Kimberly-Clark - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered resilient profitability but softer top line: net sales $4.84B (-6.0% YoY; -1.8% QoQ) as FX and divestitures weighed; adjusted EPS $1.93 (-4.0% YoY; +28.7% QoQ) and reported gross margin 35.8% (up vs Q4) on strong productivity momentum.
• Versus S&P Global consensus, adjusted EPS beat ($1.93 vs $1.89) while revenue missed ($4.84B vs $4.89B); 15 EPS and 10 revenue estimates anchored consensus; management cited pricing investments and tariffs for near-term pressure. Bold beats/misses: EPS beat; Revenue miss.*
• 2025 outlook lowered: Adjusted Operating Profit and Adjusted EPS now flat to positive (constant currency) vs prior high single-digit and mid-to-high single-digit growth; Adjusted FCF now ~$2B vs >$2B prior; FX drag reduced modestly vs January guide.
• Key narrative catalysts: $300M gross tariff headwind being mitigated via network re-optimization, maintained brand support and innovation cascade (e.g., Huggies Snug & Dry) to defend share and affordability; expected organic acceleration in Q2 on easier comps and activations.

What Went Well and What Went Wrong

What Went Well

• Productivity and margin execution: reported GM 35.8% and adjusted GM 36.9% (down 20 bps YoY but up vs Q4), with SG&A savings beginning to flow; adjusted operating profit $844M (down 6% YoY) despite FX headwind.
• North America operating profit +1.3% YoY to $676M despite divestiture and pricing investments, driven by productivity and M&S/R&G optimization.
• Management commitment to innovation across “good-better-best” tiers and preserving marketing support; Huggies Snug & Dry upgrades positioned to win value-conscious consumers (“we want to put the best product in front of the consumer”).

What Went Wrong

• Top-line softness: consolidated organic sales -1.6% YoY driven by -1.5% price; IPC organic -2.8% and IFP organic -2.3% as price investments and FX weighed; consolidated net sales -6.0% YoY.
• Tariffs/macro cost shock: ~$300M gross tariff impact (net ~$200M) driving guide cut; Q2 flagged as the largest tariff headwind quarter (~200 bps GM headwind vs PY) before mitigation ramps.
• Equity income and FX: equity companies net income fell to $44M (from $61M) primarily on currency; adjusted EPS down 4% YoY despite lower adjusted tax rate, reflecting lower adjusted Op Profit and equity income.

Transcript

Operator (participant)

Good morning and welcome to the Kimberly-Clark First Quarter 2025 earnings call question and answer session. I will now hand it over to Chris Jakubik, Vice President, Investor Relations. Please go ahead.

Chris Jakubik (VP of Investor Relations)

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. 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.

Mike Hsu (CEO)

Okay, thank you, Chris. In the first quarter, we continue to make solid progress across the three pillars of our Powering Care strategy, building on the strong foundation we established in 2024. While our top line was somewhat softer than our expectation, the first quarter overall was consistent with our full-year plan. Our results demonstrate that our cascade of innovation across the Good, Better, Best value spectrum is winning with consumers. We held global weighted share while navigating a dynamic environment. Volume plus mix was solid, demonstrating that demand in our categories remains resilient. We made strong progress optimizing our margins and continued to deliver world-class gross productivity enabled by our Integrated Margin Management approach. Our freshly wired enterprise matrix organization is playing a key role scaling initiatives in 2025, and this is enabling us to bring the best of Kimberly-Clark to all markets faster and better than before.

In addition, we're on track to generate approximately $200 million of SG&A savings in the next few years. We remain confident in our ability to execute the plan we outlined for this year, even as we navigate a rapidly evolving external environment. In fact, Powering Care gives us a running start. In this evolving environment, we see three keys to winning. We will deliver stronger differentiation at every rung of the Good, Better, Best ladder. We will deliver industry-leading productivity to generate funds to reinvest in the business, drive profitable growth, and address external headwinds. We will continue to enable a faster, more agile organization. We're continuing to perform while transforming. We're scaling our transformation and reshaping our portfolio for stronger, more profitable growth over the long term. As we move forward, we will stay true to our purpose and values to deliver better care for a better world.

We remain confident in our ability to unlock our long-term potential for our consumers, our company, and our shareholders. With that, I'd like to open up the line for questions.

Operator (participant)

Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone. Your first question is coming from Lauren Lieberman from Barclays. Your line is live.

Lauren Lieberman (Managing Director and Equity Research Analyst)

Great, thanks. Good morning. I know there's a lot to cover today, but I was hoping we could start with organic growth. Results in North America significantly trailed what we'd seen in scanner, which was pretty strong, actually. We didn't see in scanner the kind of deceleration a lot of other companies and categories saw during the quarter. I know in the prepared remarks you mentioned there was no retail destocking. It would be great if you could just help articulate what drove the gap in North America performance reported versus what we saw in scanner. Secondly, just to get to something north of 1.5%-2% organic sales growth for the year, so better than category growth, implies a significant ramp after the first quarter results globally.

Helping you just talk a little bit about why we should expect to see that acceleration. Thanks.

Nelson Urdaneta (CFO)

Sure. Thanks, Lauren. I'll get started with bridging the first quarter and how we expect the balance of the year to evolve, the acceleration that we are foreseeing in volume and mix, especially as we go into the second quarter. I'll ask Mike if he can jump in in terms of some of the key initiatives that are being taken across the globe as we speak. Firstly, as Mike said, in our organic sales, we're slightly below our expectations for the first quarter, while profitability was in line with what we expected, supported by strong productivity delivery, both in costs and overheads. As a reminder, we're lapping the strongest quarter in 2024, in which we grew 5.6% organically last year.

There were four factors at play in the first quarter when we unpack organic sales growth, which helped bridge scanner data consumption to what our organic sales came in at. Firstly, as we stated, weighted average category growth was we had expected to be around 2% coming into the year. That's what we had seen at the end of 2024. Whereas for the first quarter, we're in the 1.5%-2% range. That's the first factor. The second is this year has one less day of shipments in the first quarter, as well as in the full year. Whereas scanner data is apples to apples in terms of days and weeks versus the prior year. This is representing about a 100 basis point impact to organic sales in the quarter.

Thirdly, we are facing lower year-on-year in North America private label shipments outside of the private label diaper business exit we have been highlighting. This as a whole represents about 40 basis points to total company organic sales. In the case of North America, which you asked, it is about 2x that, about 80 basis points of a headwind. Lastly, we have planned strategic pricing investments in price pack architecture across several markets and categories, including U.S. Consumer, which started happening at the very end of 2024, U.S. Professional, where we have been maneuvering through a highly competitive environment in certain segments within Professional, as well as some of our emerging markets.

Now, going into the full year and our expectations in the year to go, first, consistent with our long-term algorithm, we continue to target a volume and mix-based organic growth for the year that's ahead of the categories in our markets. We have a strong slate of new product and go-to-market activations that are happening as we speak. They're being ramped up. We started at the end of March, and that's happening through Q2, parts of Q3, and investing heavily behind it. That is one of the pieces that should accelerate volume and mix in Q2 and on. The other bit is when we do the comparison against the prior year, assuming shipments are in line with consumption, we should see just less than 40 basis points of a tailwind in 2025 versus 2024 from the retail destocks that we experienced last year.

That is all built into our outlook for 2025. As we get into the quarterly perspective, it is really going to be basically on the year to go, a comparison of quarter-over-quarter. That is the progression that we are seeing. Q2 in particular should be one of the easiest comps that we have because of the destock level that we saw in North America, which overall would represent a tailwind of around 80 basis points for the company. Again, that is primarily in North America. Overall, we are expecting to see volume and mix to accelerate in the balance of the quarters for the year. I will turn it over to Mike for some further perspective on the initiatives.

Mike Hsu (CEO)

Yeah. Lauren, I'd say one, we have a strong pipeline to improve our consumer value propositions around the world. That is why we felt like it was very important, despite some of the external headwinds we're seeing, to preserve the fundamentals of our plan and execute it. Overall, I'm going to say a couple of things. Growing faster than our categories and markets depends on how well we provide better care for our consumers. We expect to deliver healthy volume and mix-driven organic growth. As Nelson points out, we do believe that will accelerate in Q2. What's behind that is a slate of innovation that we've launched. I mean, I mentioned in my prepared remarks, Huggies Snug & Dry North America, that's only recently started shipping and has barely started shipping, and it's a great product.

If you look at the reviews, it compares very favorably to the premium tier, even though it's targeted against the mainstream value shopper. We feel great about the innovation. We also have a broad slate of improvements that have yet to start shipping in international, including Latin America, where we have seen a little bit more softness recently. We are going to make some significant product improvements internationally along the same lines, improve product quality. That is really the basis. Our whole strategy is predicated on we're going to make better products at a lower cost, and we're going to innovate to do so. We are going to pull on the matrix to work faster, to bring the best of what we have to markets around the world.

Operator (participant)

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

Nik Modi (Managing Director)

Hey, thank you. Good morning.

Mike Hsu (CEO)

Insightful help yesterday, Nik.

Nik Modi (Managing Director)

Thanks. Good job. I guess, Mike, the question is just given the value-seeking pressures that we're seeing pretty broadly, that I think we can all agree will probably persist for at least the next few quarters. You talked about innovating at different tiers, but how do you manage that along with the price mix and kind of your margin cadence, right? Just trying to get an understanding, is the revision just a tariff-related thing, or are you also baking in some kind of mixed weight as you kind of innovate more on the more of the value end of the market?

Mike Hsu (CEO)

Yeah, Nik, I would say the revision and the outlook is primarily headwind cost-related, right? I'll say strategically, I think as we're implementing our innovation strategy and our marketing strategy, I think we've accounted for some of the mixed differences. I want to say a couple of things. One is that our categories continue to exhibit very resilient demand. I mean, the category growth, as Nelson pointed out, has decelerated, but it still remains healthy. It's 1.5%-2% versus 2%-ish at the start of the year. That reflects a little bit less pricing, as we had highlighted in international. There is some frequency and softness across Latin America, which is under the gun economically as well. I will say, though, in our categories, they are daily-use categories, and consumers remain interested in the product performance, and they're interested in better-performing products.

I think, Nik, increasingly affordability has become paramount, more than kind of it's been in my 12 years, 12+ years here at K-C. We are very focused on that. We recognize that situation, and we understand the burden that I would say the middle-income to lower-income households are dealing with. Our strategy is to, we said in the prepared remarks, cascade our innovation from premium throughout the tiers. I think the Snug & Dry example that we pointed out, I think one of the analysts sent us yesterday, the reviews, they compare very favorably to our Tier 5 product. We are okay with that. Part of that is how we manage the mix and the margin structure. Also, I'd say we are going to prioritize winning the consumer and winning the share.

Part of management's job is to figure out how to solve the mix issues. Our teams are doing that. What we want to do is put the best product in front of the consumer and get them into the Huggies brand or the Kotex brand or the Depend brand. That is our job, job one. Secondarily, we will be able to manage the mix over time, we think.

Nik Modi (Managing Director)

Great. Thanks, Mike.

Mike Hsu (CEO)

Okay. Thanks, Nik.

Operator (participant)

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

Dara Mohsenian (Managing Director)

Hey, good morning.

Mike Hsu (CEO)

Hey, Dar.

Nelson Urdaneta (CFO)

Hey, Dar.

Dara Mohsenian (Managing Director)

I just wanted to get a bit more detail on the incremental $300 million in tariffs. I get the dynamics are rapidly changing on the tariff front. It did sound like previously you felt the tariff impact will be more manageable. Really, two questions. First, short-term, Nelson, why is the situation more burdensome than previously believed? Can you give us some detail on where specifically the incremental $300 million is coming from? Is it pulp? Is it China? How much are other buckets, etc.? How much are you assuming you can offset through both price and productivity when you look at the full-year guidance? Second, maybe a similar question just from a longer-term perspective.

Mike or Nelson, back at Analyst Day 13 months ago, there was a lot of time spent on how you're able to potentially price quicker, more precisely, drive mix to offset cost issues, etc. Just where you stand as an organization 13 months later. Should we think of this just as more of a discrete external issue, the tariffs that are one-time and hard to sort of plan or manage for, or has something changed in your ability to sort of use agility and flexibility to manage through the cost environment as you outlined down at Analyst Day as we move sort of past the tariff impacts we're talking about today? Thanks.

Mike Hsu (CEO)

Yeah. Let me start. I'll ask Nelson to provide the details on kind of what changed. I will say the whole underlying strategy and why we're rewiring our organization for growth is we want more agility. All the things you talked about, Dara, with, "Hey, can we move fast, whether it's on revenue management or on cost management?" We're able to move faster now than we were just one year ago, right? That's kind of one of the key points. I would say just a comment on what changed. I would say what changed is, I think, the breadth and degree of tariffs and also the countries involved, I think, has changed significantly since maybe where we were at the end of the last quarter. I think that there has been, as everybody knows, a very volatile kind of environment.

There has been a lot of change back and forth and continues to have change. This kind of represents our best view of what we see today, which I'll let Nelson talk a little bit more about.

Nelson Urdaneta (CFO)

Sure. A few things. Back in December, Dara, when Chris and I were at your conference, I mean, we chatted, we shared at the time that the majority of what we sell in the U.S. is sourced and made locally here in the U.S., and that in terms of raw materials and finished goods, our combined exposure to three specific countries, China, Mexico, and Canada, was just less or around 10% of our total cost of goods. If we factor in all of our raw materials and finished goods imports for our U.S. business, 80% of our total costs in the U.S. are U.S.-based. Only 20% of our U.S. costs are exposed to tariffs. As Mike indicated, in the last 20 days, we've had to reflect cost impacts of actions on three fronts, which also include the depth of the actions.

First is the aggregate U.S. tariffs on China of 145%. This is driving about 2/3 of the $300 million gross impact that we have shared today. That is largely on finished goods, per your ask of the breakdown. The other element is U.S. reciprocal tariffs to Mike's point about breadth and reach, and that is about 10% that have been put in place on other countries, which we source from. This is representing about 10% of the $300 million impact. Lastly is the set of retaliatory tariffs that have been announced by other countries on the U.S. This is representing around 25% of that $300 million. We are working fast through actions to mitigate these costs. Frankly, the learnings that we had in the 2021, 2022, 2023 cycle have come in pretty handy. The other bit is that we are one year into our Powering Care transformation.

We recently hosted many of you at our Beech Island facility to showcase some of that transformation in action and what we're doing about it. Frankly, at this moment, we're much better positioned to handle through many of these headwinds. Now, it takes a little bit of time. You can't solve that overnight because we're having to reaccommodate some of the elements of our supply chain, and we intend to already be able to address about 1/3 of the impact this year. It will take us through 2026 to pretty much be able to address the whole element in a consistent manner based on what's been enacted today. As always, we will keep our consumers at the center of any course of action that we take to make sure that we're having the right value props in place.

Mike Hsu (CEO)

All right, Dar. We're going to give it to you like a fire hose because I'm sorry, we got a lot to say on this. I will say the big thing I want to emphasize is, and there may be some semantics here, but you mentioned, "Is it a discrete item?" At this point, I am treating it as a discrete item, right? There's an externality that we don't think will continue to recur over time. What we want to do is run the play, run our plan as intended, right, and give the innovation and the marketing and all the productivity plans room to breathe. We want to execute those. Our global network, I really feel strongly, positions us to navigate this volatility in the environment very, very well.

As I mentioned, Powering Care, the strategy that I outlined, I think we continue to be very committed to that strategy. We want to differentiate our brands through superior innovation and activation. We want to deliver world-class levels of productivity. We want the organization to work faster. Those are all, I would say, evergreen things that would be good in any economic environment, but especially in this environment. The other thing I want to point out is that this change in the tariff environment, while it presents a near-term challenge that we just kind of went through, it also presents some opportunity. We feel like the best approach to mitigate the headwinds is to reoptimize the network, right?

What this has done is change kind of like the costs at different nodes of our network and change some of the operating constraints. We just have to rerun the model and, in my words, kind of reoptimize what our flows are, right? That is part of what we all signed up for. I think the other thing is, over the last couple of years, we have really enhanced our ability to deliver better products at lower cost. Huggies Snug & Dry is a great example with the U.S., China, and the rest of the world working together to deliver a superior proposition. We also think there is going to be more value-oriented volume to be earned, and we are confident in our ability. We are going to maintain brand and product support that we anticipate at the start of the year.

We are working hard to accelerate savings so that we can drive durable solutions.

Dara Mohsenian (Managing Director)

Can I just quickly follow up? Yes. No, that's very helpful in a lot of detail. The value-conscious consumer that you've talked about in the prepared remarks and so far in Q&A, how much of that have you seen so far versus it's more of a forward expectation? It sounds like that's more expected from here. You obviously talked about the broader product offering, the innovation, winning with consumers. Just can you talk about the need for maybe investing in affordability and the pricing side of things, particularly given the pricing result that we saw in the quarter here in Q1? That'd be helpful. Thanks.

Mike Hsu (CEO)

Yeah. I mean, I think it's a subtext in our whole discussion, which is we've been seeing it, Dar, and you probably have been seeing it in our categories over the past year, right? I think there's been a migration to opening price point where that typically has meant more affordable price package sizes that consumers could get into. That's primarily for lower-income households. I think on the higher-income households, they're even seeking value by, I would say, larger counts at lower price per unit, right? We have seen both ends of it. I think if you—this was in the prepared remarks—if you look at kind of the impacts on costs that are going to be hitting the average consumer in the U.S., I think budgets are going to be tight. Affordability for us is core to our strategy here.

It's why we highlighted what we're doing on Snug & Dry, which is our mainstream value play here on diapers in the U.S. We have that same strategy around the world and also across our categories. We want to be—we want to offer a great product offering at the premium end, and that is going to continue to be a big growth driver for us. We want to cascade the product innovation that we have at the premium end throughout the tiers that we offer. We will let the consumer decide about which products they want.

Dara Mohsenian (Managing Director)

Thanks. I'll get back in queue.

Mike Hsu (CEO)

Okay. Thank you, Dar.

Nelson Urdaneta (CFO)

Thanks, Dar.

Operator (participant)

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

Anna Lizzul (VP of Equity Research)

Hi, good morning, and thank you so much for the question. First, I did want to touch on costs as well. The cost environment is certainly creating more pressure, and it is a very fluid environment. Just related to marketing, is this impacting your ability here to invest, or are you considering different means of where and how you're reaching different consumers now, just given they are more pressured? Related to innovation, of course, understanding that plans have been made for this year, consumers are expecting to be more value-conscious. Does this impact your longer-term strategy at all and thoughts around a more premium portfolio?

Nelson Urdaneta (CFO)

Yeah. A few things. I'll start with the cost environment and what we're facing. I'd like to separate it into two elements, and I'll build on the discussion we just had on the $300 million linked to the tariffs. Coming into the year, we expected costs to be largely in line in terms of inflation versus what we experienced in 2024. That was around $200 million. That remains about the same. That has not changed. Costs, excluding the impact from tariffs, have remained largely in line with what we expected at the beginning of the year. That's one. What we're having to address is the $300 million of incremental gross impact from the tariffs. As Mike said, this is something that we see as more discreet.

We're rapidly moving to address at least a third this year and the balance of it going into next year. The reason why we are calling or changing our guidance for the year to about flat in operating profit and EPS has to do with the fact that we do not intend to cut investments behind our innovation and our plans. For the first quarter of the year, we invested at around a 6% level of advertising behind our marketing initiatives and our new products and existing platforms, which was largely in line with prior year. We intend to continue doing that as the year progresses because we've got significant innovation that's been put into the marketplace, and it's going into the market.

There are pockets of initiatives that will be taken as well in terms of investments beyond just brands, and it has to do with our supply chain. We intend to maintain our investments in the business in terms of capital expense. For the year, we call at the beginning of the year around $1 billion-$1.2 billion. It largely has to do with the transformation of the supply chain as we're into the second year of Powering Care. We are maintaining that level of investment despite the headwinds that we just talked about. Overall, I would say there's no impact to the long-term strategy. We remain steadfast on progressing our Powering Care strategies and ensuring that we can drive sustainable, profitable growth with solutions to unmet consumer needs for years to come. But Mike.

Mike Hsu (CEO)

Yeah. At the risk of providing too much transparency, here's what I'll say, which is, look, we recognize that there's this discrete cost headwind. We believe we can generally offset that over time by reflowing our network, right, by resourcing kind of where we're making product and where we're shipping it from. As you take that into account, they're mostly supply chain moves that are the solution. If we believe that, Anna, then what we're trying to avoid doing is reducing quality in our product that's working or cutting the marketing that's working and giving our plan a chance to breathe and perform as we're seeing year to date, right? That's really kind of the underlying thesis that we have, and we feel like it's the right play for us.

Anna Lizzul (VP of Equity Research)

That's very helpful. Thank you so much.

Operator (participant)

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

Javier Escalante (Research Analyst)

Good morning, Mike, Nelson, Chris. My question has to do.

Nelson Urdaneta (CFO)

How are you?

Javier Escalante (Research Analyst)

Hey, how are you guys? My question has to do with the use of pricing to drive mix. And if you can split the discussion between emerging markets and North America, right? Particularly emerging markets, you see currency headwinds, and you are making price investments. I know that this is a financial reporting issue that where you are making the price investments not necessarily correlate with what you are taking pricing to do the so-called PNOC. So that one aspect, but particularly also in North America, as you look to drive mix, are you increasing promotions in the high end? What exactly, if you can talk strategically about how you are using pricing to reconfigure the portfolio in the US and internationally, that would be very helpful.

Mike Hsu (CEO)

Yeah. Maybe I'll start with a headline, Javier, that kind of says, "Hey, we're focused on driving volume and mixed growth while maintaining PNOC or pricing net of commodity discipline," right? We're trying to be disciplined on price. Maybe there's more embedded in that than may appear. The strategy is we're going to make our products better, right? I just kind of mentioned to Dar, every rung of the Good, Better, Best ladder, and then we'll let the consumers vote as to what the mix ends up being. Our job is to make sure that whatever mix flows based on how the consumer votes, that it's acceptable to us, right? That's part of management's job, right?

The other part of what's implied in that statement, focused on volume and mixed growth while maintaining PNOC discipline, is that the categories have seen a significant wave of pricing over the last several years, right? We just kind of are maybe two years removed from what I would call an inflation supercycle. What we've been a little more focused in our current strategy is really anchored on, hey, improving the product quality, driving positive mix through premiumization by making premium products of the consumer's desire, right? Over time, cascading that innovation throughout our value tiers. That's really what we're driving. There's no really significantly different strategy on a country-by-country or category-by-category basis to kind of optimize based on pulling different pricing levers.

I mean, again, our teams, the directions of the teams is they have to have pricing net of commodity impact discipline. We want to drive the volume plus the mixed growth. I do not know if that answers kind of what you're looking for, Javier.

Javier Escalante (Research Analyst)

Yeah, sure. Let me drill down a little bit on North America specifically, right? If you can comment on the promotional environment as you see it or you saw it in Q1 and what we should expect for the balance of the year, given that you have more innovation coming in, and I suppose that you want people to try that out. At the same time, coincides with the tariff, right? Help us understand how you see the balance of the year use of pricing relative to your innovation.

Mike Hsu (CEO)

Yeah. I think maybe it starts with the philosophy that we do not really see promotion as a sustainable driver of growth. We do see it as a useful trial vehicle for innovation, right? That is kind of the focus. Why do we have that attitude? We offer daily essentials that have, as you know, low substitution. If you think about our categories, promotion overall for the category does not grow consumption, right? Just because I promote bath tissue does not mean you are going to go more often, right? Thus far, what we are seeing is—sorry, you will have a minute. The category demand remains resilient, right? We do see promotion as an important tool to support trial. Kleenex is a great example. I think we were up over 400 basis points on share last year.

We did promote Kleenex and merchandise it, and we think merchandising has been an important strategy or important driver of that growth. In the quarter, we were up another 150 or so basis points on Kleenex. That is a good one. With Huggies Snug & Dry and Huggies Skin Essentials, they are great new products. We want them in consumers' hands. We are going to spend some time promoting them, right? It is not a promotion-driven strategy, but it is part of the overall plan to drive trial of the products that we want in the consumers' hands, right? That is kind of what we are doing. I would say we are operating consistently around the world on that. The big thing for us is—this is beyond North America—we want to cascade great innovation.

We want to drive it in the premium tiers, and we want to cascade it throughout our tiers around the world.

Nelson Urdaneta (CFO)

Just to build one more point, Javier, I mean, you're always going to see some elements of moves across channels and price-pack architectures. That's something that, again, we activated at the end of last year as part of our reaccommodation of the channel strategy. That's more of adjusting to the realities of the marketplace and where we see the growth coming. That's not in it for us to be promoting, as Mike said. It is very different. The other bit is, remember, Integrated Margin Management, including our productivity plans, allow us to be able to flex when needed to make sure that we remain competitive, not just in the U.S., but across the globe.

Javier Escalante (Research Analyst)

Okay. Thank you, guys.

Mike Hsu (CEO)

Okay. Thanks, Javier.

Operator (participant)

Thank you. Your next question is coming from Bonnie Herzog from Goldman Sachs. Your line is live.

Bonnie Herzog (Managing Director)

All right. Thank you. Good morning.

Mike Hsu (CEO)

Good morning, Bonnie.

Bonnie Herzog (Managing Director)

I have a question on guidance. I guess I'm trying to bridge the gap between your new EPS guidance versus prior. I was hoping you could maybe walk through the different puts and takes. You're now guiding currency-neutral EPS growth of 50 basis points at the midpoint versus roughly 6.5% prior. You certainly highlighted the negative impact from tariffs of $300 million. Could you walk through some of the other assumptions or puts and takes to your new EPS growth guidance? I guess hoping you could help quantify the impact you expect from stepped-up productivity savings, as well as what sounds like your expectation for greater price investments this year, as you've kind of mentioned, Mike, to really improve your competitiveness and affordability.

I guess in the context of that, how big of a risk is there that you're going to need to maybe increase investments further to improve your competitiveness, especially if private label pressures intensify in an economic slowdown? Ultimately, I'm just trying to understand what's factored into your new guidance. Thank you.

Nelson Urdaneta (CFO)

Sure, Bonnie. In a nutshell, the real big change in terms of our guidance is the new news on the cost front. It is a $300 million gross, which on a net basis is around $200 million. That is the real move, and that is what brings us to about flat on the year, give or take, on both operating profit and EPS. There are slight moves on the currency, but there are also moves elsewhere. That is not really driving it. It boils down to the $200 million net headwind that we see for the year. That is really what is in it. It is reflected in terms of our expectations of gross margin, and that is what we are building inherently in the outlook that we are providing today. Because what is going to happen and what we foresee is Q2 will be the biggest impact from a headwind related to the tariffs.

They're in full swing right now. Again, we've only reflected in this outlook what's been enacted both domestically here in the U.S. and outside of the U.S. As such, thinking about the quarters, we would expect a headwind of around 200 basis points for Q2 versus prior year. As we progress through the year, that would be mitigated as we enact all the different changes we're doing in terms of our supply chain and the mitigation plans are being enacted and implemented. The other bit is, does it impact our ability to invest? No. As we stated at the beginning, we intend to keep investing behind the innovation and the marketing plans that are in place and in play today. We're not going to stop any of the investments in our supply chain.

If anything, we'll have to accelerate some of them as part of the mitigation plans that are being implemented.

Mike Hsu (CEO)

The other thing I'll add, Bonnie, and I think part of your question was on the stretched consumer and what do we do about that? I think one is this is not a new trend, and you know, we all kind of saw where the puck was going last year. One of the hallmarks of the plan for this year is what we're doing with, I mentioned, on Snug & Dry or our mainstream value, which is we want to improve our mainstream value offering. Our approach would be, let's improve the product and give that a chance for the consumers to touch and feel that and get that in the house. Apparently, I was just looking at the online reviews yesterday at some retailers, and the new Snug & Dry is almost five stars out of five, right? It's a great product.

We feel great about that and that approach. It compares favorably with the Tier five or the premium products, but that's okay. I think our philosophy internally would be, hey, let's make a great Tier 4 product, and the Tier 5 team can figure out how to beat that. That's kind of how we're approaching things. I do recognize that promotion has ticked up just, I would say, a touch in personal care in North America, not significantly. At this point, we're still running our play. We had a plan for promotion. It's more focused on trial of the new products, and that's kind of the play that we're running for now. We recognize we're going to have to continue to be agile.

Nelson Urdaneta (CFO)

Bonnie, I would like to—sorry, go ahead.

Bonnie Herzog (Managing Director)

Oh, no, no, please. Go ahead.

Nelson Urdaneta (CFO)

Yeah. I would just like to add one other thing in terms of, as you think about the margin progression and some of the elements that are in play, we're already seeing some of the $200 million in SG&A savings that we had committed to starting in 2025-2026 coming through in Q1. Those savings, I mean, just to give you a perspective on overheads, SG&A alone, we were at around 13% for the quarter versus a 13.2% prior year. Those savings are giving us some leverage in terms of offsetting and maneuvering through some of the headwinds, but also delivering the fuel to be able to continue reinvesting. I think you had something else you want to bring up.

Bonnie Herzog (Managing Director)

No, no. That was honestly exactly where I was going with this. It sounds like you do have the flex if the environment deteriorates further so you can remain competitive. It sounds like, yes, exactly what you just said. You have some of this fewer leverage to kind of reinvest in the business, etc. That is helpful.

Nelson Urdaneta (CFO)

Yeah. I mean, we have it. We have it. The whole thing is that, again, it's not immediate. That's why we're saying that it takes a little bit of time for things to work through. Midterm, long-term, we do see the solves.

Bonnie Herzog (Managing Director)

All right. Thanks so much. I'll pass it on.

Mike Hsu (CEO)

Yeah. Just one note, Bonnie. I would say, and that's kind of why we made the change to the outlook we did. It's given us the opportunity to preserve the plan that we believe in and that we believe is working, so.

Bonnie Herzog (Managing Director)

All right. Thanks again.

Mike Hsu (CEO)

Great. If we could take one more question, that'd be great.

Operator (participant)

Certainly. Your last question is coming from Chris Carey from Wells Fargo Securities. Your line is live.

Mike Hsu (CEO)

Hey, Chris.

Nelson Urdaneta (CFO)

Hey, Chris.

Chris Carey (Head of Consumer Staples Research and Senior Equity Analyst)

Hey. Hey, everyone. One kind of around cogs and then a separate question, the bigger picture. The savings program, you are going to be a bit higher this year than your goal and expectations. This is going to be the second year running. It would appear that you are running ahead of the multi-year plan on gross productivity savings. Are you pulling forward future savings? Are you now thinking that the savings program will be bigger over time than your prior expectations? If you can just expand on that. If I could, just secondly, I am struck by the conversation during this earnings call where clearly a number of analysts are trying to figure out, in a way, we have more inflation and yet continued strategic pricing decisions. I understand tariffs are discreet.

Nevertheless, it is interesting in the context of your analyst day when it was you're kind of making the case that you can manage through these cost environments maybe with a bit more agility. Is this your decision to basically take a little bit of the hit on tariffs to keep the plan in place, or are we perhaps talking about a retail environment where you're unable to pass through higher costs for tariffs as retailers themselves are dealing with a lot of incremental tariffs on gen merch and other such categories? I wonder if you could just comment on maybe why you're sticking to this pricing program outside of just, "Well, we want to stick to the plan." I wonder if there are other things going on. Thanks for those two items.

Mike Hsu (CEO)

Yeah. At the risk of oversharing, I'll just try to illustrate a little bit, Chris. It's a complex situation. The tariff situation creates unusual complexity because companies have different positions and different, I would say, sourcing strategies for different markets, right? It's not as simple as, "Well, tariffs are in, so you price it all away," right? In our case, why wouldn't we do that? I mean, we believe we can mitigate most of the cost by switching sourcing. In some cases, we have competitors that don't have to switch sourcing because they're sourcing locally. You would price yourself to be uncompetitive and risk kind of eroding that business or taking it out while you could have solved it by switching your sourcing solution.

The problem with the sourcing is it takes longer because we do not have everything where we need exactly where we need it now, right? Because the world changed. That is why there is a hit to this year, which we think we will mitigate into next year or the year after, is because we can mitigate it over time with supply chain moves, but they take some time to manifest. Really, that is kind of why you are getting the guide that you are getting. It is not an external kind of set of factors. It is more about us wanting to preserve kind of the plan that we have that we think is the right plan and working, and then also recognizing that we have a solution, but that solution is going to take a little time.

Nelson Urdaneta (CFO)

On the savings program and the progress that we are making against our stated target of $3 billion in five years, Chris, as you rightly mentioned, I mean, we had a very good year in 2024, our first year of the program, in which we delivered 5.9% of gross productivity, about $745 million of savings. For this year, we have had a good start. Q1 was about 5.2%, and we have stated that our aim is to be in the upper end of the range of the 5-6%. We are projecting another strong year in terms of gross productivity. The approach on Integrated Margin Management that we started working on a couple of years ago is paying dividends.

It is really being embedded in our culture and has given us enterprise-wide visibility and accountability to be able to drive over time margin enhancement across all of our businesses and be in line to deliver in our stated target of at least 40% gross margin by the end of the decade and at least 18-20% operating profit margin as we exit this decade. It is not going to be linear, as we said. I mean, we look at it more on a year-over-year basis and in a sustained period of time. In terms of, are we prepared to take up the $3 billion for the five-year? At this moment, we want things to kind of play out over time. We are very encouraged by the opportunities that we see ahead of us.

We were very encouraged by the second year that's in front of us, but we're only in a year anniversary since we launched the Powering Care program. Excited about the future on this end and the opportunities that this will create for us.

Chris Carey (Head of Consumer Staples Research and Senior Equity Analyst)

Thanks, guys. It's a complicated world. I appreciate the candor. Thank you.

Mike Hsu (CEO)

Okay. Thank you, Chris.

Chris Jakubik (VP of Investor Relations)

All right. Thanks to everybody for joining us. For the analysts who have follow-up questions after the call here, we'll be available. Appreciate the time.

Operator (participant)

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