Kimberly-Clark Corporation (KMB) Q3 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to the Kimberly-Clark Third Quarter 2026 Earnings Call. Participants have been placed on a listen-only mode. I will now hand the floor over to Chris Jakubik, Vice President Investor Relations at Kimberly-Clark. Chris, please go ahead.

Thank you, and good morning, everyone. I would like to remind everyone that during our comments today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures during these remarks. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. You can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at investor.kimberly-clark.com. With that, I'll turn it over to Mike for a few opening comments.

All right, thank you, Chris, and thank you everyone for joining us. Well, this week marks a new chapter for Kimberly-Clark. We officially completed our acquisition of Kenvue, a defining moment in our 154-year history. We're delighted to welcome the talented Kenvue team. The closure of this transaction marks a major milestone in our Powering Care transformation, a year of rigorous integration planning, and the starting point for an exciting future defined by extraordinary care. We have created a portfolio and set of capabilities uniquely positioned at the intersection of fast-moving consumer goods and healthcare. Our companies share a rich heritage. We've pioneered entire categories, providing everyday essentials that serve billions of people around the world. Consumers have been loyal to our brands for generations because they trust us to provide better care for them and their loved ones. We form deep, lifelong bonds with consumers and translate that intimate relationship into significant lifetime value. Now, we have a generational opportunity to do even more. Everyday health is becoming more personal, more proactive, and more essential. With the addition of the Kenvue brands, we will be there for more people, in more places, and across more everyday health needs. That is the aspiration that guides our new company, better care in more hands to enable smarter health. From baby care to women's health to active aging, consumers require and deserve a higher standard of care, and we will meet that moment with exceptional science-backed innovation and best-in-class execution that continues to raise the standard. We're energized, and we're ready. We've worked to strengthen our base business, enhance our capabilities, and build our combined team. Now, our team is heads-down focused on execution. Near term, we will enhance performance, efficiency, and effectiveness by applying our proven operating model. We will reinvest in our brands to ensure we are delivering superior brand propositions across the value spectrum. Medium term, we will benefit from category and geographic expansion, and longer term, we will capture secular growth tailwinds. Our teams have worked hard to map out our integration, and we have implemented the leadership team and operating model for the new company, executed critical day one priorities, and sequenced multi-year systems and process integration roadmaps. We have got a running start, and our priorities are clear. We will execute with excellence, deliver against our synergy commitments, strengthen our core brands and businesses, and see growth. Now, to deliver the value of the combination, we have a clear three-phase plan: ready, set, and grow. Ready covers the first 100 days when we will set the tone for the new company, and in this first phase, we will ensure seamless operations and deliver quick wins on synergies. I am confident that our shared commitment to care and strong execution will enable us to deliver generational value for consumers, customers, and shareholders. Now, looking at the third quarter, we delivered solid results driven by our durable operating model, which overcame challenging one-off headwinds. The underlying health of our base business remains strong, and we have sustained momentum. North America continued to show strength in tissue and share gains in Kimberly-Clark Professional, and we are driving performance in personal care. We also delivered across our international personal care focus markets, including South Korea, Brazil, and Indonesia. As we move into the fourth quarter, we are focused on applying our playbook across the combined company, and our durable Powering Care growth engine will continue to power and strengthen our performance. We are confident in our ability to drive sustainable growth in 2027 and beyond. I want to thank the teams who have made our transformation possible and executed this acquisition with such dedication and focus. We are excited for this new beginning and the future we are building. Kimberly-Clark is a new kind of health and wellness company, and extraordinary starts today. With that, I would like to open the line for questions.

Certainly. Everyone, at this time, we will be conducting a question-and-answer session. If you have any questions or comments, please press star one on your phone keypad at this time. We do ask while posing your question to please pick up your handset if listening on speakerphone to provide optimal sound quality. Once again, please press star one on your telephone keypad at this time if you wish to join the queue to ask a question. Please hold a moment while we poll for questions. Your first question today, Dara Mohsenian from Morgan Stanley. Dara, your line is live. Please go ahead.

Hello, Dara.

Hey, good morning.

How are you?

How are you?

Good.

We've had some pressure points that have cropped up more recently, cost pressures, even with oil coming back down the last couple days here. You've been dealing with the China issue. Just the maintained fiscal 2026 guidance, just wanted to get a sense of what drives confidence there and maybe some of the key assumptions driving the underlying Q4 delivery. Then for 2027, the opposite question, which is, you've laid out adjusted EPS dilution not expected to be more than mid-single digit dilutive, versus standalone KC, but you've got potential synergies that could be pretty robust. There's a couple one-time items from 2026, like the fire, the China issue that could get better. One could be more optimistic. It'd just be helpful to hear some of the puts and takes for 2027 now that the deal's officially closed, particularly synergies and reinvestment needs and any of the other key factors you would call out for next year.

Okay. Hey, Dara, maybe I'll start and I'll ask Nelson to chime in, but I just kind of want to give you some overall perspective on how we're thinking about the balance of this year and then a little bit into 2027. But I will tell you, the overall is we feel great about where we are and what our plans are shaping up to be. In the near term, we're very focused on executing and building sustainable momentum. Part one for me, the priority is we're going to focus on executing the integration seamlessly. As I told the organization in multiple town halls, and my perspective is I want the integration to be boring for the organization and also for our customers. That means is, in a pragmatic way, it's exciting that we're coming together, but we want to be able to operate. Our euphemisms internally, we say, "Hey, we want to be able to ship product, pay suppliers, and pay people," right? That's kind of the paradigm that we're operating in. We're very focused on the fundamentals. I will tell you, as of Monday, we implemented the new organization structure and the new operating model, and that's off to a great start. There's definitely lots of work ahead, because obviously, as we come through the coming weeks, especially into 2027, we'll be making some staffing changes, system and reporting changes, but that's all going to be very well sequenced, and we feel great about that. I mentioned this, like three stages of how we're thinking of integration ready. That's really about flawless execution through the first 100 days. Set is really about 2027, which is making sure we're establishing a sound foundation for growth. Grow is unlocking the full potential of the company, right? I think that's kind of how we're thinking about the integration. I think part two is, the second big priority for me and my leadership team is we're focused on improving the momentum of Kenvue and KC brands, right? I will tell you, self-care and essential care performance was solid in the quarter. You guys probably already saw that. It was up 3% organically, and we take a look at a detailed by category, by time period scorecard of the Kenvue brands every month in our monthly trading updates up until we closed. I would say, for a scorecard that looked 100% red this time last year, Nelson, I think you would agree, I think when we had our review last Thursday, it was 70% green. I think the Kenvue business is turning and turning pretty well. But the other areas of where we got to get improvement is on some on the KC brands. As you're well aware, Dara, that we had this social media crisis that was proved to be false based on false information, but it did impact our business pretty significantly. I think it's going to take us time to work it back. We're very confident we'll bring the business back and ultimately regain our market leadership position, but it's going to take a little time to rebuild that. The last area is, we're looking for improved performance in North America skincare, North American oral care, and then a little bit on the KC side, the personal care, we'd like to improve our execution in pockets, including in North America. Again, I think that's kind of the overall where the first couple priorities are. Maybe the thing I'll click on underlying all that is we're going to stay very balanced and focused on creating shareholder value over the long term. That means, as you might expect from us, we're not really going to sacrifice long-term value to manage to a short-term number. We want to make sure we can invest in the brands. The China diapers is a case in point. The business has taken a hit, but we're going to continue to invest through the cycle to make sure that we rebuild that business back to it. Ultimately, we're a flywheel growth company, and that means we want to be able to invest in our brands to drive growth, and that will create a virtuous cycle of growth. That's kind of where our focus is. But I think Nelson maybe will give you maybe some of the additional details.

Yeah, just to back a little bit, Dara. I mean, a few things. As Mike said, we feel pretty good about where we stand today. More importantly, we're taking a very disciplined approach to the first year of the combined company to ensure that we have sustainable, profitable growth in the mid-long term. As a starting point, I mean, we're on track or ahead across the key deal metrics that we laid out a year ago, including closing of the transaction, the synergy pacing, the cost of capital, and the operating momentum across our legacy standalone Kimberly-Clark business, Kenvue, our new categories, and Arbex, which went live July 1st of this year with our joint venture partner, Suzano. I think it's perspective as we head into the balance of the year and 2027, our first full year as a combined company. For a transformation of this magnitude, I mean, we remain on track on both earnings accretion and importantly, approximately getting to about a two times leverage by the end of the second year of the transaction. Now, going into your question on 2026 and then next year. First, our outlook, and that's again, standalone Kimberly-Clark, reflects stronger underlying business momentum that the headline third quarter results suggest, along with a strong global commercial agenda for the fourth quarter that's underway. We also expect to benefit from incremental cost mitigating actions that were taken in the third quarter. This includes all the elements within our integrated margin management toolkit, including revenue growth management, productivity, and other measures that the team has already activated. The other bit to take into account is that we have an easier comp in the fourth quarter, particularly for our North America business, which, as you might remember, had a lower growth in the fourth quarter of last year. The other bit, as Mike mentioned, is we will remain pretty disciplined in the balance of the year, that is in the next two months, and we're reserving the flexibility to pursue value-creating investments that can accelerate our longer-term agenda if attractive opportunities emerge between now and the end of the year. Now, looking at the next year, three things that we're focused on. First, delivering the deal synergies. Second, strengthening the core of the two businesses. Third, seeding future growth. As it relates to deal synergies, we are on track with our synergy plans, and the actions that Kenvue took at the beginning of this year actually position us well to have a strong start as we get the two companies operating on a combined basis now. The other bit is on strengthening the core of the businesses. We continue to expect a gradual return towards a category-level growth, particularly in the new categories that have come into the business. This will be supported by increased investments in marketing, innovation, and R&D. At the same time, we'll be sharpening the portfolio and improving execution, and this will include SKU rationalization, increased service levels, improvements, all of which can create some near-term impacts as we position the business for healthier mid and long-term growth. And then lastly, on seeding our future growth, we are also making targeted upfront investments behind our biggest categories and the opportunities we see, recognizing that the financial contribution will build over time. So overall, Dara, we feel pretty good about where we stand today, and we remain on track against the assumptions we established a year ago, and we will preserve flexibility to invest appropriately behind the business over the next few months and in 2027.

Thank you, guys.

Sorry about that. I feel like we hit you with a fire hose. Welcome back.

Very comprehensive.

Thanks.

Thank you. Your next question is coming from Peter Grom from UBS. Peter, your line is live. Please go ahead.

Great. Thank you. Good morning, everyone. Hope you're doing well. I wanted to just ask about North America. I know there are a lot of moving pieces here, but would love to get your perspective just on the health of the business, given weaker share performance the last couple of quarters and pricing lower. Just any perspective there and how you see that evolving as we move forward. Thanks.

Yeah. Thanks, Peter. I will tell you, I'm confident in the underlying health of the North America business on the KC side. Actually both sides, but I think that question was more directed on the KC side. The underlying health of the KC side of the business is solid. It was a soft quarter. Definitely, Peter, impacted by a few key discrete impacts. The largest, I think, which is again, retailer inventory changes, which for us in the quarter was about 130 basis point headwind. We did postpone a major new product launch, and again, that's maybe an executional issue within the house. We had a new manufacturing asset to produce the new product out, and it wasn't putting out the quality that we wanted, and so we pulled it back, and we'll be launching it likely early next year. That was probably the second big one. There is some share softness, primarily due to club distribution changes in baby care, which I think you guys are all well aware of. Those were a few of the big impacts. I do expect overall in North America, our execution to improve. I'm really confident in the innovation pipeline. I think the brand investments that we have and the commercial capabilities, as you guys all are well aware, we have a great customer organization. Our e-commerce business is growing double digits, I think north of 20%. The other area, Peter, is tissue is performing very strongly, both on the consumer side and on the professional side, and we feel great about the performance there. Overall for the year, I know you probably want to talk a little bit about promotions, but I think we expect our pricing overall for the year to be relatively flat. Again, while I think it's maybe two quarters are a little softer than what we're used to, we do expect to improve our performance in North America.

Just to add a couple of numbers, Peter, for you. One, keep in mind that the club distribution in diapers and training pants, it's about a point of headwind in the quarter for North America. Then also to reiterate what Mike was saying, in tissue, we gained overall 20 basis points share on a weighted basis in the quarter, and that's on the heels of two straight quarters of continued strong performance. Underlying health of the business in North America is strong. Again, we've got strong activations and innovations in the pipeline, which will continue into next year.

Great. Thank you so much. I'll pass it on.

Just to add one point there. I think as you're tracking it, Peter, I think you mentioned the patterns on pricing. As you look at it, year-to-date, total company pricing is down about 70 basis points, 80 basis points in North America, and that's having lapped our least intense quarter of programming last year. If you recall, we shifted some programming from Q3 to Q4 last year. So Q3, least intense period, and we're about to lap our most intense prior year period of programming in Q4. As Mike said, when you think about the year, we'll probably land with pricing relatively flat. So you kind of get on a sequential basis a little bit of a pickup in terms of what that pricing profile looks like.

That is super helpful, guys. Thanks so much.

All right.

Thank you. Your next question is coming from Michael Lavery from Piper Sandler. Michael, your line is live. Please go ahead.

Thank you. Good morning. I just want to come back to Kenvue. Your excitement over the deal is clear, and just want to see if you can help us understand a little bit better how to think about some of the brand's health momentum. They have obviously been a little quieter since the deal was announced, but you guys have been working with them closely. Can you just maybe give us a sense of maybe first of all, if or how their brand-building framework that they used, how it compares to yours, what similarities or differences there might be, and just how to think about the opportunity for the organic growth? Because I think some of the cost savings potential feels a bit more straightforward, but I know there is also a real focus on just building that top-line momentum. Can you help us understand how you see those building blocks there, and maybe some of your take on the recent color from their side?

Yeah. Okay, Michael, great question. I will tell you, I will give you a little color. Just recognize it's day three for me officially, so I want to try to give you a little more context for how the brands are doing. I will tell you, your overall question, and I think I said this a little bit earlier, a lot of the challenges that they've had over the past few years have been, in my mind, 100% executional, and I don't think I've found any that I perceive as being structural yet. What I will say is, I think Kirk and the leadership team at Kenvue did a phenomenal job pivoting when Kirk got in that chair. I think this goes back to it, and this is where Kirk and I bonded, because we were kind of trained by the same people, and so we have a similar philosophy on how you support brands. I think Kirk made a lot of big moves to strengthen the execution. One of the most important was, at the beginning of January, he flipped the operating model, which matches almost exactly with ours, which is why we've been able to so seamlessly move to the new org structure on Monday first thing, and we're operating in the new model. I will tell you, I'm encouraged with Kenvue's Q3 performance. As you guys probably saw, organic was up about 3%, and we're seeing some positive momentum. I think there is plenty moving in the right direction, and maybe I'll note a few things, Michael. OTC overall, I think is performing well in my book. Tylenol for the year, I think up somewhere between low to mid-single digit, I think, which is a great rebound. I think in the quarter, it was up about 70 basis points of share. Also in OTC, Nicorette is up about 7% year-to-date. Zyrtec up 5% year-to-date. Love the advertising they're doing to drive kind of category expansion with Sanjay Bhatia. Then, I would say overall, hair, very good. Rogaine, surprisingly, I didn't know this, Michael, but it may be driven by some GLP-1 adoption, so Rogaine's up 30% year-to-date. OGX, the shampoo, is also performing very well. Then in essential care, the baby brands are up about 5% year-to-date. BAND-AID, which is a great Halloween giveaway, is up 4% year-to-date. So, I think there is plenty moving in the right direction. Again, what is driving it, and this kind of reflects maybe a personnel choice I made more recently, North America, it is clear, Carlos and I also have very similar training, and he is very focused on the core aspects of execution, which DPSM is the shorthand, which is distribution, pricing, shelving, and merchandising, and focusing on execution, which I think, Michael, had been a little bit off of the focus area for Kenvue in the past. I think we are seeing, really, that kind of performance is really driven by better fundamental execution across all those levers. I think we are not out of the woods yet. The areas that we got to improve, I would say they are stabilizing, but there is plenty of work left to be done. Skin care was down just a little bit under a point year to date, and that is versus a category that is up about four. Again, I think the team has taken steps to improve execution there. I think medium term, and this is my perspective, and it still needs to be worked through the team, I think it is about resetting the assortment. I do think there are some extensions that we have done with some of the brands that will require a reset over time. The other area for me, and John Halvorson knows this, and he is totally up to the task, and I was just with him and the agencies a couple. We got to improve the creative execution. I am looking. While in skin care, the marketing investment is fine and it is competitive with the category, I think there is room to increase our investment there. The other area is oral care, Listerine. Year to date, down about 2 points. For me, this is my opinion, which is I think we need to simplify and clarify the offering and the key benefits for the consumer. Given the leadership share position that we have, I mean, very, very strong leadership position in the category, for me, it should be similar to what we have been doing with Kleenex and Depend and Poise, which is focus advertising on expanding penetration and frequency of the category. That is kind of the focus area for us. Beyond that, Michael, I would say longer term, there is a lot more headroom in these categories than I originally thought when we made the initial announcement. It is going to take some time to get there. We are not going to take shortcuts. We will build through the fundamentals. What you will probably see in 2027 is a little bit of a conservative approach that we reflected in our 2027, 2028 outlook. We want to create the room to accelerate investments and get the brands in a better position to grow.

Really helpful. Thanks for that, Mike.

Okay. Chris tells me to tell you that we are going to share more at CAGNY.

Okay. Sounds good.

All right.

Thank you. Your next question is coming from Chris Carey from Wells Fargo. Chris, your line is live. Please go ahead.

Hi, Chris.

Hi. Good morning, everybody. First, Mike, can you talk about the team's ability to deliver on this integration and synergies while continuing operational excellence on the legacy Kimberly-Clark business with a key leader leaving in Russ Torres, and how you are backfilling and making sure that you do not miss a beat? That would be question number one. Just love some context on that. Then for Nelson, when you say mid-single-digit dilution for 2027, just to be clear about this, are earnings down mid-single digits in 2027, then snap back? That is my interpretation, which I think is what you are saying, but I would just like to confirm that. Then within that, can you just talk about the treatment around amortization going forward in the non-GAAP numbers and what is reflected in the outlook for 2027 and going into 2028? Thanks so much.

Okay. All right. Thanks for the question. Let me start with the team. Look, I feel great about our leadership team, and I think we are really well positioned to deliver generational value. You may know that, or I may have mentioned this before, but we did detailed assessments on every leadership team member for both Kenvue and KC, kind of going in as I selected the staff. I think Nelson told me he spent seven hours being assessed. So, we took a very detailed approach, and we used outside experts to kind of help us do that. So, I feel very good about the talent that we have in the room and the selections. Certainly, I guess I will say, first and foremost, I am excited for Russ and his new adventure. I think, not knowing that much about that business, but I think they found a good one, right? I am excited for him. I would tell you, his departure probably reflects a change in timing for both of us. It should be clear to all of you that within KC, we were on a path of transition, but when we had the opportunity to create this, I would say, combination that would create generational value, I think the timing for me changed and the timing for Russ changed. You are only going to have this time of your life once, right? I am excited for him. I will tell you, parenthetically, I love being more directly involved in all aspects of the business. I am not sure the team enjoys that as much, but it is kind of more akin to what I am used to doing. I think hopefully, that will have a positive impact. Let me tell you, the IMO is in great hands with Jeff Melucci, who put a lot of this deal together, steering the process, and then Nelson, who you would really want tracking and making sure that the teams are ensuring synergy delivery, which lines up with financial delivery anyways. The big note that I should point out is we had transitioned about 60 days ago from an IMO-led implementation of the synergy delivery to an ELT-led, right? So each of the ELT members, or enterprise leadership team members, whether they are a business unit owner or a functional owner, are accountable for delivery versus kind of a group in the center. But Nelson is going to oversee that. Again, I feel very good about where we are at the team, and I feel great about the people we have on the team.

Yeah. Chris, going into your questions around the modeling and the outlook we gave when we announced the transaction. First, all comparisons are against KC standalone. That is the first bit. We will come out with pro formas and all that in more detail as we get into reporting actual results for full year 2026 and put that forth, so that then we can start comparing that in that way. So when we talked about mid-single-digit dilution and then snapping back, that is exactly it. So for 2027, that is what we would expect, but that is against a standalone Kimberly-Clark EPS. That would, of course, be reflective of the fact that we would have the amortization of the intangible assets. Going to that, the treatment around amortization is, as you remember, Kenvue was adjusting out their portion of amortization of these assets. We do not. It's not in our policy, so we actually will keep that within our non-GAAP metrics. That's the element that's there for modeling purposes. And we had that reflected also in the latest pro formas that we filed as part of the recent debt issuance. Then as we step into 2028, what's going to happen is we expect to have a year that's on algorithm on a two-year compounded basis, which would be in the mid to high single-digit EPS growth on a compounded basis, two years versus the baseline of 2026 standalone KC.

Okay. Thank you so much.

Okay. Thank you.

Thank you. Your next question is coming from Javier Escalante from Evercore. Javier, your line is live. Please go ahead.

Hello. Good morning, everyone, and congratulations on completing the merger. I would like to double-click on diapers, if I may, both in the U.S. and China. How is your diaper business performing outside club? What is the competitive dynamic overall? What we see in Circana is these Chinese diapers are leveling off, and wonder whether that opens up an opportunity to restart a premiumization cycle after two years of promos. On China, I know that it's 11/11, social commerce is a big deal there. How are you using this to build trust? Any early reads on equity, how the messaging is landing? I know that you said that the recovery is going to take time, but anything? Tell us how you're dealing with this. I have a follow-up, if I may. Thank you.

Yeah. Okay. Thanks for the question, Javier Escalante. Great to hear from you. Look, I feel great about overall our diaper business. I know it's been a choppy couple quarters, but I think when you take one of the best performing businesses we have in the world and chop it by 70%, it's going to affect the business. I would say the underlying kind of strength of the products, I would say, the performance relative to competition of the product, I think we feel great about, and then the innovation pipeline that we have. So we've got a proven strategy to elevate and expand the category, to your point, right? That's what we're going to continue driving. We know how to win in the most competitive markets in the world, especially China. Our playbook is to drive that innovation that grows categories, delivers superior value propositions across all value tiers. Our strategy internally is really, Javier Escalante, best product at the lowest possible cost, right? When we do that creates the room to invest in building brand love and driving really compelling activation. I'll start with North America. I think I'd say we've seen solid performance in North America over the last few years, gained share two years in a row leading up into this year, despite increasingly intense, I would say, promotional environment. I think we feel like we have the best innovation agenda that we've had in a very long time. To your point, I would say premiumization continues to create some tailwinds. Just for reference, I think when I joined the company, I think we were about 30% of our business overall was premium. Today, we're well over 85%. So I think what you articulated around driving premium mix through offerings that offer that better performance for consumers is the core of our strategy. I think we have seen over the past few years the entry of some lower-priced diapers, a lot of it coming from China. Our attitude is, well, we compete with 200 diaper brands in China. We've been beating them there, and so we feel confident we can beat them here. So for us, our approach is, hey, let's make sure that our value propositions are sharp and that we continue to bring the innovation. So, we have things like HuggFit 360 Overnight. We're excited about one that will prevent diaper rash more specifically that we'll be launching in the first quarter. So we've got a lot of great news. I would say, as you point out in the U.S., the majority of our share decline in U.S. baby care was driven by distribution changes in club, which we are working through. I would say if you look outside of it, Javier Escalante, overall across BCC or baby and childcare more broadly, our share is overall slightly up. We feel good about where that is, but we are going to stay focused on executing our playbook. I will pivot to China. Just to kind of give you all the context, the Chinese authorities refuted the false allegations and they declared that Huggies were safe. That was really important. SAMR, the authority that had jurisdiction there, confirmed the quality and safety of our products. I will tell you, they were very complimentary of how our teams engaged with them through the whole discovery process. At this point, Javier Escalante, demand has stabilized. I would say it has improved slightly. But recovery is going to take time because here is what I have learned, which is like bad news goes viral and good news does not. Right?

Yes.

What that means is then we have to put the good news out ourselves, and that is going to take a little time, right? Again, as I told the team in Shanghai, if there is any team that knows how to do it is that team, right? Again, we are focused on rebuilding consumer trust. We are elevating transparency directly with consumers. I think we have a glass box look into our production facilities for consumers to look at. Then regular updates on, they can see kind of the quality coming off the line. I think we feel great about that innovation. I think it is probably no team I am more confident in than our China team. I think the long-term health of our China business, I am excited about diapers specifically, but I am also excited about how the China team, together with the Kenvue team, will build the Kenvue brands in China as well.

This too shall pass, I guess. I interrupted you. Go ahead.

I was just going to say, you asked specifically on 11/11. I mean, that's a bonus.

Yes

The reality, Javi, is that it's going to take some time. 11/11 is already, if you were pipelining and creating everything, that already went through. It's something that as the news came out, it was right upon us, and we still expect the business to be subdued in the fourth quarter, because of where we're at and the timing of when the government came out with the results favorable to us. But again, we will take the time, we will make the right investments in order to make sure that Huggies gets back to its rightful place in China. As a reminder, right before this, we were right around 20% leadership, number one, gaining share for five years straight at about 200 basis points a year in our business in diapers in China. We're absolutely focused in making sure that we regain that.

Thank you, man. In the spirit of my comment of making the merger boring, right? If you can help us, because there has been a lot of detail here, in a very simple narrative, how you see the sequence of the synergy plan in 2027. The way that I think of it in my head, perhaps, is how you preserve the low-hanging fruit in terms of revenue synergies, what are you going to be tackling in terms of cost? Is it COGS? Is it back office? Tell us a little bit, kind of like in a very simple way, this is what it should be happening through 2027. Thank you very much.

All right. Let me start with a higher level and then Nelson can add. Chris wants me to make sure that I say, Javier, more CAGNY, okay?

Okay. Good.

Number one, I'll just say, here's how we're thinking about it. Again, I'm kind of a boring person, so I don't like drama as we operate the business. I think we have a very well-thought-out plan. I mean, we announced the leadership team back in April, then the next few levels several months ago. The teams had plenty of time to think through this. Maybe part one is there are going to be significant staffing changes, this is the unfortunate work of combining companies. There are going to be staffing changes throughout 2027. We feel very good about our plans there, and I think our teams are very familiar with what those are. That's part one. Part two is, I think, maybe primarily on Nelson's teams, we're going to run separate systems for a while, then we will gradually bring them in, because KC happens to have very robust, the latest SAP S/4 ERP systems for both North America and then a separate instance for the international business. We'll, over time, in a phased way, be bringing the Kenvue businesses onto those platforms as we bring the KC businesses forward on those. In the meantime, I think it's on Nelson's team to kind of cobble together a reporting. I guess they're using Power BI, Javier, to kind of do that. Again, that'll give us, I think, the visibility we need to manage in the interim. I think we have a very planful approach to deliver the synergy. Not sure if Chris agrees with me saying this now, but I feel very good about where we are in the synergy plan. Sitting in my chair, as you would expect that I would say, I think we will beat the synergies that we have talked about publicly.

Javier, if you think, I mean, obviously we have been providing updates over the last 12 months. We have been very diligent in our process of looking at the synergies through the IMO, the segments, and the functions, and getting ready for day one, which was earlier this week. We, as I said earlier, are on track with our plans. Again, the overall cost synergies for the deal are about $1.9 billion, and there are three sources that are very clear to us. One is the overheads optimization, G&A. That will drive about a third, and that is already incorporating, eliminating certain roles, which is part of having to do a transaction like this. It is leveraging spans and layers of controls across the organization. Then there is a series of non-people costs, including systems, which we are progressively going to be tackling. It is starting now, and that is very clearly laid out. The second bucket is in COGS, and that is going to be closer to 40% of the overall, give or take, so between 30%-40% of the synergies. We have clear plans with Tamera and her organization around optimizing our distribution network and leveraging procurement capabilities to drive savings from starting now. Then the third bucket is in sales and marketing and trade spend optimization. Very clear plans on that. Obviously, tackling duplication of roles, but also around leveraging media synergies and optimizing trade spend. All of that is very carefully planned, and it will be orchestrated and executed, starting executing it now as we begin the first week of the merger of the two organizations. We will provide more details when we get to CAGNY, Javi. Obviously, one of the things that we have talked about earlier this year is we are encouraged by Kenvue having taken a proactive approach at the end of the first quarter, getting some of these organizational changes underway, which accelerate some of those synergies into 2026 and give us a good head start as we go into next year. We will provide an update of the cadence of how those savings will come through, but some of that has already been materialized this year.

Awesome. Thank you so much.

Thank you. Your next question is coming from Anna Lizzul from Bank of America. Anna, your line is live. Please go ahead.

Hi. Good morning. Thank you so much for the question. I was wondering if you could elaborate specifically on your launch of Big Dreams and diapers, and where do you see this competing in the landscape? What are your aspirations for this brand specifically? Then if I can ask a bigger picture question on cost, clearly freight, a bigger headwind. How should we think about that in terms of some of the heightened costs, but in light of the benefits you're also seeing from the Arbex JV on input costs? Thank you.

Okay. Hey, thanks for the question, Anna. Yeah, maybe just a comment. We're really excited about Big Dreams, and that's something, I think, for those who may not have the context that we've launched with Amazon, in partnership with Amazon. I think the team at Amazon is very, very excited about the product. I think we've put together a fantastic quality product that I think has with the attributes, with our knowledge of the diaper category, we kind of know what consumers are looking for. I think the unique thing there, Anna, is we wanted to make sure we're offering a very, very strong value proposition, particularly, I would say, for, I would say, middle to lower income consumers. One thing that I'll emphasize is, Anna, we saw maybe a few years ago, several years ago, maybe the prospects for what everybody calls this K-shaped scenario of an economy. We're really, I would say, steeled or focused to be able to operate effectively in that kind of environment. For us, we've been emphasizing, hey, how do we bring the best of our innovation into more value-oriented offerings? Again, that's kind of why we're looking to drive low cost in our production so that we can afford to do that. This is another example of that. Within the Huggies brand, we did something similar, bringing, I would say, our latest core technology on diapers and launching it into our value tier first on Snug & Dry in North America about 18 months ago. Again, that's kind of part of our strategy, which is to adapt to the, and kind of win in the K-shaped environment. We feel good about that. Then maybe I'll ask Nelson to comment on the inflation.

Yes. Anna, in terms of costs and where we stand today, as we provided the update back in September at the Barclays conference, we now project total full-year gross inflationary impacts of around $250 million, of which $50 million was an impact in the second quarter. Then for the balance of the year in the second half, we expect around $200 million of inflation. This step-up of around $50 million versus our prior update back in August, concurrent with our second quarter update in earnings, is largely driven by the spike that we saw in spot freight rates in North America. That number, again, remains the same. There's no change right now versus what we updated you all at the Barclays conference earlier in September. The teams are doing a great job through a combination of mitigating actions that have been undertaken, as I mentioned earlier in the call today, and that includes all elements of the integrated margin management toolkit, from revenue growth management to the very strong productivity that we're delivering year to date. We're at 6.1% gross productivity, 5.8% for the third quarter, so those programs will continue. The always-on cost discipline around all the structures. As it relates to Arbex, we are very pleased with the stand-up of the joint venture, which went live July 1. The Arbex management team and Suzano, our partner, along with ourselves, we are very focused on unlocking strong value creation, which will entail very proactive measures around cost containment, cost management, and driving productivity. We are taking full advantage of that already. That is underway. We will be providing a full update on our view for 2027 when we get to that in February of next year. Again, we remain very disciplined in our approach to managing costs and managing over the term of the business to ensure that we deliver pricing that will cost at least neutral, which is our philosophy that has been in place for many years now.

Great. Very helpful. Thank you.

Thanks, Anna.

Thank you. Your next question is coming from Robert Moskow from TD Cowen. Robert, your line is live. Please go ahead.

Hey, thanks for the question. Maybe you are going to give more details at CAGNY, but the revenue synergy target was the one that struck a lot of people as the most ambitious. They are notoriously difficult to execute, and it seemed to involve a lot of international expansion of brands that had not traveled into these different regions in the past. So, are your first impressions the same? Do you still see the same kind of opportunity? What are the first steps for enabling that, Mike?

Yeah.

Maybe you could talk a little more on that.

Yeah. Thanks for the question, Rob. Yeah, again, maybe, I am not sure, Chris, if I had to do it over again, maybe I would not have put revenue synergies out there, because I think what I am hearing from investors is, "Well, we do not care until you put them into the algorithm." Okay, which I think is fair enough, right? However, sitting in my shoes, Rob, I think we will deliver more over time. But I would not write that down, because I think ultimately it has to make its way into the growth algorithm, right? So, that is part one. But I would say in the medium term or short term, I would say it is what you say, which is like there is some obvious distribution gaps. We had a large KC personal care business in Europe, probably about a decade ago. But we had a tough time in that business. I think Kenvue brings, I think, a lot stronger distribution and capability in Europe than we ever had. Similarly, in India, we used to be in a joint venture with Unilever, where that got us very good distribution. When that agreement ended, I think we have struggled since. Kenvue has a multi-hundred million dollar business there. They are in about 3.1 million points of distribution in India. I think that is a market that I think the KC personal care brands can make an impact in. So, I think there is going to be some obvious, I would say, geographic distribution opportunities that while we have struggled in the past, I think there are some capabilities that are different. The flip of it is the same. Within Kenvue, they've got a relatively, I would say, a smaller business in markets like Mexico and Korea, where we are over $1 billion in both those businesses just on the KC side. I think, again, we feel like there's some pretty good opportunity. Longer term, and again, maybe there's a misnomer in terms of what's a synergy. There's really two buckets of what we're calling synergies. There's integration synergy, which tends to be the smaller amount, right, in my mind. Because what we haven't articulated as well, and this is probably my fault, Rob, there's a lot more transformation opportunity, right? The thing is, KC, I would say we're still in the early innings of our transformation. I'd say like the third inning. I think Kenvue's earlier in that process. A lot of what I guess I'm miscalling synergy is really transformation opportunity. But what we're seeing is there's a lot of category growth, category development opportunity that hasn't There's still an opportunity for us to market more effectively. Again, maybe the example I'll give you, if you think about on the KC side, what we've been doing with Kleenex, what we've been doing with Poise and Depend, which is advertising to expand category consumption, penetration, frequency. By the way, on the Kenvue side, they're seeing great results. The reason why allergy or Zyrtec is up this year is because they've shifted that to that strategy at the beginning of this year, and I think it's really working effectively. I mean, the facts are, which is shocking, less than 20% of the population that suffers from seasonal allergies ever treats it. Kind of that's the insight that we're going after. That's kind of why we have a lot of conviction, and I would just say what the growth is going to be.

Okay. Just to be clear, when you gave that $1.9 billion number, were you talking about transformation opportunity also, or two different things?

Well, I would probably say. No, Simon, some of it's pure synergy stuff, but some of it is more efficiency that we saw. I think it was a blended number.

The 1.9 is cost. That does not have anything related to revenue synergies.

Yeah

Rob, as you remember, it was minimal in terms of the operating profit or EBIT that we would see out of the revenue synergies in what we valued, because we reinvested close to 60% in our modeling in the S-4.

Yeah

Yes, it was $1.4 billion in revenue, but only $200 million in EBIT contribution.

Net

because of the reinvestment.

Right.

Yeah.

Because of the reinvestment of around $300 million. When I talk about the synergies, it is really going to be on the $1.9 billion, which is the costs.

Yeah.

Rob, that is what we are focused on.

Hey, and Rob, maybe just, sorry to keep adding stuff, but I would say, hey, maybe, and this is a topic that investors bring up, "Hey, Mike, is this a cost play or is it a growth play?" My attitude on, no, this is a flywheel play, meaning the whole goal is we're getting costs out so that we can reinvest in the brands to grow the brands faster. That's our model of Powering Care that we feel really strong conviction about, that's been working for us. I know we can always improve our execution, and we're going to do that, but that's kind of what we're doing with this whole transformation with both companies.

That's how we doubled over the last five years, our absolute advertising spend, because we applied that flywheel as we ran through Powering Care and the whole transformation of the portfolio. That's the playbook that we're going to have as the combined company gets underway this week.

Okay. Thank you very much.

Great. If we can take one more question.

Thank you. Your final question is coming from Susan Anderson from Canaccord Genuity. Susan, your line is live. Please go ahead.

Hi. Good morning. Thanks for taking my question, and thanks for all the details this morning. I was wondering if maybe you can just give some color, maybe I missed it, on just where retailer inventories are at with your brands and categories, and then also including the Kenvue brands. I think some of the competitors talked about a weaker start to cold cough, which impacted retailer orders. I guess, are you seeing something similar with Kenvue's OTC brands with inventory at retail, and then just how you're feeling about your other categories as well going into the back half? Thanks.

Well, Susan, great question. Since Nelson and I just looked at the retail inventory by geography at Kenvue last Thursday, I think it's in kind of normal to within the range of what they've been carrying for the last few years. We feel good about that. I think there have been some changes on our side. I would say retailers have, inventory has compressed a bit. I do think with a couple big customers, there have been some changes in inventory strategy, inventory technology that's driven by that. But again, I think, in general, I would say the retail inventory headwinds that we've experienced this year tend to be timing-related. Our underlying demand, I'll tell you, we feel it remains healthy.

Yeah, I would just add, two things. One, in North America for this year, it's going to represent for the over, close to about a point of growth, and that's what we had-

For us

for us, for KC standalone. As we go into Kenvue, as Mike said, we have been looking at the data. We are obviously joining forces as we speak. We will go through the integration, and we will see what those levels are, and there obviously could be some changes and adjustments, but the one thing is, we are going to be focusing on service levels. As service levels improve and whatnot, there will be further optimization in inventories. Obviously, this is one of the places where, as we get into the integration with our supply chain team and we deploy Kinaxis and some of the tools that we have got, that should drive optimization over time. Again, more to come on that as we get underway with the integration, Susan.

Great. Well, thanks everybody for joining us. If analysts have any further follow-up questions, myself and my team will be available to take them. Thanks everybody for tuning in today.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you once again for your participation.