Kimberly-Clark Corporation (NYSE:KMB) Q4 2021 Earnings Conference Call January 26, 2022 10:00 AM ET

Company Participants

Taryn Miller - Investor Relations
Mike Hsu - Chairman and Chief Executive Officer
Maria Henry - Chief Financial Officer

Conference Call Participants

Chris Carey - Wells Fargo Securities
Lauren Lieberman - Barclays
Steve Powers - Deutsche Bank
Kevin Grundy - Jefferies
Andrea Teixeira - JPMorgan
Dara Mohsenian - Morgan Stanley
Jason English - Goldman Sachs
Peter Grom - UBS
Nik Modi - RBC Capital Markets

Operator

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. [Operator Instructions] It is now my pleasure to introduce today’s first presenter, Taryn Miller.

Taryn Miller

Thank you and good morning, everyone. Welcome to Kimberly-Clark’s year end earnings conference call. On the call with me today are Mike Hsu, our Chairman and CEO and Maria Henry, our CFO.

Earlier this morning, we issued our earnings news release and we also published prepared remarks from Mike and Maria that summarize our fourth quarter and full year 2021 results. Both documents are available in the Investors section of our website. We hope you find it valuable to have our prepared remarks ahead of this call. In just a moment, Mike will share a few opening comments and then we’ll take your questions. During this call, we may make forward-looking statements. Please see the Risk Factors section of our latest annual report on Form 10-K for further discussion of forward-looking statements. We may also refer 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.

Now, I will turn it over to Mike.

Mike Hsu

Okay. Thank you, Taryn. Good morning, everyone. Before we get to your questions, I’d like to offer some perspective on our results and outlook. In 2021, we continue to execute our strategy to elevate our categories and expand our markets. While our overall financial results were disappointing, we took decisive action to offset the impact of higher costs with significant pricing actions. These actions, which began in the first half, helped us deliver organic sales growth and improved net selling prices in the second half of the year, including strong fourth quarter performance.

We continue to make significant progress accelerating organic growth in personal care. Through the year, our team launched strong innovation and support it with superior local market execution, all of which contributed to strong share gains in numerous key markets. We also strengthened market positions in several important growth markets, by integrating Softex in Indonesia, commissioning a state-of-the-art production facility in Nigeria, and advancing our route to market in India. While we are encouraged with our top line performance and the way our teams executed in a very dynamic environment, our margins and earnings were negatively impacted by a challenging operating environment.

Input costs escalated well beyond previous levels and supply chain disruptions limited our ability to fully meet the growing consumer demand for our products. In 2022, we intend to accelerate organic growth further. We have strong brands and healthy categories. We will continue to support our brands with breakthrough innovation, agile digital and superior local market execution. We also expect performance in our tissue businesses to improve as we cycle the volatility and demand we have experienced over the past 2 years. We are committed to recovering and eventually expanding our margins and we expect to make progress this year. We have taken significant pricing actions and expect pricing to offset a majority of the impact of cost inflation. We are confident in our ability to restore our margins to pre-pandemic levels over time. We remain confident in the potential of our brands and categories and in our ability to create meaningful shareholder value, while we work to achieve our purpose of Better Care for a Better World.

Now, we would be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will open the floor for questions. [Operator Instructions] Thank you. Our first question will come from Chris Carey with Wells Fargo Securities.

Mike Hsu

Good morning, Chris.

Chris Carey

Can you just, maybe to start, just help frame the volume impact that you are expecting from the price hikes? I guess based on your comments around pricing that’s going to cover the majority of inflation, it seems like you are suggesting maybe 4% to 5% range on pricing, maybe volumes down about 1%. Is that fair? And then maybe where you expect the volume hit to play out? Clearly, there is some momentum in Personal Care. Consumer Tissue is coming off of a year where comps shouldn’t really be too much of an issue. I wonder if you can just dimensionalize that comment around pricing versus volumes and how you are seeing it play out and whether you could see some upside if elasticity stay where they are?

Mike Hsu

Yes. I think that’s a good push, Chris. And I think that’s right, which is overall, we feel good about the momentum of our business overall. Personal Care, for sure, strong performance and we are expecting that performance to continue. We have got great innovation coming and great brand support throughout the year on both our Consumer Tissue and our Personal Care businesses. And so I think we feel good about the commercial programming. That said there is significant pricing in the plan. And so there will be an elasticity impact, which we have estimated. So, we have volume down a little bit, offsetting some of the organic growth that’s being driven by the commercial programming. And so the reality is, thus far, I would say the categories – our categories are essential. And I think the demand that we saw in the fourth quarter kind of highlights the essential nature of our categories. And despite the price increases, we are seeing good volume performance. And so I’d love to see that our elasticity assumptions are a little conservative and potentially, there could be a little upside. Generally, in our categories, if the other – if the market moves in the direction, generally elasticities are a little lower.

Chris Carey

Okay. And just – yes, yes, no, that’s helpful. Thanks. Just one follow-up on the outlook for input cost inflation, I think maybe that’s part of the surprise today. Can you just maybe dimensionalize the significance of distribution of energy? You called out polymer-based materials, I guess pulp is secondarily – is a secondary impact relative to those. But can you just frame the relative impact of these and whether again the line of sight or whether you are just taking a bit more of a conservative view, cognizant of what you said in the prepared remarks, that visibility is a bit lower in this environment? So thanks for that.

Maria Henry

Sure, Chris. Let me spend a minute on our inflation outlook for 2022. As you just mentioned, it continues to have volatility around it. For perspective, if we had given you our outlook on the October call, we would have been $300 million lower than the outlook that we are providing today. So, it’s been quite volatile. And we are kind of calling it at a tough part of the cycle, hence, the range around it. But let me talk about what we see. Approximately half of the inflation for 2022 is expected to come from distribution and energy. And then of the raw material components, the inflation will be led by polymer-based purchase materials. So, things like superabsorbent and non-wovens and then followed by pulp. And so, let me just spend a minute on the two areas that will make up our commodity inflation. Number one is what happens with market prices and I will give you a little more detail there in a minute. But the second one is how inflation – commodity inflation flows through our P&L. And as you know, we use contract structures to manage some of the volatility on commodities and some of those contracts reset in the beginning of the year. So, they reset at higher prices this year. And then some of them also have some timing lag built in. So, some of the high inflation that you’d see in the market in the fourth quarter will flow through our P&L in the early part of 2022. But that said, on the market prices, I will tell you what we are seeing. So, the market price in North America for eucalyptus will be down. The market price for softwood, we are expecting to be down in a similar amount to eucalyptus. And the full year average polypropylene prices will also be down for market pricing in 2022. So, those are the things you hear us talk about the most. But since the inflation is coming from other areas in 2022, let me comment on market pricing that we expect to be up. Fluff pulp, we expect to be up; recycled fiber, expect to be up; non-wovens, expect to be up; superabsorbent, up sizably next year; distribution, up; and energy, up. So, the basket of commodities, well, the traditional ones, thankfully, we expect to be coming down and we are already seeing that in the fourth quarter. There is meaningful portion of our basket that the market prices will be up on in 2022 and that’s what’s reflected in the outlook that we provided.

Mike Hsu

Yes. So Chris, maybe I will just tack on. I mean historically, what we see is a quick reversion in our commodities, like typically, in 2018, right, the big driver of our increase was pulp. And so that quickly receded in 2019 and 2020 to some extent. And so that’s typically we will see in our categories. We will see reversion. It always happens in our categories. And so I expect – fully expect over time pulp to come down and the resin-based, whether it’s super board absorbents or non-wovens to come back down. But this cycle is a little different, because the peak is higher, it’s broader and it’s longer. And so regardless of what’s happening with the cycle, we are going to restore our margins with both price and cost initiatives. And we expect our teams to cover the majority of inflation with pricing. So, that’s part one. If we get a little more reversion, we are not expecting reversion this year. And if we do, then our recovery will be a little bit faster. That said there will be reversion at some point. But given the call and I think what’s maybe a little confusing to maybe some of the analysts and investors, as Maria mentioned, it’s a broader set of inflationary impacts than we typically talk about, which is typically – and energy is a big one. And labor and freight are big ones that we typically haven’t talked about in the past, but are big ones for this year.

Chris Carey

Okay. Thanks so much for all that perspective.

Mike Hsu

Okay. Thank you, Chris.

Operator

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

Mike Hsu

Good morning, Lauren.

Lauren Lieberman

Great. Thanks. Good morning. Hi, I wanted a little bit about pricing. In the release, there was a mention of – I don’t know, I meant the – sorry, in the prepared remarks in the release, but about some incremental pricing. So simplistic question, are there new price increases that have been announced that we should expect to start flowing through? But then perhaps more interestingly, I was curious about the ability to price for energy, for logistics and then also for the fact that contracts are resetting higher. Because I was just wondering, is it more difficult if market pricing is down, so that what your customers see is a better relatively speaking, better environment, but you are talking about your contracts resetting higher and that being part of the difficulty here? Is it more difficult to get incremental pricing through and that’s kind of the construct driving inflation?

Mike Hsu

Yes. Thanks, Lauren. Yes, couple of things. One, we have executed multiple rounds of pricing. And I would say globally and generally, our pricing is on track. We announced – I’ll just give you an example in North America. I think we announced in March, in August, in November and then I think we may have had another announcement in December as well. So there has been multiple rounds. I will tell you – and that’s happened globally in most markets around the world for us. I will tell you, in most markets, the trade discussions have generally been very constructive. I think our customers are seeing the same things happen. Especially, as you mentioned in some of these other areas, they are more affected by freight and distribution and some of those things than we are since it’s a bigger component of their P&Ls. So I would say the discussions have generally been constructive. We have seen some movement in other brands and some movement in private labels. There is a little stickiness in some markets like in Western Europe and Latin America for us. But as I mentioned to Chris, the consumer demand reflects the essential nature of our categories. And so we expect to make progress on pricing. We expect to make progress on recovering our margins. And as a principle, I would say we are expecting our teams to be able to price to offset the majority of the inflation.

Lauren Lieberman

Okay, great. And then just one other question I had was on cost savings. Restructuring is complete and now ongoing for savings. The fourth forecast of $300 million to $350 million is a little bit low by recent standards. And I know also in the prepared remarks in the release, you mentioned less savings on the negotiated raw material prices. But I think one thing we talked about last quarter and I talked with other companies is sort of the difficulty of achieving typical run-rate productivity in a constrained environment, whether it’s because of labor, access to the plants with COVID and absenteeism challenges throughout the supply chain. So, I was wondering if you could comment a little bit on that on the absolute level of FORCE savings for this year? And just if these sorts of impediments are part of why the number might be a little bit lower than you might typically target in such a deeply inflationary environment?

Maria Henry

Yes. Lauren, you are spot on with what you are hearing from other companies. It’s the same thing that we are seeing within our FORCE cost savings, the negotiated material price component will be down meaningfully. If you think about the benefit of our contracts in 2021 was significant as those reset as we move forward, that’s less of a benefit for us in 2022, but we do still expect to see benefits from product changes and from ongoing productivity improvements. The other line that’s in our FORCE cost savings is distribution. So under normal circumstances, we would be driving productivity in distribution expenses every year. Those are going the other way right now. The distribution costs are up meaningfully and they will continue to be is our expectation in 2022. And then, as you said, given what’s happening in the supply chain where our demand is exceeding our ability to supply at the moment, taking any downtime on any of our machines is very punitive. And so finding the time to do the work to drive the savings is a bit challenged and that’s really what’s behind the range. I will say that the team kicked off a program in 2021 to really look at the multiyear pipeline that we have around FORCE cost savings. And we have better visibility today than we have ever had in terms of what those opportunities are and how we need to – how we can unlock those. And that includes some investment behind the supply chain that you see showing up in other areas of the P&L. But we have never had better visibility to what those opportunities are and they continue to be meaningful for the company. And as things – when things normalize around supply chain, we will be able to drive a higher number on that FORCE cost savings line.

Lauren Lieberman

Thanks so much. I will pass it on.

Mike Hsu

Great. Thank you, Lauren.

Operator

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

Mike Hsu

Good morning, Steve.

Steve Powers

Yes, hey, thanks. Good morning. Maybe a little more clarity and color around your guidance, I guess, from two perspectives. First is, in the first quarter, your prepared remarks suggests incremental difficulty in that first quarter with a sequential decline in earnings. I would think you might have some room for sequential acceleration on revenue even with a higher FX burden. So I am guessing that incremental pressure is coming from cost pressure and margin pressure, but just again, maybe you can dimensionalize that? And I want to juxtapose that against your – the strategic ambition to restore margins. And I am really curious as to where you think you can get to on that objective by year end. So I guess I am trying to get a little bit more depiction in my mind about what the kind of improvement curve looks like throughout the year as you slide south in 1Q and then build back, trying to get a sense of where you think the exit rate is in ‘22 with the base case?

Maria Henry

Sure. I will start and then Mike will add some comments. But let me address the first quarter first. We usually don’t give quarterly guidance. And even when you push us to do so, we generally don’t do it. But I think it’s very important to understand what we think is happening in this quarter, because we do expect that our earnings will be lower than they were in the fourth quarter and that’s driven by a few things. One, the commodity pressure will continue to be intense and inflation in the first quarter will be high. The pricing isn’t fully in, in the fourth quarter. And then we are in the midst of pretty acute supply chain disruption caused by Omicron. So – but we are seeing, as our other companies and as our suppliers and as are our customers, but we are seeing higher absentee rates, which is stressing our ability to fulfill the demand that we see and get the products manufactured and get them to the customers and the customers to get them on shelf. So that is all happening live right now. And so we’re calling the year at a very challenging time to call the year given the amount of volatility right at this moment. And then as I look at 2022 in total, we’re expecting stronger second half earnings, and we are expecting a ramp, what’s causing the ramp. Some commodity costs are expected to ease. And while I talked a bit about contract structures and other things, we also have exposure to the spot market on commodities. So we are expecting commodities to ease.

And then as you know, just on comparisons, of the $1.5 billion inflation that we saw in 2021, $1 billion of that came in the second half. And so if you’re looking year-over-year, you got an easier lap in the second half. The other thing is we expect the pricing that we currently see to be fully in the market in the second half and then our cost savings also ramp as we go through the year. So those are the factors that drive the ramp. We are very focused on our margin recovery, recognizing what the $1.5 billion of inflation from last year and then the added inflation this year does to the margin structure. We are very focused on recovering the margins of this business to pre pandemic levels and then expanding them over time. We expect to make progress on that as we go through this year. Again, we’re calling the year in a very difficult part of the cycle. So when I look here today and say, this is what our fourth quarter is going to look like, there is some volatility around that. So that said, with our current assumptions, we will make progress on the margin recovery through the year after the first quarter. And we would expect to be in a better place by the time we exit this year and moving forward. But Mike, if you’ve got some comments?

Mike Hsu

Well, yes, great question, Steve. Let me hit – there is really three strategic imperatives for us as a management team. I mean number one is we got to accelerate organic growth. And you can see all the work we’ve been doing the last several years doing that, and I think we’re making progress. And we expect our tissue businesses to improve now that we cycled a lot of the COVID demand volatility. So that’s part one. Part two, we’ve got to enhance margins. And so I’ll come back to that in a second. And part three is I want to reduce our earnings volatility. Obviously, with this volatile environment, I’m not going to talk much about that. But just you should know that we’ve got smart people working on that because I recognize that’s a strategic issue for the company, and we do want to reduce our earnings volatility over time.

On the margins, my goal is to enhance margins over time over the long-term. And that’s kind of the basis of our Elevate and Expand strategies. The reasons why we want to elevate our categories and expand our markets is to do that. That’s a core component of it. I will say given the fact that we’ve taken on last year I think 2x our previous all-time high in inflation, obviously, our margin has taken a substantial hit. And we’re very focused on the near-term on margin recovery. I don’t think we’re going to give you specific timing, but here’s what I will say is that I’m targeting for us to deliver in the upper end of our range, and I expect our teams to perform that way. And if our assumptions coming into the year hold then we will have by year end delivered a substantial improvement in our gross margin performance over the course of the year. And that’s how I’m thinking about it. And then if we get a little reversion in the commodities, then that will accelerate that further.

Steve Powers

Okay, thank you. I mean I appreciate the difficulty of trying to call the full year at this point, so thank you for that color. I guess maybe, Mike, a little bit, just if I could...

Mike Hsu

I think – so just the point on that is the one point I would make is the COVID environment while I would say the demand environment has kind of stabilized, particularly in our tissue businesses, both KCP and Consumer Tissue, as Maria talks about, the supply environment is probably more volatile now than we’ve seen throughout the whole COVID period, right? Because it’s affecting absenteeism, whether it’s in the distribution centers of the plants or our suppliers and missed deployments on pickup, so it’s a very volatile environment. I think you’re seeing that more broadly as you kind of look at other industries.

Steve Powers

Yes, for sure. I think we will continue to hear more about that in the coming days and weeks. Just on that demand environment, Mike, if I could, just – I think you gave us some good color in the conversation with Chris about how you’re thinking about volumes and reaction to the pricing this year. But I guess I’m curious as to how your – the underlying elasticity assumptions compare with historical elasticity, just how you approach coming to that conclusion? And just again, sort of what the basis for your assumed the last year’s and where maybe you’re expecting more versus less? Any color there would be helpful. Thank you.

Mike Hsu

Yes. Tough question because the trick of the elasticity modeling is we’re beyond the range of estimation. So that’s the difficult part of it, Steve. And so you’re kind of estimating what’s happened historically and the price points are higher than they have been. That said, our past experience is, in our last round of pricing, elasticities have come back. The market generally moved in a direction, and elasticities were a little less than we initially estimated, and that’s been our kind of recent history. And so that’s what we’re going on.

I think the important thing is we’ve got a very strong growth playbook. It’s working hard. We’ve gotten very good commercial programming across both our professional and consumer businesses. And so there is really good underlying brand momentum. And so we expect that to continue. And we recognize that we are putting significant pricing out there. And – but I think as I mentioned earlier, we’re seeing the impact of the essential nature of our categories.

Steve Powers

Okay. Very good. Thank you so much.

Mike Hsu

Okay. Thanks, Steve.

Operator

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

Mike Hsu

Kevin.

Kevin Grundy

Good morning, everyone. Hi, Mike and Maria. A question for Maria, I think, on the outlook first and then I have a follow-up, which is the guidance and how you pulled it together, Maria, how would you characterize the level of conservatism in the outlook? Or I guess said differently, just given the volatility and sort of the unprecedented cost pressure, and I’m not asking you to review at all the earlier question on what’s embedded around commodities and input costs, but have you built in sort of additional cushion than you typically would just given the volatility and how challenging ‘21 was and the number of downward revisions [Technical Difficulty] built in than you typically would. Investors can get some level of comfort as best as we can in this environment that this is hopefully sort of a low point?

Maria Henry

Yes, it’s a great question. You can imagine, we spent considerable time getting arms around our own plans for calendar 2022 and what we’re going to hold ourselves accountable from an internal plan standpoint. And as we reviewed that and as we pulled together our internal plan, what I would tell you is at this point in time, here in the middle of January, it’s tilted more toward risk. And for all the reasons we talked about, and I won’t repeat them, it is tilted more toward risk. And so that’s how we put the guidance range together. So we’ve got our internal plan, which is what all of our teams are focused on either delivering or beating. And then looking at the risks and opportunities, it is tilted to risk and that’s what we used to influence our guidance range, if that’s helpful.

Kevin Grundy

That is helpful. And just sticking with that for a moment, I guess the area which was a little bit surprising to me, I guess, like where our model was the level of OpEx inflation. I think there is been a great deal of time around modeling COGS and gross margins for all the reasons that we know. But I think the level of OpEx inflation was also a little bit surprising. So maybe just, if you wouldn’t mind, and then I’ll pass it on, spend a moment on that. And how much is sort of fixed versus variable sort of if need be, there is an opportunity to sort of tighten a little bit and pull on the string to offset further inflation that’s not currently anticipated?

Maria Henry

Yes. I think it’s a very important area to talk about. So we are continuing to invest in our business. We are bullish about our long-term prospects. And we think the investments that we have been making and that we’ve ramped up over the last several years since we kicked off K-C 2022 strategy are paying off. They are working. And so we talked about advertising and what we’re doing to support the brands with effective marketing. But those investments go beyond just advertising. We’ve talked lot about investing in our commercial capabilities. And we’re going to continue to do those things because they are working and they are paying off and the ROIs are there. And it’s those investments that are helping us have meaningful growth in – especially in our Personal Care segment of the business, when we look at 2022 versus 2021, we’ve also talked about the benefit that we had in our between-the-line spending in 2021 due to lower variable compensation expense that normalizes for 2022.

And the last area I’d comment there on between the lines and investments is we’re also making a few, what I would call, foundational investments. And we’re very committed to those as we think that they are very meaningful to the long-term health of the company. First, we’re opening our North America commercial center in Chicago this spring, which we’re very excited about. And our North America team is handling that transition quite well. And early signs are very positive, but it is an investment. And the other one I would call out that I mentioned before is we are – we did start our program to upgrade SAP to S/4HANA. We began that last year. That ramps up even more in 2022. And that investment is showing up both in the P&L as well as in our capital expenditures. So we’re sticking with the investments that we know are working and that are fueling the top line. We’ve got some foundational investments. And then we have some expenses that were lower in ‘21, that will step up in 2022 around employee cost. And that’s really what’s behind it. Mike?

Mike Hsu

No, just important – they are important investments. The SAP, obviously, that investment is going to fuel our cost savings for the future, too. And so we feel very good about those. And we’re going to continue to be very disciplined about our spending. But we feel like we’re making the right investments for the long-term health of the brands and also for the organizational health.

Kevin Grundy

Got it. Thank you both. That’s great color. Good luck.

Maria Henry

Thanks.

Operator

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

Mike Hsu

Good morning, Andrea.

Andrea Teixeira

Thank you. Good morning. So my question, Mike and, I guess, Maria, if you – if we should expect nominal pricing to be in the mid- to high-single digits when it’s all said and done at the mid-positive range or pretty much whether you’re expecting for sales on the three to four in nominal? And in that case, it implies that probably you’re getting additional pricing in the spring with that. And I just want to confirm that because you did imply, obviously, FX being a negative and then negative volumes. And then related to that, are you seeing private label getting some – I mean some of the categories obviously had a lot of shelf space during the pandemic. But some of the other categories do not. So I was thinking, are you seeing private label, in particular, in diapers coming back as we go into that? And that is what is informing you not only about demand elasticity, but also in terms of availability of the product that you may want to embrace for some private label concessions here? Thank you.

Mike Hsu

Yes. Just on the pricing, Andrea, I would expect over the course of the year, mid to high single-digit increases on pricing. And that could vary a little bit based on conditions. But again, that’s kind of what we are marching against. And thus far, as I mentioned earlier, we’ve executed multiple actions, and they are generally on track. And so we feel good about that progress. And obviously, we’re keeping a close eye on that. In terms of private label, I think – and maybe I’ll talk to North America differently. I’d still say private label is still down in most categories. I think it was up a little bit in bath tissue, but down in most of the other categories. It’s something we’re going to continue to be very focused on. But we’re very pleased with our brand momentum. And I think although we’re making progress in organic in North America, some of that’s still muted because we’re still working through supply challenges. As you recall, we had significant challenges in the first half because of the storm down here in Texas. We recovered very well from that. And so really saw our service levels improve throughout the course of the year. But I’d say even in the fourth quarter, we – as Maria mentioned, we under-shipped demand because we’re having difficulty getting carriers or getting supplies and all the other things that are associated with what’s happening with Omicron and COVID. And so again, we’re keeping a sharp eye on private label, but we’re really focused on driving our business, and we feel good about the progress we’re making.

Andrea Teixeira

And in terms of like when you said mid-single digits on top of like low-single digit, call it, three to four you already implemented, is that the way we should be thinking? But in total, between 2021 and 2022, you are going to hit high single digit price increase? Is that the way to think?

Mike Hsu

Yes, in general. Again, yes, we – again, as I mentioned, we’ve made multiple rounds. And if you could go back and look at our kind of maybe what’s happened in pricing in North America already, pretty significant moves.

Andrea Teixeira

Thank you. Great. I will pass it on. Thank you so much.

Mike Hsu

Alright. Thank you, Andrea.

Operator

Thank you. [Operator Instructions] Our next question comes from Dara Mohsenian with Morgan Stanley.

Mike Hsu

Good morning, Dara.

Dara Mohsenian

Hi, guys. Good morning. So just to follow-up on Andrea’s question, can you give us a little more granularity on what product categories and geographies incremental pricing that’s coming in 2022 will be focused on? Is it more just sort of across the board in everything? Are there specific areas where there is more aggressive pricing posture, again, in terms of the incremental increases in 2022? And then given a lot of these categories we’re talking about multiple times that you take incremental pricing, can you just talk about your experience historically when you’ve been in situations where there is multiple rounds and how the elasticity might be different than in situations where you’ve just had one round of price increases has been necessary.

Mike Hsu

Hey, Dara, yes, just as a policy, though, I’ll just clarify. I’ll talk about the pricing we’ve implemented. I will not talk about any future pricing actions. Although I’ll say, I take as an approach, I do expect pricing to offset a significant portion of inflation. So that’s just kind of a principle that I’ll kind of put out there. But I’ll talk about what’s already occurred, and I’ll focus on North America as a starting point. We announced mid to high single-digit increases in March, largely in our Personal Care business in North America, but in about 60% of our consumer business last March. We took some further action primarily in tissue on count back in August, and that was effective this quarter. And then we took additional actions that were announced in Q4, generally about a mid-single-digit list increase across most of North American consumers. So that kind of should give you a sense of kind of what’s been happening in the marketplace, at least in North America. I would say, in international market, similar, multiple rounds in Europe, multiple rounds, in some cases, monthly in Latin America, unfortunately and of course, in Asia as well. So it’s pretty extensive.

Dara Mohsenian

Okay. And it sounds like it’s generally broadly across the board. I don’t know if you want to – it sounds like you don’t want to get into too much specifics. But generally, we’re expecting pretty broad increases in 2022 incrementally. Is that fair?

Mike Hsu

Well, yes, I think that’s the case. And we’re expecting that the pricing that we have in the flow through substantively.

Dara Mohsenian

Okay. And then on the margin side, the comments about returning to pre pandemic levels over time, can you just be a bit more specific on the timing of that? Is that possible at some point in calendar ‘23 or is that more of a far out multiyear goal? How do you think about that? And also, does it require cost levels to come back down, or is it realistic if you are at current cost levels in terms of ability to recover fully through pricing offsets over time?

Maria Henry

Yes. Dara, I am not going to give a specific timeframe. And I would say that the driver of that is really the volatility around the factors that are causing the margin to be depressed in the first place. And it’s just – it’s too hard to call beyond 2022. What I can tell you though is that I am very confident that we will take – we are taking and we will take the right actions to recover the margins of the business, whatever that looks like. So, we have shared with you what our assumptions are for 2022 in terms of all of the moving pieces. And if it turns out to be different than that, if there turns out to be upside, that’s great for all of us. If it turns out that the environment is rougher than what we are thinking, we will take the right action. So, if inflation continues to run, we will continue to price. We will continually look at the cost structure of the business and take the right actions. But I can’t, today, give you the exact timing of when we will have the margin structure where it was in 2019 before the pandemic began. The other thing that I will comment on when we think about that and the actions and kind of managing through that, going back a bit to what Kevin was probing on in terms of the cost structure, this is probably the right time to call out. We did wrap up the Global Restructuring Program that we kicked off in 2018. And we successfully delivered that with annualized savings of $560 million, 40% of those accrue to between the lines. So, when you look at our cost structure today outside of the supply chain, we really did restructure the between-the-line spending of the company. We took almost 200 basis points out. And then we invested back in the areas where we will have competitive advantage and differentiating capabilities. So, when I look at the cost structure between the lines today, we are in good shape, and we actually benchmark in the top quartile in terms of between-the-line cost structure. So, feel good about where we are and that we are optimized and we are investing in places that have high ROI. So, I do want to call that out as the environment changes over time, that part of the P&L I feel good about.

Mike Hsu

Hi Dara, the other thing I will add is the fundamentals would suggest in our core commodities, there is going to be reversion. But I do not want our teams waiting for commodities to come down to drive margin recovery. And so our plan is to work to recover margins. And then if the commodities – when they do revert, then that will affect – that will change the timing and hopefully move it up.

Dara Mohsenian

That’s it all for me. Thanks guys.

Mike Hsu

Okay. Thank you, Dara.

Operator

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

Mike Hsu

Good morning Jason.

Jason English

Hi. Good morning folks. Thanks for squeezing me in. And Happy New Year, I still think January, right.

Mike Hsu

Chinese New Year time, so.

Jason English

You got a big Chinese business too, so there we go. A quick question for clarification, in response to an earlier question, I think many people will have interpreted your comments to suggest that you expect to realize around 5% plus pricing this year. But many times throughout the call, you have suggested that you expect prices to lag inflation and have a price cost deficit. If you got 5% flowing through the P&L, that would be almost $1 billion and would eclipse your cost inflation. So, can you clarify what seem to be two conflicting comments?

Maria Henry

Yes. I think that the numbers that you quoted are right. And when I look at currency, commodity price for 2022, that should be about even for 2022. The margin story is that, that was not even in 2021, given the $1.5 billion of inflation that we saw. It was, I think, it’s about a 30% drag to operating profit growth in ‘21. So, while it’s even for 2022, we haven’t yet recovered the impact from the spike in inflation in 2021, Jason, if that’s helpful.

Jason English

Sure. No, it’s really helpful. Because I think you said you expect to offset the majority of cost inflation next year, and you said it many times. But the reality is you expect price to offset not just all the cost inflation, but most of currency, which is I think just a different conclusion. Then to get down to your numbers, you really have to take an act to volume if you are going to get that much price. So, I guess my question is, where is the – where are you expecting volume to fall short, because you are telling us that you under-shipped this year. So, at some point, hopefully, you catch up and we replenish. We catch up on some of that, so you get a benefit. Professional, I think is still tracking down 16% to 17% biometrically to pre-COVID levels. I imagine that’s going to be a pretty strong tailwind. Tell me if it’s not. So, where is the big offset?

Mike Hsu

Well, again, I think the key – here is a couple of things. And I think you are right, Jason. I think we are expecting improved performance and growth in both consumer tissue business and the professional business. I think on professional, though, I would not expect a snap back, right. Because I think what has done is stabilized at a lower level. We are running below, about 85% – our washroom business is running at about 85% of what they had done pre-pandemic. And that’s because – I don’t know if you are in your office, but we haven’t seen a full scale return to offices, and I don’t expect that in the near-term. We haven’t seen a full-scale return to travel, especially business travel. And I don’t think we are expecting that in the near-term. And so I think we are dealing with a professional business that’s going to grow. And we are pretty excited about the growth plans that we have this year, the innovation and the commercial trends we have in the business this year. But it’s not going to revert to pre-pandemic levels this year at least. And so that’s part one. Consumer tissue, same thing. And I think there has been a lot of volatility in the last couple of years, driven by consumer stock up and then destocking and so forth. When it all shakes out, it’s a very stable business, probably one of the most stable businesses in consumer. And in the last couple of years, a 2-year stack of our fourth quarter would be plus 3, right. And so we are expecting solid growth in consumer tissue. And then our personal care business globally is doing very, very well, as you can see in the fourth quarter, being up double digits. And we are expecting continued growth there. The offset really from us is we are pushing prices at a pretty high level. And so that’s going to have an effect. And we hope that our elasticity assumptions prove out to be a little conservative.

Jason English

Yes. I am going to try to squeeze one more real quick. Share repo, you effectively paused it back half of the year. You are guiding down free cash flow for next year. When should we expect to see you back in the market buyback stock?

Maria Henry

Yes. As soon as we have got the excess cash flow that will allow us to do it, so again, we are in the tough part of the cycle here in terms of capital allocation. Nothing on capital allocation, how we think about it has changed. And those steps are invest in the business, look to grow the dividend, which I am pleased to say we will do again for the 50th consecutive year. And then beyond that, with the remaining cash flow, we are always looking at M&A. But assuming there is nothing there, then it goes to share buybacks. So, when the margins recover – let me start at the top, right. We are expecting strong top line growth in our business. We are expecting the margins to recover. And when those two things happen, we will get back to the cash generation levels that will enable us to do share repurchases. So, we are committed to shareholder-friendly capital allocation practices as we have done in the past. And we are at about – I think we finished with leverage at 2.3x, excluding restructuring. That’s ahead of kind of the 2.0 that the agencies like to see for the single A rating. And we do remain committed to the single A rating. So, at this point in time, the way the numbers line up, we don’t have the cash within the rating to do buybacks, but I very much look forward to being able to get back to doing so.

Jason English

Understood. Thank you all. Bye.

Mike Hsu

Thank you, Jason.

Operator

Thank you. Our next question comes from Peter Grom with UBS.

Mike Hsu

Good morning Peter.

Peter Grom

Hi, good morning everyone. Hi, good morning guys. So, just a quick follow-up on Steve’s question, I know you don’t want to give a specific timeframe, but I just want to get some clarification around the comment, which I think was significant gross margin progress in 4Q. Is that simply just margin expansion, or should we read that comment as a suggestion that the fourth quarter is really when you expect to see margins return closer to those pre-pandemic levels?

Maria Henry

Yes. I think we do expect gross margin progress versus pre-pandemic level to happen faster than on the operating profit line for the investment reasons that we talked about before. But we are expecting to have progress. We are not expecting to be back to pre-pandemic levels. So – but the actions that we have taken for the environment that we are in and that we think we are going to be in during this year, as those materialize through the P&L during the course of the year, I think we are going to be on a good path if the environment is what we think it is today, which we know that it won’t be, because it’s too difficult to predict, especially with the volatility. But if it were, if I was able to hold that constant, I think we would be on a good glide path. But I say that recognizing with the volatility, I just – it’s too difficult to call what the environment will look like and exactly when those margins will hit the pre-pandemic levels. But again, we are taking all the right actions in the business to do that. And we talk a lot about margin, which we are very focused on because we are focused on the overall health of the financial structure of the company. So, it’s appropriate. I would call out a few things, though, that what – getting back to Jason’s question, what generates the cash so that we can provide healthy returns with actual dollars. So, when we look at operating profit growth, that’s very important. And I think it’s worth noting a few things. First, on margin recovery, we will get there faster on consumer than we will on professional. Because professional – today, we had a cost structure that was built for a business that’s larger than one it’s producing today. And so there is a misalignment between the revenue of the business and the cost structure of the business. We will get that corrected, but that will take some time. So, the recovery will come faster on consumer. But then going to the profit dollars, I call out in 2021, consumer tissue, for all the reasons that we have talked about, that was 75% of the operating profit decline. So, there were very specific dynamics that caused it. It was the big driver of the profit decline. But if you look at our personal care business, which is half of our company, strong growth, strong market shares. It actually grew operating profit in the fourth quarter. It also grew in the third quarter. So the second half of the year, the Personal Care segment, which is very healthy, is actually growing operating profit and in the near-term, I will take the dollars, recognizing in the long-term I have to get the margin structure to the right place. So, I just thought I would give a little bit more color by segment there.

Peter Grom

No, that’s incredibly helpful. And then just completely shifting gears here, I would love to get an update on the performance in the D&E markets, which seem to perform quite nicely in the quarter. Can you maybe provide a bit more color on kind of the health of the consumer in those regions? Like what is driving the stronger growth, whether it would be category or Kimberly-Clark specific? And then I guess on pricing, how have pricing actions been received in those markets versus what you see or what you are seeing in developed markets?

Mike Hsu

Yes. Thanks for the question, Peter. Yes, great performance in developed and emerging markets. Overall in the quarter, I think it was in our statement, but organic up 10 in the quarter and 8 for the full year. And that was composed of really a healthy balance of price volume and mix importantly. And so – and then we saw solid growth in all regions, high-single digit gains in Asia and Latin America and double-digit growth in EMEA. And then really strong double-digit growth in China, India, Russia, Eastern Europe and Africa, which are kind of the important future growth markets for us. So, we are really excited to see that. And I think what’s driving it is, I have mentioned kind of in my prepared remarks, really, really great innovation. We are doing a really good job. Our teams around the world are doing a great job, scaling, really, what I would call breakthrough innovation across markets. We were up multiple share points in Korea in the fourth quarter. That is a version of the Chinese diaper technology that we have put out there, which is related to the diaper technology that we have in North America, which is the same technology that we put out in Australia, which was also up multiple share points. And so I think really, really good consumer-inspired innovation and then superior local market execution around digital, marketing and sales execution. So, it’s kind of all the things and they are all working very hard for us. One of our business leaders, call it all oars in the water, meaning we used to be over-reliant on one thing to drive the business. We are really – part of our commercial capabilities that we are developing is we want everything out there working and working in the same direction. And when we do that, we tend to see the results that we think we are seeing now.

Peter Grom

Thank you. Best of luck.

Mike Hsu

Okay. Thank you.

Operator

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

Mike Hsu

Good morning Nik. Thanks.

Nik Modi

Good morning Mike. So, just two quick questions for me. Just on the upstream innovation agenda, Mike, can you just talk about what’s going on there? I mean has it had to take a backseat just given all the situations that you have been dealing with, with COVID, etcetera? And then we talk a lot about labor and transportation and input costs. But we don’t talk a lot about retail media, which seems to be a growing demand from your customer base. So, I was hoping you can provide a little bit of context on that and how that’s hitting your P&L?

Mike Hsu

Yes. Okay. Yes. Great questions, Nick. Yes. I think the flavor maybe you could have gotten from Maria’s commentary earlier. I mean we are continuing to invest in the foundational things that are going to make this business healthy for now and the long-term. And we recognize we are working through some choppy waters. But we are committed to growing this business for the long-term in the right way. And so, yes, so we had not – we are not pulling back on our innovation investment and our insight and technology investments. And we are excited about it. And I think the reason you are seeing the results that we are realizing around the world is because we are just doing a better job of scaling big ideas and big innovations that are really grounded in great technologies. And so we are continuing to do that. Maria mentioned the visibility of our pipeline on cost savings is probably better than it’s ever been. Well, the visibility of our pipeline of our technology innovations better than it’s ever been, too. And that’s one of the things as we – coming into this role, we wanted the organization to work longer term. And we are here for today and we are also here for tomorrow and to be able to balance that. And so we are really pleased with that progress. And so – which is why I would say we are confident that we are going to continue to be able to invest and grow in our businesses, both in personal care, professional and consumer tissue. So, that’s one. I think with regard to retail media, yes, it is becoming a bigger topic. I will say I feel very good about our digital capability. And we are very disciplined. And we have so much data around – as Maria mentioned earlier, digital is our life. I mean we know exactly what it is. We have made significant progress on ROIs over the course of the last 3 years or 4 years, and we know what the investments are worth. And so we are very capable – have the right sort of data, as you might expect, to be able to work with our retailers and make the right investments. And frankly, some of those investments are really, really good for us, and we are really excited to do that with them. And others, we are going to need to see a little more improvement. But overall, I think it’s an operational issue and capability that our organization is really well equipped to deal with.

Nik Modi

Okay. Thanks, Mike.

Mike Hsu

Okay. Thank you, Nik.

Operator

Thank you. At this time, I am showing no further questions. I will turn the call back over for closing remarks.

Mike Hsu

Okay. Thank you. In closing, I would like to really reinforce a few key points to my opening remarks. 3 years ago, we launched our strategy to deliver balanced and sustainable growth, and that plan is anchored on our strategy to accelerate top line growth by elevating our categories and expanding our markets. Now to do this, we have invested in our brands and capabilities and our people. This growth is fueled by improvements to our cost base, delivering strong annual productivity through our FORCE and Global Restructuring programs. It’s pretty clear we are executing our strategy in a very dynamic environment. And our teams have faced challenges well beyond what we or anyone else had anticipated. But that’s our reality and we expect the volatility in the environment to persist this year. We are committed to our strategy and we are executing well, evidenced by our growth in personal care, strength in market share performance and the actions we have taken in a very volatile environment.

We are excited about the potential of our brands and categories and our ability to develop innovative products that will enhance our portfolio and the value we provide to our consumers. We are also committed to restoring our margins and expect to make progress this year. This commodity cycle is clearly different from past cycles. And the time to recover will be elongated due to continued inflation. We are confident in the actions we are taking and in our ability to create meaningful shareholder value over time. I am especially grateful for the dedication of our talented teams and we will continue to do all we can to ensure a safe and rewarding work environment in the year ahead. Thank you all for joining our call today.

Operator

Thank you, ladies and gentlemen. This concludes today’s teleconference. You may now disconnect.