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First Move with Julia Chatterley
Tech giant IBM Closes Its $34 Billion Deal To By Red Hat; Richard Branson's Virgin Galactic Comes To Market Before Heading To Space; Hong Kong's Chief Executive Says The Extradition Bill Is Dead, But Doesn't Formally Withdraw It. Aired 9-10a ET
Aired July 09, 2019 - 09:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JULIA CHATTERLEY, CNN INTERNATIONAL HOST, FIRST MOVE: Live from the New York Stock Exchange, I'm Julia Chatterley. This is FIRST MOVE. And here's
your need to know. Signed, sealed and delivered. Tech giant IBM closes its $34 billion deal to by Red Hat, we will be speaking to the CEOs.
Houston, we're going public. Richard Branson's Virgin Galactic comes to market before heading to space. And Kill Bill, Hong Kong's Chief Executive
says the Extradition Bill is dead, but doesn't formally withdraw it. It's Tuesday. Let's make a move.
Welcome once again to FIRST MOVE in another jam packed show as you just heard there. Not though quite as jam packed as Fed Chief Jay Powell's
schedule this week. Take a look at this because this is the short term focus for investors. So I'll keep reiterating. We're going to be binge
watching the Fed Chairman this week and over the next few days. He is speaking at the Boston Federal Reserve Bank today, then is on Capitol Hill
on Wednesday and Thursday. We'll call it a plethora of Powells this week.
Ordinarily, you know, I wouldn't be so hyperactive about Fed speak, but given that payrolls report, given the sensitivity around the prospect of
rate cuts even coming as early as July of course given market pricing, we'll keep looking at it.
Right now, we've got stocks showing you a weaker open this morning following two days of weakness. And of course we've got to European stocks
lower, too. German stocks down some one percent dragged lower by further dent in Deutsche Bank stock and a profit warning from the chemical giant
BASF. More details on what they're saying in just a moment, but what we've seen so far in July of course is that the June's big jump has not
materialized.
We've seen a star spangled sogginess, let's call it that. Questions being asked about the Feds progress on rate cuts and the rate path going forward
though, I will say with just one percent off the record highs that we've seen despite chatter from Wall Street about concerns on the outlook and
economic uncertainty.
Morgan Stanley cutting its outlook for global stop citing trade uncertainty and weakening manufacturing. BlackRock also cut its global growth outlook
for the second half of this year that they did say emerging market debt could do well, and as we were talking about on the show yesterday when a
quarter of all global sovereign debt is trading with negative yields. The risk reward of lofty yields in countries like Turkey, perhaps look
relatively more attractive, maybe.
And that could of course, get more help for Jay Powell if he sounds very cautious this week, too. Remember what Kristina Hooper of Invesco said to
us yesterday, what was it? "He might not give the markets what they want, but he will give them what they need."
What we need to get to the drivers. Within the past hour, IBM has announced it has completed its acquisition of software firm Red Hat. Clare
Sebastian is live with the details on this -- a whopping great tech deal -- $34 billion. A move into the hybrid Cloud market here, Clare. They
promised the second half of this year, and they have not disappointed on closing this deal swiftly.
CLARE SEBASTIAN, CNN BUSINESS CORRESPONDENT: They haven't, Julia. Nine days into the second half and here we have it, but this is IBM going all in
when it comes to Cloud computing. They've been trying to refocus the business to move into these higher value, higher margin areas like Cloud
and AI.
The deal is worth $34 billion, that's more than a quarter of IBM's entire market cap. So this is really a huge investment. And the hybrid Cloud, as
you say is the key.
This is a an area where I've seen a lot of companies moving into. It's a high growth area. It is where companies can move data and run applications
across both the public and private Cloud and Red Hat has open source technologies that really allows them to do that.
So along with IBM scale, this is seen as something that could help give IBM the edge on the competition. It has been falling behind rivals, like
Amazon, like Google, like Microsoft in the Cloud space and it really needed to do something big according to analysts to get it into that space.
So this is something that is seen as a really big move for the company and a really big move for the CEO, Ginni Rometty.
CHATTERLEY: Absolutely. You know, we've spoken to the CEO of IBM, Ginni, of course on a number of occasions about this movement, about the drive
into higher margin, high growth businesses like the Cloud.
To your point though, there is fierce competition -- Microsoft, Amazon, Google -- who already offers similar kind of products. The argument here
and I think some of the critics look at this and say, "If this technology is open source, companies can already use other platforms via Red Hat. Why
go to IBM? Why go to IBM's offering?"
[09:05:07] SEBASTIAN: Yes, I think that that is going to be the key going forward. How do they integrate with Red Hat? I think that's really what
Wall Street is going to be watching.
And the really interesting thing about this, Julia, is that Red Hat already partners with some of the competition. They have partnerships with Amazon
Web Services, with Google Cloud. Now they say when they're announcing this deal today that they're going to continue to strengthen those partnerships.
So IBM is not going to be working essentially with its competition. But IBM, its revenue has been declining, its share price peaked in 2013. It's
never recovered those heights.
So as I said, they really needed to do something big to get ahead in this area.
CHATTERLEY: Yes, a big bet. Clare Sebastian, thank you so much for that update. And we'll be joined by the CEOs of IBM and Red Hat, of course
Ginni Rometty and Jim Whitehurst later on in the show.
For now, we're going to move on to our next driver and the space race is well and truly on. Richard Branson is taking Virgin Galactic public.
Rachel Crane joins us now on this story. The first of course of the space giants to go public, this is the way ultimately to finance the push to get
people into space and to become profitable doing it, Rachel.
RACHEL CRANE, CNN BUSINESS INNOVATION AND SPACE CORRESPONDENT: That's right, Julia. Now, Virgin Galactic has announced that later this year,
they will go public with Social Capital Hedosophia taking a 49 percent stake in the company.
Now, this merger has been valued at $1.5 billion. And of course, we know that Virgin Galactic was looking for an investment last year, they turned
down a billion dollar investment from the Saudi government following the murder of journalist, Jamal Khashoggi.
So this merger here, it did take people by surprise, but we do know that Virgin Galactic was looking for an investment hoping to compete in the
billionaire space race here. You have Jeff Bezos, his Blue Origin, saying that they expect to send space tourists to space by the end of the year.
So you know, this is getting very heated here and Virgin Galactic looking to stay ahead of the curve. So this investment will surely help them do
that, Julia. I will be speaking with Richard Branson in just a couple of minutes to get some details on what this means for the company. What this
means for those over 600 space tourists that are hoping to go and fly on Virgin Galactic spaceship soon.
So lots of unanswered questions here, and hopefully we'll have some answers soon -- Julia.
CHATTERLEY: Yes, absolutely. I mean, 600 people have given up $18 million, potentially for that seat, the ticket to get to space. I wish I
could join them, quite frankly, Rachel.
But to your point about some of the fierce competition here. This is an interesting way to finance it. What's the likelihood that we see the likes
of Jeff Bezos's Blue Origin, of SpaceX even looking at something like this specifically as SpaceX breaking away to try and finance this separately?
CRANE: Well, Musk has famously said that he would never take SpaceX public because the market forces you know, the focus on profitability and
quarterly earnings that the company just wouldn't be able to weather that storm.
So it's very interesting to see Virgin Galactic, you know, putting them up to this public scrutiny. But Musk has certainly said that he is not
looking to make SpaceX vulnerable like that and Bezos of course, up until this point, has self-financed Blue Origin.
So unclear if Musk, will go back on his word or if Bezos will look to the public to finance his company, but at least at this point, we know Virgin
Galactic is taking that major step -- Julia.
CHATTERLEY: Yes, I think as far as Elon Musk is concerned, he's once bitten, twice shy. I can't get my word out. Rachel Crane, thank you so
much for that and we really look forward to an interview with Richard Branson. How quickly do they think they can be profitable?
All right, let's move on to our next driver. Shares in BASF German, the chemical maker, of course down some five percent in trading today. The
firm warning that profits could drop some 30 percent this year. They cited a combustible mix of both trade tensions and slow growth.
Anna Stewart joins us on this story, a 30 percent drop in earnings in 2019 compared to 2018, even with the order weakness, the trade tensions,
agricultural concerns, Anna. I can't help thinking that perhaps they're being a little bit too aggressive here, but the kitchen sinking perhaps
going on. What do you make of what they said?
ANNA STEWART, CNN REPORTER: Yes, or were they just too optimistic at the beginning of the year? Now, this has taken analysts by surprise. I have
to say there's been a flurry of downgrades. Citibank, Deutsche Bank, JPMorgan, Jefferies, and take a look at the spillover effect that we've
seen on all the rival share prices.
You've got their Bayer, Covestro, Lanxess -- all knocks off their highs. Xetra DAX also dragged down today. And really this is one of those
bellwether businesses that spans so many different industries. And so it's really sounding the alarm here.
[09:10:04] STEWART: Now, on the list, as you said industrial demand is weak, particularly in Germany. That comes as no surprise, particularly if
we consider those factory output numbers we got at the end of last week.
Auto sector gets a special mention. BASF saying here that the car production globally fell around six percent in the first half of the year,
12 percent in China. Stocks with bad weather, that's the agriculture in North America and the ongoing trade war. That is the main topic in this
report.
CHATTERLEY: Yes, and that's exactly where I want to go, Anna, because they did say, look, despite their hopes and their early predictions that we
would see some kind of trade deal this year, they're now saying actually, after the G20, they're not sure it's going to happen this year.
I mean, that's a bold call from a company, particularly in light of broader optimism, I think from investors that continues here.
STEWART: And really worrying given that this is just the beginning of this Q2 earning seasons here in Europe. It has a huge international footprint,
BASF. So frankly, it is very, very exposed to trade tensions.
Now, it says here that the economic and industry output has slowed mainly, and I quote, "due to the trade conflicts." They had hoped that this would
have improved by now. It really talks about the G20, so that energy in G20, it thought that might have had some sort of quick resolution, but it
was quite clear that what came out of that Summit just means that there won't be any sort of resolution in the second half of this year.
So Julia, welcome to the European earning season Q2. I think this might be a theme.
CHATTERLEY: Yes, watch this space. And we'll see it in the United States, I'm sure, too. Anna Stewart, great job. Thank you so much for that. All
right, let's move on now and I'll bring you up to speed with some of the other stories that are making headlines around the world.
Donald Trump has renewed his attack on the British Ambassador taking to Twitter this morning to label him wacky, pompous, and a very stupid guy.
It follows leaked cables in which Kim Darroch called the Trump administration inept and clumsy. The President also ranted on Prime
Minister Theresa May after Downing Street expressed support for the Ambassador, saying she has made a quick disaster of the Brexit crisis after
going her own foolish way.
House Speaker Nancy Pelosi along with other U.S. lawmakers calling on the Labor Secretary, Alexander Acosta to step down. Acosta cutting minimum
sentence plea deal for billionaire Jeffrey Epstein back in 2007, when he faced life in prison for sex trafficking. Epstein was again charged with
sex trafficking on Monday. He has pleaded not guilty.
Hong Kong protesters are rejecting the Chief Executive's announcement that the controversial extradition bill is quote "dead." They accuse Carrie Lam
of wordplay and say they will continue protesting until she formally withdraws the legislation. Ivan Watson is in Hong Kong for us.
Ivan, fascinating to see the developments overnight. The extradition bill is dead according to the Chief Exec, but clearly, as far as these protest
is concerned, trust is completely broken until that's formalized.
IVAN WATSON, CNN SENIOR INTERNATIONAL CORRESPONDENT: That's right. The political crisis here continues to simmer, Julia. Carrie Lam, the
appointed Chief Executive of the city, she came out and said she was taking steps to try to heal what she described as the rift in society.
And she did mention that this Extradition Law which seems to have started a cycle of a month of protest that it is dead. Take a listen.
(BEGIN VIDEO CLIP)
CARRIE LAM, CHIEF EXECUTIVE, HONG KONG: Because of all of these grievances and confrontations, there is an exercise to amend the future to fulfill
this ordinance. I have almost immediately put a stop to the amendment exercise. But there are still lingering doubts about the government's
sincerity or worries whether the government will restart the process in the Legislative Council.
So I reiterate here, there is no such plan. The bill is dead.
(END VIDEO CLIP)
WATSON: Well, if Carrie Lam was hoping that that would mollify or pacify the opposition movement here, immediately, voices came up in protest,
accusing her of playing semantics, calling the bill dead, but not withdrawing it completely from the legislative process.
You had a number of university student unions rejecting the possibility of a face-to-face meeting with her. They're saying that they want it done in
open so that the meeting would be on equal footing.
I just spoke with one of the prominent opposition activists here, Joshua Wong who said he, too, would not sit down face-to-face with her arguing
that members of that Umbrella Occupy Movement of five years ago that occupied the streets for nearly three months, that five of them met with
her and then, a majority of them then faced a variety of different criminal charges. So what's the point of doing that?
[09:15:01] WATSON: You have some opposition leaders vowing to hold more protests as early as this weekend. So until that day comes, Hong Kong is
still facing uncertainty.
A leadership that seems to be extending the olive branch, but not giving in completely to the demands of the protesters. Protesters vowing to come out
into the streets again and just Sunday, we saw a large protest movement, and then some clashes with police at the end of that.
So this city seems to still be mired in the same kind of crisis. One of the worst that I've seen in the city and that probably people have seen in
a generation. Back to you, Julia.
CHATTERLEY: Yes, it's quite fascinating, Ivan. It feels like the whole handling of this situation has been pretty tone deaf from the Executive in
Hong Kong here. And how Carrie Lam continue here I think is a sort of interesting question. What next? What do we think happens here? Are we
in a sort of standoff situation until that bill formally gets withdrawn? The sort of protests and the pushback seems like it's going to continue.
What was the catalyst for her to come out today and go, "Okay, it's dead."
WATSON: Yes, I mean, that may have been a step in the right direction for the opposition. But you have to remember that this protest movement is not
monolithic. It doesn't have leaders.
Many of the leaders from the Occupy Movement of five years ago, were subsequently charged and convicted, that one individual Joshua Wong just
served a hundred days in prison.
So the opposition movement has made it a point to try to stay amorphous, so that no one person can kind of feel the wrath of the law here in Hong Kong.
And as a result, you kind of get disparate demands coming from different people, some saying, "Hey, we need to have an independent commission to
investigate allegations of police brutality," others saying any of the protesters who were detained must be released, other people saying that the
extradition law has to be withdrawn, others saying "Hey, Carrie Lam needs to step down."
CHATTERLEY: Right.
WATSON: Meanwhile, the authorities here, they try to take a soft approach to the protesters, dividing them into different groups, those who protest
peacefully and those who do use violence. It's a big glob right now. And that's what you get when your leaders aren't elected directly. And they're
not allowed to use the authoritarian tactics to break up the protests, which are the only real response that the people on the street really have
to this nonelected leadership -- Julia.
CHATTERLEY: Yes. Ivan Watson, thank you for that. Call me a cynic. But I just wonder whether the decision here to kill this bill was because the
protesters were targeting mainland Chinese tourists, but no doubt we'll talk about this again.
All right. Thank you for that. Still ahead though here on FIRST MOVE. IBM's heads get a Red Hat. We will speak to the tech giant's CEO about
sealing a $34 billion deal today and some sparkling results, Pepsi shares bubble up as his investors drink in the latest earnings numbers. All of
that to come. Stay with FIRST MOVE.
(COMMERCIAL BREAK)
[09:21:22] CHATTERLEY: Welcome back to FIRST MOVE live from the floor of the New York Stock Exchange where once again, it looks like we're heading
for a softer open in the U.S. markets this morning.
Let's get some more context on what we're seeing here. We're joined now by Liz Young, Director of Market Strategy at BNY Mellon. Liz, great to have
you with us.
LIZ YOUNG, DIRECTOR OF MARKET STRATEGY, BNY MELLON: Great to be here.
CHATTERLEY: As always. What's going on in markets right now? We're around one percent off the highs. But I do get this feel that any good
news that we get right now, it's sort of bad news for markets if it means that it kind of questions Jay Powell's moves on rates?
YOUNG: That's right. So the market right now is watching policy more than anything else. And as much as we want to talk about trade and we want to
blame that for any moves, whether up or down. It's really about policy, we came into the year where bad news was good news, because it meant that the
Fed might cut rates, and then the market started to price in two rate cuts for the rest of the year.
We think in our base case scenario that the Fed actually just stays on hold for the remainder of 2019.
CHATTERLEY: Wow. I mean, we're in a situation now on July 31st, where the market is predicting and expecting a quarter of a point cut. How between
now when the 31st of July is Jay Powell going to go, "Guys, you kind of got it wrong here."
YOUNG: Well, you have to remember though, he never promised a cut.
CHATTERLEY: No?
YOUNG; He said that they were going to be data dependent and that they were going to be patient. And if conditions called for it, then he would
ease policy. But we got a pretty good jobs number last Friday. And when we got the last jobs number that was weak, then the market really liked
that and thought, great, they're going to cut rates.
Now this time, when we got a decent jobs number, I don't know that the data is there that's going to really prove to him that he needs to make a move.
CHATTERLEY: You know, it's interesting. The Federal Reserve will always say, "Look, we set policy for the United States, we don't set policy for
the rest of the world."
YOUNG: Right.
CHATTERLEY: But when we look at what's going on in the rest of the world, Europe perhaps weakening, concerns about Chinese growth. If we look
outside of the United States data, perhaps you could make a stronger argument that the insurance rate cut that the market is pricing right now
is perhaps justified.
YOUNG: Well, one of my favorite lines to use is that when the U.S. sneezes, the world catches a cold.
CHATTERLEY: Right.
YOUNG: But in this scenario, the U.S. is still the best house on a bad block, right? It's the cleanest dirty shirt or whatever you want to call
it. So right now, we're still kind of helping the globe when we look at GDP growth, and we're still steady, not necessarily rip your face off rally
strong, but steady.
And all Powell needs to do is make sure that we continue that momentum and that speed. So there's not really a threat to our growth, he doesn't
really feel like he needs to stimulate.
We do expect places like Europe, Japan, and other parts of Asia to have to stay easy and easier than we are because they're a lot more exposed to
trade and they're going to be under pressure much more than the United States will be.
CHATTERLEY: I was making the point at the beginning of the show that this week, we get numerous commentary, numerous times of commentary from Jay
Powell, three times in fact this week.
Does he begin to just try and shift the thinking, the market thinking this week to say, "Hey guys, you're kind of jumping the gun here on rate cuts."
If you're right here --
YOUNG: So he has an opportunity -- every single time he talks, we hang on every word.
CHATTERLEY: Yes.
YOUNG: And he has an opportunity to really tell the market will be there if dire circumstances present themselves and that's the important part here
is that policy can put kind of a floor not only on market drops, but it can control volatility from here on out.
And as long as he proves that he is willing to do that, control volatility and put a floor on some of those really sharp drawdowns, if they said
occur, then I think the market will be okay with it.
The biggest risk right now is that, like you said, we're just a couple points off the biggest high. So the risks are certainly to the downside,
especially if the market is wishing for a cut and it doesn't get that.
[09:25:10] CHATTERLEY: You know, it's interesting. I asked Kristine Hooper of Invesco yesterday what the big risk was, and she said that a
trade deal doesn't happen.
YOUNG: Sure.
CHATTERLEY: But based on what we're seeing, we could argue that the big risk here is that if a trade deal does happen that the Fed has already cut
rates, and suddenly we're back in this.
YOUNG: Yes, and I don't disagree with her. I think it's going to happen in a different order.
CHATTERLEY: Yes.
YOUNG: We're going to get news that the Fed isn't going to cut rates as much as the market wants it to, before we find out whether or not we're
going to get a trade deal.
CHATTERLEY: Right.
YOUNG: We do expect there to be some sort of deal between U.S. and China, but not until closer to the end of the year. And until then, there's going
to be just this kind of broader message of protectionism around the globe and keeping everything at home. That's what royal markets can cause some
volatility in the meantime.
CHATTERLEY: So what should investors be doing right now?
YOUNG: Investors, you should stay invested and there is a case to be made for easy Central Bank policy around the globe still continuing to allow
stock prices to slowly edge higher.
That doesn't mean we're not going to have corrections in between and you definitely should have a diversified portfolio to try to protect yourself
from some of those sharp drops. But this isn't a time when you're going to run for the hills.
CHATTERLEY: No because as you said, there is a lot of supportive noises coming from Central Banks all around the world.
YOUNG: Right.
CHATTERLEY: Yes, additive. Liz Young, great to have you with us. Liz Young there of BNY Mellon. All right, we are counting down to the market
open. We are looking at a softer open.
It is Tuesday session, of course, three sessions of weakness and that would add up to, but as we've pointed out, and had a discussion here, Jay Powell
and what Jay Powell says about the outlook for the economy. The U.S. economy here is going to be front and center and continue to be safe
particularly as Liz Young is right, and they don't intend to cut rates in July. More to come.
(COMMERCIAL BREAK)
[09:30:00] CHATTERLEY: Welcome back to FIRST MOVE. I'm Julia Chatterley live from the New York Stock Exchange and that was the opening bell for
Tuesday's session.
As expected, we are losing a bit of ground here as we get shaped up for this session ahead. Investors of course are going to be cautious until we
hear from Jay Powell this week particularly in light of the conversation we were just having there with Liz Young, and that's one analyst basically
saying that Jay Powell isn't going to cut rates in July.
That would throw the cat among the pigeons, I can tell you for investors. Right now, we're also of course heading into second quarter earnings
season. Fact Set saying that overall corporate earnings could be down 2.6 percent year-over-year after falling some 0.3 percent in the first quarter.
It's actually been three years since profits last felt for two quarters in succession, so it's going to be an interesting one.
All right, let me walk you through our global movers in the session. Apple in focus. Rosenblatt Securities analysts has downgraded the stock for
neutral to sell, predicting new iPhone sales will be disappointed. Also, notable that he didn't mention China sales concerns. The stock of course
is still up some 25 percent this year. It's one of the best Dow performers so far in 2019 despite more broadly those concerns about China as I
mentioned.
All right to IBM and Red Hat, also a focus of the day. IBM formally closing its $34 billion deal for the software company, Red Hat. It is the
biggest acquisition as we've discussed on the show in IBM's hundred-year history.
They agreed to pay $190.00 a share for Red Hat, a 63 percent premium. The Red Hat CEO and the management team will remain in place.
Marriott International also in focus. The hotel chain says it is being fined $124 million by the U.K. regulators over the Starwood reservation
database breach last year. It affected some 330 million customers breaking those tough GDPR privacy rules set up in Europe. Marriott says it will
contest the fine.
Interesting to see these European data privacy rules well and truly kicking in.
All right, let's talk Pepsi. Pepsi shares are higher on better than expected Q2 results. The healthier snacks and sparkling water helping fuel
the sales growth in the quarter. Pepsi shares having a banner year up some 20 percent.
We're now joined by the CFO, Hugh Johnson. Hugh fantastic to have you with us. Congratulations on a solid Q2 performance here.
I look at the North American snack business, and once again, you continue to drive strong performance there overall for the performance. Talk us
through the quarter.
HUGH JOHNSON, CEO, PEPSI CO.: Sure, happy to. Good morning, Julia. Nice to be with you. We felt like it was a good strong quarter for us. What
we're probably most pleased about is we've got broad base growth across the portfolio from Frito-Lay to North America beverages, terrific performance.
We've got Quaker back and growth in a nice way.
And internationally, all three of our international sectors are showing good growth. Developing and emerging markets growth is about eight
percent. So in terms of the near-in performance, we feel very good about it because it's reflective of the investments we've made back in the
business and advertising and marketing and in selling capability.
The basic fundamentals that we know drive the business. Perhaps most encouragingly is, we're starting to see the benefits of some of the longer
term investments that we're making in manufacturing capacity and in digitalizing the company.
As we make those investments, we think this isn't just a short term blip of improved performance, we think we've made a pivot to a higher growth rate
for the company for an extended period of time. And we feel terrific about that.
So I think things are going very, very well right now. And we're very optimistic about the future.
CHATTERLEY: Is that about the beverage business as well? Is that investment that you're making having an impact there too? Because this is
ultimately challenged with consumers changing taste, the exposure with fizzy drinks, is that the investment having an impact in that part of the
business, too and as you say, sort of pushing towards higher growth?
I know data is also a huge part of what you're doing there and just trying to tap into ultimately what consumers want here.
JOHNSON: Yes, we think actually, the investments we're making in the beverage business are creating the right foundation for that business to
perform well over the long term.
We really had a couple problems to focus on. Number one was the Pepsi business. We needed to increase the advertising levels. We needed to
launch some new innovation, and we needed to get the execution in the marketplace better on that business.
We're now seeing the impact of all of that. That spending as well as that management leadership impact. And as a result, the Pepsi business is up
three percent in the first half of the year.
[09:35:08] JOHNSON: So we feel like that business has turned around very nicely.
The second big challenge was Gatorade. We had a couple of gaps in the portfolio where we were being challenged competitively. Number one, was in
zero calorie sports drinks. We got serious about making Gatorade Zero a big business for us at the beginning of this year. It's now twice the size
of the competitive product in the marketplace. So we feel like we've got that half of Gatorade addressed.
The other is there's an off the field consumption product that's hydration oriented. And we're launching actually, this week, Bolt 24, which is a
watermelon juice based product. We think it serves the needs of athletes off the field to play better than any product in the marketplace. And we
have huge optimism in terms of that addressing the other competitive balance that we had.
Last but not least is Mountain Dew. We've launched a terrific innovation, so we feel like we have that piece of Mountain Dew in a good spot. The
back half of the year, we will see significantly more advertising on Mountain Dew and we've also put a new regional selling structure in place.
And because Mountain Dew is a much more regional business than the balance of our businesses, we think we'll start to see the impact of that regional
structure in the back half of the year, specifically on Mountain Dew. So I kind of feel like we've got the building blocks in place for all three of
those big brands to do well.
And if we have those, right, the business is going to perform very, very well.
CHATTERLEY: You sound incredibly optimistic, and I look at some of the organic revenue growth that you're pulling out the international business;
10 percent in Latin America, five percent in in Europe, in Sub Saharan Africa; five percent, Asia, the Middle East and North Africa.
And then I look at your forecast for this year. And you've maintained your forecasts and I just wonder whether you're being a little bit conservative
here.
JOHNSON: Well, I don't know that I would say we're conservative. I would say that we're realistic in terms of dealing with whatever potential issues
may face us. I think we're confident in the way that we're running the business and we'll see how the year lands.
Right now, we've reiterated our guidance. We'll see how we land in the back half of the year.
CHATTERLEY: I want to talk to you about China. I know you continually get questions about the impact of the trade war and the tensions. But, you
know, for PepsiCo, you guys have been in China for 37 years now. You're you sort of your engine of growth, as your CEO has called it before.
In China, for China, with China is the sort of mnemonic that you use here. What are you seeing in this business? And as a U.S. brand operating in the
country? Are you facing sort of any challenges amid the sort of broader tensions over a trade negotiation here? What are you seeing?
JOHNSON: No -- yes, we really haven't seen much, Julia, in terms of impact or sort of negativity towards us because we're an American company doing
business in China.
One of the great things about PepsiCo's brands is, they tend to get adopted by local people very quickly and they tend to think of them as their own
brands, not an American brand.
So our foods business with Lays and Quaker continues to do extremely well, growing double digits. It has for a number of quarters at this point.
Frankly, we expect that business to accelerate going forward. We think there's just a world of opportunity in China.
The beverage business is always a challenging business. We've had ups and downs. We have a terrific bottling partner in Tingyi in China and we are
optimistic about the long term. We just need to continue to build out the business there.
But in general, we see China as nothing but a big opportunity.
CHATTERLEY: And then finally, I want to ask you about returning cash to shareholders here. You've said in the past, look, over a billion dollars'
worth of CapEx from the company this year versus $8 billion in dividends and share buybacks. It's a sort of political football at the moment for
companies in the United States and that will probably be so as we head towards the 2020 elections.
How do you decide the sort of one billion versus eight billion dollar ratio and getting that right both for the company, but also to keep shareholders
happy, too?
JOHNSON: Yes, so our overall cash return to shareholders this year will be about $8 billion dollars, about $5 billion in dividends and about $3
billion in share repurchase. And that ratio is something that's been reasonably consistent for us for a good period of time.
A few years share repurchase has been higher, but I think that ratio has been pretty consistent. I think we had that about right dividends or
something that many of our investors like, they rely on it. It gives them good solid yield that they feel positively about. We're about a three
percent dividend yield company and they certainly appreciate that.
And then beyond that, when we do share repurchases, we really allow the shareholders to choose. Do I want to take the cash return or would I
rather have my percentage ownership of the company increased by virtue of someone else choosing to cash out?
So I think we've got the balance in a reasonable spot on that front. And I think it's, it's appropriate from a public policy perspective, as well as
from a shareholder return perspective.
[09:40:19] CHATTERLEY: Makes perfect sense. Hugh Johnson. Sir, thank you very much for joining us on the show today and congratulations again on
solid quarter.
JOHNSON: Thank you.
CHATTERLEY: All right, we're going to take a quick break here on the FIRST MOVE, but up next is IBM and Red Hat seal their mega deal. We will be
joined by the CEOs of both firms. Stay with us.
(COMMERCIAL BREAK)
CHATTERLEY: Welcome back to FIRST MOVE, should Facebook be allowed to shift personal data between Europe and the United States? That's the
question at the heart of a landmark court case getting underway in the E.U.'s top court.
The verdict could affect hundreds of thousands of tech companies. Hadas Gold joins me now. Data sharing, Hadas. The risk, of course, if that data
shifts between Europe and the United States, it's hackable in the United States. It's also subject to surveillance in the United States, and that's
the problem.
HADAS GOLD, CNN BUSINESS REPORTER: Julia, that's exactly the problem. This is a case brought by Max Schrems. If you recognize the name, it's
because he is an Austrian privacy activist and lawyer who has long been a thorn in the side of these Big Tech companies.
And this case today in Luxembourg in the European Court of Justice is actually a continuation of a long saga Schrems has had specifically against
Facebook, but really against all of these data transfers between the European Union and the United States.
The argument being that E.U. citizens have a right to certain privacy on their data and that when that data is transferred to the United States,
it's subject to U.S. surveillance.
Now Schrems is trying to argue in case that the replacement for a new agreement that was in place because of his last court case, which was sort
of a surprise win for him is actually not enough and he is trying to argue that it's still subject to the U.S. surveillance, and also that the Irish
Data Commissioner who is in charge of regulating Facebook because that's where Facebook's European headquarters is, is not doing enough.
And so today, there's -- the case is ongoing in Luxembourg. Facebook is arguing that if any of these agreements are struck down, if the court said
that the current agreements that they have for data sharing are not good enough to protect Europeans data privacy, that could affect transatlantic
trade, because as you noted, tens of thousands, if not hundreds of thousands of companies rely on these data transfers. And this could have
huge implications for the business community -- Julia.
[09:45:34] CHATTERLEY: Yes, it's quite fascinating, isn't it? If companies have to hold these as entirely separate pools, it could actually
mean more business actually being operated out of Europe and in the United States and vice versa? How long is it going to take to reach a verdict on
this, do we think?
GOLD: We're not going to see a verdict today, that's for sure. It's going to take a few months, likely in the early months of 2020. It's going to
take some time. This can is literally going on right now in Luxembourg, Facebook has gone up as well. Schrems has gone up. So have various sort
of activist groups on both sides.
Well-known names like the American Civil Liberties Union of the United States are also involved providing expert testimony because privacy
activists in the United States believe that if the court strikes down these agreements, it could even lead to reform in the United States.
CHATTERLEY: Yes. And that's the big key here. Hadas Gold, thank you so much for that. All right, you're watching FIRST MOVE, we'll be right back.
(COMMERCIAL BREAK)
CHATTERLEY: Welcome back to FIRST MOVE, I want to return to our top story now. IBM has completed its $34 billion acquisition of software firm, Red
Hat. And I'm pleased to say we're joined now by the CEOs of both firms, Ginni Rometty of IBM and Jim Whitehurst of Red Hat who join us now.
Congratulations to you both, and thank you so much for joining us. Ginni, you reiterated and you promised it was going to happen in the second half
of this year, I make that nine days in. You must be elated. You didn't hang around.
GINNI ROMETTY, CEO, IBM: Yes, I am very elated. We've both worked very hard and the teams have worked very hard to move this through. And I think
it's just a testimony that it is the perfect match and that this is a great thing for our clients.
So as you know, Julia, this is a big day for us, and this is the moment we reset the Cloud landscape. And it's all about being the number one hybrid
Cloud provider in the world now.
CHATTERLEY: Jim, we've also got some very pleased employees, I'm sure today feeling significantly richer. Talk me through the feeling on this
day for you guys, too.
JIM WHITEHURST, CEO, RED HAT: Well, you know, we're a mission driven company. Yes, we're trying to drive open source to be the default choice
for, you know, how Clouds are built.
And as part of IBM, we think we can accelerate that journey, and I think for all of us on that mission, this is a great day because it allows is to
do more and do it all faster.
I think that's really the driving force that gets Red Hatter's excited.
[09:50:07] CHATTERLEY: Yes, you're right. It's about the innovation in the future, less than the paycheck, I have to make that point specifically.
Ginni, talk to me about this, because you've said, look, this is about the future of the hybrid Cloud, about talking to clients and saying, "Look, we
have options. This is open source technology, you can work with us. You can work with competitors. But we just want to show you the best options
here for combining your own Cloud, but also the public Cloud, too." What happens now.
ROMETTY: Yes, because this is -- I always say the number one reason this was an easy decision is that it is what clients need right now. And 80
percent of their workloads still need to move to the Cloud.
But this won't be a winner takes all and everything moves to one or two public Clouds. Because all our clients that we deal with, they've got an
existing IT estate, just like if you had a current home, and they're going to modernize all those back ends, but they're going to do it piece by
piece.
And for every application, you'll decide for regulatory reasons, data reasons, cost reasons, you're going to say, "I'll take a piece of it and
put it on a Cloud. A piece on a private, a piece I'm not going to touch," just like you'd remodel a house and decide to do room by room.
And then by the way, we know they already have five to 15 Clouds already spread all over. And now I have security and management concerns.
So together, what we're giving them is freedom of choice, but the ability to write something once and run it anywhere they need to. And that with
skills as being the number one issue, every client will cite is a very big deal and it's all on open source.
So this is a hybrid multi-Cloud play. And it's what they need to modernize in the future. And it allows them then one ability to manage no matter
what Cloud -- public, private, who so ever, the IBM Cloud, others -- in a way to manage that consistently and securely.
So it is the destination that we see and it is the foundation for the architecture of the next generation.
CHATTERLEY: You've both reiterated since this deal was announced the open source aspect, the fact that you know you will continue to work and your
technology, Jim will be available for other big Cloud players out there, too. What conversations have you been having with clients about that
aspect? But also, what differentiates IBM here and their offering?
WHITEHURST: Well look, so open source is a powerful way that innovation happens. And it's open and it's free, and anyone can participate. And
that's a really powerful thing.
For an enterprise most really, honestly don't care about technology. They care about delivering functionality for their customers. And so it's how
do you take this open source innovation, make it safe, secure, and reliable? How can you take that innovation and plug it back into your
existing systems where all your data is, where your customer data is?
And so, you know, when you're trying to build new functionality on your website or on a mobile application, most of that technology is going to be
open source on that end. But how do you make sure it's safe and reliable? But how do you plan it all the way back to the back end systems where the
customer data is. And that's something I think we can uniquely bring.
We bring a platform that new applications are built on. IBM brings a breath of, you know, industry expertise, business process knowledge,
application development expertise. And together we can offer really a unique value proposition to accelerate our clients businesses.
CHATTERLEY: Ginni, I want to bring it back to the numbers here. You said to us in the past, look, this is going to be accretive. It's going to be
positive from year one.
We've had a couple of analysts out there saying look, just because of the accounting, you'll have to have significant revisions to earnings this year
and next year. Can you give us any clarity on that? You've said the long gain here is obviously it's going to be a revenue lift, and it's going to
be additive immediately. But what about some of those revisions? Can you give us any details?
ROMETTY: Yes, sure, sure. So first round revenue, as you just mentioned, 200 basis points CAGR over five years as an increase to IBM.
And then Jim has built a great company, and unlike a lot of Cloud companies, this is a very profitable company. So both gross margin and
free cash flow are accretive in year one. EPS is accretive at the end of year two.
And then what you're just referring to now is because it is such a profitable company, you have something called purchase accounting. And so
what we'll be doing is, you know, we have our earnings next week, just in a couple days, we will do our 2Q earnings, IBM's normal 2Q earnings, and then
just shortly after that, a couple days, August 2nd, we'll be doing an Investor Briefing to update them on the implications for 2019 and then the
midterm for IBM given some of those things.
CHATTERLEY: It makes perfect sense. So we'll wait and watch for that. Jim, talk to me about the fact that you've both said you're going to remain
independent. The culture is not going to change. You're going to continue to be Red Hat and who you are. This is just going to be combining two
really powerful forces here for the hybrid Cloud future. If that's still the mandate here and will be continued?
[09:55:10] WHITEHURST: Oh, absolutely. You know, we've been planning for the last eight months and everyone we've worked with it at IBM, I think
understands that.
You know, we talk a lot that our source of advantage is a capabilities advantage around how we work in open source communities and how we can
harden open source to deliver for customers. And that capability is so tied up in our culture.
And what we talked about is this is two cultures working together to deliver unique value for our clients that we couldn't do apart. It's not
two cultures coming together to become one.
And, look, we've celebrated in open source communities for a long time. Diversity adds value. Diversity of background, diversity of belief,
diversity in ways of working. And I really do think that the fact that there are differences between the two actually make us more powerful and
more capable working together in that way.
ROMETTY: I think another quick way to think about that --
CHATTERLEY: The future is bright in the future's hybrid. Yes.
ROMETTY: That's right. The future is hybrid and to be multi Cloud, Jim does need to be a distinct unit.
CHATTERLEY: We look forward to seeing you guys progress. Thank you so much for joining us on the show. Ginni Rometty, the IBM CEO there and of
course, the Red Hat CEO, Jim Whitehurst. Guys, thank you so much.
All right. And that just about wraps it up for the show. I'm Julia Chatterley. You can listen to our podcast as well on cnn.com/podcast.
You've been watching FIRST MOVE, time to go make yours.
(COMMERCIAL BREAK)
[10:00:00]
END
