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WHEN: Today, Wednesday, February 20, 2019
WHERE: CNBC's "Closing Bell "
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Kimberly-Clark CEO Michael Hsu and CNBC's Sara Eisen on CNBC's "Closing Bell" (M-F 3PM – 5PM) today, Wednesday, February 20th. The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2019/02/20/watch-cnbcs-full-interview-with-kimberly-clarks-new-ceo-michael-hsu.html.
All references must be sourced to CNBC.
MORGAN BRENNAN: Welcome back to the "Closing Bell." A combination of rising material costs, increased tariffs and a stronger dollar, pressuring companies across sectors to raise prices on goods. Kimberly-Clark is one of those companies raising prices in North America, back in August on products like Cottonelle bathroom tissue and Huggies Diapers. That stock is up almost 7% since then. Our own Sara Eisen is live from Dallas, Texas with Michael Hsu, the CEO of Kimberly-Clark, who joins us exclusively in his first interview since taking over as CEO back in January. Sara.
SARA EISEN: Alright, thank you very much, Morgan. And thank you Mike, for hosting us here and for doing this exclusive interview with us.
MICHAEL HSU: Hello, Sara. Welcome to Dallas.
SARA EISEN: Yes. It's good to be here. So, brand new CEO. You're taking over for Tom Falk, who was CEO for 16 years.
MICHAEL HSU: Yes.
SARA EISEN: What do investors need to know about you?
MICHAEL HSU: Well, I've got to tell you, it is quite the honor to come into this role. And I think maybe the biggest thing about me is that I'm a person who sees opportunity. And so, because of that, I'm really excited to come into this job at this time because I think it's a great company and Tom has built a great legacy, transforming the company over his 30-plus years with the company. But I still see a lot of opportunity ahead of us.
SARA EISEN: So, let's talk about that. Because the company is in a bit of a turnaround mode coming off a rough patch on sales with some hope in the last quarter. Where are you in this transformation?
MICHAEL HSU: Yeah, so certainly, we're not satisfied with our performance in the last couple of years, but we are making progress. And solid progress in our fourth quarter, where we saw are net sales organically up 3%. And the big, important thing was given the commodity inflation we've taken on in the past year, we started to get price realization. And that's been critical for us. So we're in that process and we expect to make solid progress in '19 both on pricing and business improvement overall. And the big thing is I think, on the market side, I think I'm seeing broad improvement across various markets in the consumer demand side.
SARA EISEN: Some analysts want to know whether there's a growth problem at this company. What do you say to that?
MICHAEL HSU: I would say we have great growth opportunity, and more than I've seen at other companies. I spent my career throughout CPG and I worked a lot on the food side. I think in contrast in our categories, we still have a lot of runway ahead of us. And the reason I say that is our categories are big. They tend to be – consumers tend to use a lot of our product and therefore, they spend a lot of money in our categories. And because of that, in some of the developing emerging markets incomes have not risen to the point where the consumer can be in the category. So, we still have that development ahead of us. If I use the baseball analogy, Sara, I'd say in a nine-inning baseball game we're probably in the second or third inning of our long-term development.
SARA EISEN: Does it make it tougher for you that one of your main competitors, Procter & Gamble, is far ahead in terms of its own transformation and really seeing the fastest sales growth they've seen in years? Does that make it harder to respond?
MICHAEL HSU: I don't know that it makes it harder to respond. And you know, we're focused on what we can control and we're managing our business to try to drive category growth with our retail partners and we're focused on bringing the right sets of innovation and the right value proposition to our customers.
SARA EISEN: And part of it is the backdrop. And I know you have talked a lot of about the costs rising.
MICHAEL HSU: Yep.
SARA EISEN: Pulp prices. Freight costs. What's that environment like right now? How bad is it?
MICHAEL HSU: I don't know that it's bad. I would say, for perspective, 2018 was a year of record commodity inflation for us, so the biggest in our history. However I think our teams have done an excellent job responding to it. We've managed our costs effectively. That's been a calling card of K-C. You know we manage -- we have a great cost program. We manage our business with strong financial discipline. And what we're focused on right now is: how do we drive more market growth? And we're seeing that, especially, in the fourth quarter some strong performances across our markets.
SARA EISEN: Are we -- consumers -- going to pay more for these everyday products like diapers and tissue?
MICHAEL HSU: Yeah. I think. You know, given the amount of commodity inflation that's occurred, we have to recover our costs and we are taking pricing. And you know, right now, I would say our pricing plans for 2018 are on track.
SARA EISEN: Is that going well? What sort of response are you getting from consumers and retailers?
MICHAEL HSU: Yeah, so -- so far we're making progress. For reference, in the fourth quarter our net realization was up 3%. Volume was down a tick, perhaps even less than maybe what a model -- through elasticities. And that's because we've had strong execution in some markets on other factors beyond pricing.
SARA EISEN: Foreign exchange is a big headwind for a company like yours and others. And the macro-economy in general. How would you characterize what's happening globally?
MICHAEL HSU: Yeah, well there are certainly some challenges in some markets and also I would say some green shoots. And certainly the note that came out from the Fed last week helped on the currency side a little bit or we expect that it will help on the currency side. Some markets, probably the biggest area where consumers are under a little bit of stress is in Latin America where they've had significant inflation. In fact, we moved Argentina, hyperinflation accounting last year. Brazil consumers are under stress as well, seeing significant inflation. But the thing for me is – what I'm seeing broadly is the consumer is very, very resilient. And our categories are very, very resilient. You know, we -- our vision is we're going to provide essentials for our consumers to live a better life. Our products tend to be necessities. And so, they're critical for our consumers on a daily basis and we're ready for that mission.
SARA EISEN: What about the U.S. in particular? We've gotten some mixed signals on consumer spending. Walmart has its best U.S. comps in a decade but December retail sales were the worst in nine years. What's your read on U.S. consumer spending?
MICHAEL HSU: Well, in my categories, I will say I think we're bullish on the categories. And we're seeing some progress, especially compared to 2017 and as we progress through 2018, we saw broad improvement. Our baby and child care business, Huggies, Pull-Ups, had a strong performance in the fourth quarter, up single digits overall. The very important thing, Sara, is to note – and I know you being in the category as a user, the important thing is the category has really rebounded –
SARA EISEN: My son is a user, just to be clear.
MICHAEL HSU: Oh, that's right. Sorry about that. Yeah – but the category really rebounded from 2017 where it was down mid-single digits in '17. In the fourth quarter it was up 3%.
SARA EISEN: So what about China? I know you're very bullish on that market. Are you seeing any impact of the trade war, whether it's on the cost input inside or the consumer demand side?
MICHAEL HSU: I wouldn't say impact from trade war or trade issues between the U.S. or China or other markets. For us, although there are some challenges in the diaper market in China, where we're a big player. It's the largest category in the world for diapers right now. Right? So, largest market in the world. I think we see that as a big opportunity and so does every other competitor. And so what's happened over the last few years -- and China has gotten much more competitive from a product and promotion environment. And so -- but over the long term, it's going to be -- continue to be the largest market. It's about $8 billion today. It's going to grow by a multiple of that over time because there's 16 million births a year and so we're in China for the long haul and focused on having great products.
SARA EISEN: I mean you guys trace their roots back to the 1800s. You have storied brands like Kleenex, like Cottonelle. How do you get the new generation of millennials consumers, which is by all accounts, is not loyal to the brands our parents grew up with, interested and engaged in your products?
MICHAEL HSU: Yeah, so we're approaching our 150thanniversary. And we're really proud of that. I wou;d say, and we just spent a conference talking about digital. I think the digital revolution is really transforming the industry, and in some ways, I think, creating a-- you know, the optimal environment for a good marketer. And the reason I say that is I started my career in the -- you know, a long time ago in direct marketing. And I think the data we have available and the tools we have available to create that productive one on one relationship with consumers is better than ever.
SARA EISEN: And the consumer now goes to Amazon to buy household products. How big of a shift is that from the categories you grew up with.
MICHAEL HSU: Well I think the numbers actually -- it may be Amazon. It could be Walmart.com. It could be any number of retailers. The interesting statistic is in our categories, 70% plus of the purchase decisions are enabled by either mobile or digital. So it's very, very interesting.
SARA EISEN: So how do you rethink the approach?
MICHAEL HSU: Well, our teams are – I would say our teams are running hard and running fast and making great progress. And we've really shifted our mix. In a lot of our categories we moved to 100% digital marketing. I think for us, it creates a real -- it really plays to our category strengths, where our categories generally in personal care are highly targeted. I mean, you being one of the 6 plus million mothers in the U.S., it's a small audience we're going after. And so, digital for us can be much more productive than mass vehicles. And then we're optimizing how we communicate one-on-one with moms or dads to drive and improve performance in the marketing convention.
SARA EISEN: And finally, you know, I've covered a lot of these consumer products companies. They've all got new CEOs, like yourself. And one of the biggest challenges that a lot of these companies, especially the older ones face is around culture and really shaking it up. How do you do that? What are you bringing to this company?
MICHAEL HSU: Well, the starting point is we've got a great culture. And I like to say we're a bit of a throwback. You know, we still care and love our employees. We care about our communities and we really care about our consumers. And that's the starting point for Kimberly-Clark. I think one of the areas we're trying to press on is, you know, we need to dial up our pace and our speed. And we spent a couple of days with our top couple hundred leaders talking about how we're going to move and move faster and how we're going to really go for it.
SARA EISEN: Alright, Mike Hsu, thank you very much.
MICHAEL HSU: Thank you very much.
SARA EISEN: For talking with us and having us here in Dallas.
MICHAEL HSU: Alright, great to be with you, Sara.
SARA EISEN: That is the newly minted CEO of Kimberly-Clark. Back to you, Wilfred and Morgan.
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