Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Tom Falk - Chairman & Chief Executive Officer

Mark Buthman - Senior Vice President & Chief Financial Officer

Mike Asbell - Vice President & Controller

Paul Alexander - Head of Investor Relations

Analysts

Ali Dibadj - Sanford Bernstein

Alice Longley - Buckingham Research

Chris Ferrara - Banc of America

Andrew Sawyer - Goldman Sachs

William Schmitz - Deutsche Bank

Connie Maneaty - BMO Capital

Wendy Nicholson - Citigroup

Lauren Lieberman - Barclays Capital

Chip Dillon - Credit Suisse

Gail Glazerman - UBS

John Faucher - JP Morgan

Lee Furst - Dudack Research Group

Jason Gere - RBC Capital Markets

Linda Bolton Weiser - Caris & Co.

Kimberly-Clark Corporation (KMB) Q4 2009 Earnings Call January 22, 2009 10:00 AM ET

Operator

(Technical Difficulty) Please be aware that each of your lines is a listen-only mode. At the conclusion of the presentation, the floor will be open for your questions. At that time instructions will be given and as to the procedure to follow if you’d like to ask a question.

I would like to turn the conference over to Mr. Paul Alexander. Mr. Alexander, you may begin, sir.

Paul Alexander

Thanks, David and good morning everyone. Welcome to our year end earnings conference call. With us today are Tom Falk, Chairman and CEO, Mark Buthman, Senior VP and CFO, and Mike Asbell, Vice President and Controller.

Now here is the agenda for the call. Mark will begin with a review of our fourth quarter results. Tom will follow with his perspective on the results, and then discuss our 2010 outlook. We’ll finish as usual with Q-and-A. For those following along on the website, we have a presentation of today’s materials in the Investor section, which is www.kimberly-clark.com.

Before we begin, let me remind you that we’ll be making forward-looking statements during the call. There can be no assurance that future events will occur as anticipated, or that the company’s results will be as estimated. Please refer to the Risk Factors section of our latest Annual Report on Form 10-K for a description of factors that could cause our future results to differ materially from those expressed in any forward-looking statements.

I’d also like to point out that when discussing 2009 results, we will be comparing to adjusted results in 2008, which excluded charges for the strategic cost reduction plan we completed in 2008, and an extraordinary loss. Finally, we will also be referring to adjusted results when discussing our 2010 outlook, which excludes an anticipated loss for the re-measurement of the local currency balance sheet in Venezuela as a result of the recent currency devaluation and moved to hyper inflationary accounting.

Management believes that reporting in this manner enables investors to better understand and analyze our ongoing results of operations. For additional information on these adjustments and reconciliations to comparable financial measures determined in accordance with GAAP, please see today’s news release and additional information on our website.

Now, I’ll turn it over to Mark.

Mark Buthman

Thanks, Paul and good morning. I hope you had a chance to review our news release with all of the details of the results. I’m going to briefly review the quarter and I’d like to start with a few headlines. First, organic sales growth was nearly 3%, including continued double digit growth for both our international business in Asia, Latin America, the Middle East, Eastern Europe and Africa, and for our global healthcare business.

Second, earnings per share increased 16% driven by improved margins, and third, cash provided by operations was up 48% to $1 billion. Now, let’s cover the details of the quarter starting with top line. Overall, sales increased more than 8% to $5 billion including a five point benefit from currency and one point of growth from acquisitions. Organic growth of nearly 3% was driven by higher net selling prices of about 2% and an approximate two point improvement in sales volumes. Meanwhile, product mix lowered sales by 1%.

Now, let me turn to the top line for each of our segments and I may not focus most of my comments on organic sales, setting aside the impact of currency and acquisitions, which you can see in our news release. By the way, when I refer to K-C International, I’m referring to our businesses in Asia, Latin America, the Middle East, Eastern Europe, and Africa, which we previously called our developing and emerging markets business.

In Personal Care, organic sales increased approximately 6%. Sales volumes were up 5% with improved performance in all regions, as selling prices contributed an additional two points of growth, while product mix was off 1%. In North America, organic sales were even with the prior year as higher volumes of 3% were offset by lower net selling prices due to increased promotional activity.

Huggies diapers delivered 6% volume growth and improved market shares by one point compared to a soft year ago performance. Elsewhere, feminine care volumes were up 11% and adult care volumes grew 10%, including benefits from innovation on Depend Underwear. In Europe, personal care organic sales increased nearly 3%. Sales volumes were up about 4% with improved performance in Huggies diapers in Poland and our core markets in Western Europe.

Overall product mix was off about a point. For K-C International, Personal Care organic sales rose about 15%. Net selling prices increased 9% and sales volumes were up 7%. We delivered double digit organic sales growth in a number of markets including Brazil, China, Russia, and Latin America overall.

Turning to consumer tissue, organic sales were down 3%, as sales volumes fell 2% and net selling prices were down approximately one point. In North America, organic sales were down about 6%. Net selling prices fell 3% reflecting an increase in competitive promotional activity, while sales volumes and product mix each lowered sales by more than one point. Kleenex facial tissue volumes were up 7%. However, paper towel volumes were down double digits and continue to be impacted by consumer trade down.

Switching to Europe, consumer tissue organic sales fell about 5% driven by a four point decline in net selling prices and slightly lower sales volumes. For K-C International, consumer tissue organic sales increased more than 2%. Our strategies to improve net realized revenue generated higher net selling prices of 6% and favorable product mix of 1%. Meanwhile volumes were down about 4%.

Moving to K-C Professional and other, organic sales were up about 3%. Higher net selling prices mostly in North America, and North Asia, and Latin America generated nearly seven points of growth. However, organic sales volumes were down about 3% and continued to reflect high unemployment levels and the weak economic environment particularly in North America and Europe. Organic volumes in these geographies were off at a mid single digit rate.

Lastly, Health Care organic sales were up 13%, all of which was driven principally by improvements in sales volumes. The I-Flow acquisition, which closed in late November, added another six points of growth in the quarter. Health Care organic volumes were up in several product categories including double digit growth in exam gloves for the 7 consecutive quarter and strong results in our apparel business. In addition, approximately six points of volume growth in the quarter came from increased global demand for face masks as a result of the H1N1 flu virus.

Now, moving to operating profit, margin, and cost savings; gross margins improved nicely from 31.9% a year ago to 33.4% as we benefited from price realization, cost savings, and lower input costs of about $145 million, as the fifth consecutive quarter of year-on-year gross margin improvement.

Fourth quarter operating profit rose 14% with an operating margin of 14.4%. Results included increased pension expense of approximately $30 million, higher selling and administrative expenses and some net benefit in other income and expense. Meanwhile, we continued to invest behind our brands with strategic marketing up about $45 million in local currency turns in the quarter.

Now, turning to cost savings; we had another strong quarter with total savings of $52 million that brings our full year total cost savings to about $240 million, well ahead of our original target for the year of about $150 million. We also realized benefits from our organization optimization initiative, as severance and related costs of $6 million were more than offset by savings of about $30 million.

Now, looking briefly at fourth quarter segment operating margins; margins improved year on year in Personal Care, KCP, and Health Care. Input cost declines benefited all three segments, while higher selling prices also boosted profitability in Personal Care and KCP. Consumer tissue margins were below prior year as a result of investments in strategic marketing, competitive promotional activity in North America and some softness in K-C International.

Now, moving to cash flow; we had another excellent performance this quarter. Cash provided by operations increased 48% to just over $1 billion driven by higher cash earnings and further reductions in working capital, partially offset by increased pension plan contributions. We improved our working capital cash conversion cycle by six days compared to the third quarter. That included benefits from payables, and a two day reduction in inventories.

Contributions to our defined benefit pension plans in the fourth quarter totaled $127 million including $100 million contribution in the U.S. that was incremental to our previous plan. During the quarter, we decided to make an additional contribution as a result of our strong cash flow.

For the full year, we generated all-time record cash from operations of approximately $3.5 million, that’s up 38% or roughly $1 billion compared to 2008’s level. That’s a terrific accomplishment by our global organization driven by significant working capital improvements. That wraps up the financial review, so to recap the quarter. We achieved organic sales growth of nearly 3%. We delivered double digit bottom line growth, fueled by healthy gross margin expansion and cash flow performance was outstanding.

Now, I’ll turn it over to Tom.

Tom Falk

Thanks, Mark and good morning everyone. Since you just heard from Mark about the fourth quarter, I’ll give you my perspective on our results for the full year and then I’ll review our outlook for 2010. In short, we delivered solid results in 2009 in a very challenging economic environment, and we maintained our focus on doing what’s right to generate sustainable long term growth and that’s our plan for 2010 as well.

So let me start and recap 2009, our overall performance was strong. On the top line, organic sales were up about 3%, and that was driven by higher net selling prices of approximately 4%. That’s a pretty solid achievement particularly considering that we faced the worst economic environment any of us have seen in more than 70 years.

On the bottom line, earnings of $4.52 per share were up 9%, compared to adjusted results in 2008. That’s at the high end of our long term global business plan target, and we significantly exceeded our original 2009 plan for earnings of $4 to $4.20 per share. We made excellent progress on the four priorities that we established at the beginning of the year. Those priorities were to improve margins, pursue our targeted growth initiatives, strengthen our brands and maximize cash flow.

On the margin front, we increased gross margin by 320 basis points and our operating margin by 140 basis points. Our focus on price realization and cost reduction was essential to delivering these improvements, and while our revenue realization strategies impacted our sales volumes in some cases, that was a short term tradeoff we’re willing to make to get our profitability moving in the right direction.

At the same time, we took additional steps forward with our targeted growth initiatives. Overall, our K-C International business grew organic sales by 11% with very strong performances in the high potential markets of China, Russia, and Latin America. We also invested more than $750 million on acquisitions that will further enable our growth initiatives, particularly in higher margin, higher growth opportunities in K-C Professional and Healthcare.

In addition, we continued to strengthen our brands with innovation such as Huggies pure and natural, gender specific Depend products, Scott naturals, Lavender Night Trial exam gloves and a number of K-C Professional safety products. We supported our brands with a significant increase in strategic marketing, and that was up about $140 million in local currency terms.

Finally, in terms of cash flow, we had record setting performance as Mark mentioned. Our cash generation has allowed us to fund our growth initiatives and improve our balance sheet, while providing additional flexibility as we move into 2010. So all in all, we executed our business plans very well and we made great progress against our key priorities for the year.

I’m very proud of what Kimberly-Clark’s worldwide team accomplished this past year and our performance gives me confidence that, we’ll continue to execute our global business plan well in the coming year. So, now let’s turn to our outlook for 2010. In terms of the environment, we’re planning for a slow and modest economic recovery overall in 2010, so we expect our organic sales volumes to be up two to 3% in 2010 after being down about 1% in 2009, and our volume growth should be led by our K-C International business as we further expand our presence in these faster growing geographies.

Just as we did this past year, in 2010, we’ll strengthen our brands and pursue targeted growth initiatives and reinvest back into our business for our future growth. So we have a healthy pipeline of innovation coming to market in 2010, and there are a number of those launches that will start in the first half of the year. We will support our brands and our growth initiatives around the world with strategic marketing spending, that is planned to rise faster than sales and we’ll invest more to improve our research and customer development capabilities.

We’ll continue to focus on reducing our costs and generating strong cash flow. That should help us overcome the expected significant input cost inflation, which we currently estimate to be about $300 million to $400 million, and enable our strong reinvestment plans. So all in all, we expect adjusted earnings per share in 2010 will be in the range of $4.80 to $5 per share. That’s up 6% to 11%, compared to 2009 earnings per share and that’s in line with or slightly above our long range target.

We’ll also deploy our cash and shareholder friendly ways. We would expect a high single digit to low double digit increase in our dividend and that will help us maintain our top tier pay out. Moreover, we’re resuming our share repurchase plan and we’ll be entering the market right away in the first quarter. More details about our 2010 planning assumptions are included in this morning’s news release and our presentation slides.

Finally, we recently completed a review of our global business plan and we’ve got further sharpening of our strategies and plans to facilitate the delivery of our existing top and bottom line growth objectives through 2015. Our annual growth targets remain 3% to 5% for net sales and mid to high single digits for earnings per share.

We’ll continue to pursue targeted growth initiatives and further develop the key capabilities that we need for sustaining our growth. At the same time, financial and cost discipline will be important parts of the plan. We’ll share more details around our GBP 2015, at our upcoming Investor Day on March 22.

So to summarize, we delivered excellent results in 2009 and we expect another solid year in 2010. We continue to invest for our long term success and we’re building a leaner, stronger, and faster company and we are confident that we have the right strategies to drive sustainable growth and shareholder value for many years to come.

That wraps up our prepared remarks. Now, we’d be happy to begin to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ali Dibadj - Sanford Bernstein.

Ali Dibadj - Sanford Bernstein

Wanted to just understand a little bit more about the consumer tissue margins. It looks like a lot of that has been driven by marketing spend increases and I’d love to understand a little bit of the ROI on that spend or does it kind of just not matter, you have to spend it anyway because of the competitive atmosphere out there to defend your share?

Tom Falk

There’s a couple things going on in the quarter, Ali. So there’s some increases in trade funding some of that is getting your price point matching up with the competition, so that your competitive on promotion and that you’ve got the right velocity to earn those promotional slots and that was part of it.

We also stepped up our marketing investment behind Kleenex and so obviously we’re in the heart of cold and flu season. We saw 7% volume improvement on Kleenex in the quarter and obviously we’d expect to see that continue as we go into the first half of the year. We’ve got some innovation coming on Kleenex as well.

So those were two factors, and the international markets you probably also saw a bit more down time in the quarter as they were a little later in the process of getting their inventory down to target levels. So particularly in places like Australia, where we’ve got some decent size tissue businesses you saw a bit more down time in the quarter.

Ali Dibadj - Sanford Bernstein

I guess to drill down on one of those aspects you mentioned both internal promotions that hit COGS obviously, but above the line as well. It feels like you have a little bit of conundrum going forward in that commodities are increasing and you said it yourself obviously and you’re budgeting for it, but you aren’t taking pricing. So I guess in some sense you’re seeing two curves cross, you aren’t going to be able to offset is one.

Two is, if you don’t take pricing up, you get hit by commodities. If you don’t take pricing down, it feels like this private label and some more like other competitors as well. The increased intensity will hurt volumes. So how do you think about that? Why isn’t there more, I guess negative pricing going forward in terms of expectations?

Tom Falk

I think if you look at 2010 for tissue, holding margins and consumer tissue would be a really good performance in the environment they’re going to be in. So we’ll have to do some things around innovation to drive mix and some of the marketing spend will help on that front and we’ve got a very aggressive cost savings program for tissue around the world to be focused on that.

I think your point is right on. It’s going to be a challenging environment for tissue in 2010 with commodity costs up, it’s a difficult pricing environment and we’re going to have to be aggressive on cost and drive mix to be able to hold margin going into that environment.

Ali Dibadj - Sanford Bernstein

Can you give us a little bit more color on the competition out there both branded and private label in terms of pricing in particular or promotions?

Tom Falk

If you go back to the last price increases that were taken in late 2008, those really haven’t been fully implemented. In many cases, they’ve been partially spent back or in some categories even significantly spent back.

So I think until you get those prices that are in effect and promotion prices starting to move up a bit, you’re probably going to see a difficult time, at least in the U.S. market and list price, we may get some pricing in some other international markets, where the dynamics are different, but I think in the U.S. market, it will be a challenging price environment. You may see de-sheeting that happens where you’ve got innovation that would drive that so you’ll get price in that form, but I don’t think you’ll see list price to a great extent.

Ali Dibadj - Sanford Bernstein

I guess it feels like there’s some sort of asymmetry in terms of people are giving back the pricing particularly branded players and not getting back the volume that one would have anticipated. Is that a fair take in the economic situation out there?

Tom Falk

Well I’d say the categories have been a little soft in some cases, facial tissue has been soft. It’s a bit more discretionary, paper towels would be the same. The category has generally shifted more to private label than some of the others. So yes, the bath tissue category dynamics have been pretty stable, but you’ve seen more of a mix shift to the lower price tier. So our Scott tissue business had a fantastic year. Our Cottonelle business had more of a challenge, so I think you’re seeing that trade down in tissue probably more than in Personal Care.

Operator

Your next question comes from Alice Longley - Buckingham Research.

Alice Longley - Buckingham Research

I am having some issues or confusion about guidance as well. You’ve got organic volume growing 2% to 3%. What do you think will happen with pricing overall? I understand maybe down in the U.S. up offshore and mix. Are those both neutral maybe as a good starting point?

Tom Falk

We would basically say price and mix are calling to be pretty flat versus 2009.

Alice Longley - Buckingham Research

Then we’ve got raw material costs going up and we’ve got marketing going up. So what do you think will happen with operating margins in 2010?

Tom Falk

We’d say, operating margins will be up probably 20 to 30 basis points, in that framework where you’d see cost savings and the benefit of the volume growth should help our margin and offset the impact of the higher commodity cost and higher marketing cost.

Alice Longley - Buckingham Research

Gross margins, do you think that they can be up as well, because of cost cutting and volume?

Tom Falk

Yes, we’ll probably see a bit more lift at gross margin, because of the impact of the between the lines marketing spending.

Alice Longley - Buckingham Research

What do you mean by that?

Tom Falk

So in other words, gross margins will have to be up higher than operating margin, because we’re going to be spending back more between the lines.

Alice Longley - Buckingham Research

So gross margins up 50 basis points?

Tom Falk

That’s not an unreasonable assumption.

Alice Longley - Buckingham Research

Then I just had a question about the North American Personal Care. You cited the three parts of the division that were up more than the 3% volume overall, so what was down, Childcare?

Mike Asbell

Childcare was pretty similar year-on-year, Alice.

Alice Longley - Buckingham Research

So that was flat?

Mike Asbell

Pretty similar, yes.

Alice Longley - Buckingham Research

I guess one final question. Your 2% to 3% volume growth that you’re foreseeing for 2010, how much do you think volume will be up offshore for international?

Tom Falk

It should be up more than that. I mean obviously, we saw a good sequential improvement during the year. The back half of the year had better volume performance than the first half of the year. We’ve got aggressive plans to continue to grow in the international markets, but we’d also say particularly in Personal Care, we’d expect to see some growth in the U.S. behind some of the innovation that we have coming.

Alice Longley - Buckingham Research

So you think volume can be up in Personal Care in the U.S. some?

Tom Falk

Yes.

Alice Longley - Buckingham Research

Actually as a follow up to that, I think you said organic growth for international in the fourth quarter was 11%. What was it for the year?

Mike Asbell

It was also up 11%, Alice.

Alice Longley - Buckingham Research

For the year and how much of that was pricing? How much volume?

Tom Falk

In the fourth quarter, I think volume was 2% and price was the balance, price and mix.

Mike Asbell

Yes, and that’s pretty similar for the year as well.

Operator

Your next question comes from Chris Ferrara - Banc of America.

Chris Ferrara - Banc of America

Tom, I just wanted to just to make sure I understand this, you think pulps going to average 8.50 to 8.75, or that with the big deal which means it’s you’re approaching 900 by the end of the year if not getting there, but you think with pulp getting up to 900 there will be no industry pricing in consumer tissue at all, like private label consisting in that type of pulp prices and survive and just want to get your color on that?

Tom Falk

We would love for that to happen, but I think just based on how tough it has been to get the last price increase established. We probably focus more on getting that established and dialing backs some of the trade spending.

You typically see in tissue is that the way it plays out is you’ll see some of the trade gets pulled out before a list price change and we’re not seeing that happen at this point in time. I mean promoted price points are still pretty aggressive and it’s a challenging environment to get price. That isn’t to say that we won’t try to get it in markets, where we think we’ve absolutely got the opportunity, but I’d just think realistically, it’s going to be a challenge in 2010.

Chris Ferrara - Banc of America

I understand that now based on what pulp is today but if you’re talking about pulp going up another $70, $80 over the balance of the year. Do you think that would change the dynamic at all?

Mark Buthman

It might. It could happen, but again, if it happens, the realization this year would probably not be significant because you’d protect promoted price points for a period of time. So much of tissue goes on promotion, it’s not that it doesn’t matter what happens to list price, but you’ve got to get promoted price points to move up to really get significant realization.

Chris Ferrara - Banc of America

I guess just on a different topic on SG&A, just trying to understand I guess for the quarter. So SG&A was up about 19% year-on-year, right after it had been running flattish to slightly up over the first few quarters. I just want to understand what’s driving that increase and how are you thinking about that line going forward? It’s like 19 and change as a percentage of sales is one of the bigger numbers we’ve seen. So I guess, what change and how do you think about it as you move into 2010?

Tom Falk

About half of the increase in the quarter was higher marketing spend. So part of that was just the timing of how that played out this year and then in the balance, the I-Flow acquisition, which has got a very heavy sales component was about a third of the balance. The rest of it was a variety of things. You had compensation expense was higher particularly in the fourth quarter.

We had such a strong third quarter and if you look at our long term comp is driven by ROIC and so the big improvement in ROIC in our outlook for the year actually caused three years worth of awards to get ratcheted up and all of that expense fell in the fourth quarter predominantly. So some of it was just the timing of when the compensation expenses got recorded this year.

Chris Ferrara - Banc of America

I hate to like be such a pain on this, but I mean the rest, I guess marketing spending and strategic spending didn’t really go up much more this quarter than it has in the first three quarters, is that right? I’m just trying to understand relative to say last quarter when it was flat, if you have the same level of yea-on-year increase in marketing spending that’s an extra 19 points of growth that. It sounds like I guess a piece of it is I-Flow and the comp but there’s nothing else that’s sizeable in there?

Tom Falk

Nothing unusual. No.

Mark Buthman

I would say, Chris, that the third quarter was maybe a little less than we had expected, the fourth quarter was maybe a little more. We always tend to ramp up in the fourth quarter and maybe it was a little bit out sized, but nothing had no particular element stand put.

Mike Asbell

Chris, if you take a look at the flow as below the line spending in 2008 for example, you’ll see that the fourth quarter is typically higher than the full year average and that’s predominantly driven by G&A.

Operator

Your next question comes from Andrew Sawyer - Goldman Sachs.

Andrew Sawyer - Goldman Sachs

I’m just going to ask a quick question on diapers. Rock announced a decent sized innovation. I’m just wondering, what kind of flexibility you guys would have to replicate or match that technically, if you find that necessary and how you’re thinking about spending plans as they come out with presumably a decent amount of media behind that?

Tom Falk

We’ve been aware of the March re-launch of Pampers for a while because it’s been out in the trade for a while and so we’ve seen the product at other markets around the world and we’re pretty aware of how it performs. We feel very good about our Huggies plan for 2010. So we know they will spend money and make a lot of noise, but we also feel like we’ve got a terrific innovation plan and we’ll come through the year with a strong Huggies franchise.

Andrew Sawyer - Goldman Sachs

How has that product performed? How has it affected your business in other markets, where it’s been for a longer period?

Tom Falk

Yes, I mean, they haven’t launched it broadly anywhere. They’ve tested it a bunch of different places. The consumer buzz on their blocs is not all positive. In fact there’s quite a few consumers that are seeing fit issues, but we’ll see. I’m sure they’ll get it right. I mean they are a very capable marketing company. They’ve been in this category a long time, but if you think about it relative to their current product, its one millimeter thinner versus our product that’s like a millimeter and a half. So it’s not as radically different than you might think.

Andrew Sawyer - Goldman Sachs

Is there anything coming through from the retailers in terms of shelf resets because one of the pitches they’re making is it takes a little bit less space?

Tom Falk

On the big box package, which is the most common largest volume pack, the pack size is 1% different, so on average across their packing. So it’s not a huge space differential.

Andrew Sawyer - Goldman Sachs

Then just quick one for Mark, why is the tax rate going up next year, I would have thought with more mix presumably coming profit mix coming from overseas? I would have thought maybe they were versed.

Mark Buthman

I think a couple things. We’re also generating more cash overseas. So we’re going to be bringing more cash back to the U.S., which tends to put a little upward pressure on the tax rate and then there’s just a natural upward pressure as we create more income that has more of an upward affect.

Andrew Sawyer - Goldman Sachs

You wind up getting closer to your statutory rate and so you need that much more tax savings opportunities to hold the rate below the statutory rate?

Mark Buthman

It’s really just the growth in the shape of our business.

Andrew Sawyer - Goldman Sachs

Just on that front, will you guys continue to raise your dividend payout? I mean you’re implying an increase in your dividend payout ratio this year. Is that something you’ll continue? Is there a target rate you’ll have?

Tom Falk

I mean certainly, we out performed this year, so our payout for ‘09 was actually lower than we expected it would be going into the year. So we’ve said historically, we’d try to grow the dividend at least as fast as our earnings growth. So I wouldn’t expect to see huge shifts and payout upward overtime, but I think a modest up tick is probably appropriate in this environment.

Operator

Your next question comes from William Schmitz - Deutsche Bank.

William Schmitz - Deutsche Bank

Can we just Venezuela, are you done repatriating money from Venezuela cash wise? I mean, will it stop impacting margins next year?

Mike Asbell

Everything has sort of changed now they’re gone to hyperinflationary accounting. So I think that as we generate excess cash in Venezuela and we can pull that cash out to do other things with it, we would look to continue to be able to do that. I think at this stage, given the state where the currency controls are, we’re not exactly sure what the rules are or how you will even get foreign exchange to pay your bills in foreign currencies at this stage.

William Schmitz - Deutsche Bank

Are diapers deemed essential items or do you have to use the 4.3 rate?

Mike Asbell

There’s three rates now. The essential rate, we’re assuming that none of our products are probably in that category. It’s probably more food oriented and so then there’s the non-essential rate is 4.3 and then there’s a parallel rate of six and so I think the question that everybody has at this point.

I don’t think anyone knows exactly how it’s going to work out, it’s going to be either 4.3 or 6 is where everything will get translated at this year. So when you see a range around some of our numbers, we’re waiting for clarity on how that’s going to play out and so I think it’s likely the SEC will lay in and tell everybody what rate they’re supposed to use and we’ll see how that happens in the first quarter.

William Schmitz - Deutsche Bank

What’s in guidance because if you look at the year-over-year comparison, obviously there was big other expense in the first two quarters. Do you contemplate that continuing or is that going to go away?

Mike Asbell

The big other expense in the first two quarters if you look at last year there’s things happening in the sales line and cost of sales line and the one most visible to the street, what was going on in other expense. As you look in the back half of the year most of the stuff that was in other expense wound up in cost of sales because of the way the transactions being done.

When you shift to hyperinflationary accounting the more of that is going to flow through cost of sales next year, but you’re also going to have a much lower sales number because we were translating sales at the official rate last year of two because that was the rate. This year their sales get translated at either 4.3 or six depending on what the guidance is, so it was 3% of our sales last year and it might be one to 1.5% of our sales in 2010. So there will be a lot of moving parts for Venezuela in the P&L in 2010 and we’ll try and be as transparent about it as we can.

William Schmitz - Deutsche Bank

Then on the SG&A line, I think it was 19.5% of sales this quarter. I know you answered Chris’s question, but is that the run rate going forward?

Mike Asbell

No, that was higher than we’d expect. Obviously, there was more, the fourth quarter accrual effect that Mark talked about and some of the compensation expense catch up, we had some of the cost of the I-Flow, the onetime cost of the I-Flow acquisition were in there. So there was a bunch of things in the fourth quarter. So I think if you look at the full year average that’s probably more reflective of what we would be aiming at.

William Schmitz - Deutsche Bank

Then the 10-K is not out yet, but you usually provide margin by region. Can you just tell me what the European margin was for the year?

Mike Asbell

I don’t know if we got that handy.

Mark Buthman

Bill, we’ll get back to you with that. I don’t think we have that right with us.

Mike Asbell

The other thing, when you do get it, we’ve booked all of the organization optimization costs in that line item and in Europe as you know the severance costs are pretty high.

Operator

Your next question comes from Connie Maneaty - BMO Capital.

Connie Maneaty - BMO Capital

I have a question on gross margin expansion. In my model, I’m having trouble getting it to expand because you have cost inflation that won’t be fully offset. You have a mix shift towards less lower priced products. You’ve got increased trade promotions. Why will the margin go up next year?

Mark Buthman

If you look at a couple of things, I mean our achieving organic volume growth of 2% to 3%, that’s going to help us from a utilization perspective. We’re going to have less down time in 2010 than we had in 2009. Now we won’t get all of that back, but we’ll get a portion of that probably half of that will comeback in better absorption.

We’ve got a couple hundred million dollars in our forced cost savings that we would expect to come through, a lot of the organization optimization costs hit cost of sales and some part of it was in our G&A area, but a good chunk of it was in our manufacturing organization. We’ll have lower pension expense in 2010 and a good chunk of that goes through cost of sales.

Then some of the currency transaction costs that hurt us that were in cost of sales for all of the purchase materials, those should be better with the better FX environment in 2010. So it’s a lot of other pieces that are hard to find, but we think that on balance, those things should help us offset the cost environment and still deliver on margin improvement.

Connie Maneaty - BMO Capital

There are so many things that go into it?

Mark Buthman

Yes, there’s a lot of moving parts and the volatility we’ve had in a lot of areas these days.

Connie Maneaty - BMO Capital

The Health Care margins went from about 21% in Q2 and Q3 down to 14.5% in Q4. What was that all about?

Mark Buthman

The onetime costs of the I-Flow acquisition were a big part of that. So as you know, we had the acquisition related costs that you have to expense and then some of the profit step up in their inventory flowed through the cost of sales in the fourth quarter. We’ll have more of that in the first part of 2010. So you’ll probably see a little bit of pressure on healthcare margins in 2010 related to that.

Mike Asbell

Connie, there was also a sequential increase in some input costs like polymer.

Connie Maneaty - BMO Capital

So year-over-year in 2010 the healthcare margins should be down from 2009?

Mike Asbell

Yes.

Connie Maneaty - BMO Capital

What’s a good assumption for I-Flows normalized margin?

Mark Buthman

From an operating margin standpoint they’ve been running around breakeven, very high gross margins historically, but obviously we’ll have to flush that profit aspect of inventory through as we do the purchase accounting and then we obviously believe that it can be accretive to us by 2011.

Connie Maneaty - BMO Capital

Then I have some questions on Venezuela too. Of the non-essential rate, are there restrictions to your access to get money at that rate?

Mark Buthman

I think the honest answer, Connie, is that we don’t really know yet. This is all relatively new. We’re still trying to figure out how the Venezuela government is actually going to make exchange available to companies to allow them to pay for the cost of imported raw materials and in some cases imported finished product.

So I think if you look at how things played out in 2009, there were some programs that were available to get exchange at the official rate, but most of our business went at the parallel rate, which so I think we’re not sure exactly how that’s going to play out in 2010. If the sufficient funding will be available at the non-essential rate that would be great, that would be one scenario, but it’s perhaps more likely that we’ll be dealing in the parallel rate as we were this year.

Connie Maneaty - BMO Capital

I just want to make sure that I’m understanding, I want excuse no have an apples-to-apples comparison excluding the one-time stuff with Venezuela, and it seemed to me in last years first quarter, you had two impacts from Venezuela running through. One was the transaction cost, but also didn’t you have a loss to reduce your cash balances in the first quarter and shouldn’t we exclude that from our adjusted base in 2009? So that it’s a straight comparison to 2010.

Tom Falk

Well, because we’ll be probably pulling some cash out again in 2010 so I’m not sure that I’d back that out completely. I mean the loss that we’re going to be treating as an unusual item is really just the impact of going to hyperinflationary accounting, which happened on January 1. To put it in perspective, if the devaluation that happened in December of 2009, all of that one-time charge would have flowed through UTA and not gone through the income statement at all.

Connie Maneaty - BMO Capital

Doesn’t the cash that you generate, doesn’t that also get re-measured and the re-measurement of the balance sheet?

Tom Falk

Yes, the bill of our cash and bill of our receivables will generate exchange losses as the exchange gains or losses as the exchange rate fluctuates in 2010, and then of your Boulevard payable position.

Connie Maneaty - BMO Capital

Did you record transaction losses in Venezuela in each of the four quarters of 2009?

Tom Falk

Yes, but in some cases, the hit was in cost of sales and others it was in other income expense. It really depended on the type of transaction.

Connie Maneaty - BMO Capital

So year-over-year, because it’s already in the 2009 base, it doesn’t get precipitously worse in 2010. So the only thing we really need to think about is the translation impact and the one-time balance sheet effect.

Tom Falk

I think that’s right. The bottom line based on what we know of the exchange rates, Venezuela should be pretty similar in 2010 versus 2009. Now, that assumes things stay as they are. Sales will be a lot lower, but the operating earnings net income shouldn’t be materially different, because the parallel rate is projected to be broadly similar to where it was in 2009. So the one-time transaction cost related to re-measuring the balance sheet is the big hit.

Connie Maneaty - BMO Capital

Are consumers shopping or as business come to a halt?

Tom Falk

No, I mean we make things that people need everyday, so people need bath tuberculosis use, people need diapers, and so yeah, it’s an environment to be sure, but no matter what’s happening politically people need our products to survive.

Connie Maneaty - BMO Capital

If I could just ask one last question, I’m sorry, how should we think about the first quarter? What are the big influences on the first quarter?

Tom Falk

Again, we’ve got quite a bit of innovation launching in the early part of the year so you’ll probably see stepped up marketing spending, commodity costs are moving sequentially higher in some areas, you’ve seen oil up a bit, so polymer costs and pulp costs will be higher than the fourth quarter. The G&A costs will likely be lower as some of the impact of the accruals that were taken in the fourth quarter reverse. So you’ll see lower G&A spending. Broadly I’d say those are some of the major impacts outlook for on to the market.

Mark Buthman

I think if you think about our business in two halves, our cost savings programs tend to kind of ramp up towards the end of the year, which tends to benefit the second half. The benefits of the innovation that will come in the first half will flow through in the second half.

So it’s likely second first half comps will be better just because our earnings were lower in ‘09, but progressively we’ll earn more in the back half than the first half.

Operator

Your next question comes from Wendy Nicholson - Citigroup.

Wendy Nicholson - Citigroup

I just have a couple of follow up questions on the tissue business. First of all I know you’ve talked a little bit over the last year about maybe some distribution losses for the Scott brand. Has that actually played out or what’s your expectation now for that?

Tom Falk

No, I think you’re seeing retailers everywhere are more disciplined on the brands that they carry and the SKUs they carry and I think that’s true, with every retailer I’d talk to they want to have a more impact full efficient line up. Broadly, we would say that we have the distribution.

We need to achieve our objectives, the distribution has shifted around and will regain in some areas we’ve lost in some other areas, but overall we would feel like we’ve done a pretty good job and brought the retailers what they needed to give them the efficient line up they’re looking for.

Wendy Nicholson - Citigroup

So in terms of pressure on your business, do you think this is just an ongoing thing or has the last year seen particularly, whatever more of a shift to private label any disproportion at pressure on your business?

Tom Falk

No, I think retailers are continuing to push. I mean they want innovation. They want to make room for innovation and so they’re going to be pushing manufacturers to make sure that their product line up performing. So every one of our brand teams is making sure that we’ve got the right things on the shelf and the right packings for each retail channel and that we’re the relevant offering that they want to put on the shelf.

Wendy Nicholson - Citigroup

Given you sort of continued down trading to private label particularly on the towel side. Does it change your philosophy or your willingness to do more private label manufacturing?

Tom Falk

Not at this point. I mean, I think we are a branded business and that’s where we focus, we do have some private label contracts that are important to us with strategic retail partners, but I wouldn’t say that it would say we’re going to go chase private label broadly as a key strategy.

We’ve got excellent programming behind Viva, which is a super premium differentiated product. We continue to make sure that Scott towels provides the value that consumers are looking for and we think both of those brands have got a role to play in the category going forward.

Wendy Nicholson - Citigroup

Then my last question and I may have my facts totally wrong here, but isn’t it in the Spring of 2010, but the brand that SEA bought from rock tier in Western Europe have to go away as a part of that licensing agreement. So I’m wondering if my facts are right if that’s still in the cards and whether that affects you at all. In other words is that a unique opportunity to capture branded share against what now looks like just a private label dominated market or is that just an immaterial thing?

Tom Falk

I think the shares were pretty small to begin with and the share growth in Europe is mostly occurring in private label broadly and so we managed to hold share and are down just a tic in a couple categories, but I’d say we’re watching private label more carefully in Europe than we are some of the other branded players.

Operator

Your next question comes from Lauren Lieberman - Barclays Capital.

Lauren Lieberman - Barclays Capital

First thing was just on strategic marketing. I think it would be really helpful if you guys could give us a ballpark idea of what percent of your general expense you consider to be strategic marketing because in the conversation about how much it increases year-over-year, local currency versus as reported? When I look back at what you said last quarter it was up $50 million, this quarter it’s up $45 million and that’s different than what Mark had just suggested? So I’m having trouble figuring out what up faster than sales means for this year?

Tom Falk

I’m not sure what question would you like us to answer in that, Lauren?

Lauren Lieberman - Barclays Capital

Let’s start with what’s the base, what percentage roughly even is “strategic marketing” of your general expense?

Paul Alexander

So Lauren, this is Paul. We consider advertising and consumer promotion between the lines as strategic marketing. Advertising, we’ll report in the 10-K, but roughly speaking it’s about 3% of sales. The consumer promotion piece is a meaningful number, but it’s less than the advertising number.

Lauren Lieberman - Barclays Capital

Then since it’s at least year-over-year even adjusting for currency, strategic marketing was up significantly in ‘09 versus ‘08. So in your plans for 2010, to increase strategic marketing faster than sales, what’s really changing outside of the dollar number? Where is it being allocated or how is it being allocated differently that you think it will have a positive impact on volumes and brand equity versus what you may or may not have seen this year?

Tom Falk

As you look at our global business plan that we’ve talked about, the categories and countries that are targeted for significant growth are going to be where we invest disproportionately. So if you looked at, our Personal Care businesses pretty much around the world you would expect to see higher A&P spending. If you looked at our Kleenex business and some of the things that we’re going to do behind that, you’d expect to see higher marketing spending.

Our Andrex business in the U.K., we’re going through a major relaunch really as we speak. Look at our VIVA business and Cottonelle business in the U.S., where you’ve got high margin differentiated products where we would want to spend more behind those, so those would be the focal points, where we see we’ve got innovation, we’ve got the strategic growth platform where we would want to spend more behind those.

Lauren Lieberman - Barclays Capital

Specifically to consumer tissue, I know the Nielsen data is less and less useful, especially now with target not included in it, but the numbers and track channels for Scott in both bath and paper towels have been down double digits. So just getting back to Wendy’s question about distribution, is the performance very, very different in untracked channels for Scott?

Tom Falk

I mean, Scott bath overall had a terrific year so significantly out performed the category from a growth rate standpoint. So, yes, there is no issue on Scott bath. I mean there’s really more of making sure we can manage the supply chain and stay in good customer service, because if you look even at the fourth quarter, we significantly out performed our expectations on Scott bath.

Scott towels we did lose share, but if you looked at our total towel share versus the prior quarter, I think it was down two-tenths of a point and that was probably pretty evenly split across Scott and VIVA.

Lauren Lieberman - Barclays Capital

Just finally on margins in tissue, I understand that broadly, when you talk about the G&A spending up year-over-year that some of it was accruals and one-time or timing issues, but when I look at the reported operating margins for tissue, as you highlighted they’re down really significantly year-over-year.

I just wondering to what degree is that or the down time tied to the fact that volume has now been negative for two years and you sort of focus on revenue realization, improving margins, it got back to a level that I’m wondering if maybe you’ll say okay, mid-teens margins was fine and now we’ll spend again, but we’re sort of back where we started in terms of margins and top line.

Tom Falk

Yes, I’d say I’d look at the average margin for the year and say tissue margins for the full year we’re up probably a couple hundred basis points, 11.5 versus 8.9, and yes, we slid back in the fourth quarter, but I’d still say looking at that full year average is really what we’re aiming at in 2010.

There was a lot of things that happen in the fourth quarter and some of that was one-time and some of it was downtime related, which we will have more of, but a good chunk of that was in the international businesses where margins were off quite a bit and part of that was downtime related.

Operator

Your next question comes from Chip Dillon - Credit Suisse.

Chip Dillon - Credit Suisse

My first question is just to clarify on the diaper changes that Proctor has put out there, you mentioned it’s a pretty minimal shelf space issue, but are there any plans at Kimberly not that you would share the details but to somehow respond to that with innovations of your own?

Tom Falk

As you know, we’re always improving Huggies and have got a aggressive product plans going into every year. In fact, we’ve got multiyear product plans and so yes, we feel like we will have a competitive and most cases superior preferred product in Huggies throughout 2010. So we’re very confident in the innovation plan that we have. We know Proctor is a great marketing company will come in and make a lot of noise about their product improvement, but I think what they’re doing if you really take it all apart is more of a cost savings program than a significant step change in product performance.

Chip Dillon - Credit Suisse

I’m sorry to beat the dead horse on the tissue issue.

Tom Falk

This horse is alive and well Chip. It’s a horse we like very much and we’ve got confidence that our tissue business can perform and earn us cost of capital and play an important role for us.

Chip Dillon - Credit Suisse

You’ll be glad to know we bought a massive package of Scott tissue, 1,000 rolls at Costco Martin Luther King day, so we’re doing our part. When you at least looking at NBSK price for ‘09 it was $718 million and supposed to go to $880 million in February, which if it just did.

I’m not saying it will or won’t and stayed there for the rest of the year and not higher or lower that would mean you have about $160 million a ton change and that would add up to be almost your full $400 million cost increase you’re building in.

I know I believe you buy about a million tons give or take of wastepaper and that’s already about $100 million a ton above the ‘09 average. So that would go through there. Are there offsets to this, where you see raw materials or other costs going down, input costs going down that would keep you in that $3 million to $400 million range or are you expecting pulp to roll down or how can we reconcile those?

Mark Buthman

In some parts of the tissue business in the U.K. for example, energy costs are probably a little lower in 2010 versus 2009. So that’s part of it and there are other areas where we’ve got pretty significant manufacturing cost improvements, it’s part of which we started out with our organization optimization program that will roll forward into 2010.

Obviously, we’re watching the fiber prices as you are and we look at the currency swings that are going on, that’s driving it in part as well as Chinese demand has been extraordinarily high and we’ll see how long that plays out.

Chip Dillon - Credit Suisse

Then noting the capital spending which you of course are citing within your planned long term range, it’s still up about 25%, 30% from where it was in ‘09. Obviously, we all entered ‘09 with a lot of conservatism, but are there any specific projects you can point to or maybe just segments you can point to as to where the increases are taking place like for example, are there new tissue machines in there or what would account for the increase in spending?

Mark Buthman

I mean, we pulled back ‘09 from our normal run rate just reflecting challenging environment and we wanted to make sure we conserve cash flow and strengthen our balance sheet going into this tough economic environment. We also felt like if the categories weren’t going to be growing rapidly, we shouldn’t need to spend as much on capital.

If you look at the 2010 plan, you’d see some capacity expansion and Personal Care around the world particularly type diapers and feminine care, you’d see more savings on cost savings programs so supporting a lot of the cost savings plans that we have we’ll spend a bit more of our capital in that vein.

We’ve got good cost savings projects that we’ll be driving to help make sure we deliver on that front. There’s no major tissue capacity expansions that are in the plan that are significant to talk about at this stage and so we think tissue, through productivity growth we’ve got the capacity to support our growth.

Operator

Your next question comes from Gail Glazerman - UBS.

Gail Glazerman - UBS

Just a few questions on the way from home tissue business, there’s a price increase in the market. Have you announced anything and just in general it’s one of more economically more sensitive businesses with macro indicators starting to point up are you seeing anything change in that business?

Tom Falk

I’d say if you look at the sequential volume comparison in KCP, it looked like it got a little better, but I’d say the comparison got easier because last years fourth quarter you saw a pretty big inventory pullback and bigger volume declines and so I would say we’re going to kind of follow the unemployment rate and you’re not really seeing a lot of job creation or seeing unemployment rate decline and until you start to see that, you’re going to see the KCP business kind of go sideways I’d guess from the comparison get easier in 2010. I don’t think you’re going to see real volume improvement until you see the economy start to turn more positively.

If you look at a lot of industries there’s still significant excess capacity and until that starts to get filled up, you’re not going to see huge swings in volume improvement in K-C Professional. There’s a general industry price increase that’s rolling around. We’ve looked for opportunities, where we get the chance to improve our net realized revenue. Whether we do that through list or we do that through increasing contract prices, we’re still evaluating the response to that.

Gail Glazerman - UBS

Just going back to private label, I guess you mentioned that private label is gaining share in Europe and there was I guess some talking around it and some of the other markets, but can you talk about what you’re seeing in the key North American markets in terms of private label share?

Tom Falk

Yes, private label is gaining share in Europe for like 50 years and so, if you look at a long trend, it’s continued to move upward generally and it’s driven by the European retailers. If you look at private label shares in our major U.S. markets, if you looked at it in just versus the prior quarter, private label shares are actually down in half of our category, and maybe flat in the rest.

So it’s down seven-tenths of a point in infant care, pretty flattish in Childcare, down a couple points in baby wipes, down a tic in Fem care, down seven-tenths of adult care, down a couple points in facial tissue, up six-tenths in bath and up a tenths in paper towels so versus sequentially, you’d say private label share has got a little weaker.

Now there was more branded spending on marketing money and trade promotion, which probably narrowed some of those price gaps, if you looked full year ‘09 versus ‘08, you’d say private label was up about a half a point or more in five of our categories and flat in about three.

So you’d see the biggest moves in adult care private label are up a couple points. It was up a couple points in paper towels and it was up about a point in facial tissue. Most of the other Personal Care categories private label shares were within a half a point of where they were in ‘08 so not a huge swing.

Gail Glazerman - UBS

I guess just last question, looking at the international volume trend, low single digits in 2009. Was that mainly kind of inventory destocking, price elasticity, and would you envision being able to get that kind of back to a double digit rate over the next year or two?

Tom Falk

We saw double digit organic growth, but probably more price and some of that is going to come as we drive innovation in some of the higher margin segments, but I also think in large parts of the emerging market as their economies start to improve, we’ll see category penetration improve.

So we would expect organic volume growth and the energy markets to probably not get back to the double digit range, broadly because we got a lot of markets over there that are pretty well developed like Australia and Korea, that are a big part of our mix, but we’ve still got aggressive growth plans in China and Russia and we’re seeing good volume growth in those areas as well as big parts of Latin America.

Operator

Your next question comes from John Faucher - JP Morgan.

John Faucher - JP Morgan

I’m going to ask you sort of a different way to look at the number for next year, aside from just margins, which is if I take a look at the reversal of charges, the benefits in the workforce reduction and the incremental benefit from force. To me, that all adds up roughly to where your cost of goods sold inflation number is for the year, that 300-400.

Then if I take a look at the lack of curtailments and the lower pension year-over-year if I add that to your 2009 base that gets me to the mid point of your guidance range and then I’m looking at this saying okay you’ve got a billion dollars in revenue growth, that has to be dropping at a relatively lower margin number, because you don’t seem to be getting much profit benefit from the growth.

So I guess is there something I’m missing there? Obviously, you talked about the higher marketing spend, but just a normalized margin on the $1 billion in incremental growth would get you a couple hundred million dollars, so I guess the question there is what am I missing on this?

Tom Falk

Yes, I think a couple things, without seeing the analysis entirely, I’d say the overhead absorption I’d probably only maybe bring half of that back, because we’ll still have some down time in 2010, so that’s part of it. We’ll have strategic marketing spending that will be faster than sales so that will be a part of it. We’ll spend a bit more in R&D and customer development so that will be another part of it.

Wage rate inflation, we didn’t do a lot in salary increases in ‘09, we’ll likely have a normal wage increase in 2010, so that will be in probably $25 million to $50 million range. We’ve some product improvement costs as we’re improving the product, we’re going to put some value back in.

So that’s a chunk that’s not in there. I think those are probably the other pieces that maybe weren’t in the analysis that you laid out that would account for the differences that you’re talking about.

John Faucher - JP Morgan

So nothing major, just taking advantage of maybe a little bit of flex to have to work on a bunch of different things is the way to look at it?

Tom Falk

It’s more the normal things that happen in the business. You have product improvement costs every year, you have wage increases every year, you have investments in marketing that you’re trying to increase at a faster rate than sales and you’ve got cost savings programs to pay for it all.

Operator

Your next question comes from [Lee Furst] - Dudack Research Group.

Lee Furst - Dudack Research Group

Can you comment on what’s going on with retail inventories?

Tom Falk

In our categories, we’re pretty high turn already. So we take up a lot of space in the warehouse and retailers really want to flow our product to the store as quickly as they can, and so we haven’t seen huge swings at this point in time. I’d say going into 2009, you saw everybody be really lien on inventory.

I wouldn’t say they’ve rebuilt that dramatically and every customer would tell you they’re trying to run with a linear more efficient supply chain and so we play a part in that, but we are already at the top end of their performance from an inventory turns standpoint in most cases.

Operator

Your next question comes from Jason Gere - RBC Capital Markets.

Jason Gere - RBC Capital Markets

Just a quick question about the 2% to 3% volume, I mean what are you assuming for market category growth maybe consumer tissue, Personal Care? I know you did talk about the slow and modest recovery. So I’m trying to figure out what you’re implying in terms of market share gains?

Tom Falk

I mean in the U.S., we’d expect the categories to be pretty flat. The birth rate has been a little down in the U.S., and so that will play out in our categories for the next couple of years and so we’d expect to see the diaper category pretty flat and tissue, bath tissue generally follows population growth, so that’s going to be flat to up slightly. Household towels the category was pretty weak this year and so was facial tissue so as the economy recovers you could start to see those categories grow a bit at a faster pace.

Globally, we’d still look for probably mid single digit category growth in diapers and some of the Personal Care spaces, fem care maybe a little slower than that as it’s more penetrated in most markets. So I’d say if you look at our 2% to 3% target, not huge share gains here, it’s really more category penetration, with perhaps some of our innovation in selected Markets we would see modest share improvement.

Jason Gere - RBC Capital Markets

Then just on the next point, just in Personal Care in Europe. Can you just comment about the simply dry rollout from Proctor? Clearly, this quarter, Huggies showed some strength and the price investment actually improved for you guys this period versus the last couple quarters. So just wondering how that competitive landscape is looking?

Tom Falk

So far, the simply dry has mostly cannibalized P&G’s existing share. So we’ve defended reasonably well and obviously we’re watching closely as they roll it out to more markets, but so far, we’re feeling like we’re doing the right things with the Huggies franchise in Europe.

Jason Gere - RBC Capital Markets

Then just the last question, with the face masks up I guess adding 6% to the growth in the fourth quarter. What assumptions are you making for 2010? Are you assuming there’s going to be some reversal as this pushes out from the H1N1? I guess can you put some color around that, thanks.

Tom Falk

I were just with our Health Care team a week or so ago having this exact same discussion and I think we’re basically assuming that we still have a little bit of H1N1 benefit in the first quarter and then it really winds down and goes back to more of a pre-H1N1 level. So you’d actually see some volume decline on face masks in 2010 and that’s built into our plan.

One of the questions we’ve been debating is a lot of this was governments and hospitals building a stockpile and it’s difficult to give visibility as to whether the stockpile was actually used and pulled down and do they need to replenish or where are they in their own inventory levels at the end user level.

So that’s something we’re still trying to get better visibility of and I think there’s talk of another H1N1 bloom in the Spring. We’ll see how that transpires at this stage, but our planning assumptions are that we’ve got a bit left in the first quarter and then we revert more to where we were before the pandemic began.

Operator

Your final question comes from Linda Bolton Weiser - Caris & Co.

Linda Bolton Weiser - Caris & Co.

Can you give us a little bit of an update on the most recent headcount reduction program and tell us how in cost savings there were in the quarter? Then I guess costs related to that were only $6 million in the quarter pretax. I thought it would be more like $12 million. Are you still going to have more costs going forward or the costs over and just the benefit and I’m also modeling about $80 million of benefit in the first half of 2010 from that is that about right?

Paul Alexander

Yes, that’s all right, Linda. This is Paul. The costs are done. They came in at about $128 million for the year. It’s in the news release. The savings in the fourth quarter were $30 million and that brought the full year to about $55 million and that leaves about $80 million for 2010. The headcount, we completed the program, we reduced headcount by about 1600 positions as we said at the beginning that we would do, so on-track and complete.

Linda Bolton Weiser - Caris & Co.

Then can you just touch on the operating margins in K-C Professional and Health Care and why they came down so much sequentially? Is that just a sequential increase in material cost inputs or something else because the pricing in professional was actually pretty good so can you explain that a little bit more?

Tom Falk

Secondary fiber was part of it. They also had some significantly higher distribution expense, which was part of that was related to a new order entry system that we put in. So we should start to see some improvement in that area in 2010 as we get that established. We also took a little bit more down time from an inventory standpoint globally on K-C Professional. So that’s sort of that story.

On Health Care, the input costs and polymer was a part of it, but probably a bigger part was the impact of the I-Flow onetime cost and some of the inventory step up that flowed through those numbers.

Linda Bolton Weiser - Caris & Co.

Then can you just tell us how the new natural diaper is doing?

Tom Falk

The Huggies pure and natural, so far so good, it’s holding steady at about a share point, but we’re doing well with the newer models with the just entering the category. So that bodes well for the future as they continue through that franchise.

Linda Bolton Weiser - Caris & Co.

Do you have all the distribution you’d want to have or is there still gains to be made?

Tom Falk

We always like more distribution, but we think we’ve got what we need to make that a successful launch for us.

Operator

At this time, we have no further questions.

Paul Alexander

All right, thanks, David. I’ll turn it over to Tom, for final comments.

Tom Falk

Once again, we’re very pleased with the performance that we delivered in 2009, but as you also know, we’re never satisfied and so we’re looking forward to 2010 to continue to execute our global business plan well. Thank you again for your support of Kimberly-Clark. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Kimberly-Clark Corporation Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts