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WHEN: Today, Thursday, February 14, 2018
WHERE: CNBC's "Squawk on the Street "
The following is the unofficial transcript of a FIRST ON CNBC interview with Coca-Cola CEO and Incoming Chairman James Quincey and CNBC's Sara Eisen on CNBC's "Squawk on the Street" (M-F 9AM – 11AM) today Thursday, February 14th. The following is a link to video from the interview on CNBC.com: https://www.cnbc.com/video/2019/02/14/here-are-the-headwinds-coca-cola-ceo-james-quincey-sees-for-the-company.html.
All references must be sourced to CNBC.
SARA EISEN: Let's go to the CEO of one of America's most global companies, getting his take on all of this. Coca-Cola out with earnings this morning. The stock having its worst day in a decade. Organic sales growth sparking a beat on the top line, but the guidance may be worrying some investors as Coke faces currency headwinds. Joining us now first on CNBC, Coca-Cola CEO and Incoming Chairman, James Quincey from the company's headquarters in Atlanta. Good morning, James.
JAMES QUINCEY: Good morning, Sara.
SARA EISEN: I was going to start on the quarter but I think we have to start on the stock move. It's down almost 7%, worst day for Coke in a decade. Are you surprised to see the reaction to the outlook?
JAMES QUINCEY: I think the reaction started to embed in some with the headwinds that we are facing in 2019. I mean in the end, we had a great result in 2018. We had a strong operational performance, we had a strong plan for 2019, good top line growth, good margin expansion; yet we face headwinds on the four "x" and on interest and tax there. We're trying to be prudent in our outlook, given the volatility and uncertainty for the year. But what we're focused on is continuing to drive our strategy which is producing results, and we'll have to manage all the levers going through the years so we can turn that into the best possible results for the shareholders.
SARA EISEN: So I just want to be clear on this, because there's some discussion in the analyst notes. The weaker outlook, and I think weaker organic revenue than some were expecting as well, is it all tied to macro-economic weakness and strong dollar?
JAMES QUINCEY: Yeah. Well, the organic revenue growth is not particularly related to the dollar. That's the translation of the earnings. But the headline number is slightly softer than 2018, with 4% organic revenue growth. That, we think, will still be at the high end of consumer products, organic revenue guidance for 2019. And it does represent perhaps a more prudent view on the macro economic growth available in 2019, which is going to be a little softer than '18. So it's still a strong number, although a little less than '18, but we'll be focused on executing our plan and really driving to the best number that we can go for.
SARA EISEN: So where in the world are you seeing weakness, when it comes to the outlook this year?
JAMES QUINCEY: As we look into 2019, clearly we see -- we see softness in some of the countries that stumbled a little towards the end of 2018. Argentina went down strongly at the back end of last year. Turkey is now adjusting to some of their macro-economic troubles. Some of the other countries in the Middle East. And, of course, Europe has softened a little bit coming into 2019. So I think it's not one country in particular. There's I think a few parts of the world that are softening, they are clearly are represented in the IMF economic outlooks. But, again, you know, the -- the good years and the bad years will come. What we're focused on is really executing against that plan. We've got good brands, good marketing, good innovation and our bottling system is executing.
SARA EISEN: We got a very ugly retail sales report for the month of December, and we're trying to figure out if it was seasonal, if there were one-term factors like the stock market decline and the shutdown, or if this really suggests that the U.S. consumer weakening in a meaningful way. What are you seeing?
JAMES QUINCEY: Well, we saw in the fourth quarter a slightly softer demand outlook in the U.S. I think part of that was our industry, the beverage industry, as the price increases from the summer fed their way fully to the consumer. But it was a little softer in the fourth quarter. But I think what we're encouraged by going into 2019 is we see a little bit of it coming back, in terms of the growth, both slightly growing in the U.S. and then growing globally, such that we see volume and price mix at the start of 2019. It may be that the backend of the fourth quarter was a little softer than the first quarter will end up being, but we want to be prudent in our guidance for the outlook and focus on what we can execute against and really manage our way through 2019, which I think in the end will be more volatile and uncertain than 2018.
SARA EISEN: Do you think the U.S. corporate and individual tax cuts are still helping consumer spending and the overall economy here?
JAMES QUINCEY: I think there is consumer spending still. I mean, clearly there's some adjustments going on. Sentiment tends to be a little more volatile than perhaps it's been in the past. But we see resilience in the consumer outlook, and we see resilience with our customers in terms of their plans to drive growth in the business.
SARA EISEN: As far as the portfolio, I mean, you continue to see this double-digit growth in Coke Zero Sugar. What else is working right now? And what's not working?
JAMES QUINCEY: Well, the things that are working, I mean the sparkling business worldwide grew, grew in revenue, grew in volume, helped a lot by coke Zero Sugar - it had its best year ever last year, the stabilization of Diet Coke in the U.S., and some really strong growth in sparkling. Some strong growth in the premium segments around the world, whether that be the premium juices, premium waters, taking control of ready-to-drink tea finally around the world. The places where we've seen some softness are places where we've chosen to put less emphasis on some of the very low-priced water and juice drinks around the world. So we're happy with the focus of our portfolio. It's expanding, we've got innovation, and we're driving growth.
SARA EISEN: Question on China: you've told me before a few times, James, that you're not really feeling an effect of the U.S.-China trade fight when comes to consumer spending in China. Is that still the case?
JAMES QUINCEY: Yeah. I mean, we're such a local business because all the drinks we sell, generally speaking 95% of them are made in the country that we sell them in, so the -- the China-U.S. negotiations on trade don't directly flow through to us. It's more the general sentiment. I think we saw China a bit like the U.S., a little softer in the fourth quarter, but at beginning of this year, the Chinese New Year has been very strong for us so far. It's only the early days in the year, but we see demand there at the beginning of the year, in '19 in China and in the U.S.
SARA EISEN: Just curious, I mean, the news is that President Trump is inching very close to making a deal with China. As a CEO who operates there and so globally, would you be in favor of just seeing a deal and an end to the fight, or would you be in favor of holding out for a better deal that tackles some of the structural issues like intellectual property theft?
JAMES QUINCEY: Look, I mean, of all the trade deals around the world, there are none that are perfect. All can be improved. And so our take on the world is: look, we think trade deals help global growth, we think they help growth in each the countries that participate in a trade deal and they can all be improved. So if there's an ability to improve the trade relationship between the U.S. and China, I think that will be a positive thing.
SARA EISEN: Wanted to talk to you back to products about the flavors, vanilla orange is a new one you guys are touting, first change to brand Coke in years, there is diet rolling out, some new flavor in years. What's driving this trend? Who's driving this trend? And what are you seeing?
JAMES QUINCEY: I think around the world you're seeing consumers more interested in personalization, more interested in trying new flavors of brands they love, and so you see that in the U.S. with new flavors on Coke, new flavors on Diet Coke. Clearly it's been part of helping stabilize the Diet Coke business, along with packaging and some great marketing. So I think you'll see more from us in terms innovation, not just around new brands and new products but also on new flavors and, of course, the other part of the equation which perhaps is not so sexy, pulling out those ones that aren't working so well and really helping the innovation machine be engaging for consumers. It tends to be more millennials and young adults, but everyone is interested in them.
MIKE SANTOLI: James, it's Mike Santoli. I wonder if you could weigh in a bit on your thoughts on capital allocations, sharing cash with shareholders, as you know there's been a lot of critical attention on corporate stock buybacks lately. Now you're in a pretty unique position, a mature company and lots of cash flow but you really utilize most of it in sharing investors in terms of dividends. You do buy back some stock, but only a third as much as you distributed in dividends. How do you think about the issues, the use of cash and whether in fact it balances out with investment in the business?
JAMES QUINCEY: Yeah, sure. Look, our starting point is doing the right things to invest in the business for the long-term growth, and we've been clear that we would prioritize our dividend and the growth of the dividend over share buybacks. We've moved to a position where we're just buying enough shares to avoid dilution by our employee stock programs. And that's a position we've taken, but as I say, our number one focus is using the cash to drive our business organically, returning dividends to the shareholders and then occasionally making some M&A plays with a less of an emphasis on share buybacks. And that's working for us, and that's the approach we're going to take for the coming years.
DAVID FABER: Mr. Quincey, David Faber. If I could just come back to the broader issue here: you know, I've listened to you on our interview here and read the conference call. Using the words cautious to describe the macro-economic outlook, volatility, uncertainty. Is this reflective of what you saw in terms of a deterioration in the global economy, or is this more specific to Coca-Cola and the competition it's finding in each of these markets and in North America?
JAMES QUINCEY: No. It's very much related to the macro-environment. I mean, we're finding that there's growth in the beverage industry. We're winning share around the world. Our plan of investing in the portfolio, expanding the portfolio, offering more choice, marketing our brands, the innovation and the great execution by our bottlers is helping us win in the marketplace and drive growth. The prudence is really centered around the macro-economics and some of the uncertainty that's been highlighted by a number of institutions out there, including the IMF in terms of the reduction in the outlook for growth next year.
SARA EISEN: James Quincey, thank you for joining us as always on the quarter and the outlook. James Quincey is the CEO and incoming Chairman of Coca-Cola.
JAMES QUINCEY: Thank you.
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