kimberly-clark corporation (kmb) ceo michael hsu on q4 2018 results - earnings call transcript - super absorbent nappies
Clark Corporation (NYSE:KMB)
ETCompany participants Alexander-2018 earnings conference call at 10: 00 a. m. on January 23, 2019
Xu Xue, Vice President of Investor Relations
Chief executive Henry-
Chief financial officer attending conference call
Wendy Nicholson, Morgan Stanley
Bernstein Bonnie Herzog
Jason English Wells Fargo
Goldman Sachs Group-
BankOlivia Hall, Germany-
Bank of America Lieberman-
Royal Bank of Canada Capital Market
Jefferies Steve Strycula
Uber Jonathan Ferney
Dear consumers, thank you for your patience.
We have your speakers at the meeting now.
Please note that every line of yours is listening --only mode.
At the end of today's speech, we will begin to ask questions.
At that time, if you would like to ask an audio question, a description of the procedure to be followed will be given.
Today, I am very happy to introduce you to the first host today. Paul Alexander.
Thank you, Paul Alexander. good morning, everyone.
Welcome to Kimberly. Clark's year-
The conference call is over.
Mike Hsu, our chief executive, and Maria Henry, chief financial officer, are with us today.
This morning, Maria will discuss our 2018 results and 2019 outlook.
Mike will then discuss our medium-term strategic focus and financial objectives.
Our remarks this morning will be a little longer than normal, but we will end up with a Q & A as usual.
We will ask each analyst to limit their questions to a few, so that we can ask questions to everyone efficiently.
As a reminder, we will move forward.
For the latest annual report on Form 10, see the risk factors section-
K for further discussion
Look at the report.
Finally, we will refer to the adjusted results and outlook;
Both ruled out certain items described in the news release this morning.
This version provides more information about these adjustments and reconciliation.
Now, I will transfer the phone to Maria.
Thank you, Paul.
Good Morning, everyone.
Thank you for joining us today.
Let me start with the headlines of our annual performance.
We achieved 3% organic sales growth in the fourth quarter and 1% growth throughout the year, which is in line with our goal.
This is a challenging macro environment where our profitability is affected by commodity inflation and currency volatility.
Nevertheless, we achieved significant cost savings and higher sales prices in the second half of the year, we improved capital efficiency and returned a large amount of cash to shareholders.
Now, let's take a look at the details of our results.
Starting with sales, net sales for the whole year are $18.
5 billion, up 1%.
Sales of organic products increased by 1%, including 2 percentage points of active pricing in the second half of the year.
Look at the top-
According to geographical location, organic sales of consumer goods increased by 1% in North America, driven by an increase of more than 1% in personal care, including an increase in the number of infant care and adult care. In K-
C. professional in North America, organic sales increased by 3% due to increased sales in all major product categories.
Sales of organic products rose 2% in emerging markets.
In terms of the main personal care market, organic sales in Eastern Europe, ASEAN and Central and Eastern Europe increased by double digits
Single digits in Latin America, but lower-teens in China.
In developed markets outside North America, sales of organic products rose by 1%.
Turning to profitability, the annual gross profit margin is 33.
2%, down 270 basis points year on yearon-year.
Commodity prices fell $0. 795 billion.
This is a whole
Beyond our original plan assumptions, $2018 to $0. 3 billion reached 0. 4 billion.
Foreign exchange is also at the forefront.
Together, these two factors reduced operating profit by 20.
Including our troops and restructuring plans, we saved $0. 51 billion in costs throughout the year.
The restructuring saved US $0. 135 billion, far exceeding our initial target of US $50 million to US $70 million.
In the first year of this project, we have made outstanding progress and our overall plan is still on track.
While saving $0. 375 billion in labor costs, we did slow down in the fourth quarter.
The performance of the quarter included an increase in transportation and distribution costs in North America, in particular an increase in transportation and distribution costs for consumer organizations, and an increase in some manufacturing-related operating costs.
These factors are controllable for us and we will pass them in 2019.
Move between profit and loss-the-
Line spending as a percentage of net sales fell by 130 basis points, reflecting the benefits of restructuring being tight management and discretionary spending, followed by lower incentive pay.
The adjusted operating profit margin was 17%, down 140 basis points, and the adjusted operating profit decreased by 7%.
Our adjusted actual tax rate in 2018 was 21%, down significantly year on yearon-
Below our original plan.
Adjusted earnings per share for the year was $6. 61, up 6% year-on-
Driven by lower tax rates.
Our guidance for October is $6 per share. 60 -$6. 80.
Now, let's talk about cash flow and capital efficiency.
Cash provided by the operations department was $3 billion, up slightly from a year earlier --on-year.
We have shortened the liquidity cash conversion cycle by five days, and increased the adjusted return on investment capital by 240 basis points, 26 basis points as of this year. 5%.
In terms of capital allocation, the total amount of dividends and stock buybacks was $2. 2 billion.
This is our eighth consecutive year to return at least $2 billion to shareholders.
Now, let me talk about our 2019 outlook.
We expect the environment to remain challenging, albeit better than in 2018.
Our goal is to provide solid improvements to our operational performance, including higher organic sales growth compared to our 2018 performance, and higher operating profit and profit margins. On the top-
Total sales are expected to fall by 1% to 2%, including expectations from the currency of 3% to 4% against the wind.
We plan to grow organic sales by 2%, which is similar to our expectations for overall market growth.
We expect a net price increase of at least 3%.
In the second half of 2018, the progress we have made in achieving prices foreshadowed our 2019 plan.
Given the overall pricing level, we expect to achieve or plan some negative batch impacts, especially in consumer organizations.
We have introduced many innovative products in the program and we will support our brand through strong marketing programs.
In addition to sales, we plan to increase our adjusted operating profit by 1% to 4%.
At the midpoint of our guidance objectives, this means an increase in margin of 70 basis points.
On average, we expect that the total amount of goods and money will adversely affect operating profits of about 20%, including the high single digit drag on the currency exchange rate.
We expect to offset most of them at higher prices.
We expect commodity prices to rise 0. 3 billion to $0. 4 billion.
This is much less than what we experienced in 2018, and we think it represents a cyclical peak of the Year --on-year headwinds.
Our goal is to save a total cost of $0. 4 billion to $0. 45 billion.
This included $0. 3 billion to $0. 325 billion in troop savings and $100 million to $0. 125 billion in restructuring savings.
Our goal of strength reflects that the value generated by our commodity contracts is less than what we have achieved in the past few years.
In addition to that, we expect other components of our FORCE program to perform strongly.
In addition, restructuring activities and savings related to the supply chain will increase in 2019.
Overall, we continue to be confident in our ability to deliver healthy supply chain savings in the future.
We expect the adjusted effective tax rate to return to a more normal level between 23% and 25%. At the mid-
Represents the point of the Year-on-
Annual earnings drag about 3. 5%. All-in-
We aim for a year-round adjusted earnings of $6 per share. 50 to $6.
70, in the middle
The point is basically Year-on-year.
In terms of our income situation, we expect revenue in the second half of this year to be higher than in the first half.
This is mainly due to the expected time of net income from rising sales prices.
Finally, in terms of cash flow and capital allocation, we expect cash from the operations to be slightly lower than our strong performance in 2018.
We expect to allocate between $2 billion and $2.
Dividend and share repurchase 3 billion.
We plan to buy back Kimberly-$0. 6 billion to $0. 9 billion-
Clark shares, in addition, our dividend increased by 3%, which is an increase in our dividend for 47 consecutive years.
Now let me hand over the phone to Mike.
Thank you, Maria, Michael.
Good Morning, everyone.
Maria introduced you to our results and the 2019 outlook, and while we are not happy with the profit in 2018, I am encouraged by the following points.
We resumed organic sales growth and net sales price increases in the second half of the year, including strong fourth-quarter results.
Of the 80 categories of countries that we have tracked, our market share has increased by about half.
We have used our financial discipline to make outstanding progress in global restructuring.
Because this is my first revenue call as CEO, and I want to tell you that I'm on K-C's future.
This is a great opportunity to lead this great company and it is a real honor.
Our strategic focus is to develop our portfolio through iconic brands, leverage our strong cost and financial discipline, and distribute capital in a way that creates value.
We call this K.
C. Strategy 2022, which is how we intend to achieve balanced and sustainable growth and create shareholder value in an environment that we see as continuing to be challenging.
So, let me outline some ideas.
First of all, we will continue to strive for excellence in cost and be the manager of shareholder capital.
These will always be the hallmark of Kimberly. Clark.
Second, driving top-
The growth of the product line will make us pay more attention to consumers and better meet their needs in the past few years.
To this end, we plan to develop and roll out more meaningful innovations, increase investment in digital marketing, and improve store sales execution.
While our business capabilities push the top-
I believe we can make them better.
We are launching internal plans in these areas to strengthen our capabilities, just as we have made continuous cost savings an exceptional capability.
Now, let me describe our growth priorities in the next few minutes.
We intend to align or slightly lead our signature brand portfolio with our category.
We start with a strong position.
We built some of the best in the world.
We have well-known and trusted brands with one or two market shares in 80 countries.
Our goal is to maintain or increase our overall market share, especially in key areas.
We have three major growth pillars, all of which are consumer-centric.
First, enhance core business.
Improve the product experience, make our products more valuable, and let more consumers put into work.
We will introduce differentiated product innovations to drive growth in the core market.
These innovations will be based on a deep understanding of consumer insights.
We will provide better performance and drive deals.
You'll see some examples of the end market in 2019, including baby care.
Through our global restructuring, our upgraded and more standardized manufacturing footprint will help us bring innovative channels to global markets faster and more consistently.
In addition to innovation, we will also develop our core business by deploying category expansion marketing, including in under-penetration categories such as adult incontinence and training pants, which is how we build dependence,Ups.
Net income management will also help us develop our core business.
With more process discipline and more consistent tool use, we can generate more revenue through pricing strategies, promotional effects, and product portfolios.
Our second pillar of growth is personal care and K-C Professional.
D & E accounts for about 30% of the company's revenue, and while we have achieved great success here, D & E is still our biggest growth opportunity due to the relatively low class penetration rate and frequency.
We have the resources and plans to succeed in the future.
For example, we will invest in driving the category development of diapers, and if the average expenditure per baby rises from 35 billion today to 15%, this is an incremental market opportunity of $1 per 3.
We will also invest in women's care, adult care and baby wipes, which have great penetration opportunities.
Our priority market is the personal care market in Latin America, China, Eastern Europe and ASEAN.
We will also book some early markets like India and Africa that are relatively small today but have a long timeterm potential.
Like developed markets, we will also deploy innovative models based on consumer insights in D & E.
As part of our restructuring, we are moving more R & D resources in the local market to achieve better and faster innovation.
We are adopting and deploying models for smaller markets.
In addition to innovation, we will drive growth in store sales execution by optimizing distribution, pricing, shelf and merchandising.
We will also deploy categories to build marketing campaigns and
Help develop market activities in these markets. In K-
C only 20% of the professional's business is in D & E.
With the continuation of industrial and economic development, we have a lot of blank opportunities. Our near-
Key markets will include Latin America and China.
Our third pillar of growth is to drive digital marketing and e-commerce. commerce.
By numbers, we can buildto-
A consumer relationship that will enable us to create the greatest lifetime value for our consumers.
We will invest more in digital marketing and help us build these relationships.
Today, the numbers are about half of our portfolio of working media, and that proportion is growing.
We deploy data.
Aim for precision, engage with consumers in the right content at the right time, drive and eye-catching marketing.
We have gained extensive experience in China, South Korea and the United States and plan to use this approach more globally to attract, acquire and retain consumers. Data-
Driving digital marketing and dynamic content development helps us to increase consumer engagement, loyalty, and return on investment. In addition, e-
Business is an important and growing part of our business.
Revenue from this channel has grown by double digits, accounting for about 10% of total revenue.
Our online stock in major countries is slightly above or similar to our offline position.
Our products are well positioned compared to the environment, because they are highly recognized and trusted by consumers, and because they are important traffic drivers, they are also crucial to helping our customers grow.
We plan to leverage our capabilities to attract our brands to capture opportunities that exist in e-commercecommerce.
Digital marketing and e-commerce
At the same time, our strategy will further enhance the core business and accelerate the development of the R & D market.
We have a strong portfolio of brands, the right strategy and organizational structure, and have laid a solid foundation for future development.
We also have many opportunities to accelerate our ability to drive growth.
We have excellence all over the world, and I hope that we will push for more consistency on a global scale and achieve gradual change in overall capabilities.
Our second strategic focus is to leverage our strong cost and financial discipline to fund growth and increase profit margins.
We have a strong tradition in this area and we look forward to moving forward.
We will drive continuous supply chain productivity through our FORCE program.
The troops saved 3.
We expect to save 4 billion of our money over the past decade.
We will also continue to implement the 2018 restructuring plan.
This is the biggest restructuring in our history. it makes us more streamlined, stronger and faster.
We will strictly control discretionary spending to help us stay ahead.
SG & A-level cost structure, we will reduce working capital through global supply chain planning and improved manufacturing footprint.
Our last strategic focus is to distribute capital in a way that creates value, which is very consistent with how we have historically operated.
After we complete the restructuring, we will reduce the annual capital expenditure target from the current target 4 to 4% to 5% of net sales. 5% to 5%.
We plan to continue to provide shareholderstier dividend.
We will evaluate M & A opportunities in a disciplined manner and be biased against Tucker
In transactions of existing categories.
M & A is not expected to be an important part of our growth strategy.
Finally, we plan to allocate healthy cash flow for stock repurchase.
Now, let me talk about our medium-term financial goals. C. Strategy 2022. Our top-
Our goal is to increase sales and organic sales by 1% to 3% per year.
The hypothetical category growth is in the range of 1% to 2%, similar to the recent situation.
Macro-adverse factors in Latin America, declining birth rates in South Korea and the United States, and price competition in Chinese diapers have all affected category growth in the past few years.
We believe that these factors are largely cyclical and we will focus on pushing these categories, but we also think it is appropriate not to plan too many improvements now.
Depending on how our category develops and whether our plan is successful, we will strive to achieve the first half of the range of 1 to 2 goals.
In conclusion, our goal is to increase the adjusted earnings per share every year.
We expect operating profit to grow by 3% to 5%, which means that the annual operating margin will increase by 30 basis points to 40 basis points.
Our strategy is to increase gross margin faster and reinvest in advertising and marketing to drive profit growth.
Continued stock buybacks will also benefit growth in earnings per share.
In terms of capital efficiency, our goal is to at least keep our top ROIC at the current level.
Over the past 15 years, our ROIC has almost doubled and is now over 26%.
We will continue to adhere to our investment strategy, but we will not give up the opportunity to create attractive returns that may be below our overall average.
Finally, our goal is to increase the dividend based on the growth of adjusted earnings per share.
Our payment rate is in our 60 s and our yield is around 3. 5%.
We still believe that strong dividends are an important part of our investment plan.
In my view, these interim financial objectives are appropriate and realistic in the current context.
In the long run, we are still very optimistic about the potential of our category and business.
Our product categories are essential to consumers and have great opportunities for development.
The brands we invest in behind are very strong and we focus on improving our key growth capabilities.
This morning, I outlined the key components of our medium-term strategy.
We look forward to sharing more information with you and updating our progress to you as this year progresses.
Overall, we are confident in our ability to create shareholder value by successfully executing our strategy.
This is the end of our prepared speech, and now we answer your question. Question-and-
Ladies and gentlemen, at this time, your question is now available. [
Our first question came from Dara Mohsenian and Morgan StanleyDara Mohsenian, good morning everyone.
Maria Henry, Dara
Dara mohsenian so in the 2022 strategic change, it is helpful to hear about the areas you are focusing on and how you can achieve your goals.
I would like to know, in response to the three strategic priorities of core R & D, digital marketing and e-commerce that you mentioned, what is the net level of incremental investmentcommerce.
Will this strategy change your structure or how it is executed more, or should we assume there is incremental investment behind them.
On the other hand, in terms of the cost savings you mentioned, are you announcing the actual incremental cost savings today, or are you executing more on the projects you previously announced?
Thank you for your question.
I will start with the first part and I would like to say that the overall game plan is that we do want to increase the overall investment in the brand, such as driving our advertising and driving our revenue growth.
Market execution, investment, and our digital marketing.
But I do think that's why we're restructuring.
So, the basic premise of restructuring is to create the space and investment funds we need to drive our business.
Maybe from my point of view, in terms of our future, what is the bigger concept that needs to be different, one, I think you get the information, which is a big concern for consumers, I think we have the opportunity to improve our game level in how we treat consumers and how we serve them.
I think what we're going to do here may be to mimic what we're doing in terms of cost transformation, which we 've always been very systematic and put in a very strong management system to drive cost transformation, we try to push what we call business discipline in the same way, and that's how we manage our innovative resources, sales and marketing resources to drive growth, and then on the cost savings issue, maria, would you like to accept this question?
Maria henreyer, there is no new news there in order to save costs.
This is the continuation of the restructuring plan that we have announced and are implementing, and the continuation of our troop cost savings plan.
Dara morsonian, okay? That's helpful.
Then in the 2019 outlook, 0. 35 billion of the input cost pressure.
Could you please elaborate on some of the key basic assumptions for oil and pulp prices?
It looks like A & P spending has risen in sales in the fourth quarter --over-year.
Do you expect this to be included in your guide for 2019? Thanks. Maria Henry Thurs.
I will advertise first and then show you the prospect of our goods.
Advertising spending in the fourth quarter of 18 was higher than in the fourth quarter of last year, but in the fourth quarter of last year it was lower.
So this is in line with our expectations and this yearover-
This year has more to do with the trends we saw last year.
Relatively stable throughout the year.
Looking forward to next year, we do intend to fully support our brand and the innovations we have launched in the market.
So we will see how the numbers change, but we will continue to support them.
Maybe, I don't know if we give the specific numbers for the ads, but that's still the central focus of the strategy outlined by Mike.
From the perspective of our commodity outlook, I will comment in the fourth quarter, and you see that this is one of the drivers we mentioned to put pressure on the gross profit margin of the commodity rise, in the fourth quarter, fiber is generally flat for us, which puts some pressure on gross margin.
But if I look forward to 2019, I will pick some key items: on eucalyptus, we expect this number to drop to the middle and high single digits;
We expect secondary fiber in the medium term. teens;
On another key input cost, we expect polypropylene to decline in the medium term
Single digits, we expect the super absorption capacity to be similar to what we saw in 2018.
With regard to crude oil, we expect it to be in its 50 s, but it will drop from $66 a barrel this year.
But the correlation between crude oil and polypropylene and high absorbent resin has not proven to be strong in the past few years, which is why we have seen some differences.
As far as some of our other fiber types are concerned, we expect these fiber types to appear in 2019 as well.
So we still expect 2019 commodities to be inflation, but not as much as we saw in 2018.
Michael HsuDara, let me tag here.
I will tell you, though, that 2019 we plan to make solid progress, and I think you can see that, and what we plan to achieve, we are improving the organic growth and overall form of our gains and losses, so one of the things we were encouraged in the fourth quarter is that we saw a net selling price increase and we are confident in the 2019 plan.
With growth of 1% to 4%, our key growth prospects have also improved considerably, which is a 70-basis profit margin expansion, so we feel better about it.
Obviously, we are not happy with the growth of EPS, but we do have such growth --
Both money and taxes have been delayed.
Dara morsonite. Okay.
Very helpful. Thank you.
Michael HsuThanks Dara.
The next question comes from Wendy Nicholson and Citi Wendy Nicholson.
First question, the organic sales growth you are predicting for 2% years.
Can you give us targeted personal care? What are your expectations for each segment relative to the consumer organization? Maria Henry.
We will not provide specific guidance by market segment in 2019.
But I think there are more prices in consumer organizations.
Is this a fair assumption?
Yes, that's it.
The second problem, however, is that there is a general belief that the growth of the D & E market is accelerating.
Mike, I appreciate everything you have experienced in restructuring your business and think a little bit about how to reinvest.
But if you look ahead in the next three years, would you say those D & E markets? I have a lot of thinking about China and markets like Brazil and Mexico.
Do you think the profit pool for diapers and sun protection businesses in those D & E markets will increase?
It seems that the level of competition in these markets has intensified.
I'm just wondering if that means profit actually decreases when you accelerate growth. Thanks.
Michael HsuYeah, Wendy thank you for your question.
You know, first of all, you can tell us that we are very bullish on D & E and I think that's the future --Why that is?
I think what is your problem.
Of course, we have seen pressure and competitive pressure in China, and everyone is aware of this. And so -
But our team is doing a good job and they are building a win-win Enterprise for a long time.
This is a market where consumers still want to see the premiere and they are still buying products with better performance.
So we do need to build a profit pool.
We need to keep an eye on our profits in China.
Brazil, I think we have seen progress.
This quarter, we will
Young people, healthy growth in prices, healthy growth in sales.
I think our team did a good job there.
What really drives this is that they are very self-disciplined in price management, cost management.
Also a key component of future strategy, what I'm talking about is business discipline is that sales execution drives our growth because our prices are actually double
Figures from Brazil this year.
Actually, the volume increased because of execution. If I can -
If I could-
I'm sorry, Wendy Nicholson is just a question about pricing in Brazil, is it for the overall business or is it just diapers?
Or does this include Sunshine Care as well?
Personal care for Michael.
Wendy Nicholson received it. Okay, fine. Michael HsuYeah.
Maybe back to your original point, which I think is the choice --
If I can say that my point is understood by nearly 30 years in and around the industry, and has seen a lot of companies and working in other companies that work in different ways
For a few different reasons, I am very excited about the opportunities for the future, you know, first of all, the blank opportunities you just highlighted in D & E
I mean, it's true to us, right?
If I say, hey, it's going to be 10 billion or 50 billion during this time, both of these numbers may be right.
Due to the low level of development, there are a lot of inherent growth in our category.
So this is a big deal I see, it's different from what I see in other companies.
The second thing, even in developed markets, I really believe there are a lot of opportunities to expand our category through what I'm talking about, and that's what I mean by the value-added premiere, right?
In fact, I think we can solve larger problems or meet certain larger unmet needs for our consumers in different ways, and expand the available value in the category and make the category
So this is the second one.
I think we are in the third area of digital opportunity.
We are approaching all the holy grail areas marketers dream.
It creates more value in our category, because consumers use our products every day, they spend a lot of money on products, and they stay in these categories for a long time. time.
So we are very fast on approaching consumers and jumping on the digital train.
Wendy Nicholson received it. That's helpful.
Thank you very much.
Michael thanked Wendy.
The next question is from Ali dibaji of Bernstein.
Hello everyone, I have three questions.
One is, in addition to that, there is almost a rebase tradition when a new CEO starts.
By the way, Mike.
Why now is the time to give the 2022 prospect as we have seen a somewhat challenging result for several years.
Anything you 've seen recently in consumers, competitors, or retailers really prompts you to say OK, God, we need to reset between now and 2022.
Why is it just a 2022 why not long
And semester guidance? Michael hsuokYeah.
Ali, I think I saw the rebase term and I don't know if my team will feel this wayit's a rebase.
I do think we are working hard, even on 2019 figures, and I think we have made progress in both organic and operational profits.
But I would say, these are in the middle.
We said, hey, in the next four years or so, they really reflect what we see in the market and what we expect from the market situation.
I absolutely believe us.
We have a long time. way to long-
The term growth potential in our category, and absolutely believe that as leaders, we play an important role in driving the category to achieve this, and that's what we do at K-
C There are about 2022
However, given some uncertainty that we see in this environment, I don't think it would be wise to go out at this point for more than four years.
So that's why we're moving in this direction here. Ali DibadjOkay.
This is very helpful.
Then, at this point, you know, under the umbrella of caution or carelessness, you talked about 30 basis points to 40 basis points in the prepared comments, the average operating profit margin in the next three or four years is higher than the gross profit margin.
Can you talk about what the driver is doing?
You just put the goods flat?
Do you have a new barrel of gross margin boost?
Then, if your operating profit margin actually improves by 30 basis points over the next few years to 40 basis points, ROIC will remain stable.
This means that the capital turnover you invest in is getting worse and worse, or certainly not improving, and it sounds worse and worse.
Does innovation require more capital spending? Is that more -
Are emerging market assets less efficient?
I mean, what is driving the ROIC? Michael HsuYeah.
So maybe, Ali, I'll start, and then maybe Maria, you can-
Maria Henry, of course.
Perhaps the first part is an increase in operating margins, which is obviously our power plan.
Maybe it's soft 19 years, and I think people understand that because of the goods, in fact, we do have plans to continue to improve our gameplay and our overall cost-saving approach, despite that.
The important thing is, I think the strategy we're talking about here is
C 2022, we do intend to premiere our business, which will drive profit and mix.
Then, another thing you and I talked about in the past is that net income management is a more important part of our future strategy.
So we look forward to taking a step forward in getting the price tag this year, but we also have the opportunity to be more strategic in price to drive the trials or deals we want or the mix we want.
Then, we have a big opportunity, and I will compare it to an opportunity to save labor costs, from how we see our trade spending and how we get more efficiency in trade spending.
Perhaps my analogy to you is that we have made great progress in OEE over the years, and I think we have similar opportunities in trade. Maria Henry. And then I -
We would like to see an increase in gross margin so that we have more investment space in key areas that maintain the top growth of the flywheel.
So this algorithm makes sense to us.
On ROIC, the biggest driver of the next few years, Ali is an investment in restructuring projects.
We discuss the fact that when we execute this procedure, we expect to have incremental capital expenditures of $0. 6 billion to $0. 7 billion.
We did a great job in restructuring in 2018 and a lot of what you see is on SG & a's side.
So the 80% savings this year are actually coming from there, and as we get into 2019, we start to seriously look at the supply chain part of the project.
Incremental capital expenditures will therefore be based on assets.
From restructuring, we will also influence our ability to drive improved working capital.
So while we have some plans to improve working capital in the area of inventory and accounts payable.
As you can imagine, when we are cleaning up new assets or are cleaning up existing ones, we expect that we will build inventory around that, to ensure that while we transfer our assets, we are able to meet customer expectations without interrupting our services.
So both of these things will be under pressure, which is why ROIC's prospects are even more bleak. And at 26.
If you take us as the benchmark, we are clearly in the lead.
As Mike said in his comments, we will not hesitate to invest in opportunities to create value, and we will do so even if they are diluted. Ali DibadjOkay. That's helpful.
My third question is 2019 tax.
I think we 've heard a lot of retailers trying to reduce the number of their suppliers, suppliers, including baby care, and even in some cases really trying to go to private labels.
Can you talk about your expectations for 2019 shelf space for some major retailers in the USS.
But maybe in Europe?
Ali, I think this is a good question.
I think maybe we see this in some pockets, maybe in some smaller retailers, but in our current plan we plan to expand distribution across the board.
So this is the focus of our attention.
You may know as well as others that distribution is often one of the biggest share drivers, so this is a big area of focus for us, not just in the USS.
Thank you very much.
Thank you, Michael.
Our next question comes from Bonnie Herzog and Wells Fargo.
Okay, Bonnie Herzog.
Thank you. good morning.
Good morning, Bonnie.
The first question.
Good morning, I just raised a short question about your medium term organic top growth target 1% to 3%.
Curious if you expect a rebound between price and quantity to be better than what you see now?
Michael HsuYeah, of course Bonnie and what I think and embed in it is not just list pricing, as I mentioned earlier in my conversation with Ali, for us, net income including list price I call it strategic price package architecture, right.
The third is the efficiency of trade expenditure.
My second question is promotional spending.
While looking at the track channel data, I think you guys seem to have pulled out of the promo and several categories in the last few months.
In fact, if this is true, it's too curious.
If so, in general, it shows that you think the promotional environment is becoming more rational, or that it's just something that's more strategic for you, you are consciously making decisions that may be sacrificed to support your profits and now have some market share. Michael HsuYes.
Great observation, what I want to say is that you can see from our actions, especially in North America, we are facing huge inflation, and I think we are making the right choice, to drive the business in the direction we need it.
If you remember about two years ago, 18 months ago, we were doing promotions because of some competition.
I don't know-
Write the business or category more reasonably, but I do think the market is looking at it at the moment, or at least have a similar concern with us that is recovering cost inflation, and make sure our profit margins are protected.
That said, if you take a closer look at home care in North America, I mean, the overall price of organic food goes up 2, the price goes up 6, and then we have about 4 points in volume, this is planned.
We said, I think in the previous call, we will reduce the promotion in the fourth quarter.
I will tell you that as a leader, we will not provide quarterly guidance on organic food, but I will tell you that there may be some confusion in terms of our organic products or price realization, because of the reduction in promotional activities, we achieved higher prices in the fourth quarter of North America.
If you would like to take a look at the first quarter of home care, I think sales on home care grew by 9% last year due to additional promotions, and we are going to scale back this year.
Bonnie herzogoVery helpful. Thank you.
Michael HsuOne, I would say that Bonnie is the basis for it, especially in bathtubs and towels in North America, the underlying trend is very healthy, in the right direction behind some of the inflation we are working on.
Thank you, Bonnie Herzog.
The next question is Jason English from Goldman Sachs.
Jason, Maria Henry.
Hi Maria. Hey, Michael.
Good Morning, everyone.
Thank you for answering my question.
Happy New Year and congrats to officially take power.
There are a few different questions here and I will try to answer them.
First of all, Maria, I understand the labor savings and why you expect so few figures this year.
Can you tell us how much labor you have saved in the past year or in the past two years?
In the structure of the cost reduction base, how much is the real structural structure, and how much is just a better purchase than the market?
Maria HenryYeah, we do provide every detail, but I can tell you that the material we save through negotiation creates great value, this is the value we get from basically better purchases than the market, in your words.
When I was looking forward to 2019, it was part of the cost savings for the troops, lower than the couple --
In the past few years
When our contract is reset, we still get value from these contracts, which is positive, but the value of the contract is lower compared to 2018.
That is why the number of troops is affected.
Other components of our unit plan have a healthy level of activity and savings associated with £ 2019.
If the spot price is rolled or weakened from the current level or your planning assumptions.
Is it fair to assume that your unit savings will be dragged down?
Spot prices fell.
What I would like to tell you is that part of our purchase has short term contracts which help stabilize our forecast, but 100% of our purchases are not covered.
So it appears in numbers.
It will not necessarily have a big impact on the troop cost savings figure.
Jason is very helpful in English. Thank you.
The last problem, the edge of the organization has basically appeared for understandable reasons.
I think you have lost more than 400 basis points in the past few years, but despite the 5% increase in prices this quarter, we are done. We finished the game with the lowest profit margin in years.
When we consider the medium term, what do you think is the level of sustainable profit margins for the business?
Is there a way to go back to the peaks we 've seen before, or we 've done it on the faint notes.
Are we still trying to build a lower, more lasting profit structure for the business?
Maria Henry, I'll make a comment, and then Mike can chime in at will.
I'm going to comment on the organizational margins in the fourth quarter, just to highlight that we're not only seeing inflation, and I also talked about what commodities we saw in the fourth quarter of inflation but the implementation challenges we faced in the fourth quarter, which reduced the cost of troops.
One of the biggest areas affected by this is the North American organization, and what happens is that the combination of orders coming in at the brand packaging level is different from what we expected.
Therefore, we do not necessarily have the right products in the right place to obtain efficient distribution to meet the needs of our customers, because we have a lot of logistics costs for each other milling shipments in the consumer organization business, we also lose the opportunity to make productivity because we are running products on some assets that do not necessarily optimize products for those assets.
So the consumer organization business, especially the consumer organization business in North America, has some additional spending in the fourth quarter, which does fall in profit margins.
Mike, what you're trying to say is
How we see the organization.
Michael HsuYeah, just comments on Jason for the fourth quarter, I worked closely with the North American home care team for a long time and they were a great team.
The trick to this business is, I said it's like driving an 18-wheel car and needs to turn like a Ferrari, right?
So it's a big deal, and I think what's happening is that where our inventory is and where the customer needs to be a bit out of sync, which adds some extra cost, then we had some equipment problems.
So I think I'm confident the team will get it back and it may take a quarter or two to get back on the right path.
But we will solve the operational problem.
We always say on paper towels that we want these profits to be on middle and high age teens.
We're still on the edge of Harris [ph]of that -
But I think we're going to make progress because, first, we're going to take back some of those operational issues.
The team pays great attention to the realization of price.
Similarly, the strategy is to upgrade these categories. this means to premiere through value-added innovation. this is our focus and is very helpful. thank you.
Thank you, Jason, Maria Henry.
The next question comes from Steve Powers of Deutsche Bank.
Good morning, Stephen PowersHey.
So, if I can, I just want to try to show more guidance for next year and maybe connect Mike to the 2022 target because the forecast requires a net sales drop of 1 to 2, despite the unfavorable inflation and foreign exchange, profits rise by 1 to 4 and I think what you call Maria is the 20% headwind of profits.
To understand the cost savings that you are queuing up for, it basically looks ready to offset the inflation of basic goods and some translation effects, like I am doing math, if not entirely dependent on the implementation of net prices, so the forecast is good, and it really doesn't seem to allow a lot of reinvestment behind these early strategic 2022 plans, like e-commerce.
Investment in business, marketing and end markets.
I guess I just wanted to test if it was fair.
I know you mentioned the plan to invest in digital marketing next year and I understand that and I think it's positive, but, do you have room for a net investment in overall marketing next year, and do this well, you need an E-commerce platform
Changes in business and market structures like China are only mathematically tense, and I just want to know something about it. Thanks.
Michael HsuYeah, Steve-
Pricing is, of course, a key component of our 2019 plan and a key planner for us, but we do.
Increased investment in advertising A & CP portfolio, and more importantly, we are turning to numbers that are more efficient for us, so we have all these elements, Maria, what would you like to add?
Maria henryah, I think
If you just want to get it out
The outlook for next year is that we have put money as a headwind factor, we have input cost inflation, and we expect strong pricing for both, so, if you look at the currency commodity price combination for the whole of 2018, this is a drag on operating profits in the mid-20th century.
With our pricing next year, we expect this to be-
Very strong coverage.
So maybe the combination of the two looks more like a singles in terms of operating profit, and then we can benefit from the restructuring savings of P & L.
We have saved a lot of cost in profit and loss, and when you put all this together, we can change the operating profit.
Okay, Stephen PowersOkay.
So I think at that time
It sounds like you don't see much risk, but I think you know how you are holding back the pricing risk you expect --
You just failed in the context of fierce competition.
If I can answer another question, then I will continue to talk about it, but focus on China.
Mike, I know you said you like what the team is doing in positioning the business for the future, but, if you take a snapshot today, you obviously lose some base, just like what you reported today and what P & G reported.
So I guess what is the plan there, or what is the component of the plan, and what should we consider in terms of the cost and time to achieve future success? Thanks. Michael hsuokYeah, thanks. Thanks Steve.
Yes, let me go back to your first pricing issue.
We feel good about our price plan and I think the fourth quarter is an indicator that we are on the right track now and we have very important plans throughout the 19 years, most of them have been announced and worked with customers, which is part of it.
Second, what I would say is that the market is responding in a similar way, not everyone, but we see a wide range of changes in the market.
So I think we do have confidence in pricing.
Part 2 China, I think what I want to emphasize is the overall performance of this quarter.
I think we mentioned a similar q3.
You are right, it is still a very, very competitive market and we are not satisfied with our performance but our team is building for a long timeterm.
Really, I will tell you that the place where we lost our run is on the lower level of our third floor.
You know where we actually develop at our 5 and 6 levels, very good and important innovations that really focus on the premiere of the class, I think we have a good consumer reaction to it.
It's growing, Level 5, level 4-6 share.
Although, I will tell you that the response may be a bit slow due to all the price activities in the market, but we feel good about it.
This year's plan is that we will promote this technology more widely in our product line and in various channels across China, so this is our focus.
The real strategy is that this is a market that really wants to premiere, consumers are trading, and the reason we see price competition is that I believe this is driven more by manufacturers pushing down prices, so we still see that the consumer movement in this direction is our focus.
Thanks, Stephen PowersOkay.
Thank you, Michael.
The next question comes from Olivia tang of Bank of America.
Olivia Tong thanks, I just want to go back to the past, the savings came in, a little bit of your expectation, the same was true last quarter, so last quarter, you talked about some of the pulp pricing arrangements that you won't repeat in fiscal 18.
So, can you talk about what is the Delta for fiscal 19 and fiscal 18?
Then relative to your expectations, in your expectations, the specific barrel of force is lower than the pulp dynamics.
Then I have [indiscernible]. And then. Back.
So there are a few things in it.
First on delta, you can imagine how it works.
If you think about where we will go in 2018, where everyone thinks the goods will go, that is our negotiating environment in 2018, and then you will soon reach the end of this year, we were negotiating when we entered 2019 and we were in a very different environment.
So the 2018 contracts we negotiate have a lot of value for us because of how much the goods have gone up and the curve is steep.
When you see us entering the 19 th century, when we pretend to be able to call the market, the intuition will say that we have to be at a fairly high level in terms of commodity prices, so with the reset of the contract, it's a different environment.
Therefore, for us, the value of the contract is less than 18 years in 19 years.
We will not provide a specific amount, however, this affects the material price portion negotiated in our force cost savings, which is why 2019 will be below the level of the last few years.
In the fourth quarter of 2018, we saw that due to the reduction in force, this is not the price of materials negotiated, it is more about the operational components of the force, especially in the areas of productivity and logistics.
So, with all the mixed shipments I talked about in the North American paper towel business, that's why the actual living savings were reduced in the fourth quarter.
Olivia tongott, are you back to normal now?
We don't have Maria Hengrui, we're working on it.
I will have a controlled discussion of an uncontrollable issue on any day, and the problem we encountered in the fourth quarter is a controllable one.
Therefore, we are very confident in our supply chain capabilities and our opportunities.
We see challenges that they are working through.
We will solve these problems and they will not necessarily be resolved in the first quarter, but they will definitely be resolved.
Olivia tongott, OK, and then in the case of fiscal 19, it makes sense that you talked to some of the issues in the consumer organization,, do you expect an increase in profit margins for each sector in fiscal 19?
Michael hsu Olivia, can you repeat it, it's in and out so I can hear the second part of your question?
Olivia Don, I'm sorry. what I'm asking is-
With regard to profit expectations, you clearly talked about the whole company, but from the perspective of a breakdown of consumer organizations, personal care and professionals, do you expect profit growth in each sector in fiscal 19?
Michael HsuYeah, Olivia, I will remind you that we do not give guidance at the market segment level, but you can imagine, given the overall objectives of the company that we have discussed, all three parts have increased profits from the center to achieve further targets for next year.
Thank you, Olivia.
Thank you, Maria Henry.
Our next question comes from Lauren Lieberman at Barclays.
Good morning, Lauren Lieberman. thank you.
I just want to go back to the earlier one where it was mentioned that in the same math, this outlook, not to mention 19' in the medium term, does not mean that Mike you is very specific about the huge incremental reinvestment of the business.
What I'm curious about, though, is your position on capacity-building.
So the analysis, in terms of greater trust or highly targeted trust in income realization, what exists in the House today --to-E-Commerce Marketingcommerce. There's a -
These things sound great, but it does sound expensive and need to be different from the skills you can get at home today.
So, if you can comment on where you can execute, rather than a desire for these big things, these things enhance the evolution of the model.
Michael HsuYeah Lauren, good question.
First of all, I want to tell you that we are only making initiatives in all these areas now, but why do we define these initiatives as initiatives that are critical to us, I mean, I think you get the opportunity for consumers and why we need to do that.
I think the reason why we oppose them like this is because we have made progress in different areas, you know historically we have been more decentralized as an operating model, it helps us a lot, it makes us very flexible, but when you do, you end up developing something excellent.
So what I'm going to tell you is that in North America, I think we're a bit ahead in terms of revenue management.
For the past year or so, we have been developing tools like Six Sigma, such as trade efficiency, Price packs, and other tools we have developed in other markets, but I think, the biggest opportunity for us is to standardize and promote them more consistently in the market, so this is a big area.
I think the other one
In a similar way, this is digital, we have very, very good pockets, this is the market you really want
Business Markets such as China, South Korea and the United States.
For example, I think our Chinese team
I think our marketing has multiplied, and in China we have made a comprehensive digital consumption in women's care, mainly in baby care.
ROIs is a multiple of our traditional ROIs.
One of the key drivers of this is that we 've got dynamic content creation that I think Paul will say, which means we're posting new content every day.
I was with the Chinese team earlier last year and they said, back in the era of e-commerce
Commercially, you have to be 996, which means you work six days a week, from nine o'clock A. M. to nine o'clock P. M.
They say it's 007 now, midnight to midnight, seven days a week and they say it's never more exciting than that, I think-it's because they really see the value of what they're doing, which drives the business.
We are doing similar things in the United States, me and one of our electronics.
A few days ago, the business manager was running through AI-generated content creation 100 and some weird activities, right.
It is a very, very special target for very specific market segments.
So I think we're really moving fast and we're excited about it, but I think this opportunity and the whole process
The process of upgrading around the world and taking all of these capabilities to the same level.
Maria Henry, I'm right-
I'm just in some context when we consider the restructuring plan for 2017 and consider how we can create value in our business, we see two things.
We see opportunities to structurally reduce business costs, but more importantly, we need to do so that we have the ability to invest in space and unleash the growth opportunities we see.
So when we put the restructuring plan together, we think of these two things.
You don't necessarily see all things going this way in 2018, because we have an unexpected increase in goods and money, which puts some pressure on numbers,, especially when Mike comes in to outline the detailed strategy, we will move on.
The focus of the restructuring plan is to move costs from less useful to more useful places, a large part of which is to find the capabilities we need to unlock the opportunities we have.
If I can ask one more question about income realization, because I think income realization is like this --
This could have been talked about for ten years at K-
But one thing I want to know in the next iteration is, what does this have to do with competition?
It can be said that we would like to see in our portfolio if there is an opportunity to be more strategic, but it is clear that the category you compete for is especially in developed markets where there may be fewer opportunities for market growth, it can even be said that like China today, the birth rate has declined and so on.
Interaction is what competition is doing, right.
Then, in the process of your thinking, it may be realistic to pursue a larger income realization, because you can have complete control over your transactions.
Michael HsuYeah is definitely a true statement from Lauren.
Especially if you're talking about a change in the price tag, which depends largely on the retail environment and what competitors are doing, we recognize that.
I think in terms of packaging
The price package architecture, or consider how we set the price, we call it waterfall pricing more effectively. I think it's within our control, and of course it's good, and there's a competitive limit on trade spending, but the problem is, it's like Lean Six Sigma.
How we use our funding activities has changed a lot --to-
Activities, we have a great opportunity to become better.
It's like running any asset in a factory, and it can be more complicated because of the opportunities and the reasons why the company still exists --
I have been working on improving trade efficiency for 20 years and I have done this in many places and the reason the Opportunity continues to exist is that it will always exist, because our business is really complicated when you sell billions of dollars to thousands of people through thousands of people, because of this complexity, things are not the best --
It is difficult to optimize under this complexity.
So what we're talking about here is the next step, introducing systems, processes, metrics, and measures to improve efficiency here.
Lauren Lieberman. okay, fine.
Thank you very much.
The next question comes from Andrea Teixeira of JPMorgan Chase.
Thank you, so-
Just to squeeze me in.
Therefore, the first issue is the progress of the pricing plan.
From the last call, you plan to increase the price of Kleenex Scott in the first and second quarters, respectively.
Are you still keeping the plan? If so, what will the reception be? With the increase in promotion and compounding, does this explain how conservative you are with the 2019 guidance?
My second question is that you have come into effect on the 18 th round, establishing a general goal 1.
It reached 5 billion in four years from 2018.
So it sounds like you're not setting goals based on your comments about Ali, just in a short period of time
For your answer to Jason and Olivia, then what do you think the acceleration of 2020 and 2021 should be. Thank you.
Michael HsuYeah Andrew, so I'll start with pricing first and maybe Maria will come back.
Yes, I think pricing in North America I think your issue is related to home care, and I think our current plan is basically in place.
Again, some of the effects you saw in the fourth quarter have to do with what we did on the bathroom tissue, and I think it could be in 2018, and also from-
Because of the shrinking sales of goods, a little expansion.
I would like to remind you that most of our price changes were made in the first quarter, or by the end of the first quarter of this year.
So this will still come true and now we have a positive holiday [ph]
Most customers know where our plans are.
Maria Henry, we have not changed $1 on the target of the troops.
We have 5 billion goals.
We're still working towards that goal.
From the source of savings, we expect-
The savings come from the four categories that make up our force plan.
Material price negotiations after next year should continue to be a factor for us, and when we continue to rule out waste, the productivity in our production operations is the same as when we design products to optimize costs, then the overall cost of the entire supply chain system, including logistics, is the area of our attention to see opportunities.
This reminds us that we have a global supply chain organization that has been running very comprehensive projects for several years and that we have built our capabilities, we continue to see opportunities there and we believe in our ability to achieve that in the coming years.
Andre TeixeiraThank you.
Thank you, Michael.
The next question comes from Nik Modi in RBC Capital Markets.
Nick modiyah, thank you so much for squeezing me in.
Mike, you just asked two simple questions and you indicated that M & A would not be a big part of your vision, at least for now, just curious what that means for Kimberly, will they be interested in you knowing to move into the new growth pillar? If you can provide any context, a new category just wants more perspective? Thanks.
Thanks Nick, Michael.
First of all, I would say that in general, I like our portfolio in three business areas.
They are huge, essential and profitable categories, and as we have said in the past, we believe there is a very strong synergy in how we buy, manufacture, sell, and transport together
That said, we will be looking for opportunities to improve our portfolio, and now, maybe not a new category, maybe for me, the focus is on opportunities that may enhance or take advantage of our geographical location to expand in the market, new technology capabilities or new business capabilities will accelerate our revenue management, perhaps the digital world we are talking about
Then it may end up reducing the risk to markets where we may be attractive to them or which may be volatile to them, so that's what we think now.
Thank you very much.
Michael HsuThanks, Nick.
Our next question comes from Kevin Glenda, who holds that view.
Thank you. Good Morning, everyone.
Good morning, Michael.
Kevin grunddyfirst, a quick Maria, just on the tax rate, what is driving the acceleration of fiscal 19, and then a broader question just to get back to this quarter, learn about some of the dynamics here and the potential impact on the outlook for fiscal 19. So we talked -
I didn't ask for a re-discussion of consumer organization issues, we talked a lot and talked about some of the labor savings, but I think I'm sitting here and looking at the relatively strong price of 3% this quarter, or the sales are relatively consistent, but the gross profit margin has dropped a lot compared to the location of the street, although we talked a lot about the annual personal care profit margin of consumer paper towels has also dropped by about 200 basis points. over-year.