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Kimberly Clark (NYSE:KMB)
Q4 2018 Earnings Conference Call
Jan. 23, 2019 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. [Operator instructions] 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 would like to ask an audio question.

It is now my pleasure to introduce today's first presenter, Mr. Paul Alexander.

Paul Alexander -- Vice President of Investor Relations

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. [Operator instructions] 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.

Maria Henry -- Chief Financial Officer

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 of 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 KC Professional in North America, organic sales increased 3%, driven by higher volumes in all major product categories.

In developing and emerging markets, organic sales rose 2%. In terms of key personal care markets, organic sales increased double digits in Eastern Europe and Asian, 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 a 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 a headwind. Those two factors combined reduced operating profit by a high 20s percent.

We delivered full-year cost savings of $510 million, including our FORCE and restructuring program. Restructuring savings $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 costs 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 line spending fell 130 basis points as a percent of net sales, reflecting restructuring benefits, tight management of 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 plan. Full-year adjusted earnings per share were $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 to $6.80. Now let's turn the 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 margin. 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 2018 with price realization bodes well for our 2019 plan.

Given the overall level of pricing we expect to achieve, we're planning for some negative volume impacts, particularly in Consumer Tissue. We have a number of innovation launches in our plan and we will 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 rate. We expect to offset much of that with higher pricing. We expect commodity inflation of $300 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 headwind.

We're targeting to deliver $400 to 450 million of total cost savings. That includes for savings of $300 million to $325 million and restructuring savings of $100 million to $125 million. Our fourth target reflects lower value generated from our commodity contracts versus what we have 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 midpoint, 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 midpoint 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, we're increasing our dividend by 3%. That's our 47th consecutive annual increase in the dividend.

Now let me hand the call over to Mike.

Mike Hsu -- Chief Executive Officer

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 restructuring.

Since this is my first earnings call as CEO, I'd like to tell you I'm excited about KC's future. This 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 of iconic brands, leverage our strong cost and financial discipline, and allocate capital on value-creating ways. We're calling this KC Strategy 2022, and it's how we intend to deliver balanced and 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 good stewards of shareholders' capital. Those will always be hallmarks of Kimberly Clark. Second, to drive top-line growth, we'll sharpen and increase our focus on the consumer and better meet their needs than we've shown over the past few years.

To do that, we plan to develop and launch more meaningful innovation, increase investment 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've built some of the world's most well-known and trusted brands and we hold the No.

1 or 2 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 worth more to 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, will deliver better performance, and will drive trade-up. 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 core businesses by deploying category-expanding marketing, including in underpenetrated categories like adult incontinence and training pants. That's how we've built large and leading brands like the [Inaudible] 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 KC professional. D&E is about 30% of company revenue. And while we had a lot of success in 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. This is a $35 billion incremental market opportunity if the average spending per baby goes from today's 15% of the U.S. level to one third of the U.S. 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 are Latin America, China, Eastern Europe, and Asia. We'll also focus on early stage markets such as India and Africa, which are relatively small today but has 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 into local markets to enable better and faster innovation. We're using an adapt-and-deploy model for smaller markets. Beyond innovation, we'll drive growth through stronger in-store sales execution, by optimizing distribution, pricing, shelving, and merchandising. We'll also deploy category-building marketing campaigns and in-market activities to help develop these markets.

In KC Professional, only 20% of the business is in D&E. We have 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 market in 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 market and help us build those relationships. Today, digital is approximately half of our working media 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 with the right content.

We gain deep experience with this approach, including in China, South Korea, and the U.S., and plan to utilize it more globally to engage, acquire, and retain consumers. Data-driven digital marketing and dynamic content development is helping us improve consumer engagement loyalty and ROI. In addition, e-commerce is an important and growing part of our business. These channels grow in double digits and is about 10% of our overall revenue.

Our online shares in key countries are slightly ahead of or similar to our offline positions. Our products are well-positioned for this 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 attractiveness 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 that 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 plan to continue providing shareholders a top-tier dividend. We'll 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 KC Strategy 2022. Our top-line objective is to grow sales and organic sales 1% to 3% annually. That assumes category growth in the range of 1% to 2%, similar to recent conditions. Macro headwinds in Latin America, birth rate declines in South Korean and the U.S., 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 3% 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 to 40 basis points. Our strategy to increase gross margin somewhat faster and reinvest in advertising and marketing the fuel to 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 yield is 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 in 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. 

Questions and Answers:

Operator

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.

Dara Mohsenian -- Morgan Stanley -- Analyst

Hey. Good morning, guys.

Mike Hsu -- Chief Executive Officer

Hi, Dara.

Dara Mohsenian -- Morgan Stanley -- Analyst

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 a incremental level of investment behind them? And then on the other end 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?

Mike Hsu -- Chief Executive Officer

Yes. Hey, Dara. Thanks for the question. I'll start with the first part.

I would say, hey, the overall game plan is we do want to increase our overall investment behind brands, right, drive our advertising up, drive out in-market execution investments up and also our digital marketing. But I do think that's why we've executed our restructuring. And so, the underlying premise of that restructuring is to create the room and the investment funds that we need to drive our business. Maybe the -- 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 to kind of raise our game in terms of how we approach the consumer and how we serve them. But I think what I'm -- we're trying to accomplish here is maybe emulating what we've done on cost [Indiscernible], which is we've been very systematic in putting 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.

Paul Alexander -- Vice President of Investor Relations

And then on the cost savings question. Maria, do you want to take that one?

Maria Henry -- Chief Financial Officer

Yes. The cost savings there was there was no new news there. It's the continuation of the restructuring program that we have announced and are executing and also the continued execution on our FORCE cost savings program.

Dara Mohsenian -- Morgan Stanley -- Analyst

OK. 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 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.

Maria Henry -- Chief Financial Officer

Sure. I -- on the -- I'll take advertising first and then I'll kind of walk you through your commodities outlook. The advertising spend in the fourth quarter of '18 was higher than in -- than it was last year of 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, it was 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. Paul, 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 some pressure on gross margins. But if I look forward to 2019, I'll tick through a couple of the key commodities. On eucalyptus, we're expecting that to be down mid- to high single digits.

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 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.

Mike Hsu -- Chief Executive Officer

And, 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 in 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 weren't 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. We're expecting 1% to 4% growth and that's a 70-basis-point margin expansion. So, we're feeling better about that.

Obviously, we're not not delighted about that EPS growth, but we do have those, the currency and tax rates.

Dara Mohsenian -- Morgan Stanley -- Analyst

Right. OK. That's very helpful. Thank you.

Mike Hsu -- Chief Executive Officer

Thanks, Dara.

Operator

Thank you. Our next question comes from Wendy Nicholson with Citi.

Wendy Nicholson -- Citi -- Analyst

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?

Maria Henry -- Chief Financial Officer

Yes. We're not going to provide specific guidance by segment for 2019.

Wendy Nicholson -- Citi -- Analyst

OK. But more pricing, I assume, in Consumer Tissue. Is that a fair assumption?

Maria Henry -- Chief Financial Officer

Yes, that is.

Wendy Nicholson -- Citi -- Analyst

OK. 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 looked 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 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.

Mike Hsu -- Chief Executive Officer

Yes. Wendy, thanks for that question. One, you can tell, we're very bullish on D&E, and I think that is the future. I'll come back to why that is.

And I think specifically your question there, certainly we're seeing pressure -- competitive pressure in China, and everybody's aware of that. And so our team's doing a great job. They're building a business to win for the long haul. And that's on a market that the consumers still want to see premiumized, right.

They're still buying better-performing products. And so we do need to work on the profit for, we do need to continue to focus on our margins in China. Brazil, I think we are seeing improvement. For the quarter, we were 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 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 just -- go ahead.

Wendy Nicholson -- Citi -- Analyst

And is that -- and just one question, the pricing in Brazil, I'm sorry, is that for the overall business or is that just diapers. Does that include fem care too?

Mike Hsu -- Chief Executive Officer

Personal care.

Wendy Nicholson -- Citi -- Analyst

Got it. OK, fine.

Mike Hsu -- Chief Executive Officer

Yes, and maybe just back to your original point, which is the options, 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. First and foremost, the whitespace opportunity you just highlighted in D&E. I mean, it's real for us, right.

And if I said, "Hey, it's going to 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, but 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 that the fact that I think we can solve bigger problems or meet -- serve 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.

Wendy Nicholson -- Citi -- Analyst

Got it. That's helpful. Thank you very much

Paul Alexander -- Vice President of Investor Relations

Thanks, Wendy.

Operator

Thank you. Our next question comes from Ali Dibadj with Bernstein.

Ali Dibadj -- Bernstein -- Analyst

Hey, guys. So, I have three questions. One is, besides the almost tradition of a rebase when a new CEO starts -- congrats, by the way, Mike. What -- 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, "OK. Gosh, we need to reset between now and 2022." And then also why is it just the 2022? Why not be a long-term guidance as well?

Mike Hsu -- Chief Executive Officer

Yes. OK. Yes, Ali, I guess, the rebase term, I don't know if my team would feel that way and that it's a rebase, but I do think we were working hard, even in 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 -- greater 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 KC 2022 are all about. However, given some of the uncertainty we're seeing in 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 in this direction here.

Ali Dibadj -- Bernstein -- Analyst

OK. And that's helpful. Then within that -- under the umbrella of prudence or not prudence, you talked about a 30 to 40 basis points on your prepared remarks average operating margin enhancement over 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 to 40 basis points over next few years, if your ROIC stays flat, that would suggest that your invested capital turns are getting worse or certainly not improving and sounded like getting worse.

Is that more CAPEX need for innovation? Is that more less efficient rollout of assets in emerging markets? I mean, what is it that's driving ROIC also?

Mike Hsu -- Chief Executive Officer

Yes. So, maybe, Ali, I'll start and then maybe, Maria, you can [Inaudible]

Maria Henry -- Chief Financial Officer

Yes, sure.

Mike Hsu -- Chief Executive Officer

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 impact. 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, KC 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 needs to be a much more important part of our strategy going forward. We're seeing this a step-forward this year with getting list prices, but we're also -- have opportunities to be more strategic on price to drive the [Inaudible] that 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.

Maria Henry -- Chief Financial Officer

Yes. And then I'd -- we 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 and the restructuring will 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 build around that to make sure that we can deliver on customer expectations without service interruptions 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 in it.

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 even if they're dilutive.

Ali Dibadj -- Bernstein -- Analyst

OK. 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, their number of suppliers, including in baby care, and really trying to go to one in private label in some instances even.

Can you talk a little bit about your shelf space expectations for 2019 in some of the major retailers, particularly in the U.S. but perhaps even in Europe?

Mike Hsu -- Chief Executive Officer

Yes, Ali. I think that's a great question. I think maybe we are seeing in -- 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 that's a focus for us.

And as you probably know as well as anybody else is that distribution tends to be one of the largest drivers of share, and so that's a big focus area for us not just in the U.S. but globally.

Ali Dibadj -- Bernstein -- Analyst

OK. Thanks very much, guys.

Paul Alexander -- Vice President of Investor Relations

Thanks, Ali.

Operator

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

Bonnie Herzog -- Wells Fargo Securities -- Analyst

All right. Thank you. Good morning.

Mike Hsu -- Chief Executive Officer

Good morning, Bonnie.

Bonnie Herzog -- Wells Fargo Securities -- Analyst

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 balance between pricing and volume than maybe what you're seeing now.

Mike Hsu -- Chief Executive Officer

Yes, for sure, Bonnie. And I think 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.

Bonnie Herzog -- Wells Fargo Securities -- Analyst

OK. 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 a 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 end and you're making a conscious decision to possibly sacrifice some market share right now in order to support your margins.

Mike Hsu -- Chief Executive Officer

Yes. 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 drive the business 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 characterize the businesses or the category as being more rational, but I do think the market is focused on right now or at least it has a similar focus as us, which is recovering some of the cost inflation and making sure that our margins are protected. 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 volume decline about of about 4 points. And that was planned and we said, I think, in the prior call that we were gonna be dialing 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 gonna 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 and 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.

Bonnie Herzog -- Wells Fargo Securities -- Analyst

OK. Very helpful. Thank you.

Mike Hsu -- Chief Executive Officer

But one additional line, I'll say, Bonnie is that underlying it, especially in bath and towels in North America, the underlying base trends are very healthy and heading the right direction behind some of the innovation we're doing.

Bonnie Herzog -- Wells Fargo Securities -- Analyst

Good to hear.

Mike Hsu -- Chief Executive Officer

Great.

Bonnie Herzog -- Wells Fargo Securities -- Analyst

Thanks.

Operator

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

Maria Henry -- Chief Financial Officer

Hi, Jason.

Jason English -- Goldman Sachs -- Analyst

Hey. Hey, Maria. Hey, Michael. Good morning, everyone.Thank you for my question and Happy New Year and congrats on officially taking the reigns.

Geez. A few different questions here and I'll try to bang through them. First, Maria the FORCE savings, I appreciate why you're expecting a smaller number this year. Can you give us a sense of, 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 in terms of structure for reducing the cost base and how much of it was just buying better than the markets?  

Maria Henry -- Chief Financial Officer

Yes, we don't 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 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.

Jason English -- Goldman Sachs -- Analyst

And if spot prices were to rollover or weaken from the current levels of your planning assumptions, is it fair to assume that your FORCE savings will be dragged down with it?

Maria Henry -- Chief Financial Officer

If 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.

Jason English -- Goldman Sachs -- Analyst

That's helpful. Thank you. And last question, Tissue margins have commenced 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 kind of finished on a week new, are we still trying to settle in to a more -- to a lower and more durable margin structure for that business?

Maria Henry -- Chief Financial Officer

Yes. 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 my -- from the remarks that not only did we see inflation, and I kind of talked about which of the commodities we saw inflation on 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 they are -- 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 product in the right places to get efficient distribution to meet the customer demands. So, 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 were 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, on the margin.

Mike, you want to talk about longer term how we see Tissue?

Mike Hsu -- Chief Executive Officer

Yes. Just to 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 to 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 that team is going to get it back. It 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 hair's edge of 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.

Jason English -- Goldman Sachs -- Analyst

Got it. Very helpful. Thank you, guys.

Maria Henry -- Chief Financial Officer -- Analyst

Thanks, Jason.

Operator

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

Steve Powers -- Deutsche Bank -- Analyst

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 it back, Mike, to the 2022 objectives. Because the forecast calls for net sales to be down one to two, yet profits to be up one to four, despite inflation and FX headwinds, which I think Maria you cited is a 20% headwind to profits. And so just understand the cost savings you have lined up, which basically look poised to offset the base commodity inflation and some translation FX.

It just seems, as I'm doing the math, that the forecast dependent a good deal if not entirely on net price realization and it really doesn't seem to allow for a lot of reinvestment between -- behind those early strategy 2022 initiatives like e-commerce and marketing and e-marketing 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 the strategy 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.

Mike Hsu -- Chief Executive Officer

Yes, Steve, it's -- definitely pricing is a key component of our plan for 2019 and a critical plan maker for us. However, we also do have investment up in terms of our-our advertising A&CP mix and also importantly, we're shifting more into digital, which is more productive for us. So, we got, we got all those elements on it. Maria is there anything you want to add to that?

Maria Henry -- Chief Financial Officer

Yes. I think that if you just think through the puts and takes on 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-20s 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-looks more like low single on operating profit. And then we have the benefit of the restructuring savings coming into the P&L. We've got the FORCE cost savings coming into the P&L. And when you kind of put all of that together, that's how we get to our change in operating profit.

Steve Powers -- Deutsche Bank -- Analyst

OK. OK. OK. So, I guess, within that then it sounds like you don't see much risk but I guess, how do you handicap the risk of the pricing pull-through that you're expecting 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 just focusing in on China, Mike, you -- I know you cited that you'd like what the team is doing in terms of positioning the business for the future, but if we take a snapshot today, you're clearly losing some ground just given what you've reported today versus what P&G reported today. So, I guess, what's the plan there? What are 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.

Mike Hsu -- Chief Executive Officer

OK. Yes. Thanks. Thanks, Steve.

Yes, let me just go back to your first point on the pricing, we are feeling good about our price plans and I think the Q4 was an indicator that kind of work that 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 on -- 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 to 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 are losing ground a little bit is in the lower tiers our Tier 3. Where we are actually growing is on our Tier 5 and Tier 6, where we have launched really good and important innovation that really focus on premiumization of the category. And I think we're having good consumer response to it.

It's growing the Tier 5, 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 wants 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.

Steve Powers -- Deutsche Bank -- Analyst

OK. Thank you.

Paul Alexander -- Vice President of Investor Relations

Thanks.

Operator

Thank you. Our next question comes from Olivia Tong with Bank of America.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Great. Thanks. I just want to go back to FORCE. The savings came in, which part 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, were there specific buckets where FORCE fell short beyond the pulp dynamic? And then I have a follow-up after that.

Maria Henry -- Chief Financial Officer

OK. The -- so a couple of things in there. On -- first on the delta, as you can picture kind of how that 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 those 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, we clearly won't pretend to be able to call the market. But 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 those 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 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 inter-milling shipments I talked about in the North American Tissue business, that's what drove the lower realized savings in the fourth quarter.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

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 get those resolved.

They won't necessarily get resolved immediately or within the first-first quarter, but they absolutely will get resolved.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Got it. OK. And then for fiscal '19, just by segment, you talked through some of the issues in Consumer Tissue, which makes sense, but are you expecting margin expansion in each of the divisions in fiscal '19?

Mike Hsu -- Chief Executive Officer

Olivia, could you repeat -- it was cutting in and out. So, I couldn't hear the second part of your question.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Sorry. Just what I was asking is if 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?

Mike Hsu -- Chief Executive Officer

Olivia, I'd remind you, we don't give guidance at the segment level. But you can imagine, given the overall company target that we've talked about, all three segments have margin improvement front and center for further objectives for next year.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Maria Henry -- Chief Financial Officer

Thank you.

Operator

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

Lauren Lieberman -- Barclays -- Analyst

Thanks. Good morning. I just wanted to go back to earlier someone had mentioned they've done 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've pretty specifically also talked about. What I was curious about though is where you stand on the capability building.

So, analytics what would exist in-house today in terms of getting going on this greater thrust on revenue realization or the highly targeted one-to-one marketing on e-commerce. There's -- these things sound great but it does sound like it costs money and requires different skill sets than may be available to 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.

Mike Hsu -- Chief Executive Officer

Yes, Lauren, great question. One, I will tell you just to be clear, we're just standing up initiatives in these 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 needed 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's served us well.

It's enabled us to be very nimble. But what happens is when you do that is 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 got 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 similar tools that we're developing in other markets but I think the big opportunity for us is is to standardize and roll them out more consistently across markets. So that's 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 U.S.

And just to give you an example, I think our China team, I think we've multiplied our marketing ROI. 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 a.m. to 9 p.m., six days a week. And they said, "Well, now it's 007," right. Midnight to midnight, seven days a week.

And they said it's never been more exciting. And I think that's because they're really seeing value in what they're doing and it's driving the business. We're doing similar things in the U.S. and I was talking to one of our e-commerce managers of the day and they're running through AI-generated content creation 100-some ad campaigns a day, right.

It's very, very specifically targeted against very specific segments. So, I think we're really moving really fast and we're excited about that. But I think the opportunity and through this process for us is to level up around the world and bring all those capabilities to the same level.

Maria Henry -- Chief Financial Officer

And I'd comment, Lauren, just for some context that when we were kind templating 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 have 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 and put it to more useful places. And a big part of that was around financing that capabilities that we need to unlock the opportunities that we have.

Lauren Lieberman -- Barclays -- Analyst

OK. And if I could just have one more question on the revenue realization, because I think revenue realization has been something that has been talked about for a decade probably at KC. 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 where there's 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 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?

Mike Hsu -- Chief Executive Officer

Yes, definitely a true statement, Lauren, which is, especially if you're talking about list price changes, right, a lot of that depends on 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 have what we call waterfall pricing more effectively, I think is a little bit more within our control. And certainly while 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've 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, it always will exist because our business is really spread out, meaning in 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 what we're talking about here is taking the next step in bringing systems and process and metrics and measures to drive more efficiency here.

Lauren Lieberman -- Barclays -- Analyst

OK. All right. great. Thank you so much.

Mike Hsu -- Chief Executive Officer

Thank you.

Paul Alexander -- Vice President of Investor Relations

Thanks, Lauren.

Operator

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

Andrea Teixeira -- JPMorgan Chase & Co. -- Analyst

Thank you so much for squeezing me in. So, the first question is on the progression of the pricing initiatives. From the last calls you have plenty to grease prices for Scott and Kleenex in the first quarter and second quarter, respectively. Are you still keeping this plan? And if so, what has been the reception and is that being accompanied by increased promotions and comporting, which explain how conservative you've been with the 2019 guidance? And my second question is regarding the FORCE.

Back in 2018, you 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 Holly and just in the short term and to your answer to Jason and Olivia. So, what do you think should drive an acceleration for 2020 and 2021? Thank you.

Mike Hsu -- Chief Executive Officer

Yes. Andrea, so I'll start with the pricing one then maybe later come back on the FORCE. Yes, 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 de-sheeting we have 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 in the first quarter or right now by -- through the end of the first quarter this year. So, that still will come through. And right now, we have positive indication and most customers are aware and -- where our plans are working there.

Maria Henry -- Chief Financial Officer

Yes. And on the FORCE target, we did not change the $1.5 billion target that we have. We are 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 it should should continue to be a faster for us.

The productivity in our manufacturing operations as we continue to drive out 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 opportunity. And as a reminder, we've got a global supply chain organization that has been running a very comprehensive program now for a couple of years. And 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.

Andrea Teixeira -- JPMorgan Chase & Co. -- Analyst

Thank you.

Mike Hsu -- Chief Executive Officer

Thank you.

Operator

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

Nik Modi -- RBC Capital Markets -- Analyst

Yes. 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 getting into new pillar of growth and new category? Just want some perspective around that if you can provide any context. Thanks.

Mike Hsu -- Chief Executive Officer

Yes. Thanks, Nik. One, I'll say, hey, overall I like our portfolio on our three big business segments that we operate in. They are large, essential, and profitable categories.

And we -- 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, I -- maybe the focus for me would be -- hey, an opportunity 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 either in revenue management perhaps or this digital world that we're talking about.

And then the last area might be to reduce exposure to unattractive markets that were markets that we might deem unattractive, right, or have volatility to them. So that's kind of how we're thinking about it right now.

Nik Modi -- RBC Capital Markets -- Analyst

Great. Thanks a lot.

Mike Hsu -- Chief Executive Officer

Thanks, Nik.

Paul Alexander -- Vice President of Investor Relations

Thanks, Nik.

Operator

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

Kevin Grundy -- Jefferies -- Analyst

Hey, thanks. Good morning, everyone.

Mike Hsu -- Chief Executive Officer

Good morning.

Kevin Grundy -- Jefferies -- Analyst

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 you talked -- I'm not asking you 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 org sales relative to consensus yet significant gross margin miss relative to where the Street was. And while we spoke a lot about Consumer Tissue, the Personal Care margin is 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 the Tissue business in North America and the FORCE savings? 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.

Maria Henry -- Chief Financial Officer

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 some favorability on the tax rate from some settlements and from tax -- some tax planning opportunities that we had just as the U.S.

tax reform all settled out that 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 U.S., and there we've got the 21% rate, outside of the U.S. combined our tax rate is in the upper 20s. 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 couple comments. Mike, chime in. But the -- versus our expectation, the challenge that we had was on the gross margin level and we've certainly talked about the issues with the -- 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.

Mike Hsu -- Chief Executive Officer

Yes, maybe -- and maybe the important thing I think about fourth quarter, Kevin, is one is broadly speaking across most markets with one or two notable exceptions, I think that 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. Personal care, up mid-single digits.

And our infant child care business, up low-double -- mid-single digits as well. And child care being up double digits. We've 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.

Kevin Grundy -- Jefferies -- Analyst

OK. Thank you very much. Good luck.

Mike Hsu -- Chief Executive Officer

Thank you.

Maria Henry -- Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from Steve Strycula with UBS.

Maria Henry -- Chief Financial Officer

Hi, Steve.

Steve Strycula -- UBS -- Analyst

Mike, congrats on the -- on your new post. A question for Maria. I 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 been favorable to you guys. That would be helpful.

Then what are your preliminary impressions on freight expense for the year?

Maria Henry -- Chief Financial Officer

Sure. A couple of 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 the spot market we'll be even even much higher higher than that 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 an expectation on commodity inflation. But even more so on the phasing of our pricing coming into the market and, therefore, into our into our P&L.

There's a couple of areas on commodities where 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 in a couple of areas versus where we were in the back half of the fourth quarter, particularly in the area of fiber. Paul, I don't know if you'd say anything else just in terms of the phasing on commodities for next year.

Paul Alexander -- Vice President of Investor Relations

No, I think that that's about right, Maria. I think we're hopeful overall that the headwinds are less significant in the second half but we'll give you an update as we do every quarter.

Steve Strycula -- UBS -- Analyst

OK. 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 strength relative to the front half?

Maria Henry -- Chief Financial Officer

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 an O.P. 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.

Steve Strycula -- UBS -- Analyst

OK. Thank you.

Maria Henry -- Chief Financial Officer

Yes.

Operator

Thank you. Our next question comes from Jonathan Feeney with Consumer Edge.

Jonathan Feeney -- Consumer Edge -- Analyst

Thanks very much. So, two questions. Within North America, why have you been so successful recently in Pull-Ups, Good Nights, and Depends versus diapers? Is there some matter, just a focus there, brand quality or maybe structurally different dynamics? And secondly, the U.S. 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.

Has that been an issue for you and how do you win in that channel specifically? Thank you.

Mike Hsu -- Chief Executive Officer

Yes, let me start maybe with the first part. I think on Pull-Ups, it's the fundamentals, which is, one, 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 bored 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 pan can do. So, big focus on the Big Kid messaging and then also innovation.

And obviously, innovation matters to this category. We feel like we have our best-ever pull-ups. Obviously, every year should -- 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 and in Pull-Ups and also Good Nights, which is even growing faster than Pull-Up.

So, we feel great about that. I think if you add it back and compare it to diapers, again elevate the category is a strategy and that's why it's an important strategy, which is what 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 marketplace.

Maria Henry -- Chief Financial Officer

And then on the drug channel?

Mike Hsu -- Chief Executive Officer

Oh, drug. Yes. I would that there's a little softness there and we're kind of working through that. We have great relationships with our drug customers, 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 U.S. that you guys would expect, large format, small format, e-commerce, and we're working through that.

Jonathan Feeney -- Consumer Edge -- Analyst

OK. Very helpful. Thank you.

Paul Alexander -- Vice President of Investor Relations

Thank you.

Operator

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

Paul Alexander -- Vice President of Investor Relations

All right. Great. Well, we appreciate all the questions today and we'll wrap up with a couple of closing thoughts from Mike.

Mike Hsu -- Chief Executive Officer

Yes. Thank you for tuning in and your support of Kimberly Clark. We are 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 KC Strategy 2022. So, thank you very much.

Paul Alexander -- Vice President of Investor Relations

Thank you.

Operator

[Operator signoff]

Duration: 88 minutes

Call Participants:

Paul Alexander -- Vice President of Investor Relations

Maria Henry -- Chief Financial Officer

Mike Hsu -- Chief Executive Officer

Dara Mohsenian -- Morgan Stanley -- Analyst

Mike Hsu -- Chief Executive Officer

Wendy Nicholson -- Citi -- Analyst

Ali Dibadj -- Bernstein -- Analyst

Bonnie Herzog -- Wells Fargo Securities -- Analyst

Jason English -- Goldman Sachs -- Analyst

Steve Powers -- Deutsche Bank -- Analyst

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Lauren Lieberman -- Barclays -- Analyst

Andrea Teixeira -- JPMorgan Chase & Co. -- Analyst

Nik Modi -- RBC Capital Markets -- Analyst

Kevin Grundy -- Jefferies -- Analyst

Steve Strycula -- UBS -- Analyst

Jonathan Feeney -- Consumer Edge -- Analyst

More KMB analysis

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