Kimberly-Clark - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for your patience in holding. We now have your speakers in conference. Please be aware that each of your lines is in a listen only mode. At the conclusion of today's presentation, we will open the floor for your questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question.

It is now my pleasure to introduce Mr. Paul Alexander. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. Welcome to Kimberly Clark's second quarter earnings conference call. This morning, you'll hear from Mike Hsu, our Chairman and Chief Executive Officer and Marie Henry, our CFO. We have a presentation of today's materials in the Investors section of our website. As a reminder, we will be making forward looking statements today.

Please see the Risk Factors section of our latest quarterly and annual reports for further discussion of forward looking statements. Lastly, we will also be referring to adjusted results and outlook. Both exclude certain items described in this morning's news release. That release has further information about these adjustments and reconciliations to comparable GAAP financial measures. Now I'll turn the call over to Maria.

Speaker 2

Thanks, Paul, and good morning, everyone. Thanks for joining the call. I hope everyone is continuing to stay healthy and safe in this environment. Let me go ahead and start with the headlines for the quarter. Organic sales increased 4%, reflecting good underlying momentum and net benefits from increased demand related to COVID-nineteen.

We achieved significant cost savings, margin improvements and record adjusted earnings. And additionally, we achieved all time record operating cash flow. Now let's cover the details of the results starting with sales. Our second quarter net sales were $4,600,000,000 That's up slightly from a year ago and includes a four point drive from currency rates. Volumes were up 2% and net selling prices and product mix each improved one point.

By segment, sales rose 14% in Consumer Tissue and 2% in Personal Care, but declined 10% in K C Professional. Mike will provide more color on the top line in just a few minutes. Moving on to profitability. Second quarter adjusted gross margin was 39.8%, up five twenty basis points year on year. Adjusted gross profit increased 16%.

We had outstanding cost savings performance in the quarter. Combined savings from our force and restructuring programs totaled $175,000,000 including strong productivity improvements. We are now targeting full year cost savings of $510,000,000 to $560,000,000 That's up nicely compared to our original range of $425,000,000 to $500,000,000 Commodities were a benefit of $80,000,000 in the quarter driven by pulp. We now expect full year commodity deflation of 150,000,000 to $250,000,000 On average, that's $75,000,000 better than our original outlook. On the other hand, foreign currencies were a headwind in the quarter, reducing our operating profit by a high single digit rate.

For the full year, currency effects are expected to be a high single digit drag on operating profit. Versus our original plan, the incremental currency headwinds are about twice the benefit of the improved commodity outlook. Other manufacturing costs were also higher year on year. For the full year, these costs are expected to increase more than we originally planned. That's due to incremental expenses related to COVID-nineteen, partially offset by improved fixed cost absorption.

Moving further down the P and L, between the line spending was up 40 basis points as a percent of sales, driven by a nice pickup in digital advertising. All in all, adjusted operating profit was up 28%. Second quarter adjusted operating margin was 21.9%, up four seventy basis points versus a year ago. Margins were up in all three business segments with significant improvement in Consumer Tissue. Consumer Tissue margins included an approximate 175 basis point benefit from improved fixed cost absorption.

On the bottom line, adjusted earnings per share were a record $2.2 up 32% year on year. Let's turn to cash flow and capital efficiency. Cash provided by operations in the second quarter was an all time record of nearly $1,600,000,000 compared to $6.00 $9,000,000 in the year ago quarter. The increase was driven by unusually strong working capital benefits, higher earnings and a temporary delay in tax payments. While cash flow is expected to decline in the back half of the year, we expect full year cash flow will be up very nicely year on year.

Second quarter dividends and share repurchases totaled about $400,000,000 That was lower than normal because of our decision to temporarily suspend share repurchases for most of the second quarter. As we mentioned in this morning's news release, we will be restarting our share repurchase program beginning tomorrow. All in all, we delivered very good results across the board while continuing to invest for future success. I'll now turn the call over to Mike.

Speaker 3

Thank you, Maria, and good morning, everyone. I really want to wish you and your families good health and safety. I'll begin by commenting on how we're operating in the current environment, and then I'll turn to our results and the outlook. Now since the outbreak of COVID-nineteen, Kimberly Clark has taken decisive action to manage our business effectively through this crisis. Our key operating priorities remain as follows: first and foremost, we are focused on protecting the health and safety of our employees and our consumers second, we're proactively managing our global supply chain to ensure supply of our essential products.

And third, we're prudently managing the business through near term volatility while continuing to strengthen the long term health of Kimberly Clark. I'm really proud of how our 40,000 employees are managing through the challenges we're facing every day. Our global supply chain organization led by our frontline manufacturing employees is doing an outstanding job keeping our supply chain rolling. We have not experienced material impact even as we've had disruptions in several markets with elevated infection rates. Despite the tough environment, our teams continue to deliver strong cost savings and productivity improvements.

While much of our attention has been on the near term, we're continuing to execute our longer term strategies. Our teams pivoted rapidly to pursue new growth opportunities that have been created in the pandemic environment. And this includes opportunities to better meet consumer and end user needs around health, wellness and protection, both in home and in the workplace. It also includes opportunities to accelerate e commerce and digital as consumers change how they engage with our brands. Now I'd like to make a few comments about our results.

Speaker 4

As Maria mentioned, organic sales increased 4% in the quarter. In North American consumer products, organic sales were up 12%. Now within that, personal care rose 5%, and that was driven by ongoing momentum on premium tier Huggies, childcare and baby wipes.

Speaker 3

In North American consumer tissue, organic sales increased 22%. Category demand was strong, reflecting increased at home consumption and some continued consumer stock up in bath tissue. Category growth moderated in the latter part of the quarter. Shipments exceeded category demand, especially in bath tissue as we worked twenty fourseven to restore customer inventory levels. Turning to KC Professional in North America.

Organic sales declined 3% and volumes fell 9%. This decline reflects the challenging environment. And I'll note that we experienced strong shipments early in the quarter, which included benefits from higher than normal customer orders in late March that were ultimately fulfilled in April. Now by product category, second quarter volumes were down about 20% in washroom, down double digits in safety. Now volume was up double digits in wipers and other products.

Moving to D and E market, sales were down 3%, driven primarily by K C Professional. Personal Care organic sales in D and E were up 2%. Now in key Personal Care markets, organic sales were up mid teens in China and up double digits in India. In Eastern Europe, organic sales were up slightly, although results were impacted by some destocking and the impact of economic lockdowns. America, organic sales fell low single digits despite favorable pricing in Argentina.

Category demand in many D and E countries has been impacted by a drop in consumer purchasing power and government restrictions on social mobility and store operations. In developed markets, organic sales were up 3%, driven by strong growth in consumer tissue. Now as you know, we're also very focused on improving our market positions, and we're making good progress. Overall, we're growing or maintaining market share in approximately 60% of our 80 category country combinations that we track. In North American consumer products, market shares are up or even in five of eight product categories.

In D and E market, shares are up in Eastern Europe, up or even in China and somewhat mixed in Latin America. In developed markets, shares are up in South Korea and The U. K. So to summarize our first half, I'm very encouraged by our progress. We're delivering strong financial results.

We're strengthening our market positions and we're managing through this crisis safely and effectively. Now I'll address the outlook. The duration and impact of COVID-nineteen on our business remains unclear, and there continues to be uncertainty in the environment. However, our visibility is improving, and we're restoring forward looking guidance for 2020. Compared to our original plan, we're raising our outlook for both organic sales and earnings.

We're also increasing growth investment, primarily in digital advertising. On the top line, we're targeting organic sales growth of 4% to 5%, which is above our original plan of 2%. And this increase reflects a combination of improved underlying brand performance and higher demand driven by COVID. A few additional thoughts about our second half organic outlook. We have good underlying momentum and will continue to support our brands with strong advertising and innovation.

New innovation includes launches on pull ups in North America and Feminine Care in Eastern Europe, Brazil and ASEAN. In addition, we expect Bat Tissue sales in North America will benefit from more people being at home and from our actions to improve customer inventory levels. We expect to continue facing challenging conditions in K C Professional and in consumer categories in some D and E markets. We also expect to see additional consumer destocking in the second half. On the bottom line, our revised outlook is adjusted earnings per share of 7.4 to $7.6 That's up 7% to 10% year on year compared to our original plan of 7.1 to $7.35 While we're increasing our outlook, we'll also invest more in our brands and capabilities.

We temporarily paused some investment in the second quarter and now plan to restore and further increase investment this year. We're doing this to fuel market share momentum and to better position us for sustainable long term success. In conclusion, we remain very optimistic opportunities to generate long term growth and create shareholder value. We'll continue to prioritize the health and safety of our people and our consumers. We're executing our strategies well, and we continue to operate our business with a balanced and sustainable approach.

Now that concludes our prepared remarks. And now we'd be happy to take your questions.

Speaker 4

Thank

Speaker 0

Our first question comes from Dara Mohsenian with Morgan Stanley.

Speaker 5

Hey, Dara.

Speaker 3

Dara. May be on mute.

Speaker 6

Can you guys hear me?

Speaker 1

We got you. Yes, we got you.

Speaker 6

Okay, great. Hope all is well on your end. Your full year EPS guidance even at the high end, it seems high single digit year over year earnings drop in the back half of the year. So I was just hoping for a bit more clarity on some of the drivers behind that. First, I'm assuming a consumer pantry deload probably depresses top line results a bit given your comments about moderating category growth towards the end of the quarter, but perhaps that might be offset by you guys rebuilding retailer inventory levels from a shipment perspective.

So just any commentary on sort of the hangover from a top line standpoint in the back half versus the first half elevated levels would be helpful. And then second, you mentioned the reinvestment back behind advertising. Can you give us a sense, is that a significant amount of reinvestment versus your original guidance a couple of quarters back as some of the other P and L line items have come in better than expected? And then just last, have you budgeted more conservatism into that guidance than you normally would for the back half just given the volatility in the environment? Thanks.

Speaker 3

Okay. Thanks, Dara. Handful of questions. Let me lead off and I'll ask Maria to jump in because I think she'll give you a little bit better context. But I will say resuming the guidance definitely reflects our growing confidence in our ability to safely operate in this COVID environment.

There are some big puts and takes certainly in demand. We see net favorable impact on demand overall though. And that reflects the strong demand growth in North America, obviously in tissue, which happens to be one of our largest businesses. We are seeing some offsetting effects both in KCP and as I mentioned some D and E markets outside of China. And I think that still remains to be seen.

And at this point in the year, I think our range is still fairly wide that probably reflects to some degree some of the uncertainty that still exists out there. But on the overall, as we feel like demand should be, for us overall, a net positive. On the investment side, definitely in the second half, our plan was tilted to increased investment in the second half or a little bit more investment in the second half. We feel very good about where our product quality is and where our marketing and communications programs are for consumers. And we feel very good about the underlying brand performance across globally in most markets.

And so we really feel good about increasing our investment. The plan is for us, we had a pretty significant uptick last year. I think it was about 60 bps in advertising increase and our plan this year would be north of that. And that was our original plan and we planned to meet that. But Maria, you want to jump in there?

Speaker 2

Sure. I think Mike you covered the highlights. When I think about the year, the overall financials look really good as we've raised our OP growth forecast and we've raised our EPS forecast for the year. Operating cash flow should be stronger for the year than we expected back in January. So overall financially this should be a really good year for Kimberly Clark.

And all of that with increased investment in our business not only for the near term but the long term. The way that that favorability comes in is that it's first half weighted for obvious reasons given the COVID situation and its flow through impacts on our business. So when I look at the full year outlook, you know, we're benefiting from solid top line growth, which is led by volume growth plus benefits from mix and price. Currency headwinds are expected to be partially but not entirely offset by commodity deflation benefits. Savings are strong.

We raised our outlook on total savings from forest and GRP to $510,000,000 to $560,000,000 for the year. And as Mike said, we are significantly increasing investments this year, particularly in advertising, but also in other areas like long term capability builds. So for the total year, it looks good. If I compare the first half to the second half and give you a little bit more detail, In the second half for profit, we will have a we're expecting slowing volume growth, which impacts our profit, where we had a sizable benefit in the first half. A little further benefit from twenty nineteen pricing actions.

And also as shelf availability improves in the back half, we should see a return to more normal levels of promotion. Commodities are becoming slightly modestly inflationary by the end of the year. And in addition, our cost savings are not expected to be as strong in the second half. And we're also increasing our investment in the back half of the year as Mike talked about. So that's really what's going on.

And my comment on the guidance is I'm happy to reinstate guidance at this point given that we have more comfort and fight into our supply chain team's ability to maintain our operations during spikes of COVID. That was less uncertain to us back in the April timeframe. So the supply chain risk has been reduced, number one. Number two, the commodity currency environment overall has calmed down since where we were in March, April. And so I would say the guidance is realistic and it reflects what we're thinking based on what we see and the actions we intend to take through the remainder of the year.

Speaker 6

Okay. That's very comprehensive. That's helpful. And then on promotional environment, you mentioned in the pricing environment. Obviously, we've seen a big promotional pullback in The U.

S. Here post COVID. What are you guys expecting in the balance of the year? Does some of that linger? Do we get more back to a normalized type of environment, particularly if category growth weakens a bit?

Does that create more risk? And perhaps just touch on what you're seeing from a competitive standpoint, particularly on the private label front here in terms of The U. S. Pricing environment?

Speaker 3

Yes. U. S. In particular, think, Dara, I would say the same thing I said last quarter is that I think the market has broadly been constructive. And that's because right now, especially the focus is on supply.

And we still are rebuilding inventories. I would say we've made progress on the personal care side. We are still catching up and we're gaining on tissue, but our service levels still aren't where we want them to be and our in stock still isn't where we want it to be. And so we're still working through that. And so we're not promoting as much as we had in the past in this environment.

I think actually the categories or other players in the market are not promoting as much either. I think just a couple of factoids. Volume sold on promotion in the quarter for the category was down, depending on the category, somewhere between 2550%. And so I think that does reflect the situation. And I think that makes sense for the business at this point.

Speaker 6

Okay. And I was getting at more sort of the back half of the year, what you guys are expecting, what you started to see towards the end of the quarter so far in July. Have you seen any changes in behavior? And is this sort of new environment post COVID likely to linger in your mind? Or could you see a ramp up with category growth dissipating a bit?

So looking more ahead as we look out to the balance of the year. Thanks.

Speaker 3

Yes, see it changing significantly in the balance of the year because of the supply situation. Think I just said that we're making a little progress in improving our supply situation on tissue, but we still have a lot of work to do to catch up. And because of that, supply is still tight. And so I don't see, certainly from our end, a heavy promotional environment from our perspective.

Speaker 6

Great. Thanks.

Speaker 0

Thank you. Our next question comes from Lauren Lieberman with Barclays.

Speaker 3

Good morning, Lauren.

Speaker 7

Great. Thanks so much. So I was hoping first you could talk a little bit about mix. You know, Mike, one of the things that you've talked about quite a bit is, you know, elevating the categories and some of the efforts that you're putting, you know, towards that in terms of innovation. The personal care mix was up 2% this quarter.

So if you could talk a little bit about that where you're seeing some greater traction with the higher priced innovation. And then how we should think about that in more economically challenged markets like in Latin America or perhaps as it evolves over Central And Eastern Europe, how we should think about mix and your innovation agenda? Thanks.

Speaker 3

Yes, great question. Mix overall, I think across both consumer, personal care and consumer tissue and in KCP, mix generally has been favorable for us across all markets. Part of it's the core strategy, which is elevate our categories being one. We have recently been more focused on premiumizing our categories with higher margin products that serve the consumers better with better product features. And so we've driven that.

And for reference, we've shifted our mix in Brazil diapers significantly. We were primarily a couple of years ago, primarily a value tier brand. And we're at the precipice of being primarily a premium tier brand at this point two years later. And so now the caveat to that is with the shift in economic conditions, we've got to be able to pivot and meet the needs of our consumer. And so even though the team has focused on premiumizing or driving the premium tiers in Brazil the last couple of years and made a lot of progress, they've shifted rapidly.

And if you look at the quarter, I think Brazil, the category was down high single digits, mostly driven through macros, right? There's, as we've mentioned in the remarks, less consumer purchasing power, less money for consumers to spend. And so they're really tightening up their household budgets. And so for us, we like having kind of a broad portfolio that we play in the value tier and the premium tier. And while our long term strategy is to drive premiumization, we want to be able to play both sides.

And so we're pivoting accordingly and driving the value tier business at this point. And so that's occurred in Consumer Tissue as well. Notably, our Cottonelle share was up almost a couple of points, I think, this quarter, and that has a positive effect on mix for us in some ways. If you look at diapers, obviously, our premium tier diapers are little movers, little snugglers have been growing faster in our business. And then interesting in KCP, also a strong positive mix shift this quarter behind wipers, which tend to be a little bit higher margin for us.

Speaker 7

Okay. Great. And just to complete the thought on Brazil, you'd mentioned that the category was down high single digits in Brazil. And then what was your performance?

Speaker 3

Yes. So we were up slightly, right? And so overall and I think this would apply to many of our D and markets. Think our end market or underlying brand performance has been strong across D and E. But as we maybe highlighted in the last quarter, the unknown around COVID was the implications or what the impact was going to be on some of the market conditions.

And what's happened in some of these D and E markets like Brazil and Russia is the government doesn't have programs like PPP in The U. S. And so the consumers don't have a backup plan or a subsidy when they're out of work or not going to work. And so they really batten down the hatches on their household spending pretty tightly, pretty quickly. And because of that, I would say we're pivoting our programming around which products we emphasize.

But the underlying performance continues to be strong. For example, in Russia, which had a similar slowdown in the category. The category was down slightly. We were up. But we gained three share points.

But there was a pretty big macro effect.

Speaker 7

Okay. That's great. And if I can ask a slightly longer term question. So I know we're going to have challenging comparisons in 2021. But just in general, as you laid out your Strategy 2022 plan, looking for organic sales growth driven at 1% to 3% range, 2% originally for this year with the idea that as you were making investments to upgrade capabilities, marketing, innovation, product quality, all those things that you could reaccelerate towards 3% to five With the higher spending that both the commodity environment and the served consumer demand is allowing you, How do you think that plays out in terms of the timeline to kind of get closer to those long term organic targets as we look beyond again, beyond this sort of COVID enhanced, if you will, near term environment?

Speaker 3

Yes, great question. We would like to get back to our longer term targets over time. I think one of the reasons we moved to kind of these medium term targets originally was the categories had slowed down significantly. And obviously in this environment the category has ticked up again. And I think we're building the fundamentals and building our capability.

And as we get more confident both in our plans and the quality of our investments and our ability to invest, we would hope to get to a faster growth algorithm at some point in time. But right now I think still believe the medium term targets that we put out there are the right ones for us. And then we'll update those when we feel like it's appropriate.

Speaker 7

And again, Mike, that would still have more to do with category growth and not wanting to call that rather than your, I guess, the magnitude and strength of the advertising programs, the innovation product quality and so on?

Speaker 3

Yes. I think it would be a combination of both. I think we would definitely want to see a little bit more from the category and more consistency over a longer period of time. And also get more confidence in our own executions and our own plans. Paul or Maria, any other commentary there?

Speaker 2

No I would just say that the investments that we're making we are expecting a return on those investments. And much of the investment is growth related investments although there is also investment on core capabilities not only growth related but also productivity related. So they we are expecting a strong return on those investments.

Speaker 7

Okay, great. Thanks. I'll pass it on. Thanks so much.

Speaker 1

Thanks Lauren. Thanks Lauren.

Speaker 0

Thank you. Our next question comes from Kevin Grundy with Jefferies.

Speaker 1

Good morning, Kevin.

Speaker 8

Hey, good morning, everyone, and congrats on the strong results here in the first half of year, particularly given the environment. Mike, just to pick up on some of the line of questioning regarding investment levels, particularly around advertising and marketing. So my question is what do you think is the appropriate level longer term? Will the step up that you're targeting this year be a permanent one? And maybe help us think about the magnitude of the increase this year because when we kind of tumble through the numbers, and then for you as well, Maria, just given what you've provided with respect to commodities and forced savings and restructuring and FX, there's a pretty substantial offset to get to your numbers.

So how much of that is advertising and marketing? And then how should we be thinking about that? And Mike, how are you thinking about it longer term? Thanks.

Speaker 3

Yes. I'll let maybe Maria comment further on kind of the details of the step up. But we are planning a significant increase this year, just as we did last year. Kevin, I don't we have not set internally a long range target, but in terms of what our overall A and P spending should be. But I would recognize while historically our advertising has been about average for the industry, it's been less than some of our direct competitors.

And so we feel like there's two factors that we want to do, which is to accelerate growth, we feel like we need to fuel that with better products and better programming, both advertising and sales programs to drive our business and market development programs. And at the same time, it's going to require more investment. And so we're doing that. Now we don't have a long range target that's public, but I would say we would like to be north of where we are today and what we finish this year.

Speaker 8

Okay. Thanks Maria.

Speaker 2

Anything Yes. To I would just add that you know, as a reminder, advertising investment will be back half loaded. And our capability building investments will also be back half loaded. You may recall that when we were on the phone in April, we talked about the fact that with all of the volatility and uncertainty, we were pausing some of our investments. And so the back half higher numbers are partially related to that, stepping back up to our original levels of investment and then also increasing the level of those investments given the overall performance for the year.

Speaker 8

Okay. Thank you both for the color. I appreciate it. I have a number of questions, but I'll pass it on to other folks. Thank you.

Speaker 1

Thanks, Kevin. Thanks, Kevin.

Speaker 0

Thank you. Our next question comes from Steve Powers with the Deutsche Bank.

Speaker 3

Good morning, Steve.

Speaker 5

Good morning. Thank you. I don't know if you guys have looked at it this way, but I guess Maria maybe I was hoping you could talk us through the second quarter gross margin less so relative to a year ago, but relative to the first quarter. Just because I know there are a lot of variables, just based on the headline disclosure, it's hard to conceive of how the margin gets $2.60 basis points better in 2Q versus 1Q. So I'm just maybe you can unpack a little bit of that to give us a sense of the moving parts.

Speaker 2

Sure. A few pieces to comment on. The savings in the second quarter were very strong as we discussed. On the margin side of the house, we also have benefit from geographic mix. So when you look across the board, the stronger performance in North America where our margins are higher than in developing and emerging markets definitely helped us on the margin side of the house.

So those were two of the bigger drivers.

Speaker 3

Okay. Okay. That

Speaker 5

makes sense. I guess the other question and I think you talked a little bit about this, but I guess as I listened to your answers to Kevin's question to Lauren's before that, is there maybe you can just talk a little bit more to the extent you can on specific nature of the second half investments, just a little bit more specificity would be helpful. And I guess I'm really trying to get a sense for how much of those investments are more tactical where we can think of the returns that you mentioned sort of being yielded in the next twelve months versus those that are longer term in nature, that are capabilities that won't yield a return necessarily next year but in the coming two or three plus years. Is there a way to describe that balance?

Speaker 3

Yes. I think let's see, Steve. I guess I would probably characterize them all as longer term in nature, but that includes advertising and brand building and capability investment. And both I classify as more long term more longer term in nature versus what I would say short term, hey, we're going to do a big buy one get one free promotion, right? So it's less tactical in that sense and more long term in the sense of building equity over the long term.

But now the caveat to that is a lot of the most of the advertising investment is in digital and that does generate returns sooner. And now we evaluate those real time. And that's one of the reasons why we do it. But that has both an equity building component and in some ways a short term volume driving component. And so I'd say a big chunk is, as Maria mentioned in her remarks, digital advertising.

We are investing a significant sum that will flow through to more of the overhead lines in capability building. And really a couple areas that we're investing aggressively in is what we called revenue growth management, which was going to help us with trade promotion efficiency and our price pack architectures and how we do pricing globally. And really the notion here is as we're building a global capability, we have a global framework and approach to it. We need to have the right analytics around the world. We need to have the right talent.

And we need to have the right tools. And so there are significant investments we're making to improve that capability there. Similarly on digital and our digital capability, only in the spend, but what we're driving is what Alison would call performance marketing capability. And that requires the same things that I just highlighted in revenue growth management, which is analytics, talent and tools. And so those are some longer term investments we're making.

Speaker 5

Yes, that's helpful. I guess just the last follow-up on that is just the lead time you need to make on these investments. Are these investments that as we sit here in July, you kind of earmarked and locked in for the back half? Or such that there's not a lot of flex in it? Or are there elements to the investments that can be flexed to the extent that the pricing environment that right now looks good kind of looks differently or the demand environment dries up?

Just how discretion and flex do you have in what's lined up for the second half?

Speaker 3

Well, maybe I'll defer to Maria's judgment here, but I would say there's always some flexibility. Nothing's ever set in stone unless we bought upfront everything, which in our case we haven't. And by definition, I think there's a lot more flexibility in digital in terms of how we go to market them. Maria any additional

Speaker 2

Yes I think that's right. We do have some flexibility on the discretionary investments that we plan to make in the second half of the year. And to circle back to your first question, which I missed one other relevant component on the Q2 to Q1, You may recall that we made meaningful investments to shore up our mills and that included additional compensation as well as other supply chain investments. Those were first quarter weighted. And then I just reiterate my comment that we did take a pause on spending and investment in the second quarter and that affected our G and A.

So the G and A increase was lower in the second quarter than the first quarter. So just to try to help with the math there.

Speaker 5

Yes. No, thank you. That's all. All those comments were helpful. Thank you very much.

I'll pass it on.

Speaker 0

Thank you. Our next question comes from Nick Modi with RBC Capital Markets.

Speaker 1

Good morning, Nick.

Speaker 4

Yes. Good morning, everyone. So Mike, I just wanted to kind of get your sense, obviously, things are changing at a rapid rate in terms of openings and closings and that has an impact on consumption, especially at home consumption. So I was just hoping you can give us some context on what you're seeing in July as it relates to some of the changes that have been taking place on a regional basis. And is your supply chain in a position yet where it can actually execute based on some of these very kind of micro regional changes, whether it be by county or by just at the city or state level?

Speaker 3

Yes. And Nick, assume you're really asking this as infection rates change around markets Yes. Or

Speaker 1

Just kind

Speaker 4

that's dictating how open an economy is.

Speaker 3

Yes. Well, I'll talk maybe operations and then the economy. One, I will start with our operations, which I think the team has been doing a phenomenal job executing very well and with a really disciplined approach to COVID-nineteen. Nick, we really have been prioritizing the safety of our employees in our plants. And we've had some sporadic outages.

I will tell you we're on the mode now as we're tracking the infection rates very closely to the lowest level possible. And in The U. S. That means by county is where we rack. And then we make our decisions.

Would proactively close plans for cleaning or make other decisions based on what those infection rates are. And so overall, as I mentioned earlier, I think we've become more confident in our ability to operate in an infection rate environment that fluctuates. And we've done that throughout this year thus far. And so on that component, I think we've really escalated our safety procedures and we feel good about that. I think from an economy perspective, again, we're still kind of working through kind of the changes.

And I think we highlighted in Q1 that there were some question marks in developing emerging markets, how that would be affected. I think that has come to be realized, particularly in Latin America, where we're seeing a fairly high impact of COVID. Plus, in a lot of the markets down there or a lot of countries down there, very strict government lockdowns on social mobility. And as I mentioned earlier, less money for consumers to spend, and so we're seeing a bigger impact. I think we've made the call in our forecast, and we feel like we have it called right.

But it is one of the reasons why we left the range a little bit wider because there still is some uncertainty there. But net net, I would say if you look at The U. S, we would expect and we mentioned in bat tissue probably would be modestly higher because of people being at home more often. And with The U. S.

Being by far our largest market, that's a net positive financially. And then we'll work through some of the challenges in some of the D and E markets even though our underlying brand performance continues to be strong.

Speaker 4

And then if I could just follow-up real quick on a quick online question. Just it seems this is a kind of an arms race to get in the consumer's basket, especially because there was new online consumers. How do you feel about your current positioning around that in terms of being the number one choice in the basket right now? Because it seems like that going forward will be a lot more sticky than what you would normally see in a brick and mortar environment. Or you could disagree with me if you think that's not the case.

Speaker 3

No, no. Overall, we feel very good. Mean, I think over time, and I think we've made progress in our digital e commerce capability, e commerce in particular, we've got very highly developed businesses in Asia, particularly South Korea and China. The U. S, I think we've really strengthened over the last five years or so.

When I we started off, we were probably in The U. S. A little lighter or a little later to the party in baby and child care, but I think we've caught up and I think we're at our fair share online now. And in tissue, we've been a little bit I think a little bit ahead. And so we feel very good about our overall positioning.

The interesting areas are some of the D and E markets where even eighteen months ago nobody was talking e commerce in Brazil and it was an infinitesimal part of our business. It's becoming fairly significant and we're making a lot of progress fast. And the interesting thing is in the capability development we're talking about with this digital and e commerce global capabilities, we really are applying lessons from our top markets like China or South Korea globally, and that's really having a big impact. For instance, one of the key strategies that Brazil is running is really adopted from our South Korea business.

Speaker 4

Great. Thanks Mike. Good luck.

Speaker 1

Okay. Thanks Nick.

Speaker 0

Thank you. Our next question comes from Andrea Teixeira with JPMorgan.

Speaker 9

Hi Andrea. Hi, good morning and congrats for restoring the guidance and buybacks and also the broader team for shipping all this volume. So can you comment on what you saw in orders exiting the quarter for both developed and emerging markets on the consumer side? And in the professional business, in other words, what was the volume rate in June much lower than the quarter? Or you were still catching up on the shelf destocking as you said a couple of times in this call?

And following up on the mix comments in emerging markets, it's great to hear about the margin accretive innovation in Brazil. But are you seeing category improving also in China and Eastern Europe or disposable income pressures are more than offsetting the reopening? Thank you.

Speaker 3

Yes. Maybe I'll start with I think the KCP just to give you a little more texture. I think definitely the business impacted by the global slowdown, but the team is really pivoting aggressively to create healthier workplaces. And so the organic overall for the business globally was down 10%. North America was down 3%.

And per your question, and I think I mentioned in my remarks, we had significant orders in March that we shipped in April, so that offset. So I think the run rate is a little worse than 3%. But there's a couple of factors. I mean, declines in the core washroom business. I mentioned globally that I think the washroom business was down about 20%.

Offices, industrial, travel and lodging, all significantly down and remain significantly down. We do see some pickup in healthcare grocery and e commerce that's offsetting that to some degree. And then also in K C Professional, we are capturing growth. As I mentioned, Wipers is up double digits. And so that's a positive one for us with a positive mix effect.

And then we are expanding our mask offering. We had sold some co pack masks. We had a very small mask business, but we have begun self manufacturing mass. We actually think we have great technology from a materials perspective. We're a large nonwovens producer and we feel like our nonwovens fabrics are excellent materials for masks.

And so we are producing some masks. Primarily, we started for internal production for our mills, use in our plants, but we are selling them externally now and that will be a good part of our business going forward. So that's the KCP part. And again, I think your question on the consumer side, again, in Personal Care, there was a pronounced stock up in the first quarter, as you might recall, we had double digit growth across the categories. If you think about Personal Care like a diaper, there's no reason for a surge like that.

And so subsequently in Q2, we're seeing if you look at the Nielsen, some of that reverse out. And but I do think in personal care overall it will level out to more normalized numbers. Still probably positive, but more normalized. In tissue, people at home more equals more use at home. And so we will see, I think, a fairly significant growth this year overall for the tissue categories.

And we're up in all three tissue categories in North America, up double digits. And we think despite there's been a little softness in the last quarter, some reversals, but we still should see a higher overall consumption in tissue both in North America and other developed markets for the balance of the year. So I'll pause there. I think there were a couple other questions there. If you could just remind me, Andrea, what else you want me to hit on?

Speaker 9

Yes. Sorry, Mike. Yes, I wanted to just go if you take us throughout the world. But before you do, like just to finalize your comments about the consumer tissue business. Are you seeing because what we see in Nielsen obviously doesn't capture you know, the the non tracked channels.

Are you seeing are you are you losing share or, like, industry? I mean, I think you mentioned, like, five out of eight categories that you're gaining share. So that, I'm assuming, is encompassing of all channels. So if you can take us through that and then talk about take us throughout the world also for China and Korea in terms of share of those categories.

Speaker 3

Yes, okay. Yes, so largely I think we feel very good about our share performance and that we're making progress there. By the categories we track and we track 80 country category combinations, what we call them cohorts, we're up or even in 60% of those. And in North America, had five of eight. Within consumer tissue, we the way we tracked across all outlets, we're up in all brands with the loan exception of Scott Bath Tissue.

And that was mostly driven by we're probably the most supply constrained on Scott 1,000. And so Cottonelle was up about two share points or almost two share points. Kleenex was up over a point Kleenex up in many markets up significantly. And so we feel good about the share performance overall. Importantly, in North America, Huggies was up two share points and so behind strong momentum on the premium side of the business.

If I click around the world, strong share momentum in Central And Eastern Europe. As I mentioned earlier, category has slowed down because of consumer purchasing power. But across CEE, our shares were up significantly. In diapers in Russia, were up three share points. Femcare up a point.

We were up about two points in The Ukraine and up about two points in Kazakhstan and growing still growing well across CIS. And so I think that we're continuing to make progress there. Importantly, in China, I think we are about even in share in diapers and up pretty significantly in feminine care. And the mix on diapers is really a tale of we're probably up almost two share points on the premium side of the business, but offset by declines in value, which we're deemphasizing a little bit in China right now. So we feel good about the strategy in China and the progress we're making on the China business.

And overall in China, I think we were up strong double digits or mid teens in the quarter on performance. And then the other areas, as we mentioned, I think Brazil, I think we were up in one category, even in one category and down in one category. But overall, I think the story in Brazil is more about the category and the economy and the team is holding up well and pivoting accordingly. The other areas that we mentioned in the past, we are making pretty good progress We've mentioned that's been an issue for us towards the second half of last year.

We're making very strong progress with pretty significant share improvement sequential share improvement in our diaper business. But similar story to Brazil, the story is more of the category there. The category was down about 10% in the quarter, which is the biggest drop, I think perhaps in Peru in thirty years. And so which has been a strong growth category for us for a long time. And that's all related to COVID.

And I see really strongly improving brand performance. So I know that I just threw a lot at you. I'll pause there and ask if you have any other follow ups here.

Speaker 9

No, that's great. I appreciate the color. And then on the e commerce and all the capabilities that you're putting together, can you update us how it evolved since the first quarter to the second quarter? And what is your goal as you put more money behind those capabilities?

Speaker 3

Yes. Well, I think from the capability perspective, we've resourced teams. We've built out kind of an overall global approach. And we've got leaders kind of in each of the four kind of core commercial capabilities that we've talked about. They report through Allison Lewis, our Chief Growth Officer.

And so we stood that up. And now we're in the process of making the right investments, as I mentioned, in the tools, in adding talent, adding staff for people who know how to do this stuff cold. And then in driving the analytics to help us to better decision making.

Speaker 9

And how much do you are you ready to share, like how much it represents from sales now in the second quarter and how much is through e commerce globally?

Speaker 3

I don't think we're ready to share that yet, but I'll pause and maybe I'll defer to Paul here.

Speaker 1

Yes. Mike, I can take that. So Andrea, on a year to date basis, from what we can see, we would say sales via e commerce or an omnichannel perspective would be growing at 30% across the company.

Speaker 9

Okay. That's helpful. Thank you.

Speaker 8

Okay.

Speaker 0

Thank you. Our next question comes from Olivia Tong with Bank of America.

Speaker 10

Great. Thanks.

Speaker 1

Hi, Olivia.

Speaker 10

Hi, good morning. Thank you. I hope you guys are doing well. I wanted to ask you about cost savings. Force and the other restructuring savings were quite a bit better than your expectations are quite a bit better than your January expectations.

So are these new projects that have absolutely nothing to do with the pandemic or are these savings that came that have come out because of the efficiencies required to meet COVID related demand? Because it sounded like you pushed out some projects from the first half into the second half, some of the cost savings projects. So that's my first question. Thanks.

Speaker 2

Sure. Some of the benefit is COVID related, but let me talk both about FORCE and restructuring on FORCE. It was a very strong quarter and better than we were expecting. And that's really coming from productivity in our manufacturing sites as well as a step up in expected savings associated with negotiated material pricing. On the productivity side, the reason I say some of it is COVID related is as we've discussed before, we did do some SKU rationalization and with fewer SKUs to run, the output on our machines is much higher.

So strong productivity there. And we also see less waste when we have fewer changeovers. When we talk about some of the COVID related delays, which we mentioned back in April, those are going to impact the second half more than they did in the second quarter. So that's on force. And then on restructuring you get that same benefit on productivity.

The assets that we have stood up as part of the restructuring program are running better than we expected. And again, the delays that we had there on starting up these restructuring programs as we can't get people into the mills with the travel restrictions and safety considerations. Those will impact the second half more than the first half.

Speaker 10

All right. Thanks. Can you talk a little bit about the parse it out, what came just from COVID and potentially comes returns basically those are reinstated costs that go back in once things get better? And then the other thing is just if you can talk through the flexibility in your manufacturing and distribution particularly if a region sees a spike in cases and you do end up with cases in a plant that results in obviously lower productivity in a plant now that we see cases rising in areas where you guys actually make stuff. So what kind of plans do you have in place?

What kind of flexibility do you have if a particular area gets shut down? Another is there capacity in another region to ship from there? It's a little bit tough when it comes to tissue towel obviously and a couple of your other categories given, you know, these are things that don't typically move very long distances. Thanks.

Speaker 2

Sure, sure. I think, you know, the strong productivity gains that we had related to SKU rationalization, we wouldn't expect the level of rationalization that we're currently delivering in order to meet the elevated demand. But we also don't expect to go back to where we were. So there should be some ongoing benefit from that as we look out longer term. Productivity and savings also are driven by higher volumes.

Higher volumes have a lot of benefit across the P and L and cash flow. If you think about one of the elements of our forced savings program is the benefit from product design changes. And so if we reduce the cost of producing a product, you've got the net savings and then that's multiplied by the volume. So when you've got higher volumes, have bigger savings. So part of that goes as the volumes go on the way it shows up in our P and L.

On your other question on supply chain and inventories, we've done a few things to help ensure that we've got the supply to meet the customer and consumer demand. The supply chain team has taken a number of actions to move inventory closer to where the demand is coming from. We have also looked across the globe at where we have production capacity to help out where we are capacity constrained. As you note, that's more efficient on some of our products, particularly in the personal care area versus the tissue area. But on the tissue area we're also getting some help from KC to Mexico, which has been great.

And the team has been actively working to qualify third party suppliers to help us meet the high levels of demand.

Speaker 10

That's super helpful. And then just question, Mike, the Personal Care side of the business. So can you just talk a little bit about the competitive environment and the balance you're looking for as you try to drive market share growth, but of course thinking through what may become a more difficult macro environment as we go forward? What's your view in terms of it sounds like supply is now sort of pretty much caught up to demand. So what's your view on the promotional environment?

Does it still stay suppressed? Or does it actually come back as supply and production normalizes?

Speaker 3

Yes. I think we're on the personal care side, generally, I think we're at this point, we haven't caught all the way up, but we're getting closer, certainly closer than we are in tissue. I do think though the terms of competition in personal care are healthy at this point. In most markets they have turned I would say to product quality and to advertising, notably in China, which I think had been very price sensitive for maybe the prior three years or so. I think it was a return to maybe a healthier competitive dynamic in the category in the sense of bringing more innovation and meeting consumers' needs in that dimension.

Think And that's something that certainly our strategy, is to take the high road, make better products and to bring more consumers into the category is kind of our focus versus trying to rent share. And so we're seeing that generally in most markets. Maybe there is a little bit of a competitive entry in Argentina and Brazil with some local competitors. But overall, I would say generally in North America, China, Central And Eastern Europe, I think it's been we've been competing on innovation and marketing. Feel like that's healthy for the category.

Speaker 10

Great. Thank you so much.

Speaker 1

Okay. Thank you, Olivia.

Speaker 0

Thank you. Our next question comes from Jason English with Goldman Sachs.

Speaker 1

Good morning,

Speaker 11

Hey, thank you. Hey, guys, congratulations on the strong results this quarter and the strong results year to date. It's impressive, particularly in context of the environment. I want to come back just come back to the same line of question you were getting earlier in the call on the implicit guidance for the back half of the year because I'm still left a bit befuddled. You've talked about currency and commodities sort of netting neutral in the back half.

You've got two ten million to two sixty million of productivity still to come. You're expecting organic sales growth on both volume and price, yet EBIT is going to be down 120,000,000 to $220,000,000 or so roughly in the back half of the year. You stack it up and it implies well north of $400,000,000 of reinvestment in the business And that's on top of the heavy investment that already came in the first half. There doesn't look to be a lot of evidence of your deferring expenses. SG and A is up 9% in the front half.

So I think everyone's going to walk away saying, this is really conservative. They're not going to spend that much. And why would that conclusion be wrong? Like what are we missing? That's a huge chunk of money.

Are there other offsets? Or where will you spend such a big slug of dollars if that is the right figure?

Speaker 2

Yes, me kind of go ahead and tick through it. And then I'll turn it over to Mike to talk more about the investments that we are making. If I look at currency, commodity and price, Jason, we had a meaningful benefit from that in the first half of the year. And that will be a drag in the second half of the year. On price, as I mentioned, the year over year benefit from the twenty nineteen pricing actions that we took has now materialized itself in the P and L.

Input costs inflation benefits are weighted to the first half. And while input costs are expected to stay relatively stable to maybe slightly inflationary in the back half. When you look at the year over year comparison, you'll remember that input costs turned deflationary for us in the second half of last year. So when you look year over year, we don't have the benefits that we enjoyed in the P and L in the first half. We're getting lower benefit from volume mix.

Our other manufacturing costs will continue to remain elevated given the safety and sanitation protocols that we have in place. We talked about the step up in advertising and capability investments. And then we have lower savings from both the restructuring program and the FORCE program in the second half. So just to be clear on where we stand on those main drivers. And then I'll turn it back to Mike to comment on the investments.

Speaker 3

Yes, I mean, I think it is a we do have significant investment plan. We feel like we have good opportunities to spend it on. As I mentioned, primarily digital advertising and then the capabilities that we talked about revenue growth management and digital marketing. But I think for me the other two things I'd mention is there's still a lot of uncertainty in our back half. Part of it related, as I mentioned in remarks, related to KCP.

And I would say because of the April or MarchApril North America impact, I would probably say there's probably still a little more slowdown that we would expect in KCP planning for. And then there's still a lot COVID related uncertainty in developing emerging markets where we just saw kind of the beginning of that in the second quarter. And so there's really two aspects, which is there's definitely investment, there's also in our plans we're leaving ourselves some room to manage through some of the COVID related issues that still exist that are still widely unknown.

Speaker 11

Okay, I understand that. Real quick on the elevated manufacturing costs because to Maria, maybe that's the 1.1 thing that's missing from our bridge. When we look at the second quarter, there's not a lot of evidence and the gross margin expansion was heroic. And when I bridge it through with volume, price, the productivity and the input cost figures you gave, it kind of all fits. There's no sort of leakage despite what seems to be some decremental margins with just the business mix.

So it doesn't look like there's a lot of elevated manufacturing costs in the second quarter. What was it like why wouldn't that same sort of margin build hold? Why would we start to see leakage on that sort

Speaker 3

of simple build in the back half of

Speaker 11

the year if that makes sense?

Speaker 2

Right. I think for the back half versus the first half on the what we call other manufacturing costs, the drag will be relatively similar. And within other manufacturing costs that category is generally inflationary. So that's not unusual and it continued to be inflationary on the standard components including our investment in product improvements which shows up in the form of on cost in the manufacturing part of the P and L and also regular labor rate inflation. What is new and related to COVID is that we have those cost increases related to the supply chain impacts around sanitization and safety protocols that are elevating these.

I know that's partially offset by fixed cost absorption from the stronger volumes, but it's not completely offset.

Speaker 11

Okay. Thank you very much. I'll pass it on.

Speaker 0

Thank you. Thanks, Jason. Thank you. Our next question comes from Wendy Nicholson with Citigroup.

Speaker 3

Good morning, Wendy.

Speaker 12

Hi. I know this has been a long call, so I'm going make my questions really direct and short. It's simply on the professional business. That business, we all expected I think to be weak. I'm wondering number one, what are you seeing third quarter has just started, but what are your expectations for trends in that business in the third quarter?

Same type of volume decline, better or worse? And can you remind us of the gross margin in that business? Is it above or below corporate average? Thanks.

Speaker 3

Yes. Maybe I'll have the trend and maybe Paul or Maria, if you the gross margin, I don't have that off the top of my head. But I think the trend I would say and given kind of the remarks we made, Wendy, would be probably slightly worse than what we had in the second quarter because of that the high orders that came at the March that were shipped in April. And so the run rate was probably a little a touch lower in North America than the 3% that we ended up in the quarter. That said, so we'll have the core washroom business down double digits.

We are making progress on our wipers and as I mentioned, our new mass business. And so those will be offsets to the good.

Speaker 2

And Paul, I'm not sure about if we comment on gross margins. So I'm going to pass that to you.

Speaker 1

Yes. Thanks, Maria. So we don't provide specific numbers at the segment level on gross margins. What I would say is that maybe not surprisingly margins for KCP would be in between personal care and consumer tissue. They're pretty healthy overall.

Speaker 9

The reason I have Hey Wendy, my apologies.

Speaker 8

Yes.

Speaker 3

Yes. I apologize. The three of us are in separate rooms because of COVID. So normally if I started answering that Paul would slap me with a ruler. But that's, you know, I'm not able to do that right now.

Speaker 12

No problem. And the reason I ask is because that business in particular, I mean, you saw a sharp shortfall in sales again, which we expected. But your cost control and the benefits of the gross margin or the benefits of commodities really insulated your profits there. And so I'm wondering, just as we think about the second half and modeling, I assume that's a business that all of the investment spending, you're probably not going to spend quite as much from an investment spending perspective. So I would think that that's a business that could, whatever, continue to kind of carry the day from a profitability perspective simply given the commodity environment is still so favorable, etcetera, etcetera.

Is that a fair assumption? Sounds like you've made significant cost cuts, which have sort of restructured that business a little bit. Am I reading too much into that?

Speaker 3

Think that, one, the team is doing an outstanding job managing the costs. But also they're doing an outstanding job pivoting to maybe what think Russ, our President of that division, would call kind of the essential to create healthier workplaces, right? It's now mission critical to create a healthier workplace. And so the notion that WIPERS and masks will become a bigger piece of the business, it has a positive mix effect from a margin perspective.

Speaker 12

Got it. And that's Thank you

Speaker 9

so much.

Speaker 2

Yes, that business is also benefiting from the geographic mix component that we talked about. So I would call that out.

Speaker 12

Fair enough. Thanks a lot.

Speaker 1

Okay. Thank you, Wendy.

Speaker 0

Thank you. Speakers, at this time we have no further questioners in the queue.

Speaker 1

Great. Well, we appreciate We'll all the close. Go ahead, Mike.

Speaker 3

Okay. Yes, just want to thank everybody for dialing and joining us today. We remain very optimistic about our opportunities to generate long term growth and create shareholder value. Our KC-twenty '22 strategies are working, and we see more opportunity for us to elevate and expand our categories. So thank you.

Speaker 1

Thank you very much.

Speaker 0

Thank you. Ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines and thank you for joining us today.