Ladies and gentlemen, thank you for your patience and holding. We now have your presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of this morning's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask an audio question. It is now my pleasure to introduce Mr. Paul Alexander.

Thank you, and good morning, everyone. Welcome to Kimberly-Clark's second quarter earnings conference call. With us today are Mike Hsu, our Chief Executive Officer; and Maria Henry, our CFO. Here is the agenda for the call. Maria will begin with a review of second quarter results. After that, Mike will provide his perspectives on our results and the outlook for the full-year. We will finish with Q&A. We have a presentation of today's materials in the Investors section of our website. As a reminder, we will be making forward-looking statements today. Please see the Risk Factors section of our latest Annual Report on Form 10-K for further discussion of forward-looking statements. Lastly, we will be referring to adjusted results and outlook, which exclude certain items described in this morning's news release. That release has further information about these adjustments and reconciliations to comparable GAAP financial measures. And now, I will turn the call over to Maria.

Thanks, Paul, and good morning, everyone. Thanks for joining the call today. Let me start with the headlines for the quarter. Organic sales increased 5% driven by higher net selling prices. We achieved strong cost savings, margin improvements and growth in adjusted earnings per share. And finally, we are broadly on-track with our overall capital plan and we continue to return cash to shareholders. Now let's cover the details of our results starting with sales. Our second quarter net sales were $4.6 billion. That is even with a year-ago and includes a five-point drag from currency rates. Organic sales were up 5% compared to flat performance in the base period. Net selling prices increased 5% and product mix improved one point, while volumes fell slightly. Mike will provide some more color in our top-line in just a few minutes. Moving on to profitability. Second quarter adjusted gross margin was 34.6%, up 120 basis points year-on-year. Adjusted gross profit increased 3% [indiscernible]. We now expect full-year commodity inflation of $150 million to $250 million. On average that is $150 million lower than our previous estimate. The reduction is driven primarily by cost and secondarily other raw materials. Other manufacturing costs also increased in the quarter compared to a relatively modest level last year. These costs are expected to be a bit higher than we planned for, for the full-year. Moving further down the P&L, between the lines spending was up 90 basis points as a percent of sales. That included higher advertising as we are investing more behind our brands, particularly in digital. G&A expense also increased, driven by higher incentive compensation. For the full-year, because we have raised our sales and earnings outlook, we have also increased our incentive compensation estimate. The increase versus our original plan is equal to…

Okay. Thanks, Maria. Good morning, everyone. Let me start by saying we made excellent progress in the second quarter. We are executing our 2019 plan well with a strong focus on price realization to improve our margins. We are launching innovations investing more in our brands and pursuing growth priorities for longer term success. We are also continuing to return significant cash to shareholders. As Maria just mentioned, we delivered 5% organic sales growth in the second quarter and while that compares to a soft year-ago, this was our best performance in over three years. Our pricing initiatives are on-track. Our volumes are ahead of expectations both in terms of the impact from price increases and from our growth initiatives. We also continue to improve mix, which was up one point for the second consecutive quarter. Let me share some of the top-line highlights starting in North America. Organic sales in consumer products increased 5% compared to a 2-point decline last year. Year-to-date, organic sales were up 3%, which is likely a better reflection of our ongoing performance. Growth in the quarter was driven by 4% higher selling prices. Our pricing plans are on-track. Volumes in North America were up slightly overall. Adult care volumes were up high-single digits and we recently launched innovations on both Poise and Depend to keep that momentum going. Earlier this month, we launched Huggies Special Delivery, our new super premium diaper. Special Delivery uses the best of our technology from around the world. This is our softest diaper. It's made with plant-based materials and provides ultimate skin comfort. It's also premium priced and a great example of our elevate the core strategy in action. In North American consumer K-C Professional, organic sales increased 2%, driven by disciplined execution of our pricing initiatives. Turning to…

Thank you. [Operator Instructions] Our first question comes from Ali Dibadj with Bernstein.

Hey, guys. A few questions for me actually. One is on free cash flow. Maria, you mentioned that particularly on the working capital side, it was a planned change, but a pretty big reduction in free cash flow this year versus last year even if you try to adjust for some sense of restructuring. So I would love a sense of why that shouldn't worry us at all in terms of that trajectory, and what you think the trajectory looks like going forward on the free cash flow side.

Sure. We said coming into the year that we were expecting operating cash flow to be down slightly year-on-year, and we still expect that. If you look at the quarter, the cash from operations of 609 was driven by higher cash taxes, and working capital was also a use of funds. So let me talk about both of those. On cash taxes, it really has to do with timing. You look at the first part of 2018, we were in an overpayment situation, and so we were paying out less cash taxes last year than what would be kind of a normalized level. This year we have the opposite. We have some catch-up payments that we had to make in the first half of this year and in the second quarter, and so that is what is going on with cash taxes. It just has to do with timing. I wouldn't call anything unusual out there. In terms of working capital, there is a number of factors. Our cash conversion days were 13, which compares to what was a very strong 11 days in 2018. And you'll recall that in the fourth quarter of last year, we had very strong cash flow benefits from working capital. We had very low cash conversion days. Part of that was driven by a higher payables balance, which got paid out in the first part of this year. In terms of working capital and cash conversion days, we are expecting and we are seeing inventory build around our execution on the restructuring programs. As we close down facilities or prepare to close down facilities and shut down lines and prepare to stand up new lines, we are building inventory so that we can maintain our service levels with customers, and we are seeing that. On the accounts receivable or DSO side, we have got in the second quarter some timing differences between the sales and collections, particularly with the quarter ending on a Sunday. So I would expect on the receivables side that to correct itself as we go through the remainder of the year. And finally, on payables, the team is executing some projects to get some benefits there, and that was a positive, helping to offset the drag on inventory and the timing differences on DSO. So it's a long answer, but I would expect for the second half that we will have stronger free cash flow and that, for the year, we will still be down little bit, Ali.

Okay. Okay. A bit of improvement for me. Okay. I appreciate the confidence of answer and will keep watching it. A couple of other things. One is, I guess I was initially encouraged to see the emerging and developed markets growing 9% this quarter, saw China pricing a little bit better and start to ask the question of, oh gosh, are we back to kind of this high-single digit type growth rates sustainably in the emerging markets for Kimberly-Clark? But then, I saw that you mentioned Argentina with 3.5 points of that 9% growth, Mike. Brazil probably helped you out a little bit as well. China, it seems like you are investing a lot in that marketplace as well, hopefully on the volume side. So just that kind of perked my expectations and my hope to a return of improvement in Kimberly-Clark emerging in developed markets. Could you kind of right size our expectations on that on a sustainable basis, please?

Yes, Ali. Good point. I think I would say overall in D&E, we are very encouraged and we are making strong progress. That 9%, it's robust, and I would say it's the fourth consecutive quarter of accelerated performance. If you go back to the third quarter of last year, I think we were up 3%, then 4%, 7% in the first quarter and then 9% this quarter. And while Argentina is a chunk of that, about a little over 3 points, we are seeing improved performance across many of the markets. Obviously price mix is a big piece of it, but we are seeing certainly less volume impact from pricing from some of the significant pricing we have taken, for example, in Brazil and Argentina, less volume impact than we originally expected. And then, on the positive front, in other markets, I would say, CE continues to grow at a strong double-digit rate. We are seeing ASEAN growth at double-digits, and then China obviously returning to growth, certainly aided by pricing or maybe, said a different way, some reductions in promotion spending in China. But we are seeing a good volume growth in our premium tiers, and we are very encouraged by that progress.

Okay. And just my last question may be a little bit of a broader question, the discourse around Kimberly-Clark among investors is that I think people generally understand that pricing has been pretty good because of commodity-driven pricing and the SKUs were better because P&G and GP and perhaps some of the competition in China was a little bit more stable. Brazil seems like it's getting a little bit better. Commodity costs were less than what we had anticipated, and all those things in kind of the Kimberly-Clark ecosystem are doing pretty well. But the challenge often in that discourse is, okay, so what is Kimberly-Clark itself doing? What was company-specific here that Kimberly-Clark is doing that could benefit it differentially besides cost savings in particular? I think we all appreciate that cost savings has been quite good. But it's kind of like the ecosystem's going in Kimberly's favor, but we are not quite sure what company specifics are happening here. So if you could help us, at least enlighten us on that, that'd be helpful. Thank you.

Yes, Ali. Great question. It's certainly, I think, one of the big things is the operating environment has improved, right. And I think that is significantly better than when we met maybe toward the end of January. And I think the consumer demand is healthier than it was then, and I would say our performance is better than it was then. One of the reasons why we are seeing less volume impact is not because elasticities are lower. In fact, as we do the analysis, the elasticities are pretty close to what we modeled. It is really more than market execution. And what we got is, I think, very strong innovation and new products coming out across, let's say, North America, particularly in Personal Care. We have got strong marketing in those markets as well driving an improvement consumption. I think, the China business I think is, we are in China for the long haul, and I think the team really believes in innovation there and I think the consumers following. And so, we are seeing strong growth in our premium tiers behind, we think, the best diaper in the marketplace right now. And so there is a lot going on there. And if you look at Latin America, double-digit pricing with almost minimal volume impact, it's not because there is low elasticity. It's because there is really strong innovation marketing and actually terrific sales execution.

Thank you. Our next question comes from Lauren Lieberman with Barclays.

Great. Thanks. Good morning. Just following on that, I think it's telling, Mike, how many times you just mentioned kind of terrific sales execution, and it feels like in some of your larger emerging markets, I'm curious to the degree to which I guess what is changed? So you alluded to, of course, better operating environment but the Kimberly-Clark specific piece, let's go back to maybe what was missing or not as strong over the last two to three years from a commercial execution standpoint, because I think that is a piece of the equation I'm still not grabbing onto and then it would be and so many markets at once that the executions driven have been like a step change. So anything further you could offer there would be great.

Yes, Lauren. I think it's a combination of factors I just mentioned, which is, I think, the operating environment has improved, in which I think the consumer can see the innovation and the product and the marketing and respond to it. And if you rewind a couple of years ago, it's tough to see innovation and advertising when you are going against a buy one get two free, right. So pouring advertising into a marketplace like that is not effective. But I think where the teams - and we always believe in elevating our categories or driving better product benefit by making the premium products worth it. And so I think we have got plenty of innovation across markets that I just mentioned that is taken a hold and getting the consumers' attention and we are encouraged by that response. And then obviously, I think all of us in CPG we all know when you have good innovation, it allows your sales force to execute much more effectively and get the shelf space you need, drive the promotions you need, and all that kind of behavior close with it. So I don't think there is a magic bullet there, but I would say that I think we all were focused on a disciplined way building our capabilities both in innovation, in digital, which is a big space for us for marketing, sales execution and revenue management. Those are the big capability areas we have been focusing on, and we are making a lot of progress.

Okay, great. And then now with the commodity environment being more benign and even just with your outlook obviously for this year but even as we look forward to 2020, with that as a backdrop and thinking about the things you laid out as core to your tenure, investing in selling capabilities, marketing, digital, revenue management, there is data needs to get it at those sorts of activities, how are you thinking about the greater flexibility you may well have today versus what you thought six months ago and the reinvestment needs of the business, particularly the new Chief Growth Officer coming on who may have sort of a different perspective on what can be done with your suite of brands?

Yes, I mean - Lauren, we are very bullish on our categories both in the near-term and long-term and I think that comes back to kind of two of the core strategies we have, which is in big developed markets, elevating the core or premiumizing our categories by making the categories worth more to our consumers. And then of course we are still in the very early stages of development. So, I think maybe the commodities have been a little lower than we expected at the beginning of the year, that does give us the flexibility. I think, the - when you add up the operating environment, which I think is more conducive to growth and consumer demand is healthier than we have seen maybe in the past year or so, I think that gives us the confidence to invest. The other part of it is, we have talked about this back in January, which is I think our - with the innovation and the marketing initiatives and the sales initiatives working, that gives us more confidence to put more money behind that, and we are very excited about that.

Thank you, our next question comes from Dara Mohsenian with Morgan Stanley. Ms. Mohsenian, your line may be on mute. You may unmute to ask your question.

…mid-single-digit pricing in the last couple quarters, but that was predicated upon a much higher commodity environment than we are sitting at today. So, curious if you are seeing any initial signs in pickup and promotion from either branded label or branded competitors with the recent commodity pullback? And as you look going forward, you commented that you don't expect to see a significant increase in market promotion. What gives you confidence behind that, and that you won't have to dial back some of this pricing eventually?

Hey, Dara, I think we only got the last part of it, so I will try to answer it, but maybe you can push me if I'm not kind of going the direction you were asking for. But I think it was related to pricing and what the environment looks like. Right now, I would say, overall our pricing initiatives overall across globally are on-track, maybe a little more focused on North America, they are also on-track. Probably the big area for us was in North America Consumer Tissue. I think the pricing was up as we expected. The big difference was private label in general still has not moved, but we are still seeing good volume growth from our brands, and probably a little bit in excess of what we had planned. I think, at this point, we have not seen an uptick in maybe competitive promotional pricing. Don't expect it, mostly because this is a multi-year issue for us, and we have had commodity inflation at record highs. It's still at a very high level. And so, for us, we are not planning - our plans don't have high promotion intensity. We are really focused on marketing the innovation that we have, and driving the advertising. I will pause there, and maybe is that what you were looking for or something else?

Yes. That is helpful. And then, if I could just slip in a second question, the gap between North American reported results and the U.S. scanner data looked like it widened pretty significantly to a few hundred basis points. Was there some inventory build that retail, particularly with the innovations that you mentioned, or is that more just a function of very strong untracked channel growth? And maybe while we are on the subject, can you give us a bit of an update on e-commerce in the club channel, your sales growth and market share performance there? That'd be helpful.

Yes, a little different there. I think what we said in our commentary that maybe the plus 3% was probably a better - if you look at year-to-date, we are plus 3%. That is probably the best indication of where we think our business is right now. We did have a few differences, certainly non-measured for us is generally stronger than measured. So that is an ongoing refrain, and a good thing in some ways. Also we had some spending changes that affected net revenue realization. I recognize we are still - dialing back to your prior question, we are still dialing back our promotion intensity. And so that affected it. And then we did have some minor retail inventory changes, but we had those in a lot of quarters.

Okay. That is helpful. Thanks.

Thank you. Our next question comes from Wendy Nicholson with Citigroup.

Hi. Good morning. There was just a comment in the North America commentary in Personal Care that caught my eye, which was number one, that volumes were up high single digits in adult care. And I was curious what drove that because I know that is been obviously a very high margin area for you, but it's an area that is been under pressure. So is that category growth or is it innovation or more promotion that you doing? And then, similarly, volumes down mid-single digits in fem care in North America. What is the plan there? I know it's been - I mean, your Kotex restates that you did a few years ago was so successful. Are there any plans for a follow-up to that? What are your plans in fem care to get that business growing again? And I'm really focused on volumes, not pricing. Thanks.

Yes. We are making progress on adult care, Wendy, up high-single digit. I think the category is up somewhere - probably about mid single-digit in that range, and I think really it's about innovation and category messaging, category-building messaging that is gaining traction for us. Definitely our product enhancements that we launched last year are gaining traction, discrete sizing. We have got Fit-Flex on Depend is going out now, and then Poise Active, and those are all working pretty well for us. And then, we have got strong brand investment and more messaging that is more category-building. So I think those of the two things that are working in adult care. In fem care, it's a great category. We have got a great global franchise. We know we need to strengthen the performance of the brand in the U.S., and the team is focused on product enhancements and improving our messaging.

Perfect. Then just going back to your comment on pricing generally, I can't remember the last time companies like you got the benefit of favorable pricing and favorable commodity impact. It's just been a long time. Those usually work opposite. And so, just as you think about the current commodity environment, I know you said you don't expect promotional levels to increase, which, I hope that is the case, but that would strike me as a surprise. But as you look toward calendar '20, the pricing that you have taken, at what point in the cycle do you get to a point where you need to contemplate may be rolling back some of the price increases you have taken, particularly in categories where you still are struggling from a market share perspective. Why not be the aggressor there, if you will? Thanks.

Yes, I think, if you sit on this side of the phone, you have a memory like an elephant. So, last year, I think our commodity inflation was $500 million or $600 million more than our plan. And so, this year, it's a little more favorable but not even close to that. And so, again as I said, the commodity impact is a multi-year impact, and I think that is driving our behavior as we work to recover margins. And right now, I think, we are seeing in the retail environment consumer demand is healthy. I think, in this environment, consumers could be more responsive to innovation and marketing, and I think that is a bit more value-added for us and our competitors to grow the categories versus driving a doom cycle of promotion.

Fair enough. Thanks very much.

Thank you. Our next question comes from Bonnie Herzog with Wells Fargo.

Alright. Thank you. Good morning. I actually had a follow-on question on private-label pricing, which has remained largely unchanged in some of your key track channel category such as diapers. So, just want to hear from you guys how concerned you are with private label choosing not to follow your pricing moves. And then, separately, could you comment on whether you are seeing any stepped-up competitive pressures from some of your online retail partners with their own private label offerings?

Yes. We are watching the private label pricing pretty closely. It hasn't moved notably in Consumer Tissue or specifically in the Bath category, or in diapers yet. I do think our brands are performing very well despite that. And I think that speaks to the iconic nature of Scott 1000, our new advertising and our product enhancements with Cottonelle, so we feel good about that direction, but it's something that we have got the keep a sharp eye on. Obviously we are a volume-sensitive business, and so while we may fine-tune our promotional plans to make sure we get the volumes that we need, we are going to manage this category - our role in the category very responsibly.

Alright. Thanks. And then just a second question for me on China. Could you drill down just a little further on your performance in that market? And it seems like volumes still seem to be under pressure, so just wanted to understand from you when we can see that turn positive or improves further.

Yes, OK. China, our biggest short-term opportunity and our biggest long-term opportunity, and I think the team is working in the right direction, which is making the investment in innovation. And we feel like we have the best diaper in the market right now. Organic was up double-digits with big contributions from both Diapers and Fem Care. In Diapers, we launched a breakthrough, what we call, our 5D diaper toward the end of - middle of last year, and we think that is the best in the market, and that is really fueling the gains. We are up significantly in the premium tiers, still down a bit in the value tiers, but we are managing through that. Some of that is conscious because we have chosen to dial back the promotional price points or raise our promotional price points. And so that drove some of the net price realization that we had in the category. But I would say, we are growing in the tiers that are very important to us, which is premium, and still declining a little bit in the value tiers. Bonnie?

Thank you.

Thank you. Our next question comes from Jason English with Goldman Sachs.

Good morning, everybody. This is actually Cody on for Jason. Perhaps the biggest surprise to us was the 8% organic sales growth in Personal Care. Developing and emerging markets were led by price, which could be fleeting, but North America had a balanced contribution for the first time in many years. Can you provide more details and tell us what is driving this specifically? What you think your end-market growth is compared to what it was a quarter or two ago? How much market share do you think you are taking? And which categories are you seeing the most share gain in? And how sustainable do you think that is?

Yes, good point, Cody. I think we are very pleased with the balanced nature of the growth in North America Personal Care. I think organic was up 6%, and that was balanced between being up 3% in price and 3% in volume for us. And that really reflects, in our mind, strong product innovation and really strong end-market execution. In Diapers, we just launched - we got great innovation coming out, and we just launched Huggies Special Delivery, which is going to deliver ultimate skin comfort. And it's got a lot of features. And if you'll indulge me, our softest diaper delivers really trusted protection. It's got plant-based materials, free of parabens and other harsh chemicals, and hypoallergenic for baby's skin. So it's got a great product, great designs and packaging. And it's priced at a significant premium. And Cody, that is been a - it's really a good indicator or a good example of our elevate-the-core strategy in action. So we are excited about that. In adult care, likewise we have got, as I just mentioned earlier, a number of product enhancements in Depend and Poise, and those are both working - those are all working well in the market.

Great. Thank you. My other question was your revised guidance calls for higher marketing spend and G&A costs. Can you just provide more details about your spending initiatives? What products is it behind? When should we expect it to hit? And then also, what caused you to increase your spending outlook? Was it just reinvesting the savings that you have from a lower commodity outlook?

Yes, Cody, it's a couple things. One, certainly the outlook had a piece of it, but it's also, given the robustness of consumer demand and I think the improving conditions in the operating environment, gives us the confidence to invest. And then, that said, some of the early returns from our innovation and our marketing thus far to date, I think, gives us more confidence to invest further. So the big areas, I think Maria mentioned - Digital is one big area for us that is working effectively for us in a lot of areas. It has strong ROIs, driving a lot of the parts of our business, what we would call direct digital marketing in North America Personal Care and Tissue. China, Fem, Diapers in Russia, I think we have got multiple markets. And then, from a capability perspective, we are also investing in people, process and tools to accelerate some of the capabilities that I outlined, including our end-market execution and our revenue growth management initiatives.

Great. Thank you. And if I can just sneak in one housekeeping item, you guys have had strong cost savings so far year-to-date. Even if commodities should come below your outlook for about $150 million to $250 million, should we still expect you to hit that target range of $400 million to $450 million in savings?

We are tracking well on our way to delivering the $400 million to $450 million savings this year. What I would say is the composition of that may be a bit different than what we were thinking. Our teams are delivering solid FORCE cost savings as they work to deliver productivity and cost reductions in our manufacturing operations. Our restructuring program is very much on-track. At the end of the day, it's possible that our FORCE savings for the year may come in a bit light, and our restructuring savings may come in a bit better than we had anticipated coming into the year. But in total, on the $400 million to $450 million combined savings, I think we are well on our way to deliver that.

Great. Thank you very much. I will pass it along.

Thank you. Our next question comes from Andrea Teixeira with JPMorgan.

Thank you. Good morning. How are you? So I have two questions. First to Maria, on the new guidance, what are you assuming for pulp prices? And should we see commodities, I guess, the spot prices have been rolling over by more than anticipated. So, in your outlook, as we progress for the year and probably as you said in a multi-year effect, should we see the timing of these contracts finally having a bigger impact and the levels like being conservative on this guidance and the revised guidance is because you don't have visibility of how long it's going to linger these lower prices? And then, the second question is about China. So, you have an impressive quarter. So in the premium segment that is finally more than offset the near tier segment decline, is it sustained more or you are seeing or you are being able to increase the marketing in spite of these marketing spend that you alluded to for the fast-growing channels, including online and baby stores? Thank you.

Alright. Why don't I start with the commodity outlook. I guess, a good place to start on commodities is just a reminder that commodities were inflationary in the quarter, and still a headwind for us in the second quarter to the tune of about 10% impact on our operating profit. But that said, they did come in a bit better than we expected. And while they were inflationary, it was the lowest level of inflation that we have seen in two years. So we are pleased with that. Costs on some of the resin-based materials as well as pulp and results of fiber all these versus our plan mostly in North America. We still do see inflation outside of North America, particularly in Latin America. Distribution costs are also continuing to run high. There is no change in our view on that, but they do continue to run high. On your question around the contracts, the contracts in general are negotiated annually. So I will remind you that we discussed the negotiations that we had coming out of 2017 when we got - I'm sorry, coming out of 2018 when we got on the call in January. So we have nothing new to report on that, and we will have to see where we land and where commodities are as we close out the calendar year and we get into our discussions with suppliers and set our contracts for next year. We will update you on where all of that lands in January. And then, the other thing I would comment on is that, in general, our outlook for commodity assumes that costs are relatively consistent with the recent spot prices, except for pulp, which is forecast to move down a bit further from here. So that is kind of what is going on with commodities.

Yes, OK. Andrea, and then on China, what I will tell you is, we are really encouraged by the progress the team is taking. Their strategy is to elevate the category by driving sustainable long-term growth. And I think, do we believe it's sustainable? I think that is our intent. And the way we are doing that is through product innovation that seems to be working very effectively in the marketplace. We have got a diaper that we launched toward the end of last year, middle of last year, the 5D diaper that is soft and flexible, breathable as much as any product out there except that the differences in the marketplace and while it's winning is that it protects better than the other products in the category, at least that is our perspective. And so that is getting traction in the premium tiers. But just to be clear, our volume in diapers was down in the quarter. It's just that it was growing significantly in the premium side of the business. That said, organic was up because of the volume differences and also because of some net pricing changes. So I think the business is heading in the right direction. We think the work that we are doing is to drive long-term sustainable growth.

That is helpful. Just on the follow-up with Maria, now I understand the contracts are one year set with suppliers, so can you kind of bridge to us because kind of last year was obviously a big hit. This year, what is your assumption for pulp embedded in your revised guidance?

Andrea, this is Paul. I would say, in general, there has been no change in how we forecast commodities. And so we are using the forecasters that you are doing well, including RECY and then we generally would line up with what they forecast.

And include the timing of the contracts, right? I'm assuming that they don't rollover the way your contracts roll, right? You can't have the spot prices because they're significantly lower now, but you can't embed it because of your contracts. Is that the way we should think?

We have got both things that affect us, obviously with the market prices, and then as we have discussed, we also have contracts that affect what we report as commodity inflation for Kimberly-Clark. One you have visibility into, and the other one you don't.

Correct. Yes. But you are not ready to give us as you did in the past where you gave us exactly the price of the pulp at this point?

If you are after what we are thinking in terms of our fiber commodity? What I would say is that, on eucalyptus, which is a major input for us on the fiber side, we have reduced our outlook range to $1,050 to $1,100 per metric ton, and that is down $75 per metric ton.

Thank you. Our next question comes from Olivia Tong with Bank of America.

Great. Thank you. Obviously, given your commentary around brand spend initiatives, a few questions there. Clearly that is helping support some of your pricing and mix initiatives. But when do you actually expect these initiatives to drive some improvement in volume? So that is the first question. And then second, just a little bit more around the new Huggies Special Delivery. Curious as to how you went about in terms of the thought process and the marketing around it because it's conveying a very different message versus what both you and your competitors have done in the past and it obviously stands up very dramatically on the shelf. So a little bit more color there would be helpful. Thank you.

Yes. On the brand investment, I think maybe the overall sale, Olivia, I think it has been working and that is a piece of the reason why it gives us the confidence to increase the investment in the back half. The example I will give you maybe is, if you talk about Brazil, pricing is up in the teens, volume is essentially a little bit less than flat. And so, while our assessment is, the elasticity has taken hold, but we have got a lot of other things going on that make that volume better than what the elasticity would've modeled, which is innovation. We have got growth initiatives on adult care and baby wipes that is getting very, very strong growth, and marketing behind those initiatives. And then, increased advertising spend or improved advertising on the diaper products. So, I think just kind of one example, but I think we have seen that and it's part of the reason why we have more confidence to spend more.

And then on Special Delivery, Mike?

Yes, Special Delivery, we are very excited about that. You can definitely see some different hands on the business. Very - maybe a contemporary look and feel. We have got a great young team on it that is kind of in tune with, I think, millennial mom and very well tested. The technology is terrific, it's a showcase of, I would say, maybe an enhanced approach from us, which is a partnership globally from a technology perspective. I mean, it takes the best of what we have been doing in North America, China, Korea and Latin America, and the team worked together to launch this product and we are very excited about all the features it has which is softness, skin protection, plant-based liner, a lot of free forms that make it more attractive to the consumer and then obviously the standout designs. Olivia?

Sorry, I was on mute. Just following up on Huggies Special Delivery, I know it's only been on shelf for a short time but any early color on retailer feedback so far? And did pipeline fill help at all in the quarter?

Yes, there is probably a little bit of pipeline, it's still relatively - we are still relatively early, so I wouldn't say the pipeline was huge and then again in the quarter. But retailer response has been very positive. I think they're very excited about obviously a look in the product quality and so got the expectations for Special Delivery. We are excited about it.

Thank you. Our next question comes from Steve Powers with the Deutsche Bank.

Hey, great. Thank you both. Just a quick follow-up on pulp. Maria, we have heard from others the idea of expected deflation from where we are now in the near-term followed by some level of tightening later in the year and into 2020. Is that your expectation as well or do you have an alternative view on where the underlying commodities trend?

That would be consistent with what we see and saying, Steve.

Okay.

It's a little too early for us to talk about 2020 but we see those same forecast.

Okay. Just to be clear, it's fair to assume that sort of embedded in the planning process?

Yes.

Yes.

Okay. Alright, great. And then, I guess, another follow-up on the reinvestments you are making above and beyond the incentive comp that you called out. It sounds like for the year it's mostly marketing with a bit more in people, processes and tools to further the ROIs you have been seeing and maybe counter some level of presumed competitive action as the industry benefits from costs. But Mike, in the past, we have also talked about Kimberly-Clark maybe being in a position to make some more assertive investments and assertive leading-edge investments in opportunity markets like India going forward, just a position in the company better for long-term growth. How are you thinking about that? Where do those types of initiatives rank in terms of the prioritization for future investment dollars?

Yes. Great question, Steve. And obviously, I think, as I mentioned earlier, I think what is changed over the past six months or so is the category conditions make investments, I think, more worthwhile or more productive, and we are seeing some of that across multiple markets. Most of the current investment that we are talking about for the second half is going into digital and capability building around revenue growth management and sales execution. So those are the near-term focus areas, but we do believe we have great opportunity to enhance our investment and categories, let's say, adult care globally, baby wipes, and then in markets like India. And so, working through those as a team, and I think we have got a lot of good opportunities to invest into and accelerate growth.

Okay. I will pass it on. Thanks.

Thanks, Steve.

Thank you. Our next question comes from Steve Strycula with UBS.

Hi. Good morning and congrats on a good execution quarter.

Thanks, Steve.

So, a few quick questions. For Maria, I think I heard you say that on manufacturing expenses were going to be tracking a little bit higher than you expected versus the start of the year. What is driving it? I haven't heard a lot of other companies really speak to that.

Sure. There is a number of items that affect what we call other manufacturing costs, which are general expenses that hit us in our manufacturing operations. They include things like fixed cost absorption, labor rate changes and inflation, product improvement investments and other one-time types of impacts such as write-offs or start-up costs associated with new equipment. It's not unusual that this is an inflationary area for us, but it is running a bit higher than we expected when we came into the year. Specifically, for the second quarter, we saw increases across all of those levers. We talked about our volumes being off a bit, which leads to fixed cost absorption impact. With our labor rates, all the inflation that we are seeing particularly out of Latin America affects the cost there. And then, one area which has a question on investment, one area where we are investing is in product improvement and we are investing there behind the innovations that we have been talking about. And those increased investments in product quality and improvements in innovation flowed through that line item. So that is what is going on there. And I would point to the fixed cost under absorption in the product investments as two of the drivers.

Okay. And as a follow up to that, if we think about the $150 million reduction to your initial inflation outlook. That is about $0.33 to earnings or 5 percentage points to EBIT dollars. And it feels like you are flowing through about a third of that to shareholders. So is it, Mike, that we just - this is a really good opportunity to address the wish list of things that you have that are actionable right now in the marketplace, including increasing on bonuses and why not out there or is this just conservatism as we think about the back half?

Yes, I mean, I you know, I think that our mass was somewhere between - flown through between a third to a half. But again, I think, part of it is the market opportunity and we think the conditions are good for us to invest. The brands are responding, and it's going to be productive for long-term health of the business. And so that is what we are doing that. Some of the comp stuff is more formulaic. Last year we were cutting comp and this year, it's just a math formula but it goes back up. So - but really the focus for us is about brand reinvestment in both, as Maria said, and products in the digital or in the marketing spending and then in some of the capability built.

Yes. I think if you took compensation aside, it would look a bit more like two-thirds flowing through.

Okay. And to close out, Mike, can you just walk us through a few of the key geographies as to what is happening on the constant currency basis across Brazil, Argentina and China? Can you touch on at a high level on a few of them, just give us a little bit more texture as to what is happening in those markets?

Yes. Very solid growth. I think, in Brazil, double digit growth overall net selling price and mix were up in the teens. Volume was about down slightly, I would say, or almost even. Overall in Brazil, I think the market price has generally moved, although some local competitors have been lagging. The better expected than expected volume performance really is related to great execution. And when I say execution, it is the whole ball of wax, meaning it's the innovation, it's the marketing and then it's the selling. And all those things are working well for us. In addition, I think in a market like Brazil or Latin America more broadly, we have got very developed plans to expand kind of the categories in adult care and wipes and that is paying off this year. Argentina, I guess, I would say, high double digit organic growth. The volume decline was in the, I think, mid single digit level. So you could - again, you could chalk it up the same thing, which is I think the consumer has kind of reset their expectations for price, but also very strong end market execution of the teams to kind of reduce the volume impact that you would have expected from that level of pricing. So, Latin America, very strong performance from a revenue perspective. Central and Eastern Europe up almost 20% or a little bit over 20%, very strong performance in Ukraine and CIS. Russia continues to grow at a very good pace for us, although I will tell you, our share are little bit more under pressure there than we have experienced over the prior couple of years. But the formula there is also same thing, it'll be refrain innovation, marketing and greater in-market execution. ASEAN, up double digits. So we are feeling good about most of D&E markets.

Great, thank you.

Thanks, Stephen.

Thank you. Our next question comes from Caroline Levy with Macquarie Capital.

Good morning. Thank you so much. I have kind of a fun one first, which is, I was very surprised to see a black diaper package. Are young families no longer doing blue and pink for their babies, bedrooms and stuff? So if you could just talk about the logic behind black packaging?

Yes, Caroline, interesting, Yes. I was saying we have got some new hands on the business. I think that the team is attuned with kind of what millennial mom is looking for. The black packaging kind of is striking off the shelf. I will tell you, we have gotten strong retailer response to it. It is the first black packaging in the category and for us in the diaper category. Obviously, we have been black for a while in the fem care category. So, I think it's so far early returns I would say, even though it's too early to really say. But it's doing its job, which is it striking it's shelf. And it's got a great shelf impression. And I would say overall, a more contemporary look and feel. And I think we are trying to address millennial mom, and so far it seems like it's heading in the right direction.

Excellent. Thank you. So I wanted to just talk birth rates. I mean, I remember maybe a year-ago you are talking about a shocking decline in South Korea. We are reading about North America seeing birth rate declines. And yet you are able to put up some really good numbers despite that in some of your - in Sydney and North America. What do you think is going on and how do you deal with that as a long-term trend?

Yes. Still a decline, maybe a little less shocking than the numbers that you may recall. South Korea, I think a couple of years ago, it was a low double digit decline. I think this year it looks like maybe about a high single digit. So that is an improvement, but it's still down. And the driver in South Korea is slower family formation. I mean, in fact, marriages are still down. So, I think, that is when - that South Korea and North America similar birth rate has improved, but it's still down about in 2018 our estimates are down about 2%. And so, I think, in big developed markets, I think that is a trend that we have to deal with. And that is why you are seeing Huggies Special Delivery or some of the things we are trying to address. The big thing about Special Delivery is, it sells at a significant premium to all the other products in the category. And the reason we feel good about that, and it's pretty well tested, it's got a lot of benefits that consumers are looking for. And that falls in line with the strategy we are really driving, which is elevate the core, which is - you have got, in big developed markets, the way to grow them is to drive premiumization. But the only way to make premiumization work is if you make the products work more and worth paying that premium for and that is what we are trying to do.

Excellent. Thank you. And just regional pushback. I mean, you have talked about the fact that you haven't seen competitor dynamics change around the price increases. But I think there is quite a bit of fear that as retailers continue to try to compete with Amazon, they may come back to the manufacturers as costs come down and push back. Can you just address that? And this is history. Are you seeing anything different?

I don't know that we are seeing anything different. I think that is an ongoing issue, Caroline, in the industry. But it's also one that those of us who've been around for a long time have been dealing with for a long time. And so we are used to this dynamic and managing through it. I will say, like most retailers that we deal with, they're mostly interested in driving growth. And so, while they may not like pricing in some categories or some retailers, they do like growth. And so that is where we are focused on working with them and partnering on the right way to grow the category.

Got it. And just my last one, on K-C Professional, your Western Central Europe volume was down 8%. Can you just talk to what is going on there?

Yes. The biggest driver in KCP and I would say another solid quarter for K-C Professional organic overall was up 1% in North American developing in emerging markets were up 2%. I think the biggest thing is we are leading price in, you know, with our leadership position in KCP generally, not all markets have followed, but we feel like this is the right move for us and we recognize as a little stickiness competitively and there is going to be some volume impacts.

So you think that is temporary?

Yes. Well, we will see if it's temporary, but it's something that we are prepared to kind of deal with as we work through the year.

Caroline, I think what I would add to that is, focused on the net of price mix and volume, especially in that market. And if you do that across developed markets, we were down about 1%.

Got it, thank you so much.

Thank you. Our next question comes from Kevin Grundy with Jefferies.

Good morning, everyone. Hey, Mike, congrats on a good result this quarter. Not to beat a dead horse, but I wanted to ask the question on the reinvestment a little bit differently. So the context, of course, company's results have not been when you have hoped over the past three years. So far so good first half of this year. But even, Mike, like as we look at the Nielsen data of market share trends, I suspect in the U.S. still not quite where you would hope. So the question is, as you are working through the quarter and thinking about how the business is progressing, what the guidance is going to be with pulp prices rolling over was there any thought to investing all of the upside to try to sustain the top-line, which arguably is going to drive the most value for shareholders over time? So the question is really around the adequacy of the reinvestment and how you were thinking about that because when we met with you early in the year, the thinking was, you were not going to do any sort of earnings reset because you didn't necessarily see the innovation pipeline sort of justifying it. So, sorry for going on a bit, but it's really around the adequacy of the reinvestment as you saw it and balancing that with the earnings flow through. And then, I have one follow up.

Yes. Kevin, I'm really glad you raised that. That is one area we have got to really focus on. And if there is one part of the quarter that we need to improve on is our share results, and we are a little bit behind what our expectations are. Part of that is related toward leading price or being first mover on price in a lot of our markets and categories. And so, we were in some ways expecting some share impact due to that. However, it's also a big reason why we wanted to drive this reinvestment here to shore up our share positions and make sure we are healthy for the long-term. I think we laid out on our Casey strategy 2022 that we are going to deliver our balanced value creation plan. And we think that this is an example of that.

Okay. Alright. Fair enough, I can leave that, I guess. And then separately, you guys, of course, in tuck in M&A sort of picked up a bit here in the HPC space, particularly with an emphasis on personal care, largely skin care. Kimberly, of course, has not been very active on the M&A front in the past. And Mike, I think your commentary earlier was, we probably should not expect much of a change. I just wanted to kind of revisit that in the current environment. Is that still the course we should really sort of expect investment behind the business and returning cash to shareholders?

Yes, I don't think we would expect a significant change versus what we told you earlier this year. I mean, we like our categories. We still think there is a lot of growth potential in our categories, especially when you look at both our opportunity to elevate the categories and also to grow in D&E. However, we are going to continue to look at opportunities and we do that consistently. We have got a - it may not appear to be, but we have got a very active M&A and development team that is always looking at opportunities for us.

Mike, would you care to comment just on what specific areas and or geographies?

Maybe I will pass for now, Kevin.

Okay. I thought I would try. Alright. Thank you. Good luck.

Thank you. At this time, we have no other questioners in the queue.

Alright. We appreciate everyone's questions today and thanks to the support from our shareholders. And we will speak with you next quarter. Thank you very much. Bye-bye.

Thank you. Ladies and gentlemen that concludes this morning’s presentation. You may disconnect your phone lines and thank you for joining us this morning.