Kimberly-Clark's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Kimberly-Clark Corporation (NYSE:KMB)

Q4 2013 Earnings Conference Call

January 24, 2014 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

Ali Dibadj - Sanford Bernstein

Gail Glazerman - UBS

Javier Escalante - Consumer Edge Research

Bill Schmitz - Deutsche Bank

Olivia Tong - Bank of America Merrill Lynch

Chris Ferrara - Wells Fargo

Lauren Lieberman - Barclays

Caroline Levy – CLSA

Chip Dillon - Vertical Research Partners

Connie Maneaty - BMO Capital

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 this morning’s presentation, we will open the lines for your questions. At that time, instructions will be given as to the procedure to follow, if you’d like to ask a question.

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

Paul Alexander

Thank you, David, and good morning, everyone. Welcome to Kimberly-Clark’s year-end earnings conference call. Here in Dallas with me today 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. Mark will begin with a review of our 2013 results focusing mostly on the full year. Tom will then provide his perspectives on our results and also the outlook for 2014. We’ll finish with Q&A. We have a presentation of today’s materials in the Investors section of our website. That presentation in this morning’s earnings news release, both include our detailed planning assumptions for 2014.

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

And now, I’ll turn it over to Mark.

Mark Buthman

Thanks Paul and good morning. Let’s start with some headlines for the full year. First, we achieved organic sales growth of 4% and was highlighted by strength in K-C International. Second, we increased adjusted earnings per share of 10% driven by organic sales growth and strong cost savings. And third, we delivered a strong year of overall capital management.

Now, let’s cover the details of our results. Fourth quarter sales were $5.3 billion that was even with the prior year, that brought full year sales to $21.2 billion also even with year ago. If you exclude currency and restructuring impacts, our organic sales were up 5% in the quarter and 4% for the full year. Our momentum in K-C International continues to be strong as organic sales were up 11% in the fourth quarter and 9% for the full year. Fourth quarter adjusted gross margin was 34.4% with the full year at 34.5%. It’s up 70 basis points year-on-year. Adjusted operating margin was 15.8% in the fourth quarter and 15.7% for the full year, that’s up 90 basis points compared to prior year.

We delivered $310 million of FORCE cost savings in 2013, the second highest amount we have ever achieved. We expect to continue our momentum going forward and are targeting to deliver at least $300 million of cost savings in 2014. We absorbed $205 million of input cost inflation in 2013 that was right in line with our expectations. Currencies were also a drag on earnings. Translation was a $70 million negative and transaction effects were also unfavorable. Fourth quarter adjusted earnings per share were $1.44 bringing our full year to $5.77, that’s up 10% year-on-year slightly above the top end of our long-term target and well above our original guidance range for the year.

Our balance sheet and cash generation were healthy and we continue to allocate capital in shareholder friendly ways. Cash from operations was more than $3 billion, now that’s down somewhat year-on-year as we expected with higher tax payments and then cash cost especially with the strategic changes that we have implemented in Europe. We had a great year driving down primary working capital. Cash conversion cycle improved six days in 2013. We expect a further one to two day improvement in 2014.

Return on invested capital also improved significantly climbing 150 basis points to 17.5% for the year. We are targeting a further 20 to 40 basis point improvement in 2014. We returned $2.4 billion to shareholders through share repurchases and dividends. For 2014, we expect to repurchase $1.3 billion to $1.5 billion of KMB stock. Regarding the dividends, we expect an increase of 2% to 4% in 2014 that will allow us to maintain an appropriate payout ratio following the expected spin-off of our healthcare business later this year. In the future after this year we would expect our dividend increases to return to being broadly in line with growth in our adjusted earnings per share.

Our credit metrics and financial position are strong, we’re confident in our outlook. As a result we’re planning for a modest increase in leverage in 2014. Now I will briefly recap segment results for the year. In Personal Care organic sales rose 5%; performance was led by K-C International with organic sales up 9%. Full year Personal Care operating margins were solid at 17.8% to an increase of 50 basis points year-on-year.

Moving to Consumer Tissue, organic sales were up 5% that was driven by a 9% increase in K-C International and a 3% improvement in North America. Consumer Tissue operating margins of 14.9% were up a 130 basis points building further on our progress over the last two years.

Turning to K-C Professional, organic sales increased 3%. Organic sales improved 9% in K-C International and were up slightly in North America and Europe. Our KCP team continues to deliver strong margin improvement despite relatively modest demands in our developed markets. For the year margins were 18.3% it's up a 170 basis points year-on-year and lastly healthcare organic sales rose 1% for the year driven by higher volumes at our Medical Device business.

Healthcare operating margins were 14.2% were up 10 basis points year-over-year. Now speaking to healthcare let me touch briefly on the potential spin-off of that business. We’re making good progress analyzing the implications of the spin. We’re preparing (indiscernible) our financial statements and plans for separation.

We expect to seek approval from our Board in the second quarter to proceed with the execution and the spin-off and we continue to expect the spin-off to be completed by the end of the third quarter of 2014 of course subject to market regulatory and other conditions.

So that wraps up my comments. To recap we achieved solid organic sales growth in 2013. We delivered strong bottom-line growth and we allocated capital and shareholder friendly ways. Now I will turn it over to Tom.

Tom Falk

Thanks Mark and good morning everyone. I will share my perspectives on our full year results first and then I will address our outlook for 2014. So starting with 2013 overall I’m very happy with the results that we delivered last year in a challenging environment.

As Mark just mentioned we delivered organic sales growth of 4% and that’s right in line with our long term target of 3% to 5%. K-C International had another great year at 9% organic sales growth that made excellent progress on the targeted growth initiatives. For example in diapers our organic sales were up more than 35% last year in China and about 20% in both Brazil and Russia and results in all three countries benefited from products innovation.

In China our Huggies diapers are now being sold in about 90 cities and we’re targeting to be in more than a 100 cities by the end of 2014. Couple of our growth initiatives in KCI were adult care and baby wipes and in both of those areas organic sales grew at double digit rates in KCI this year. In feminine care our organic sales rose high single digits in KCI. We had a very strong year in fem care in Latin America and we continue to benefit from the roll-out of some of our premium product variations similar to U by Kotex in the U.S.

K-C Professional organic sales were up high single digits in K-C International and we’re growing there as industrialization and economic development roll-out across those regions. So overall I’m very encouraged by the progress we’re making in K-C International and that part of the business now makes up 39% of our total company sales. In North America we drove solid sales growth and we launched innovations on several brands including the Depend, Poise, U by Kotex and Cottonelle. On Huggies diapers our innovation, marketing and promotion strategies led to some improved performance in the back half of the year and slightly higher volumes for the year in total.

Our North American brands are healthy overall. We had market shares that were up or even with the prior year in 7 of our 8 major categories. In terms of profitability and bottom-line growth in 2013, we had margins improve in North America and Europe in K-C International and they also increased in all four business segments. This broad-based improvement is a sign of a healthy business. I’m pleased that we delivered 10% growth and adjusted earnings per share. That’s our best performance since we launched the global business plan more than 10 years ago.

Finally as Mark has already highlighted, we continue to operate with financial discipline. We delivered significant FORCE cost savings last year. We improved our working capital and ROIC. And we returned substantial cash to our shareholders. So overall, we delivered on our commitments in 2013 and we have got good momentum going forward.

So let’s move to our outlook for 2014. We will continue to focus on delivering a healthy growth model and leveraging our financial discipline. That means we plan to drive the top line with growth initiatives and innovations to increase margins behind strong cost savings to continue to invest in our brands, to improve our return on invested capital and to improve our cash flow.

And now, in terms of our specific targets, on the top line, we expect organic sales to grow by 3% to 5%, including another year of high single-digit growth, organic growth in K-C International. We will launch a number of new innovations in KCI, including diaper and feminine care upgrades in Brazil, China and Russia. We also expect to make further progress expanding our adult care, baby wipes in K-C Professional businesses internationally. We have got a strong innovation pipeline coming in North America. In a near-term that includes activity on Huggies diapers and baby wipes, our GoodNites youth pants, Depend briefs and Viva towels. To support our brands and growth initiatives, we will increase advertising and research and development spending faster than sales.

On the bottom line, we are targeting adjusted earnings per share in the range of $6 to $6.20, that’s up 4% to 7% year-on-year. Our plan includes a 3 to 4 point drag from negative currency translation as a result of the stronger U.S. dollar. So taking that into account, our underlying growth is solidly in line with or even slightly ahead of our long-term objective. As usual, our plan is based on forward currency exchange rates. We have also assumed some bottom line negative impact in Venezuela from either a currency devaluation or ongoing market volatility.

We have assumed the commodity cost inflation this year will be similar to last year in the range of $150 million to $250 million. We expected adjusted earnings per share will be higher in the second half of 2014 as compared to the first half. Recent spot currency exchange rates are already broadly consistent with what we expect for the full year and the benefits of price increases, our growth initiatives and our cost savings program will layer in as the year progresses. Finally, we will continue to focus on cash generation and capital allocation in 2014. Cash provided by operations should increase nicely year-on-year driven by earnings growth and lower restructuring payments and we’ll allocate about $2.5 billion to dividends and share repurchases, which represents a cash return of about 6% based on our current market capitalization.

So to summarize, our financial performance was excellent in 2013. Our business fundamentals are healthy and improving and we are optimistic about our plans for 2014 and the opportunities that we have to deliver attractive returns to our shareholders.

So that wraps up our prepared remarks. And now we will begin to take your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time the floor is now open for your questions. (Operator Instructions) Our first question comes from Ali Dibadj with Sanford Bernstein.

Ali Dibadj - Sanford Bernstein

Hi guys.

Tom Falk

Good morning Ali.

Ali Dibadj - Sanford Bernstein

Hey, a few things to think about. One is in terms of competition, we heard for example from K-C de Mexico yesterday and actually (indiscernible) again we have had increased competition in Mexico. We are hearing hopefully hang on re-launch more directly with (indiscernible) on the horizon. Can you give us a sense of the competitive situation right now and what you anticipate both in personal care and consumer tissue and if there are any particular hotspots to think about what it was?

Tom Falk

That’s a fair question. Yes, I think that there is everyday somebody gets up and wants to eat our launch, Ali. So we know we have to be moving pretty fast on innovation and cost savings and other things to continue to deliver the kind of results that we posted this year. And Mark and I were just in Mexico on Tuesday and spent some time with Pablo and the team down there. And it was a tough competitive quarter, lot of price investment that didn’t yield a lot of volume improvement for anybody. And so I think they will have a challenging start to 2014, but they have got a lot of innovation coming. And then in the end, that’s what usually drives on that front. Globally, from the competitive standpoint in personal care, we probably look at Unicharm as one that’s more aggressive in moving outside of Japan into other markets. We know that they are going to be launching some new products in Brazil. We believe they are and we’re preparing for that with a lot of innovation and a lot of improvement in our business there to be ready for their launch. So that’s one that we watch as probably Unicharm and lots of places and they tend to play more in the premium end of the category where we tend to play as well.

China has gotten more competitive broadly it's not just hang on; I mean I would say in the Personal Care space. Procter is aggressive, Unicharm is aggressive, Kao is in there through ecomm [ph]. So it's a relatively growing market and we’re doing pretty well over there but we know we got to continue to drive innovating in China to make sure we keep the momentum that we have got on that front.

Broadly in the U.S. that would be the typical player so Procter would be one that we would see but on the other hand you got Energizer just bought J&J’s Fem Care business and so we’re watching to see what happens as they observe that and do some things to change the trajectory if that does. So lots of competition in Personal Care and I would say we feel like we have got good innovation coming to weather the storm. On the tissue front we have a lot of regional competitors as well. The FCA Vinda deal in China we’re not a big tissue player in China so that one is really not one that I worry too much about. CMPC, a Chilean Company is big in tissue in Chile in the Southern Cone but they are growing out of the Southern Cone and doing some things in Brazil. They are part of the challenge that we see in Mexico and we watch those guys pretty closely as well.

In North America you know it's us, Procter and GP and private label and private label is probably the most aggressive competitor. Last GP had some challenges early in the year which clearly benefited our start to 2013 in the North American tissue category and they are now back in normal supply and so we won't have that tailwind and they will be a tougher competitor going into the year but we have gotten, again got a lot of good things happening with improvements on Cottonelle. Some big news on Viva on a stronger Kleenex line-up again. So maybe more than you’re looking for Ali but lots going on competitively around the world.

Ali Dibadj - Sanford Bernstein

No some more is good and if you bring it all together and can you elaborate [ph] on the stuff that we’ve been hearing. It doesn’t like that things are getting easier for competitor perspective and if you would kind of say yes or no to that and how do you, are you modeling that in terms of how you think about 2014 that things aren’t going necessarily get easier or you’re in fact modeling some anticipation of competitive fervor.

Tom Falk

No I mean like I said two things one is we have a really strong innovation lineup coming so that makes me feel pretty good about how we will fair versus competition. We’re actually seeing some of the currency movement in some places, some competitors taking price up in some markets which that’s also things that typically happen on a normal competitive cycle. So that would be a positive. On the other hand we know we have got lots of good companies that would like to take some of our market share and so we’re not going to give that up easily and we’re going to be competitive and make sure we get at least our fair share of the growth on these markets and to answer your question directly I mean I would say this is not that different from what you normally see in the competitive environment, maybe a little bit more intense with a few more global players coming at you but I would say I’ve also seen more aggressive periods in my career. So it's not out of the line of reason here.

Ali Dibadj - Sanford Bernstein

So one thing that is different and you guys reported and gave your commodity guidance and swift [ph] from NBSK to eucalyptus in your explicit guidance and can you help us think through that. Is that something you guys are equally capable of doing, is the range given on eucalyptus taking into account some of the increases we have seen in Latin America and Spain in December and January and where do you think that trajectory is? So just a little bit more about that particular commodity, does it change things competitive with you?

Tom Falk

We have been doing this internally for a while because Northern Softwood has not been, has been a shrinking part of our fiber mix for many years and now eucalyptus is the largest single grade that we buy and so we actually thought it will be better disclose before investors and now that that information is a little bit more readily available or Northern Softwood was kind of the benchmark that everyone tracked and so we track both internally obviously but eucalyptus is probably the one that’s a bigger driver and it's going to have more of an impact as you try to model our cost going forward and so we’re calling it in the 800 to 830 range. It's that 860 right now so we would say yeah we’re going to have a little bit of headwind in the start of the year but our guys look at the Reese [ph] forecast and think they have got it right, but you will see weaken a little bit later in the year and we will see what happens. Obviously, currency can have a role to play there if the Brazilian real goes south in a hurry, you may not see as much downside there, but we will see what happens.

Ali Dibadj - Sanford Bernstein

Thanks very much.

Operator

Our next question comes from Gail Glazerman with UBS.

Gail Glazerman - UBS

Hi, good morning.

Tom Falk

Good morning Gail.

Gail Glazerman - UBS

Maybe just sticking on pulp for a minute, do you have opportunities if the new capacity really pressures hardwood a lot to increase the share of eucalyptus that you are using or you view it pretty much there like what you can?

Tom Falk

We have been slowly increasing them. And this is probably more a detail than you want, but two grades of fiber perform a different role in the make the tissue. So northern softwood actually provides strength and eucalyptus provides softness. And so we have been trying to do a better job of making tissue strong while using more eucalyptus to make it even softer. And so that’s more of the reason why we shifted. It’s been of a price fiber driven grade. It’s more – we are trying to deliver soft tissue and still deliver enough strength, so that it performs well. And so that’s more of the function than anything else. We keep driving it that way. And there is a limit as to how far you can go at some point. You will have to have some string fiber in the mix.

Gail Glazerman - UBS

Okay. And I appreciate the comments on the competitive environment that maybe just taking a step up, could you give some comments in terms of what you are seeing and in terms of just underlying demand in some of your core markets? Are you any more optimistic about changes in China? And are you finally seeing signs of the churn in birth rates in the U.S.?

Tom Falk

I’d say, in China, we have the drag in year babies that all were born. And that probably boosted the category, the last 12 to 18 months or so, that because trainees train their babies quicker than they do in the U.S. that will roll off. So the category growth in ‘14 probably won’t be as robust, but we got a lot of innovation coming. We still got a lot of category penetration opportunity and we will be expanding our geography. And so as a 35% growth that we had on average last year in China and we slowed down in the fourth quarter, I think it was low 20s. And so you will probably model a slightly lower growth rate in China, but still pretty healthy relative to everywhere else in the world. In the U.S., the birth rate has been pretty stable, I mean, it’s not getting worse, it’s not getting usually better. So we are still right around 1.7, 1.8ish kind of a rate and we are not seeing much on the consumer confidence front that’s pushing it hard. I think we talked in the past, it’s a bit related to consumer confidence and employment levels and those are getting slightly more positive, but not enough that we are seeing it drive the growth rate significantly.

Gail Glazerman - UBS

Okay. And can you just, I guess, you mentioned negative pricing in the personal care segment in the U.S., can you just talk a little bit about what was driving that?

Tom Falk

Yes, we did kind of a switch in the marketing mix a bit in the quarter. We started this really in the second half, where we essentially shifted some money from couponing the trade. We wanted to be bit more competitive on shelf every day. And so you saw a negative price, but then you also saw positives in between the lines on strategic marketing and so really that’s more couponing related. We spent about the same level of advertising broadly across the company for the year. I think advertising spend as a percent of sales was down 10 basis points, some of that was productivity related, where we did better on immediate buying. But in the fourth quarter on baby child care, it was more of a switch from consumer promotion to trade and we saw that in kind of mid-single digit volume growth for Huggies.

Gail Glazerman - UBS

Okay. And just last question, consumer tissue has pretty robust earnings in the quarter, and I am just wondering what you attribute that to as there was some reference to lower spending in that category, was that the big driver, was it the price benefit from the de-sheeting?

Tom Falk

So I mean it was pretty good de-sheeting benefits that flowed through. And so that way we show that it shows a negative volume and positive price and that was part of it, but good cost savings broadly. And so I think that was solid quarter. And again, we are encourage by the progress we have made in consumer tissue over the last several years of consistent margin improvement to get it back to kind of the mid-teens levels.

Gail Glazerman - UBS

Okay, thank you.

Tom Falk

Thanks Gail.

Operator

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

Javier Escalante - Consumer Edge Research

Hi good morning everyone. I have a question actually you alluded earlier with Ali, but will like to have kind of like a little bit more color on the U.S. When you look at…

Tom Falk

I gave Ali all the color I have.

Javier Escalante - Consumer Edge Research

Yeah let’s see if you can give me a little bit of more contrast. Is it specific with the private label growth the volume growth that at least we see in the mid-teens in track channels, right? And to what extend given that each part of you and Procter and Georgia-Pacific and private label pretty much have the same market share. Is it a concern or not that the growth of the private label would may undermine the pricing architecture of the tissue category to the extent that people are going into private label, into the teens in terms of volume.

Tom Falk

Yeah I would say private label growth of that level is always a concern. You saw when GP had some of their problems early in the year they actually ceded shelf space to private label and some retailers and so when you get more distribution in a lot of these accounts that directly drives volume and velocity in share and so the good news is that our shares were pretty stable in this environment and but it's also one that you worry about from a category dynamic standpoint and we got to make sure that we’re doing the right job of delivering value with our brands across Cottonelle, and Scott and Viva and Kleenex to make sure that consumers know that we’re going to take good care of them and their family. So we feel pretty good about the momentum that we have got overall with tissue and a lot of good things coming but we’re watching the private label situation carefully.

Javier Escalante - Consumer Edge Research

Tom the other question has to do with the change in packaging that my understanding they want to be implementing in diapers in the U.S. My understanding is, is it not that you’re going to be reducing the number of diapers this quarter or have you already done that? What is the initial reaction from the consumer standpoint if you can give us an update on that?

Tom Falk

Yeah I mean our primary competitor as you probably know did that change in the fourth quarter and it takes a little while to convert your lines over to the new counts and so we will be following that in the first quarter. I think we start shipping those in February and again not much consumer reaction that we can tell in the fourth quarter. Unusually what happens in this kind of process where you do a count reduction you wind up with a small household inventory decline because on average you’re buying fewer diapers and so you typically see a little bit of a category dip for a while but we didn’t actually see that in the fourth quarter. Overall the category was up a little bit more than normal so that’s one thing we will watch as we roll through that in the first quarter.

Javier Escalante - Consumer Edge Research

And finally on China, I don’t know whether I missed it or not but it seems like you didn’t mention or at least I didn’t hear it further expansion in Chinese cities, I think that you mentioned the support [ph] that you now have but are you continued taking expansion further into this less developed cities or that is something that is behind you?

Tom Falk

We’re at about 90 cities now we will be in more than 100 by the end of 2014 and again these are all pretty big cities too. They are all over a million people. So it's a pretty amazing place as I’m sure you know and so there is great expansion coming on these deal so had a big fem care launch in China in the fourth quarter that’s going well and so we will be expanding not just our geographic representation but also building our portfolio beyond the huge healthcare as we have got lots of things we can do in feminine care and ultimately adult care in China.

Operator

Our next question comes from Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

Did I hear you say that you reflected some Venezuela impact in guidance? Can you just talk about kind of what you were assumptions were and maybe there is any Argentina impact in there as well?

Tom Falk

We did reflect some Venezuela income statement impact in guidance. We did not try to predict of what it's deval would be or what happened. We essentially said that something is probably going to happen in Venezuela whether we can’t exchange at the level we got in 2013. If they don’t devalue or if they do devalue we will have a translation hit and it also depends on what happens with price control. So there is a number of different variables and so we assumed we would make less money in Venezuela in 2014 than we did in 2013. We made a little less in 2013 than we did in 2012. So that’s we probably took a little bit of an adjustment for that. And in Argentina, we look at forward exchange rates at the time we have rolled the guidance together and make a guess on where that’s going to go. So we have a prediction of some currency weakening in Argentina. If you look at current spot rates, I don’t know, where they are this morning, but as of yesterday that would be worse than what we have in our guidance, but that’s again a low single-digit percentage of our overall business. And I don’t think we would have any adjustment for that in our outlook at this point in time.

Bill Schmitz - Deutsche Bank

Great, thank you so much. And do you think you should have a price down there, because last time we all kind of got hand rung about what’s going to go on in Argentina, Venezuela, it seemed like everybody is kind of priced through it? Is that still an option now or is that kind off the table?

Tom Falk

Yes. We have an excellent team in Argentina. And if you are able to launch innovation, you are often able to couple pricing with that and that team has been able to pull forward innovation and get some pricing to offset the impact of inflation in that market at least partially and they have also been terrific about making sure their existing tax sizes and then having a relevant offer for the consumer that is a little squeezed on what they are able to spend. So we actually had a pretty good year overall in Argentina and we would obviously like even better margins and like to continue to grow even faster, but in the environment that they are in, they executed at a pretty high level.

Bill Schmitz - Deutsche Bank

Great, thanks. And then just to sort of follow-up on the personal care stuff, I mean, the 16.5% operating margin in the quarter, I mean, sort of both neutral, is that kind of the new level of operating margin to the business, because I always thought that personal care should always sort of be structurally higher than personal care, all things being equal on the sort of commodity neutral basis and just tell me if I am wrong there?

Tom Falk

Yes. I would look more at the full year margins for all of the segments. That was a better precursor. Fourth quarter, you have passive write-offs and other things that you do, trade promotion accrual. So there is couple of things that probably pushed personal care a little lower than the normal average and probably pushed tissue a little higher than the normal average, but that’s why I think the full year number is more representative and then we would look to build from there. I still believe that if you look at 2014, we will have a full year of our exit from Europe, which will be a margin improvement. We have got some price coming in the first quarter in North America, which will help. And so there is a lot of things that would indicate that we should get some margin improvement in personal care off the 2013 average in 2014.

Bill Schmitz - Deutsche Bank

Okay. And then just one last quick one from Mark, I mean, how do we think about the spin off now in terms of the dividend that’s coming back to Kimberly, because I know you are only growing the dividend 2% to 4% because of some of the loss cash flow from the healthcare spend, but it was my understanding that there is an option there to put some extra debt on the businesses it’s been, I mean, that might come back in, you could just buyback stock or payout a special dividend. Is that still within your consideration?

Mark Buthman

Yes, I mean that’s all part of planning, I mean, typically on a spend I think the way we framed our dividend is pretty typical you kind of reorient the new size of your expected balance sheet. And I would expect to capitalize the new company in a way that’s appropriate for its business and it’s not unlikely that you would have a one-time dividend to come back. You think about the way we think about cash flow.

Tom Falk

That maybe more of accelerated share repurchase.

Mark Buthman

Yes, yes.

Tom Falk

I don’t think we are going to do a special dividend, Bill.

Mark Buthman

No.

Bill Schmitz - Deutsche Bank

Okay, got you. But you are going to use the money to give it back to shareholders when it comes back in, because it seemed like there is a capital requirements or anything?

Mark Buthman

Yes, absolutely.

Tom Falk

We don’t keep extra cash on the balance sheet. So we will pay it as we always.

Bill Schmitz - Deutsche Bank

Perfect, thanks for your time.

Tom Falk

Thanks.

Mark Buthman

Thanks Bill.

Operator

Your next question comes from Olivia Tong with Bank of America Merrill Lynch.

Olivia Tong - Bank of America Merrill Lynch

Thanks. Good morning. I wanted to what – within your 3% to 5% total growth rate for the company that’s planned for 2014, what are your – what are you expecting for developed versus developing market growth?

Mark Buthman

It’s similar to where we were this year kind of high single-digit organic growth for K-C International and low single-digit organic growth in North America as you look at what’s going on in that front. So and Europe would be relatively flat, maybe a little bit – maybe similar to North America.

Olivia Tong - Bank of America Merrill Lynch

Got it. And then on gross margin, you posted solid gross margin improvement this year despite obviously some raw material and FX headwinds, so with that backdrop, can you give some color on where you think the opportunity is for gross margin, not just for 2014, but also long-term and how does it breakout between savings and leverage versus mix from both the category and geographic perspective?

Tom Falk

Yes, I mean I think lot of levers that we are looking at for gross margin. Innovation and mix are two at the top-line level that are really rich opportunities for us as we continue to grow personal care, as we continue to grow into higher margin segments things like in the adult care space, baby wipes et cetera. Those can provide a nice uplift to gross margin. On the cost savings front and again next year it will be a second year in a row that we’re in the 300 million plus range and ahead of inflation so that’s another boast from a gross margin standpoint. We’re still getting very good productivity growth, we’re still rolling at our global procurement capability. We’re still working on specification changes to make sure we’re getting good value for all the components that go into the product and all those things should drive a robust cost savings culture going forward and so we’re pretty encouraged that we can continue to deliver that. There is a little bit of a drag from geographic mix as K-C International’s gross margins are on average lower than North America but if you look last year overall I think on the operating margin standpoint the K-C International is probably less than a 10 basis point drag. So that really wasn’t the big negative force for us overall.

Olivia Tong - Bank of America Merrill Lynch

And just lastly appreciate the color on first half very second half and fully understand that you don’t provide quarterly guidance but given that you’ve got a pretty tough comp in Q1 with the (indiscernible) comp and then just also disruptions at GP last year that helped you, can you talk a little bit more about the changes [ph] of quarterly earnings for 2014 and do you expect Q1 to post year-over-year EPS growth?

Tom Falk

Yeah we’re not going to give quarterly earnings guidance as we said so I guess I think from what we told you going in the first quarter we’re going to have some headwinds and some tailwinds. So clearly currency will be a headwind versus last year, pulp cost would be higher in fact higher than our full year average. On the other hand we’re going to get some price in some categories. So we had a very strong start last year and we know it's a tough comp to lap so I wouldn’t be surprised if we were down a little bit in the first quarter but we expect to see again we’re comfortable with the overall guidance for the year and the second half will probably be a little bit better than the first half.

Operator

Our next question comes from Chris Ferrara with Wells Fargo.

Chris Ferrara - Wells Fargo

Can you help I guess reconcile some of the personal care emerging markets growth numbers that you’re seeing with I guess what are the most readily available data points on what market growth rate and Kimberly growth rates. I guess you guys are putting up faster growth numbers in diverse in China and everywhere else and yields since then [ph] and totally appreciating their differences. Can you just kind of help us reconcile that a little bit to sort of you will elevate the concern that there are warehouse is full of diapers back somewhere in China. Can you just kind of address that?

Tom Falk

Yeah I’m pretty sure that’s not the case. I’m pretty sure that people don’t want to take positions in high cube items like this but couple of things first of all the international market share data is not as well developed as North America. In North America you have much more coverage and much more scanned outlets and it's still a good part of the emerging markets that is in the traditional trade which is not well covered as really a sample at best. And so we have even seen some disconnect since some markets were, you know Russia we’re up 20% in diapers this year if you looked at it I think the Nielsen surely would say we lost share and yet the category didn’t grow 20%. Category in Russia was probably up 12% and so but they only cover maybe three quarters of the outlets at best and so emerging market it is a little tough to get benchmarks on what’s going on but generally I would say in markets like Russia, China, Brazil we’re growing faster than the category and in China and forget it's a geographic expansion. We continue to drive innovation and grow in multiple tiers. It is a good part of it, but we’re also driving a lot in some of untrack channels. So ecomm [ph] in China for example is a big driver of that category.

In Argentina we are very big in the (indiscernible) which are the small diaper stores and those aren’t really attract Nielsen channel and if you go to Brazil we’re doing well in (indiscernible) and that’s not a channel that’s tracked as readily as some of the modern trade would be and so I don’t worry too much about that but it does making it a little tougher for outsiders to get a good benchmark on that?

Chris Ferrara - Wells Fargo

That’s really helpful. I appreciate it. And I guess just one other on a totally different note, I mean, look you endured years and years of pretty nasty part of the inflation and if we all really moving into a period where that sort of inflation is going to be more benign, I guess one, how does it affect if at all, how you think about managing your business and managing innovation for that matter? And then I guess when you sight innovation and new product development as a way to drive gross margin, because it sounds sort of like structurally from a benchmarking perspective you don’t view your gross margin that is too low for the type of businesses you are in? Is that right? And do you see an opportunity for Kimberly to be significantly higher in gross margin over time, maybe even getting to 40% at some point?

Tom Falk

Yes. No, I think that Mark and I still have scarred from those commodity battles. So I wouldn’t say that we have totally forgotten what that felt like, but the good news is in past years if you had $250 million of commodity inflation, we were a $100 million to $150 million cost savings kind of company that you wound up with a big problem. Now that we are delivering more consistently on the cost savings front, we are probably feeling a little bit more confident that we can handle some of the swings in commodity costs a bit easier. We are also seeing as you get better innovation, you got more opportunity for pricing power in many of these markets as well. And so that is another lever that we can pull in some markets to be able to offset that. And so given your question on gross margin, absolutely we would love to continue to build gross margin and we do think that gives you the franchise value that drives multiple over time. And it is a metric that we are focused on internally as well as operating margin.

Chris Ferrara - Wells Fargo

Thank you.

Tom Falk

Thanks.

Operator

Our next question comes from Lauren Lieberman with Barclays.

Lauren Lieberman - Barclays

Thanks. Actually I had wanted to ask about FORCE, that kind of asked question with a perfect lead-in, the acceleration that you are delivering on FORCE savings overall and another big year expected from ‘14, it will be great if you could tell us a little bit about what kinds of new programs or areas you have been kind of driving into to drive these incremental savings and how the numbers are getting bigger and bigger when – for companies it’s been added for so long if anything you start to – one would start to worry that it gets tougher to find savings not easier? Thanks.

Tom Falk

That’s a great question, Lauren. And I think that’s probably a traditional way of thinking about it and we have actually tried to turn that around and really look for all the opportunities or areas we would have and we have still have big gaps within our best performing operations and our weakest performing operations. And that’s goal that we can go turn in the value. We are doing a lot to build capability for around lean continuous improvement across the company. We are doing a much better job of benchmarking and understanding what the drivers are of performance at our best performing units and then transferring those best practices at a faster pace. We talked about global procurement. We are just getting better purchasing capability in market and leveraging the scale of Kimberly-Clark better across the organization. We are doing better in design for values that we are putting the components in the product that the consumer cares about and that drives the performance, but those ones that don’t move the needle there is a way to substitute or use less. So we are getting better at that. And I think the vision that our operators have now is much bigger than it ever was. They have a got a robust pipeline of areas to go look and they are even more confident that we can bring that value to the bottom line. And that’s exciting for us and we also look at other companies out there like Colgate who has been a phenomenal company at this and they are a smaller company than we are. And I think they are delivering $400 million on a smaller cost base than we are. And so while we had ourselves in the back for getting the $300 million, we also know that there is other better benchmarks out there and we shouldn’t be satisfied and that’s the healthy way for us to approach it.

Lauren Lieberman - Barclays

That’s great. Thank you. And then also the commentary on increasing advertising spending next year granted we would all prefer to see advertising go up than down, but I think that was interesting that, that was, I mean, you specifically mentioned in the release even when this year with advertising dollars flatter, I guess, it was down as a percentage of sales, your sales were so strong. So why the decision to put more money back in? Do you think you really get an incremental lift? Is it just a rising competitive environment or was it a – we have pretty good visibility on cost savings and like what else should we do with the money?

Tom Falk

No, really – it really is more built up from the business unit innovation plans and in terms of looking at what they need to spend. Also looking at that outlook for competitive activity. So we talked a little bit about, we know we got Unicharm coming in Brazil so we have got additional investment there. We’re launching fem care in China so we have got additional investment there and so we really do look at it more strategically around what are our innovation plans, what are our competitive activity that’s planned and build the plan that way. I would say this year we got a little bit more cost savings in the marketing area than we have got in the past. So we did, we turned our purchasing team loose on media buying and we have freed up a lot more money than we had in the plan and that helped our overall cost savings number but it actually instead of showing up in cost of sales and gross margin it showed, some of it showed up in the strategic A&P line and so that helped us basically give more coverage for the same dollars this year.

Lauren Lieberman - Barclays

And then just finally following up the fem care launch in China. How many cities were you targeting initially? Is the strategic there to do as you have done with diapers like come in at the super premium and then move down market? If you can just tell us a little bit more that would be great.

Tom Falk

Yeah we have been in China in fem care for a long, long time. It's really a relaunch, we have had some different brands that we got with acquisition and so it's really relaunching around the kind of the U by Kotex portfolio aimed at more up market, young at least that we call her and so it was really a major relaunch in the fourth quarter and yes it will be very similar to diapers where we start in a smaller geographic region that we can support, build momentum and then begin to roll it across the markets. Obviously we’re having the success we have had in diapers you create great credibility for our sales team on the street as they come in with a new item in China.

Operator

Our next question comes from Caroline Levy with CLSA.

Caroline Levy – CLSA

Couple of short term ones and then a longer term one. In December P&G called up that their business had strengthened across categories and across geographies in December relative to October, November, did you see that?

Tom Falk

Yeah I mean I probably would say we saw that in some markets. Are you talking about in the U.S. or anywhere else particularly?

Caroline Levy - CLSA

I thought, assuming it was a global comment.

Tom Falk

Yeah I don’t, I was listening to their call this morning. I was getting ready for this one. I will read their transcript a little later but I looked in our categories, our organic was probably a bit stronger than theirs but again I probably would tell I didn’t dive into their numbers as deeply yet as you may have.

Mark Buthman

I would say Caroline that our December we typically finished the year strong. I would say this year was similar.

Caroline Levy - CLSA

Okay. And then if you could just tell us a little bit about why Mexico was weak? I didn’t get a chance to listen to the generally the Mexico call yet.

Tom Falk

There was a lot of competitive price investment in Mexico in the fourth quarter including by us and it did not move incremental volume as much as hoped for and so that led to basically I think sales were down 7% in the quarter, 6% organic something like that. Most of that was price loss and so that was a tougher comparison. Overall Mexico had a pretty good year but they had a weaker finish to the year and they will probably have a tough start in the first quarter but as I said Mark and I were just down, they have got an aggressive plan for 2014 and that’s been a high performing team and a great operation for several years and I’m sure they will get it sorted.

Caroline Levy - CLSA

All right and then moving to China if you’ve the fem care launch and yet your volume growth slowed to about 20% in the quarter. You have been, I don’t know maybe that was just the diaper growth slowed to 20% in the quarter but do you think the base is such now that we should be looking more at low double digit growth going forward? I mean do you sense the competition really coming at you more aggressively in the Mummy [ph] stores and online where you used to have some big wins.

Tom Falk

The question on diaper growth, my comments for about growth in the quarter so we averaged 35% for the year. We have been in the 40s for the first three quarters. We were at 22 in the fourth quarter and so fem care was in launch for part of the fourth quarter. So I think we had a double-digit growth in fem care, but it was lower than that number. And we would expect that to kind of build in the first quarter. It’s a little smaller business than the diaper business. So it won’t have as big of an impact. China overall is a competitive market, it’s been a competitive market for a long time. And so there is a lot of every CPG in the world is over there trying to build with our brand for the future. And so we feel like we are holding our own and we are definitely in the game, but we know Unicharm and Procter and Kao and Hengan and SCA and everybody else wants to play over there. So we have got to deliver good innovation and good value to the consumer to make – to be able to win there long-term.

Caroline Levy – CLSA

Thank you. And then just follow-on from that is really if you were to try to size up the 2020 opportunity of China, Brazil, Russia, if you think about the upside from per cap consumption growth and/or wealth creation or how do you look at it? Which do you think will be the best growth market through 2020 for you?

Tom Falk

China. We are already more developed in Brazil and we have consumers probably a bit more developed support a middle class, but there is so much opportunity in China just because of population that I would say of those three choices that China will be the biggest growth driver. I would expect the others to also be significant growers, but if you would force me to pick one I would say China is going to be the biggest business of the three by 2020.

Caroline Levy – CLSA

Right. And it seems to me that some of the increased competition will help drive usage, because that the usage is still quite low in China right?

Tom Falk

Yes, absolutely. I mean, one of the – you never like to have more competition, I guess, but it does to help penetrate categories if you got a lot of people making noise about the product.

Caroline Levy – CLSA

Right, thank you very much.

Tom Falk

Thanks, Caroline.

Operator

Your next question comes from Chip Dillon with Vertical Research Partners.

Tom Falk

Hi Chip.

Chip Dillon - Vertical Research Partners

Good morning. Can you hear me?

Tom Falk

Yes, I can hear you now.

Chip Dillon - Vertical Research Partners

Great, terrific. Thank you. The first question is just if you could update us with the moving parts with the tissue moves in Europe, where do you stand in terms of your sort of pulp purchases if you could split it in the three buckets, the hardwood which I assume is almost all eucalyptus and then softwood for tissue and fluff?

Tom Falk

In Europe, we are not buying a ton of fluff. We are buying a little bit, because we still are making some pant type products. So the biggest grade by far that we buy in Europe would be eucalyptus for the consumer tissue business.

Chip Dillon - Vertical Research Partners

And I am sorry, Tom, I was looking more for the global overall given that change over the year what is your overall purchases as a company?

Tom Falk

Yes, Paul can give you the details.

Paul Alexander

Sure. We still consume about 2.4 million metric tons of virgin fiber about half would be eucalyptus/hardwood and the other half would be split pretty evenly between fluff pulp and northern softwood.

Chip Dillon - Vertical Research Partners

Got you, got you. Okay, thank you. And Tom looking I know you have – a couple of questions have been asked, but I just was noticing last year on the FORCE savings, I think you guys were looking for 250 to 300 and on my numbers you were like 320, so I mean you have beaten your midpoint by almost $50 million and I don’t know if there is – if there are one or two specific areas you can point to and then will those areas be different in 2014 where you expect to get the bulk of your savings?

Tom Falk

Yes, I mean if you are adding in some of the tissue restructuring settings, just you might have gotten up to a number that high, but we try to break those out separately and not that will come in, but the three buckets that we focus on are negotiated material or negotiated purchases savings or procurement group productivity, so how do we drive lean and lower ways higher uptime and so all of our operations have clear metrics on those. And then material specification changes, so how do we do a better job of designing for value and all three of those buckets contributed pretty evenly. I mean I think negotiated material savings was probably $90 million of the $300 million and change and so and the other two were over $100 million each and so we would expect those to continue to be strong in 2014.

Chip Dillon - Vertical Research Partners

Got you. And then I guess the last question is on when you look at the – your forecast for ‘14 and some of the components, it looks like at least on the numbers we saw a couple of weeks ago that your expectation for eucalyptus in the U.S. is about $50 a ton less than where it was at least it is this month and so that’s pretty healthy decline. Are you looking for similar declines in, a similar decline in either fluff and/or softwood?

Tom Falk

Northern Softwood, we’re basically using the risky forecast so I think we’re in the 9.50 to 9.75 range and it should be not as big of a drop as EUC [ph] and that’s driven by more the capacity the capacity that’s expected to come from a EUC [ph] standpoint but I think fluff would be similar to Northern Softwood but that grade isn't going to be as affected by capacity additions.

Operator

Our next question comes from Connie Maneaty with BMO Capital.

Connie Maneaty - BMO Capital

I was just wondering when you might have the spin-off financials ready. I think you talked about that on the last call and secondly what was the order of magnitude impact on EPS from your Venezuela assumptions? Thanks.

Tom Falk

In the spin financials we will probably file the Form 10 Mark in early April I think, is that the plan? On Venezuela we essentially it's similar to our guidance last year, we gave a cut from what we earned this year. I don’t know Mark if you’ve got rough ball park? It's probably about a point of earnings growth adjusted in a ball park.

Mark Buthman

That’s in the ball park in that overall term.

Operator

At this time we have no other further questioners in the conference.

Paul Alexander

Great. Well we appreciate everybody’s questions today and we will wrap up with a quick comment from Tom.

Tom Falk

So once again we appreciate your support to Kimberly-Clark. We got good momentum in 2013 and we look forward to another year of executing our business in 2014. Thank you again for spending some time with us this morning.

Paul Alexander

Thank you very much.

Operator

Ladies and gentlemen that concludes today’s presentation. You may disconnect your phone lines and have a wonderful morning.

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