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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for your patience and holding. We now have your presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you'd like to ask an audio question.
It is now my pleasure to introduce today's first presenter, Mr. Paul Alexander.
Thank you, and good morning, everyone. Welcome to Kimberly-Clark's year-end earnings conference call. With us today are Mike Hsu, our Chief Executive Officer and Maria Henry, our CFO.
This morning Maria will discuss our 2018 results and 2019 outlook. Mike will then talk about our medium term strategic priorities and financial objectives. Our remarks will be a little longer than normal this morning, but we'll finish as usual with Q&A. And we would ask each analyst to limit their questions to just a few, so we can get to everyone efficiently.
As a reminder, we will be making forward-looking statements today. Please see the Risk Factors section of our latest Annual Report on Form 10-K for further discussion of forward-looking statements. Lastly, we'll be referring to adjusted results and outlook; both exclude certain items described in this morning's news release. That release has further information about these adjustments and reconciliations to comparable GAAP financial measures.
Now, I'll turn the call over to Maria.
Thanks, Paul. Good morning everyone. Thanks for joining the call today. Let me start with the headlines on our full year results. We delivered 3% organic sales growth in the fourth quarter and a 1% increase for the full year consistent with our target.
It was a challenging macro environment and our profitability was impacted by significant commodity inflation and currency volatility. Nonetheless, we delivered significant cost savings and achieved higher selling prices in the second half of the year and we improved capital efficiency and returned significant cash to shareholders.
Now, let's take a look at the details of our results. Starting with sales, full year net sales were $18.5 billion, up 1%. Organic sales rose 1% and that included about 2 points of positive pricing in the second half of the year. Looking at the top-line by geography, in North America, organic sales in consumer products increased 1% that was driven by an increase of more than 1% in personal care including solid volume growth in baby care and adult care.
In K-C Professional in North America, organic sales increased 3% driven by higher volumes in all major product categories. In developing an emerging market, organic sales rose 2%.
In terms of key Personal Care markets, organic sales increased double digits in Eastern Europe and ASEAN and mid-single digits in Latin America, but fell low-teens in China. In developed markets outside of North America, organic sales rose 1%.
Moving on to profitability, full year gross margin was 33.2%, down 270 basis points year-on-year. Commodities were drag of $795 million. That was an all-time high and well above our initial planning assumption coming into 2018 of $300 million to $400 million.
Foreign currencies were also head winds. Those two factors combined reduced operating profit by high 20's percent. We delivered full year cost savings of $510 million including our FORCE and Restructuring program.
Restructuring savings were $135 million well above our initial target of $50 million to $70 million. We made excellent progress in the first year of this program and we remain on track with our overall plan.
While FORCE cost savings of $375 million were substantial, we did have a soft fourth quarter. Performance in the quarter included elevated transportation and distribution cost in North America particularly in Consumer Tissue, along with some higher manufacturing related operating costs. These factors are controllable for us and we will manage through them as we go through 2019.
Moving down the P&L, between-the-lines spending fell 130 basis points as a percent of net sales, reflecting restructuring benefits tight management and discretionary spending and secondarily lower incentive compensation.
Adjusted operating margin was 17%, down 140 basis points and adjusted operating profit fell 7%. Our adjusted effective tax rate in 2018 was 21% that was down significantly year-on-year and below our original plans.
Full year adjusted earnings per share was $6.61, up 6% year-on-year and driven by the lower tax rate. Our October guidance was for earnings per share of $6.60 - $6.80.
Now, let's turn to cash flow and capital efficiency. Cash provided by operations was $3 billion, up slightly year-on-year. We reduced working capital cash conversion cycle by five days and we improved adjusted return on invested capital by 240 basis points, ending the year at 26.5%.
On capital allocation, dividends and share repurchases totaled $2.2 billion. That's the eighth consecutive year we've returned at least $2 billion to shareholders.
Now, let me turn to our 2019 outlook. We expect the environment will remain challenging, although somewhat better than in 2018. We're targeting to deliver a solid improvement in our operating performance that includes higher organic sales growth compared to our 2018 performance and improved operating profit and margins.
On the top-line, total sales are expected to decline 1% to 2% that includes an expected 3% to 4% headwind from currencies. We plan to grow organic sales by 2% that's similar to our expectation for overall market growth.
We expect higher net selling prices of at least 3%. Our progress in the back half of 2018with price realization bodes well our 2019 plans. Given the overall level of pricing, we expect to achieve or planning for some negative volume impacts particularly in Consumer Tissue. We've a number of innovation launches in our plan and we'll support our brands with strong marketing programs.
Moving beyond sales, we plan to grow adjusted operating profit by 1% to 4%. At the midpoint of our guidance targets that implies margin improvement of 70 basis points. On average, we expect commodities and currencies in total will be a headwind on operating profit of about 20%, including a high single digit drag from currency rates. We expect to offset much of that with higher pricing.
We expect commodity inflation of $300 million to $400 million. That's much less than we experienced in 2018, which we believe represented a cyclical peak in terms of year-on-year headwinds. We're targeting to deliver $400 million to $450 million of total cost savings. That includes FORCE savings of $300 million to $325 million and Restructuring savings of $100 million to $125 million.
Our FORCE target reflects lower value generated from our commodity contracts versus what we've achieved over the last couple of years. Outside of this, we expect strong performance on the other components of our FORCE program.
In addition, supply chain related restructuring activities and savings will be ramping up in 2019. Overall, we continue to have high confidence in our ability to deliver healthy levels of supply chain savings going forward.
We expect the adjusted effective tax rate will return to a more normal level and be between 23% and 25%. At the mid-point that represents a year-on-year earnings drag of about 3.5%. All-in-all, we're targeting full year adjusted earnings per share of $6.50 to $6.70, which at the mid-point is essentially even year-on-year.
In terms of our earnings profile, we expect earnings will be higher in the second half of the year compared to the first half. That's primarily because of the expected timing of the net benefit from selling price increases.
Finally, on cash flow and capital allocation, we expect cash provided by operations will be slightly below our strong performance in 2018. We expect to allocate between $2 billion and $2.3 billion to dividends and share repurchases. We plan to repurchase $600 million to $900 million of Kimberly-Clark stock, in addition for increasing our dividend by 3% that's our 47th consecutive annual increase in the dividend.
Now let me hand the call over to Mike.
Thanks, Maria. Good morning everyone. Maria walked you through our results and 2019 outlook and while we aren't satisfied with our margin in 2018, I was encouraged with the following. We returned to delivering organic sales growth and improved net selling prices in the second half including strong fourth quarter performance. Our market share positions improved in about half of the 80 category country combinations that we track. We leveraged our financial discipline and we made excellent progress on our global restructure.
Since this is my first earnings call as CEO, I'd like to tell you I'm excited about K-C's future. It's a great time to have the opportunity to lead this great company and it's a real honor. Our strategic priorities are to grow our portfolio by iconic brands, leverage our strong cost and financial discipline and allocate capital in value creating ways. We're calling this K-C Strategy 2022 and it's how we intend to deliver balanced sustainable growth and create shareholder value in what we assume will be a continued challenging environment.
So let me outline a few thoughts. First, we'll continue to be lean on cost and be stewards of shareholders' capital. Those will always be hallmarks of Kimberly-Clark. Second, to drive top-line growth will sharpen and increase our focus on the consumer and better meet their needs that we've shown over the past few years. To do that we plan to develop and launch more meaningful innovation, increase investments in digital marketing and improve in store sales execution. While our commercial capabilities that drive the top-line are good, I believe we can make them great. We're launching internal initiatives in these areas to strengthen our capability just like we've made ongoing cost savings a superior capability.
Now, let me spend the next few minutes describing our growth priorities. We intend to grow our portfolio of iconic brands in line with or slightly ahead of our categories. We're starting from a position of strength. We built some of the world's most well-known and trusted brands and we hold the number one or two market share position in 80 countries. Our objective is to maintain or improve our overall market share position especially in key categories. We have three main growth pillars and all of them are consumer centered.
The first is to elevate core businesses. Improving the product experience, making our products more valuable and work more consumers is what I mean by elevating core businesses. We'll launch differentiated product innovation to drive growth in core markets. These innovations will be based on deep understanding of consumer insights. We'll deliver better performance and will drive trade off. You'll see some examples of that end market in 2019 including in baby care. Our upgraded and more standardized manufacturing footprint enabled by our global restructuring will help us bring our innovation pipeline to market more rapidly and more consistently around the world.
Beyond innovation, we'll grow in core businesses by deploying category expanding marketing including in underpenetrated categories like adult incontinence and training pants that's how we built large and leading brands like Depend, Poise and Pull-Ups. Net revenue management will also help us grow core businesses. With more process discipline and more consistent utilization of tools, we can generate more revenue through pricing strategies, promotion effectiveness and product mix.
Our second growth pillar is to accelerate Developing and Emerging markets with an emphasis on Personal Care and K-C Professional. D&E is about 30% of company revenue and while we had a lot of success here, D&E remains our largest growth opportunity because of the relatively low levels of category penetration and frequency. We have the resources and plans to achieve success going forward. For example, we'll invest to drive category development in diapers, it's a $35 billion incremental market opportunity if the average spending per baby goes from today's 15% of the US level to one third of the US level.
We'll also invest in feminine care, adult care and baby wipes which all have significant penetration opportunities. Priority markets for us are in Personal Care of Latin America, China, Eastern Europe and ASEAN. We'll also book some early stage markets such as India and Africa, which are relatively smaller today, but have significant long-term potential. As in developed markets, we'll deploy our consumer insight based innovation model in D&E too. As part of our restructuring, we're moving more R&D resources in the local markets to enable better and faster innovation.
We're using an adopt and deploy model for smaller markets. Beyond innovation we'll drive growth through stronger in store sales execution by optimizing distribution, pricing, shelving and merchandizing. We'll also deploy category building marketing campaigns and in-market activities to help develop these markets. In K-C Professional only 20% of the business is in D&E. We've significant whitespace opportunity as industrialization and economic development continue. Our near-term focus markets will include Latin America and China.
Our third growth pillar is to drive digital marketing and e-commerce. Through digital we can build one-to-one consumer relationships, which will enable us to maximize lifetime value for our consumers. We'll invest even more in digital marketing and help us build those relationships. Today a digital is approximately half of our working medium mix and that percentage is growing.
We'll deploy data-driven and compelling marketing with precision targeting to engage with consumers at the right time at the right content. We've gained deep experience with this approach including in China, South Korea and the US and plan to utilize it more globally to engage, acquire and retain consumers. Data-driven digital marketing and dynamic content development is helping us to improve consumer engagement, loyalty and ROI.
In addition, e-commerce is an important and growing part of our business. This channel is growing double digits and it's about 10% of overall revenue. Our online shares in key countries are slightly ahead of or similar to our offline positions. Our products are well positioned versus environment because they have high recognition and consumer trust and they're also critical to help our customers grow since they're important traffic drivers. We plan to leverage our capabilities and attracting this of our brands to capture the opportunities that exist in e-commerce.
Digital marketing and e-commerce also further enable our strategies to elevate core businesses and accelerate growth in D&E markets. We have a strong portfolio of brands, the right strategies and organization structure and a solid foundation to build on going forward. We also have significant opportunities to accelerate our capabilities to drive growth. We have pockets of excellence around the world and I expect us to drive more consistency globally and achieve a step change in capabilities overall.
Our second strategic priority is to leverage our strong cost and financial discipline, to fund growth and improve margins. We have a strong legacy in this area and that's something that we expect to continue going forward. We'll drive ongoing supply chain productivity through our FORCE program. FORCE has generated savings of 3.4 billion over the last decade and we expect significant savings for years to come.
We'll also continue to execute the 2018 restructuring program. This is the biggest restructuring in our history and it's making us leaner, stronger and faster. We'll rigorously control discretionary spending to help us sustain our top-tier SG&A cost structure and we'll drive down working capital with benefits from global supply chain initiatives and our improved manufacturing footprint.
Our last strategic priority is to allocate capital in value creating ways and is very consistent with how we've operated historically. After we complete our restructuring, we'll target annual capital spending of 4% to 5% of net sales, down from our current target of 4.5% to 5%. We're planning to continue providing shareholders a top-tier dividend. We will evaluate M&A opportunities in a disciplined manner with a bias for tuck-in transactions in existing categories. M&A is not expected to be a significant part of our growth strategy. Finally, we plan to allocate healthy amounts of cash flow to share repurchases.
Now, let me turn to our medium term financial objectives that come with K-C Strategy 2022. Our top-line objective is to grow sales and organic sales 1% to 3% annually. That assumes category growth in a range of 1% to 2% similar to recent conditions. Macro headwinds in Latin America, birth rate declines in South Korea and the US and price competition in China diapers, have all impacted category growth in the last few years. We believe these factors are largely cyclical and we'll focus on doing our part to drive these categories, but we also believe it's appropriate not to plan for much improvement right now.
Depending on how our categories evolve and the success of our initiatives, we'll work to achieve the upper half of that 1 to 2 target range. On the bottom line our objective is to increase adjusted earnings per share mid single digits annually. We expect to grow operating profit 3% to 5%, on average that implies annual operating margin improvement of 30 basis points to 40 basis points. Our strategy is to increase gross margin somewhat faster and reinvest in advertising and marketing to fuel the top line. Ongoing share repurchases should also benefit EPS growth.
In terms of capital efficiency, our objective is to at least maintain our top tier ROIC at its current level. Over the last 15 years, we've nearly doubled ROIC and it's currently more than 26%. We'll continue to be disciplined with our investment strategies, but we won't turn away value creating opportunities with attractive returns that may be below our overall average.
Lastly, we're targeting to increase our dividend generally in line with our growth in adjusted earnings per share. Our payout ratio is in the low 60s and our yields about 3.5%. We continue to believe that a strong dividend is an important part of our investment proposition. I believe these medium term financial objectives are appropriate and realistic in the current environment. Longer term, we continue to have significant optimism about the potential of our categories and our business. Our categories are essential for consumers and have significant development opportunities. We have very strong brands that we're investing behind and we're focused on raising our game on key growth capabilities.
This morning I've outlined the key components of our medium term strategy. We look forward to sharing more information with you and updating you on our progress as the year progresses. Overall, we're confident in our ability to create shareholder value through successful execution of our strategies.
That concludes our prepared remarks and now we'll take your questions.
Thank you. Ladies and gentlemen, at this time, the floor is now open for your questions. [Operator Instructions] Our first question comes from Dara Mohsenian with Morgan Stanley
Hey, good morning, guys.
Hi, Dara.
So on the 2022 strategy changes, it was helpful to hear about the areas you're focused on and how you get there. I'm wondering what sort of the net level of incremental investment to attack the three strategic priorities you mentioned the core D&E and digital marketing and e-commerce. Is this sort of the strategy changes more the way you're structured or execute or should we assume there's an incremental level of investment behind them. And then on the other hand in terms of the cost savings that you mentioned, is there actual incremental cost savings you're announcing today or is this more executing on the prior programs you've announced?
Hey, Dara. Thanks for the question. I'll start with the first part, I would say, the overall game plan is, we do want to increase our overall investment behind brands, like to drive our advertising up, drive our in-market execution, investments up and also our digital marketing. But I do think that's why we've executed our restructuring. So, but the underlying premise of that restructuring is to create the room and the investment funds that we need to drive our business. Maybe from my perspective the bigger kind of notion of what needs to be different in terms of our going forward, one, I think you get the message, which is a big focus on the consumer and I think we have that opportunity to kind of raise our game in terms of how we approach the consumer and how we serve them.
I think what we're trying to accomplish here is maybe emulating what we've done on cost transformation, which is we've been very systematic and put in a really robust management system to drive cost transformation and we're trying to bring the same approach to driving what we're calling commercial discipline, which is how we manage our innovation resources, our sales and marketing resources to drive growth
And then on the cost savings question, Maria, do you want to take that one.
Yeah, the cost savings, there was no new news there. It's the continuation of the restructuring program that we have announced and are executing and also that continued execution on our FORCE cost savings program.
Okay. That's helpful. And then on the 2019 outlook, the 350 million in input cost pressures. Can you detail some of the key underlying assumptions there that are embedded for oil and pulp prices? And it looks like A&P spending was up as a percent of sales in Q4 year-over-year. Would you anticipate that in 2019 also is that embedded in the guidance? Thanks.
Sure. I'll take advertising first and then I'll kind of walk you through our commodities outlook. The advertising spend in the fourth quarter of '18 was higher than it was last year fourth quarter, but last year fourth quarter was low. So it was in line with our expectations and the year-over-year really has more to do with the trend that we saw last year. For the full year is relatively flat. Looking at next year, we do intend to fully support our brands and also the innovations that we put out into the market. So we'll see how the numbers shake out, but we will continue to be supportive there. Probably, I don't know if we're giving a specific number for advertising, but it continues to be a core focus of the strategy that Mike outlined. In terms of the commodities outlook that we have, I'll just comment for the fourth quarter you saw that that was one of the drivers that we mentioned on some pressure on the gross margin where commodities were up, fiber in general was flat to up sequentially in the fourth quarter for us, which put some pressure on gross margins.
But if I look forward to 2019, I'll pick through a couple of the key commodities: on eucalyptus, we're expecting that to be down mid to high single digit; secondary fiber we're expecting to be up mid-teens; on the other key input costs, we're expecting polypropylene will be down mid-single digits and we're expecting super absorbent will be similar to what we saw in 2018. On crude oil, we're expecting it to be in the 50s, but it'll be down from $66 a barrel this year. But the correlation between crude oil and polypropylene and super absorbent has not proven to be strong in the last couple of years, which is why we see some differences there. In terms of some of our other fiber types, we're expecting those to be up in 2019 also. So 2019 commodities we expect to still be inflationary but not nearly as much as what we saw in 2018.
Dara, let me just tag on here. I would tell you, although, 2019 we plan to make solid progress, and I think you can see that and kind of the results that we're planning for, we're improving the organic growth and the overall shape of our P&L and so one of the things that we're encouraged about in our Q4 was that we saw the net selling price improvement that gives us confidence about our plans for 2019. We're also making a pretty significant improvement on our key growth prospects in 1% to 4% growth and that's 70 basis points margin expansion, so we're feeling better about that. Obviously, we're not delighted about EPS growth, but we do have those - the currency and tax drags.
Right. Okay. That's very helpful. Thank you.
Thanks Dara.
Thank you. Our next question comes from Wendy Nicholson with Citi
Hi. Just first question, the organic sales increase that you're forecasting for '19 of 2%. Can you give us directionally personal care versus consumer tissue, what you expect for each of those segments?
Yeah. We're not going to provide specific guidance by segment for 2019.
Okay. But more pricing I assume in consumer tissue. Is that a fair assumption?
Yes, that is.
Okay. The second question, though, shifting gears just to the comment accelerating growth in D&E markets generally. And, Mike, I appreciate everything you went through in terms of reorganizing the business a little bit thinking about how to reinvest in the business. But if you look out over the next three years maybe, would you say those D&E markets, and I'm thinking a lot about China, but also about a market like Brazil and Mexico. Do you think the profit pool in your diaper and sun care business in those D&E markets is going up? It just seems the level of competition has intensified so much in those markets. I'm just wondering if you think as you accelerate growth whether that's going to mean margins actually contract. Thanks.
Yeah, Wendy thanks for that question. You know, one, you can tell, you know, we're very bullish on D&E, and I think that is the future - Why that is? I think what specifically your question there. You know, certainly, we're seeing pressure, competitive pressure in China and everybody is aware of that. And so - but our team's doing a great job, they're building a business to a win for the long haul. And that's on a market that the consumers still want to see premiumize, where they're still buying better performing products. And so we do need to work on a profit pool. We do need to continue to focus on our margins in China. Brazil, I think we are seeing improvement. For the quarter, we are up mid-teens, healthy growth in price, healthy growth in volume as well. And I think our team is doing a great job there. And what's really driving that is, they're being very disciplined on price management, cost management. But also a key component of the strategy going forward, this commercial discipline that I'm talking about is the sales execution is driving a big piece of our growth, because our pricing is actually up low double-digits in Brazil this year. And the volume is actually up and that's because of the execution. If I can - if I could just -
Just one question about pricing in Brazil, I'm sorry, is that for the overall business or is that just diapers? Or does that include sun care too?
Personal Care.
Got it. Okay, fine.
Yeah. And maybe just back to your original point, which is the options and I think - if I could just say my perspective is informed by kind of almost 30 years in and around this industry and having seen a lot of companies and worked in other companies that do it different ways. I'm really excited about opportunities going forward for a couple of different reasons, you know, first and foremost, the whitespace opportunity you just highlighted in D&E. I mean it's real for us, right? If I say, hey, it's going be 10 billion over this period or 50 billion, both numbers were probably right. There's a lot of growth inherent in our categories because of the low levels of development. So that's one big thing that I see, that's different that I've seen in other companies.
The second thing is still even in developed markets in our categories, I really believe there's a lot of opportunities to expand our categories through what I call elevation which is what I mean by that as value added premiumization, right? And the fact that I think we can solve bigger problems or meet certain bigger unmet needs for our consumers in different ways and expand kind of the value that's available in the category and premiumize the category. So that's the second piece. And then I think we are in the third area this digital opportunity. We're approaching the Holy Grail territory of everything a marketer dreamed of. And it creates much more value in our categories because consumers use our products every day, they spend a lot of money on them and they're in these categories for a long, long-time. And so we're really moving fast on getting closer to our consumers and jumping on the digital train.
Got it. That's helpful. Thank you very much.
Thanks Wendy.
Thank you. Our next question comes from Ali Dibadj with Bernstein.
Hi, guys, so I have three questions. One is, besides that there's almost tradition of a rebase when a new CEO starts. Congrats by the way, Mike. Why is this the right time to give the 2022 outlook, because we've already seen several years of a little bit challenging results. Is there anything you see in the consumer just recently or competition or retailers that really prompted you to say okay, gosh, we need to reset between now and 2022. And then also why is it just a 2022, why not be a long-term guidance as well?
Okay. Yeah. Ali, I guess saw the rebase term I don't know if my team would feel that way and that - it's a rebase. I do think we're working hard even on our 2019 numbers I think to make the progress we're making both on the organic and the operating profit side. But I will say, these are mid-term targets and we're saying, hey, over the next four years or so and they really reflect what we're seeing in the marketplace and our expectation of market conditions. I definitely believe that our - we've got long - way to long-term growth potential in our categories and definitely believe also that as leaders we play a significant role in driving the category to realize that and that's what the strategies we're talking about in K-C 2022 are all about. However, given some of the uncertainty we're seeing this environment, I don't think it's prudent to go out longer than that four years at this point. So that's kind of why we're steering this direction here.
Okay. And that's helpful. Then within that, you know, under the umbrella of prudence or not prudence, you talked about a 30 basis points to 40 basis points on your prepared remarks, average operating margin enhancement over the next three years, four years and higher than that on gross margin. Can you talk a little bit about what the drivers for that are? Are you just keeping commodities flat? Do you have new gross margin improvement buckets? And then if your operating margin is actually improving 30 basis points to 40 basis points over the next few years, the ROIC stays flat. That would suggests that your invested capital turns are getting worse or certainly not improving and sounds like they're getting worse. Is that more CapEx need for innovation? Is that more - less efficient rollout of assets in emerging the markets? I mean what is it that's driving ROIC also?
Yeah. So maybe, Ali, I'll start and then maybe Maria you could -
Yeah, sure.
But the - maybe the first part is operating margin improvement, one, obviously, our FORCE program. And maybe a soft year '19, I think people understand because of the commodity, in fact, notwithstanding, we do have plans to continue to raise our game on FORCE and our overall cost savings approach. And then importantly, I think the strategy that we're talking about here K-C 2022, we do intend to premiumize our business and that will drive margin and mix. And then the other thing that you and I have talked about in the past is net revenue management is being much more important part of our strategy going forward. So we're expecting to see a step forward this year with getting list prices but we're also have opportunities to be a little more strategic on price to drive the trial we want or the trade up we want or the mix that we want. And then we have a big opportunity, I would liken it to a FORCE cost savings opportunity in terms of how we think about our trade spending and how we get much more efficient in it. And then maybe the analogy I'll give you is, we've made a lot of improvement in OEE over the years and I think we have that similar opportunity in trade.
Yeah. And then I - we'd like to see the gross margin go a little bit ahead so that we also have some more room for investment in the key areas that keep the flywheel going on the top line growth. And so that kind of algorithm makes sense to us. On ROIC, the big driver there for the next couple of years, Ali, is the investment in the restructuring program. We talked about the fact that we're expecting between $600 million and $700 million of incremental CapEx as we execute that program. And in 2018, we did a great job on the restructuring, a lot of what you saw was on the SG&A side of the house. So 80% of the savings this year were really coming from there and we're kind of getting going in earnest on the supply chain part of that program as we're moving into 2019. So the incremental CapEx will be there on the asset base. From the restructuring, we'll also affect our ability to drive working capital improvements. So while we've got programs to improve working capital in both the areas of inventory and payable. As you can imagine as we're standing up new assets or taking out assets that are currently existing, we expect that we'll have inventory builds around that to make sure that we can deliver on customer expectations without service interruption, while we're moving assets around. So there'll be pressure on both of those things, which is why there's a more muted outlook on ROIC. And at 26.5, if you benchmark us, we're at clearly in a top-tier level and as Mike said in his comments, we aren't going to hesitate to invest in value creating opportunities that come our way even if they're dilutive.
Okay. That's helpful. And just my third question will be more of a 2019 tax. I guess, we've been hearing from a lot of retailers trying to skinny down their suppliers, the number of suppliers, including in baby care and really trying to go to one in private label in some instances even. Could you talk a little bit about your shelf space expectations for 2019 at some of the major retailers actually in the U.S. but perhaps even in Europe?
Yeah, Ali, I think that's a great question. I think maybe what we are seeing that in some pockets and maybe in some of the smaller retailers, but in our plan right now we are planning to grow distribution overall. And so that's a focus for us. And you probably know as well as anybody else is that distribution tends to be one of the largest drivers of share, so that's a big focus area for us, not just in the U.S. but globally
Okay. Thanks very much guys.
Thanks, Ali.
Thank you. Our next question comes from Bonnie Herzog with Wells Fargo.
All right. Thank you, good morning.
Good morning, Bonnie.
My first question - Good morning, I just had a quick question regarding your medium term organic top line growth target of 1% to 3%. Curious if you guys are expecting that to be a better bounce between pricing and volume than maybe what you're seeing now?
Yeah, for sure Bonnie and I think and embedded in that is not just list pricing but as I mentioned earlier when I was talking with Ali was net revenue management for us which includes list price, I would call strategic price pack architecture, right. And also the third bucket is trade spend efficiency.
Okay. And then my second question is on promotional spending. And in looking at the track channel data, it looks like you guys have pulled back on promos and few categories I guess in the last few months. So curious if that is, in fact, true. And then if so does this suggest in general terms that you think the promotional environment is becoming more rational or if this is just something more strategic from your and you're making a conscious decision to possibly sacrifice some market share right now in order to support your margins.
Yes. Great observation and one I would say is yes, you can see in our behavior which is faced with the big inflation we're seeing particularly in North America, we're making the right choices I think to the drive the business in the direction we need to make. And if you recall maybe two years ago, 18 months ago, we were dialing up promotion because of some of the competition. I don't know that I would - write the businesses or the categories being more rationale, but I do think the market is focused on right now or at least has a similar focus as us, which is recovering some of the cost inflation and making sure that our margins are protected. That said, and so specifically if you look hard at North American family care, I mean, pricing overall organic was up 2, price was up 6 and then we had a little bit of volume about of about 4 points and that was planned. And we said I think in the prior call that we're going be down back our promotion activity in the fourth quarter. I will tell you that just as a heads up, we don't give quarterly guidance on organic, but I will tell you there probably is going be some lumpiness in terms of our organic or our price realization, because we got higher price realization in the fourth quarter in North America because of that promotion pullback. And if you'll think about take a look at Q1 in family care, I think we had a 9% volume growth last year in family care because of additional promotion activity, which we'll be scaling back this year.
Okay. Very helpful. Thank you.
One additional and I'll say Bonnie is that underlying it especially in bath and towels in North America, the underlying base trends are very healthy and head in the right direction behind some of the inflation we're going.
Thanks.
Thank you. Our next question comes from Jason English with Goldman Sachs.
Hi, Jason.
Hey, Maria. Hey, Michael. Good morning, everyone. Thank you for taking my question. And Happy New Year and congrats on officially taking the reins. A few different questions here and I'll try to bang through them. First, Maria, the FORCE savings I appreciate, why you're expecting so a smaller number this year. Can you give us a sense of the FORCE savings you've achieved in the last year or maybe last two years? How much of it was really sort of structural in nature into the structure reducing the cost base and how much of it was just buying better than the markets?
Yeah, we do provide the specific details of each, but I can tell you that we generated significant value from what we call negotiated material savings, which is the value that we get from basically buying better than the market to use your words. And as I look forward to 2019, that is the portion of the FORCE cost savings that will be lower than it has been in the couple - in the last couple of years. As our contracts reset, we still have value from those contracts, which is positive but the value of the contracts compared to what we had in 2018 is lower. And so that's what's affecting the FORCE number. The other components of our FORCE program all have healthy levels of activities and savings associated with those for 2019.
And if spot prices were to rollover or weaken from the current levels or your planning assumptions. Is it fair to assume that your FORCE savings will be dragged down with it?
It's - spot prices move lower. What I would tell you is that a portion of our buy we have short term contracts, which help provide stability in our forecast, but we don't have coverage on 100% of our buy. So it will show up in the numbers. It won't necessarily have a big impact on the FORCE cost savings number.
That's helpful. Thank you. And last question, tissue margins have come in substantially for understandable reasons. I think you've lost over 400 basis points over the last couple of years, but we finished despite 5% price growth this quarter, we finished at the weakest margin level we've seen in a number of years. As we think about medium term, what is the sustainable margin level for that business in your view? Is there a path back to peaks we've seen before or given we've kind of finished on a weak note. Are we still trying to settle in to a lower and more durable margin structure for that business?
Yeah, I'll comment and then Mike feel free to chime in. I'll comment on the tissue margins in the fourth quarter just to emphasize the point from the remarks that not only did we see inflation and I kind of talked about which of the commodities we saw inflation in the fourth quarter, but the execution challenges that we had in the fourth quarter, which led to lower FORCE cost savings. One of the biggest areas that was affected by that was North America tissue and there what happened is the mix of the orders that came in at a brand pack level was different than what we expected. And so we didn't necessarily have the right products in the right places to get an efficient distribution to meet the customer demands that we had higher logistics costs as we had a lot of inter milling shipments in the Consumer Tissue business and we also lost the opportunity on the productivity side on manufacturing as we are running product on some assets that aren't optimized for necessarily for those products. So the Consumer Tissue business particularly in North America had some additional expenses in the fourth quarter and that really weighted down on the margins. Mike, you want to talk about longer-term how we see tissue.
Yeah, just a comment on the fourth quarter Jason, I work closely with that team in North America family care for a long time and they're a great team. And the trick of that business is, and I said it's like driving an 18 wheeler that needs a turn like a Ferrari, right? So it's a big business and I think what happened is that we got a little out of sync in terms of where our inventory was and where it needed to be for customers and that added some additional cost, and then we had some equipment issues. So I think I'm confident that team is going to get it back and may take a quarter or two to kind of get back on that right path. But we'll address the operational issues. We've always said overall on tissue, we want these margins we expect to be in the mid to high teens. We're still kind of on the Harris edge [ph] of that - that number right now, but I think we will make progress because, one, we will get back some of these operational issues. The team is very focused on price realization. And, again, the strategy is to elevate these categories and that kind of means premiumize through value added innovation and that's where our focus is
Got it, very helpful, thank you guys.
Thanks Jason.
Thank you. Our next question comes from Steve Powers with Deutsche Bank.
Hey, good morning. So I just want to try to unpack next year's guidance a little bit more if I could and maybe tie back Mike to the 2022 objectives, because the forecast calls for net sales to be down 1 to 2, profits to be up 1 to 4, despite inflation and the FX headwinds, which I think Maria you cited as a 20% headwind in the profits. And to just understand the cost savings you have lined up, which basically looked poised to offset the base commodity inflation and some translation effects, just seems as I'm doing the math that the forecast is dependent a good deal if not entirely on net price realization and it really doesn't seem to allow for a lot of reinvestment behind those early strategy 2022 initiatives like e-commerce and marketing and end market investments. And I guess I'm just trying to just test is that fair. I know you cited a plan to invest in digital marketing next year and I get that and I view that positively, but do you have room to net invest in overall marketing next year and also make this right you need to an e-commerce and changing structure in markets like China just the math just feels tight and I just want some perspective on that. Thanks.
Yeah, Steve it's - definitely pricing is a key component of our plan for 2019 and a critical plan maker for us, but however we also do have. Investment up in terms of our advertising A&CP mix and also importantly we're shifting more to digital which is more productive for us, so we got all those elements on it and Maria is there anything you want to add to that?
Yeah I think the - and if you just think the puts and takes on the out - the outlook for next year we've got currency up as a headwind, we have input cost inflation, we're expecting to get strong pricing against the two of those, so if you look at the full year 2018 for the combination of currency commodity price that was a mid 20's drag on operating profit. With the pricing that we're putting in place for next year, we'd expect that to be - have very strong coverage. So maybe the combination of that looks more like more singles on operating profit and then we have the benefit of the restructuring saving coming into the P&L. We've got the FORCE cost savings coming into the P&L and when you kind of put all that together that's how we get to our change in operating profit.
Okay, okay. So I guess within that then what - it sounds like you don't see much risk, but I guess you know how do you handicap the risk of the pricing pull through that you're expecting - you're just not coming through just given the competitive backdrop. And then if I can tack on one more question then I'll pass it on, but focusing in on China. Mike, I know you stated that you like what the team is doing in terms of positioning the business for the future, but if you took a snapshot today you're clearly losing some ground just given what you reports versus what P&G reports today. So I guess what's the plan there or the building blocks of the plan and what should we be thinking about in terms of the cost and time to achieve future success? Thanks.
Okay. Yeah, thanks. Thanks Steve. Yeah, let me just go back to your first one on the pricing. We are feeling good about our price plans and I think the Q4 was an indicator that kind of we're on the right track right now and we have pretty significant plans throughout 19', most of them have been announced and worked through with customers and so that's one part. Second is, generally I would say the market is responding in a similar fashion not everybody yet, but we're seeing the market move broadly. So I think we do have confidence in terms of the pricing. The second part China, one is, I guess I'll highlight, performance overall for the quarter and it was - I think we mentioned it, similar Q3. You're right, it continues to be a very, very competitive market and we're not satisfied with our performance, but the team is building for the long-term. And really I will tell you that the area where we're losing run a little bit is in the lower tiers our tier 3. You know where we are actually growing is on our tier 5 and tier 6, where we have launched really, really good and important innovation that really focuses on premiumization of the category and I think we're having good consumer response to it. It's growing, the tier 5 year, tier 4 - 6 share. Although, I would tell you that the response is probably a bit muted because of all the price activity that's in the marketplace, but we feel great about that. And the plan for this year is, we are rolling that technology out more broadly across our line and across various channels throughout China and so that's our focus. And really the strategy is, it's a market that really want to premiumize, consumers are trading up and the reason we're seeing price competition is I believe it's more driven by the manufacturers pulling the price down and so we're still seeing the consumer movement in that direction and that's our focus.
Okay, thank you.
Thanks.
Our next question comes from Olivia Tong with Bank of America.
Thanks, I just want to go back to FORCE given, the savings came in and sort of your expectation and that was the case last quarter too, so last quarter you talked about some of the pulp pricing arrangements that you had in fiscal 18' that won't repeat. So could you talk about what's the delta there fiscal 19' versus fiscal 18'? And then relative to your expectations, where the specific buckets for FORCE fell short beyond the pulp dynamic. And then I have [indiscernible].
And then. Back.
Okay the - so a couple of things in there on - first on the delta, as you can picture kind of how this works. If you think about where we were coming into 2018 and where everyone thought commodities would go that was the negotiating environment as we entered into 2018 and then you fast forward to as they have contracts come up at the end of the year and we're negotiating as we go into 2019, we're in a very different environment. So the 2018 contracts that we had negotiated had significant value to us given how much commodities rose and the steepness of the curve. When you look at where we are going into 19', when we clearly pretend to be able to call the market, the intuition would say that we've got to be at a pretty high point in terms of commodity prices and so it's a different environment as they've contracts reset. So the value of the contract is lower for us in 19' than it was in 18'. We're not going to provide specific amounts, but that affects that negotiated material price portion of our FORCE cost savings which is why 2019 will be lower than what it's been in the last couple of couple of years. For what we saw in 2018 in the fourth quarter with FORCE being lower it was not on negotiated material prices, it was more on the operating components of FORCE and in particular it was on the area of productivity and the area of logistics. So with all of the intermingling shipments I talked about in the North America tissue business that's what drove the lower real life savings in the fourth quarter.
Got it and are you back to normal levels there at this point?
We are not, we are on it. I'll take a controllable issue over an uncontrollable issue any day and the issues that we had in the fourth quarter are controllable issues. So we are very confident in our supply chain capabilities and in our opportunities. The teams are on the challenges that we saw, they're working through them. We will we will get those resolved, they won't necessarily get resolved immediately or within the first quarter, but they absolutely will get resolved.
Got it, okay and then for fiscal 19' just by segment you talked to some of the issues in consumer tissue which makes sense, but are you expecting margin expansion in each of the divisions in fiscal 19'?
Olivia, could you repeat, it was cutting in and out so I could hear the second part of your question?
Sorry, just what I was asking is - on margin expectations you obviously talked about the total company, but by segment Consumer Tissue, Personal Care and Professional, are you expecting margin expansion in all of those in each division for fiscal 19'?
Yeah, Olivia, I'll remind you, we don't give guidance at the segment level, but you can imagine given the overall company targets that we've talked about all three segments have margin improvement from center for further objectives for next year.
Got it, thank you.
Thank you.
Thank you our next question comes from Lauren Lieberman with Barclays.
Thanks, good morning. I just wanted to go back to earlier someone had mentioned that in the same math that sort of the outlook medium term let alone 19' doesn't imply tremendous incremental reinvestment in the business which Mike you pretty specifically also talked about. What I was curious about though is where you stand on the capability building. So analytics, what exists in house today in terms of getting going on this greater trust on revenue realization or the highly targeted one-to-one marketing e-commerce. There's a - these things sound great, but it does sound like it costs money and requires different skill sets than may be available to you in house today. So if you could just comment on where you are on being able to execute versus having the aspiration of these big things that kind of enhance the model going forward.
Yeah Lauren, great question. One, I will tell you just to be clear, we're just standing up initiatives in all these areas now, however, the basis of why we have defined these as critical ones for us, I mean I think you get the consumer opportunity and why we need to do it. I think the reason why we stand them up this way is because we've made progress in different areas and you know historically we have been a bit more decentralized as an operating model and that served us well is enable us to be very nimble, but what happens is when you do that as you end up developing pockets of excellence. And so what I will tell you, in North America we're a little ahead I think on the revenue management side. We've six sigma like tools that we've been developing over the past year or so on trade efficiency, on price pack and we've got some other tools that we're developing in other markets, but I think the big opportunity for us is to standardize and roll them out more consistently across markets, so that's one big area. I think the other - in a similar way is this digital and we've got really, really good pockets of excellence and that's in the markets that you really want them in which is the big e-commerce markets like China, South Korea and the US.
And just to give you an example, I think our China team - I think we've multiplied our marketing ROIs, we've gone to a fully digital spend in feminine care and mostly digital spend in baby care in China. The ROIs are a multiple of what our traditional ROIs are. One of the key drivers of that is that we've got what I think Paul would say dynamic content creation, which means we are putting out new content every day. And the China team I was with earlier last year and they were saying, well back in the old days in e-commerce the saying was you had to be 996 which meant you work 9 am to 9 pm, six days a week. And they said well, now it's the 007 right, midnight to midnight, 7 days a week and they said that's never been more exciting and I think –and that's because they're really seeing value in what they're doing and that's driving the business. We're doing similar things in the US and I was talking to one of our e-commerce managers the other day and they're running through AI generated content creation a 100 and some odd campaigns a day, right. It's very, very specifically targeted against very specific segments. So I think we're really moving, moving really fast and we're excited about that, but I think the opportunity and through this process-process to level up around the world and bring all those capabilities to the same level.
Yeah and I comment more into - I just put some context that when we were contemplating our restructuring program back in 2017 and looking at ways to create value in our business, we had two things that we saw. We saw the opportunity to structurally lower the cost of our business, but importantly the need to do that so that we would have the investment room to invest in capabilities to unlock the opportunities that we saw for growth. So as we put that restructuring program together, we had both of those things in mind. You didn't necessarily see everything play out that way in 2018 given that we had the unexpected run on commodities and also currencies going against us, which put some pressure on the numbers, but moving forward especially as Mike's coming in and outlining the detailed strategies. The point of that restructuring program was to shift costs from less useful places and put it to more useful places and a big part of that was around finding the capabilities that we need to unlock the opportunities that we have.
Okay and if I could just ask one more question on revenue realization because I think revenue realization has been something that - that's been talked about for a decade probably at K-C, but in this sort of next iteration, one thing I'm wondering about is, how this relates to the competition right? It's sort of one thing to say we want to look within our portfolio and see whether the opportunity to be more strategic, but obviously the categories in which you compete particularly in the developed markets where there's perhaps less of a market growth opportunity and even arguably like in a China today with the declining birth rates and so on. Revenue realization also - the interplay is what's the competition doing, right. So how is that factoring into your thought process that pursuing greater revenue realization is maybe all that realistic that being more productive with your trade is something that's entirely within your control.
Yeah, definitely a true statement Lauren, which is - especially if you're talking about list price changes, right, a lot of that depends on the retail environment and what competition is doing and we recognize that. I do think in terms of pack - price pack architecture or thinking about how we set pricing, we rather call waterfall pricing more effectively I think is a little bit more within our control and certainly well, trade spending there's competitive constraints there as well, but the thing about it is, it's like lean six sigma. There's a huge range of variation in how we spend our funds event-to-event and there's a big opportunity for us to get better. And it's just like running any asset in a mill perhaps even more complex because the reason why there continues to be opportunity and companies - I have been working on trade efficiency for 20 years now and I've done it in a lot of places and the reason why the opportunity continues to exist is it always will exist because our business is really spread out meaning anytime you're spending billions of dollars through tens of thousands of people who sell to hundreds of thousands of people it's complex and because of that complexity things are not optimal - tough to optimize in that complexity. And so we're talking about here is taking the next step and bringing systems and process and metrics and measures to drive more efficiency here.
Okay, alright, great. Thank you so much.
Thanks Lauren.
Thank you. Our next question comes from Andrea Teixeira with JPMorgan.
Thank you, so - just for squeezing me in. So the first question is on the progression of the pricing initiatives. From the last calls you were planning to increase prices for Scott in Kleenex in the first quarter and second quarter of respectively. Are you still keeping this plan and if so what has been the reception and is that being accompanied by increase of promotions and compounding, which explain how conservative you've been with the 2019 guidance? And my second question is, you've got into FORCE back in turn 18' established a total target of 1.5 billion in four years starting in 2018. So it sounds like you aren't taking that target down based on your comment to Ali and just in the short-term and to your answer to Jason and Olivia, so what do you think should drive acceleration for 2020 and 2021. Thank you.
Yeah Andrew, so I'll start with the pricing one and maybe Maria will come back on the FORCE. Yeah, I think the pricing in North America I think your questions relates to family cares is on track and I think the plans that we have are largely in place right now. Again, some of the impact that you saw in fourth quarter was related to desheeting we've done in bath tissue maybe in the, I think in the middle of 2018 and also from - a little inflated because of merchandising pullback. I'll remind you, most of our list price changes are going in the first quarter or right now by through the end of the first quarter of this year. So that still will come through and right now we have positive vacations [ph] and most customers are aware and where our plans are working there.
Yeah and on the FORCE target, we did not change the $1.5 billion target that we have. We're still working against that target. In terms of where the savings come from, we would expect that - the savings come from all of the four categories that make up our FORCE program. Negotiate a material price beyond next year should continue to be a factor for us, the productivity in our manufacturing operations as we continue to drive out waste the way that we engineer our product to cost optimize them and then overall costs across the supply chain system including logistics are all areas where we see opportunities. And it's a reminder we've got a global supply chain organization that has been running a very comprehensive program now for a couple of years that we built up our capabilities and we continue to see opportunities there that we believe we've got the capabilities to deliver upon in the next few years.
Thank you.
Thank you.
Thank you. Our next question comes from Nik Modi with RBC Capital Markets.
Yeah, thanks a lot for squeezing me in. Just two quick questions Mike, you indicated M&A is not going to be a big part of, at least your vision right now, just curious what that means for Kimberly would they ever be interested in you know getting into new pillar of growth, a new category just want some more perspective around that if you can provide any context? Thanks.
Yeah, thanks Nick. One, I'll say hey, overall I like our portfolio on three business segments that we operate in. They're large, essential and profitable categories and as we said in the past, we believe there's very strong synergies in how we buy, make, sell and ship and so better together. That said, we will pursue opportunities to improve our portfolio and right now rather than maybe new categories, maybe the focus for me would be in opportunities that might enhance or leverage our geographic scale in a market, a new technology capability or a new commercial capability that's going to accelerate us either in revenue management perhaps or this digital world that we're talking about and then up - and then last it might be to reduce exposure to unattractive markets that were markets that we might be attractive right or perhaps volatility to them, so that's kind of how we're thinking about it right now.
Great, thanks a lot.
Thanks, Nik.
Thank you. Our next question comes from Kevin Grundy with Jefferies.
Hey thanks, good morning everyone.
Good morning.
First, a quick one Maria, just on the tax rate, what's driving the acceleration in fiscal 19' and then a little bit of a broader question just to come back to the quarter and sort of understand some of the moving parts here and potential implications on the outlook for fiscal 19'. So we talked - I'm not asking to revisit the Consumer Tissue issue, we spoke a lot about that and some of the shortfall on FORCE savings, but I think I'm kind of sitting here looking at the 3% pricing in the quarter relatively strong or sales relatively consensus yet significant gross margin miss relative to where the street was and while we spoke a lot about Consumer Tissue, Personal Care margins also down about 200 basis points year-over-year. So anything else that you can sort of fill in here to help us better understand some of the moving parts in the quarter and some of the margin shortfall, anything else you'd highlight besides that tissue business in North America and the FORCE saving, just want to make sure I have my head around this and how much of this is going to linger into the first half of the year? Thank you.
Sure. On the tax rate the tax guidance that we gave for next year is not only for next year, but it's kind of what we see is our tax rate in the environment as it is. What I would call out is that in 2018 we had some favorability on the tax rate from some settlements and from some tax planning opportunities that we had just as the US tax reform all settled out but we accrued some benefits better than what we were expecting in 2018. To get to our tax rate if you think about at a normal level of 23% to 26, about two thirds of our statutory incomes in the US and there we've got the 21% rate. Outside of the US combined, our tax rate is in the upper 20's and then we've got a couple of points coming from state taxes and if you run all that math you'd get a normalized tax rate in the guidance range that we provided. In terms of the fourth quarter from our expectations, I'll make a on a couple of comments and Mike chime in. First is our expectation, the challenge that we had was on the gross margin level and we've certainly talked about the issues related to the execution in the FORCE number, but also I'd comment that commodity inflation was strong in the fourth quarter and up sequentially. So there was additional pressure on commodities versus what we were expecting in the fourth quarter.
Yeah, maybe and maybe the important thing I think about the fourth quarter Kevin is, one is I think broadly speaking across most markets with one or two notable exceptions, I think the businesses is improving and getting healthier and importantly the consumer has proven to be very, very resilient. So in North America organic was up 3 in the quarter, you can see that, but personal care up mid single digits and our infant child care business low double digit - mid single digits as well and for child care being up the double digits. We got double digit growth broadly across D&E markets, Brazil, CEE, ASEAN, India were all up double digits and up in share in most of those markets. So I think we are seeing broad improvement and I think that gives us some confidence in our 2019 outlook.
Okay, thank you very much, good luck.
Thank you.
Thanks.
Thank you. Our next question comes from Steve Strycula with UBS.
Hi Mike, congrats on the - on your on your new post. Question for you [ph], wanted to see if you could speak a little bit more about your 2019 gross margin outlook, particularly how should we think about the timing of the year maybe midyear for a commodity being favorable to you guys that would be helpful and then what are your preliminary impressions on trade expense for the year.
Sure. A couple comments, when I was talking earlier about what we're expecting on 2019 inflation I didn't mention distribution and distribution will be inflationary next year to the tune of double digits. I think North America carrier rates are expected to be up around 10% and in the spot market will be even much higher than that as we as we go into 2019. And then in terms of how things flow, I think we indicated that we're expecting stronger performance in the second half versus the first half as a number of factors play out. One, would be and expectation on commodity inflation, but even more so on - at the phasing of our pricing coming into the market and therefore into our P&L. There's a couple of areas on commodities where in the in the last month or so we've seen indications that some of the pressure will come off as the demand in China softens and there's some indication potentially of some inventory over there as well that as things work through in the first quarter we would expect some relief in a couple of areas versus where we were in the back half of the of the fourth quarter particularly in the area of fiber. Paul, if you have to say anything else just in terms of the phasing on commodities for next year.
No, I think that that's about right Maria. I think we're hopeful overall, but the headwinds are less significant in the second half, but we'll give you an update as we do every quarter.
Okay, great, so would you say then holistically for the year that would be safe to say the gross margin should be net positive for the year given by the back half of strength relative to the front half?
What I'd say is we're expecting margin improvement in the 2019 plan and if you think about the pieces that I described particularly on pricing and secondarily on commodities that you would expect strength as that pricing comes into the market because given the 20% impact on margins that we're expecting on OPs from currency and commodity, the offset to that is price. So the margin improvement will be clearly affected by the timing of that pricing coming into the market.
Okay, thank you.
Thank you. Our next question comes from Jonathan Feeney with Consumer Edge.
Thanks very much. Two questions, within North America what have you been so successful recently in Pull-Ups, GoodNites and Depends versus diapers? Is there some matter just to focus there, brand quality or maybe structurally different dynamics? And secondly, the US drug channel has been an issue for some CPG companies we've seen both in the lower store traffic that's already happened and maybe looking forward to whatever the ultimate adoption of delivering online will bring. Is that an issue for you and how do you win in that channel specifically? Thank you.
Yeah, let me start maybe with the first part. I think on Pull-Ups, it's the fundamentals which is age with one [ph]. We're back on our big kid messaging which has worked for us over a long time and we tend to get I think more with - tired of it before the consumer gets tired of it and I think the focus there needs to be about bringing consumers into the category and showing them the benefits of what a training pant can do. So big focus on the big kid messaging and then also innovation and obviously innovation matters this category, we feel like we have our best ever Pull-Ups, obviously every year we should have our best ever Pull-Ups and we feel great about the product right now and that's what's driving the double digit growth in pants - in Pull-Ups and also GoodNites, which is even growing faster than Pull-Ups. So we feel great about that. I think - and then if you light it back or compare it to diapers, again elevate the category is the strategy and that's why it's an important strategy, which is what our opportunity to do is bring that same level of innovation and value added innovation to premiumize the diaper category and we're doing that in 2019. Too early for me to share with you the specifics, but we feel good about some of the news we have coming into the market place.
And then drug channel?
Drug, yeah, I would say there is a little softness there and we're kind of working through that. We have great relationships with our drug customers and very, very good and I just saw some good news this past week on some of the things we're doing there. But again I think - overall I think you continue to have the challenges across channels in the US that you guys would expect, large format, small format, e-commerce and we're working through that.
Okay, very helpful. Thank you.
Thank you.
At this time, we have no other questions in the queue.
Alright, great. We appreciate all the questions today and we'll wrap up with a couple of closing thoughts from Mike.
Yeah, thank you for turning in and your support of Kimberly-Clark. We're going to make solid progress in 2019 and we're going to accelerate our growth while maintaining our strong financial discipline as we develop our K-C Strategy 2022. So thank you very much.
Thank you.
Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines, and thank you for joining us today.