The market gave Coca Cola Amatil shares a real mauling yesterday after the country’s dominant soft drink producer and marketer warned shareholders that first half earnings would be lower, thanks to intense price discounting and the impact of the stronger dollar.
The shares dropped more than 10%, or $1.46, to $12.99, the first time they have been at these levels for six months, a reaction which seems to have been knee-jerk and quite silly given other information the CEO, Terry Davis, gave shareholders.
Perhaps the market was also reacting to the company being singled out by Coles for the high cost of its leading soft drink brands, especially Coca Cola. That was seen as a warning that Coles (and perhaps Woolworths) would start pressing the company to lower its soft drink prices.
CLL – 12-Month Performance
The company said its first half earnings before interest and tax for the first-half of the year will be down 8% to 9% before significant items.
The company blamed several factors – CEO, Terry Davis telling the AGM in Sydney that sales to supermarkets had had a very difficult start to the year due to intense discounting from rival Pepsi, which Mr Davis claimed was selling for less than half the price of Coke.
"In Australian beverages, the grocery channel has experienced a very difficult start to the year due to the continuation of higher levels of competitor discounting and the impact to volume from lower retailer inventory levels," he said.
That meant that the combination of price competition from Pepsi, since December and subdued consumer spending and confidence, coupled with retailers’ lower inventory levels contributed to the difficulties facing the Australian grocery business, which accounts for around 50% of business of the company’s most important division, its the Australian beverages operation.
And the company said its SPC Ardmona business was facing toughening competition from imports by retailers for their own (private) label products. Retailers are taking advantage of the strong dollar to boost their private label products and this had put a dampener on Ardmona which is experiencing a fall in volume and earnings.
"The shelf prices of many imported private label products are being sold at levels well below the cost of Australian grown packaged fruit and should the retail trading outlook not improve in the second half, the SPCA earnings decline is expected to lower Group earnings by between 2 to 3 per cent for 2013, Mr Davis told the meeting"
The company has asked the federal government impose a temporary tariff on all imported canned tomatoes and processed fruit in order to give the domestic industry some "breathing space".
"At the same time, the business shall seek longer-term relief from World Trade Organisation anti-dumping safeguards." Mr Davis gave the meeting the example of New Zealand, which in 2011 used the WTO anti-dumping rules to impose duties on canned peaches from Spain of 1.26 euros per kilogram.
Speaking to the media after the results were released, Mr Davis rejected the criticisms of the cost of Coke and other soft drink brands produced by the company from Coles CEO, Ian McLeod. Mr Davis said Australia’s costs were higher than in countries such as Indonesia and a fairer comparison should be made with drink prices in the UK.
Shareholders were told the profit pressures were expected to disappear by early in the second half and the company expects to return to earnings growth from higher volumes in the second half of the year. It also expected full-year earnings before interest and tax, and before significant items, to be "broadly in line" with FY2012, which were up 3.1% before significant items, interest and tax. But Ardmona looks like remaining a concern.
To keep shareholders happy, Coca-Cola Amatil forecast an increase in its first-half dividend by 10.4% to an expected 26.5 cents a share, made up of an ordinary dividend of 24 cents and a special dividend of 2.5 cents (Westpac declared a special dividend for its first half last Friday). CCA paid a 3.5c a share special dividend for 2012.
But it wasn’t all grim news for the company. Mr Davis said the highlight was "the continued strong performance of the Indonesian business which has generated volume and revenue growth of over 10 per cent and the New Zealand and Fiji region which has recorded a return to growth, with improved results versus last year."
And that, coupled with the forecast of a rebound in the second half of this year, tells us the market reaction yesterday was simply over the top. Coke shares have been falling for a while since the shares hit $15.25 in March. The shares are now 15% under that peak, which tells us the market reckoned the big run up earlier this year had been overdone.
After the fall from the peak and the 2c rise in the interim, the company’s shares are yielding more than 4.7%, much healthier (for yield-hungry investors) than the 3.9% at the peak with the 2012 dividend of 59.5c a share.
