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Kimberly-Clark Corporation (NYSE:KMB)

Q1 2013 Earnings Conference Call

April 19, 2013 10:00 ET

Executives

Paul Alexander - Vice President, Investor Relations

Tom Falk - Chairman and Chief Executive Officer

Mark Buthman - Senior Vice President and Chief Financial Officer

Mike Azbell - Vice President and Controller

Analysts

Gail Glazerman - UBS

Wendy Nicholson - Citi Research

Ali Dibadj - Sanford Bernstein

Linda Bolton Weiser - B. Riley & Company

Bill Schmitz - Deutsche Bank

Jason Gere - RBC Capital Markets

Lauren Lieberman - Barclays

Chris Ferrara - Bank of America

Alice Longley - Buckingham Research

Javier Escalante - Consumer Edge Research

Jason English - Goldman Sachs

Caroline Levy – CLSA

Leigh Ferst - Wellington Shields

Linda Bolton Weiser - B Riley & Company

Operator

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters 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 ask if you would like to ask a question.

It is now my pleasure to introduce today’s first presenter, Mr. Paul Alexander.

Paul Alexander

Thanks, David, and good morning, everyone. Welcome to our first quarter earnings conference call. Here with me today in Dallas are Tom Falk, Chairman and CEO; Mark Buthman, Senior VP and CFO; and Mike Azbell, Vice President and Controller.

Here is the agenda for our call. After an opening comment from Tom, Mark will begin with the review of first quarter results. He will also provide an update on the strategic changes we are making in Europe. Tom will then provide his perspectives on our results and the outlook for the full year, and we will finish with Q&A. We have a presentation of today’s materials in the Investors section of our website, which is kimberly-clark.com.

We will be making forward-looking statements today. Please see the Risk Factors section of our latest Annual Report on Form 10-K for further discussion of forward-looking statements. We will also be referring to adjusted results and outlook. Both exclude certain items described in this morning’s news release. The release has further information on these adjustments and reconciliations to comparable GAAP financial measures.

Now, I will turn it over to Tom.

Tom Falk

Well, good morning everyone. I just thought it would be appropriate for me to start this morning by commenting that we are well aware that the eyes of the nation are on the events that are unfolding this morning in Boston, and I just like to start by offering our condolences regarding the tragic event that happened earlier this week in Boston, and please know that the thoughts and prayers of everyone at Kimberly-Clark as well as those of the entire nation are with the families of the victims of this terrible event.

I’d also like to let you know that we are sitting down here in Dallas, Texas very close to the small town of West Texas, and so we would like to also extend our deepest sympathies to our neighbors to the south as they deal with the aftermath of the explosion of the fertilizer plant that happened at that small community this week. So, it’s truly been a difficult week for Americans in various places across the country. So, I just thought we should start with that and remind everyone what’s really important going on around us today, but with that, I will turn it over to Mark Buthman.

Mark Buthman

Okay, thanks Tom. Good morning everyone. Let me start with the headlines. First, we achieved organic sales growth of 3% that included increases of 6% in our North American consumer tissue business and 5% in K-C International. Second, we delivered adjusted earnings per share of $1.48, that’s an all-time record and up 19% year-on-year boosted by strong cost savings. And third, we continue to allocate capital in shareholder friendly ways through dividends and share repurchases.

Now, let’s cover the details of the quarter. First quarter sales were $5.3 billion, up 1% versus last year. Underlying organic sales rose 3% versus a tough comparison of 6% growth a year ago. The results this quarter were driven by increased volumes of 2%, higher net selling prices of 1%. Unfavorable currency rates and lost sales in conjunction with our restructuring activities each reduced sales by 1 point. First quarter adjusted gross margin was 34.6%. It’s up 140 basis points from last year. The increase was driven by organic sales growth and $85 million of FORCE cost savings partially offset by $35 million of input cost inflation. We are off to a great start with our FORCE program this year relative to our full year target of $250 million to $300 million. Our teams are pushing hard to free up funds to reinvest to field our business and to drive additional bottom line growth.

Moving down to P&L between the line spending increased 10 basis points as a percent of sales and that was driven by small increases in G&A. Strategic marketing spending was down slightly, mostly due to the timing of innovation launches, which relative to last year are going to be more towards the latter part of the year. Other income and expense benefited from a gain in the sale of some non-core assets.

Adjusted operating profit rose 16% with an operating margin of 16%, that’s up 200 basis points compared to prior year. Really encouraged by our margin performance to start the year as both our growth and operating margins were highest we have achieved in 3.5 years. The first quarter adjusted effective tax rate was 30.8% now that’s up from last year but its in-line with our full year targeted at 30% to 32%. Equity income was up 36% in the quarter as K-C Mexico had a great start to the year. So putting it all together, first quarter adjusted earnings per share rose 19% to a $1.48 as well above of what we expected three months ago and plus continued momentum in KC International, strong cost savings and above plant volume growth in our North American consumer tissue business. Now turning to cash flow, cash provided by operations in the first quarter $607 million that’s up 4% year-on-year. The improvement was driven by earnings growth, a smaller increase in working capital relative to last year now is partially offset by higher cash debt payments.

We continue to allocate capital and shareholder from ways with the first quarter dividend payments in share repurchases totally nearly $800 million. In February we announced our 41st consecutive annual increase in the dividend, the 9.5% increase should help maintain our position as a top-tier dividend payer. In addition we repurchased $0.5 billion of KMB stock in the quarter. We continue to expect full year repurchases to be between 1 billion and 1.2 billion. Now I’m going to highlight a few areas from our segment results for the quarter. We first look here organic sales growth is 4% with volume growth of 3% and net selling prices up 1 point. Compared to a tough comparison of the year, our toughest comparison for the year KC International had another good quarter with organic sales up 7%. We continue to make excellent progress with targeted growth initiatives in KCI. This momentum helped offset volume declines in Venezuela and in Australia where heavy diaper promotions last year affected the comparison. Tom will talk more about KCI in minute. Also in Personal Care organic sales were flat in North America and up double digits in Europe.

First quarter Personal Care operating margins of 18.4% rose a 150 basis points. Improvement was driven by organic sales growth, cost savings and higher production volumes personally offset by increased by between the lines investment, cost inflation and unfavorable currency effects.

Moving to consumer tissue, organic sales were up 5%, a volume growth of 4% and slightly higher selling prices. The volume increase was highlighted by double digit growth in North America for high margin Cottonelle bath tissue and KLEENEX, Facial Tissue both brands improved market shares in the quarter. In addition, Cottonelle benefited from increased promotions support in a strong cold flu season help boast KLEENEX volumes. Consumer tissue operating margins rose 200 basis points in the quarter. Margins benefited from organic sales growth, cost savings and lower between the lines spending partially offset by cost inflation.

Turning to KC Professional, organic sales were even with last year has improved pricing in (inaudible) set by slightly lower volumes. Despite a relatively flat top-line our KCP team continues to drive our profitability by delivering cost savings and improving mix. First quarter operating margins of 18% were up 230 basis points year-on-year. Lastly healthcare organic sales were down 1% driven by lower surgical and infection prevention volumes which were impacted by a slowdown in surgical procedures in the U.S. in the first quarter. Operating margins were down 200 basis in the fourth quarter, overall healthcare results were behind plan but our team is focused on improving performance throughout the balance of the year. Before I turn it over to Tom let me update you on a strategic changes we’re making in Europe. Overall we’re moving quickly to implement the changes. We’re on track with our operating plan for the year.

We have stopped selling Huggies diapers in 13 countries so far. We expect to exit the remaining five markets in this second quarter so the impact on our top-line will build over the remaining part of the year. Our diaper facility in the UK will start production mid-March and our Spanish facility is likely to close in May. We have also reached agreements to sell our polish consumer tissue business and that transaction is expected to close on the third quarter. Given our progress so far we have narrowed our estimate for cumulative charges by raising the low end of the range by $50 million, we continue to expect the cash cost will be 50% to 60% of the total charges for the restructuring program. Now regarding the brands we’re retaining in Europe it's solid performance in the first quarter and as bath tissue volumes improved and our market share rose into the high 30s, in Personal Care, Huggies baby wipes volumes grew at a double-digit rate. So, we got more work ahead of us in the next two quarters will be important as we shed additional sales in overhead cost, but I am confident that our European team has focused and now execute the plan very well. So, that wraps up my comments.

To recap, we generated solid organic sales growth. We delivered strong margins, an all-time record adjusted earnings per share, and we continue to allocate capital in shareholder friendly ways. Now, I will turn it over to Tom.

Tom Falk

Thanks Mark, and since Mark has reviewed the quarter in detail, I will just add that our overall results were excellent. So, we are only one quarter into the year and we have got more work to do, but I am pleased with our solid organic sales growth, our strong margin improvement, record earnings per share, and our capital allocation, which was very shareholder friendly.

So, I want to focus my comments this morning on our consumer businesses in North America and K-C International, and then I will talk about our full year outlook. So, let me start with North American consumer. The two primary objectives for this business this year are to improve our brand positions and to increase our operating profit, and we are off to a very good start in both areas. In terms of market positions, we improved or maintained market share in 7 of the 8 consumer categories that we track. And that included solid gains in Kleenex facial tissue, Pull-Ups training pants, Huggies baby wipes, U by Kotex feminine care products and our Poise and Depend brands. As Huggies diapers were shared through down about 1 point versus the last year quarter, we are currently launching our best ever snug and dry diaper and an improved slip on diaper.

So, regarding the bottom line, our North American consumer business had a very good quarter with excellent FORCE savings, improved manufacturing costs, and volume growth in our high margin brands, including Poise, Depend, and Pull-Ups. Now, that’s particularly true in consumer tissue, where volumes for our Kleenex and our Cottonelle brands were very strong as Mark mentioned. Although that level of volume growth would be tough to repeat, we are encouraged by our momentum that we are optimistic about our second quarter innovation that we have got coming on both of those brands. So, I am pleased with our overall performance in our North American consumer business.

Now, let’s shift to K-C International. Our first quarter organic sales growth was more than 5% and that’s consistent with our first quarter plan for the year. KCI faced it’s most difficult comparison of the year in the first quarter with 13% organic sales growth in the base period last year, and we continued to expect that KCI will deliver high single-digit organic sales growth for the full year. Working together with our global brand teams, KCI is making further progress with these growth initiatives. In diapers, we continued to innovate across our portfolio and we have expanded diaper pants in the more parts of the world, but that strategy continues to deliver strong results in key markets.

In China, where Mark and I were just visiting recently, our diaper volumes increased 50% and they have benefited from innovation, market share gains, and category growth. Huggies are now available in 85 cities in China, and that’s up from about 80 cities at the end of last year. In Russia, our diaper volumes increased by about 10% in the quarter. As in Brazil, diaper volumes were up by about 5% and were affected as expected by selling price increases that we recently implemented because of the weaker real. The increased pricing and improved product mix brought total organic sales growth in Brazil for diapers to be about 15%. And in all three of these markets, we have premium diaper innovation launching in the second quarter. We also have new manufacturing facilities starting up in China and Brazil to support our growth plans. And other businesses within K-C International are feminine care organic sales were up high single-digits and we continue to rollout premium executions that are very similar to the U by Kotex launch in North America.

And finally, in adult care and baby wipes both of these businesses delivered double-digit organic sales growth in the quarter building on our momentum that we achieved last year. And just like we have got in North America, we are building the adult care category in K-C International with our Poise and Depend brands. And in baby wipes, we have good momentum in South Korea and Latin America, and we will be expanding capacities to support our growth plans. So, overall, we remain very excited about our prospects to drive strong top and bottom line growth in K-C International.

Now, let me turn to the outlook. In terms of our 2013 earnings guidance, we are now targeting adjusted earnings per share in a range of $5.60 to $5.75, raising about $0.10 higher than our previous outlook and reflects our strong first quarter performance and our plans to continue to reinvest back in the business for our long term success. We expect to make additional progress on targeted growth initiatives with a particular focus on KC International and we have a lot of innovation coming in the balance of the year and we will support that innovation and these growth initiatives with higher levels of strategic marketing. We also got a number of new assets starting that will support our growth plans later this year. The same time we will continue to focus on generating cost savings to make sure we can fund our investments and improve our profitability. So far input cost and currency rates are tracking in the range of our previous assumptions. We’re optimistic about our opportunities and we believe that our prospect to drive profitable growth have never been better.

So to summarize we’re off to an excellent start in 2013. We’re pleased with our progress but we’re reaching for more and we remain convinced that our global business plan will continue to deliver value for our shareholders. So that wraps up our prepared remarks and now we will begin to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from (inaudible).

Unidentified Analyst

Wanted to ask I noticed you had a pretty accelerated pace of buyback in the first quarter I mean more than half of what you plan to do for the year and I was just wondering with the strong results why you might not top that up a little bit given that you have already done so much.

Tom Falk

Our plan heading into the year just like we did last year was to be a little bit front end loaded on share repurchases given the cost of commercial paper. We’re still holding course, we had a billion to billion two in our outlook for the year, we still think that’s a good plan. So if it plays out if we have more cash flow obviously that’s one of the options we have got to deploy it.

Unidentified Analyst

Got you and the second question I had was and I might be missing a little something here but on K-C International I never said in tissue I know that’s not the bigger focus, it's obviously personal care and you mentioned that the volumes grew 4% and of course you’re coming off a strong 12% gain a year ago. What should we see that sort of normalize that in personal care in the emerging K-C International markets, I mean it's 4% kind of the number we should go with as we look ahead or I think based on Tom’s comments should we look for something maybe a little bigger than that going forward.

Tom Falk

I think in K-C International the volumes were pretty flat on consumer tissue. We did take up some price and mix on that front and that’s done well, I think the volumes were down a percent. So again we’re not adding a kind of additional capacity there and are focusing on driving mix in revenue realization and getting our margins up and you saw some of that improvement in the quarter.

Unidentified Analyst

I was really talking more about personal care.

Tom Falk

On the personal care front, I would say the toughest comp in the first quarter and so we would expect to see what the innovation picking up in the last three quarters of the year we will see a little bit better growth from personal care going forward.

Mark Buthman

Yes if you look at relative to our 3% to 5% top-line Chip obviously personal care in KCI is going to be higher as part of a mix.

Operator

Our next question comes from Gail Glazerman with UBS.

Gail Glazerman - UBS

I just wondered if you could talk a little bit more about exactly what surprised you in the first quarter and I guess just trying to reconcile that with the guidance sort of the rest of the year. Last call you talked about actually expecting the second half to be improved relative to first and it doesn’t feel like that’s consistent with the current guidance and I know you were just talking about the innovation type one (ph) and that will flow through the next few quarters, so can you give a little bit of color there?

Tom Falk

Yes that’s a fair push so that’s a two things one is consumer tissue in North America was really way ahead of expectations and so Cottonelle volumes were up double digits, KLEENEX facial tissue was up double digits and on the facial tissue front that’s probably more of a strong cold and flu season phenomenon and the Cottonelle front one of our primary branded competitors that’s not a public company has had some product supply problems and they sensed I know that’s what their customers have indicated they were going to have trouble supplying, and that certainly helped our business, and it showed up and they would share a loss and our volume gain in the first quarter. So, we ran everything full and try to take advantage of as much of those business opportunities as we could. So, that certainly helps us. We assume they will work their way out of that problem later in the year, and so that’s where we don’t expect that level of volume growth in Cottonelle to continue at that kind of a rate. So, that was one thing.

And then I think the other thing that was a big positive for us was cost savings, so we had a very strong start to the year on FORCE. Now, you could say gosh, you are over $80 million in FORCE in the third quarter and fourth quarter of last year. So, why were you surprised, but it was a stronger start to the year than we had probably forecasted. That should bode well for our results in the balance of the year.

Gail Glazerman - UBS

Okay. And just looking at the European restructuring a little bit, you commented that you aren’t selling Huggies in, I guess, 13 countries and moving out of the remainder, but I presume you are still selling diapers as with the comments about I think 14% private label growth. And I am just wondering when would you expect to see that trail off?

Tom Falk

We will honor all of the private label contract commitments we have with our customers in Europe. And so we signed those contracts, they had a certain data which they would renew and we will fulfill the terms of the contract. We will also – we are going to sell diapers in Italy as we noted in the restructuring, and there may be some other private label contracts that will retain post the shutdown of some of the facilities in the UK and Spain. So, I think the good news on the European front is that our other personal care categories in consumer tissue we saw a good growth in the retained portfolio, and we are investing in those and things like Andrex Washlets in the UK. Our Pull-Ups business had a nice improvement in Europe. Our baby wipes business is growing like crazy. And so the strategy that we have had of focusing more on those growth opportunities in that market very early days that we are encouraged by the first quarter performance.

Gail Glazerman - UBS

Okay thanks very much.

Tom Falk

Thanks Gail.

Operator

Our next question comes from Wendy Nicholson with Citi Research.

Tom Falk

Good morning Wendy.

Wendy Nicholson - Citi Research

Hi, good morning. My first question is on China specifically, I know you said that you have gone into, I think five new cities, but can you comment on the competitive environment in China and how your strategy is unfolding in terms of going down market a little bit in pricing? And then second question and I really apologize if I missed it, but did you give us guidance for the year like volumes, price mix, sales growth, if that’s in the press release I didn’t see it?

Tom Falk

Okay. Then on the first question on China, Mark and I were just in China and so we did the grand opening of our new mill in Nanchang and got to meet with the China team again, and they are doing pretty well. And so our strategy in Huggies of going to the mid-tier has gone well, and so we are not going all the way down to the lowest tiers in China, where we are staying in the mid to premium tiers. And in fact they are just launching a new Huggies platinum, which is a super-premium tier on top of our existing premium tier. So, we will have three product offerings in China in the very near future, which we will think will appeal to the moms in China, they want the very best product for their babies.

I would say the competition from Unicharm is probably the toughest and to a lesser extent Kao, P&G the factor in every segment over there, but we would probably see the toughest competition from Unicharm and Kao at this point in time. But it’s an exciting market and the team is very energized by success and they are reaching for more. On the guidance front, our primary assumptions didn’t change from our full year estimates that we gave you earlier. So, in organic volume for the year, we are looking at overall 3% to 5% organic sales growth, 2% to 3% volume, 1% to 2% pricing mix, currency is going to be about a point drag for the year, and then we will have a couple of points of restructuring drag for the year. And so, that hasn’t changed since January which is why we didn’t say anything about it in the release.

Wendy Nicholson - Citi Research

So, the $0.10 lift to the estimates is maybe a little bit from K-C Mexico, it’s a little bit on the margin side, but it sounds like most of your assumptions are kind of the same as they were?

Tom Falk

Well, probably we are a little bit ahead in consumer tissue in the beginning of the year. Cost savings are tracked a little ahead, and obviously, Mexico is part of it, but we would expect that Mexico will have a good year just based on where the peso was trading but we planned together.

Operator

Our next question comes from Ali Dibadj with Sanford Bernstein.

Ali Dibadj - Sanford Bernstein

I wanted a little bit deeper in terms of the kind of dichotomy between all other segments in consumer tissue because without the consumer tissue success I think top-line at least would have been somewhat of disappointing top line results for most folks. So I’m kind of understanding consumer tissue I think you have explained us through flu and Cottonelle in particularly. What was the little bit more disappointing I guess on the other end of things, whether it be personal care or in particular KCP or healthcare.

Tom Falk

Still with healthcare we were surprised and a little disappointed. In fact we started out the year with healthcare was a little bit of a flu pandemic scare and sold a bunch of a face mask in January so we started out pretty strong but then actually you have seen this from some of the healthcare companies that have reported surgical admissions are done about 4% in the first quarter and nobody can figure out why and so everybody has got a hypothesis as to what’s going on but we haven't got a good read on that and so I would say as the quarter played out just the underlying category volumes in healthcare we’re little disappointing and in K-C Professional our washroom business in North America, we saw a kind of low single digit top-line which would be as expected but the safety business was off, part of that was we decided to shut some business in that segment which we knew about but I would also say that it's maybe reflective of kind of a weaker manufacturers environment than maybe we would have hoped going into the year and that’s probably is tracking somewhat with what you’re hearing in markets around the world. KCI obviously we’re looking at that as a global deal and so yeah we were slower in Europe than we thought we were going to be we were a little slower and other parts of the emerging markets that we thought we were going to be in. So the B2B business were generally a little slower on the top-line than we would have thought in the plan.

Paul Alexander

I would just add that overall personal care was right on track with our plan that obviously was a segment that had really strong results last year during the quarter so you probably want to take a look at the comparisons before you take that into account as it reflect on what personal care did this quarter.

Ali Dibadj - Sanford Bernstein

You think about the margin story here still in the quarter net-net top-line I think was roughly (inaudible) but the margin is really the big surprise and can you talk a little bit more in detail about disaggregating that? So how much of it was volume leverage? How of it was non-leveraged cost cutting within, I think it includes volume leverage in FORCE and how much of it was price realization or something that I’m missing?

Tom Falk

We don’t include volume levers in FORCE, since FORCE is about 85 million and so FORCE net that against the input cost increase was certainly a big driver of that. Better volume was just all by itself was about 30 million and if you look at the change in unabsorbed fixed cost which we track that was another 15 million. So you could look at it and say cost savings is about half of our gross margin improvement and volume including down-time related volume effects was about the other half of it.

Ali Dibadj - Sanford Bernstein

And certainly if you’re sustainable it sounds like that the way you’re talking through it.

Tom Falk

On the fixed cost absorption front, we took most of our downtime in late 2011 and early 2012 to get inventories in line so the comps will be much easier on that front in the first half of this year so that will start abate a bit in the second half of the year but again we would expect with some of the innovation that we have coming that we will have decent volume growth in the last nine months.

Ali Dibadj - Sanford Bernstein

Okay my last quick question is on KCI because it's a (inaudible) business and growing so. It's certainly looks like it slowed a bit, you can discuss comps et cetera but one thing that I want to get your perspective is this continued seemingly difficulty of taking pricing in KCI personal care and that might be a competitive issue, that maybe a mix issue but try to understand that outside of Latin America pricing in that category, KCI-PC.

Tom Falk

We typically take a lot of price where you got cost issues or currency swings and so if you look at the markets where you had this quarter really the two big markets Brazil and Argentina, where there has been the most currency movement as where we got the most price. In the balance of KCI, you look at like China, for example, there hasn’t been a lot of currency movement, there hasn’t been a lot of commodity cost get really in the Personal Care space. And so we are really focused on driving innovation, driving mix, and so launching a Tier 6 diaper in China is going to do more for us from a margin and putting revenue in the category standpoint than trying to drive a list price change.

Ali Dibadj - Sanford Bernstein

Okay, thanks a lot.

Tom Falk

Thanks Ali.

Operator

Our next question comes from Linda Bolton Weiser with B. Riley & Company.

Tom Falk

Good morning Linda.

Linda Bolton Weiser - B. Riley & Company

Hi, just maybe you could give a little more information just to help me understand, because in terms of your organic sales growth, I assume you are still kind of thinking 3% to 5% for the year the previous guidance, and it was at the low end in this first quarter, but you have more innovation coming later, but you have some stuff that kind of helped it like the flu season, but I don’t see the comparisons actually getting that much easier. You were pretty strong for all the quarters of last year, just the third quarter was up 3%, but the other quarters were up 4%, 5%, 6%, so how do we have confidence really that you can do little better than 3% later or is this going to be 3% for the year or can you give a little more color on the comparisons issues?

Mark Buthman

Yeah, I think that’s fair. We said our organic target for the year is 3% to 5%. We said organic volume is 2% to 3% and price mix is 1% to 2%, and so we kind of came in at the low end of that in the first quarter. But we really got most of our heavy up innovation coming in the last nine months of the year and we are pretty bullish on what we are going to be doing there. And so I think to move from the bottom end of the range to the top end of the range on organic volume is very doable. And so I think where the plan is unfolding about is we thought it would and we look for that to deliver the things we would worry about a little bit as the continued weakness in healthcare surgeries if that will be a drag, and we would like to see a little bit of an economic improvement benefit KCP, but on the consumer front, we feel pretty good about what we have got common in KCI and in North America.

Linda Bolton Weiser - B. Riley & Company

Okay. And then can you just give an update, because it’s been a while since the feminine care, the new brand U was launched and can you give us an update on like how that’s doing like what market share it has achieved maybe in the different categories of pads and tampons and all that? And then secondly, can you give an update on the slip-on diaper, because you said there will be an innovation coming on that? Is that an innovation because you need to improve it, because it wasn’t working or is that just an innovation to just drive it further in terms of market share gains?

Tom Falk

Yes, sure. You would like those as we have made steady share progress in the U.S., I think it’s up to a little over seven shareholder category now, and our total Kotex share is trending around 18, which is up several points from when we started that the U launch. And so we have little bit of softness on volume on our Kotex natural balance in the first quarter and made up for that with continued growth of U by Kotex and have more innovation coming on that brand as the year progresses. And what was your second question, Linda?

Linda Bolton Weiser - B. Riley & Company

Just an update on slip-on?

Tom Falk

Slip-on diapers is just continuing to work on improving the product. And so I would say as you know we normally do, we can consistently launch renovation improvements to our diaper and pant lines around the world. And so it’s a nice improvement to the slip-on diaper one. Again, it’s one that we would like that to be to pick up a little bit from a share standpoint, it’s a big idea around the world, and so it will be a good improvement for mom.

Linda Bolton Weiser - B. Riley & Company

Okay. And just one last thing on, you said you are going to sell a business in the third quarter of the Polish tissue business, I think like does your guidance for the year include a potential gain on sale that might be included in your earnings then or will that be…

Tom Falk

Yes, there was a gain and nearly that’s not what I will go through the restructuring line, and no, there won’t be any – there is nothing related to that that would be in our guidance.

Linda Bolton Weiser - B. Riley & Company

Okay. And then the restructuring cost savings in the quarter are you including that in FORCE savings or is that separate, and I am projecting restructuring savings of $40 million for the year, is that about right?

Tom Falk

Well, in the first quarter, we had about $5 million related to the tissue restructuring that was not included in FORCE. So, that would have brought the total into $90 million including that and coming in the full year.

Mark Buthman

Linda the $40 million would be right between 2013 and 2014 that would get to our full year $100 million run-rate at the end of 2014 for 2013 it will only be about $15 million.

Operator

Our next question comes from Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

Do you think this is the peak less margin quarter for the year? I just kind of looking at the year-over-year comparison.

Tom Falk

I hope not, we feel pretty good about the momentum and lot of things working well. You would say on the gross margin front we should see a little bit of increased cost inflation, although in the first quarter we had 35 million which is not too far off, our annualized rate of the guidance so we set a 150 to 250. So I think we will see how that plays out but we’re encouraged by our progress. As we have launched more innovation, we’re aiming forth to be margin accretive so that should give us a little bit of upward bump on gross margin as well. So we’re focused on building that overtime Bill and we hope the first quarter was a good step in that direction.

Bill Schmitz - Deutsche Bank

Okay and then are you tempted to change you’re sort of growth algorithm, maybe not in the sales line but it seems like the business mix has shifted so much and a lot of low end margin stuff is out in the business. So shouldn’t it be kind of a catch up period in terms of eBay growth which maybe kind of gets you a lift sort of mid-single digit operating profit growth target that you have in the long term.

Tom Falk

I think the other thing we’re looking for is particularly with the strong start this year where can we accelerate investments that will benefit our future growth and are we making sure we’re investing in the brands at the right level to fully take advantage of the innovation opportunity that we have. So we’re strategic partnering in the first quarter was a little bit lower growth rate than past quarter’s but we think for the full year we’re still going to be increasing that and that will be another that we will look for investment.

Mark Buthman

I would say Bill over the long term 6% to 9% bottom-line, we like to hit that consistently and it's going to require gross margin important, continued investment in the business to do that and so that is consistently hitting our algorithm is really our goal.

Bill Schmitz - Deutsche Bank

And just the private label the big private label boast in Europe is there a change in strategy there? So are you guys going to sort of open yourself to all those private label contracts in some of the smaller markets?

Tom Falk

I think that was kind of a tactical move a couple of years ago, they are still up existing capacity and as we have excited facilities I think that will be a smaller player in the private label market in Europe overall.

Bill Schmitz - Deutsche Bank

It was a big move right? I mean I think you said organic sales grew up 14% and first in Europe is that just going to get rid of some of the old diaper stuff as you hold the factories down.

Tom Falk

These were contracts that we entered into last year. So (inaudible) moves like that in the last couple of quarters of 2012 and it's really just contracts that we picked up last year that were roughly a yearlong that will roll off in the second and third quarter.

Mark Buthman

And remember Bill Baby Wipes volumes were also up-strong double digits also and we’re keeping that business.

Operator

Our next question comes from Jason Gere with RBC Capital Markets.

Jason Gere - RBC Capital Markets

Two questions one I was wanting if on U.S. both questions are on the U.S. and if you could talk about the retail environment, the course of this quarter we heard comments in some of your big retailers out there about some pressure that we’re seeing, so I guess one I was wanting if you could just talk about the competitive landscape what you’re seeing out there, I know in the food side it looks a little more promotional. So just wondering what you might be seeing up there on the HPC side personal care and tissue and then I have a follow-up question. I will ask afterwards.

Tom Falk

It's a tough quarter and retail generally, just when you look at some of the comps but I would also say that our categories in consumables they have generally done much better than food in some of the other categories we’re are more of an essential product line and we’re also encouraged to see consumers are still responsive to innovation, so when we look at how our new (inaudible) products, these products are performing in the market some of the Baby Wipes products are there in the market. These are our premium priced line extensions and they are doing pretty well from a category standpoint. We saw consumer is still willing to pay for a better product.

Jason Gere - RBC Capital Markets

Okay, that makes sense. And then I guess the more specific question is on just U.S. diaper, and help me with math right now, I guess U.S. diapers of about 15% of your total sales? Is that right?

Tom Falk

Globally for U.S. diapers?

Jason Gere - RBC Capital Markets

So, U.S. diapers are at 15% of your total company sales after all the adjustments?

Tom Falk

Yeah, I mean, we would normally don’t get into that level of detail, but if you can look at our market shares in the mid 30s, I think you could get a pretty good approximation.

Jason Gere - RBC Capital Markets

So, I guess, what I am trying to figure out is that, can you talk about where the category trends are now, because I know last year, they were still down I think at these mid single-digit and its birth rates are starting to stabilize. There should be like a nice swing I guess to your organic sales calculation, so if you go from negative 6, maybe over the next two years, 2%, there is like about 800 basis point kind of swing I guess on the organic sales calculation, you multiply that by 15%, that’s over 100 basis points of organic sales. So, I guess, can you just talk me through where we are right now, what are you seeing out there, and you expect over the next maybe two years that you actually see that migration from significantly negative category trends to modestly positive. Can you just kind of walk me through some math here?

Tom Falk

Yeah, sure. If you look at the diaper category last year, it was probably down a couple of points and our expectation for this year that will be down about a point. And the training pant category last year was down more than that, and that was more of the three years of low birth rates piling up in the category as kids tend to be start Pull-Ups training around age 3, and so training pants is down mid single-digits last year. And it’s encouraging to see our training pant business is modestly positive, and that’s probably because there is some penetration opportunity still in that category, and we have driven things like GoodNites and Little Swimmers, which we count in that metric. And those were doing better than the overall training pant category would have performed. So, I would say, you are probably a little high in your estimate of diapers as a percent of sales and you are probably a little more negative in terms of where the comp was last year and where it’s going. So, I wouldn’t expect you are going to see as much top line lift. And at this point, we would say the birth rate seems to have bottomed out. We hope that it will turn slightly positive later this year, but it will be – the category will still be down a point for the year and hopefully will see a flatter category in 2014.

Alice Longley - Buckingham Research

Okay, thanks for the reconciliation. Thanks guys.

Tom Falk

Yeah.

Operator

Our next question comes from Lauren Lieberman with Barclays.

Tom Falk

Hello Lauren.

Lauren Lieberman - Barclays

Hi, thanks. Good morning.

Tom Falk

Good morning.

Lauren Lieberman - Barclays

Just another consumer tissue margin, because this was I think just north of 15%, the best it had been since 2004 and knowing that there was the benefit little bit of help from flu season this quarter, just want to get some perspective on whether you think 15ish percent obviously has been give and take quarter-to-quarter is sustainable and whether using consumer tissue margins could be higher than mid-teens over time?

Tom Falk

Well, you may have recalled that we were when tissue margins were down in the high single-digits that we weren’t pretty – we weren’t happy with that and we were aiming to get back to the mid-teens. And so now that we are back at the mid-teens, you can imagine that we are not totally happy with that, and we wanted to go higher still, and so it’s been a good focus on mix and revenue generation and driving premium utilization and launching innovation. And so as you look around the company thinks like, we will have a lot of flushable moist wipe launches this year in North America and all over the world and we are starting to look at other things that we can do with our great tissue brands that bring more margin and revenue into the category. And so that’s I think just starting to take hold and so we do have more opportunity to drive margin north in the future and rest assured the team is not stopping at 15%.

Lauren Lieberman - Barclays

Let me just on the topic of innovation then with the flushable wipes example, that’s maybe not a terribly nice question, but sometimes ideas you guys have had that strike you as big ideas haven’t been quite as successful as hoped, whether it’s the hand towel or past efforts at flushable wipes like that, what if anything is different now, is it just keep trying until the consumer catches up?

Tom Falk

Well, I think we are better marketers than we probably were. We tried it in the past. We are listening better to the consumer. We got, as you see, some of the flushable moist execution there, actually this category has been growing. It's just finally get on the radar screen and we’re getting it in more market. So we have had terrific launch in the UK for example behind android’s watch list. And we will take some of that learning and take that into other markets and so I think it. There is a consumer need there and we got better and better product executions and we’re talking consumer about it in ways that are memorable and starting to drive some new habits.

Mark Buthman

I think it's fair to say it's takes longer but one of our learning is when you’re trying to change habits it just takes longer versus the product you’re improving, the consumer uses every day so that’s probably fair.

Lauren Lieberman - Barclays

Okay and then just final question on this your outlook in general for pricing in tissue in North America much has been talked about some of the private label capacity and improving quality and so on and so forth and it certainly sounds like this quarter was a large and not publically traded having some challenges you were bit protected for now but is your outlook at pricing in this tissue category pricing not mix with the same price can remain as positive and stronger as it has been.

Tom Falk

I would say generally tissue pricing broadly followed big moves in pulp pricing. So our outlook for pulp is pretty stable. We’re talking about up 20 bucks a ton or something like that for the year and I think given that you’re unlikely to see big swings in tissue pricing. That doesn’t mean that it won't be promotional activity at the edges but if we do a great job of driving innovation we should be hopefully let promotional which winds up with more revenue at the end of the day.

Lauren Lieberman - Barclays

And just one house keeping question, you mentioned that if there was any gain on the Polish sales wouldn’t it be part of your numbers but in the release this quarter you mentioned the worse gains on asset on the numbers but so I don’t wants the difference or was it just…

Tom Falk

We sold some real estate in North America that we didn’t need and so that goes into other income and expense. So if it wasn’t related to any of the restructuring activities.

Lauren Lieberman - Barclays

And that’s the difference because it was related to restructuring it would have been excluded.

Tom Falk

Yes. So if we took a facility that we took a write-off on and has a gain we don’t take the write-off and as excluded item and then take the gains through operations. We play straight down the middle.

Operator

Our next question comes from Chris Ferrara with Bank of America.

Chris Ferrara - Bank of America

It was kind of striking when you were talking about in diapers in China that I guess you called that Uni-Charm and Kao is the biggest competitors in not so much profit and for probably the largest share play in the market. Just wondering why that is.

Tom Falk

We look at the best performing product in the market and test against that product to make sure we can make competitive claims and so Uni-Charm and Kao both make some terrific products particularly in the diaper pants area where we’re growing in many of those markets and they have the strongest product offer that we’re aiming at and so we test against those and it also make terrific diapers that we have tested again. So Procter is in that for a while and Uni-Charm and Kao are aggressively trying to grow those parts of the business. So we feel like we’re in the share battle with them as much as anybody.

Chris Ferrara - Bank of America

And I guess on another note, in Europe I hear you’re on the 13 countries exited, can you give an update on sort of the cadence of cost coming out so I know you’re saying for the full year, the cost is going to come as fast as the sales have but was that the case for Q1 as well like was there a net profitability impact of the European piece this quarter?

Tom Falk

Europe had a very solid start for the quarter, so overall their profit was up versus prior year and tracking with the plan even a little bit ahead of their plan and second and third quarter is going to be the key turning point for the cost, the back office cost in particular and the team in Europe is monitoring execution of that plan very carefully and I’m confident they are going to deliver on their goals for the year.

Operator

Our next question comes from Alice Longley with Buckingham Research.

Alice Longley - Buckingham Research

My question is about the hikes in your commodity cost, they were up 35 million in the first quarter which seems pretty low versus your annual guidance. Why are you lowering your guidance for the year for commodity cost hikes?

Tom Falk

But I don’t think we are we said $150 million to $250 million is what we think we are going to see in inflation and then we have $35 million in the first quarter. So, if you annualize that, we would be bumping up against the low end of the range. And in the first quarter, I think it was about $15 million was pulp, about $10 million was polymer, about $10 million was distribution cost. And so I would say those are the probably pulp for the full year we expect will be two-thirds of the inflation with the balance being, the other big chunk being distribution and that’s both diesel rate as well as carrier rate increases, including some in Latin America, where there has been some big carrier rate increases in Latin America.

Alice Longley - Buckingham Research

Okay. But maybe the bottom end of your range, we should – it’s more likely than the top end, right?

Tom Falk

But it’s certainly with the commodity pullback that’s happened in the last week or so, that wasn’t probably fully reflected in our guidance. You can see in the assumptions we are assuming oil is going to be in the $90 to $100 a barrel range, and natural gas, we are assuming $4 to $4.50, and that’s pretty much tracking oil probably the one that’s maybe you got a little bit more upside than what we shared with you. Pulp, we still think if you look at Northern softwood, 8.90 to 9 ton, price range is about right. Secondary fiber we are assuming is around $2.60, $2.65, and there maybe a little bit of upside on that, but we will see how the year plays out.

Mark Buthman

Yeah, I think the cost analysis is especially with oil, I mean, it’s on the bottom of the CNBC News screen every day, and it’s just – it’s too easy we have learned to focus on current day pricing. And I think our range of $150 million to $250 million for the year is still a good call and gives us some flexibility in the guidance, if oil or natural gas or fiber run up on us in the whole year.

Tom Falk

And currency rates are also obviously a key factor here a lot of times, they move in opposite direction with input costs.

Alice Longley - Buckingham Research

Okay. And the follow-up to this is you never really give us the base off of which we can run these commodity cost increases, let’s say, your commodity costs were up $150 million through the year. Is that an increase below, let’s say, 3% organic sales growth we might get 3% to 4%, what was kind of an increase is the $150 million year-over-year?

Tom Falk

It would be low single-digits.

Alice Longley - Buckingham Research

So, you are getting leverage from that from cost going up less than organic sales growth, correct?

Tom Falk

Yes, yes.

Alice Longley - Buckingham Research

So, the $150 million would be up like 1%, 2% year-over-year?

Tom Falk

Yeah, I mean its low single-digit spend, Alice.

Alice Longley - Buckingham Research

Yeah, excellent. Thank you.

Tom Falk

Thank you.

Operator

Our next question comes from Javier Escalante with Consumer Edge Research.

Tom Falk

Hello Javier.

Javier Escalante - Consumer Edge Research

Good morning to everyone. How are you? Question for you, I have two questions, but I would like to just start both in KCI, so I would like to start with China, so you moved 50% right, and certainly I don’t think that the market is growing 50%. So, if you can give us the sense of, if you kind of split China basically in Tier 1 and Tier 2 cities, where you were up to last year and then the new cities that you have three cities, which you are penetrating right now. If you can let us know your best guess what is the market growth in Tier 1, Tier 2 cities versus Tier 3 cities? And also what is the market structure, what is your market share in Tier 1 and Tier 2 cities versus your market share in the new cities that you are competing, entering, and also if you can tell us Unicharm and Procter & Gamble diapers share as well divided between Tier 1 and Tier 2 versus the rest which is your rollout as you started last year? That will be my first question.

Tom Falk

Javier, I think you might have dialed the wrong number, you might be thinking I am Nielsen or something, but I am probably not going to give you that level of detail. I guess, I will say this is that in the large cities and we almost look at a share on a customer by customer basis. So, in the large cities, in the modern trade customers, we would have much stronger share than we would on a national basis. So, it’s not uncommon to have shares for us north of 20% in the large modern trade and even though our national share in China is probably half of that. And so as you go into new cities, obviously, your share is a lot smaller you are trying to build it with some of the new customers as you go into those markets, and then in we are also doing quite well in e-commerce in China, which is a growing channel, which isn’t very accurately measured. And so it’s s a very dynamic complex market. I also tell you quite honestly in many cases because the Nielsen coverage is still a little spotty but anybody that is quoting you at market shares in China is probably pulling your leg. So Procter is still the share leader, Uni-Charm is probably got a share that’s higher than ours overall but we will be competitive in the Tier 1 cities with both of those companies kind of buying for share leadership certainly in our segments in the super premium segment. We would be the share leader; in the mid-tier you typical would see P&G and Uni-Charm with a little stronger shares than we have because we’re the new comer to that segment.

But good news is the category overall we think is growing at least mid-single digits maybe high single digits and so it's still a pretty existing diaper market for us.

Javier Escalante - Consumer Edge Research

But the mid-single digits if you grew volumes at 50s somebody must have been losing share. So if you can help us understand who is losing share because growing at 15 the market is growing only mid-single digits somebody must be losing share. Do you have any idea what player is sharing for you?

Tom Falk

I would say probably if you look at the Nielsen data I have seen is probably been P&G and Haugen have been the biggest share of losers. On the other hand you could still lose share and grow volume just give the overall growth of the market.

Javier Escalante - Consumer Edge Research

But you said you lose mid-single digits and grew 50s so that’s why was seeing the share losses and the other question that I have is that you mentioned China growing at 50, Russia growing at 10 and the slowdown was in Brazil to 5 but it's still very strong growth in this big market so which markets went negative. Could it be related on to what extent this is related to a Kimberly specific issue or is broader market issue that will be the case if one of the negative markets I think you flag it was Venezuela? So if you can explain which markets were negative and whether this is a Kimberly specific issue and that will be very helpful. Thank you.

Tom Falk

The two big negative markets, one is Australia and had more to do with the timing of promotions. So we had more promotional shipments in first quarter ’12 than typical that’s a big holiday period in Australia, so usually those promotions take place late in the year for whatever reason they happened in the first quarter of ’12 they also have happened in the fourth quarter ’12. So we’re a little late in Australia and that was probably the biggest comp change and then Venezuela was a little weak in Latin America overall just related probably more to our ability to get foreign exchange to pay for important product or as you know we’re disciplined in terms of how we manage that part of the world and so those are the two biggest volume drags in KCI and I guess you could say at least Australia was probably K-C specific and that it was more on timing of promotional shipments in Venezuela. I don’t know who you want to give credit to that one for so.

Javier Escalante - Consumer Edge Research

But in terms of Venezuela how weak is weak? You talked because last quarter because you mentioned that their volumes were down 30% could it be that kind of magnitude in Venezuela for you?

Tom Falk

It wasn’t that, because of the size of the Australia business was in KCI that probably had a much bigger impact on the overall comps than anything else.

Operator

Our next question comes from Jason English with Goldman Sachs.

Jason English - Goldman Sachs

First to follow-up to Lawrence’s question, the post tissue exit, how large was that gain this quarter?

Tom Falk

It wasn’t a gain basically we took…

Jason English - Goldman Sachs

I was referring to the non-core asset sale in the quarter.

Mark Buthman

Non-core asset sale it was the majority income which on adjusted basis was 24 million so it's the majority of that.

Tom Falk

I guess the other point there Jason is that that was in our plan for the year.

Jason English - Goldman Sachs

One more follow-up, back to KCI in Brazil. There has been some chatter out of the market of the government trying to tamper the inflation rate by partnering with your retailers giving them some tax relief in exchange for some price cuts. Have you seen or heard about this, if so what’s the status or any intentional implications for you.

Tom Falk

That has not had a big impact on us at this point and I think most of those initiatives have been focused more on food, inflation and less on our categories up to this point.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

I just have one question; you were talking about new assets, starting up in the second quarter and maybe for the rest of the year. What kind of assets are they and what’s the cost of starting them up and when are they fully operational?

Tom Falk

We will be adding as I mentioned Mark and I are dedicated a new diaper plan in China so that’s under startup, we will be adding some Baby Wipes capacity in a couple of markets around the world so that will be co-format that’s the converting assets will be starting up. We’re adding some adult care capacity in different markets around the world and so none of them will have the startup impacts like a new tissue a plant would have and all of the startup cost were baked into our plan for the year but it will a bit of an impact as the year progresses.

Operator

Our next question comes from Caroline Levy with CLSA.

Caroline Levy – CLSA

Just a little more specific you’re in 85 cities already in China. Do you think you’re going to be raising your goal because it looks like you’re moving pretty quickly there and the second part of the China question is how quickly would you get a margin benefit from manufacturing the line of share of your product locally versus importing?

Tom Falk

Certainly adding capacity in China will give us a margin boast, we have already got a couple of diaper lines running in China at our existing facility in Nanjing and we manufacture quite a bit of feminine care products in China and we enjoy the margin benefits from that and so by adding the diaper capacity we will give us a boast probably starting later this year and certainly in 2014 once we get past the startup and in terms of raising our goal. Our China team is certainly aggressive and as developing such growth plans they were very enthusiastic when Mark and I were with them earlier this year and our job is to make sure that we can make all their dreams come true. So, we think that will be a good thing for Kimberly Clarke long term.

Caroline Levy – CLSA

And just in terms of the consumer in China since you just got back any sense of a major shift one way or the other or I mean obviously your business has been growing that there is a lot of concern about the consumer there.

Tom Falk

You still think good GDP per capita growth even though the overall GDP growth rate has slowed a bit and Chinese moms are moms anywhere else, they want the very best product for their babies. They talk a lot about the little emperors in China where parents really sacrifice a lot to provide the very best for their children and that has impacted us a bit. I mean those children are their future and they’re going to invest in them to make sure that they can be as well-educated and as healthy and as strong as they can possibly be and that’s certainly is a trend that abating at all in China.

Caroline Levy – CLSA

And then if you can talk company overall, your price mix outlook because you had pretty strong price mix growth in the first quarter of last year, that’s more modest this year. Is that what we saw in the first quarter kind of what you would expect for the balance of the year for price mix?

Tom Falk

We set our goals is 1 to 2, we were one in the quarter. We should get a little bit of additional mix as the innovation rolls out but we got relatively benign cost inflation and currency rate swings in the plan and so those are usually bigger drivers of the price line. If you saw big spike in commodities or a big swing in currency raised in an individual market you would see more pricing offsets there.

Caroline Levy – CLSA

Right and if you could just talk a little bit about Mexico because you have great growth in your equity income line and was it volume driven? Was it, whatever you can share about that market?

Tom Falk

We had a solid quarter and really every component of the equity income line this quarter had a very solid results. So we don’t talk them about often but our business in India had a nice profit improvement, our business in Saudi Arabia had a nice profit improvement as well and so those are in that line but they are obviously much smaller than the K-C Mexico numbers and Mexico had a good executions, decent top-line and great cost savings and that translated into a nice improvement and as talking to Pablo Gonzalez earlier in the week and they are pretty bullish on their outlook. In fact I think their call has gone going as we speak, so Pablo is probably out talking to his shareholder group about the good news the K-C Mexico.

Caroline Levy – CLSA

Final question just on the U.S. environment again sort of a similar question about the consumer because there is a lot fear that private label or lower price brands are kind of set a stay in the new reality even if the economy gets better. Do you have any thoughts of that?

Tom Falk

Well it's interesting we track private label shares as you would expect and then basically in every single category that we track this quarter shares were down versus the prior quarter is slightly down and in many of them were down versus the year ago quarter and so I would say the ones that’s up year-over-year is dry bath tissue and so that’s probably the one that you have seen the most competitive pressure, we talked a little bit about that I think our non-public competitors that had some supply problems in the first quarter created a little bit of a window for some private label improvement as well but overall we’re not seeing anything at least in the recent quarter that would indicate that the consumers are feeling more squeezed and bound shifting into private label.

Operator

Our next question comes from Leigh Ferst with Wellington Shields.

Leigh Ferst - Wellington Shields

I was wondering if you can tell us some more about the surgical numbers that were down 4% in the quarter. How are they trending towards the end of last year and also is there any remarkable difference between elective and non-elective?

Tom Falk

Well it's one that you saw a debt in the third and fourth quarter of last year and I would tell you we don’t have the data yet to be able to tell you and I think that’s going to be elective right? Because if you need surgery you’re probably not able to post-pone it as much as you would think but. I think everyone is trying to unpack this data and get a better look at and when we look at our surgical supplies business and in the fourth quarter we’re down a percent it was flattish in the third quarter. We’re also existing some lower margin (inaudible) business which affected those numbers a little bit but we would expected a little bit better underlying environment for surgeries in the first quarter than we saw and we’re still trying to figure it out along with a lot of other companies I would guess.

Leigh Ferst - Wellington Shields

And did you say you’re expecting U.S. birth rate to be down this year?

Tom Falk

Well they have been down every year for the last three years and we’re expecting birth rate to flatten out this year.

Mark Buthman

Category it will be down.

Tom Falk

Category will be down for some because the babies that weren’t born last year won't be wearing diapers this year.

Leigh Ferst - Wellington Shields

Okay so flat is what you’re forecasting recently so that’s no change. Thank you.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

First question is I noticed the minority interest is creeping up over at about 80 million a year and yet it looks like your dividend to them are only like a third of that or fourth of that, is that correct or how does that generally work for you?

Tom Falk

I don’t know I have to think about that one Chip and get back to you. I mean the minority interest is it includes some other stuff related to our one of our finance industries that’s probably part of what’s going and that we have got this off shore financing thing that’s on the balance sheet, that’s probably doing more to drive that somewhat unrelated to the dividend flow beyond that I would tell you there is other big minority interests in Korea and that business continues to do very well and also continues to pay out the dividend.

Unidentified Analyst

And then second question on that financing I noticed there is a note 395 million I think that actually winds up next year and the question is, is that note which is in sort of the long term assets. Is that offset by in your debt section somewhere or is it sort of hanging there in other words. If you’re trying to compete your net debt should we include that note in your cash because you have an offsetting liability on the debt side.

Tom Falk

Yes there is an offset.

Unidentified Analyst

And then last question it looked like to us that the corporate expense when you look at just in the pure sense was a little elevated versus a year ago. We get 62 million I think and should we expect that to be higher than it was a year ago or was the first quarter just an anomaly?

Tom Falk

Chip that would include some higher incentive compensation expenses which are related to our increased outlook for the year. So for the full year we probably be up year-over-year in that line but I wouldn’t assume that the first quarter would be a normal run rate.

Unidentified Analyst

Lastly Mark you mentioned the gain on the real estate that caused the other income line to be normalized to 24 million, what should we expect that on a normal basis to be. I always thought it was always more or less the small like 10 million expense, is that fair or should it be zero or what would you got us do?

Mark Buthman

It's normally, it's very slight positive or very slight negative.

Tom Falk

Plus or minus 10 million and every once in a while you have something like we had this quarter where it's a little lumpier.

Operator

Our next question comes from Linda Bolton Weiser with B Riley & Company.

Linda Bolton Weiser - B Riley & Company

I think in the past where we had the bird flu outbreak you actually saw the safe mask lift, are you seeing any of that yet due to what’s going in China or not?

Tom Falk

Not yet and the another thing we have tried to be better at managing pandemics because what has happened to us in the past is that everybody orders everything and panics and they needed 10 cases they order a 100 cases and then if we ship it to them then they want to ship it all back to us two months later. So we actually have, once we have evidence of there is a – the demand serves like that coming we go into instant allocation mode and limit the ability of them to buy outsize amounts and so we’re trying to do a better job of managing that for everybody, supply chain in these kinds of situations but we haven't seen much happen yet at this point.

Operator

At this time we have no other questioners in the queue.

Paul Alexander

All right. Thank you David, we will wrap up with a closing comment from Tom.

Tom Falk

Once again we’re off to a good start at Kimberly Clark and we appreciate your support and once again our thoughts and prayers go out to the folks in Boston that are affected by the events that have unfolded this week. Thank you very much for being with us today.

Mark Buthman

Thank you very much.

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