Coca-Cola Amatil profit slumps 25% as soft drink sales drop
Coca-Cola Amatil is cutting bottled water prices, launching new soft drink products and spending more on marketing to try to reverse a slide in volumes and margins that decimated its full-year earnings.
CCA has posted its lowest profit for eight years, with underlying net profit falling 25.3 per cent to $375.5 million in 2014 as CCA's key brands lost sales and market share in supermarkets and convenience outlets in Australia and margins were squeezed by pricing pressure and rising costs in Indonesia.
Chief executive Alison Watkins, who took the helm last March, said the worst was over for CCA and reiterated her guidance for a return to mid-single digit earnings per share growth over the next few years.
However, Ms Watkins suggested the recovery in earnings this year would be modest and would depend on the success of strategies aimed at reconnecting with consumers who have cut consumption of sugary soft drinks, attracting new consumers to the soft drink category and reducing the price gap with Pepsi.
There would be no "free kicks" from the sale of a stake in the Indonesian business for $US500 million ($645 million) or lower interest rates.
"We don't anticipate we'll experience a bounceback (this year) but we expect 2014 will be a base," Ms Watkins told analysts.
"We won't be going backwards, that's certainly our intention, but we believe we're better to do it right and generate better improvement in subsequent years," she said.
CCA shares, which have fallen 16 per cent in the last year, rose as much as 5.7 per cent to $10.55 on the prospect of a return to profit growth.
"The company remains cautious, as the first half of 2015 will be a difficult period for the Australian business to cycle. However, management commentary is slowly turning more positive with news that operational accounts are again growing and an assurance that earnings growth will recover to mid-single digit growth over the next few years," said Citigroup analyst Gino Rossi.
The full-year result, which fell short of market forecasts, highlighted the impact of a small drop in beverage volumes and sales on CCA's high fixed-cost base.
Group sales for the 12 months ended December 31 slipped 1.9 per cent to $4.94 billion, but earnings before interest and tax, before one-off costs, dropped 21.8 per cent to $651.5 million, with Australian EBIT falling 21.3 per cent and earnings in Indonesia plunging 65.2 per cent, countering a currency-driven 6.7 per cent improvement in New Zealand and Fiji.
December-half earnings before interest and tax fell at almost twice the rate of decline in the June-half, plunging 26 per cent to $334.8 million, but exceeded earnings in the first half, in line with CCA's October guidance.
Analysts had forecast an underlying net profit of $382 million and earnings before interest and tax of $659 million on sales of $5.04 billion. CCA also booked another $103.4 million in one-off restructuring costs, taking the bottom line net profit to $272.1 million compared with $79.9 million in 2013.
Ms Watkins said earnings in Australia were expected to "stabilise " this year as cost savings flowed through in the second half, while Indonesian volumes and earnings were expected to grow strongly, buoyed by a $US500 million capital injection from CCA's major shareholder, The Coca-Cola Co.
"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.
"We are confident that the combination of revenue and cost initiatives we have underway will restore the business to growth. The pace of recovery will however depend on the success of revenue initiatives in Australia and Indonesian economic factors," she said.
Ms Watkins said it was too early to tell if new products, pack sizes and marketing programs would lead to a sustained improvement in sales in Australia.
"There are encouraging signs around smaller pack sizes and the Colour Your Summer campaign and Barista Bros (iced coffee)," she said. "We are positive and optimistic but it's definitely too early to tell."
While the lower $A would be good for consumers, consumer sentiment remained cautious about the budget and rising unemployment. "We certainly haven't seen any great bounces," she said.
CCA has cut 400 jobs, or 10 per cent of its Australian workforce, as part of a plan to reduce costs by $100 million over three years and will reinvest the savings into innovation, marketing and pricing to win back consumers and customers in the route trade.
CCA has also launched a suite of new products including Zico coconut water, frozen fruit whip, slim-line soft drink cans and cheaper bottled water in a bid to tap healthier consumption trends, reverse a slide in beverage volumes and regain market share lost to rivals such as Asahi's Schweppes and private label brands.
Asahi revealed on Monday that earnings in Australia and New Zealand rose 43.5 per cent in 2014 on a 5.9 per cent increase in sales, underpinned by growth in beer, cider, bottled water and non-cola products.
CCA will launch a low-sugar Coke sweetened with stevia in April. It is also close to launching a low-sugar Sprite lemonade, and its Mt Franklin bottled water business will be relaunched during the year, with new packaging and price architecture.
CCA cut its final dividend by 31.3 per cent to 22¢ a share, representing a payout ratio of 85 per cent, taking the full-year payout to 42¢ a share compared with 58.5¢ in 2013.
Ms Watkins said CCA's balance sheet remained very strong and free cash flow was also expected to remain strong, so the business was well-placed to target a dividend payout ratio of over 80 per cent over the next three years.
CCA shareholders are due to meet on Tuesday afternoon to vote on the proposed sale of a 29.4 per cent stake in the bottler's Indonesian business to major shareholder The Coca-Cola Co for $US500 million.
The proceeds will be used to expand production and warehouse capacity and cold drink infrastructure to strengthen CCA's position in one of the biggest beverage markets in the world.
CCA plans to increase capex in Indonesia to $170 million a year for the next three years, taking group capex to around $330 million.
CCA has invested about $1.3 billion in capital in Indonesia over the last 22 years and now commands about 60 per cent of the soft drink market. But the Indonesian business remains cash flow negative and earnings have been falling for several years as new players enter the market and competition increases.
Ms Watkins expects returns in Indonesia to cover the cost of capital by 2020.
