CCA confident of return to earnings growth

Posted by AFN Staff Writers on 18th February 2015
CCA confident of return to earnings growth
CCA confident of return to earnings growth

Australian food and beverage giant Coca-Cola Amatil (CCA) has announced a drop in trading revenue of 1.9 per cent to $4.9 billion, and a decrease in earnings before interest and tax (EBIT) of 21.8 per cent to $651.5 million for the year ended 31 December 2014.

CCA’s Group Managing Director Alison Watkins said the Company’s earnings had come under “significant pressure in recent years driven by structural changes in the marketplace”.

“2014 has been a year of transition with solid progress made in developing and implementing a range of initiatives to stabilise earnings and return the business to growth,” Ms Watkins said.

“We are confident that the combination of revenue and cost initiatives we have underway will restore the business to growth,” Ms Watkins said. “The pace of recovery will however depend on the success of revenue initiatives in Australia and Indonesian economic factors,” she said.

Australian beverage business

CCA said its Australian beverage business earnings declined 21.3 per cent with the business commencing restructuring activities targeted at strengthening its competitive position against the backdrop of difficult trading conditions.

The Company said structural challenges in the industry persisted with gains in the energy, sports and dairy categories insufficient to offset declines in carbonated beverages (CSDs). CCA’s strategic review identified a number of priorities for the business with second half activities to be focused around commencing the rebalancing of pricing across channels, increasing the level of marketing spend to support brand equity building activities as well as implementing cost savings initiatives. In addition, the business has identified over $100 million in cost savings to be delivered progressively over the next three years.

By the end of the year, CCA said its business had delivered some improved momentum with operational account numbers back in growth and the launch of 250mL cans tracking above expectations.

Farina Parsons, Analyst at advisory firm BW Equities said CCA had a strong position in the Asia-Pacific beverages market, with the powerful Coca-Cola brand providing CCA with “a relatively stable earnings stream, narrow economic moat, and medium uncertainty rating”. Ms Parsons said CCA’s 56 per cent share of the carbonated soft drink market and valuable distribution network provided it with a strong competitive advantage.

“While the Australian market is relatively mature, we see opportunities for Amatil to grow its share of the non-carbonated soft drinks categories,” Ms Parsons said.

Indonesian and PNG businesses

CCA reported that both its Indonesian and PNG businesses delivered strong volume growth and market share gains across key categories. Rapid cost inflation, currency depreciation and increased competition however impacted segment earnings. The Indonesia & PNG region delivered volume growth of 17.6 per cent and EBIT of $31.9 million, compared with $91.6 million last year.

In Indonesia, CCA said the focus had been to expand its market presence by improving product availability and affordability. As a result, the Company successfully gained market share across all key categories, including, most importantly, re-establishing its market leadership position in Carbonated Soft Drinks.

However, intense competition limited price increases with the increased mix of lower priced affordability packs also impacting earnings. CCA said cost inflation had been significant with legislated increases in wages and fuel costs. The decline in the Indonesian Rupiah alone increased input costs by around $35 million.

Australian Food News reported in November 2014 that CCA had announced a Heads of Agreement with the global Coca-Cola Company to accelerate CCA Indonesia’s (CCAI) growth strategy. Under the terms of the agreement, The Coca-Cola Company will invest US$500 million into CCAI, a subsidiary of CCA, in return for an ordinary equity ownership interest of 29.4 per cent.

Yesterday’s Extraordinary General Meeting voted overwhelmingly to support this move by CCA.

New Zealand and Fiji businesses

New Zealand & Fiji earnings increased by 6.7 per cent in Australian dollars with New Zealand earnings flat in local currency terms.

CCA said the overall grocery market remained sluggish in New Zealand despite strong consumer sentiment, with the non-alcoholic ready to drink beverage category declining by 0.6 per cent. CCA’s New Zealand business grew overall market share with gains across all categories except Carbonated Soft Drinks.

Alcohol, Food and Services businesses

CCA reported that its Alcohol, Food & Services earnings declined by 7.4 per cent with improvements in SPC earnings offset by declines in Alcoholic beverages and Services.

Alcoholic beverage earnings were impacted by declines in the dark spirits category. Jim Beam volume however recorded significant improvements in market share in the second half following the re-introduction of the six pack ready-to-drink offering. The business experienced a slower than expected return to beer and cider due to delays in ranging in some customers and increased competition in the cider category.

Fourth quarter momentum improved with the introduction of smaller packs and new products in the cider category and the successful launch of new beer brands.

SPC earnings improvement

CCA reported that its SPC business delivered a significant improvement in earnings to deliver a close to breakeven result, driven by improved ranging, successful new product launches and productivity improvements.

Priorities and outlook

In October 2014, CCA announced the results of a strategic review of the business which was conducted in response to deteriorating market conditions across the Group with the objective of restoring CCA to sustainable earnings growth.

“Concrete progress has been made in implementing strategies to strengthen the market leadership position of the Company in its two major markets, Australia and Indonesia, which we believe will enable us to return to growth and generate attractive and sustainable returns for our shareholders over the next few years,” Ms Watkins said.

The priorities for each business unit are as follows:

Australia – Stabilise earnings and return to growth

CCA said the Australian beverage business would strengthen its category leadership position by rebuilding brand equity in Coca-Cola and with innovation geared toward “better for you” products in both CSDs and stills.

Together with its partner The Coca-Cola Company (TCCC), CCA said it was materially up-weighting marketing investment and developing more targeted recruitment strategies.

CCA said its new product development pipeline was “strong and well developed” with Coke Life, a lower calorie and naturally sweetened Coca-Cola offering, to be launched in April 2015.

The Company said it had commenced restructuring the business with a number of change initiatives expected to be in place by mid-2015. The business will assess the introduction of new frequency and entry level packs aimed at increasing affordability and meeting the desire for smaller packages while providing greater differentiation of packages across the channels.

CCA said it was rolling out a “next generation digital technology platform” which would “significantly enhance the route-to-market model and deliver a step change in customer service”.

At the same time, CCA said it was restructuring the cost base to deliver ongoing productivity gains and continue to expect to achieve savings of over $100 million progressively over the next three years providing it with the ability to fund increased brand building and revenue management initiatives.

While the trading landscape continues to be challenging, CCA said it was pleased with the performance of recent product launches and up-weighted marketing initiatives which have delivered improvements in transactions, recruited new consumers and delivered share gains across a number of categories.

The Company said it was targeting to stabilise earnings in 2015. Cost initiatives will be implemented progressively throughout the year and accordingly, benefits will be weighted to the second half.

Indonesia – Expand market presence to “realise the market’s potential”

CCA said Indonesia was “an exciting growth market” for the Company. With consistent growth in demand from Indonesia’s emerging middle class CCA said it now had the opportunity to increase its appeal to a broader range of consumers to ensure it continued to be a leading player in the market over the longer-term.

The Company said that to achieve that position would require significant levels of investment into the market to capitalise on the growing demand. It said its Heads of Agreement plan with The Coca-Cola Company would strengthen its market position by broadening its product offering with new products, new consumption occasions and a greater range of affordable packs.

At the same time CCA said it would transform its route-to-market model to increase its relevance and availability to the traditional trade and broaden our customer base. The Company said it will also be targeting improved productivity and efficiency in production and logistics by better leveraging its scale. CCA said the objective was for CCA Indonesia to be able to self-fund growth from operating cash flows from 2020.

Alcoholic beverages – Continue to build alcoholic beverage portfolio in Australia and New Zealand

CCA said it would continue to build its alcoholic beverage portfolio by strengthening its product offering and customer servicing capability to the licensed channel. The Company said it would achieve this by leveraging CCA’s large-scale sales, manufacturing and distribution infrastructure assets.

CCA said it had A number of strong alcoholic beverage brand owner partners as well as the opportunity to develop its CCA brands. The Company said growth needed to be paced and its medium term focus will be to build credibility by winning with its existing partners.

SPC – Invest to restore SPC to a profitable, modern food business

CCA said was implementing a transformation plan to revitalise the brand portfolio and return the business to profitability. The Company said it had a “strong pipeline of innovative fruit-based snack products” backed by a disciplined capital investment plan that will modernise its production facilities and establish a lower cost position.