kimberly-clark corporation q3 2008 earnings call transcript - super absorbent polymer used in agriculture

by:Demi     2019-08-27
kimberly-clark corporation q3 2008 earnings call transcript  -  super absorbent polymer used in agriculture
Clark Corporation (NYSE:KMB)
Q3 2008 earnings call at 10: 00 a. m. on October 22, 2008 ETExecutivesMike Masseth-VP, chairman Dick and CEOMark IRTom Buthman-SVP & CFORandy vest-VP and controllleranalystsali Dibadj-Sanfu BernsteinGail Glazerman-
John Howsie-J. P.
Morgan ChaseConnie Maneaty-BMO Capital MarketsWilliam Schmitz-BankAlice Lanley, Germany-Buckingham Palace, ResearchChris Ferrara-Merrill Lynch, LynchJason Kiir-reineberman-Dillon-independent ResearchLinda Bolton Weiser-Caris & Associates, we now give you the floor at the meeting.
Please note that every line of yours is listening --only mode.
At the end of the speech, we will begin to ask questions.
At that time, if you want to ask a question, the procedure to be followed will be stated.
I want to hand over the meeting to Sir. Mike Masseth. Mr.
You can start, Sir.
David, Mike.
Good Morning, everyone.
Thank you for your attention to Kimberly. Clark.
Tom Falk, Chairman and CEO, is with us today;
Mark Bussman, senior vice president and chief financial officer;
Randy vest, vice president and chief financial officer
The agenda for today's conference call is as follows.
Mark will start with a review of our third-quarter results.
Tom will then provide his point, which will give us enough time to have a Q &.
For those who wish to follow up, we present today's material, namely www, in the investor section of our website as usual. kimberly-clark. com.
First of all, let me remind you that we will move forward.
Look for statements on today's call.
There is no guarantee that future events will happen as expected or that the company's results will happen as expected.
For the latest annual report on Form 10, see the risk factors section-
K. describe factors that may lead to significant differences between our future results and any forward results
Look at the report.
We will also mention
GAAP financial indicators, including adjusted earnings per share, adjusted operating profit and adjusted operating profit margin.
Management believes that reporting in this way can give investors an understanding and analysis of the results of our ongoing operations.
For more information on why we make these adjustments and reconciliation based on comparable financial measures identified by GAAP, please see today's press release and more information on our website.
Now, I give it to Mark.
Thanks Mark, Mike. Good morning.
I will briefly review this quarter, starting with the top line.
Sales rose about 8% to $5 billion, including less than 3% of the monetary effect.
Organic growth was almost 6%, but driven by our focus center to increase net realized income, net sales prices rose by 4 percentage points and product portfolios improved by 2 percentage points.
Total sales fell by about 1%, more affected by higher prices than we expected.
We have also seen some of the effects of weak economies and slower growth in consumer trade categories.
Now, rotate the top line for each of our clips.
Sales of personal care increased by nearly 12%.
The increase in sales and the increase in net selling prices have driven strong organic growth of about 9% per cent, with an increase of about 4% per item.
The improvement of product structure has brought new growth points.
Sales in North America grew by nearly 7%.
New sales prices have risen by 4 points, while both buying and mixing prices have risen by more than 1%.
The rise in sales prices includes good progress among us.
Prices of diapers and trainers rose in July.
The growth in sales is mainly due to our leading baby wipes in marketing.
Our children's care brand is similar to the level it was a year ago and fits the plan in general.
Although we did experience the short-term impact of price increases before major competitors.
Personal care sales fell 8% after moving to Europe.
Global sales and core markets fell by the same percentage as continued competition in the European promotional environment.
Sales of personal care products in developing and emerging markets grew by nearly 20% for 16 consecutive quartersdigit growth.
Sales of organic products increased by 15%, sales increased by 9%, and the improvement of price mix promoted the growth of six percentage points.
The number highlights include the low growth of the fast-growing BRICS 20. Double-
Digital growth across Latin America.
Good performance in Korea and Vietnam.
Now moving to consumer organizations, sales are up 5%, including three benefits from money.
Net sales prices rose by 7% per cent, steadily growing globally, and mixed improvements also increased sales by 2% per cent.
Taking into account the cost environment, the transaction volume has dropped by about 7%, and in order to increase the revenue realization, we are conducting some transactions in the transaction volume.
In North America, net sales fell by 2%, net sales prices rose by 6%, and improvements in product portfolios were offset by a 9% drop in sales.
In terms of pricing, the benefits mainly come from the growth of the role products we implemented in the first quarter.
Again in early August.
Facial tissue prices rose at the end of the third quarter.
So far, we have made some progress with the implementation of the third quarter price increase, but it is still too early, and we continue to carefully observe the price points of the promotion.
There are a lot of details in the news release about sales, but in short, there are brand series in all categories.
Moreover, the decline in purchases continues to reflect our decision to have some low-margin private label business at the end of last year.
Now, the sales of organic products organized by consumers have shifted to Europe.
Net selling prices rose by 4% as several markets rose.
Due to rising prices and weak categories, volume fell by about the same percentage, especially in the United States. K.
In developing and emerging markets, consumer organizations have grown organic sales by 13%, driven by a 12-point rise in net sales prices and a 4-point hybrid improvement.
Now, move to K-
C. Professional, etc. , sales increased by 8% year on year, of which the currency started three points.
Driven by a 5% increase in net sales prices, organic product sales increased by 4% and mixed sales increased by 2%.
Overall, sales fell a bit this quarter.
KCP continues to make progress on target growth plans
Global sales of high-margin diapers and safety products have grown rapidly this season.
In North America, sales of KCP organic products increased by about 2% as prices rose, and mixed prices for each product rose by 3%.
Compared to the strength of a year ago, the volume of transactions fell by 4%, affected by our concern about price increases and the current economic environment.
KCP has a great quarter in Europe, double
Buying is growing and prices are up two points.
In developing and emerging markets, sales of KCP organic products continue to grow at twice the ratedigit rates.
Finally, sales in the health care sector increased by 4%.
5% of growth and 1% of monetary gains contributed to revenue growth.
These increases were partially offset by a 2% decline in net selling prices, reflecting the continued competitive landscape in the surgical supplies market.
Sales of health care products increased by 4% to double
The number of exam gloves is growing.
Our medical device business has also achieved strong quarterly growth, up 6%.
Now moving to operating profit and cost savings, I will refer to the adjusted operating profit and profit for this discussion, which does not include some of the expenses and benefits detailed at this morning's press conference.
Operating income fell 9% to $0. 626 billion in the third quarter, with operating margins of 12. 5%.
Profitability was affected by cost inflation of about $0. 25 billion this quarter.
This is the highest quarterly amount we face.
The cost of many of our oil-based inputs continued to increase this quarter, reflecting the impact of the surge in oil prices earlier this year.
Despite inflation, we continue to reinvest our brand.
Strategic marketing investments grew by $25 million, faster than sales.
Profits are also affected by the 60 to 70 basis points of planned production downtime we have taken to improve inventory conditions.
Now, when it comes to cost savings, the total savings in the third quarter were $47 million.
Our ongoing force plan saved US $19 million this quarter, although some of our facility expenditures increased and overall productivity was below average.
In terms of the strategic cost reduction plan, we achieved $28 million in year-end earnings this quarter and we are tracking past our initial target for this year.
In this environment, our team is still very focused on cost savings.
We will save a lot of money for this year.
However, this yearto-
With a date result of $0. 137 billion, we may not be able to achieve the goal of saving $0. 2 billion to $0. 25 billion for the whole year.
Now, let's take a brief look at the operating margin of the third quarter division.
As expected, profit margins have declined in all areas due to the inflationary pressures we face.
Nevertheless, the profitability of personal care remains at a health level of nearly 19%. Moreover, K-
C. professional and other profits have improved well since the second quarter.
In addition to the input cost inflation, the production downtime I just mentioned also affects all departments.
This is especially true in consumer organizations and healthcare.
Now, simply turn to taxes, with an adjusted effective tax rate of 28 for the third quarter.
2% in the range of 28% to 30%, close to the low end of our previous guidance.
According to what we know now, the adjustment rate of 2008 in the fourth quarter should be within the range of 27% to 29%.
When it comes to equity income, equity income has grown by 35%, mainly due to K-C to Mexico.
The results of KCMs reflect double-digit sales growth and good income tax settlement, partially offset by cost inflation and monetary losses of about $0. 3 billion in the United StatesS.
Debt in dollars
Benefits for K
C tax settlement from KCMs is equivalent to about 0.
03/share, while the negative impact of monetary losses is about 0. 01 per share.
Now go to cash flow and balance sheet.
Cash provided by the business unit was $0. 641 billion, up 13% from the previous yearago period.
Mainly because of the improvement of working capital performance.
While our working capital matrix has improved over the last two quarters, we still have the opportunity to further improve our performance.
In terms of capital expenditure, we invested $0. 219 billion this quarter.
Brought a year. to-
The date expenditure was $0. 652 billion.
Our annual investment target is $0. 85 billion to $0. 95 billion.
We bought back the stock repurchase.
5 million KMB shares cost about $0. 13 billion this quarter. Bringing year-to-
The date of the repurchase to $0. 55 billion.
During these uncertain times, our steady balance sheet and capital structure provide us with good service.
In this environment, we are more conservative in terms of balance and capital deployment.
So we now expect to buy back shares worth $600 to $0. 65 billion this year.
We are also looking forward to contributing to the United States. S. -
Pension plan for the fourth quarter.
So this ended the financial review.
Looking back on this quarter, we achieved strong growth.
The huge cost inflation has dragged our profits down.
The profit results are consistent with the plan and our cash flow has improved.
Now I give it to Tom.
Thank you, Mark. good morning, everyone.
I will comment briefly on the third quarter and then I will review the outlook for the rest of the year and then we will discuss your issue.
My headline this morning is that we are going through a very challenging environment.
Our recent focus is on net income and cash flow.
At the same time, we are doing the right thing for the long-term health of the business.
My view on our third quarter results is to highlight a few points.
First of all, I'm proud of our Kimberly.
The Clark team and how they responded with unprecedented cost inflation.
With their efforts, our organic sales have grown by nearly 6%.
Our business in developing and emerging markets is also very healthy and has contributed significantly to our growth this quarter.
Our D & E team takes advantage of the opportunities these fast-growing markets offer us, combining excellent marketing, good product innovation and strong customer relationships.
Secondly, our focus on increasing realized income has begun to pay off.
This is also the key to offsetting the cost inflation we have experienced and restoring profit margins.
We have been paying special attention to consumer organizations and K-
C. professional business.
So I was inspired.
Net sales rose about 4% in the quarter.
Then our portfolio is also 2% off.
Although, as Mark mentioned, we have more pricing leadership than we expected.
Focusing on revenue is our right focus in this environment.
Third, I am pleased with the continued strength of our cash flow and balance sheet.
Over the years, our financial strength has provided us with good service.
Therefore, despite the recent turmoil in financial markets, we are ready to obtain credit and demand for Kimberly --
Clark's business paper program continues to maintain strong momentum.
Our financial strength also enables us to pay the dividends of health.
This provides attractive benefits for our shareholders and shows our confidence in the future.
So let me talk about the prospects now.
Unprecedented fluctuations in global commodity currencies and financial markets have led to a high degree of uncertainty in the current business environment.
So looking at our business today, there are a lot of activities.
Many of them are even experiencing major fluctuations every day.
While this makes it more challenging to predict our results in the short term, the plan we are following is very clear.
We are ensuring that the factors that we can control are effectively managed.
So we are building our brand, we are improving our key competencies, we are reducing our costs, and then we are deploying our cash in a way that is fair to shareholders.
To ensure the long-term health of our business, these are the right things we should do.
At the same time, we are taking appropriate measures to improve our recent results.
We are driving the price of mixed products and we are working to improve our efficiency and continue to reduce our working capital.
Therefore, our plan for the fourth quarter is to achieve strong organic sales growth in the medium term. single digits.
This will be driven primarily by a higher net selling price and an improved portfolio of products.
Sales growth in the fourth quarter is likely to be relatively weak, as we are focused on revenue in the same weak areas of the economy.
Nevertheless, we still want to maintain a higher level of investment and strategic marketing in customer development activities.
Given the significant change in foreign exchange rates over the past month, we now expect the currency to drag down our sales comparison for the fourth quarter, rather than the benefits we have been experiencing over the past few years.
At the same time, the price increases we implemented in the third quarter, and some of the benefits of the recent decline in commodity costs, should help drive continuous improvement and adjusted operating profits in the fourth quarter, compared with the third quarter
Assuming consumer demand remains the same and there is no substantial change in input costs, forex will not remain at the current level we are experiencing today.
The currency that we are obviously most closely following is listed in today's presentation slide.
I am encouraged that the cost of goods has started to decline recently, but it may take a while.
It may take six months to fully realize these lower costs in our results.
Although the recent strengthening of the US economy has had an impact on the RMB exchange rateS.
The dollar was almost immediately reflected.
In fact, we now estimate that the recent changes in the currency exchange rate that occurred last month will have a negative impact on our fourth-quarter performance of about 0. 10 to 0.
15 per share compared to our previous plan.
This includes a large amount of money translation and transaction losses from Kimberly.
Clark, New Mexico
Again, let's assume the current rate here, Paso has dropped by about 15% in the last three weeks, and I believe it started to drop again this morning.
So, overall, based on what we know today, we expect the adjusted earnings per share for the fourth quarter to be within the $1 range. 02 to $1.
07, by contrast, $1.
2007 11 per share.
In view of the expected fourth quarter results, we now expect adjusted earnings per share for the full year of 2008 to be within the range of $4. 15 to $4. 20.
It's also $4.
25 per share on 2007.
This new guidance compares with our previous guidance on adjusting earnings per share for $4. 20 to $4. 30.
So all in all, our top growth strategy continues to deliver good organic growth as we implement our growth plan goals.
Increase the net selling price and continue to improve the product structure.
Although unprecedented levels of inflation have disrupted our bottom line growth, several levels of inflation have disrupted our bottom line growth and we have taken positive measures to offset cost pressures.
So today, we can continue to improve our profit margins in the fourth quarter.
This will lay the foundation for further progress in 2009.
Our team is committed to improving our performance and I also hope that once the cost of money and goods, the commodity market has stabilized, we will get more benefits from the recent cost reduction of goods.
But given the volatility we experience in the current environment, it may take some time.
So, regardless of the circumstances in which we are located, you can count on us to stick to our global business plan strategies that aim to build a strong, lasting franchise brand.
We believe this route will create a long-term
Long-term sustainable growth in Kimberley
Long term value of Clark and our shareholders.
Thank you for your attention today.
We are happy to answer your question now. Question-and-
Ladies and gentlemen, at this time, you can speak on your question. (
Operator instructions)
Our first question came from Ali Dibadj from Sanford Bernstein.
Ali Dibadj-Sanfu BernsteinA asked a few questions.
The first is price awareness, which is obviously a bit worse than you think.
It seems that, at least from the point of view of auscultation, organizations are more inclined to one organization.
What do you expect from the price, I mean, I think there will be some relaxation in the future?
How do you think you have to reduce your price, especially as an item, maybe you will start rolling here.
At this point, Tom FalkWell, you know we are still trying to achieve the price and you don't see the cost of the goods at this stage.
You know, the pulp just started to break last month.
You see the price of hard wood in the South fell by $60.
But if you look at a lot of other cost inputs like super absorbent and something else, we haven't seen a lot of cost drops yet.
So, you know, at this point, you know we 've been actively pushing prices up.
We have been increasing our promotional prices as much as possible.
Not everyone in every category has it, so we know that there will be some volume exposure when we go through this.
What we might be watching closely is something like facial tissue, and the price increase is just beginning at the end of the quarter.
Obviously, we are entering the season of cold and flu.
How do we behave when we go through that environment.
But you mentioned something in it.
One is that some of you may not have seen a fall in commodities yet.
But hopefully when this starts to happen will you expect to have to delay pricing?
I said, in this case, you 've seen it, you know you mentioned it a few times in your earlier comments and press releases, and it's a competitive dynamic, whether it's a private brand, or some other brand players, are positive in pricing.
Tom FalkYeah, I think we will keep an eye on this matter.
If you look at our stock for the quarter, our stock is basically fairly stable.
The organization is a little weak.
Some private label improvements.
We will obviously continue to focus on this issue.
You know we will want to be competitive in the end.
But I also think that in this environment where costs are inflated so badly, you know that our focus is also to increase our profit margins during this period.
Ali dibagi Sanford Bernstein and profit margins are one of the levers you save on these costs and it looks a bit disappointing this quarter.
In the face of high goods, is it possible for you, or how likely is it, to advance your cost savings project, and now you have a little less room to move forward?
Tom falky thinks this is a few things.
When you look at the breakdown of material specification changes.
We continue to do well and show strong cost savings in this regard.
Actually, the productivity is negative for the first time in a while, you know, we spent more downtime this quarter and we tried to track it separately.
But obviously you won't run either when you need more downtime, so that's part of it.
You know, obviously, the kind of inflation we 've been experiencing lately, it's hard to get the facts from suppliers.
In the end, you know, there's not a big deal in it.
I think there is a little bit of inflation in this figure.
I also think that as the downtime increases, we may not be able to control the maintenance expenditure as we did before.
So I continue to believe that we have a good opportunity to save money in the long term based on the goals we set.
Although we may not reach the goals we set for this year in 2008.
The last question is about personal care.
That's why our profits fell sharply this quarter.
Can you talk about this?
Is it a change in packaging size, a change in channels, a self-owned brand, and a market growth?
Please give us a feeling. thank you.
There are a few things about Tom FalkYeah.
You know there's an increase in strategic marketing.
The number of personal care may not be proportional.
You know they have, and they have also been hit by increased polymer costs this quarter.
As a result, polymer costs were higher in July than in June, higher in August than in July, and higher in September.
So this came true in the first quarter.
One of the mixed changes is that you know the second quarter is a pretty big little swimmer quarter for us.
So, you know, in the third quarter, you see relatively few swimmers, and the rest of the product portfolio flows more through there.
So, you know, our second-quarter profit margins are usually a bit high for us.
So, I think this is probably the three biggest factors that affect the comparison.
Thank you, Ali Dibadj-Sanfu BernsteinOkay. Tom FalkOkay.
The next question comes from Gail gretzman at UBS.
Good morning, Gail Glazerman-UBSHi.
Gail glazeman
UBSI guess back to volume trend, can you give me a little more color? If you think how many colors will you get, other competitors follow up as prices go up as well?
You said you had few stocks.
If you can give a little more color, especially in the towel section you refer.
Tom FalkYeah, of the number of consumer paper towels, several things are happening this quarter.
Some of them are the number of private labels we reduced earlier this year, which is a year-round comparison in the field.
There are also some German
The film that happened at the end of last year at Cottonelle, we tracked as volume negative, the price is positive.
So inside.
Then, you 've seen weaknesses in some categories, and actually the face and towel categories are a little weaker in season 3 than in history.
In the end, you know, we may have lost a little share, maybe a bit shared in turn in bath towels and towels.
So all of these factors add together, this is a very ugly quarter of sales for consumer organizations.
You are also an emerging market, especially in Latin America, and we are very positive in price.
Prices have risen by double digits in many Latin American markets.
And at the same time took some volume risks there.
Gail glazeman
UBSOkay, any weakness in the third quarter, do you think this will be the inventory of the customer's inventory?
In some markets, we see more inventory in the home than in the customer, says Tom Farrow. The U. K.
For example, the Bath category dropped sharply.
Big shift in private labels in the United StatesK.
But you also see that the promotion from a large number of packaging promotions is less than normal, and in these promotions, the number of packages purchased by consumers is much smaller, although the promotional price points are similar, they are reluctant to stock as in the past. Gail glazeman
UBSOkay, just switch gears in terms of cost.
I fully understand that it will take some time to go through this process.
But can you give us a feeling, a little bit of the feeling we get into 2009, and (inaudible)
In the past few months, the price of waste paper has begun to rise.
You may not have a particular hedge or anything that prevents it from flowing through.
I mean, I think, if things stay the way they are today, when will you see most of the releases.
I think Tom FalkYeah, let me talk about each item area.
Diesel is clearly the first thing we see.
So, you know, no matter how much the carrier pays, it passes quickly.
So diesel, you know, we 've started to see some benefits.
You know the next one is probably pulp.
Obviously you have some inventory and obviously you have stock of your finished product.
So, you may be in the system, between raw and finished stock, with four to eight weeks of stock, which needs to flow through before you start to see the benefits of pulp and secondary fiber.
It is clear that the price of hard wood in the South fell by $60 a ton last month.
I think the price of Cork in the North is up about $20 per ton.
We have seen some recently, such as in the past few weeks, due to the fact that some Chinese exporters have not been able to obtain letters of credit and have been unable to transfer some products overseas, the price of secondary fiber has dropped by $30 to $40 a ton.
In fact, what we are not sure about is how short it is as more liquidity enters the financial system.
Will the export market pick up again at some point?
So we look at this very carefully.
It takes longer for the polymer.
Some of our polymer suppliers and superabsorbent suppliers still feel some of the effects of the hurricane season in Southern AmericaS.
Especially Hurricane Ike.
As a result, we already have some base monomer used to make super absorbent and some of our other polymers, but the supply is very short.
We even try to manage through this on crisis management allocation projects.
When this returns to a better balance, we expect to see the benefits of falling oil prices in the end.
But, you know, in some cases, it may take three to six months in the end. Gail glazemanUBSOkay.
Is the color enough for you? Gail glazeman
That's great.
Thank you very much.
The next question is from J. John Hausey. P.
Hello, John. John Howard. P.
Good morning, Morgan.
I think it's just a quick follow up.
You know, you guys mentioned the volatility of raw materials multiple times in the prepared comments.
We got a little color, you know, I guess.
I mean, I 'd like to explain that what you're basically saying is that the trend is moving in the right direction, but is it just a day? to-
The day that makes you think so fluctuates?
You know, look, we will, you know, we will insist that we have this, you know, it's good for us.
Or, there's something else on the horizon that makes you feel okay, you know we can see this thing and it's going to go back to a bit of a disadvantage.
Tom FalkIf you talk to a supplier today, I mean, you know, they 've been using oil all the time
They have been cutting feed for the past three years.
They are lagging behind in price realization.
So they sit there and watch the oil, you know, $70 or less.
You know, their center point is $100 a barrel, or $120 a barrel, or $80 a barrel.
So, you know, they're thinking about it and planning what it's more likely to look like.
You know, it's only really over the last month or so.
You know, still remember the $147 oil peak and thought we were a few days behind in the market.
In the end, therefore, it will begin to be corrected.
But in the short term, I think everyone is trying to figure out what zero is.
Commodity prices are still rising in some cases.
I mean we use a lot of cartons to move our products which is very high
Single, low double
This quarter is still the number.
So you don't see these costs going down as you think. John Howard. P.
Morgan charso sounds good and I don't want to explain it to you, but it sounds less volatile than it is prudent.
You know, volatility is actually something you can't predict, and you know, every raw material is moving in one direction or another.
So are these two statements fair?
I think it's fair.
You 've seen some of the CEOs that I think have gone out and raised prices multiple times in a quarter.
You haven't seen their announcements rolling those back yet.
John Howard. P.
Morgan chasers. Okay.
Then there is another issue that needs to be followed up again in the repo.
I see, I mean you guys are wary of talking about reducing repo guidance.
Is it prudent to enter the debt market? You know, you just want to keep a little more cash when the numbers go down?
In terms of why you are more cautious about buying back, give us a little philosophical perspective.
Tom fakye, I asked Mark to talk about this, and in order to add a little color, in the end we will put some money into the pension plan for the fourth quarter.
May have to contribute in the first quarter.
We have to buy the rest. inaudible)
I think we have announced that this will happen in the first quarter.
So we had a few phone calls in the first quarter about cash and we might make sure we had some try powder here.
But if you want to add anything, Mark.
I think this is a good description.
This is not a big change.
We will still buy back two to 3% shares this year.
This is our remote target.
Good request for our business newspaper visit.
You know, we have $0. 85 billion CP in the market, and we usually have $0. 2 billion plus or minus.
You know, in this volatile environment of financial markets, our typical range may be at the low end, and you know, we just feel like it's a smarter place. John Howard. P.
Morgan chasseokai, but it sounds more, you know, now it's more about the use of cash than the source of cash.
This is fair.
Mark MassethWe expects another stable cash flow quarter. John Howard. P.
Thank you very much, Morgan chasseo.
The next question comes from Connie Manetti of BMO Capital Markets.
Coney, Tom fakming.
BMO Capital marketing company.
When does the fall in other currencies start to affect demand in these markets?
Do you feel this way?
Tom FalkI and Mark just made some Forecast calls when they were on the emerging markets team.
You know, early on, but we didn't see the need for it.
You know they run their business in local currency every day.
So, you know, AmericaS.
Exchange rate is (inaudible)
How do they see the business every day.
I mean, it obviously affects their input costs, so they buy a lot of products or materials imported from the USS.
You know they might see an increase in some translations.
On the other hand, most of these goods have fallen relatively and costs are falling.
So I think they are still trying to make a net calculation to see if they need further price increases to restore the net swing between the falling cost of goods and the change in exchange rates.
But, you know, I think, you know, we're still pretty in general (inaudible)
Out of emerging markets.
We saw another strong quarterly growth.
I expect another solid quarter in the fourth quarter, in local currency.
When you look at what's going on with the currency, Connie Manetti-BMO Capital Market snow, do you think this is mostly the effect of translation, you know, memories of what happened between 1995 and 2001, when all currencies, emerging market currencies fell below the floor.
And really influenced the business at the local level. Do you see (inaudible)?
I think it's a bit of a problem like chicken and eggs.
Because I'm not sure it's a change in the exchange rate of the local currency against the United States. S.
The dollar is moving.
So, I mean, I guess it's all from your point of view.
But you know for sure, as the dollar goes weak, you know these local currencies are really a good wind for us.
Now that the dollar has swung backwards from another way, it will be a translation headwind for us.
You know, our biggest trading risk is probably Mexico, which we talked about at the press conference, where there are hundreds of millions of dollars in US Treasury bonds. S.
We issue bonds in dollars every month.
Then in individual markets, they have trading risks, and we tend to hedge some of them on a 12-month basis.
So they buy pulp or they buy polymer and they know what the risk is after 12 months.
We have hedge some of our funds to 2009.
Coney MarketsOkay Maneaty-BMO Capital.
There is one last question.
I think you said in your comments that you expect a single digit increase in sales in the fourth quarter.
I think you mean organic sales growth? Tom FalkYes.
It is reported that sales may decline due to monetary reasons, right?
Tom FalkWell's currency will definitely be a drag.
We will see it.
I mean, I think you know that organic sales growth will be medium term at this pointsingles.
And then we're at this point,inaudible)
Exchange rates are traded every day.
I would say, at the current rate, you know that we will definitely be adversely affected by the currency in the fourth quarter.
Coney MarketsOkay Maneaty-BMO Capital.
Thank you very much.
The next question comes from William Schmitz of Deutsche Bank.
Tom fakming bill
William Schmitz
German bank guy in the morning.
Just to make us go further on the currency issue.
Can you talk about the impact of the translation on the percentage change in the top row?
Tom FalkWell, I mean, if you just look at the actual rough numbers, you know, a basket of currencies may have depreciated by 13% to 15% in the past month or so.
You know, before that, sales in development and emerging markets accounted for 32% of our sales.
So, you can see, you know, drag 400 to 500 basis points from the top line.
Europe is not included.
So, I don't know Mike or Mike, do you have any other opinions on that?
Massage therapist Mike
Does this help you?
William Schmitz
Deutsche Bank is just trying to figure out what its trading part is.
So if it is 400 to 600 basis points on the top line, then what is on the bottom line.
Because I imagine you, I know you're hedging a bit, but you have considerable doubts about the cost as well.
Tom FalkYeah, first of all, we will not avoid the translation.
So we don't hedge with cash. cash exposure.
We usually hedge about half of the trading risk on a 12-month basis.
So, the amount we have to hedge every month, we will hedge on the next 1/12 days.
So we will protect some of them again.
The biggest deal could be in Mexico.
So, if you look at Paso's performance, we have over $0. 2 billion in the US. S.
Dollar debt could be close to $0. 3 billionS. dollar debt.
So you can figure out how much this will cost.
I mean, if you look at Mexico in order, you know, given where Paso is today, if you remove it, they get some tax benefits that won't repeat in the third quarter.
I mean, as far as the tax and trading currency impact is concerned, there may be a 5% share order draft in Mexico.
William Schmitz
Deutsche BankGood.
Then there is the P & L pension cost.
I mean, should we look for more revenue in the expense section?
I mean, should we look for a big increase in your pension spending in the next quarter and then looking into next year?
Tom FalkWe based on your funding status at the beginning of the year, only one pension expense bill is made every year.
So you list your pension assumptions and then that's what you're paying for this year.
Then, entering 09, we will obviously give you more guidance.
But you can expect that the performance of our pension plan is very similar to that of the market.
Therefore, I expect that the funds for the pension plan will increase in 2009 and that the pension expenditure will increase significantly in 2009.
We will give you more colors in January.
William Schmitz
Deutsche Bank
If you can, the last one.
China was not mentioned in the press release.
I mean, what is the business trend after the Olympics?
Tom Falk continued to do well.
I mean, in general, we just saw that our investment market continues to grow strongly, so the performance in China is quite stable.
We didn't see a big gap there.
William Schmitz
Deutsche BankGreat.
Thank you very much.
The next question comes from Alice Longley at Buckingham Research.
Good morning, Alice ResearchHi Longley-Buckingham Palace.
I have a follow-up question about currency.
This is also the case, involving the following (inaudible)
On the bottom line.
It sounds like some of your offshore costs are denominated in dollars, so if the cap is reduced by 5% in currency, will the bottom line be cut more?
Tom falky guessinaudible)
The way to think about money, you know, there's a trading risk because we buy pulp everywhere in the USS. dollars.
You know, we bought a lot of polymer or non-polymer.
Woven materials priced in the United StatesS. dollars.
Obviously, all the local labor content will also be expressed in local currency.
We can find a lot of other materials locally.
If you look at our lucrative places, or some of the markets highlighted in this morning's earnings phone review attachment.
But I will focus on America. K.
I noticed the Korean Peninsula and I noticed the Australian dollar.
I want to see paso, Mexico.
Probably Brazilian real.
It will be a big market for us, and we usually get good profits from it.
So you will get translation exposure, top and bottom there.
But on top of that, you will have some trading risks and they will buy some items in local currency.
Alice Langley at Buckingham Research Center.
Following these lines, you tell us that currency hedging will be 0 compared to your previous guidance. 10 to 0.
In the fourth quarter.
Can you tell us how much your income has increased in the first nine months of this year?
I think Mike or Paul may have this number.
Alice Langley at Buckingham Research Center.
Mike MassethIt had only a few cents of analysts in the third quarter.
This year-to-
Date, about 0. 15. Tom FalkOkay.
Alice Langley, Buckingham Research Center15? Massage therapist Mike
Alice Langley at Buckingham Research Center.
My other problem is the fourth quarter. The mid-
One-digit organic growth.
I just wanted to take apart the pieces.
Compared with the third quarter, pricing may be stronger than the third quarter, the volume will be weaker than the third quarter?
Tom FalkI believes that the only new price in the fourth quarter will be an increase in facial tissue we are talking about, which will take effect later in the third quarter.
We have some K-
C. professional price increases that began to launch in the fourth quarter.
So this will be the biggest growth.
Select in turn in price realization.
You know, our facial tissue usually has a stronger volume quarter due to colds and flu, so you know we'll look for better volume quarters in turn.
In addition, it may be very similar to the trend in the third quarter.
Alice Langley-Buckingham Research paper? Tom FalkYes.
Alice Langley-Buckingham Research Center, so its volume dropped by 1%?
Tom FalkYeah, I also don't want the price to be lower than the quantity, but the price of most organic products is mixed.
Alice Langley at Buckingham Research Center.
Then my last question is about personal care in North America, where the volume slows down very fast.
You put child care down here.
Is that sorted?
I think you're saying your stock hasn't fallen.
All I want to know is (inaudible)de-
If consumers really cut the number of such products in tough times.
Tom FalkYeah, we 've seen a little shift from training pants to diapers, and as you can see, you know, consumers are going to make kids in diapers longer, maybe you know that choosing diapers is cheaper than training pants.
You know, in terms of personal care, another factor you have had in this quarter is that we and our main competitors have both raised prices.
We entered the market three weeks ahead of our major competitors.
So in the three weeks of August, we were there at a higher price.
Then there are some, some accounts, some promotional price differences for about three weeks.
In this quarter, diapers and pants have been around six weeks and we are at a price disadvantage at least on some key accounts.
So choose to take this risk to drive revenue.
Therefore, this may be another factor in the weak bitcoin sales this quarter.
Alice Langley-Buckingham studiesloading last?
Alice Longley-Buckingham studies (Inaudible)de-loading.
Tom FalkI means that in terms of consumer behavior, what you see varies by category.
Obviously, in diapers and bathroom paper towels, they will return to the store to restock as they need these products every day.
But in a month, they may buy big contracts at the beginning of the month, and they have enough salary.
When they get to the end of the month, they don't have a salary, they may buy smaller contracts, or they may buy smaller ones, you know, not a pack of 20-pound toilet paper, but four packs.
So, you see, in a payment cycle, there's more shift in consumer behavior than we might have seen in the past.
Alice Longley-you at Buckingham Palace. Tom FalkThanks.
The next question comes from Chris Ferrara of Merrill Lynch.
Chris. Tom.
Good morning. how are you?
Tom Falk is good.
Chris Ferrara-Merrill Lynch just wanted to ask the timing of the decline in pulp prices and how it flows through your inventory.
I thought you said last quarter. S.
The inventory is completely in (inaudible)
That way you get the effect immediately.
Is that wrong?
You should get some, Tom FalkYeah, but you know, there are also your finished products.
So it will take longer to actually flow through your gains and losses. Mike Masseth(Inaudible).
Tom Falk and all our stocks outside of the USS. are not on (inaudible).
Okay, Chris Ferrara-Merrill Lynch. So for the U. S.
The side of the part is (inaudible)
This is just what you did (inaudible)
So you, it would be a good measure if we could look at your inventory days?
This could be a better agent.
Chris Ferrara-Merrill Lynch linchokai, good.
I know you're talking, you know I think 60 to 80 days is (inaudible).
First, can you translate it directly into EP?
Or another part that I didn't think?
Also, is the downtime basically over this year and next year?
What I'm trying to say is Tom FalkWell, obviously it depends on the volume.
So if our quarterly volume is weak, we may continue to take advantage of downtime to manage our inventory.
Therefore, we are working to ensure that our working capital goals are met and that we do not accumulate a significant inventory in this environment.
So I think we will continue to have some downtime, especially in consumer organizations with weak sales in the fourth quarter.
This may last up to 2009 depending on the situation in the category.
Chris Ferrara-Merrill Lynch. Okay.
In other words, don't think it's neat and sluggish, downtime, and don't think it will slow down your factory because the volume will slow down.
I mean . . . ? Tom FalkRight.
Chris Ferrara-Merrill Lynch, right? Tom FalkRight.
Chris Ferrara-Merrill Lynch.
Then, I think this is a very simple question. The 0. 10 to 0. 15 current (inaudible)
You said the impact, you know, we will also play relative to your previous tour guide.
Is this a fair statement? If the dollar does not move so aggressively, it is clear that you cannot completely separate it from the item, but because you do not see much in terms of the item.
Would you guys raise the numbers if the dollar didn't move this quarter (inaudible)?
Tom FalkWell, I'm going to choose not to play fake cards today, but you know, I think, what I'm trying to say is that there are so many large moving parts, so much so that it may be more difficult to predict the business than at any time in my memory.
When you see a change in currency and a change in oil.
One of the things we do as a management team is, you know, you used to be able to set up, predict assumptions five or six weeks ahead of forecast summary, and make sure they don't drift too much.
Now, we are considering adjusting them the day before the end of the forecast, as everything can be changed in a short time.
So it's a different environment to be able to run the business and predict what we're going to deliver.
Chris Ferrara-Merrill Lynch but if there is no direct loss I should consider.
I mean, it's fair to accept the total amount of monetary impact, just, you know to see what your numbers look like, right?
I mean, unless there are other important things that you're talking about that are going to turn around, you know, . . . . . . Tom farkeno, I think, you know, it may also be the biggest trading risk in Mexico, but the translation should have a good connection to what's going on with the goods.
You know, if you keep track of the dollar, the euro, against a barrel of oil over a period of time, you see a very tight fit.
So I don't know which one is the cause and which one is the effect, but they are definitely relevant.
Chris Ferrara-Merrill Lynch lincino
Thank you very much. thank you very much.
The next question comes from Jason Gere at Wachovia.
Jason Kiir-WachoviaThanks.
Most of the questions have been answered.
Ask a few simple questions.
First, I mean, can you talk about some of the stronger trends in KCP and Europe relative to North America, maybe just in North America?
You know, if you can talk about more macro issues, you know, office vacancies, hotel contracts, and so on.
Tom FalkYeah this is a good question, KCP is a problem that we usually see signs of economic weakness earlier than the rest of our business.
But that's not the whole cycle so far.
You know there's a great quarter for the KCP in Europe.
I mean, there's not that much in America. K.
This has always been our strong point, but you know, we have achieved great results in Germany.
Some achievements have been made in China and Europe.
So, you know, continue to grow well in this industry.
The team did a good job in delivery. In the U. S.
May pay more attention to the realization of prices.
But even if we talk to our distributors in this industry, I would say they are cautious.
You know, they see that their customers are more selective about the need to be in their bags, and less about the items they have.
But, you know, at this point in time, we haven't seen a major shift in our business.
We have a high position in manufacturing, office buildings, healthcare, accommodation, etc.
You think it will begin to feel here.
We are not as strong as some restaurants in terms of food service, and I know the number of these restaurants is very small.
But so far, our combination has stayed quite well.
We continue our efforts to drive our security channel business, workplace and wiper business, which is a higher profit for us.
So it may also be that we get a healthier combination than we did before going into the downturn.
Jason Gill-wajovi Okai
Then I think on the other side, think about Europe.
Obviously, it looks like you are pricing on a consumer organization, not on personal care, and I think in the normal economic cycle you will think that the situation will be the opposite and personal care will be more value added.
Just, can you talk, do you know the promotional environment outside?
You know, especially in terms of personal care, what you can do about what you really know, try, I want to stop the loss in terms of volume.
Tom FalkYeah and Europe are probably the most competitive markets in the world at the moment.
And it's really in all aspects.
You know, what you see is that the cost of goods has been rising.
I mean an increase in energy.
Electricity prices in the United States. K.
Because they have a real shortage of electricity, they have increased a lot because they have a lot of operational networks there.
So, you know, in terms of overall numbers, some localization costs are growing much more than you expected.
Nevertheless, it is difficult to get the price.
In terms of personal care, our main competitors have been doing a lot of free promotions for one buy one get one free.
We haven't matched all of this yet, so we have achieved a bigger sales volume this quarter.
We focus on launching improved 5-level products and provide promotional and brand building support behind this.
But with that said, our share of the European diaper market is likely to decline.
On the organizational side, you know you continue to see fairly weak categories in the USK.
There are fewer kinds of paper towels in the whole bathroom, which is unheard.
Retailers are trying to question it, you know, and that's a big increase in private labels.
This is one. some food storage rooms go to stock.
Obviously, ourinaudible)
You know, we're the first to be a brand leader.
So the economic environment in Europe is much weaker than what we see in the United States. S.
Jason Gill-wajovi OkaiGreat.
Thank you very much.
The next question comes from Andrew Sawyer of Goldman Sachs. Andrew Sawyer -
Of course, Goldman Sachs syeah is only for a quick domestic service project.
Can you give some framework for the scale of pension contributions that we are talking about?
Are we looking at $100 million, $0. 2 billion, these types of numbers?
I think it's about $50 million this year.
Next year, you know it could be much bigger than that.
But we will give you some perspective.
It obviously depends on how we end up doing this year.
Because your year-end valuation will determine this. Andrew Sawyer -
Over $50 million, or an absolute $50 million?
Tom falky, the absolute contribution of Andrew Sawyer is only $50 million
Goldman Sachs. Tom FalkU. S. plan.
So over the years, we have made other contributions to other initiatives and other markets.
So you may see different numbers in the footnote at the end of the year. Andrew Sawyer -
Goldman Sachs sokay then quickly turned to business planning for 09.
A lot of what you're talking about is challenges, you know, even predicting tomorrow, not to mention the whole year.
When you think of this, do you guys insist on the idea that your merchandise retreat will not flow to your numbers and you need to get the price?
Or, did you take a more adaptive approach and say, you know, we don't necessarily need to stick to pricing and maybe we'll get more volume.
In this ever-changing environment, how do you make your line managers responsible for sales targets and profit targets?
Tom FalkYeah, we're still working on 2009 plans as you think.
One thing we are doing is obviously looking at multiple scenes.
You know, look at the high, medium and low oil prices.
What impact does this have on other goods?
What we expect the cost environment to look like.
Obviously, in the case of multiple currencies.
See how much we can invest in brand building.
What is our innovation plan?
Because ultimately continuing to drive innovation and brand building will help you avoid becoming a commodity and help you continue to build brand assets in your business.
But, you know, start thinking about how to manage an environment that is less stable than in our history.
In this environment, we often can't change prices quickly and easily, so we still don't fully figure out how to do this.
But if we are to have the kind of volatility we see in the market today, we all have to learn how to be more flexible. Andrew Sawyer -
Do you start with the default view?
Or, are you starting with running your business as if you would see a high oil scene and then adapt to another way?
Is that what you said?
Tom FalkYeah is, and we may start with a more conservative set of assumptions around the cost of goods.
Then look at its variability. Andrew Sawyer -
Goldman Sachs.
Thank you very much. Tom FalkThanks.
The next question comes from Lauren Lieberman at Barclays.
Lauren Lieberman-thanks, good morning.
This is the first time I have heard the news.
Tom falky said nothing.
Lauren Lieberman-Barclays yeah, I can't, okay, where am I? Okay.
If you could talk about emerging markets?
I know you talked a little bit about the currency.
But, you know, it's just a very unstable situation.
Signs of slowing growth in any category, or your thoughts on middle-class expansion, you know, continue as we are about to enter, or as global macroeconomic growth slows
I think I will say that.
You know, as I said before, I was referring to people in emerging markets who operate in local currency, so I mean . . . . . . Lauren Lieberman-Barclay I mean, I'm not worried about the locals, I mean, that's what we 've really touched before.
I mean . . . . . . Tom.
Lauren Lieberman-Barclays refers to the business in the local market.
Yeah, but I think the key is, you know, they continue to see job growth and middle class development in local currency, etc, and hopefully more people will be able to get into our category.
Things may be slower now.
I, even if you look at the growth rate of our emerging markets a little slower than it was earlier this year, but it's still OK, I think our emerging market rankings rose 18% in the fourth or third quarter.
So, you know, I think we might expect it to be a little slower.
But it will still be the fastest growing part of the business next year.
Lauren Lieberman-Barclays Sokai
Then, if you can touch the planning assumptions, $0. 9 billion, or $0. 9 billion.
I know you said you're looking forward to getting a little help in the fourth quarter in terms of moderate scenarios and energy costs.
But what order of magnitude are we talking about?
Because you also said, you know, natural lag will affect.
Tom FalkYeah, I think the last quarter was 900, maybe 750 to 800, if we have one.
You know, from some of the declines we 've seen recently, pulp could be better $45 million. All of the oil-
You know, the related polymers and so on will be a little better.
About $20 million.
I think it could be two bigger factors.
Lauren Lieberman-Barclays Sokai
The last question is, is the goal still to continue to reduce inventory when you consider manufacturing downtime?
Or now, what's more important is not to let it build?
You know, I'm just trying to reach the same order of magnitude to see if you're still pursuing the goal of really raising inventory levels and how much downtime is reasonable.
There are several ways to think, Tom fakye.
We set the target inventory level for each enterprise.
Basically every SKE.
So you know, that's how we run the target better over time, not the run time, or, you know, this kind of thing.
So we are working to build more flexibility in order to make tier changes more frequently and even remove downtime from the system as needed.
Instead, we will run this code for a week and then make a level change to the next code.
So these are a lot of features that we build in our business team.
It tries to do this, not the cost of hurting you like it does.
So how do you find a way to reduce downtime and reduce costs as much as you can to minimize the cost impact.
Now, even so, you think, you end up wanting to expand your numbers so you can fill up your asset base and not manage downtime well, so.
Lauren Lieberman-Barclays SokaiAll right. Thank you.
The next question comes from the Chip on Chip, which is independently studied.
Hi Tom, good morning. Tom falkie Chipper
Independent of Chip Dillon's research Hey, the first question is about debt related to woodland transactions in the past, just a little picky here.
I think the merger started last quarter with about $0. 611 billion.
Is this the same number?
Tom FalkYeah, I don't think it will change, so . . . . . . Chip Dillon from independent research
Then, the second question is, can you talk about what you think of the dividend?
I know, you know, back in your early 70 s, you raise this question almost every year.
You know, in these uncertain moments, you seem to have some buff if you, you know, things stay tough.
Is the dividend that you would like to see rise next year or is it too early for you to make a commitment?
Tom FalkI believes that we will say that we have a firm commitment to dividends, we have set goals, and we will continue to increase dividends at a rate that is faster than income growth.
Our dividend will fall this year, but I still expect it to increase in 2009.
It is clear that we will recommend this to the board and discuss it later this year and they will announce it early next year.
But this is going to be an issue that we are considering at the moment.
Independent research Chip Dillon.
The last question is, you know, the three and a half years of strategic cost reduction plan is coming to an end.
It looks like, you know, you almost realized what you thought.
You know, the world changed a lot at that time.
Are you thinking about things that might be smaller or similar in the future?
Or do you think you will take a break on the strategic cost reduction?
Tom FalkWell I think, you know, a strategic plan is coming to an end, you start thinking, you know, what you can do next.
So obviously you can expect us to have
Looking at our strategic planning process, if we find that we can take some action to create shareholder value and strengthen our business, we will not be ashamed to move those actions forward.
But at this point in time, we focus on delivering and completing the current plan.
And then, you know, when we have more things to talk to you at some point, we obviously raise those questions.
Chip Dillon from independent research has done it for you.
As far as this is concerned, I mean you mentioned the downtime and the current call and you also canceled some private tag activity or sorry, the low-cost brand you have in the tissue field.
Is it possible for you to see some of the organization's business's capacity decline in the next year or two, at least in the United StatesS.
Maybe even in Europe?
I mean, I think our footprint in AmericaS.
It's still solid.
So, you know, we have something that we call blank, but we, you know, we're working on filling it.
And got the right asset allocation here.
So I don't see any meaningful capacity changes at this point.
Chip Dillon from independent research has done it for you. Good luck guys.
Tom fakxie Chipper
The next question comes from William Schmitz of Deutsche Bank.
William Schmitz-Deutsche Bank is sorry for the follow-up.
In the press release you commented on, you know, sales are growing and you said that the fourth quarter will be relatively weak.
Does this mean it will drop again?
Tom FalkWell, I mean, I would say, you know, my definition of a relatively weak is a small affirmation or a small negation.
William Schmitz-Deutsche BankAll right.
All I need is this.
Thank you very much. goodbye.
Goodbye, Tom falkok.
The next question comes from Linda Burton wither and Caris.
Hi Tom, I think you said in the past that maybe you think some management incentives for working capital and inventory need to be adjusted.
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