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Kimberly-Clark (NYSE:KMB)

Q2 2012 Earnings Call

July 26, 2012 10:00 am ET

Executives

Paul J. Alexander - Vice President of Investor Relations

Mark A. Buthman - Chief Financial Officer and Senior Vice President

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

Analysts

Gail S. Glazerman - UBS Investment Bank, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

Jason Gere - RBC Capital Markets, LLC, Research Division

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Caroline S. Levy - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Javier Escalante - Consumer Edge Research, LLC

Constance Marie Maneaty - BMO Capital Markets U.S.

John P. San Marco - Janney Montgomery Scott LLC, Research Division

Chip A. Dillon - Vertical Research Partners Inc.

Lauren R. Lieberman - Barclays Capital, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Operator

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

Paul J. Alexander

Thank you, David, and good morning, everyone. Welcome to Kimberly-Clark Second Quarter Earnings Conference Call. With us 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 second quarter results. Tom will then provide his perspectives on results through the first half of the year and also our full-year outlook. We'll finish with Q&A.

As usual, we have a presentation of today's materials in the Investor Section of our website. Before we begin, let me remind you that we will be making forward-looking statements today. Please see the Risk Factors section of our latest Annual Report on Form 10-K for further discussion of forward-looking statements. We'll also be referring to adjusted results and outlook this morning, 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 this morning's news release.

Now I'll turn it over to Mark.

Mark A. Buthman

Thanks, Paul, and good morning. Let's start with the headlines. First, we delivered organic sales growth of 5%, as highlighted by 9% growth in K-C International. Second, we generated strong improvements in both adjusted gross and operating margins, as well as double-digit growth in adjusted earnings per share. And third, we reinvested significantly behind our brands, with higher levels of strategic marketing and R&D investment.

Now, let's cover the details of the quarter. Overall sales of $5.3 billion were even with the year-ago period, underlying organic sales rose a healthy 5%. It's driven by higher net selling prices of more than 2% and increased sales volumes of 2%. On the other hand, changes in foreign currency rates decreased sales by more than 3%, and lost sales in conjunction with our pulp and tissue restructuring reduced sales by an additional 1%.

Moving down the P&L, adjusted gross margin was 33.6%. That's up 240 basis points year-on-year. The improvement was driven by organic sales growth and $70 million of FORCE cost savings. Although we benefited from input cost inflation of $30 million, this was mostly offset by unfavorable currency translation effects.

Let me spend a minute on our FORCE program. Our teams around the world have been working hard to identify and implement additional savings programs so that we can fund reinvestment and improve our margins. They've made excellent progress in the first half of the year, in particular by leveraging our global procurement organization and continuous improvement capabilities. As a result, we're increasing our 2012 full year savings target to at least $250 million, up from our previous estimate of $150 million to $200 million. This new guidance, our 2011 and 2012 combined total savings, are now projected to be at least $515 million. So we'll exceed our existing 3-year target of $400 million to $500 million after just 2 years.

Now turning back to our results. On an adjusted basis, second quarter operating profit rose 8% with an operating margin of 14.7%. That's up 110 basis points compared to prior year. Our investment between the lines increased, including a $35 million step-up in strategic marketing to support our product innovations and targeted growth initiatives. Administrative and research spending also increased as we continue to build capabilities to support future growth, particularly in K-C International.

Second quarter adjusted earnings per share were $1.30 compared with $1.18 last year. While we benefited from a slightly lower adjusted effective tax rate, that effect was mostly offset by lower equity income.

Cash provided by operations in the second quarter was a solid $740 million. That compares to a strong year-ago performance of $771 million. In terms of primary working capital, I'm encouraged that we're on track with our plan to reduce our cash conversion cycle by at least 2 days this year.

We continue to allocate capital in shareholder-friendly ways. During the second quarter, we repurchased 2.5 million shares of KMB stock at a cost of $200 million. We now anticipate full year share repurchases of $1.3 billion, up from our previous target of $900 million to $1.1 million (sic) [$1.1 billion] for the year. This reflects our expectation for additional excess cash flow, including proceeds from the exercise of stock options.

And the last, we're now expecting a more moderate year-on-year decline in our diluted share count than we previously anticipated. That's mostly due to the accounting impact of option exercises.

Now I'll highlight a few areas from our segment results for the quarter. In Personal Care, organic sales rose 7%, with volumes up 4% and net selling prices advancing 3%. We had another quarter of strong volume growth in K-C International, including high-single digit growth in each of our major regions. The growth initiatives performed very well. In fact, in the Diaper category, specifically, China volumes grew by more than 40%, and Brazil and Russia volumes were each up approximately 20%. Elsewhere, our European business delivered solid volume growth in the quarter, while our North American volumes were down slightly.

The benefit of improved net selling prices in Personal Care was driven by K-C International and our Huggies brand in North America.

Second quarter Personal Care operating margins of 16.8% were pretty similar to both last year and the first quarter this year.

Turning to Consumer Tissue, organic sales were up more than 1%. Net selling prices rose 3%, while organic volumes fell about 1%.

We continue to deliver excellent price realization in both North America and across K-C International. Consumer Tissue operating margins rose 340 basis points versus last year, and I'm really pleased that our teams continue to capture the benefits from our strategies to improve revenue realization and drive cost savings. Lower pulp costs also helped our tissue margins.

Moving to K-C Professional & Other, organic sales were up 3%. The increase was driven by improved volumes of 2% and higher net selling prices of 1%. Volumes were up 5% in K-C International, while North American and European volumes were up modestly. Operating margins of 16.4% were up 120 basis points versus last year, driven by benefits from organic sales growth, cost savings and lower input cost.

And lastly, Health Care organic sales were up 7%, as driven by volume growth. Medical device volumes increased double-digits, with strong growth in both our digestive health and airway management businesses. In addition, surgical and infection prevention volumes rose mid-single digits as led by growth in exam gloves and surgical products. Operating margins in Health Care of 13.6% were in line with a year ago.

So that wraps up my comments. To recap, we achieved solid organic sales growth led by K-C International, delivered improved margins and earnings per share and we're reinvesting in the business to support our growth strategies.

Now I'll turn it over to Tom.

Thomas J. Falk

Thanks, Mark, and good morning, everyone. Since Mark has reviewed our second quarter results, I'll just add that I'm encouraged by our overall performance and by the execution of our Global Business Plan strategies. About halfway through the year, we've made excellent progress in a continued volatile environment, and our business fundamentals are strong. So let me share some of the highlights of our results from the first half of the year. On the top line, our organic sales were up 5%, and that's ahead of our original full year target for growth of 3% to 4%. K-C International has been a key driver of that growth, and our organic sales there are up 11% and that includes 15% growth in Personal Care, which is a significant pickup compared to the 10% organic growth this business achieved last year. And we're delivering strong results in several key priority businesses. For example, in China, our Diaper volumes so far this year are up more than 45%, and that's driven by benefits from product innovation and distribution expansion. Our Diaper business in Russia is also performing very well. We've got 20-plus percent volume growth there. An upgraded Huggies diaper has been key to our success in this market. And in Brazil, we've launched premium diaper pants. Our diaper volumes there have increased by more than 15% so far this year. And then finally, volumes in adult care and baby wipes across Kimberly-Clark International are each up about 15%, and we're making these businesses become truly global. So I'm pleased with K-C International's performance so far this year. Our categories are healthy, we're generating better-than-expected growth and we're very optimistic about our future prospects for this part of our business. And it's good to know that K-C International has even more innovation coming in the second half of the year. That includes the relaunch of premium adult care pants in Brazil, premium fem care offerings throughout Latin America and a diaper upgrade in South Korea.

Now turning to North America. We delivered mid- to high-single digit volume growth in feminine care and adult care in the first half of this year, and both businesses are benefiting from strong marketing programs and product innovation. And on the innovation front, we're optimistic about our Poise brand's recently announced entry into the feminine wellness category. Our other businesses in North America are generally performing in line with our plans, although category demand in baby and child care is tracking at the low end of our previous expectations. We've also seen some modest trade down in these categories, but nonetheless, our market shares are holding steady in these 2 businesses.

And looking more broadly at our market shares in North America, our positions remain solid overall, as we're up or even with year-ago market share levels in 6 of our 8 consumer businesses.

And finally in Europe, conditions remain challenging, particularly in Southern Europe. With that said, our market shares are generally stable overall and our European team is on track to achieve its 2012 plan.

So overall, organic top line growth has been very good through the first 6 months of 2012 and our brands are in great shape. To drive this growth and support our brands, we've been investing significantly, including an $80 million increase so far this year in strategic marketing. And our research and development spending was also up at a double-digit rate in the first half of this year.

Now turning to profitability, we've increased adjusted gross margin by 240 basis points in the first half of the year. That's been driven by our focus on organic sales growth and cost savings. Our adjusted operating profit has grown by 10% in the first half and that's led to a 12% increase in adjusted earnings per share, and that's ahead of our original plan for the year.

We continue to run the business with financial discipline. Our balance sheet remains strong, our cash provided by operations is up 30% through June. So while we're only halfway through the year, we've got more work to do, but we're tracking ahead of our previous expectations in a number of areas, and I'm encouraged by our progress.

So let me move to the outlook. Our plan is to build on the momentum that we've had going in the first half of this year. We'll continue to focus on our targeted growth initiatives, innovation, brand building, cost-reduction and shareholder-friendly capital allocation. There are a number of updates to our full year planning assumption in this morning's news release. We're now targeting 2012 adjusted earnings per share to be in a range of $5.05 to $5.20 per share, and that range is about $0.05 per higher -- $0.05 per share higher at each end of the range than our previous estimates. The key drivers for the increased outlook are our higher organic sales growth and increased FORCE cost savings. While we've lowered our commodity cost estimates, we expect that those benefits will be largely offset by more unfavorable currency exchange rates as commodity cost and the U.S. dollar continue to generally move in the opposite directions. We've also taken up our strategic marketing and G&A investment plans to support our growth initiatives, and I'm pleased that we're able to increase our near-term outlook and increase the level of investments we're making for our future success.

So to summarize, our performance in the first half of the year was excellent. We've increased our expectations for our 2012 organic sales growth, cost savings and adjusted earnings per share, and we remain convinced that 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 Gail Glazerman with UBS.

Gail S. Glazerman - UBS Investment Bank, Research Division

I guess want to talk about volumes a little bit, specifically the growth that you posted in European Personal Care as well as North American Tissue. Is that just because of easy comps or was there something else going on?

Thomas J. Falk

I think in Europe Personal Care, a couple of things. We had double-digit growth in our baby wipes business. We had high-single digit growth in DryNites and Pull-Ups and we had low-single digit growth in branded diapers. And so it's good to see we've got good innovation and strong brands in some of those categories that are delivering growth. We also picked up a couple of private label contracts, which also helped, and then I think the comps were a little easier in second quarter last year. So lots going on there. In Consumer Tissue, in Europe was your question or was it in...

Gail S. Glazerman - UBS Investment Bank, Research Division

And North America.

Thomas J. Falk

In North America, you saw kind of a mixed bag. The second quarter facial tissue volumes were down just a touch. Our shares were relatively stable overall. COTTONELLE volumes were down, but Viva and Scott Towels volumes were up. Some of the -- most of the COTTONELLE volume decline had more to do with promotional timing at a key customer. Last year we had a big promotion, it didn't repeat this year. So that would explain most of it. But the shares overall in tissue look pretty decent.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just sticking with volume and demand a little bit, can you offer any incremental color? You mentioned a little bit of the trade down in baby care. I'm just wondering, as you move through the second quarter, any changes, incremental changes, reflective of the macro environment or has it been kind of as you've been seeing for the last couple of years?

Thomas J. Falk

You probably saw private label shares ticked up in several categories, 1 point or 2 sequentially, and so diapers was one of those. I think it was up a point sequentially. Our shares were flat, but that's one that you probably would look to. Now you have other ones. You look at our adult care shares, our private label is down a couple of points. And so it's probably just one that we've watched sequentially, but infant care was up, I think, 0.9 point. Fem care private label share was up just under a point. Facial tissue, it always goes up sequentially because it's the weakest quarter, so that one was fairly normal. And then in the dry bath category, private label was up a couple of points. So as we would say, we'd look at modest category trade down, those were areas we'd probably focus on.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just one -- couple quick questions on commodity cost. Looking at your forecast for NBSK, that's kind of in line with the first half average, yet prices seem to be falling in the second half. Are you expecting some sort of pickup or, again, are you just basing this on forecasts that are out there?

Thomas J. Falk

Yes, we're basing on forecasts that are out there. So we're down probably about $35 a ton on average per NBSK versus our last update for you. I think in April, we talked about $915 to $930 a ton. We're now calling it $880 to $895 a ton on average for the year. Current spot is about $880. So we think that we're in the ballpark, but we'll see what happens. I think the northern softwood market has maybe gotten a little bit more slack in recent weeks, so there may be a little bit more downside there. But the hardwood market where we probably buy more eucalyptus than anything else seems fairly firm at this point. So I wouldn't see a lot of opportunity on that part of our fiber mix.

Operator

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

Christopher Ferrara - BofA Merrill Lynch, Research Division

So strategic marketing, up about, I guess it looks like it's about 25% or so in the first half. I guess, I want to try to understand the need to continue that pace. To what extent is this increase structural versus in response to heavy new product activity? I guess -- so could you talk about that and the need for this pretty fast pace and increase to continue over the next couple of quarters?

Thomas J. Falk

Yes. I guess, I would say if you kind of look at the percent of sales, we're back pretty close to where we were in 2010. So we had ramped up and gotten up to a little over 5% of sales. In 2011 it flattened out, and we really had a better year of sales growth and didn't increase strategic marketing, in fact, it decreased a little bit. And so we're more back on the trendline and kind of back to where we probably ought to be from a percent of sales basis. We really look at it more market by market and are we competitive with our share of voice and are we investing appropriately behind the innovation. And so most of the incremental funding is going to drive Personal Care growth in emerging markets, and so you're seeing -- with the kind of growth we're seeing in China, Russia, Latin America, you're seeing a significant uptick in spend there. In North America, when we launch our new Poise and Depend products, we're doing that behind a full up A&P program. Same will be true with some of the new U by Kotex experience. We had a relaunch of the mainline Huggies diapers that we supported this year, and so we're investing behind innovation that we think will drive top line and margin ultimately and then that's showing up so far this year.

Christopher Ferrara - BofA Merrill Lynch, Research Division

Got it. And I guess, on another note, this $20 million drag, I guess, to operating profit this quarter on, I guess, on production downtime, can you talk about what the full year run rate would be in order to generate the 2 days of cash conversion cycle improvement you're talking about? Are you already there or do you think you're going to have incremental downtime for the rest of the year that will affect operating profit?

Thomas J. Falk

We still would say that the amount of downtime we're going to take is going to be pretty similar overall this year to last year. Last year was probably more heavily back-end weighted, so I think our comps are going to get easier on that score in the back half. Pretty much all the downtime has been focused on North America and baby and child care, where the category's softer than we thought. So we're taking downtime to make sure we don't build inventory in that environment. And maybe Mark, you can talk about cash conversion cycle, but we're pretty close to running at the rate that we need to run at, and I think we just a little bit of opportunity in the back half as we get past some of the launches that we've built some inventory for in the first half.

Mark A. Buthman

Yes, I would say, Chris, that the teams are, as our rate of innovation has picked up, obviously, that throws a curve at the supply chain that teams are getting much better at planning for inventories, executing the launch and pushing inventories down. So now this has become more a normal cycle in our business op, but we're right on track to meet or potentially exceed our cash conversion cycle goal for the year.

Operator

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

Jason Gere - RBC Capital Markets, LLC, Research Division

Just, I guess, thinking about price as it comes through the sales composition. Last quarter was 3, this quarter, I guess maybe a touch over 2. Just from the area of competitive activity that you're seeing in North America and even to Europe to some degree, are you seeing any risk out there of price rollbacks? Can you just maybe talk about the -- I mean, I know, there's always a timing of when some of the pricing kind of anniversaries, but I guess I was just wondering about the competitive landscape, and then should we expect that the pricing benefit that is built into this year's expectation starts to, I guess, decelerate over the course of the year more than anniversary-ing it but just because there might be a little bit more promotional element coming through?

Thomas J. Falk

That's always a risk, especially as you have a weaker commodity environment that someone will spend it back. I think our primary competitor has been pretty transparent on where their focal point is for pricing investments, and so you guys have read all that, I'm sure. So the areas that they highlighted, I'm sure we'll continue to see activities that we'll be focused on. And from our standpoint, we're focused on driving the business with innovation and driving a better mix overall. We will anniversary a lot of the pricing in the back half of the year, particularly K-C International, but also in the U.S. So the pricing comps will get tougher. And in the meantime, if we can continue to drive innovation, we'll make it that much tougher for everybody to compete.

Jason Gere - RBC Capital Markets, LLC, Research Division

Okay. So at this point, you're not -- even with pulp kind of below the forecast you're not -- and I kind of feel that pulp is at the level now where you took pricing maybe or the lesser on the pricing, so it feels like things are fine at retail, but maybe if you can provide a little color of any discussions with retailers if they're looking for any incremental trade support just, obviously, paying attention to how commodities are trending for you.

Thomas J. Falk

Yes. I don't think they've seen a big enough commodity pullback in any area that would -- that, that alone would drive a major pricing action, and I think most retailers would like to be advantaged as opposed to just seeing a broad industry decrease. So they would like a special offer that's lined up with their particular strategy and are more focused on that kind of a discussion than in trying to get you the rollback industry prices, which just takes dollars of the category and hurts their same-store sales.

Jason Gere - RBC Capital Markets, LLC, Research Division

Okay. And then, I guess, just the last question would be, I think, last quarter, we were hoping to see some stabilization in just North America child care, then just maybe some updated thoughts. I mean, how prolonged do you think this will be that, I mean, hopefully we won't see continued mid-single digit declines year-over-year as you head into 2013, but just your research, your intel, just a sense of where we are in the category, when do you think the category could stabilize?

Thomas J. Falk

I mean, obviously, we're feeling the full effects of 3 years of low birth rate declines, and the birth rate looks like it's going to be fairly flat this year. And so you'll start to see that roll into the child care category as those children graduate from diapers and move into Pull-Ups, and so we would expect that you'll still see relatively soft category comps this year, but it should start to stabilize next year.

Operator

Our next question will come from Linda Bolton-Weiser with Caris.

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

So just another question on pricing. I see that in -- you said in Personal Care International, your pricing was up about 4, I think, and you said driven by increases in Latin America. Can you comment on how the pricing works in other emerging markets besides Latin America when you have these currency devaluations? Do you take price? And how does that work? And is it harder or not harder, like I guess Russia would be an example or maybe some of the Asian emerging markets where there has been some currency devaluations? Can you just kind of comment on the pricing in International outside Latin America?

Thomas J. Falk

Yes, I mean, as you can imagine, it's a fairly complex -- the question depends on the amount of the material that's imported in that particular market versus what's produced in-country. So if a good part of your cost base is in a foreign currency and your home currency devalues, you're going to see pricing happen a lot quicker. So for example, in Russia, as we have moved to producing in-country, now more of our cost base is in ruble so you can handle swings in the ruble a lot easier than if you were importing all the diapers from Europe or from somewhere else. And so in Russia, for example, there has been some price improvement but not to the extent that you'd see in the ruble devaluation. And so, I think broadly, you'll tend to see pricing changes when you have big swings in currency, when you've got a high level of imported content. And beyond that, if it's mostly local, you won't typically see a lot of price swings at that point just because the commodity costs are maybe offset -- the commodity benefit may be offset by currency weakness.

Operator

Our next question comes from Ali Dibadj with Sanford Bernstein.

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Want to go back to emerging market growth in KCI, in particular, and of course the trend looked pretty good this quarter, but I'm trying to figure out the trajectory. So last quarter sequentially, I guess, Personal Care at 19% organic or 18%, 19% in '12. Consumer Tissue at 10%, I think now it's about 4% organic or thereabout. So there's a deceleration, and I just want to get a sense of because it didn't look like comps were much different. I want to get a sense of how you think about that in the context of some of the distribution gains you had gotten, I think, in China, which drove some of the 40% growth this quarter. But also in the context of the overall macro environment that we're hearing about in emerging market, so if you have any thoughts about that given this sequential deceleration, I think it'd be helpful.

Thomas J. Falk

Yes, and I think we talked about last quarter where it was probably -- the comps are going to get tougher as the year progressed, and so you saw a little bit of that in the second quarter. If you look at our sales on a sequential basis, they were pretty similar in dollar terms and there wasn't a lot of new pricing. And so if you factor out the currency effect, you'd say you had some sequential volume improvement and so even though you had a deceleration on the rate of growth year-over-year, you still would see the size of the business growing broadly. And so you looked at Personal Care volumes in KCI, they were up 12 in the first quarter, they were up 8 in the second quarter. Yes, there are some things that were a little softer. Venezuela was a little softer in the second quarter, partly because of some of the price controls and things that went in caused a little bit of disruption there. But I'd say, broadly, in the big markets like China, Russia, broadly across Latin America, we didn't see much change Q1 to Q2, and the momentum still feels pretty good. And obviously, those comps will get tougher as the year progresses, but we're not seeing a big slowdown across the board yet at this stage.

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Okay. Okay, that's helpful. And then in the context of kind of cash conversion or working capital from before, how much of a -- should we expect that the higher level of working capital and that's what we've seen over the past few quarters because of the bigger entry into the emerging markets, this kind of distribution or whatever. Is there kind of just a step-up we should expect or should we expect going back to historical levels of working capital going forward?

Mark A. Buthman

Ali, you mean absolute dollars invested?

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

No. Like I guess, ratio-wise.

Mark A. Buthman

We're at close to -- we're not at the best all-time, but we're under 13% of sales and we think we can continue to improve off of that. Our cash conversion cycle is about 46 days. I'd love to see us closer to 42 and improving beyond that, but we're not planning on significant increments of working capital investment. As our mix of business shifts overseas supply chains get a little longer, but hopefully benefits from lean and better planning activities can offset that. So significant increases is not part of the plan. In fact, we'd like to continue to drive -- we expect to continue to drive improvement.

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Okay, okay. So just the distribution chain in the emerging markets won't drive it too much higher it sounds like. You can get benefit out of...

Thomas J. Falk

Yes, hopefully, our capabilities offset that.

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then last question for me, at least, is around pricing and competition. What are you seeing in the environment? I think you've touched on it briefly in a couple geographies, but broadly, are you seeing any changes? Are you anticipating any changes from your retail discussions? There's a question before about increased trade spend request, doesn't sound like that's happening, but how are you planning for that going forward at all if that were to change?

Thomas J. Falk

I mean, retailers are trying to drive their business overall, so they -- I was walking stores with a major retailer earlier this week, and they're looking for how do you get the right innovation in the store with the right insight on the shopper to drive my category. And so it's not just about an item price discussion with most of our strategic customers. They want to talk about the insights about the shopper and the total relationship that you're trying to build with the consumer. And so that's really where we want to play as well where we're bring innovation, things like the fem wellness category that we launched on Poise; we're getting great support. We want to bring totally new dollars to their category. That's very exciting for them. If you're the fifth guy bringing an idea to them that's already on the shelf, then you wind up having the item price discussion. But where you've got news and real innovation, they get excited about it and want to support you.

Operator

Our next question comes from Caroline Levy with CLSA.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

I have a handful of brief questions. Could you give us market share or at least the direction in China, Russia and Brazil?

Thomas J. Falk

Yes. I mean, I think broadly, the shares would be up just given our outperformance, but I also would tell you that the market shares there are usually sample data. And so like in Diapers, I think if you looked at our national share, we're probably high-single digits, low-double digit, something like that, but it would be up sequentially. Russia, we're probably in the high 20s, diaper market share, which would be the key one that would be up slightly and Brazil in Diapers, we're probably what, Paul, mid-30s?

Paul J. Alexander

Coming up on that.

Thomas J. Falk

Coming up on that. But again, in most of those markets, we're actually looking at -- as much at category penetration and category growth as much as share in those markets because if we can take a mom who's using 1 diaper a day to using 2 diapers a day, we double our business and that's what's exciting about many of these markets.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

I'm just mentioning this in the context of people being very worried about a slowdown in China and a lack of ability for moms to buy diapers, so I just wondered what your huge volume growth, if you think it's share or you think the category really is expanding despite fears.

Thomas J. Falk

Well, I think for us it's -- we were in about 70 cities at the end of the year, we're in 80 cities now. So part of it is we're just expanding geographically. We were in the Super Premium tier and we moved into the mainline segment last year. So in the first half, we're getting better comparisons by participating in the broader part of the category and so those are probably 2 bigger factors that ultimately will translate into an improvement in our national share, but it was more of we're participating in more of the category and that's driving our growth at this point in time in China.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

Yes, that's great. The second thing is can you -- I don't think you did this. Just give us a sense of how much currency, how much worse currency might be in the back half and for the full year.

Thomas J. Falk

Yes, I'll let Paul give you the highlights on that.

Paul J. Alexander

Yes, for the full year, Caroline, currency is going to be a drag of about 3% on the top line, and previously, we were expecting about a 2% drag for the year. All of that is coming essentially in the back half.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

And it skews to the third quarter, I'm guessing.

Paul J. Alexander

I mean currency rates adjusted pretty late in the second quarter, so yes, we're going to feel it pretty quickly in the third quarter here.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

Okay. And at the bottom line, does it tend to have a more significant impact?

Thomas J. Falk

I think we said our commodity inflation was better, about $50 million, and the effect of currency translation and transaction is probably worse, about $50 million. So they roughly offset each other, this time in our guidance for the back half of the year.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

Okay. That's helpful. But obviously, higher quality, if it's currency that's eating in there. In your European volume growth which was extraordinary, can you break out how much came from the nonbranded?

Thomas J. Falk

Yes, I think we said we had high -- we had double-digit growth in branded wipes and high-single digit growth in branded DryNites and Pull-Ups and then had low-single digit growth in branded diapers. And if you look at the private label business in Europe, it's still only about 10% of our overall sales, so we picked up some additional contracts but we had solid growth in our branded portfolio.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

And how do you explain that because Europe's been so horrible for most people?

Thomas J. Falk

Well, we've got a strong business in the U.K. and that's doing well. And actually, a lot of the innovation on wipes was pretty strong across Europe. And I was just in Europe a couple of weeks ago with Mark and some of our other leaders. And yes, Southern Europe is tough, but there are other markets. Our KCP business in Germany, for example, is doing quite well. So there are other pockets where it's maybe not as bad as you might read in the newspaper.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

That's great. And then 2 last question is, major launches for the third quarter, you did strive [ph] a couple of ideas you're supporting, and some companies have reported softness in the kind of grocery channel, the more traditional distribution channel and I'm wondering if you're seeing that, like there are certain areas of retail that are particularly weak and others that are strong.

Thomas J. Falk

Yes, I think you're still seeing growth in e-commerce. You're still seeing growth in a lot of small format retail, so I would not be surprised to see good numbers from dollar stores and drugstores. And then, obviously, the big-box retailers, they'll be reporting their numbers soon. You're going to see those on a monthly basis. So I think in many ways, traditional grocery winds up being the donor for a lot of that growth. So we'll see how that plays out. I mean, a lot of our categories have been shifting for many years out of grocery and into other channels. And I wouldn't say that's accelerating by any stretch, but it's still occurring.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

Just the product launches?

Thomas J. Falk

Yes, product launches, we've got a lot of things going. We launched some things in the second quarter on Depend and Poise, as well as in our -- under our U by Kotex brand. Those will continue in the back half. Got a lot of activity coming on diaper pants around the world where you'll see that hit in a number of markets. And one of the things I'm excited about is we're getting to our international markets much faster with our innovation, so things like the fem wellness platform will be in multiple markets, and it actually it started in Chile and it is moving to other markets rapidly around the world, including the U.S. So you'll see that show up. Our U by Kotex approach to the fem care category will be in more than 30 markets by the end of next year, so we're getting out with our innovation around the world much faster, which is exciting.

Operator

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

Javier Escalante - Consumer Edge Research, LLC

If you don't mind coming back to this issue with U.S. pricing for tissue categories, like bath tissue and paper towels. But hopefully from a different angle, what are you seeing with private label as all the data we have access to suggest that retailers may be using these categories as profit centers as opposed to loss leaders? Do you think that retailers have achieved enough stake in these categories in terms of market share as to become supportive of -- is structurally more attractive margin profile for these categories?

Thomas J. Falk

No. I think it's a true statement that many retailers use private label as a more consistent source of margin because it can't be -- it doesn't have to be comparison price or -- some retailers, particularly on things like branded diapers, will want to have the best diaper price in a market. And so as a result, their margin sometimes erodes because of competitive pricing comparisons. They don't feel the same obligation to do that on private label, so it does, in a category management strategy, typically plays a more consistent margin generator. But I also would tell you, talking to many retailers, they want brands that their shoppers want on shelf at a competitive price and at a good value. And so it's just understanding how do we make sure we make our brands and innovation so powerful that moms come in and want to buy us every day, and that's our task as marketers and as brand builders.

Javier Escalante - Consumer Edge Research, LLC

Understood, but what I meant, Tom, is whether you think that the floor, the pricing floor for private label is going up, so therefore you are going to see a more -- a structurally more attractive category going forward just simply because of these categories are key for them to manage their own profits are maybe using diapers, for instance, as loss leaders instead?

Thomas J. Falk

Yes. I think that we haven't seen much of that yet in any of the data. The private label hasn't followed the last diaper increase that the branded players took, and so sometimes it takes 6 months or more for that to take place. We'll see if that happens this time. It hasn't happened yet.

Operator

Our next question comes from Connie Maneaty with BMO Capital Markets.

Constance Marie Maneaty - BMO Capital Markets U.S.

Just 2 quick questions. What's the split between your developed and developing markets business as a percent of total sales these days?

Thomas J. Falk

Yes, what we would call developing and emerging markets, which is everything except North America and Europe, is high '30s, Paul, I didn't...

Paul J. Alexander

Yes, it's between 36% and 37%.

Thomas J. Falk

Of our total sales.

Constance Marie Maneaty - BMO Capital Markets U.S.

Okay. And then on the increased outlook in the second half, is this coming more from the change in commodities or a pickup in sales growth? And if it's coming from sales growth, why should there be greater momentum in the developed market?

Thomas J. Falk

Yes, I guess a couple things. We'd say there's a lot of moving parts in the guidance. So we'd say better volume overall was part of it, a lot of that from emerging markets. So we factored in -- we're doing better in emerging markets, but categories are a little weaker in some places in North America. The net of that is about a point better volume growth, and we're on that track so far this year. So 6 months in, we'd expect us to deliver that. So that's part of it. Our cost savings number, we took it up from a range of $150 million to $200 million to be more than $250 million, and so that on average is about a $75 million increase. That's a good chunk of it. And then 2 other factors that kind of offset each other were lower commodity costs and weaker foreign-currency rates. And then the final drag was we've got our share count was slightly higher because we're not buying back as many shares due to the price being higher, and as well as option exercises in the first half caused our diluted share count to go up. So that's about $0.05 a share that was a drag. So this may be more of an analysis than you were looking for, but those are kind of the big factors.

Operator

Our next question comes from John San Marco with Janney Montgomery.

John P. San Marco - Janney Montgomery Scott LLC, Research Division

Did you say 10% of Europe Personal Care is private label for you? And then is that number just Personal Care? And I guess the question is are you picking up new contracts in the U.S. as well?

Thomas J. Falk

In Europe, about 10% of our Personal Care sales are private label and in the U.S. we have -- it will be a much smaller number than that, and we have very few private label contracts in Personal Care. We just do a couple of things in training pants and in diapers.

John P. San Marco - Janney Montgomery Scott LLC, Research Division

Okay. And then, I guess, how does the trade down that you referenced in North America and Personal Care, how does that change your strategy or your way of thinking around private label, particularly in the context of the downtime costs that you had apparently the last couple quarters?

Thomas J. Falk

Yes, I mean, in the U.S., the strategy has really been to drive our branded business, so we delivered a product improvement on Huggies mainline in the second quarter. We're starting to see some momentum from that. We've also got product news coming in the back half of the year. We've actually seen some uptick in our Super Premium segment behind some of the launch of diaper pants and other things. So we're really focusing on driving our branded business with innovation across the spectrum, and more of the issue is in the category weakness generally is probably more of the reason for the downtime. And then at the margins, we're seeing growth in some private label, which is mostly coming out of our competitor's share at this point.

Operator

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

Chip A. Dillon - Vertical Research Partners Inc.

First question is on the Consumer Tissue segment. You mentioned in North America the volumes overall were down 4%, but if you look at the individual components, none of them seem to be down that much. I just didn't know what the disconnect was. and you did breakout the loss and the restructuring as well.

Thomas J. Falk

Yes, I mean, probably the biggest one that was down was COTTONELLE year-on-year, which is kind of mid-teens, but a lot of that was promotional timing, whereas Viva was up mid-teens or high teens actually and Scott Towels was actually up a bit more than that. So I think, probably, the bigger size business that drove the downturn was more the comp on COTTONELLE with the year-over-year promotion timing being a big part of that.

Chip A. Dillon - Vertical Research Partners Inc.

Okay. And then looking at the -- you mentioned that the share count probably will be a bit higher despite the increased buyback which, of course, is tied to options. And what I think is interesting, it looks like you've been granting about 2 to 3 million a year in options and yet you ended last year with the amount that were exercisable, sort of at about half what it was at the end of 2010 or 2009. So I guess the question is, with the stock up and people exercising, it looks to me that after this year you might have a very low number of unexercised options. Is that fair? And should we see an increase in grants given the profitability this year?

Thomas J. Falk

I think the other thing is, we're granting a lot fewer options, Chip, than we have in the past. So if you look at the structure and makeup of our long-term incentive program, 75% of the value of grants now goes in performance-based restricted stock. So it would only vest based on performance for our 3-year average sales growth and our 3-year improvement of return on invested capital. And then 25% of that mix is in the form of options, so we're driving it more to pay for performance-based restricted stock and less on options, which we think aligns us better with shareholders over time.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. And then just last, as you look at your -- at the K-C Professional business over the last 3 to, say, 5 months or so, are you seeing any clue as to sort of what you sense is happening on the broader economy based on your customers in that business, maybe within certain segments?

Thomas J. Falk

Yes, I mean, I would say I was pleased with the volume performance in the last quarter, so washroom was up a couple of percent and we were up 1% overall. Safety and wipers were a little lower than that. So I think I would say, anecdotally, that talking to distributors, they were more bullish early in the year on the outlook for the U.S. economy than they are today. I just think that's natural given all the things that have happened since the first of the year that, I think, everyone's outlook for growth in the U.S. has slowed a little bit and so you're seeing that. And so at this point, I think they're all still projecting growth but not as much as they were expecting at the beginning of the year.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. And one last quick one, Tom. When you talk to your retailing customers, as we see several players, First Quality, Clearwater and others bring on capacity that's aimed at private label, do you sense that the customers are going to dedicate more shelf space to the tissue categories than they had in the past or are they -- do you think they might be cutting back on some of what they carry in the brands, the more national brands? Or how do you think that's going to shake out?

Thomas J. Falk

Well, if anything, I think it's going the opposite way where we have a lot of retailers that did SKU reduction and probably felt like they went too deep, and ultimately, they want to carry on their shelves the products that their customers want to buy. And so where customers clearly have a strong preference in this country for brands, they want to carry those brands in the right mix at the right value and then find ways to differentiate themselves from how they bring that to life in the shopping experience. And so we're probably doing more shopper research than we've ever done to bring those insights to our customers to be able to talk about the kind of events that we ought to have and how do we make sure we convert the shopper when she's in the store. And so I think just because somebody built a machine doesn't mean that a retailer's going to want to sell more private label. I think it is more about they want to make sure they're hitting the sweet spot of what their shopper wants to buy.

Operator

Our next question comes from Lauren Lieberman with Barclays.

Lauren R. Lieberman - Barclays Capital, Research Division

Just a couple of follow-ups. First is on the share repurchase. So you definitely said in the release that you expect the share count to be down year-over-year, but are we talking kind of like a 1% decrease? I mean, is that sort of in the ballpark?

Thomas J. Falk

Yes, I think that's about right.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay, great. And then on the new private label contracts in Europe, I just want to check, you'd mentioned that last quarter as well, so I was wondering if there were new additional contracts this quarter or if this is just a continued benefit of the wins from Q1.

Thomas J. Falk

That's a continued benefit of the wins in Q1.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay. And then on SG&A, so outside of the increase in strategic marketing and R&D, like, I'd estimate maybe year-to-date, other SG&A is up probably $100 million. And so I know, of course, there's a piece of that, that rises with sales, but that also suggests maybe some increase in other sort of admin and selling. So if you could -- if you're willing to talk a little bit about where some of those extra dollars are going, that'd be great.

Thomas J. Falk

We just talked about the incentive comp program. And so a good chunk of it is actually incentive comp increases year-over-year. So as you update your outlook for your next 2 to 3 years, that swings your payout levels for your incentive comp programs. And so that's probably -- if you strip that out of our G&A in the second quarter, you would see an increase that was more like inflation. So I think -- so that's part of it and not an insignificant amount. We're having a better year this year, so it swings those numbers higher, and last year, it was swinging the other way a little bit.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay. And with that true-up then have sort of been taken care of this quarter, should I think about that also being higher year-over-year for the balance of the year?

Thomas J. Falk

I'd say it will be higher for the full year than 2011, but I don't think it's going to accelerate from here. I think the other place you'd see -- we're investing in K-C International so you'd see a little -- you'd see faster growth in K-C International. You'd see relatively flat G&A profile on the direct front in North America and Europe, which you'd expect.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay, great. And then finally, just on adult care, you mentioned kind of globalizing that business. And historically, I remember you talking about one of the challenges with globalizing adult care was it was largely an institutional business outside of the U.S. So [indiscernible] how that's changed just from a big picture standpoint or how your approach to the business has changed so that you're overcoming that kind of structural hurdle?

Thomas J. Falk

Well, it's mostly an institutional business in Europe but it's not in the emerging markets, so just the category hasn't been developed yet. And so we're in the process of changing that. So we've got dedicated resources in numerous markets around the world to launch Depend and Poise and other brands that relate to those and make sure we get that innovation out as quickly as we can.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay, perfect. And I guess one other thing would just you mentioned Poise going into sort of the female wellness. Admittedly, it was like if there was a release, I missed it. So if you wouldn't mind just quickly elaborating on what that really means. It sounds like it's a new category almost.

Thomas J. Falk

Yes. As we're talking about it, a lot of times women talk about the first conversation that moms have with their daughters as they're entering puberty. And this is the second conversation as women enter menopause and no one has this conversation with them, and yet women all over the world suffer from all kinds of menopausal symptoms. And so this is a line of products that would help deal with that. It could be a cooling wipe, it could be vaginal moisturizers, things like that, that would be sold in that part of the store. We've actually launched it in other markets around the world, and it's been a nice add to the Poise brand and helped fuel our overall Poise brand growth in those markets. And it's really aimed at having that second conversation with our consumer, so that they know that there's a brand out there that's taking care of them.

Operator

Our next question comes from Bill Schmitz with the Deutsche Bank.

William Schmitz - Deutsche Bank AG, Research Division

Was there any change in the tenor of growth throughout the quarter, because you're getting all these data points that things slowed towards the middle to end of June. Do you see that in either North America or globally?

Thomas J. Falk

No, I wouldn't say so. I mean, it was pretty consistent from a top line standpoint throughout the quarter. No big swings anywhere that I would point to.

William Schmitz - Deutsche Bank AG, Research Division

Got you. And then is there a competitive response to the big diaper initiative that one of your competitors is maybe planning on launching in the back half of the year? Is that going to be a big line? And will you change your sort of promotional activity in response to it?

Thomas J. Falk

I think that we would say, we always want to make sure we're competitive and we -- but we also would say we've got strong innovation plans of our own that we want to make sure we're going to execute against. So you could argue it's their response in response to our Huggies mainline improvement that launched in the second quarter, and so there's lots of things going on back and forth. They're in the middle of radiant launch on fem care. We've got improved U by Kotex products out there, and I'd say when both major brands are innovating, that's good for the consumer, right, and that makes it tougher for private label.

William Schmitz - Deutsche Bank AG, Research Division

Got you. And then this is sort of like a broader longer-term question. But if you kind of look at your profit growth over the last 4 years, like 280% of that growth has come from the KCI business. So how does that change over the next, call it, 4 years?

Thomas J. Falk

Well, I think the exciting part is that we're getting scale in KCI in lots of markets, and that's just building a franchise for us there that we think will continue to grow for the future. And I think if you talk to our KCI leaders, in many ways, they feel like we're just getting started. I mean, we're still in growth mode in China. We're still in an aggressive growth mode in Russia and Eastern Europe. And I was in Moscow about a month ago, and that team is excited and they're going into all kinds of new geography in Eastern Europe and are really just building businesses from the ground up. And so I do still think there's a lot of room to run in our overall KCI size and scale of that business.

William Schmitz - Deutsche Bank AG, Research Division

But the question was more, how do you get the profits up in the U.S. and Europe? Because, like I said, those 2 businesses had declining profits over the last 4 years and if you look at your aggregate profit growth over the last 4, 280% of it came from KCI.

Thomas J. Falk

I'd say, if you looked at Europe in particular, that one's going to be probably more of a stable cash generator for us. I think in North America, we still have pockets of North America that have got decent growth. If you looked at fem care and adult care, those categories are growing nicely and we're seeing good responsiveness, and there are pockets of growth in our Consumer Tissue business. Some of the things that we're doing behind facial tissue as well as moist perineal cleaning and bath tissue, those are growth pockets for us. We've got a good portfolio of growth options in KCP in Health Care that will help in the U.S. market. So we still think there are pockets of growth that we can improve our profitability in North America overtime as well.

Mark A. Buthman

I think, Bill, if you just look at the macro landscape since '09, those geographies have been much slower growing. And particularly in the Diaper categories if you look at birth rates, you see it directly reflect and impact kind of our largest profit contributors. So there is a macro overlay here, but we're doing -- within that, doing all that we can to drive both category growth and profitably.

Operator

At this time, we have no further questioners in conference.

Paul J. Alexander

All right. We'll turn it back to Tom for a closing comment.

Thomas J. Falk

Well, once again, we're pleased with our execution in the first half. We're off to a great start, and our Global Business Plan is delivering the kind of shareholder value that we'd expected. Thanks for your support of Kimberly-Clark.

Paul J. Alexander

Thank you.

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