Paul J. Alexander - Kimberly-Clark Corp. Maria Henry - Kimberly-Clark Corp. Thomas J. Falk - Kimberly-Clark Corp..

Lauren Rae Lieberman - Barclays Capital, Inc. Jason English - Goldman Sachs & Co. Wendy C. Nicholson - Citigroup Global Markets, Inc. (Broker) Caroline Levy - CLSA Americas LLC Ali Dibadj - Sanford C. Bernstein & Co. LLC Stephen R.

Powers - UBS Securities LLC Olivia Tong - Bank of America Merrill Lynch Jonathan Feeney - Consumer Edge Research LLC Erin Lash - Morningstar, Inc. (Research) Iain E. Simpson - Société Générale SA (Broker) Bill Schmitz - Deutsche Bank Securities, Inc..

Ladies and gentlemen, thank you for your patience in holding. We now have your speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's statements, we will open the floor for your 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 today's first presenter, Mr. Paul Alexander..

Thank you, and good morning, everyone. Welcome to Kimberly-Clark's Third Quarter Earnings Conference Call. With us today are Tom Falk, Chairman and CEO; Maria Henry, CFO; and Mike Azbell, our Controller. Here's the agenda for the call. Maria will begin with a review of third quarter results.

Tom will then provide his perspectives on our results and the outlook for the full year. We'll finish as usual with Q&A. We have a presentation of today's materials in the Investors section of our website. Now, as a reminder, we will be making forward-looking statements this morning.

Please see the risk factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements. We'll also be referring to adjusted results and outlook. Both exclude certain items described in this morning's news release.

The release has further information about these adjustments and reconciliations to comparable GAAP financial measures. And now I'll turn it over to Maria..

Thanks, Paul. Good morning, everyone. Thanks for joining the call today. Let me start with the headlines for the quarter. Organic sales were basically even year-on-year including 3% growth in developing and emerging markets.

We achieved significant cost savings and margin improvement, and we increased cash flow, improved capital efficiency and returned cash to shareholders. Now let's cover the details starting with sales. Our third quarter net sales were $4.6 billion. That's down about 3% including a currency drag of more than 2%.

Tom will provide more color on our top line in just a few minutes. On profitability, third quarter adjusted gross margin was 36.4%, up 30 basis points compared to the prior year. Adjusted operating margin was 18.2%. That's up 70 basis points. I'm encouraged that our teams continue to improve the shape of the P&L even in a tougher environment.

Our cost savings initiatives continue to be a key driver of margin improvement. Third quarter FORCE cost savings were $105 million, equal to our previous all-time record. Through nine months, FORCE savings are $295 million. So we're tracking to be toward the high end of our $350 to $400 million full year target.

In addition, our organization restructuring generated $15 million of savings in the quarter. Commodities were favorable by $10 million mostly due to lower fiber costs. Full year deflation should be toward the middle of our previous estimate of $25 million to $125 million.

On the bottom line, third quarter adjusted earnings per share were $1.52, up 1% year-on-year. That's despite a currency drag of more than $0.10 per share, mostly from transaction effects. Moving on to cash flow and capital efficiency. Cash provided by operations in the third quarter was strong at $948 million.

That's up 12% year-on-year driven by improved working capital. On adjusted return on invested capital, through nine months, we're up 100 basis points, nicely ahead of our long-term goal of 20 basis points to 40 basis points of annual improvement.

On capital allocation, third quarter dividend payments and share repurchases totaled more than $550 million. The full year amount should be approximately $2.1 billion. Moving on to segment results. In Personal Care, organic sales rose more than 1%. That includes 4% growth in developing and emerging markets.

Overall Personal Care operating margins were healthy at 19.8%, although off 70 basis points year-on-year including significant currency headwinds. Moving to Consumer Tissue. Organic sales fell 2%, driven by results in North America.

Consumer Tissue operating margins of 18.1% were up 110 basis points with benefits from cost savings and lower input costs. In our third segment, K-C Professional, organic sales were down 1%. That included a 1-point impact from lower sales of nonwovens to Halyard Health. K-C Professional operating margins were 19.6%.

That's up 100 basis points year-on-year, driven by higher net selling prices and cost savings. So, overall, it was a soft quarter on the top line and a tough environment. Nonetheless, we delivered significant cost savings, improved our margins and increased cash flow.

We also continue to improve our balance sheet efficiency and allocate capital in shareholder friendly ways. I'll now turn it over to Tom..

Thanks, Maria, and good morning, everyone. I'll share my perspectives on our third quarter results, and then I'll comment on our full year outlook. So starting with the third quarter. As Maria mentioned, our organic sales were about even year-on-year and reflected a more challenging economic and competitive environment.

Regardless of the reasons, I'm not satisfied with our top line results, and I expect some improvement in the fourth quarter. On the other hand, I am broadly encouraged with our current market share positions, so we are holding up well in a challenging environment. Let me give you some details about our third quarter sales and market conditions.

In developing and emerging markets, organic sales were up 3%. That compares to a 5% growth in the second quarter as performance improved in China but softened in Latin America, particularly in Brazil and Argentina. In Brazil, organic sales in Personal Care fell about 5% year-on-year due to lower volumes.

Results were impacted by competitive promotion activity and an even more difficult economic environment. We'll be launching more innovation in the next few quarters in Brazil while making sure we protect our brands appropriately.

In Argentina, while selling prices were up in the quarter, volumes were down low double-digits in a challenging consumer environment. Category volumes are declining at about the same rate as our volume decline and have worsened over the last three months. Now looking outside of Latin America.

In Eastern Europe, organic sales in diapers increased 10% due to broad-based volume growth on Huggies across the region. In China, organic sales in diapers were up low single-digits as strong volume growth was mostly offset by lower selling prices.

Looking ahead in China, we expect our volume momentum will continue with benefits from innovation and healthy category demand. We also expect the promotion environment will remain competitive.

So, overall, while organic growth in developing and emerging markets has moderated this year, that's mostly because of slower economic growth which has resulted in weaker category dynamics. In most of our key businesses, our market positions are generally improving or holding steady.

I'm still very optimistic about our long-term growth prospects in developing and emerging markets because of the inherent category penetration opportunities that exist in this part of the world. Nonetheless, given the volatility in the current environment, it's difficult to predict when growth will pick back up significantly.

Turning to our North American consumer businesses. Consumer Tissue volumes were down about 3%. The comparison included impacts from changes in the timing of promotional shipments and 6% growth in the year ago period. Year-to-date, our volumes were up 2% in this business. That's a good indicator of our ongoing performance.

And in addition, our market shares in the third quarter were relatively stable sequentially. So we expect better volume performance going forward compared to the third quarter. Personal Care volumes in North America were up 1% compared to 10% growth last year. Child care volumes were up double-digits. They benefited from innovation and category growth.

Baby wipes volumes were also up double-digits in the quarter. Volumes were off low single-digits in diapers and mid single-digits in adult care. Both businesses had double-digit growth last year with increased promotion shipments and benefits from innovation.

Competitive promotion activity has also picked up somewhat recently particularly in adult care. Our market shares in the third quarter were stable in diapers and down about one point in adult care. In terms of overall market shares in North America, our positions remain healthy.

Shares improved or were even with prior year levels in seven of eight consumer categories on a year-to-date basis and in five of eight categories in the third quarter. Now moving beyond sales. We continue to manage with financial discipline.

As Maria highlighted, we delivered another quarter of strong performance on cost savings, margins, return on invested capital and cash generation while we continue to allocate capital in shareholder friendly ways. These results demonstrate the continued strength of our business. Now moving on to our outlook.

We remain optimistic about our long-term future. We'll continue to execute our innovation, marketing and targeted growth initiatives to grow our brands. We'll also continue to focus on improving the profitability and efficiency of our businesses. In terms of our guidance for full year 2016, we expect organic sales growth of 2%.

Our previous target was 3%. On the bottom line, we're targeting full year adjusted earnings per share in a range of $5.95 to $6.05. Compared to our previous guidance, we've lowered the top end of the range by $0.10 per share to reflect our new organic sales estimate.

Our earnings outlook represents year-on-year growth of 3% to 5% which I believe is pretty solid performance in this environment. Over the next three months, we'll continue to assess the environment and finalize our detailed operating plans for 2017.

And as we always do, we'll provide our guidance for the coming year in January when we announce year end earnings. So, in summary, while it's been a more difficult environment to generate top line growth this year, we are competing effectively and our market positions are in good shape.

We're managing the company with financial discipline, and we continue to execute our global business plan strategies for long-term success and shareholder return. That wraps up our prepared remarks, and now we'll begin to take your questions..

Thank you..

David, are you there? We're ready for questions..

Our first question is going to come from Lauren Lieberman with Barclays..

Thanks. Good morning.

Can you guys hear me? Tom? Paul? Hello?.

Our question comes from Lauren Lieberman..

Hey, Lauren, sorry. We had a little mix up there. Good morning..

That's okay. No problem. Good morning. Okay. So first I actually wanted to ask about was margin performance. Because you showed really good margin expansion in both Consumer Tissue and K-C Professional even with volumes down.

So is that – is it because those businesses have been where most of the cost savings activity is, or is it more about the deflation? Because I think that's sort of an interesting dynamic to think about as we look into next year..

Yeah, I mean if you looked at the cost savings by segment, I mean it was relatively proportionate. In fact, if anything, Personal Care was probably a little heavier than Consumer Tissue. I think, yeah, you probably had more of the competitive pricing activity particularly in some of the emerging markets like China affecting Personal Care.

On the deflation side, it was only $10 million, but again most of it was pulp. So that did benefit Consumer Tissue probably a little bit more than Personal Care..

Okay. And when you think about the margin expansion and the productivity work, a couple places in your remarks you mentioned the promotional environment.

And I think I'm having a hard time getting my arms around how much of the sort of deceleration that you've seen, not just this year but also with it getting more severe this quarter, would you tie to the competitive environment, the macro environment and whether or not you think there'll be a need or desire to spend back more to kind of continue to protect market share positions or to stimulate category growth?.

That's sort of the interesting question I think in this environment. So I'd say there's question that there's less growth out there in lots of places. And so Latin America was certainly the case where categories have gone negative in a big way due to some of the economic impacts in places like Argentina.

And there's just as many people chasing that growth, and so that does make it more competitive. On the other hand, you saw some pretty heavy up activity in some markets in the third quarter that probably won't repeat at the same level.

There was some very heavy adult care couponing in North America, for example, by both of our primary competitors, think $14 digital coupons on a $13 item. We don't see that reoccurring. It was probably more of a one-time thing.

We also saw some pretty big easy ups couponing, more like a $5 coupon, which is way above normal in that market as they were launching a new product. And again, don't see that continuing at that level. And we didn't match those offers, but that does affect your short-term volume while that stuff is working its way through the market..

So is that the expectation because particularly it sounds like in North America Personal Care, some of the promotional activity, you're assuming it doesn't continue and that helps with the – because you need things to accelerate pretty significantly Q4 versus Q3 to do the 2% for the full year total company..

I think it's not as big a step up as you think. There are a lot of things across the company that should be better sequentially. So, if you looked at KCP, we had about a point drag from Halyard. That rolls off in the fourth quarter. Europe was also very weak in KCP which some of that was Brexit-related. That's gotten a little bit better sequentially.

So we'll see how that plays out in the fourth quarter. If you looked at Consumer Tissue, there was more of a promotion timing 2Q versus 3Q. If you look at our year-to-date volume, we're up a couple percent on Consumer Tissue in North America and expect to have a solid fourth quarter versus the negative trend in the third quarter.

So there's a number of things that were probably working against us in the third quarter that will make the comparison a little easier in the fourth quarter..

Okay. And so it sounds like particularly KCP and Consumer Tissue – those are the two? I think the Personal Care comparisons was something a lot of people had their arms around, but the volume seeming shortfall in KCP and Consumer Tissue is what really felt pretty surprising. So it feels like (16:21).

(16:21) the biggest miss versus our plan as well..

Okay. All right. I'll pass it on. Thank you so much..

Thanks, Lauren..

Thanks, Lauren..

Our next question comes from Jason English with Goldman..

Good morning, Jason..

Hey. Good morning, folks. Thanks for the question. I guess I want to pick up first on Lauren's line of questioning, maybe from a slightly different angle.

As you think about your categories and the growth trajectory in the markets which you operate, do you have a sense of how fast they were growing last year and how fast they're growing now?.

Yeah, we don't measure that on a quarterly basis. We would have said last year the global growth rate was somewhere in the 3% to 4% range. We haven't redone the math for this year, but I would say it's going to be at the low end or even slightly lower than the low end if I would have to guess.

Just when you see places like Argentina where we were tracking mid single negative category growth through the first half of the year and saw kind of double-digit category dips in the third quarter. That and Brazil would be the other big market that's had kind of mid single-digit negative category growth comps.

Those would be things that would be a bigger drag on that standpoint. Yeah, that and the pricing environment of China's probably the other one that's a big shift this year relative to what it would have been doing last year.

And so we'll take another look at it going into 2017, but I would guess it's certainly lower than the 3% to 4% we had estimated last year.

That's helpful. And speaking of going into 2017, I know you're not in a position to give guidance, so I wouldn't ask you to at this point in time. But we can't help thinking about the business's trajectory into next year with some of the fading momentum we have right now. It sounds like year-to-date, I think FX all-ins have been about a 12% headwind.

Consuming sort of flatlined in the fourth quarter. You're looking at sort of maybe a 9-point drag to EPS this year. Implying constant currency despite the top line decel, you're still posting pretty solid double-digit earnings growth.

Assuming rates hold, FX abates next year, what are some of the offsets that would prevent you from kind of getting to that sort of constant currency growth rate whether it be sort of inflation, what you see on that front, clearly slower end markets, et cetera? Any thoughts you can provide on that front would be appreciated..

Yeah, again, you're right. We'll give you a more complete look in January. And I'd say for us, it tends to start with our outlook on category growth and some of that's driven by what's going on economically, and so we're – every economic forecast it seems like that we look at lately has a lower GDP growth number than the one before it.

So we're not expecting a snapback from category growth. In terms of – as we tend to look at the combination of input price, currency and commodity costs, that probably still net feels like a drag year-on-year going into 2017. On the other hand, we've also seen lots of big swings between now and the end of the year.

And so we have a number of other events happening between the presidential election and two more Fed meetings. So we'll see where we're at on that calculus a couple of months from now..

Very good. Thank you, guys. I'll pass it on..

Thanks, Jason..

Our next question comes from Wendy Nicholson with Citigroup..

Hi. Good morning..

Hi, Wendy..

I just had a quick question sort of following up on Brazil specifically. Because when we visited you guys down there, I mean we were struck by just how strong the business was. You specifically chosen to play in the higher tiers, and historically, and even last year when things were tough economically you guys were still doing really, really well.

So I'm just wondering if you can just speak a little bit more about Brazil.

Is it specifically the diaper business or is it the fem care business more that has deteriorated and is it – do you really think it is the economic situation? Are people trading down? Are they doing without? Or is it just the competitive environment? If you can speak to the pricing environment specifically that would be great. Thank you..

Yeah, sure. That's an important market. So it's – I would say if there was all of the above on your – as an option for your answer, I'd probably – it's probably a little bit of all of those things but let me go category by category. So fem care for us, doing really well. I think we're up three share points year-to-date.

Category leadership, have launched a bunch of innovation, and I'd say that business looks pretty solid overall. Diapers has been more competitive. Category has been weaker. There has been some trade down in the category as well, and you see more tier two growth. It's been more competitive.

And so from a pricing standpoint, promotion standpoint, there's been more activity on that front as well. And I think within that, you've seen some either it's household inventory destocking or it's moms who were using four or five diapers a day now using three or four diapers a day.

And so you take one diaper a day out of the equation, and that's a double-digit category decline for that consumer. And so I think it takes a little while to get household panel data to really understand what's driving that.

But it's gone on for long enough now, it's probably more than just inventory destocking where you're actually seeing the middle class in some cases in Brazil are getting poorer and having to make tough trade-offs.

You'd certainly see the same kind of phenomenon in Argentina as well as they're moving to more of a market-based economy in some areas that's putting big pressure on consumer wallet. So while we're still well positioned and bullish long-term on Brazil, it's been a tough economic environment. You've had a recession for the second year in a row.

Their overall outlook is not that optimistic. And economies run on expectations and until people start to believe it's going to get better, it's not going to snap back probably..

And if you see people really trading down or even not leaving the category but just using less, I mean would you contemplate a more aggressive pricing action there to sort of spur consumption? Or are you still happy to play at the relative premium end and you want to preserve that position?.

And then in Brazil, we have a very strong tier two business. So we are – we actually are continuing to drive that and are benefiting in that area. But net-net if the whole category is down, it has been – it hasn't been enough to stimulate the consumer to use more at this point anyway..

Got it. And then just ballpark, I know you don't break out advertising as a percentage of sales on a quarterly basis. But of the sort of roughly high 3%s, 4%, I mean this year, are we trending kind of at that same level.

Or has there been any change, up or down for you?.

No, I think year-to-date, we're almost right on. As a percent of sales, it's 3.8% or 3.9%, something like that. So very little movement. And I think the thing that you don't see is that we're probably doing more digital couponing which shows up as a reduction of net sales, which can factor into our price column of our analysis of change in sales.

But there's been more competitive couponing activity as well..

Fair enough. Okay. Thank you so much..

Thanks, Wendy..

Our next question comes from Caroline Levy with CLSA..

Hey, Caroline..

Good morning. Thank you. Hi. I'd like to ask for a little more explanation of what you think is going on in China. Our surveys there are not – I guess the retailers and distributors are not really talking about price discounting, but you're obviously seeing it.

So I'm just wondering if you can talk by channel where the pricing pressure is coming from and maybe even by competitor? Just trying to understand what's going on. And I don't know if you have any more specifics on the volume growth..

Yeah, I mean the volume growth for us was very strong, particularly in newborn, and we're expecting and seeing a stronger birth rate in China that was back end loaded this year. And it's really across all classes of trade.

We tend to look at modern retail baby superstores and then e-commerce as our, sites that we have data and insight into, and we're doing well and growing strong double-digits in both – in all of those categories.

In terms of the pricing, I think, again, that's a place where it's one of the fastest growing markets in the world, and you're seeing lots of competitors chasing it.

So the two Japanese competitors as well as P&G are all very aggressive, and it's probably one of those things, Caroline, where everyone thinks the other guy started the price war, but we're all trying to drive our business in that market. And our shares are pretty stable overall, and we've got good innovation in the market and more coming.

And so we feel pretty good about our position in that market..

So, yeah, just on that innovation, do you have different product by channel? So, for example, for online, would you have different innovation? And what's been driving the growth this year?.

No, I mean it's a pretty similar product lineup. You may have different pack counts or pack sizes by channel. And for us, as we said, newborn has been a strong driver this year, but our premium lineup is continuing to do well in China overall, tier five, which we would call it. But our top-of-the-line Huggies products are doing well in China..

Thank you.

Just last question, do you see this persisting, this competitive environment?.

I don't think it's going to get any easier any time soon because China is one of the best growth opportunities available in the world right now, and I think it's going to be the biggest consumer market at some point in time in just about every category. And everyone's trying to build a position there, and we're certainly among them..

Thank you so much..

Thanks, Caroline..

Our next question comes from Ali Dibadj with Bernstein..

Hey, guys..

Hey, Ali..

I'm not sure I'm getting a very clear picture about the split of the slowdown between competition and just the economy around the world.

So I know it's tough to tell, but is it 50-50? Is it 60-40? How should we think about splitting that? Because going forward, between competition and economic slowdown, we obviously try to figure out which one of those is going to get better.

But maybe start with kind of what's the split here? Is it P&G and the Japanese companies we've heard them before, just like you just said a second ago getting super aggressive in China? Is it economic slowdown? Can you just give us some more quantification of which one is really driving it? Because it sure feels like, in my editorial comment, it sure feels like since basically Q4 last year, we've been hearing, look, China's just a one-time thing.

It was single day. And then we heard, oh no, people are getting more aggressive in China, but it's really because it's VAT issue. And then now it doesn't sound like it's that benign. And then similarly, in the U.S. and in Latin America, we kept thinking, look, things are okay, things are okay, and things will slow down quite dramatically.

So I'm still trying to unearth this economics versus kind of competition..

Yeah, that's fair, Ali. So, if I were to give it to you regionally, I'd say in Latin America, it's probably more category decline than competitive activity. Although, when the category is declining, you do still have more competitive activity as everyone is trying to hang on to their share of the business. In China, it's more competitive activity.

The categories are fine. The birth rate is fine. In China, you're seeing good underlying category growth on a unit volume standpoint. In North America, honestly, on a year-to-date basis, we're fine. We had a tougher third quarter. We had tougher comps for sure in a lot of areas because of some of the launch activity last year.

But if I looked at Consumer Tissue in North America which had a negative comp, it had more to do with we had a little heavier promotional schedule in the second quarter where we had great volume growth than we did in the third quarter where we went backwards.

We're expecting to finish with a strong fourth quarter, and that business is on track from a share perspective. Europe – Eastern Europe – I'd say Western Europe and the U.K. was pretty weak overall economically.

Some of the reaction to the Brexit vote, you had a lot of people that didn't want to hold inventory for a while and had fairly weak growth in both the consumer and the KCP side. Eastern Europe is essentially fine. It's competitive, about like normal. Categories are performing reasonably well. So it is more of a region-by-region assessment.

You do have some of both factors in both places. But I don't know if that helps you understand it better, but that's probably how I would break it down for you..

No, it certainly helps. And to tie that a little bit to your share position, so healthy shares on average, not – it sounds like when you're saying not, not losing share.

So should we expect your competitors to deliver kind of zeros organic sales growth, or are there things that you think may make the category be growing faster than you're growing, e.g., tough compares or what have you.

Because it just – it feels like a lot of this is – if you're not losing share, everyone else is going to have to be feeling some pain as well.

Is that a fair assessment?.

Well, we'll find out I guess this week. So – but that would be my assessment..

Okay..

I mean I think, Ali, I would just add it's probably better to look at results through nine months. As Tom said, there was a lot of noise in the third quarter, and I think if you look at through nine months, that's probably a better reflection of how we're doing..

Okay. Thank you. And then the last thing I just want to throw in again on this topic is kind of almost what I started with in terms of how should we – why should we expect this getting better? I mean it feels like competition is not going away yet.

I don't know if you guys are seeing anything that suggests the macroeconomic situation in Latin America or whatever is getting better. You hear from Walmart that they're going to have to put in more private label to fight all the (31:50) in the U.S.

It just feels like there's more brewing here that may make it tougher before it gets better and wanted to just get your reaction, given you guys see many more things than we do..

Yeah, I mean, I would agree with the statement that it's not going to get better quickly. I don't expect a snapback here. On the other hand, there are some green shoots in some places. I'm encouraged by the volume growth in China, the birth rate in China. We've got lots of good innovation coming in lots of places.

I look at our fem care business, for example, where we've seen share growth in the vast majority of the categories that we compete in around the world, and there's consumers still responding to innovation. We still got good growth opportunities for adult care overall.

And it's a little bit more competitive in North America, but we've seen good growth outside North America. And so, while there's – maybe we're going through a tougher economic period of time. I do think in the long-term, there's still lots of room for category penetration here..

Okay. Thanks very much, as usual..

Thanks, Ali..

Our next question comes from Stephen Powers with UBS..

Great. Thanks. Yeah, I may have missed a bit. Can you talk a bit more about what drove the Tissue mix – or sorry, Tissue miss in North America? I know you cited the promotional timing shifts into Q2, but that should have been foreseeable.

So I'm just trying – I'm trying to figure out where the miss versus your own expectations resided?.

Yeah, I mean it's one that, again, we didn't give you guys quarterly guidance, but it was one that we expected to do a little bit better in the third quarter than we did.

Some of it was our primary competitor in North America probably did a better job of executing against the Olympics promotions, and while we had activity, it didn't compare at the same level. And so we'll have a little stronger program in the fourth quarter. On the other hand, we did have a very strong second quarter.

And last year, our comps were tougher. So it made it look worse than maybe it would. If you looked at it on a year-to-date basis, it looks fairly similar..

Okay. And then if I can drill into Russia, you seem pleased with the Eastern European trends in general. But if I just triangulate it, it seems like Russia is a little bit softer than what I would have expected based on your commentary coming out of Q2.

Can you just expand on that a little bit?.

I mean, overall, I mean it was up double-digits in the quarter across Russia, Ukraine, CIS which would be what we would all bucket into those categories. And I'd say, Russia and CIS are probably performing the best.

Ukraine is maybe less negative than it was in the past, but that's still an economy that is under quite a bit of stress with everything else that's going on in that market. But overall, I'd say our Russian business is on track for the year with our expectations..

Okay. Okay. And then lastly if I could. I know you don't expect a snapback, but to the questions earlier, the Q4 outlook implied in the full year guidance does feel like somewhat of a snapback to more or less normal. Is all of that Consumer Tissue renormalizing, or should we expect sequential improvement in both Personal Care and Tissue..

Yeah, I mean, it's one that I think to hit our revised full year guidance, we only need, Paul, what, about a point of growth in the fourth quarter....

Yeah..

...versus zero in the third quarter. So it's not a huge uptick to be able to round (35:23) the 2% growth for the year. So it's one that, again, I think that's doable across a number of places. But overall, I would expect the ones that were off the most in the third quarter will have the biggest opportunity to close the gap..

Okay. Thank you very much..

Thanks..

Our next question comes from Olivia tong with the Bank of America Merrill Lynch..

Great. Thank you.

Tom, first question is just when you characterize your market shares as sort of broadly healthy and you're broadly encouraged by them, are you talking about dollar share or volume share?.

We typically look at dollar share. We look at both. But the one that we probably focus more on is dollar share. So when you hear us talk about it externally, it's typically dollar share..

Got it. Because when you talk about specific categories, you talk a lot about volume. And when I look across Nielsen data it looks like a couple of the categories you are sort of trending downwards particularly in some of the developed markets, U.S., for example. And then a couple of the emerging markets so just wanted to clarify that.

And then also, going into Q4 and also into 2017, when you think about what's driving that improvement, is it coming primarily from volume or – and what do you think about mix in price and roles that they play in terms of driving that organic sales acceleration?.

Yeah, I would expect that the sequential improvement will be mostly volume based particularly in North America. I don't expect to see any big pricing improvements. There's no major price increases that are happening in any of the categories..

Got it. And then just can you update us on your view of sort of what the industry is growing at in your categories? More so for the medium-term rather than the very short- or long-term and has there been any change in terms of what you think the industry will grow at..

Yeah, so we had commented on that a little earlier. Typically, our long-term outlook has had the categories growing 3% to 4%. And we haven't remeasured that for what we think actually happened in 2016 or what we think might happen in 2017, and we'll give you another look at that when we give you guidance in January.

My guess is that it had slowed down just because of the category declines that we've seen in Latin America as well as the pricing activity that we've seen in China. Those two together would probably – those are all large markets and would definitely bring down the category growth rates a bit..

Got it. Thank you..

Thanks, Olivia..

Our next question comes from Jonathan Feeney with Consumer Edge Research..

Good morning..

Thank you, guys. Good morning. I just want to ask about the cash flow. The last time, I mean, excellent cash flow performance. And I'm wondering two things. The last time you spent at this rate on CapEx which you lowered for the full year, it was back in 2009 when obviously there were some very different macro dynamics.

And I guess with a very strong cash flow performance, is that something we should expect going forward? What are your sort of priorities for allocation with this outperformance? And does that signal anything about your expectations for structural growth? Because I think in prior periods, it probably did. Thank you..

Sure. We did have really strong cash flow in the quarter as you saw, and we had really good performance in working capital particularly in reducing inventories. And that came through to help our cash flow numbers. In terms of CapEx, we do expect that we'll be below our original guidance that we gave coming into the year.

But that is driven by a couple of things. First, we have had really strong productivity this year and you see that showing up in our FORCE cost savings as one of the levers that we use to drive that. And we also do have slower volume and sales growth than we expected coming into the year.

And so we're very rigorous on what we spend capital on and making sure that we're matching up the timing of when we're putting assets in the ground with our expectations and with slower volume growth this year, our capital is lower than we expected. This is an area that we continue to drive.

You know that we've set up a global supply chain organization last year, and that organization is partnering with the finance organization and the operating teams are continuing to drive added rigor into our capital process. And so we're not changing our long-term expectation there, but we are incredibly rigorous on that.

And we'll flex the CapEx spend with the needs of the business. I wouldn't take it as a signal for anything else other than just where we are as a company this year..

Thank you very much..

Our next question comes from Erin Lash with Morningstar..

Hi. Thank you for taking the question. I wanted to ask specifically about China and the growth, the organic sales that you cited with regards to diapers, seem to be an improvement.

How much maybe was that driven by the just overall category demand as opposed to innovation? And then more broadly with regards to innovations across the categories that you compete in, I guess in light of the tough macro backdrop as well as intense competitive activity, do you see your innovation skewing either more to the premium or the value end or has that not really shifted in light of what's going on? Thank you..

Yeah, those are good questions. And so I mean, if we look at China today, the birth rate is definitely helping. And we expect more live births this year. And it could be as much as 7% more live births in 2016 than there was in 2015.

You're still seeing GDP per capita go up in China so more consumers have more money to spend in categories like ours, which helps. We're continuing to drive our city expansion, so we're in now 130 cities where we started the year at 115. And so we've got more geography to cover as well which is fueling our growth. And we continue to launch innovation.

And so we've been driving some improved newborn products, and that has really helped drive a lot of our near-term volume growth. But we've also – we're also driving diaper pants hard across a number of tiers both mainline and premium tiers. And so I think there's a combination of those factors has really helped our volume growth this year..

And then with regards to innovation more broadly I guess across the categories in which you play where that kind of maybe – if that's skewing one way or the other?.

China tends to skew a bit premium. The golden baby phenomena is alive and well in China, and Chinese moms and dads invest a lot in their child and hopefully children as they go to more than a one child policy. And we tend to see the best for baby as a strong pull for our business in China..

Okay.

And then in a more competitive or I guess challenging economic environment like Brazil, would that still skew more premium or would that be more balanced or skewed maybe to value?.

Yeah, Brazil you are seeing a bit more trade down, more growth in the lower tier products. There still is a segment of the consumer that has money to spend and will pay more for best for baby, so you've got to balance your innovation across those tiers. But you are seeing more emphasis on the value equation in markets like Brazil and Argentina..

Thank you very much. That's helpful..

Thanks, Erin..

Our next question comes from Iain Simpson with Société Générale..

Hello, Iain..

Thanks very much. Hi there. Good morning, everyone. Just a couple of questions from me. I wondered if you could just talk a little bit more about the pricing environment in Chinese diaper? I know you have touched on it, but I seem to recall at the second quarter stage you talked about it being down about mid teens year-on-year.

I was just wondering if that was a sort of similar level in the third quarter. And also I think in some kind of other infant channels. We've seen some destocking in the C2C channel.

I just wondered if there were any signs of that there? And then moving on to Tissue, really high level, but your comp in the Q4 is a couple of points tougher than your comp in the Q3 yet you're talking about an improvement despite that.

Any color you can give onto the drivers of this a bit more on whether you think there's a risk that lower input costs from pulp coming down does translate into a tougher pricing environment would be great. Thanks..

Okay. On China pricing and – broadly, I would say the market got a little bit more competitive in Q3 than in Q2. And so again, you saw lots of innovation, lots of good global competitors trying to drive their business. And the Chinese consumer is the beneficiary of that for sure.

I wouldn't say we've seen any significant destocking impacts in any of our businesses. I mean we have a pretty big e-comm presence in China, and that business tends to be relative for us at least, relatively efficient low inventory. And it flows pretty directly to the consumer. So again, China – good growing competitive market.

We're competing well, and we feel pretty good about our position there. On the Tissue comps, I mean again, we had a weaker promotional calendar in the third quarter as it turned out than we needed, and we expect to have a stronger quarter going into the fourth quarter.

Fourth quarter is also typically a little bit better facial tissue quarter, so we'll see how cold and flu shapes up. And on the pulp question, at the levels of pulp chains that we're seeing, I wouldn't expect that to have much impact on pricing..

Thank you very much..

Thanks, Iain..

Our next question comes from Bill Schmitz with Deutsche Bank..

Hi, Tom. (46:32). Hey, can you just talk a bit more about the timing of the promotional activity? Because it seems like you probably were planning on some promotions in the back half of the year, and they didn't come through. So how does that happen I guess is the first question.

I think it was Cottonelle and Huggies and Diva had like a really good back half last year. And so you have to lap it again, I think this year. And then a couple follow-ups. The fourth quarter year guide to get to 2% is between 1.5% organic and 5% organic. So, if I heard you right, you kind of think it's going to be the low end of that 1.5% to 5%.

Is that fair? And then the last one is just on the SG&A leverage which was great.

Can you just talk about what's driving the SG&A growing substantially lower than sales and how sustainable that is?.

Okay. You've got a pretty eclectic list there, Bill..

I know. I wanted to get them all in..

Yeah, on the Tissue growth, some of it is timing of promotions and when they ship. I think overall we had a pretty good promotional calendar. On the other hand, we probably underestimated the impact of front-of-ad circular Olympic stuff and how much lift that would provide to a primary competitor.

So, in some cases, we had the promotion, we just didn't get as much of it as we thought we were going to get. And that obviously has lapped, and we'll expect a little stronger performance going into the fourth quarter.

And so we feel pretty good about the lineup we've got, and again, year-to-date, we feel like the Tissue business in North America is at or ahead of its plan. So we're comfortable with what we're doing on that front. The fourth quarter comps, essentially I would say is that to get to the low end of our guidance, we only need to deliver one.

So to put that in perspective, I wouldn't say I was predicting that, and we'll see what it looks like when we post it in January.

As you guys know, I'd rather give you guys annual guidance anyway, and this is the one quarter of the year where I have to give you quarterly guidance, otherwise I'd just rather talk about where we're going from an annual plan and not manage the business quarter-to-quarter. SG&A growth.

We are maybe Maria, you want to comment on that, because we are really trying to make sure we're focused on controlling that element of our P&L that we can control..

Sure. We also have some currency FX when you look on the face of the P&L and SG&A. If you unpack that and look, locally, we actually have SG&A increases in some places, particularly in Personal Care where we continue to invest in our capabilities and building that business out in developing and emerging markets.

We also operate in some high inflationary environment. And so again, when you strip the currency, we have increasing SG&A in some places because of inflation. But we balance it out.

We continually look at our SG&A spend to make sure that we're directing as much of it toward growth-oriented initiatives and then have extreme rigor on the more discretionary non-growth oriented core SG&A spend..

Okay. Great. That's very helpful. Thank you..

And at this time, we have no further questioners in the queue..

All right. Well, we appreciate all the questions, everyone, and we'll wrap up with a comment from Tom..

Well, once again, thank you all for spending some time with us this morning. We hope to deliver a little stronger performance in the fourth quarter, and thank you again for your support of Kimberly-Clark..

Thank you very much..

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