell short of that objective at the time. I think it's important to also highlight that prior to us launching this interim strategy, we said that our long-term would be 3%-5% top line growth, organic, and we would be striving to get to, you know, mid to high single digit EPS. I'd say we're currently working through our long-term strategic plan, and in the not-so-distant future, we're gonna be back with an update. So stay tuned.
Okay, great. So just sticking with financials for a minute, I wanna talk a bit about gross margins. There's been significant progress, not far off the kind of 35% benchmark, and there's still significantly inflationary costs flowing through the P&L. So, I know you've spoken to needing to have a plan for margin recovery without relying on deflation to get there. But I guess it strikes me as reasonable to assume that there have been structural changes in the business and with cost savings. Again, given the progress you've made on recovery and that there's still so much inflation in the P&L, it feels like 4Q into 2024, there should be a pretty clear path back and even discussion to be had at margins going above prior, you know, pre-COVID levels.
Yeah.
Is that a reasonable thought process? And if so, why?
You're onto something.
Well-
One would hope.
One would hope. Okay.
So as you stated, Lauren, we're very pleased with the progress made in the last 5 quarters of recovering margins. In fact, in the Q2 of this year, we got to 34% gross margin, which is a 400 basis point recovery versus the low point that we had at the end of 2021. We, we've been very clear, and we're committed, and we have a line of sight in the near term to get back to that 35%. And given a, a slew of changes we've done in the business over the last 4.5 years, we're confident that we will expand margins from there.
One of the things that we faced during 2021 through the end of this year, based on the latest projections we provided in July, is that we're staring at about $3.6 billion of incremental commodity costs and currency in a 36-month period that we've had to deal with. And our teams have been very decisive in implementing revenue growth management actions with the toolkits that have been deployed to realize pricing. Also, in ensuring that we remain disciplined on costs, also ensuring that we launch margin-accretive innovation, and then, of course, continue to deliver savings through our FORCE program. In FORCE, there's an element of self-help, as we've explained in the past, because remember, we get into material price negotiations with some of our vendors.
Some of our commodities are not as liquid as you would see in other CPGs, and we have one-to-one negotiations with global vendors, with contracts that might cover multiple years or they lag a market index. We have been already flowing through some savings in FORCE that have been coming through. We said in the last call that for the year, we expect around $100 million of commodity inflation. Yet if you look at the first half, we had a cumulative of $190 million. So based on what we provided as you know, as guidance in July, we would be expecting roughly $90 million based on that guidance to come our way favorably as we head into, as we go through the second half.
To the extent that commodity trends and the dynamics in the marketplace remain, yes, we should see some further benefits coming through, but the key really, Lauren, is that it's not one-to-one, as we've explained, and you can't just extrapolate directly from a, from an index like RISI into what's gonna flow into our P&L. But overall, we're seeing abatement. We've seen resins coming down multiple quarters, double digit. We've seen fiber, the fiber complex finally start to come down in the Q2 of this year. In aggregate, four key components on average were down in the low teens, and our projections still call for that to continue. Transportation normalized in the U.S. in general, and to the extent that that continues, we should expect benefits to come through.
Okay.
Yeah, we did view the margin recovery to 2019 margins as a milestone, not a destination. And so when I came into the role back in 2019, you know, margin expansion at that time was a goal, and it still remains one, so we still need to do that.
Okay. So just, I guess, can you talk a little bit, like, the sort of the structural things? As you think about whether it's the path ahead, the beyond 35%, but what are the types of structural changes, let's call it, at your disposal that you can kind of go after? Because I think it's important to talk about, you know, beyond the mechanics of cost inflation, the questions on pricing, even if it's revenue growth management driven, but sort of those underlying structural things that can improve the profit profile of the business.
Yeah. I would characterize them as a virtuous cycle of, bucketed in three items, if you will. The first one starts with our strategy. We launched our strategy four and a half years ago. Mike, when he took over as CEO, put together the notion of elevating our categories and expanding our markets. And this has been really fundamental to where we're at today, and we've got plenty of examples of how the strategy is coming together. China, which we tangentially touched on. Let me give a little bit of examples of what's been working in China and how that playbook can be scaled elsewhere in the globe. In China, we've continued to premiumize the categories, and that's both diapers and feminine care, in the last four, four and a half years.
In that time period in China, with all the structural situation that Mike explained, we've been able to grow our business in the high single digits to low teens year after year. We've consolidated our leadership position in diapers, where we've gained, since 2019, 400 basis points of market share. In feminine care, we've strengthened our position, gaining in that same time period, 300 basis points of share. We have a tremendous focus in ensuring that we have the best products available in the China market, and then we quickly transfer the benefits in those upper-tier products to the rest of the tiers that we've got in both feminine care and diapers, and that, in turn, allows us to grow volumes in a margin-accretive manner. If we go to Huggies diapers, as an example.
In 2020, we introduced the best product in the marketplace, and we have the best product today. It was a major improvement in terms of dryness and thickness. We then went ahead and launched a super premium product at a 50% premium to the next tier, featuring cotton and a 3D liner. And then we've taken those benefits, and we've been quickly moving them to other tiers in diapers. If you take that playbook, we're very thoughtful about the fact that our categories are essentials, and our consumers are not going to compromise on quality. They really want the best products for their babies and for their own personal care needs. And we're taking that playbook and applying it elsewhere in the globe, both in developing and emerging markets and developed markets.
The second component of why we've changed and why we feel confident of our ability to continue to move beyond the milestone of 2019 gross margins are the investments that we have been making in enhancing our capabilities. First is revenue growth management. Mike talked about it. We've assembled a team that has been investing in digital tools to hone in our skills in realizing pricing and realizing improvement in revenue and growth management. We have playbooks that are being deployed on price pack architectures across the different markets, channels, and formats that we operate in. Secondly, it's investments on our commercial capabilities and what we're calling internally, the power of our network organization. Last year, we opened our commercial hub for North America in Chicago, where we're assembling a top team that's focusing on product innovation and in market execution in North America.
We've invested in capabilities to scale innovation quickly across the globe. If you look at fem care, feminine care, as an example, we've taken overnight pads, which we're launching across several markets, and we're doing that in a much more, much faster way than in the past. Same applies for certain platforms in adult care. And if you take that to K-C Professional, our Icon tissue dispenser, we launched it in the U.S., and we're now scaling quickly in Europe, and we'll scale it in the rest of the globe. So those are capabilities that we didn't have before, and we've been really stepping them up. And then the third capability is on continuing to drive our growth productivity pipeline. We're investing in building that pipeline across the 500 earnings calls.
We believe that it'll be a key unlock as we move in the next few years. And then the third component of why we're so confident is the partnership that we continue to build with our customers. They're key in this whole trajectory change that we're doing. They fully understand the essential nature of the categories we compete in, and they understand that they need to be financially healthy. Because if our categories are financially healthy, it means that we can invest in innovation, and we can invest behind the brands. And that, in turn, creates value for our consumers, for our customers, for our shareholders. As Mike has said, we sit down with our customers continuously to review our future innovation pipeline, what's coming in the pipeline two, three years from now. So they get to see where that money is going and why we are gonna be continuing to drive value for the category, and that's what gets them really excited about what we bring to the table, leading in the categories we're in.
Okay. There's a lot there, but I wanna... Before I come back to some questions on innovation and the market performance, I want to ask one more question about margins and FORCE in the self-help. So savings in 2022 and 2023 were a bit, you know, kind of below the pre-COVID levels. And I know across our coverage, productivity is a kind of tougher to get at when, well, factories were closed. So there's lots of offsets with the activity. But also you'd mentioned that some of the FORCE savings you see is on these negotiated material savings. And so I think historically, when you're in a deflationary market, there's less negotiated savings to be had. So how should we think about the magnitude of FORCE savings going forward? You know, do we get back to that, what was it, the high $300-$400 kind of level per year? Yeah, you know, and then-
Yeah.
The top line's grown, so as a percentage of sales, it's still as a three should be, but I, I don't know if that's a fair assessment.
Yes. So a few things. We, you know, we have a big trajectory. We've had FORCE in place since 2006, so it's been probably 17 years. If you look at a broader historical delivery, the $300 million, give or take, of last year and this year, is well within the range of what we've delivered. To your point, prior to these past 2 years, we were delivering slightly ahead of that obviously, in a deflationary environment, as you rightfully say, we're not gonna be materializing significant, you know, material savings. But what I focus on is really on the gross productivity pipeline. That's what flows through, that's what's coming through, and that pipeline is very healthy, Lauren. So, you know, it fluctuates quarter to quarter, it fluctuates year to year. We're well within the range of what we've delivered. Could it be higher down the road? Yeah, it is possible that it'll be higher down the road, but it's well within the range of what we've done before.
Okay, great. I wanted to shift to North America specifically for a moment, because I do get a lot of questions on what we see in the Nielsen data, and with certainly the topic on the Q2 call and the market share performance. So I guess, a couple of things and reasons why it's important. One is that there's a question out there of whether gross margin recovery gets pinched by the need to put some more promotional dollars back into the market. That's a question across the industry at large.
Yeah.
That one's focused on volume. So, that piece of it, and then the second is just with the market shares. I, I guess, would you say your U.S. market shares have been in line with or, or better than what you might have expected, given the pricing, given the historical elasticity in the categories-
Yeah.
You know, the types of supply, the label, et cetera?
Yeah. So for the... I would say for the past, let's say 18 months, market shares globally and maybe, and, and definitely in North America, not where I want them, right? And so how do I think about market share philosophically? Well, here's, here's how we manage our business units and the markets, which we, we manage them on sales, operating profit, gross margin, cash, and market share. And it's all-- I guess it's five of those things, right? That's a lot, but, you know, and, and, but they're all equally weighted. And, and what we tell them is, "Hey, these need to grow, and they don't have to all grow the same amount, but they all need to grow consistently over time." And so, and, and, and we put that accountability.
But and philosophically, you know, I feel like if you're not growing share, then you're harvesting the business, intentionally or not. So, I think share is probably, in my mind, the most important marker. But also, you know, I think we wanna grow share the right way. I think globally, I think the company has done a pretty good job on share in the last 5 years. I think, you know, overall in personal care, you know, on a weighted basis, we're up. I think in our, you know, in three of our top four markets, you know, we're up, high single, low double digit in share points. I mean, in Korea, South Korea, I think we're up, I think in four or 5 years, up over 20 points. In Australia, up double digit.
I said three of four, the one of the four that's not in there is North America, which is a focus area for us. You know, what's happened there, definitely our shares, we were kind of moving in the right direction in a couple of years ago. I think what you know has caught us or affected our share trajectory has been our pricing. You know, I think Nelson and I especially prioritize margin recovery because philosophically, I feel like if you know anyone can sell you know a brand at no margin you know, but you know to have a healthy business, it needs to have some margin.
And so I think that was maybe, in my mind, the most important thing, especially looking at over $3 billion in inflation costs, right? So I think our teams have done an excellent job of that. I would say, competitively, you know, have we, you know, have other companies lagged behind us on the pricing? And that's explained a piece of it. I'd say the other part of it is, you know, maybe my emphasis, if I were to be self-critical, I'd say: Hey, you know, maybe the teams have maybe, you know, overcorrected on the margin recovery, and maybe we've lost a little traction on the execution of that. So overall, I would say there's some relative timing relative to competition that's affected shares, and I think we're cycling through that now.
We have some pockets where we need to see improved execution, both on the innovation and the advertising and commercial programming. And so, but that said, I would say, you know, the core tenets of Elevate and Expand, A, making products better, finding bigger needs, and serving them better, I think all hold, and we'll continue to run that set of plays. I think I did get the sense there was a lot of drama on the call related to the promotion environment, and I got a little bit in our one-on-one meetings this morning.
I think, I think people are kind of maybe thinking about maybe old tapes, you know, because I think there's likely to be a lot of drama related to diaper war, is this, and maybe that happened, you know, years ago. But I'm not a fan of growing share by renting share through promotion. I was telling a story in a one-on-one this morning. I once was new on a business, and, you know, we inherited a big brand. Nelson and I worked, and this is in another company, and the VP on that business comes in and is like: "I got a problem." And I'm like: "What's the problem?" He's like: "Well, we're...
This is our biggest brand, and we're promoting it 37 weeks." I'm like: "Oh, I see the problem, which is like, what's the growth strategy? 52 weeks of promotion, right? So, and then what do we do next year, right?" So I- that's why I'm not a fan. It's like a shortcut way to try to demonstrate some growth. I think it generally is dilutive to margin. It's not the healthy way to grow the business, and I'd rather earn it by making the products better, making our brands more attractive to consumers. And I use promotion, I prefer to use promotion tactically to serve a marketing objective, which is, for me, tends to be trial for a great product that we want consumers to buy.
Yeah. It feels in personal care categories, that seems like I don't want to call anything easier, but an easier task, right? And certainly, your competition seems to articulate the same views on, you know, prioritizing category growth and innovation, all the right things.
Yeah.
In consumer tissue, it strikes me as a tougher spot, less predictable maybe, but you've got private competitors. Would that be the area that you get, where you say you're sort of doing a little bit of, self-analysis and saying maybe we overcorrected? Is it more on the consumer tissue side, that's a tougher thing to figure out?
I would say not in North America, yet. I think definitely, so promotions play a bigger role in that category. If you just look at the percentage volume sold on deal, it's gonna be slightly bigger. So it's definitely more important. But again, I still think there's a lot of needs that can be served in a category like bath tissue. We talk about a better way to clean. I think that's really, really important, and I think the category has been trading on this, you know, equity around soft and strong forever. You know, but, you know, we think texture is really important and that it can help deliver a better clean.
I think the wet, dry, routine, regimen can add a lot of value to consumers. So I think there's different ways to kind of, to manage that. But again, I don't think it goes back, harkens back to saying: Hey, you know, the volume is a little soft, and so it's time to go BOGO. I just don't think that's ever the answer, the right one for our brands, in this business. But you're right. I mean, volume matters. You know, these are big businesses with expensive capacity that need to be kept full, and so we all recognize that. But again, I think, you know, for me, you know, especially on the tissue side, operating discipline is really, really important.
Okay, great. This may come a little bit out of left field, but I, before we run out of time, I wanted to just talk a bit about Indonesia. Because I think the, the Softex acquisition has had and has a lot of promise.
Yeah.
And it was super exciting when it was announced. And, with the impairment charge that you just took, you said, you know, no change in the optimism on the market and the market potential.
Sure.
Maybe you could just talk about, like, what hasn't worked strategically and needs to change going forward.
Yeah. Still love it. You know, still glad we made the deal. Nelson and I are going out later this month, and so, you know, for a business review. You know, Indonesia, I think today is the number 5 diaper market in the world, 4 million births a year. I think projected over the next 10 years, it'll probably climb to number 3. So it's an important strategic market for us. Also, this, this business has a great set of brands in feminine care and also adult care, so it was a perfect fit. You know, what's changed versus our acquisition assumptions? You know, one, we bought it, and then COVID hit, and Indonesia was hit pretty hard by COVID.
So we saw, especially in the diaper category, which is our largest business there, the category slow down as a result of COVID, much slower than the assumptions we had made in the plan when we acquired it. I think it will recover, but I think it's gonna take a little bit more time to recover. And as you... Since you do DCF models, you know, the medium term is the most important part of the model. And so that, that's one component. I think the other component is this was a privately run company with the last few years run by private equity.
So, you know, I think, you know, versus our expectation, maybe some of the business practices were not as disciplined as we liked, and so that's a piece that, you know, we've brought in our most experienced management that has a great track record of building up our positions in developing emerging markets, and we've deployed them to the business there. And, you know, we're confident in their ability, we're confident in the business and the brands there, and it's just going to take us a little time to work through. But I'm, I remain super excited about Indonesia as a market and as a growth engine for us.
Okay, great. We are out of time, so we'll go to breakout, but please join me in thanking Nelson and Mike for being here with us today.