Does history repeat itself? Just ask Coca Cola Amatil (CCL). For the second time since August the company has revealed an earnings guidance downgrade, and yet investors haven’t really sold off the shares, despite another fall in the wake of the latest cut.
Yesterday it revealed a larger than expected earnings downgrade of up to 7% for 2013, its second since mid-year, and the shares fell more than 4.7% to end at $12.28.
In August, it revealed the first downgrade of up to 4%, at the bottom of its interim results, and the shares fell more than 70c, or closer to 5%, to just under $12.10.
The shares rebounded in the next week or so after the August downgrade, and no doubt they will recover in the next week after yesterday’s cut.
So the larger earnings downgrade produces a less fraught reaction from investors – even on a day when the wider market was weak for most of the day.
The company blamed a combination of weak consumer demand, the weather and tougher conditions with some retailers (read Coles and Woolworths).
Coke now expects its full-year pre-tax earnings to slide by between 5% to 7% in the year to December 3.
CCL YTD – Coke’s growth hits more roadblocks
The company told the market yesterday that while there had been an improvement in its Australian beverage business in the third quarter, fourth quarter trading to date was not seeing the expected post-election uplift in consumer spending.
”The non-grocery business has continued to grow volumes in the second half, however, consumer demand has been more subdued than expected," managing director Terry Davis said in a statement to the ASX.
"While we have seen some improved momentum in the Australian grocery channel, with carbonated beverages returning to growth and an improvement in market share, the aggressive competitor pricing activity has continued which has limited price realisation in the half to date."
In the wake of the continued lull in consumer spending the company is now forecasting a 5-7% decline in full-year EBIT for its 2013 year with the lower earnings also driven by more aggressive competitor activity as well as an estimated impact of almost 1% to group earnings due to the weaker Indonesian Rupiah and PNG Kina.
Coca-Cola Amatil, which has had a fast growing soft drinks operation in Indonesia, said that demand had slowed during the third quarter as the economy adjusted to higher levels of inflation and slower consumer spending.
”The fundamentals drivers of increased consumption per capita of commercial beverages remain strong and for 2013 we would expect the Indonesian business to deliver low double-digit volume growth and earnings growth,” the company said.
In calendar 2012 the Indonesian and PNG business recorded volume growth of 10.3% and EBIT growth of 16.8%.
Coke said its alcohol, food and services division, which covers its local spirits operation, SPC Ardmona, coffee and water beverages, were all trading in line with expectations.
The company said it was still searching for a successor to Mr Davis who plans to step down from the CEO role at the end of August next year.
The downgrade yesterday compares to the downgrade issued in the interim profit statement in August when the company said:
"At this early stage of the half, and with the major trading period of November and December still to come, CCA now expects 2013 full year Group EBIT to be within a range of flat to a 4% decline on last year, before significant items."
Mr Davis said, “While the Australian non-grocery business continues to perform well, the trading conditions in the grocery channel continue to be challenging. A number of initiatives are being undertaken to improve the operating performance with a strong summer promotional and marketing programme and a number of new product launches in the pipeline. We are also on track to deliver $10-15 million of cost savings and efficiency gains from programmes that commenced in the first quarter.”
"The momentum in Indonesia is expected to continue. Mr Davis said, “We have delivered a great result for the first half and expect to achieve strong volume and earnings growth in the second half. We experienced a strong Ramadhan trading period, delivering combined June/July volume growth of over 15%, and while we expect there may be some short-term impact on demand as consumers adjust to the recent reduction in fuel subsidies by the Government and as the earlier timing of Ramadhan impacts second half growth, we remain confident of delivering within our targeted 10-15% volume growth and 15- 20% local currency earnings growth in Indonesia for the full year. We do however expect trading conditions in PNG to remain challenging for the second half. "
The takeaway from this update is: don’t blame the lack of a consumer bounce after the election, Coca Cola’s biggest problems in the current half year are the weakness in the Indonesian and PNG currencies, which have been greater than the weakness in the value of the Aussie dollar which has risen since the June 30 end to the half year.
Local demand is OK in Australia, but not brilliant. This is a company which really can’t grow any faster than retail and liquor sales in Australia. Indonesia is the one area where CCL can get above average growth which affects the whole company in good times, or holds it back when things become a bit rough.
