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Kimberly-Clark (NYSE:KMB)

Q2 2011 Earnings Call

July 25, 2011 10:00 am ET

Executives

Thomas Falk - Executive Chairman, Chief Executive Officer, President and Member of Executive Committee

Mark Buthman - Chief Financial Officer and Senior Vice President

Paul Alexander - Director of Investor Relations

Analysts

Javier Escalante - Weeden & Co., LP

Chip Dillon - Citigroup

John Faucher - JP Morgan Chase & Co

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

Alice Longley - Buckingham Research Group, Inc.

Michael Lavery - CLSA Asia-Pacific Markets

Per Ostlund - Jefferies & Company, Inc.

William Schmitz - Deutsche Bank AG

Jason Gere - RBC Capital Markets, LLC

Wendy Nicholson - Citigroup Inc

Linda Weiser - Caris & Company

Christopher Ferrara - BofA Merrill Lynch

Gail Glazerman - UBS Investment Bank

Operator

[Operator Instructions] It is now my pleasure to introduce today's first speaker, Mr. Paul Alexander.

Paul Alexander

Thanks, David, and good morning, everyone. Welcome to Kimberly-Clark Second Quarter Earnings Conference Call. Here today are Tom Falk, Chairman and CEO; Mark Buthman, Senior VP and CFO; and Mike Azbell, Vice President and Controller.

Here's the agenda for our call. Mark will begin with a review of our second quarter results. Tom will then provide his perspective on our results and discuss our full year 2011 outlook, and we'll finish with Q&A.

As usual, we have a presentation of today's materials in the Investor Section of our website, which is www.kimberly-clark.com.

Now before we begin, let me remind you that we will be making forward-looking statements today. There can be no assurance that future events will occur as anticipated or that our results will be as estimated. Please see the Risk Factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements.

I'd also like to point out that we will be referring to adjusted results and outlook today, both of which exclude certain items described in this morning's news release. For further 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. Let's start with a few headlines. First, we delivered organic sales growth of 3% highlighted by 8% growth in K-C International. Second, cash flow was strong and improved both year-over-year and sequentially from the first quarter. And third, we continue to focus on the right near-term actions to offset cost inflation, raising selling prices, delivering strong cost savings and reducing our overhead spending.

Now let's cover the details of the quarter. Overall, sales increased 8% to an all-time record $5.3 billion. Organic sales rose 3% on track with our full-year plan, sales volumes improved 2% while net selling prices were up 1 point. Volumes benefited from innovation and our targeted growth initiatives, although category demand remained soft in parts of North America. Second quarter adjusted operating profit rose 1%, with an operating margin of 13.6%. Performance benefited from topline growth and $45 million of FORCE cost savings, that was negatively impacted by input cost inflation of $180 million. That brings year-to-date cost inflation to $375 million, which is significantly higher than our previous plans.

Let me spend a few minutes on the cost environment. Cost for many of our oil-based materials have continued to rise, even though oil prices have moderated over the last 3 months. That's true for polymer resin, super absorbent, adhesives and other packaging materials. Costs have been impacted by tight supply for raw materials used in our production and strong global demand, particularly in China. As a result, we've raised our cost inflation assumption for the second consecutive quarter. For the full year, we now expect cost inflation of $650 million to $750 million, which is higher than our previous plan by $200 million. That's an incremental headwind of about $0.35 per share. Nonetheless, despite the pickup in cost inflation, we're maintaining our previous guidance for adjusted earnings for the year. Tom will talk more about that in a few minutes. We're also encouraged that market pulp prices are decreasing by -- in July by $20 to $30 per metric ton. That's included in our plan.

Now turning back to our second quarter results. Second quarter adjusted earnings per share were $1.18, compared to a $1.20 last year and benefited from a lower share count. Meanwhile, a higher adjusted effective tax rate reduced our earnings by $0.07 per share in the quarter.

Cash provided by operations increased 31% to $771 million, driven by lower working capital. As expected, cash generation also improved significantly versus the first quarter. I expect our cash flow in the second half of the year to be up nicely compared to the first half, as our earnings grow and nearly all of our pension plan contributions are behind us. We repurchased 5.3 million shares of KMB stock in the quarter at a cost of about $350 million. We're on track to execute our $1.5 billion share repurchase plans for 2011.

Now, I'll highlight a few areas of our segment results for the quarter and as usual, further details are in this morning's news release. In Personal Care, organic sales rose 3%. Sales volumes improved 2% and net selling prices were up 1%. We delivered high single-digit volume growth in K-C International outside of Venezuela, and adult care and baby wipes in North America. On the other hand, volumes fell significantly in Venezuela, and baby and child care volumes in North America reflect continued soft category demand along with a modest decline in market share compared to strong year-ago levels.

Personal Care operating margins of 17.1% were below prior year, as price increases in K-C International and cost savings were more than offset by input cost inflation.

Turning to Consumer Tissue. Organic sales grew 4%, and selling prices were up 2% led by cost-driven price increases in K-C International, and our mix improved slightly. Sales volumes increased 1% as gains in bathroom tissue and Kleenex facial tissue in North America fueled by innovation and share gains were partially offset by declines elsewhere. Operating margins of 10.4% improved both sequentially and versus the prior year.

Moving to K-C Professional & Other, organic sales increased 1%. Net selling prices were up 2% in response to commodity cost increases, while sales volumes fell 1%. Volumes in North American Safety and total KCP in Europe both declined compared to double-digit increases in the prior year. On the other hand, volumes were up mid-single digits in K-C International and high-margin wipers in North America. Operating margins of 15.2% were down year-on-year but remain solid and picked up nicely sequentially.

Lastly, Health Care organic sales were up 11%, driven by higher sales volumes of 10%. Volumes of high-margin medical devices were up high single-digits in North America, including strong growth from I-Flow. Supply volumes grew double-digits and benefited from improved category demand in North America, along with some distributor and end-user inventory reductions in the year-ago period. Operating margins were above prior year levels as sales growth in cost savings more than offset cost inflation.

So that wraps up the review of the quarter. To recap, we achieved organic sales growth consistent with our plan led by K-C International, delivered strong cash flow and we continue to take aggressive actions to offset commodity inflation.

Now I'll turn it over to Tom.

Thomas Falk

Thanks, Mark, and good morning, everyone. I'll share my perspectives in our second quarter results and our full-year outlook, and then we'll get to your questions.

In short, we continue to execute our Global Business Plan strategies, and we continue to target top and bottom line results for 2011 that are in-line with our previous guidance. So let's start with our second quarter results. Although adjusted earnings per share were down slightly versus last year, we delivered sequential improvements in most areas. Organic sales growth, margins, earnings per share and cash provided by operations all improved versus first quarter levels. This gives us confidence in our ability to deliver improved results in the second half of this year.

Let's look more closely at a few areas of performance in the quarter. Our organic sales growth of 3% was on track with our full year plan. I'm encouraged with our 2% volume growth, which we achieved despite continued weakness in the baby child care and K-C Professional washroom categories in North America. As you heard from Mark, we continue to make good progress with our targeted growth initiatives. In North America, that was particularly true in adult care, K-C Professional wipers and Health Care medical devices. And K-C International had a very strong quarter, highlighted by great volume performance in Personal Care in a number of markets, including China, most of Latin America and the Eastern Europe, Middle East and Africa region.

We're gaining market share in a number of our businesses. In the U.S., we held or increased market share in 6 of our 8 key consumer categories. That includes share gains of 3 points in adult care, 2 points in baby wipes and facial tissue, and 1 point in bathroom tissue. And to the first half of the year, our shares are even with or ahead of last year in 7 out of the 8 categories. In K-C International, we're also growing ahead of category rates in a number of markets, including Brazil and China.

We have a number of innovations coming to market in the near term, that includes Huggies Little Movers Slip-On diapers which launches in just a few weeks, and we're excited about this first-of-a-kind innovation in North America, and we are also introducing it in some markets in K-C International. We also have exciting innovations coming soon in Kleenex facial tissue and Poise pads.

Let's shift now to cost reduction. I'm encouraged by our progress delivering FORCE cost savings and overhead spending reductions. Our efforts in these areas helped us improved gross and operating margins 50 basis points sequentially from first quarter levels, even though our input cost increased further. I'm also pleased with our cash generation in the second quarter. Our strong cash flow enables business reinvestment and shareholder-friendly capital allocation. On that front, second quarter dividends and share repurchases totaled $630 million and full year amounts should be around $2.6 billion.

Last quarter, we shared with you the 3 areas that we're focused on to offset cost inflation: improving revenue realization; delivering FORCE cost savings and reducing overhead spending. For the full year, we're now ahead of or on track with our previous plans in each of these areas, which is very important since the commodity cost environment has worsened again over the last 3 months. Let me give you a short update on each of these areas.

First, on the revenue front, we're getting good traction with a number of our pricing initiatives in K-C Professional and in K-C International, and we expect full year benefits to be somewhat higher than we previously estimated. Elsewhere, price increases have started to go into effect for our North American bathroom tissue business. While still relatively early, we're cautiously optimistic that these increases will be realized in the marketplace. While implementation of our diaper price increase in North America has been delayed slightly, we continue to expect that overall price mix improvements will benefit our top line by 1% to 2% for the full year.

Second, we continue to identify and implement incremental FORCE cost savings programs, and we're raising our savings target for the second consecutive quarter. Our new target is $300 million to $350 million, that's $50 million more than our previous plan.

And third, our teams are making excellent progress reducing overhead in discretionary spending. As a result, we reduced our full year SG&A spending plan significantly and now expect the total between the lines expenses will grow at a much lower rate than sales growth.

Altogether, we expect these actions along with stronger currency exchange rates to essentially offset the incremental inflationary headwinds we're now expecting compared to our previous plans. So we continue to target full year adjusted earnings in the range of $4.80 to $5.05 per share for 2011. Nonetheless without some moderation and commodity cost, it's more likely that 2011 results will be in the lower half of that range.

So to summarize, we continue to execute our strategies for the long-term success of Kimberly-Clark. We're making excellent progress managing those factors we control to deliver solid results in the short term, and we're firmly convinced that successful execution of our Global Business Plan will continue to improve shareholder value.

That wraps up our prepared remarks. And now, we'll begin to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Wendy Nicholson with Citi Investment Research.

Wendy Nicholson - Citigroup Inc

Two questions. First of all, can you talk about sort of the early receptivity, if you will, of the pricing that you've put into the marketplace? Are you getting pushback from the retailers that you need to increase your level of promotional spending or anything like that to sort of defray some of that impact? And then my second question is on the Health Care side, that business looks like it's kind of come roaring back from a volume perspective. Is there fair degree of visibility that in the back half, those kind of higher levels of volumes will continue? Because I know you face some pretty easy comps there.

Thomas Falk

On the pricing front, I would say it's progressing about as we would normally expect, and so I think most retailers want to make sure they're not going to be disadvantaged. But I think they also see pricing going up in lots of categories across the store. And so ours are no different as we feel the pressure of commodity cost. So you're starting to see retails go up and hopefully, we'll be able to sustain that through the second half. On the Health Care volume front, we did have really easy comps. And you may recall last year about this time, we had actually some distributors returning products that were bought in prior periods for the H1N1 crisis. So we would guess probably about half of the 10-point volume increase was related to the easy comp, and then the more normal underlying growth rate is more in the mid single digits which is what we'd expect going forward.

Wendy Nicholson - Citigroup Inc

Okay, fair enough. And then back on the pricing side just for a minute, I mean, even though we've seen whatever a lot of volatility and pulp prices maybe starting to roll over, net-net, the pricing that you've put in place, I mean, the probability that, that could be rescinded or anything like that, I mean, we'd have to see a pretty substantial further change in pulp before you backed off any of the price increases you put through. Isn't that fair to say?

Thomas Falk

We got a long way to go just to get back to even here, so.

Operator

The next question comes from Gail Glazerman with UBS.

Gail Glazerman - UBS Investment Bank

Just looking on the pulp for a moment, I just want to understand the guidance a little bit further. You mentioned the July decrease was in line with your estimates. First-half pricing seemed to be kind of in line with the low end of your guidance. There's some other decrease in the market for August. I mean, does that imply that you're looking for some sort of rebound later in the year? I'm just curious what you're seeing there.

Thomas Falk

Yes, we typically look at the 3 industry forecasters and average those. If you look at where we were at $970 in the first quarter. We were at $1,030 for the second quarter. So for the first 6 months, we're averaging about $1,000 a ton. Our guidance for the full year is $1,000 to $1,020 and that would say that there's the risk of there'll be some pickup in the back half which is what the forecasters are saying. There may be a little bit of upside on that. We'll have to see.

Gail Glazerman - UBS Investment Bank

Okay. And can you just talk generally about what you're seeing with the consumer? Have you seen any changes in buying behavior with the soft patch that we've seen in the broader macro data?

Thomas Falk

Not yet, in fact, one encouraging sign was that private label shares were really down across the board in virtually every category, both sequentially and year-over-year. So I think behind the innovation that we're driving and others are driving in the marketplace, the categories are looking a little healthier. We would like to see a little quicker uptick in the birthrate, which that's probably the other sign of economic confidence that's been weak for longer than we would have guessed. But we're starting to see some early signs that, that maybe improving although the category will still be down more than we would have expected for the year.

Gail Glazerman - UBS Investment Bank

And just a last question on feminine care. Your volumes were, I guess, well to just flat year-on-year. You're, obviously, comping a lot through by Kotex. But I'm just wondering, are you seeing increasing competition there and any issue, I guess, sequentially in terms of share?

Thomas Falk

No. I think our shares were down half a point or something sequentially. But the Kotex shares hang in there at about 5. And so I would say at this point, we're not seeing anything major from a competitive front that's happening in the marketplace and we've got good product improvements yet coming this year so expect to hear more from that space.

Gail Glazerman - UBS Investment Bank

Okay. And I guess one last question. In terms of resin, so your third quarter prices or your July prices were up from what they were in June and, I mean, is there any sort of contractual lag that you would expect to see some benefit from lower oil prices?

Thomas Falk

What's actually happening is that -- and this is probably a more complicated explanation than maybe you're looking for -- is because of the relative price of oil versus natural gas, a lot of the refineries are using natural gas more on their steam crackers. And as a result, they're producing lots of the polymer byproducts that go into many of the things that we use like polypropylene or adhesives or packaging materials. And so there's still some relative shortages of the monomers that go into our supply chain. And so you're seeing still pretty firm pricing for polymers and adhesives and super-absorbents and things like that.

Operator

Our next question comes from Alice Longley with Buckingham Research.

Alice Longley - Buckingham Research Group, Inc.

Could you talk about on the baby business in the U.S? I think you said your share was down a little bit. Is that expected to improve later? Why is your share down and why should it improve?

Thomas Falk

Yes, I mean, I'd say our shares have been bouncing around between 36 or 37, and we're more on the 36 side of that this quarter. So it's down about a point or so, but last year was kind of a high watermark. So it's a little tougher comp. We've got a lot of innovation coming in the second half with this Huggies slip-on diapers as well as some product improvements to our mainline, so I think innovation typically drives share in this category, and we'd expect to see some uptick due to the innovation that we've got coming.

Alice Longley - Buckingham Research Group, Inc.

And is the share loss in this quarter tied to your comment you said that diaper pricing was delayed a little bit?

Thomas Falk

No. I mean, the pricing is going to really didn't have that much impact on share. We thought prices are going to go up in July. It's looking more like it's going to be October at this point.

Alice Longley - Buckingham Research Group, Inc.

And why the delay?

Thomas Falk

For the competitive activity shook out and one key packing in the category, which has typically been our merchandise and cardboard boxes. The industry is shifting to polybags. And it takes a little longer to convert the assets for that new format.

Alice Longley - Buckingham Research Group, Inc.

Okay. So it's not that your major competitor is causing a delay in pricing going through?

Thomas Falk

We don't believe so.

Alice Longley - Buckingham Research Group, Inc.

Okay. And then one final question. Can you just sort of remind us why Personal Care margins overall are down year-over-year while consumer tissues are up? Why the difference in direction? Is it just easier comps for tissue?

Thomas Falk

Yes. I'd say more of the pulp hit tissue last year, and Personal Care is really being hit by all of the secondary materials costs, so polymer adhesives, packaging, superabsorbent are all up double digits this year.

Mark Buthman

The other thing, Alice, is that more of the pricing has already been taken in Consumer Tissue, and Personal Care pricing comes more later in the year.

Operator

Our next question comes from Per Ostlund with Jefferies & Company.

Per Ostlund - Jefferies & Company, Inc.

Want to talk a little bit about the paper restructuring since you are accelerating that activity here. As we get through that restructuring, can you help us understand just a little bit how the commodity cost sensitivity changes or actually does it change? Is the sensitivity still there and it just won't be as capital-intensive, or will you truly have a better control over your cost and then the inflation expectation that go with that?

Thomas Falk

Yes. I guess, I would say, it probably makes our sensitivity to pulp price slightly worse. We were about 10% integrated with these 2 pulp facilities. On the other hand, they're relatively high-cost pulp mills, so they didn't provide an enormous economic hedge benefit. They did provide some volatility benefit. And so we'll be slightly more exposed to the swings in pulp price without these mills.

Mark Buthman

Yes. Obviously, the other thing is the nature of the products that are produced at those mills are more value or private-label oriented, which tend to be lower margins. So there will be a slight mix improvement.

Thomas Falk

Well, the better mix, that's right.

Mark Buthman

Yes.

Operator

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

Linda Weiser - Caris & Company

I was just curious in the Consumer Tissue segment. The mix had been trending sort of positive up 1% or so, and now it was sort of flattish. Is there a particular reason for that, that you can explain?

Thomas Falk

I mean, I think Scott tissue had a good quarter. But so did COTTONELLE, I mean, we picked up share overall in bath tissue. And so yes, there's nothing major that I'd say. We got more innovation coming on Kleenex in the back half, and second quarter is typically a weak facial tissue quarter because you don't have as much of the cold and flu or back-to-school impact. So that probably also affects it a little bit.

Linda Weiser - Caris & Company

Okay. And just on your inventory, I guess, it was a little improved. It was up 13% year-over-year. I think, it was up maybe 14% last quarter. So maybe a little improved, but it's still up quite a bit. Are you feeling comfortable with that? And was there any curtailment effect in the quarter?

Thomas Falk

Yes. I mean, I'll let Mark comment on the inventory. Curtailment was negligible. I think it was about $10-million hit. And if we look at days of inventory in our supply chain, it was maybe up under a day, first quarter, second quarter. But there's some opportunity in the back half. But, Mark, maybe you can comment on that if you got any other color on it.

Mark Buthman

Yes. The improvement -- so inventory is right in line. We have a lot of innovation coming to the markets, so the businesses are wanted to make sure they can support product launches with the right levels of inventory. So we feel good overall about our management of inventory. The benefit in our working capital for the quarter was extension of payables. So it was the principal driver, which our global procurement organization is doing a great job of managing. So overall, we feel pretty good about working capital.

Linda Weiser - Caris & Company

Okay. And can I just ask, there's been a lot of speculation over Carl Icahn's involvement with Clorox, and he has listed Kimberly-Clark as being one of the companies that should be looking at acquiring Clorox. And you sort of have this health and hygiene kind of strategic thrust both in your company and in Clorox. Can you just comment on do you think there's any kind of strategic set and if there's certain areas that would be or certain areas wouldn't be? Is there anything you can say?

Thomas Falk

Yes, I mean, because I'd say we typically don't comment on rumors of M&A. I guess, I would say this is that -- our plan as we said to many investors doesn't call for big transformational M&A. And so I don't think any of the announcements related to Clorox change that point of view, and we would consider the Clorox to be a well-managed company. And so as we look at it, it's hard to see how you come in and do a whole lot better job of it.

Operator

The next question comes from Javier Escalante with Weeden & Co.

Javier Escalante - Weeden & Co., LP

I have a question with regards to whether you think that you need to increase prices higher or in more places, given that number one, your cost inflation has worsened by $200 million while your estimate for savings is up by only $50 million. And I have another question after that.

Thomas Falk

Yes, absolutely. Javier, one of our key strategies for this year is to get up price whenever we can. And so we have been aggressive in many markets around the world. And looking at revenue realization, some cases are doing that through list price, some places through mix, some places through innovation. And so that's a key strategy for us this year.

Javier Escalante - Weeden & Co., LP

And then the second question has to do with SG&A that came down more than I would have thought. Number one, FORCE savings were only $45 million versus $60 million in the first quarter. So what drove the SG&A reduction? Has marketing and spending been dialed back in the quarter, and if so, by how much?

Thomas Falk

Yes, a couple of things there. We probably don't do a very good job of tracking SG&A savings in FORCE. Most of the FORCE savings tend to be cost-of-sales-oriented, and so that's probably part of it. The second part of it is that marketing spending was down versus prior year in the quarter which last year was the launch of you U by Kotex as well as Poise, and so marketing year-on-year was down probably $20 million to $25 million, but sequentially, was up $10 million. So we spent, in the second quarter, about the same level or a little bit higher than we did in the first quarter.

Javier Escalante - Weeden & Co., LP

And on the savings, basically, you were up in the savings or savings to $300 million to $350 million. If I am calculating correctly, you basically have $105 million in savings accrued in the first 2 quarters, so that means that you need to ramp up the savings to $245 million. Could you explain the kind of activities and what is going to drive these accelerated savings, given that it's been a little bit on the low end at the beginning of the year? And that would by my last question.

Thomas Falk

Yes, absolutely. No, that's a good question. It is back-end loaded. We've got an aggressive plan really principally around our growth procurement program. It's got substantial benefits yet to come, and there is a lot of programs underway that will be delivering value for us in the second half. We're also continuing to drive our lean manufacturing profits throughout our plants, and we'd expect to see additional savings from that. In addition, we have our usual material cost savings programs that will continue to deliver in the back half. So the plan is back-end loaded, but we got enough visibility that we're confident we'll be able to get this year.

Operator

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

Jason Gere - RBC Capital Markets, LLC

I was wondering if you could just talk a little bit about the European market. Clearly, it sounds like 3 months from your last conference call, the North American market is a little bit more status quo, KCI is a little bit better but Europe, still seems to be kind of the swing factor in terms of how the year may play out. Can you just talk a little bit both from a Consumer Tissue and from a Personal Care side?

Thomas Falk

Yes. I mean, I was just in Europe a couple of weeks ago, and that team is committed to delivering their plan for the year, and they've got actions in place to do just that. They've got lots of cost savings coming to help offset cost inflation. They also are planning on getting some pricing in some of their key categories. We probably had a softer start on diaper volume at the beginning of the year, but they've got a number of things underway to help turn that around in the second half. So I came away feeling encouraged that the European team, while our plan is back-end loaded, they've got plans in place to make sure they can deliver.

Jason Gere - RBC Capital Markets, LLC

And within your guidance, obviously, if you look at the market growth versus the innovation, obviously, you've talked about some innovation, I mean, what sort of expectations are you building into Europe? Are you looking for a nice sequential improvement? Can you put a little color around that?

Thomas Falk

In terms of top line or product line?

Jason Gere - RBC Capital Markets, LLC

Top line. Yes, I'm just focusing top line.

Thomas Falk

I think Europe's top line probably isn't going to change all that much, and I think you'll see much better bottom line as some of the cost savings come through.

Jason Gere - RBC Capital Markets, LLC

Okay. Just a clarification question. When you talked about the diaper pricing in October, was that just on the pack change or is that also where, I think, there was some list price changes as well with some of the categories?

Thomas Falk

There will be some implementation of the list price changes, but there's also a fair amount of promotion protection that will take place in the third quarter. So I would say we're probably not going to get a lot of price realization in our third quarter and more it will come in the fourth quarter.

Mark Buthman

And, Jason, most of the pricing actions at the end of the day is tied to count reductions, only a minority portion of it is coming through list price changes.

Thomas Falk

It's a big part of the category these days.

Jason Gere - RBC Capital Markets, LLC

Okay. And then just a last thing. Can you talk to me or sell me on these slip-on diapers just in terms of, I guess, the consumer testing that you've done out there, why it took so long to come up with this idea? Sounds a lot like a training pant. So I'm just wondering if you could just talk to me about it. I have a baby, so maybe I'd be in the market for it.

Thomas Falk

No, I think it's a big idea around the world. If you want to look to the Japanese market, it's a significant amount of the category. We've launched it in Korea as well, and it's done very, very well. And so it's really another option for mom, diapering an active baby. So it gives her additional flexibility. And so we do think -- it's priced from a value standpoint. It's going to be very similar to a price for a training pant. We know we need to continue to drive value around our training pant business, but we do think it's going to be a good option for mom. And so research is customed very favorably. And we've been at this idea a number of different ways for a number of years. We launched the product -- I don't know -- it's probably 5 years ago now called Huggies Convertibles. And we were aimed at this and didn't quite get the execution right. We thought it was a big idea then, and we're going to go back out and we think we've got a much better execution this time.

Jason Gere - RBC Capital Markets, LLC

And I know part of launching is obviously the competitive advantage, but just can you talk about training pants then in terms of the growth or lack of growth maybe you're seeing there and just the timing of coming out with the product here that I assume would be at a premium to diapers and especially when the category is still seeing some softness right now?

Thomas Falk

The category is really soft because of the birth rate, but mom still wants the very best for her baby and part of what's happening in the training pant category is as we've seen category weakness for several years, it's -- finally, those children are migrating into training pants and that's having an impact on the category. But we believe we're going to exceed to bring innovation to the category even with the category is down to moms that are there who want the very best for their babies.

Operator

Next question comes from Ali Dibadj with Sanford Bernstein.

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

A few questions. One is if you could just talk a little bit more about the dichotomy of growth that you're seeing right. So KCI 8%, all in 3 and I think the way you guys define KCI is about a 30-year business. So you're really not seeing much growth maybe on around then roughly to 0 in the rest of the business. Can you talk about that difference? Can you talk how that's driven by price versus volume between those 2 groups, kind of KCI and non-KCI? And then also how you think about the outlook for especially the non-KCI part over the next whole while?

Thomas Falk

Yes. I guess, I'd say if you look at the various categories in the U.S., you'd see a mixed bag here as well. You'd see the diaper category is down. And so that's obviously been a drag across diapers and pants. But wipes is up. And so we continue to do very well there. And then if you looked at that Poised and depends those are on trend with aging and you're seeing still strong mid-single-digit category growth. And we've done even better than that over the last couple of quarters. Some care we've had consistent strong growth behind the smooth innovation launch. So we're seeing better results on that standpoint. So with Europe, you'd see more X currency negative organic growth which really is something that's not too surprising given what's going on in that marketplace. And then KCP, you're still seeing a relatively weak economic outlook, which hurts our washroom business, relatively better results in safety and wipers. And Health Care obviously in the quarter, we had an unusually large volume growth. We'd expect that to be more mid-single-digits going forward.

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

And so if you have a current situation particularly outside KCI, it doesn't sound like you're, again, planning a lot of price elasticity when you start thinking about the PC price increases late in the year. So if you could talk about that. And then also for the emerging markets, you mentioned in the past few quarters, it's been difficult to take pricing in the emerging market to offset currencies or to offset commodities basically because of competitive environment. Has that curtailed a little bit or is that still an issue?

Thomas Falk

So we've gotten more price in emerging markets particularly in the last quarter. I don't know, Paul, if you've got the details of that.

Paul Alexander

Yes. Ali, our total price was up 4% in K-C International, and we also had a point of mix as well. So we've been doing a good job getting revenue both in Personal Care, primarily in Latin America and then in Consumer Tissue really in all regions of the world.

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

And on the price elasticity question, the first part?

Thomas Falk

I think if you look at from a diaper standpoint, we really try to do a better job of understanding how the consumer shops and are bringing price in a way that will cause less sticker shock than maybe we have in the past. So just doing it by account change across the big part of the category, we think we'll have a reduced elasticity impact versus a straight list price change.

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

Okay. Just one last clarification on the marketing research and general expenses number that's down 25 bps. Can you just aggregate that in terms of percent of spend in advertising versus overhead reduction?

Thomas Falk

I think the answer to an earlier question, marketing which should be advertising and promotion is down by $25 million year-on-year. It’s up about $10 million sequentially, and then the balance is SG&A.

Operator

Our next question comes from John Faucher with JPMorgan Chase.

John Faucher - JP Morgan Chase & Co

Just a quick question in -- I'm trying to figure out -- if we take a look at your raw material inflation, the key input cost increase of $375 year-to-date, your total COGS is up, it looks like just over $700, so roughly half of your COGS increase is represented by the raw material inflation. If we take your outlook for the balance of the year which I think works out to like $275 to $375, and sort of went double that and added that to COGS, I think we'd end up with a gross margin over the back half that's probably roughly in line with the second quarter gross margin. But given sort of the comp there, where you had much higher input inflation in the back half and also the pricing, any thoughts in terms of sort of sequentially how we should see the gross margin play out over the back half of the year?

Thomas Falk

Yes. I mean, I guess we'd say for the year, we'd expect gross margin to be down somewhat more than operating margin. We're saying operating margins is going to be down 50 to 70 basis points for the year. And so just given where we're at and what we have yet to go, I think will maybe close the gap a little bit in the back half, but we'll guess that we'll be down a little bit more in gross margin than we will in operating margin.

Mark Buthman

John, you should see both gross and operating margin sequentially improved in the back half of the year consistent with our expectation for earnings to ramp up.

John Faucher - JP Morgan Chase & Co

Okay, got it. That's what I was looking for. I mean, but in order to get to sort of closing that gap, you would need sequentially a decent sized uptick and, I guess, the issue really revolves sort of as it comes in at the lower end of the raw materials range and then better leverage from pricing, is that kind of the way to look at it?

Thomas Falk

And so pricing is part of it. We've got much more cost savings come in the back half.

Operator

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

Christopher Ferrara - BofA Merrill Lynch

So I just want to go back to the diaper pricing delay for a second. Can you just talk, I guess, about what changed incrementally, like why did it get delayed? And then I get that, we already knew what it's going to be. Some of us could be downtown, but what change from last time to now?

Thomas Falk

I think the big shift was deciding to take the big box to polybags. And so that was the discussion that happened among us and our principal customers in terms of how we wanted to present the category to the shopper. I assume that our primary competitor was also having some discussions with their primary customers. And so primary customers were pushing hard to take the category to polybags which makes more sense. We've been talking about doing that for a while, actually it's a much better environmental solution. And so we decided to go ahead, and make that change, which will actually give us some more economic benefit in 2012 because the cost of poly is less than the cost of the cardboard boxes that we're putting it in. So in discussions with key customers that a decision that was made in the last quarter.

Christopher Ferrara - BofA Merrill Lynch

And, I guess, on the overhead savings, can you talk a little bit about what the specifics are there? Obviously, you guys have sourced a lot of savings from overhead this quarter. It looks like it's been a continued lead [ph]. Can you just touch on some of the specific items that are getting cut in addition to marketing?

Thomas Falk

I mean, it's just being disciplined about the things that we can control. And so I'll be going onto a call with our top 1,000 leaders after this to talk about how we need to do an even better job of controlling our controllables. So it's SG&A, it's travel, it's headcount, it's how do we use pure consultants and how do we use less contract labor? So we're really trying to manage all of those details very tightly to make sure that we control the things that we can control in a difficult economic environment.

Christopher Ferrara - BofA Merrill Lynch

I guess, and how much of it relates to that difficult economic environment versus how much the stuff you should be doing anywhere, right? Because it just strikes me, it's a pretty big number and then you think about marketing and you guys have been a company that's been pretty consistent in the last couple of years, at least, with pushing marketing higher even though the cost environments have been tough and now marketing might be down as much as 15% this quarter. So I guess the question is, can you talk about marketing and the rest of overhead and how much of this is a reaction to what's going on versus how much is sustainable?

Thomas Falk

Well, I mean, again, marketing was up about $10 million sequentially. And so last year, you had the launch of U by Kotex and some new Poise things that happened in the second quarter so that was probably the biggest quarter from a marketing spending standpoint we've had in a while. We've got more of our innovation coming in the back half. So with the Huggies Little Movers Slip-On diapers coming and some new Kleenex products and new Poise product is coming, we'll have a little bit heavier spend in the back half this year than we did last year.

Mark Buthman

Then I think the other 2 drivers, as we drive lean, were more advanced in supply chain. But as we drive lean through the back office, we're finding opportunities to streamline the way that work gets done and get more work out of the talent that we have, provide better opportunities for them to have an impact on the business. And the other thing is mix. I think we're getting better and more sophisticated both at our research investments, our innovation investments and our marketing investments. So we're getting more bang for each dollar that we spend.

Operator

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

Chip Dillon - Citigroup

First question is I noticed and maybe this has been addressed before but the depreciation charges this year are much higher than what they've been in the past and, of course, you're still making earnings, so that's terrific for cash flow. Could you talk a little bit about why they are higher and what we should expect going forward should they stay at this like between $1.1 billion and $1.2 billion rate?

Thomas Falk

Yes. Most of that is the restructuring charge for the tissue restructuring has really spiked up depreciation and so that's a good chunk of it.

Mark Buthman

Ongoing depreciation is $800 million to $850 million.

Chip Dillon - Citigroup

So obviously that's got the charge in there. And that starts to come down early next year because you're accelerating that program, correct?

Thomas Falk

Yes. We should be through it by the end of 2012, but we'll have a lot of it in this year, I think.

Chip Dillon - Citigroup

Got you. And then, you did mention, by the way, that there will be some cash costs significant involved with this. Would that also be incurred this year or does that bleed more into next year? In other words, do you take more of earnings hit this year, although it's not ongoing, and actually, spend the money next year?

Thomas Falk

I think that the timing of that is probably still hard to call at this point in time because of where we are in the various processes. We had some cash cost already in the second quarter, I think it was $15 million. And we may have more later this year but some of it could spill into 2012.

Chip Dillon - Citigroup

Got you. And then, as we look at 2012 -- and obviously, strategic opportunities can come up. But barring that, it looks like -- is there any reason why we would not see your share buyback pace stay? I know it's quite elevated, but stay at $1 billion or higher next year or do you think it's more likely to settle back down?

Thomas Falk

This year was unusual. I mean, we really roughly doubled what we would normally buyback. And so, we'll give you more specific guidance on 2012 in January, but if our strong cash flow continues, expect to see us put it to good use for our shareholders through dividends and share repurchases.

Chip Dillon - Citigroup

Okay. And then lastly, as we look at China, you mentioned you're having a good growth there above the market rate. And my understanding is that you are mostly involved disproportionately perhaps versus the population in the northern half. Is there any movement to broaden your base there or make it more proportional?

Thomas Falk

Yes, absolutely. The Eastern Seaboard of China is where lots of the GDP is today and so for Huggies, for example, at the end of the year, we were in 50s or so cities. Today, we're probably in 65 cities, and so we're just continuing to expand our distribution base for our key products in China and expect that to continue for quite a while.

Operator

Our next question comes from Bill Schmitz with Deutsche Bank.

William Schmitz - Deutsche Bank AG

Did you say what the local currency operating profit growth was in the quarter?

Thomas Falk

I don't think we did.

Paul Alexander

But from a translation standpoint, Bill, currency benefited the top line by about 5%, the same would be true on operating profit.

William Schmitz - Deutsche Bank AG

Okay, so it's pretty linear there?

Paul Alexander

Yes.

William Schmitz - Deutsche Bank AG

Okay, got you. And then, can you just like give us a little more granularity on where some of the SG&A costs are coming from? I know you talked about advertising which looks like it's going to tick up a little bit in the back of the year. But what was like the big revelation this year that's going to drive such robust cost savings and if you can give like line item by line item as much as you can?

Thomas Falk

Yes, I mean, I think we've got everybody focused on controlling the things that they can control. So we're doing a good job, as Mark mentioned, in driving lean into our various processes. We're trying to manage our headcount tight. And where we need to deploy talent to build some new capability, we're trying to source that by efficiency in other areas. We're managing travel and consultancy costs tightly. And everybody is very conscious of -- particularly with the cost inflation that we got this year that we've got no excuses. We're going to control the things that we can control to try to deliver our objectives this year.

William Schmitz - Deutsche Bank AG

Okay, great. And then just on pricing again. I mean, it sounds like K-C to Mexico had some challenges to be nice on some of the price increases. Is that just discreet to Mexico or is there any risk in the U.S. and the rest of Latin America on that front?

Thomas Falk

Yes, I think that they had a real tough quarter in pushing some of the price increases through, and we'll see how that plays out. So far I'd say I'm encouraged about what we see happening in the U.S. And we've had pretty good success in a number of other International markets in taking price. And I think we're not alone relative to lots of other CPGs that are needing to get price with this kind of commodity cost environment.

William Schmitz - Deutsche Bank AG

Okay. And then, just lastly, did the delay of the diaper price, does it have anything to do with Luvs not taking the pricing? Was that the original plan? Does the delay have anything to do with that?

Thomas Falk

No. I mean, really Luvs tends to line up more in private label. So we'll watch that space to see what happens. If private label goes up, I would expect you might see Luvs follow that.

Thomas Falk

Okay. So but -- is [indiscernible] will not go do the pack count change?

Thomas Falk

We don't have good visibility of what they're up to, so what typically happens is there's a little bit of a lag generally, at least 90 days and sometimes a bit longer before private label lines up. But I'm sure they're under the same cost pressures that we are, and I expect to see some pricing action happen there over time.

Operator

The next question comes from Caroline Levy with CBSA.

Michael Lavery - CLSA Asia-Pacific Markets

This is Michael Lavery in for Caroline as CLSA. Just was wondering on the overhead, it looks like your corporate cost are down double digits about 6 quarters in a row, obviously, that's all the efficiencies you've referring to, but how long can you keep that up?

Thomas Falk

That seems high relative to our expectation. What numbers are you looking at there, Michael?

Michael Lavery - CLSA Asia-Pacific Markets

Well, I think -- well, so I guess the difference there...

Thomas Falk

We're just trying to keep them from going up. I don't think they're down double digits. You may be looking at an allocated segment cost or something.

Michael Lavery - CLSA Asia-Pacific Markets

Well, I think in '09, that exclude some of the items that you hadn't called out as extraordinary because of the 1 year timing of them. But it looks like sort of an ongoing run rate. There's some good declines. Is that something you can keep up?

Thomas Falk

Yes, I would say broadly our goal is to try to grow SG&A at a slower rate than sales. And so certainly, in some of our businesses like Europe, you're seeing them not grow. But if you look back and looked at like '09, we had a large severance program, and that may have spiked that up in '09, and then we got the savings from it in 2010. So we got a lot of benefit if you look at, at that SG&A line between '09 and '10, but those were more kind of related to those unusual factors. And so I'd say going forward, it'd be better to model it at growing at a slower rate than our sales growth.

Paul Alexander

Michael, this is Paul. So from year-to-date basis, those unallocated costs are very similar to year-ago levels. So we're tracking in line with what Tom suggested.

Michael Lavery - CLSA Asia-Pacific Markets

Okay, yes. So just -- I'm talking about just for the corporate line, sorry, not the SG&A, right. And so that would be around the pace that it should keep up?

Paul Alexander

Yes.

Michael Lavery - CLSA Asia-Pacific Markets

And then for the pricing, obviously, in KCI, you've mentioned some benefits like in LatAm, but when you get the pricing coming from the recent increases in U.S., what would that look like on the segment basis? Like in Personal Care or tissue, how much acceleration would we likely see there?

Thomas Falk

Let's say the price increase on diapers is about 7%, that's the biggest chunk of Personal Care segment. But there isn't any price in the marketplace at this point in time on feminine care and adult care. I think baby wipes price increase is about 5%. So you probably see a low to mid single-digit price impact just from the U.S. market in that segment. In tissue, the price increases are more mid-single digit. And so, and some of that is going to come through sheet count, some is coming through lift so you'll see kind of a mix there. But I guess you'd see probably a mid-single-digit pricing in tissue sequentially going forward.

Michael Lavery - CLSA Asia-Pacific Markets

And with that kind of magnitude, how much of a volume would you expect you might see, like if the sheet counts and count reductions are part of that, is that a direct volume hit just because of smaller pad size?

Thomas Falk

Yes, you'll typically see a volume drag particularly from sheet count essentially reducing the household inventory for a period of time. You'll see a bit of a blip on diapers as well, although consumers tend to use about the same number of diapers per day. And so we've also got a lot innovation coming in the second half. And so if you look at the balance of those 2, it's a little tougher to call.

Operator

At this time, we have no further questioners in the queue.

Paul Alexander

Okay, then we'll wrap up with a quick closing comment from Tom.

Thomas Falk

So once again, we continue to execute our Global Business Plan well in a very challenging environment. And we thank you for your support of Kimberly-Clark.

Paul Alexander

Thank you.

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