Kimberly-Clark Corporation (KMB) Q1 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for your patience in holding. We now have Mr. Mike Masseth in conference. Please be aware, each of your lines is in a listen-only mode. At the conclusion of Mr. Masseth's presentation, we will look we will open the floor for questions. [Operator Instructions] I would now turn the conference over to Mr. Mike Masseth. Mr. Masseth, you may begin sir.

Thanks David. And good morning everyone. We appreciate your interest in Kimberly-Clark. With us today are Thomas Falk Chairman and Chief Executive Officer, Mark Buthman, Senior VP and CFO and Randy Vest, Vice President and Controller. Now here's the agenda for today's call. Mark will start with a review of our first quarter results. Then Tom will provide his perspective and discuss the outlook for 2008. That will leave us plenty of time to finish as usual with Q&A. For those wishing to follow along, we've a presentation of today's materials in the Investors section of our website, which is www.kimberly-clark.com. First, let me remind you that we will be making forward-looking statements during the call today. There can be no assurance that future events will occur as anticipated or that the company's results will be as estimated. Please refer to the Risk Factors section of our latest Annual Report on Form 10-K for a description of factors that could cause our future results to differ materially from those expressed in any forward-looking statements. We will also be referring to certain non-GAAP financial measures, including adjusted earnings per share, adjusted profit and adjusted operating margin. Management believes that reporting in this manner enables investors to better understand and analyze our ongoing results of operations. For additional information on why we make these adjustments and reconciliations to comparable financial measures determined in accordance with GAAP, see today's news release and additional information on our website. Now I'll turn it over to Mark.

Thanks Mike. Good morning everyone. I hope you had a chance to review our news release this morning with all the details of our results. I am going to briefly review the quarter, starting with a few headlines. First we achieved very good top line growth with sales up nearly 10%. That includes organic growth in excess of 5%, which is in line with our 4% to 6% target for 2008, led by strong performance in our Personal Care businesses. Second we reinvested back into the business at a healthy rate. Strategic marketing spending rose more than $20 million in the quarter, climbing faster than sales. And third we delivered solid bottom-line results. Adjusted earnings per share for the quarter were $1.08 up 5% from last year and in line with our previous guidance for earnings in a range of $1.05 to $1.08 per share. This was despite absorbing cost inflation that was well above our previous expectation. I would like to review some of the details of our results, starting with the top line for each of our segments. In Personal Care, sales climbed 14% driven by strong volume growth of 7%, improved net selling prices and product mix, each added an additional point of top line growth and currency benefited sales by 5%. In North America sales volumes increased about 4% and net selling prices rose 2%. Volume growth was led by our Adult Care business, with a double-digit gain behind improvements to poise and depend. Baby and child care delivered solid volume growth compared to a year ago, along with good early benefits from the price increases that started to go into effect in February. Moving to Europe, personal care sales volumes rose 1% with growth in Huggies diapers and baby wipes, and our Pull-Ups and DryNites, child care brands. Net selling prices were off 3% due to continued competitive activity in core markets. In the developing and emerging markets, personal care sales jumped more than 25%, that's the 14th consecutive quarter of double-digit growth. Sales volumes increased 13% with broad-based growth in each region. Highlights included: high 20s growth in the fast growing BRICIT countries, double-digit growth in Latin America overall and also in South Korea. Our D&E teams delivered outstanding results in the first quarter. We expect the positive momentum to continue going forward. Turning to consumer tissue, sales rose 7% including 4 points of benefit from currency. Higher net selling prices contributed 3 points of growth, although 1 point gain in product mix was offset by lower sales volumes. In North America, net sales were up slightly. Our focus on improving revenue realization drove a two-point gain in net selling prices and a one-point benefit in product mix. Those gains were offset by a 3% decline in sales volumes. That falloff was driven primarily by our decision to shed some low margin business in order to improve revenue realization and to support continued growth of higher margin offerings. In other parts of the business Kleenex facial tissue volumes recovered from a soft cold and flu season in the fourth quarter, more essentially even with year-ago performance. Switching to Europe, sales volumes gained 6%, spurred by growth from our market leading Andrex bath tissue brand in the U.K., and Kleenex brand in several markets. Moving to K-C Professional and other, sales increased 9% including nearly 5 points from currency. Organic sales were up more than 4% with higher sales volumes and net selling prices each contributing 2 points of growth. We had another good quarter with key growth initiatives in KCP. Global wiper sales continued to expand, with a first quarter increase of 12%. At the same time, KCPs business building efforts helped drive a strong double-digit increase in sales across the developing and emerging markets. We also had a solid quarter in North America with good volume growth in washroom business. Lastly, Healthcare segment sales were down almost 2%, despite 2 points of favorable currency. Net selling prices were off about 2% in the quarter and product mix and sales volumes, each fell about 1%. Although volumes were down slightly, overall performance was essentially on-track with our first quarter plan for healthcare. Comparisons were impacted as expected by strong growth last year in face masks, which benefited from avian flu preparedness that didn't recur this year. In addition, volumes and net selling prices declined in surgical products due to continued competitive market conditions. On the plus side, we generated solid growth in medical devices, led by our Ballard airway management offerings. We also had a good performance outside North America with the over all business growing at double-digit rate. Based on plans and price, we expect improvement in top-line performance from healthcare overall going forward. Now moving to operating profit and cost savings, and for this discussion, I am going to refer to adjusted operating profit and margins which excludes certain charges that are detailed in this morning news release. First quarter operating profit rose 3% to $688 million, with an operating margin of 14.3%. Profitability was impacted by significant cost inflation, which totaled about $160 million in the quarter. Due to escalating oil prices and continued increases in Eucalyptus pulp and secondary fiber, the inflationary impact on our bottom line was several cents per share, worst than our first quarter plan. Despite the inflation, we're continuing to invest in strategic marketing. In the first quarter, spending was up $22 million supporting growth in areas such as personal care and the developing and emerging markets, and adult care here in North America. We also kicked off our 'Be Kind to your Behind' campaign for Cottonelle bathroom tissue. Now turning to cost savings; we delivered total savings of more than $50 million in the first quarter. Our ongoing FORCE program generated savings of $24 million in the quarter, despite higher spending levels at some our facilities. At the same time, we realized $28 million of year-on-year benefit from our strategic cost reduction plan. We still expect to deliver total cost savings for 2008 in $200 million to $215 million range. Now, let's look briefly at first quarter segment operating margins. Personal Care continues to perform at a very high level with strong improvement versus year ago, fuelled by our top-line momentum. Profitability was up significantly in each region of the world. Both Consumer Tissue and K-C Professional and other segment margins continue to be impacted by inflationary pressures. In both of these businesses, the benefits from top-line growth did not overcome cost increases, particularly from pulp and higher manufacturing costs. Finally Healthcare margins were down reflecting lower sales, higher input costs and the impact of down time to manage inventories. Now switching to taxes; the adjusted effective tax rate in the first quarter was 27.7% that was towards the high end of our previous guidance for a rate in the 26% to 28% range. Compared to last year taxes overall were about $0.01 drag relative to a year-ago earnings. Looking ahead based on what we now, the second quarter 2008 adjusted rate should be in the 30% to 32% range. That's higher than both the first quarter of this year and the second quarter of the last year to the expected timing of tax planning initiatives. Now moving to cash flow in the balance sheet. Cash provided by operations was $426 million, compared to $525 million in the prior year. The decline was driven by increased working capital levels, particularly higher inventories. Although a significant portion of the inventory increase came from the combined effects of currency rates and cost inflation, we know we've got to be more efficient overall. Working capital is a key focus area for us company wide, our business teams are engaged in implementing plans to improve our inventory management performance. We expect to make progress later in the year. Looking at capital spending, we invested $220 million in the first quarter. That's in line with our full-year investment target of $850 million to $950 million. Regarding share repurchases, we bought $3.1 million of KMB stock at a cost of about $200 million during the quarter. That's consistent with our full-year target to repurchase $800 million to $1 billion worth of KC stock. So that wraps up the financial review. To recap the quarter, we achieved strong top-line growth, we reinvested nicely back into the business, and we delivered solid bottom-line results in line with our commitments. Now I will turn it over to Tom.

Thanks Mark and good morning everyone. I'll comment briefly about the first quarter then I will review the outlook for the balance for the year. My headline today is that we are continuing to deliver as we build for tomorrow. Our teams are driving great results in personal care and across the developing emerging markets organization. Now while inflation remains a big challenge for us, I am pleased with how we've been able to continue to overcome these cost pressures. As for my perspective on our first quarter results, I'd like to highlight several key points. First our businesses in developing and emerging markets are very healthy. Our teams are capitalizing up on the opportunity these rapidly growing market offer us with a blend of great marketing, solid product innovation and strong customer programs. And with a 22% jump in sales in the first quarter, our D&E businesses now we represent 31% of our portfolio and that's up from 28% just a year ago. Second, we are making good progress in improving our revenue realization with net selling prices up about 2% in the first quarter. I am encouraged by the successful implementation of the mid-quarter price increases for diapers, training pants, bathroom tissue, and paper towels in the U.S. From both a customer and a consumer point of view, so far these increases have gone very well and our market shares are in solid position overall. And with oil at $115 per barrel or even a little higher than that this morning and pulp nearly $900 per ton, you can be sure that improving revenue realization will remain a key focus for us. And third, even though we hit our plan for the quarter, we still got lots of room for improvement. Inflation aside, we're not satisfied with the margins in our Consumer Tissue, K-C Professional or Healthcare businesses. The fact is our operating costs were higher than we would like in all three of these businesses. We also not satisfied with working capital performance which as Mark mentioned earlier was a drag on cash flow in the quarter. We've got too much inventory and we're committed to being more efficient in this area. My final point is that throughout the first quarter, we continued to do the right things for the long-term health our businesses. We stepped up marketing spending to help build our brands, we brought innovation to market across our businesses or investing in capital to support our growth particularly, in developing and emerging markets and we're driving cost out of the system to help improve our competitive position. Now let me turn to the outlook. Our global business plan is creating sustainable growth and we're confident we will continue to deliver... to execute our plan well and deliver on our commitments going forward. Building on the momentum of our first quarter performance, we expect solid growth in organic sales over the balance for the year. Favorable currency effects at current rates of exchange should also benefit sales comparisons. One of the consequences of a weaker dollar however is inflation in dollar-based commodities like fiber and oil. As a result we anticipate that inflation will continue to put pressure on our margins, particularly in light of the escalation in costs over the past quarter. Nonetheless, we expect to generate good bottom-line improvement for the full year, as we focus on improving our revenue realization and reducing costs. Meanwhile we plan to continue to support our growth and further strengthen our competitive position, with higher levels of spending for strategic marketing and customer development. Overall, we remain comfortable that our results in 2008 would be in line with a long-term objectives of our plan. Specifically, we expect adjusted earnings per share in 2008 will be in a range of $4.45 to $4.60 per share, that's up 5% to 8% from the $4.25 per share we earned last year. As for the second quarter, we expect adjusted earnings per share will be in a range of $1.08 to $1.11. This will represent growth of 4% to 7% compared with the $1.04 per share we earned in 2007, even though we're projecting an increase in the effective income tax rate versus both last year and the first quarter of this year that's equivalent to several cents per share or more. To summarize, we're off to a good start in 2008 and we have solid plans in place to drive results over the balance of the year. We remain focused on delivering sustainable growth in sales and earnings and in deploying our cash in shareholder-friendly ways. We believe we have the right strategies in place and we intend to continue to drive our targeted growth initiatives, strengthen our capabilities and improve our cost effectiveness. Our strategies are designed to build strong enduring global brand franchises. Trusted brands like Huggies, Pull-Ups, Kleenex, Kotex, Scott and Depend to name just a few and we're confident that our efforts will result in long-term success for Kimberley-Clark regardless of the cost environment and create value for our shareholders. With that, thank you for your interest today and now we will be happy to take your questions. Question And Answer

Ladies and gentlemen at this time we will open the floor for questions. [Operator Instructions]. Our first question from Jason Gere with Wachovia Capital Markets.

Good morning.

Good morning, Jason

Just a quick question. Can you talk a little bit more about what's going on in Europe, specifically maybe in the UK market on the diaper side. I believe one, P&G had been taken pricing there and I am not sure if you guys followed. So, I am just wondering just in the peak time of the UK market but also your four key markets, the competitive pressure's going on in that diaper market right now.

Just to clarify Jason which direction did you think they were taking pricing up or down?

I heard that they were going up.

Well, I think what you've seen is if you it look at the UK market in particular, but this is to some extent through across Europe is that you have seen a lot of retailer generated price activity. Over there the retailers are actually funding very low prices in key destination categories like diapers. So you've seen lot more buy one get one free activity. You've seen then advertising diapers that might normally retail for six pounds a package being advertised on TV at three pounds per package and that's not all funded by the manufacturers. Most of it is being funded by the retailers who try and drive foot [ph] traffic in what's viewed as a slightly weaker economy in the UK. So I think you may see if there was may be less promotion in the fourth quarter versus the first quarter, you could see some sequential improvement. But I wouldn't say at this point in time there had been any broad upward movement in price in diapers at least in Europe, we have taken some tissue pricing up in the UK, specifically where Proctor is really not a player in that category any longer.

Okay, so I mean, what's your general outlook over the next couple of quarters For you know this business, I mean do you think things can get better or do you think it is really going to, with the sluggish European economy, that we should continue to see these type of activities going for at least the near term.

Yes, I think the retailer generated activities is hard to predict, what they are going to do. They don't always give us complete visibility of those plans. As we look actually at Europe in a couple of categories, I was pleasantly surprised to see our tissue volumes were up by 6% in the first quarter and really across the core markets in Europe for diapers, we were down a little bit, but across the entire European market place we were up slightly from a volume standpoint. Price was negative in Europe for us on diapers in the quarter, which reflects the promotional environment that were are in. I guess, I would say at this point I am not seeing that easing one of the consequences of the weaker dollar and the stronger European currency is, that a lot of the local manufacturers aren't seeing the same level of cost inflation on dollar based commodities as we are seeing in this country.

Okay and then... just one more question, then jump back in the queue, can you... I mean, I know last quarter you'd talked about cost inflation about $400 million plus, I didn't see a numbers, this time I mean I am guessing it some where in that...I don't know if you can look at the quarter and it has a run rate going forward but it certainly well over 500... seems to be the right rate. Can you talk maybe a little bit about, if that is the case, are there more cost savings initiatives you can step up? Is it inevitable that there is more pricing coming that's coming through and specially in North America, do you feel comfortable taking another price increase... with what you have seen of the last two months consumers' reaction to the first price increase that's been kind of enabled? Thank you.

Yes, I mean there is a lot of questions in there. I guess I would say on the cost front certainly with $160 million of cost inflation in the first quarter, our $400 million estimate that we started out the year is, look light based on our current outlook... it's probably going to be at least $100 million more and maybe $200 million more than we started out. But obviously you picked the oil price and you can calculate what the impact is. In terms of the cost savings, we are still comfortable at the $200 million or $250 million a year is about what we are going to deliver this year. I think the extent we are going to cover it is going to come more on revenue side. And so we talked about price being 1% to 2%, we were trending to the high end of that range in the first quarter and that's certainly going to have to continue. Without speculating on future pricing I guess I would say that this price increase seem to have gone well from a retailer standpoint and a consumer standpoint. We're not seeing private label shares improving in fact to the contrary private label share are declining. And so I think in an inflationary environment like this you go to focus on revenue recognition to be able to cover that.

Okay, great. Thanks and good luck with everything.

Thanks Jason.

Our next question comes from Ali Dibadj with Sanford Bernstein

Hey guys.

Hey Ali.

A few questions, one is just on your working capital. I mean it clearly continues to bloat here, and you guys keyed in on it, not only on this call but in the previous conference call. I'd love to get underneath what specifically from our operational standpoint you guys are doing to tackle that because, there is at least one school of thought out there, that says you can't really get at those numbers unless you change the incentives for both your sales folks and your ops folks to really, really focus in on that. Just trying to understand how you are going to of about trying to take that issue?

Yes I'll give you a little bit a color and may then maybe ask Mark to add some detail to it. You know, I think first of all if you look at the working capital... or we look primary working capital, receivables, payables, inventories, essentially receivables, payables are basically on-track in terms of day sales activity. So you are not seeing a lot of movement there and you saw a little bit of sequential decline in payables which really has more do with timing of capital spending and year-end accruals and things like that. But basically there isn't... is obviously more you can do in those areas, but no major issues. So big issue is inventory and if you look at inventory and kind of break it down about half of the increase in inventory is due to inflation in currency. And so obviously that's not allowed but you can manage on that front, but the other half is things that we can't manage and Mark just give your a little bit of color on that in terms of what we're doing from a compensation standpoint and how the team is focused on that.

Ali this is a... obviously, a focus for us organization-wide both for our finance teams and the business teams. And for the first time we've got a specific incentive metric in our compensation plan related to working capital improvement. In the business team there is the whole variety of activities underway, starting with improving our demand planning, focusing on SKU management, as we've done a much better job with innovation and focusing on our customers making sure that we're really getting the right amount of velocity for every SKU we've have got in the portfolio. So I think your comments are spot on. We have got the incentives right. My belief is we've got all the information systems we need. We are fully deployed now with SAP across the organization. We have got all the tools and the processes. Now it's a matter of driving those activities down through the organization, which we've got plans in place to do.

Okay, different type of question; just around the commodities obviously which continue to be these big concern here. Last quarter there was a sheet of assumption, as you go through the assumption now and you compare the numbers obviously at that point we and other folks, I am sure thought they were conservative assumptions on the commodity cost and what you're assuming going forward that clearly changed. Can you gave us a taste of the assumptions they have embedded in the 345 to 360 going forward similar what you did in Q4 ?

Yes that's... it's 445 to 460.

Okay.

So we didn't lose a bucket in but that...

yes sorry, sorry, sorry.

That's okay. I just want to make sure you remember so. I think that the... as you look down the worst stream, fiber continues to be a slowing quarter-on-quarter but more that probably was in secondary fiber even more than pulp, which is a bit of a switch for us and you have seen recycle fiber has been in tight supply actually and in both the U.S and Europe. And so that's been probably the biggest dynamic and has led to more pricing in than the KCP business. So I think our secondary fiber costs were up something like 35% in the first quarter and expected to go higher in the balance of the year and that's probably been a big shift, and on the oil front that's a little bit harder to measure. Obviously diesel fuel is a direct pass through from the carriers and so diesel is at $4.20 and I think we came into the year, it was probably $3.50 or thereabout was our expectation. And so that's the big impact and that will continue. The balance of oil... we don't have a lot of direct oil exposure, but as it works its way through the supply chain in the polymer and adhesives and other materials, that will work its way through our cost assumptions and so in some way it depends on how hedged some of our suppliers were as to when you see those price increases coming through. And as they do come through, you are challenging every supplier to go back and find ways to offset or to offer us alternatives that mitigate some of the costs. So to extent we can, we are trying to avoid some of those, but obviously that will play a factor for us. When we look at the other materials in the first quarter, it was up about $60 million, I think year-over-year which was a big number.

So I mean, it sounds like all these numbers are obviously up yet guidance hasn't changed. You mentioned a second ago or a little cover minutes ago that, a lot of that will have to be pass through in terms of pricing?

Yes in terms of reconciling the cost to the bottom-line numbers I mean the positives will be, probably get more pricing than we expected. So it's more towards the high end of the range. We were probably more positive on the interest expense line as the commercial paper rates are gone at about 2% right now, so we are still expecting to be a little bit more positive on that assumption for the year. Other income and expenses in another area... where we typically assume a small amount of expenses we have had some currency hedging gains that been more positive so that's been other area. But there have been other areas of the P&L where we've been able to pick up some amount to cover that those cost differences.

Okay. And as in guess, a little bit of a broader question just on the pricing, How do mitigate all this. How do know that the consumer is about to book on your price increases until they actually do?

Well, we have done price elasticity modeling for lot of our categories and we're working with the retailer they understand what items do you need in opening price points and where is move up price point, what are the of the promotional lifts at varying a levels of activity. We've got a lot of modeling data but in kind of inflationary environment, everybody is having to go back and relook at those. So in some cases you'll do it with count or with a sheet count our package count, at other places you do it with straight list and so it's probably more of an art form than a science in terms of understanding how to play that.

I think in some ways are K-C Professional business is actually more of a leading indicator than the consumer businesses and they actually had a very good volume quarter, both in the workplace and the washroom businesses.

And were very aggressive on price.

Our next question comes from Chris Ferrara with Merrill Lynch.

Hey good morning guys.

Hi Chris

What are the going to marketing spending a little bit, so was that up $22 million year-over-year; is that the right run rate we should think about for the rest of the year? And then just can you sort of bench mark yourself versus your peers in your categories. I know it differs by marketing and by peer but I was just wondering if you could benchmark yourself where you think you stand today on marketing spending versus the peer group.

Yes, we typically we're measuring share of voice in each of our categories and where we are versus launch activity and versus other. So we know some markets we will spend more than our share of voice in another market will spend little bit less, but generally we're looking to see that we were at least competitive and being heard. Let's say that Metric is getting a little bit more complicated, as we're doing more with alternative media and so we believe that we're among leaders in looking at integrated marketing planning to the spread our marketing dollars across, across a wider range of media and PR activities and so you know,I'd say we were probably a little less PV than average and a little bit more alternative than average. But I know that market place is changing pretty dramatically. In terms of how we spread the funds, as we spend pretty aggressively in D&E as we are really trying to build in emerging markets. Obviously spent, a fair amount in our tissue business behind some of the Cottonelle re-launch, so what where we have innovation and news will spend aggressively behind the news.

And as far as the run rate for the year, do you think the plus 22 million in Q1 is similar to what we will see for the rest of the year?

Yes I mean... I guess our expectation, as we've said over the long term is to continue to increase our strategic marketing spending. One of the interesting things as we have done that we are basically on plan with that for the year so far, but as we've done that we got more top-line for it and then probably we would have anticipated. So we're over delivering on the top-line and doing it with fairly modest increases in marketing spend.

Great. Thanks. I just wanted to go back real quick to the offsets that you guys are generating to the material's cost inflation. So this quarter in particular, looks like other income swung pretty positively from expense to income. Was are these hedge gains on currency and how would you think about that line item through the rest of the year or is there any way to sort of get arms around that one?

The big swing was we had hedging losses last year or hedging gains this year and so and we are not... we are pretty routinely hedging about half our transaction exposure so it wasn't that we are doing more hedging or being more aggressive with hedging, it was really just more of the movement... the more consistent movement of the U.S. dollar. So we're every month hedging about one-twelfth of our transaction exposure twelve months out. So...

Great thanks a lot. I appreciate it.

Thanks.

Our next question comes from Filippe Goossens with Credit Suisse.

Hello, Filippe.

Yes good morning. Tom, how are you today?

Pretty well.

I am going to focus my two questions this morning more on your developing and emerging markets, if I may. The first one, we have seen somewhat a subtle broadening in terms of your advertising mix, particularly in Latin America and that also includes the Huggies toiletries in addition to what you did previously with Huggies. So the three questions related to that observation, the first one is give that you are now advertising Huggies toiletries, is that an indication about your continued comfort emerging market will continue to significantly outperform the developed markets. Secondly can you talk a bit about your return on the invested capital for that type of advertising, compared to let's say the diaper business. And then finally, given the better margin profile of toiletries, could we expect from it to continue to focus on that side and perhaps look at let say tuck-in acquisition opportunities in order to make the company as a whole less dependent or less... make yourself less subject to these higher commodity prices?

I think, I'll get all those done. Filippe you will have to help me if I forget one of those or in part of the way through. But in terms of the Huggies toiletries marketing pretty much the way we think about that is where we've got strong diaper shares. We're going to drive everything we can with the Huggies brand and all of the occasions around that Huggies brand name that we can. So in a lot of the developing and emerging markets, we have very strong diapers shares and so we are driving the toiletries business. We had some great success behind launches in Latin America and have built nice share positions. Having said it's still a relatively small category, relative to the rest of our businesses and feminine care for examples Diapers and even tissues in some of those markets. In terms of marketing ROI... that's a tool we are continuing to build and develop. And so we have got better metrics in place. But again that's an another one that is still more of art than a science and it's easier to see after it's happened than to be predictive of what's going to happen. So it is one that Tony Palmer and his team is really trying to build better capability to analyze our marketing spend and be more predictive with what we should expect for given levels of investment around the world. But developing and emerging markets has been a place that we found is a good opportunity to continue to invest and grow our business. In terms of the signal on toiletries and whether that... we should look for more tuck-in acquisitions, I think again this is more about building up the Huggies brand and we have got some great innovation there, and we are able to bring to the marketplace. But I wouldn't interpret that to be a strategic shift to the magnitude that you were describing. And I think that was all of the questions, did that cover everything you were looking for?

That's correct. Tom and I just had one another question on China. Obviously, a very fragmented market at this juncture, both for personal care products, as well as consumer tissue. Given the indication of the Chinese government that they are going to become more stricter as it relates to regulations. What specific opportunities will that create for companies like yourselves? And maybe just a little bit from a more broader perspective, if you look at China specifically, do you see the opportunities for you coming more from benefiting from category growth, as you make people more familiar with the... the Kimberly-Clark brand equity or do you see opportunities more coming from taking market share away, given that the market is still so fragmented at this stage.

China is a very exciting market for us and it will appear for probably every other CPG company in the world. So there is a lot of companies ploughing the same ground in China right now. And so, it is a very competitive marketplace and there are a lots of brands, particularly at the low end, but more in the mid to premium tier where we want to play, we tend to run into the same global players with an occasional local player. So it's us and P&G and Unicharm are the major players in the premium personal care arena like diapers and fem care in China and so, our strategy is to really grow those... the premium and super-premium segments of the category. And as incomes improve for Chinese consumers that seems to be happening. We had a terrific top-line performance in the first quarter, as we did across most of the developing and emerging markets.

Any concern about some of the stronger local players like Tomakya Hangon [ph] trying to move more up scale and become incremental competition for you guys?

Hangon is a terrific operator and they do a great job in a number of categories. So yes, I would say absolutely that would be a concern.

Okay, great. Thanks so much Tom.

Our next question comes from the line Lauren Lieberman with Lehman Brothers.

Thanks. Good morning.

Good morning Lauren

First thing was, in the press release you guys mentioned some business exists in North America consumer tissue. Can you just elaborate on what that is and how much of an even impact there was on the quarter and is it something we should begin building into the next three?

Yes, that was a private level contract and it accounted for more than half of the volume decline in the consumer tissue U.S numbers that we quoted for the first quarter and that comparison will be with us for most of the year.

Okay, and that about the magnitude.

Yes, roughly.

With no seasonality or anything.

No.

Okay.So then rest of the decline we'd spend is obviously not that significant. Would you say that it's tied to the max to the pricing that came through or is there something else to just beware of.

Well, its really probably de-sheeting on Cottonelle. So we report volume in sheets as you know and so, as we de-sheeted Cottonelle on the fourth quarter of last year, that also volume comparison, so you know. We have good single digit volume growth on Scott tissue and we improved our net sale dollar over all for Cottonelle, but the de-sheeting was probably volume comparison that they, you typically see in period after a account change like that.

Okay. And then KC Professional, mean that is one the business that you spoken about has been really somewhat difficult volume was still really solid. And you also made it seem as though I think Mark just said it seems to be typically a forward indicator. So what are you seeing, I mean are you expecting volume to moderate going forward and are you expecting pricing to accelerate based on what you know about contract coming to you?

Mark and I just spent sometime with our KCP team in Atlanta and they several of them have just come back from our meeting with lot of there North American distributors. And they were more bullish than I was expecting. And so they were feeling like the first quarter was overall pretty solid, January and February were good months for the most of distributors and March was a little soft, but their outlook for April was positive and so they weren't really seeing the weakness. Obviously if you are making something that requires consumer credit to buy it. like a car or a house, it's a different story but the rest of the economy broadly based was in pretty good shape. So I'd say overall their outlook continues to be pretty positive, more than you might have expected for the economy at this point in time.

Okay and then pricing question, I mean it should be accelerating what comes through in P&L based on contracts coming due?

Yes, we were very aggressive in pushing this most recent price increase through. There appears to be sticking. It appears that competition is mostly following in the professional market and obviously as contracts come up, the message that we are giving that team is to be aggressive on revenue recognition this year.

So I think Lauren they had, I think KCP said eight separate price increase over the last 3.5 years. So they... it actually been ahead of the consumer business and in discussions with the team they are very focused on improving realization. So they have got, I wouldn't call it a rhythm but they've got almost a biannual price increase model and they really got the sales team focused on realization now, which is a good thing to see.

Okay.But just to be clear on that I mean those price increases, it only applies for a certain amount of time. So if contracts come due, things don't come due every year so its not that?

One of the things we are trying to do, Lauren, which maybe we haven't talked about as much as we have been trying to convert more of our contracts to what's called an until further notice contract as opposed to an annual negotiation, so that we can change price more flexibly going forward. Now there are still are some big government contracts that are on annual bid, but more of the day-to-day business is on an until for the notice contract.

Okay, Okay great. And then just finally on the Healthcare business; also in the press release, mentioned something about some issues in surgical supply, pricing was down which I would never expected and volume was a little bit better, but if are going to talk some of the dynamics there, what exactly is going on from a competitive standpoint and if you have started to make up some of that business in the nitrile gloves?

Healthcare is sort of a tale of two cities there. We have got the supply business which is things like gloves and surgical and surgical wrap and gowns and that been a tough competitive battle. Then we have got the devices business, which are all the Ballard products, and those have been going very well. So we had solid growth in devices in the quarter and we had good international growth in the quarter which is up double digit, but the drag which are the bigger parts of the business are in the supply side and some of it was comparisons to the prior quarter where we had a fair amount of mask sales still for avian flu ordering which obviously was a weaker flu season, so there wasn't as much of that this year, but some of it was still the gloves comparisons and it's a longer sale cycle to really gain back customers from a glove standpoint, so the team feels good about the order pipeline, but it hasn't all translated in the orders at this point time and so... take pricing is more competitive than you would think in the environment on the supply side as we have companies like Medline and even Cardinal, have been more aggressive and are trying to take bid business which is what why you saw the... the little bit weaker price comparison, so I think there is more competition in healthcare than we are probably expecting at this point in time given the cost that occurring in the cycle.

Okay, great thank you.

Thanks.

Our next question comes from Connie Maneaty with BMO Capital.

Good morning.

Good morning Connie.

I have couple of questions. First I think you mentioned in you remarks that while you were pleased with the margin in the Personal Care segment, you thought there was more improvement in the rest of the business. In those businesses were the cost is higher than you had expected because of inflation or there is something on the SG&A area that is ahead of budget?

Well, I'd say SG&A were on track. I think in particularly in Consumer Tissue and K-C Professional which are big manufacturing operations, we didn't operate a couple of our mills at plans so we had some higher cost in Consumer Tissue in Europe as we were converting over the to the Andrex long roll that affected us, a couple of our tissue mills in the U.S. had some unplanned maintenance spending that was higher than we anticipated in the first quarter and so... those were areas that we were referencing and despite the inflation we also didn't operate as planned in a couple of our business in the first quarter.

Well can you quantify what the gross margin impact of the mills not operating as planned would have been, just to put it into perspective relative to what's happening with inflation?

Well mean inflation would be by far the bigger number. So you are probably talking in the high single digit, low double-digit millions of dollars as opposed to the $160 million of cost inflation that we saw for the quarter.

Okay. And then secondly, as food inflation rises in a lot of the developing and emerging world, have you seen that start to cut into disposable impact, and have some sort of impact on your BRICIT sales?

Obviously we have a great D&E quarter, where sales were up 22% I think if you look at our BRICIT sales for the quarter, they were up more than 40% and so were not seeing that yet at this point in time. Obviously, as we have thought about that you get about a billion people in the world that live on a dollar a day or less. And as rice has doubled than other food stuff have doubled, that's clearly cutting into their purchasing power. If you think about our strategy, we probably are aimed at more the... the middle income consumer or the growing middle class and in most of those markets, incomes for that group are still rising faster than inflation and so you are not seeing as big of a pocketbook impact on the food cost. But it is something that... that we continue to watch and has some concern about. But so far it doesn't seem to be affecting our D&E sales as much as you might have expected.

Okay that's great, and just one final question back to inventory. I think we understand that you are going to... you have changed your compensation structure to address the inventory issue. But are there targets in terms of the number of days you want to take out or the gross rate of inventory?

Yes basically we are targeting a working capital as a percent of sales. And then they can break that down into individual business units in terms of how they track back to get to the percent of sales targets.

Okay can you give us what the inventory targets are?

It will vary, vary by business. At an enterprise level, we again we are setting the goal to reduce working capital as a percent of sales. Obviously we were up in the first quarter so will be talking to our top 1000 leaders right after this call and talking about how we're going to get back on track so.

Okay, thanks very much.

Thanks.

our next question is comes from Gail Glazerman with UBS.

Hi good morning.

Good morning Gail.

You've touched on this a little bit on the call but just to be explicit, last call you were very bullish I guess from the U.S consumers and having pushed through on the price increase. I 'm just wondering and the expenses you have had in this quarter are you just as bullish, less bullish?

No we still feel it's pretty good; we are looking up private levels shares... kind of how that compared to versus the first quarter last year and also sequentially and you're seeing private label shares flat or down in nearly every category that we compete in both sequentially and versus first quarter of last year. So that would say that the consumers holding up pretty well and this environment. So used to still seeing solid growth in the super premium segment of categories. So where we are able to bring those... little luxuries that don't cost that much more but mom's going to buy that to take a care of her family. You got to obviously see deliver value in those situations she'll keep coming back and buying that. But so far we're still optimistic about the consumer.

Okay, great, and just going back to inflation. When you are talking about the fiber, you are highlighting... you are highlighting waste paper and doing that earlier and turn there earlier comments on you suggest and general specifically looking at call is that playing out largely we expected or your stand a little bit more fresh back on placing the encourage that you see some of the these later on the year.

You know that Northern softwood that been tracking pretty much with expectations. Eucalyptus has run up faster and expected in fact with more capacity coming on in the Southern hardwood type, and while we expected that to be the weaker grade for the year and it's actually it was $20 it only took in February and they are proposing $40 for April. That's a more aggressive move than we would have expected for eucalyptus at this point in time. Secondary fiber has had more to do with Asian demand for secondary fibers there. They are buying up lot of the secondary that's available on the U.S and Europe and shipping it to China to be used in cardboard box plants that are being built over there. So... that's one that I don't see that trend slowing down too much either in the near term.

Okay and finally a last question, going back to Europe you talked about not as much cost pressure because of the currency and what that means? I am just wondering, I mean given that prices are actually down in Europe I mean if there has to be significant margin pressure there. Is there any sense what might that to break and turn in the other direction?

Well we did give some consumer tissue price in the quarter but did not achieve any in the personal care front. And so I think what you are seeing right now is more of the retailer driving category price levels and lost some of those retailer skirmishes take place, it's going to be difficult call what the long-term pricing levels are going to look like.

Okay. Thank you very much.

Our next question comes from Chip Dillon from Citigroup.

Hi, good morning Mark and Tom; first question is on the you mentioned the consumer tissue prices were up 2% year-on-year. How much of the first quarter initiatives did you actually experience in the quarter and sort of how much has left over to see realized in the second quarter?

I'd say that there is the pricing in both consumer tissue as well as on diapers and training pants which all happens around the same time happened around mid quarter, so around the middle of February.

Okay, we've about half way to go.

Right.

Okay. And then you mentioned I think Mark you mentioned that the fiber I think it's a fiber or fiber energy were several cents above plan in the first quarter. Can you talk a little bit about how they broke down and did you mean $0.2, $0.4 just to give us an idea.

Somewhere in there you know several is more than five and less than ten.

But you were talking about these categories is just fiber?

Both those categories.

Okay. And then you mentioned on that this one thing on the other income, which was usually is a negative number in the currency gains. If we would I guess expect to see that kind of a number, if we see a dollar maintain it's pace of decline was just pretty sharp in the first quarter, but if we don't then I believe we would not see such an increase in the future quarter. So is that correct?

Chip,I think it's really tough to predict, but I think a kind of plus or minus $5 million expense or income is the range I would think about.

Okay, got you. And then last year the tax rate in your press release on January 24th you mentioned tax rate for '08 of 30% to 32%, but in the comments you said 26% to 28%. Usually I believe your are supposed to... I am not an accountant, but make your best guess each quarter so what your full year rate will be and it looks like this year you tell us 30% to 32% in the second. Is that also your best guess of the year or is that in the adjustments to get you through a level that you think will be different for the year.

No our full year outlook is still the same at 28% to 30%. Just timing of various initiatives hit us such that, under the current accounting rule... under the accounting rules, you sort of book them when you have them and we are expecting the second quarter to be 30% to 32%?

And Chip, I used to be and accountant, so I understood the way that you described that you use to kind of true it up, but a lot of the new accountings rule works which is, FIN 48 you basically have to mark all of our reserves up or down during each quarter. So you're going to see, I think from those companies more volatility in interim effective rates. But we still think the long-term rates for the year is going to be in the 28% to 30% range.

Got you. Thank you very much.

Thanks.

Our next question comes from Andrew Sawyer with Goldman Sachs.

Hello guys, I was just wondering if you could maybe help me through the PERSONAL CARE margin behavior. I guess if its going to try and break down, how much of that is coming from pricing and versus leverage on growth in your in your emerging markets?

Personal care if you look at price in mix it was about a point in North America, it was down three in Europe, we were up about five points of prices in Latin America and Asia was about a push. So I'd say pricing mix was overall a slightly positive, probably a couple of points, the bigger factor I think driving some of the margin activity was volume where we had decent volume growth in North America about 4% Europe was pretty flat but Latin America and Asia were up double-digit, so I'd volume was a bigger impact on Personal Care profitability in the quarter.

Just kind of shifting gears, you see strategic marketing up, but you guys have acknowledged, you are kind of pairing back on your in-store promotional support, which you have seen come in the Nielsen data. Do you have any early feedback on how competitors or retailers are responding to that, and I guess what implication you see at the consumer level as well.

Yes in terms of paring backing in-store promotional support, I think we are trying to make sure that we are managing the rate of increase in our trade funding but I would expect that your going see us continue to get our fair share of promotional support and so it's just trying to do it in a more efficient way and spend less where we can do achieve that. So I think as we look at out marketing execution, we're more focused on full 360 execution ever before so being able to take the great strategic marketing work that we are doing and carrying it all the way to the retailers, so its really getting those dollars to work harder for us and deliver more volume for the same marketing spend is really the focus that our teams are centered on.

Well, thanks a lot guys.

Thanks Andrew.

Our next question comes from Mariann Montagne with Thrivent Asset Management.

That's Thrivent.

Good morning Mariann.

I am just wondering about Consumer Tissue in Western Europe, the 6% volume number was pretty outstanding and do you think that something that you can continue to achieve or improve upon?

Well I'd say a couple of thing, Europe had a much cold and flu season than North America, so particularly in France and the UK we had a great facial tissue quarter, as symptomatology was much worse over there, then it was here. So some of that was a seasonal impact that won't be that wont be sustained, but we also had a very a very solid launch of Andrex long in the first quarter. I am sure there was some pipeline still as we brought that new product to market but, but it was the solid launch and good promotional support behind it. so probably I'd say here the category is certainly not growth at that rate, so we were going a little bit ahead of the category, so I would expect we wont sustain at quiet at that level, but we are encouraged by the performance in the first quarter.

Well, I am encouraged they kept the flu over there. The other pricing beside of thing, can you just give us a rough number as to what the average price increase was at mid quarter, weighted for your portfolio? And also, if that was something that still needs to be offset by the commitments and promotions or what have you and when we can actually see those numbers coming into Kimberly?

Well if you look at the... just for the whole company, net price promotion for the first quarter, was about 2%.

Right.

The list price increases in North America were more than 5%, 6% and so obviously we had about a half a quarter of that. But as we look at our outlook for the whole year, our guidance for the... when we had laid it out was to have price in the 1to 2% range. I still think that's the right guidance, but I would guess we would trend more towards the high end of that range then the low end of that range.

Okay, and is there focus more upon taking the pricing to cover the cost throughout and looking for more volumes at this point?

Yes.

Okay, but still the 2% looks like the number for the year.

Yes, I think that if you continue to see inflation at the level that is at, it will obviously be more aggressive and looking for price and give you more guidance as that plays out. But that's our planning assumption at this point in time.

But just in general, too, I am wondering what makes you optimistic about the 108 to 111 range, given the much higher tax rate during the quarter what in the basic business looks very strongly going into the second quarter.

We will have some sequential improvement from, revenue realization and in North American consumer businesses our K-C Professional business also typically starts out a little slow as most distributors tend to not order as much in January. So we expect the pick up in KC Professional sequentially. The momentum continues to be good we expect that to be strong heading into the second quarter so those are probably the biggest factors that we'd be looking at.

Okay, thank you

Thanks

Our next question is from Bill Schmitz from the Deutsche Bank.

Hi good morning

Hey what only pre-buying ahead of the pricing increases in February?

I'd see very minimal we try to manage that as most good manufactures do to... to avoid that what you saw with some customers is they actually took their retail prices up ahead of our price increase. So they in effect got the advantage of that retail without pre-buying.

It's a pretty good trick actually, and then operating profit growth for the year and then free cash flow growth for the year. Do you have any assumptions in those two metrics?

I think operating profit growth for the year will be relatively consistent with our original assumptions, we are looking for some margin expansion for the year, given what we are starting out, I think that's going to be more difficult, but with the stronger top-line, you should still see reasonable operating profit, comparisons, free cash flow growth is going to depend on how successful we are at improving working capital in the back half of the year.

Okay. So there is no number around it, I mean if the returns probably hasn't grown, but if you do it for the improvement, you should see sort of modest low single growth is that fair?

I think that's probably fair.

Okay. And then you had a talk about...all the other input cost and the model but you never talked about diesel. Can you just give me some help on your sensitivity of diesel prices.

Bill, I think if you look at the first quarter, I mean distribution cost other than volume was up about $20 million which is that's not all diesel, but they are good chunk of it is diesel. So... I don't know Mark or Paul if you have got any other input on that.

Really get a just part of the overall assumption that we would have on an oil is that in North America which would be the biggest impact for every dollar per barrel of oil change. We've got about that $5 million to $6 million impact to us in various things that comes through including diesel, fuel and power packaging and other things like that. I would say that diesel fuel comes through the quickest and then the other things take some time to roll through the system.

Okay, That will answer my questions. So in that $6 million diesel's incorporated in that number.

That's correct.

Okay, great. Thanks very much guys.

Thanks.

Our next question comes from John Faucher with J.P. Morgan Chase.

Good morning guys. I really apologize for following up on in this inventory situation again, but I just want to square something in your opening comments or I think you said that you would have some factory downtime to keep finished goods inventory lower and I am assuming this is a same downtime that you referred to as sort of maintenance issue during the Q&A. Is that correct?

John that's my comment was in my remarks and that specifically relates to the Healthcare business.

Okay

Different and the comments Tom talked about which regarded downtime which impacted our cost.

Okay, got it. And then so if we look it there is some may this is question isn't really relevant then, but did we see a bigger increase in raw material inventories as opposed to finished goods inventories in this quarter, when we look at that inventory number and you know again, is that exacerbated by the cost inflation we're seeing. Does that mean all the more forward by in pulp what have you?

I say we saw a little bit of that for example in our K-C Professional business that they are keeping a little bit more secondary fiber around just because it was hard to get and so where you can find some you tend to buy it. But I will say the majority of increase was in finished product and not in higher quantities of raw materials.

Okay and so as we follow up on the finished products commentary you guys have talked about pretty consistently over the past nine months in terms of being related to the restructuring piece, etcetera so its been reserved the commentary there is still consistent with where you have been over the past nine months, that just probably a little bit worse than where you anticipate and so the back half benefit probably will still happen just may be of the higher base?

Yes we just finished set of forecast reviews on each of our business and every body had I mean reason why we had more inventory, but they all have plans to bring it down and some the,

But the problem is everyone has the reason why they have higher inventory?

some of them were building it for product launches and some of them legitimately is the case and in the end we probably had a more complexity with SKUs we got them more complex distribution system in so. Some it will systematically higher then it was before we started and we can be still be better then we have done today and we will be taking some down time in the second quarter and third quarter to help it bring it back into line.

Okay, great, thanks.

At this time we have no further questions.

Thank you David, then I guess, we will wrap it up. Tom, some closing comments please ?

Yes, I am very pleased with the performance delivered very good top line growth particularly in Personal Care and our developed and emerging markets business. And we are looking forward to continue and deliver on our commitments. And thank you again for your support to Kimberly-Clark.

Ladies and gentlemen, you may disconnect at this time.