Paul Alexander - VP, IR Maria Henry - Senior VP & CFO Thomas Falk - Executive Chairman & CEO Michael Hsu - President, COO & Director.

Ali Dibadj - Sanford C. Bernstein Wendy Nicholson - Citigroup Jason English - Goldman Sachs Group Kevin Grundy - Jefferies LLC Lauren Lieberman - Barclays PLC Andrea Teixeira - JPMorgan Chase & Co. Bonnie Herzog - Wells Fargo Securities Sunil Modi - RBC Capital Markets.

Ladies and gentlemen, thank you for your patience in holding. We now have your speakers in conference. [Operator Instructions]. It is now my pleasure to introduce 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; Mike Hsu, President and Chief Operating Officer; and Maria Henry, our CFO. Here's the agenda for our call. Maria will start with a review of third quarter results.

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

Please see the Risk Factors section of our latest annual report on Form 10-K for further information. And lastly, we'll be comparing our 2017 results to 2016 adjusted results, which exclude certain items described in this morning's news release. 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 third quarter. We continue to deliver earnings growth and returned to positive sales growth territory in a challenging environment.

We achieved excellent cost savings and reduced our discretionary spending and we returned significant cash to shareholders. Now let's look at the details, starting with sales. Our third quarter net sales were $4.6 billion, up 1% year-on-year. Organic sales rose slightly, and Tom will provide more color on our top line in just a few minutes.

On profitability, third quarter gross margin was 35.8%, that's down 60 basis points as input cost inflation and lower pricing more than offset our strong cost savings. Commodities were $115 million drag in the quarter, and we now expect full year inflation will be slightly above our previous estimate of $200 million to $300 million.

This outlook includes somewhat higher cost estimates for pulp and polymer resin. Helping to offset that inflation, our teams continue to deliver significant FORCE cost savings, with third quarter savings of $125 million. Moving down the P&L. Between-the-lines spending was down 60 basis points year-on-year.

As we mentioned on our earnings call in July, we're tightly managing overhead and discretionary spending in this environment. Our third quarter operating margin was 18.4%, up 20 basis points year-on-year.

I'm encouraged with the margin improvements we achieved in our Personal Care and K-C Professional business segments and in the developing and emerging markets overall. On the bottom line, third quarter earnings per share was $1.60, up 5% year-on-year.

Lower equity income reduced earnings by about $0.03 per share, offset by a slightly better effective tax rate worth about the same amount. Now let's turn to cash flow. Cash provided by operations in the third quarter was $805 million and in line with our expectations.

Cash flow in the year-ago quarter was $948 million and included very strong working capital improvements. Our third quarter 2017 working capital cash conversion cycle was down 6 days compared to full year 2016. I'm pleased that our teams continue to make good progress in this important area.

We're also managing capital spending even more tightly in this environment, and we expect that full year spending will be slightly below our $850 million to $950 million target range. On capital allocation, third quarter dividend payment and share repurchases totaled more than $500 million.

We expect that the full year dividends and share repurchases will total $2.3 billion. That number includes $900 million of expected share repurchases. Looking at the segment results. In Personal Care, organic sales fell approximately 2%. Organic sales were up 3% in developing and emerging markets but down elsewhere.

Personal Care operating margins were 20.8% and up 100 basis points. The improvement was driven by cost savings and reduced between-the-lines spending. In consumer tissue, organic sales were up 2%, driven by North America. Consumer tissue operating margins were solid at 17.1%, although down 100 basis points.

The results were impacted by higher input costs, mostly in pulp. In K-C Professional, organic sales in the quarter were up 2%, with gains in all major geographies. K-C Professional operating margins were strong at 20.9%, up 130 basis points. That comparison included benefits from both sales growth and cost savings.

In summary, we continue to grow earnings in a difficult environment, we are tightly managing costs, working capital and capital spending and we continue to allocate capital in shareholder-friendly ways. I'll now pass the call over to Tom..

Thanks, Maria, and good morning, everyone. I'll give you some more detail on our top line sales and market conditions, and then I'll address our outlook for the balance of the year. Looking at the third quarter, our organic sales were up slightly year-on-year after being down about 1% in the first half of the year.

Volumes in the third quarter increased more than 1%, while net selling prices fell about 1%. But overall, it's challenging to find growth right now in several of our large markets. So looking at some of those key markets. In North America, conditions remain relatively difficult, including elevated competitive activity.

In the consumer categories that we compete in, the total market did grow by about 1% in the third quarter, and that's 1 point better than that same category grew in the first half of the year. In our consumer businesses in North America, organic sales were similar year-on-year after being down 3% in the first half of the year.

Volumes rose 1%, led by our consumer tissue and adult care brands. On the other hand, net selling prices fell 1% as a result of competitive activity and some of the fine-tuning of our promotion strategies that we mentioned on our earnings call in July. Looking at our individual businesses in North America. Personal care volumes were off 1%.

In the infant and child care mega category, our volumes were down mid-single digits in a continued challenging environment. Now we expect better performance in the fourth quarter as comparisons ease and we have more promotion and other brand activities planned. Volumes increased high single-digits in adult care in the third quarter.

Our Poise and Depend brands benefited from category growth, from increased marketing and promotion support and from some of the innovations that we've launched in -- behind these 2 brands over the last 12 months. Consumer tissue volumes in North America increased by 5% and rebounded nicely following a difficult first half of the year.

We benefited from a stronger promotional calendar, from good merchandising execution and our comparison to a soft performance in the year-ago period. Turning now to our K-C Professional business in North America. Organic sales rose 2% in the quarter. That was driven by volume growth of 3%.

Volumes were up in all major product categories as our team is executing its growth strategies well in a relatively sluggish market. Switching to developed markets outside of North America. Organic sales were down 3% in the third quarter.

All of that decline was driven by South Korea, including in diapers, where category conditions are challenging as a result of a significant decline in the birthrate in that country. Moving to developing and emerging markets. Organic sales were up 3% in the third quarter, including volume growth of 4%. Looking at some of our key markets there.

In Brazil, organic sales in personal care were similar year-on-year. Our volumes continue to grow with benefits from innovation across the portfolio. Selling prices came down, though, as we adjusted to the stronger Brazilian real and competitive activity.

In China, organic sales in personal care were up mid-single digits with strong double-digit growth in feminine care. Our Kotex brand in China is benefiting from product innovation and our focus on the premium end of the market. Organic sales in diapers in China were similar year-on-year.

Product mix improved while volumes and selling prices were down as comparisons were impacted by very strong growth last year and competitive activity this year. Diaper pricing continues to be less negative this year than it was last year. And going forward, we will continue to focus on driving winning product solutions on Huggies in China.

In Argentina, organic sales in personal care were up strong double digits, driven by higher selling prices. Huggies diapers' volumes continue to grow somewhat even though the category demand in Argentina is still down. And then lastly, in Eastern Europe, organic sales in personal care increased high single digits.

Our volume momentum continues in this part of the world as we achieved another double-digit increase this quarter on both Huggies and Kotex. Selling prices declined in Russia and Eastern Europe, mostly reflecting price rollbacks following the strengthening of the Russian ruble.

I'd also like to mention at the end of the third quarter, we purchased the remaining 50% of our joint venture in India. Although the categories in India are small today, we're optimistic about the long-term growth potential in this country.

And then finally, I'll briefly build on Maria's financial review to say that I'm encouraged with our team's accomplishments on our FORCE cost-savings program, the way we've managed our overhead spending in this year, especially in the third quarter, and then our working capital and capital allocation.

Now I'll turn and cover our outlook for the balance of 2017. As we mentioned in this morning's news release, we're confirming our previous full year 2017 targets. We continue to expect that sales will be similar or up slightly year-on-year. Given results through 9 months, it's more likely that organic sales will be similar for the full year.

On the bottom line, we continue to expect that earnings per share will be at the low end of the $6.20 to $6.35 range. As Maria noted, our commodity inflation estimate has increased somewhat from 3 months ago. On the other hand, we've reduced our discretionary spending plans for the year.

In addition, our outlook for currency rates and the effective tax rate has improved slightly. So in summary, we're focused on competing effectively in the near term, we're executing our Global Business Plan strategies for long-term success and we're optimistic about our opportunities to deliver attractive returns to shareholders.

That wraps up our prepared remarks, and now we'll begin to take your questions..

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

I have a few questions. One is if you can talk about kind of the recent top line organic results you delivered in the context of the longer-term 3% to 5% organic range, and what you see is the gaps, whether it be particular geographies or particular business units that you need to close and, I guess, your comfort with that. That's the first question..

Yes, sure. I think a couple of comments, first on overall category growth. When you've got the birthrate going negative in big markets like the U.S. and major negative in South Korea, we'd guess the birthrate's down 7% to 9% year-to-date in Korea, which we have a hard time explaining to be honest, and don't think that's sustainable.

On the other hand, it is what it is and those babies aren't born this year and they won't be in the category next year or the year after that. So category weakness is certainly there in a couple of big markets.

And then we had negative 1 price, which is pretty similar in the first half and the third quarter as you had pricing that went in as a result of currency in some places like Russia and Brazil last year that's coming out as those currencies have turned around and a generally more competitive price environment, even in markets like the U.S., as the same number of competitors are chasing lower growth or lower category.

So we still think the 3% to 5% is the right long-term growth opportunity. We've got good growth as emerging markets develop. But I'd say, certainly this year, that has been tough to go find..

And just on that, I mean if you think about all those drivers, are they going to get better in 2018 at this point? Or do you just have no visibility into that? Because it certainly doesn't -- it feels like it's a pretty far reach to get anywhere near the 3%, the 3% to 5% range, even next year..

Yes, we'll give you '18 guidance in January, but I'd say your instinct is right, that it -- we don't -- we're not planning for it to snap back. We would expect -- I mean again, the babies that aren't born this year aren't going to be in the diaper category next year either.

So and I think, as we understand, much of it is a millennial thing, where they're having kids a little later. Is there -- what else is going on in Korea that might be affecting it? What's the path forward as to how those recover? Those are all things that we'll be looking at.

But again, I would expect it's going to be another challenging year from a growth standpoint in 2018. At least that's what we're planning for at this stage..

And then just if I may, just the last question. Given what we're seeing on private-label trends, what's your stance on manufacturing private label for other retailers than Costco? For example, Amazon..

Yes, we do, do private label for a number of retailers and across several categories and have for a long, long time. We don't usually talk about it very much, and it is a very small part of our business. It's less than 5% of our overall sales..

And nothing in particular about the e-commerce channel in regards to private label?.

No. I mean, we -- well, I mean, I think there isn't much private label in e-commerce today. And so we really are focusing on building our branded business and e-comm across our categories and in many key markets around the world, China and Korea, especially, where it's exploded. And it is where a lot of the category is taking place..

Our next question comes from Wendy Nicholson with Citi Research..

Can you comment on your decision to focus on cutting your spending as aggressively as you have been? I mean, on the one hand, it's great that you've insulated your profit margins in a difficult environment. I assume there's some negative operating leverage and obviously costs are going up.

But when you talk about sort of your cutting your discretionary spending, how much more fat is there to cut? And I guess, could you address the thought that, hey, if you cut less and maybe spent more, do you think that would have a positive impact on your organic top line growth? If you could talk about your -- sort of your philosophy, given just how challenging so many markets are right now..

Let me give you a couple of headlines and let Maria give you a little bit more detail.

I mean, first of all, I mean, there has been some shift out of advertising and digital couponing that you guys don't see because the digital coupon value is a reduction of gross sales to get the net sales and it kind of shows up in our price calculation as we give you the analysis of change in sales.

So part of that negative 1 point of price is more digital coupons, and we spent a little bit less advertising. The other -- if you've got low birthrates in markets like the U.S. and Korea, more advertising isn't necessarily going to help you stimulate category demand. I mean, it could be a share play that you really felt like you could influence it.

But in this kind of environment, we also said being sharp and competitive on price is even more important, so we've probably invested a little bit more there.

And then the cost cutting between the lines is, I think, kind of a normal belt-tightening you do in a tough year, but I'll let Maria give you a little bit more detail on how we've thought about that..

Yes, I just follow on Tom's comments that on the growth-oriented investments that we make, we pay a lot of attention to what the ROI is on those investments.

And we continually monitor that to see, are we getting what we're expecting? And then we shift our investment dollars to the highest and best use, where the strongest ROI is, given the competitive environment and the category dynamics. On the overhead spending, that is an area where you always have room on discretionary expenditures.

And when the top line is where it is and as we face inflationary pressures, it just makes sense to tighten our belt on discretionary items. And while we hope that all of our spending contributes value, there's a rank order of higher-value activities and lower-value activities.

And we just pull back and eliminate the areas that, again, have a lower return to the overall profitability and success of the company. And so it's regular belt-tightening below the line and a really hard look at ROIs on the growth-oriented investments..

Got it. Okay. And then my second question, if I can, is just on China. Because we heard a lot from Procter on Friday about their initiatives in the diaper category, how much they're investing there.

Can you just remind us where exactly you are positioned, your portfolio? Are you in the superpremium end? How big is your share maybe in the pants area? I'm trying to assess how much of a threat their renewed focus in that market is on your business specifically..

Yes, Wendy, it's Mike. Yes, we're probably balanced, but we're probably -- the growing part of our business has been the premium business, but we're generally balanced overall. We have a good position in Tier 3, but also Tier 4 and 5.

And the growth has been more out of the premium side of our business, and that's where we're driving more of our business. Our performance overall in China this quarter, I think as Tom mentioned, the organic was even versus -- or similar to versus year-ago. But we're very confident in our business there long term.

It's obviously the world's largest diaper market. We've got a great team with great technology and we like our position there..

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

Clearly, this is shaping up to be a pretty tough year for you guys, as I think you've conceded, Tom. What I'm trying to do is wrap my head around, parse out, what may be sort of transitory pressure and what may have some more enduring headwinds. I mean, birthrates in the U.S. look like, at some point, they should come back.

Input costs obviously ebbs and flows, and right now, it's flowing against you. But what stands out in results is really the combination of pricing and cost. I think I've got to take my model back to 2004 to find an environment or a year where you were poised to deliver negative price with cost inflation. And Ali asked the question on private label.

We see in the data, it's got momentum and you're flagging competitive intensity just around so many markets, driving some negative price. So my core question is that.

Is that here to stay? And if not, why not? Why should we believe that pricing pressure won't be more enduring? And if it is, what are the implications for the margin profile of your business overall?.

So good, deep philosophical questions there. I'd say one thing. As you look at the Nielsen data, the private label is probably somewhat overstated because it doesn't include growing parts of the category, particularly e-commerce where there's really, really very little private label at this point, particularly in the U.S.

And we saw a little bit of spike in the quarter in private label in a couple of places, in particular, markets that were probably hurricane relief-related. So if you're going to donate diapers, you may go buy private-label diapers to do it. But we'll see how that resolves as the quarter rolls forward.

But at a larger view of your question, we would say that, yes, you've got to have both winning products and you've got to be price-competitive going forward. And so I don't think that's going to change.

And so we know that the prices are probably -- you're not going to get an annual price increase every year, although we haven't operated that way for a long, long time, but we are expecting lots of good local competition as well as global competition that's going to make a price competitive market.

So I don't know, Mike, if there's anything you want to add to that..

No, no, I think it is an interesting observation you make, Jason, though, that with the cost inflation, seeing the pricing pressure in some of the markets isn't what you normally see. And so again, I think we're preparing ourselves to operate effectively in that environment and be able to grow profitably in that kind of a marketplace.

But obviously, that's not our preference..

Some of the pulp price increase, really quite honestly, if you look at supply/demand model, you wouldn't have predicted it would be as high as it is. So our -- another RISI forecast stated that it's going to be higher in '18. And yet you again say it's hard to believe that under the supply and demand fundamentals, it's going to be there.

It's harder to price off that if you're not sure that the commodity increase is real and enduring..

Our next question comes from Kevin Grundy from Jefferies..

First question for Tom and Mike. I wanted to come back to personal care, which came in a little bit shorter than expectations, I think, broadly in the quarter, and just understand what the surprises were to the downside.

Because, Tom, I think you talked about birthrates in North America and South Korea, which were already sort of understood going into the quarter, year-over-year comparisons also understood.

So was it just the competitive environment that was worse than expectations that drove some of the downside? And if so, why does that necessarily get better in Q4 or even into next year? I'd just like to try to better understand that. And then I have a follow-up..

Yes. I think, Kevin -- I think it largely -- probably competitive environment. Obviously, that I think the birthrate, particularly in the U.S. and South Korea, has been known for a while, probably larger than what we where we were expecting previously.

But I think the competitive environments continues to be active out there, particularly in North America. I think what you are going to see is that we are expecting to see our performance improve, particularly in the U.S. and North America, as we finish out the year from a promotional perspective. We've fine-tuned our promotion plans.

I think we are seeing some of that reflection at the shelf now, and we're expecting better performance there..

Okay. Maria, question for you, if I may, on input cost inflation, which is becoming more topical broadly across the group and I would say certainly for Kimberly-Clark. Can you -- so the first is kind of a housekeeping.

Can you just confirm that pulp purchases for the company are probably about 25% of cost of goods sold? And then related to that, just given the worries around top line, what's your expectation for pulp inflation, raw material inflation over the next 12 months, just given the potential worry here around margins and the company's ability to offset this with FORCE savings and pricing would certainly seem less applicable in the current environment given the competitive activity? So commentary there would be helpful..

Sure. In terms of our commodity purchases, what we say is that, generally, commodities- and energy-related spend is just under 50% of our cost of goods sold. And then within that, our largest single commodity buy is pulp, which is about 1/3 of that number. That will get you to about our pulp spend for the company.

In terms of the inflationary pressures that we see, as I think Tom commented, it is stronger inflation than we were expecting. When you look at the fundamentals of demand and where we are in the cycle, we wouldn't expect it to be as high as it is. There is some supply constraints that seem to be in play here, so we'll have to work through that.

The higher inflation is one of the drivers of getting even more aggressive on the overhead cost that we've been talking about in the third quarter. We're fortunate to have very strong performance on our FORCE cost savings delivering $125 million of savings against $115 million of inflation that we saw in the quarter.

The teams have done a great job on the FORCE cost savings. We're now at about 4.1% of our cost of goods sold in savings delivery. And that has been up year-on-year for the last couple of years. And the teams continue to expand the lens that they look at to continue to drive productivity in our supply chain.

In terms of the exact numbers and expectations on where we think the commodities are going, I'm going to ask Paul to kind of run you through..

Yes, I mean, I think that for the next 12 months -- or for 2018 specifically, as Tom said, we'll give you our planning assumptions in detail when we get to January. As he also referenced, if you looked at market forecasts right now, they would suggest inflation again next year..

And at some point -- if you think about commodity inflation in a band, at some point, if it gets high enough, we expect that we will be able to get some pricing against it. It's just when you've got -- when you are where we are in terms of the inflation and the volatility around it, it's a little tougher to price.

But if you look historically, after some inflection point on inflation, we're usually able to get some price in the market..

Thanks for that. Just to drill down without asking you guys to put numbers on it.

For Maria and Paul, is it fair to say at this point, based on what you know and where spot prices are, that you feel comfortable that the FORCE savings can cover your input cost inflation over the next 12 months?.

Well again, I don't want to give a specific number on the outlook. I think our FORCE cost savings, we're in good shape to deliver the guidance that we gave for this year when you look at where we are in a year-to-date basis. I think broadly, we continue to believe we've got room to go on that program as we looked forward.

So when we come back in January, we will give you our perspective on what we think on the cost savings versus the inflation estimate..

Our next question comes from Lauren Lieberman with Barclays..

So a couple of questions. First thing was just on China. I think you guys said that -- or that volume in China diapers was down this quarter. Would you just -- it could may be my mistake, but it's not something I recall hearing before. I think the pattern has sort of been strong volume with negative pricing, and then that you said pricing was better.

But can you just talk a little bit, the dynamics on China volumes turning negative in the diaper business and sort of the outlook forward? My first question,.

Yes, Lauren, volume was down in China, particularly in diapers. I think mix was favorable. And the pricing environment has probably stabilized versus Q2 and pretty much on kind of what our annual assumption of it at the beginning of the year.

I think what's going on is probably, the volume, has been a little bit more competition chasing the world's largest market. And what's probably been different about maybe the recent quarters is a little more pickup from local Chinese players.

We probably lost a little volume in our Tier 3 business, or our mid-tier business, versus our premium business. So I would say we recognize our -- competitive launch by P&G is out there, that probably hasn't affected our business as much at this point, but it's been more some local players picking up trial..

Still, looking at the part of it -- so our toughest comp of the year in China volume was against third quarter last year. So it's up against a pretty strong growth number. And so overall, yes, we're making progress there. It's a challenging competitive set, but we're pretty happy with what we've got going on.

And our femcare business in China has taken off, and that grew strong double digits and kind of picked up the slack a little bit this quarter..

Okay. It sounds like that was also maybe the case in Brazil, a couple of markets. It seems like femcare has been an accelerating path in many markets.

So I know diapers is just a much bigger category, but can you kind of talk about, as you look forward and think about growth opportunities in D and E markets, the role you expect femcare to play, and the degree to which that can balance, also perhaps, continually more competitive diaper environment?.

Yes, Lauren, I think we're excited about our femcare business. Globally, I think it presents a very significant opportunity for us to both expand consumption and/or distribution. In Brazil, specifically, femcare was up strong double digits. Overall organic sales in Brazil were even. Year-on-year, kind of a different story though.

Volume's up pretty strongly, femcare up double digits, as I said. And diapers was up mid-single digits. But a little bit offset by a decline in net selling prices. I do think the economic conditions in Brazil are -- we're seeing some green shoots. Maybe a touch, a tick up in consumer confidence hasn't really translated to overall category demand yet.

But I do think the team is executing much better in Brazil. We've got the right price pack architecture in place, improvements are in our product offering. And I think we're poised to grow when the market continues [indiscernible]..

Okay. I just had one final question, and that was around the U.S. and promotional and competitive environment.

So oftentimes, I hear manufacturers talk about that retailers are actually funding the stepped- up promotional environment, particularly in categories where they're traffic builders, there's a higher basket, so diapers being prime on that list.

Can you talk about the degree to which you're seeing that? Or is it that retailers maybe have not been using Kimberly-Clark products in their promotional strategies, so it's required you to do something differently to kind of get back in that rotation?..

Yes, I think perhaps maybe, Lauren, I would say those statements are partially true. Which is, hey, these are high-traffic-building categories and so retailers invest a lot behind them. But I think it's also true that we're seeing though, that we believe a lot of it is competitive spending.

And I think you can see it maybe in some of the other numbers that are out there. And so I think it's a little bit of both. As I said maybe in July, we weren't happy with our first half performance in the U.S. We did have to fine-tune our promotional personal approach.

I think the team has made steps, particularly in family care, which as Tom mentioned, was up over 3% organically and volume was up about 5%. So I think they've made very good progress on that, improving their in-store execution. And we're doing the same in our personal care businesses. And we're expecting to see better progress..

Our next question comes from Andrea Teixeira with JPMorgan..

So going back to the Chinese diaper market, and I apologize for going back and forth here.

When would you expect the destocking to be finished and pricing to improve in your view? You alluded to weak pricing being where you expect it to be, but could you be more specific on what is embedded in your guidance besides of the easier comparisons as you go into the balance of the year? And you -- are you planning any reaction to the increased competition in pants? I know it's relatively smaller to the tape category, but nevertheless, it's one of the premium categories that you want to be in.

And also, can you elaborate more on the reduction on the CapEx? What will you be investing less than you originally planned? And is this reduction just a shift to next year? So if you can also elaborate on those..

Yes, sure. Maybe I'll take a couple of those and then give Mike the bulk of the China question. So I guess first of all, we didn't really call out destocking as an issue in our volume change. So I mean, a good chunk of our business in China is e-commerce and there's not a lot of inventory shift through that channel.

And then second, on CapEx, I don't know, Maria, if you want to comment on CapEx before Mike gives you a little deeper answer on....

Sure. Yes, on CapEx, it's -- we expect that it'll come in below our original guidance for the year. And the largest driver of that is with the lower sales for the year, we obviously aren't spending as much CapEx on growth capital.

And as I talked about tightening up on discretionary spend and I talked about ROI focus on growth investments, we have that same discipline on our capital spending. And so not all projects are created equal.

And we continue to invest in the high-return CapEx projects, particularly the ones that are helping deliver some of the FORCE cost savings that we've been recording. But overall, in the lower-growth environment, that reduces our CapEx spend along with a lot of discipline around the ROI and prioritizing where we are investing our CapEx..

And then on China, Mike can give you a little more detail on what's going on in pants, we've been there for a long time in multiple tiers, we're doing diaper-pants in lots of places. But maybe just give her a little more color in that..

Yes, Andrea. So to your question on pricing, I think the pricing environment is largely consistent with what we assumed at the beginning of the year. So pricing is less negative in 2017, but still down slightly versus 2016.

The promotion environment remains pretty competitive and we're kind of assuming kind of it's going to stay at this level for a while. And pricing in Q3 was comparable to where it was in Q4. Our teams have made a lot of progress, notably on the cost front.

And so while the pricing has come down over the last couple of years, our gross margins are performing very well. And so the team's doing a very good job there. I think the issue in the quarter for us on volume was more competitive issue around maybe some local competitors, primarily in Tier 3, picking up some volume and some trial at the mid tiers..

Did we cover all your questions, Andrea, through that?.

Yes..

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

I guess I wanted to circle back to the U.S. We really seem to be seeing a bit of a disconnect between broad macro indicators and then category growth rate in the U.S. So could you guys speak to the strength of the U.S. consumer? And then maybe give us a sense as to what you think might be driving soft U.S.

consumption at a time when, really, the consumer environment should at least in theory be doing a little bit better than what a lot of the staples category performance suggests..

Yes. I mean, I'll let Mike unpack this a little bit more. It is a mixed bag where you're seeing decent category trends in tissue and adult care and things like that, and diapers is more of a birthrate phenomena. But Mike, maybe you want to go a little deeper on that..

Yes, maybe there are a couple of things. And as it pertains to our categories, across all of our categories, the average -- the category volume is down 1%. So I think down slightly. Bath tissue, the consumer tissue side, I'd say largely on track with where it's been.

I think the decline has been in the diaper business, which, as Tom mentioned earlier, driven, we believe, by a reduction in births, right? The birthrate was down in the first quarter of 2017, down about 3%. So I do think the consumer -- if you read all the things we read, continues to be under stress.

But there has been a different phenomenon in maybe the diaper business, which is a large business for us, which has probably driven down some of our consumption..

Okay. And then I -- my last question, I guess, is on your innovation pipeline, just in thinking about it relative to your top line weakness year-to-date.

Just trying to get a sense of, if some of this pressure could also be due to some of your innovation possibly not resonating as well as expected? And then could you guys give us a sense for how full your pipeline is and will there be more in the market next year?.

Yes. I think certainly, we're always looking to do better on innovation. We do have some strong innovation this year, notably in the U.S. I think in the recent quarters, been improvements in adult and femcare with Depend mainline absorbency improvement. And in China, an improvement in our Tier 5 diaper performance.

So I think we've got some pretty good in the market this year. We're looking to probably improve it even further next year. And we're excited about some of those launches. But I think we're going to come back and talk more about those in January..

Our next question comes from Nik Modi with RBC Capital Markets..

I guess the question, we've been hearing a theme emerging over the past few quarters, at least on all the conference calls, about the local players you mentioned in some of your remarks about China and some things you're seeing in Tier 3 cities.

But if you kind of, like, think about the entire world, in Latin America and what these local players are doing, what is different, number one? And why are they gaining share? And number two is how do you address it? I mean, are there organizational design changes you might need to make in order to better address the local consumer?.

Yes, maybe just I'll start and then let Mike build on it. I mean, I would say in China, it's the -- when we talk about Tier 3s, it's not Tier 3 cities, it's Tier 3 in the category, kind of the middle of the category, the mid-priced performance. Not the low end, but the kind of the middle.

A lot of it is coming in through e-commerce, which essentially makes it a little bit easier to get on the unlimited shelf. And if you get trial, you can pick up a share point. And so you do see more entrepreneurial local players that sell a decent-enough-performing diaper and do it through e-comm, where they can get some attention and some trial.

And it's probably too early to see what the repeat is. I'd say in other markets, we probably haven't seen as much of that phenomena. You've got some local players like CMPC in Latin America that are emerging in a lot of places. But I would say China has been the one where you've seen more of a resurgence of smaller local players.

And that's mostly happened this year, I would say..

Yes, Nik. And I don't think I have any blinding insight in terms of what you do about it. But I would say it comes back to the basics at how we run our business, which is better innovation. And I think we're customizing and tailoring our innovation to make sure that we're performing and competing effectively against all competitors on all tiers.

And so I think we have some ideas that we're going to do -- working on to strengthen our performance of our products. And then also investing more behind our brands. And we think Huggies is positioned very well in all markets, particularly in China.

And we like our positioning there and we'll invest more behind the Huggies brand to build that business, is what we're going to do..

Yes, maybe the only thing organizationally is we are organized, where we're the local market leaders, own the response to any local competition. So the team running the China business, they're accountable for developing the strategies to deal with whatever kind of competition is in front of them. There's a global organization around to help them.

But they're there on the front line every day and deciding what to do, what to launch, how to promote or what channels to go after it..

Our next question comes from Ali Dibadj with Bernstein..

Welcome back, sorry..

It's okay. We're here all day..

So am I. So two questions. One is, look, FORCE, for many of us, certainly me, continues to be a little bit of an abstract concept, right? So it's broad based, you're hearing lots of things. Can you maybe just give us....

It's real cash, Ali. It's spending money..

No, no, but I'm just trying to figure out, can you just give us 2 or 3 specific examples that make up FORCE? I mean, is it a big project? Is it -- just if you could give us just something concrete that turns into the concrete dollars this year or something. Just maybe just to help guys think -- to think about it..

Absolutely..

Sure. The FORCE cost savings are coming from a number of areas, and I'll kind of tick through them and then go deeper if you want to, Ali. On -- the first one is the savings that we're able to get from negotiating lower material prices with suppliers.

The second one is we look to improve our productivity and waste across the system, particularly in our manufacturing operations. And there, it's things like driving OEE, eliminating waste through the whole process, going deep on lean manufacturing methodologies, things like that.

The third area is overall driving down the spending across our manufacturing facilities. So that's in addition to the productivity of the equipment and the machines, it's just driving out any unnecessary spend in the facilities. And finally, the fourth big area is around optimizing the cost of our product, specifications of our products.

So our engineering teams are continually looking for ways to lower the cost of the product while maintaining or improving the performance and the quality of the products that we sell. So we've made significant progress in all of these areas this year and last year.

And with the global supply chain team being in place, they're looking across all of those areas, plus logistics, to find ways to drive savings. And if you looked at the project list that make up what delivers the FORCE cost savings, you'd see hundreds of projects across the system globally that then add up to deliver those savings.

There is specific examples we talked about in the personal care area, the strong cost savings. We've had a number of examples where we've been able to share best practices across the globe where one of our manufacturing facilities has optimized a way to drive cost out of the diaper, they share that across the system.

And then other manufacturing locations implement those learnings and that helps us optimize the cost of our products. But it's really in those four areas, and there are many, many projects across the system with our teams working on that globally..

So that's very helpful. If we we're just to dig in one of them, just to give a little more color to it. So the second one, sort of productivity and operating efficiency.

So what are your OEEs right now on average? And can you -- because I'm just trying to figure out how much of [indiscernible] is left, right? So where are we on OEE, as an example?.

So it varies widely across businesses. So if you looked at OEE for our tissue machine, it would be very high because it's a baseload asset that runs 24/7. If you looked at an OEE for a diaper machine, it would be much lower because you've got lots of stops and material changes and grade changes and things like that.

And so I think for us, it's -- we would measure OEE for every diaper machine in the system and there's still a pretty good delta between the best-performing machine and the worst-performing machine.

And the good news is, with a lot of the work that we're doing, our best-performing machines are getting better at about the same rate as our worst-performing machines. And so we do see lots of opportunity yet on productivity to continue to get best-in-class..

Okay, super helpful. Totally separate type of question. You mention your categories clearly are more challenged right now. We get that. But it also looks like your market shares are more challenged.

And I just want to go back to this what you were just mentioning a second ago, for example in China, but more broadly, that look at reinvestment that has to be put back into the marketplace a little bit there. But not just China, in the U.S., showing less share even elsewhere.

What are the things that you expect, not just from a category perspective, but from a market share perspective, you guys to be able to deliver on better results?.

Yes, that's fair. We're not satisfied with our market shares this year. We're up in about 40% of the country category intersections that we track, that are the biggest ones. And our goal for the year is to be up in at least half. So we're tracking below goal.

North America's probably been the one that has had the toughest hit, given the first half results that we've had. We expect them to finish a little stronger. But I don't know, Mike, if you want to give any more color on other areas you're thinking but from a market share standpoint..

No, I mean, it's a great area to pick at, Ali. It's an area that we're clearly not happy about. And that we're trying to make sure that we run the business and make sure we find the right investment behind the brands, be able to grow profitably. And we're doing that. I think we made some progress in family care.

Not declaring victory because we're just taking the next step in the right direction. But we're trying to grow our shares, grow our business and then grow our profit at the same time..

Yes, if you looked at our three-month shares versus our year-to-date shares, our trend is a little better sequentially, but we're still not satisfied..

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

All right. Well, thank you, everyone, for your questions this morning. And we'll conclude with a short comment from Tom..

Well, once again, we appreciate your support of Kimberly-Clark. And we'll continue to do everything we can to deliver good shareholder value over the long term. Thanks very much..

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