As expected it was a miserable first half for Coca Cola Amatil (CCL) – an earlier trading update in April and earnings downgrade told us that – but yesterday we heard that there’s more of the same to come.
So the company is facing a second year of weaker earnings. And, much of that is down to weak management oversight in the past couple of years.
Shareholders have already seen their shares slide 19% this year and dipped another 2% yesterday to end on $9.54. Yesterday there was more bad news with the interim payout cut by 4c a share to 20c.
That’s a very high payout of nearly 84% which is above the company’s target range of 70% to 80% and indicates how much the board wants to keep shareholders happy.
The fall in dividend was 16.6% which matches the size of the slide in net profit to $182.3 million, from $216 million in the first half of 2013.
That was on an 0.5% rise in trading revenue to $2.33 billion, which is well behind the rates of inflation in Australia, Indonesia and NZ, the company’s main markets.
In her address to the AGM in May, CEO Alison Watkins outlined the reasons for the company’s weakening performance, and detailed some of the measures she had put in place to fix the problems and halt the slide.
She announced to the AGM a complete review of the company – the results of that will be announced in October. Judging on her remarks yesterday, we can expect the changes to be dramatic and looking to cut more than $100 million in costs from the company over the next three years and the possible divestment of offshore assets.
Many of the changes have already been put in place, especially in the way the company services the trade routes of smaller customers and the distribution of CCA products, including soft drinks and alcohol on the same trucks.
CCL 2Y – Can Watkins add life to Coke?
At the AGM in May she warned that 2014 would "not be an easy year" and explained why the company was under pressure, which yesterday’s report again laid out – weaker sales in the company’s trade heartland, convenience stores and petrol stations, along with that now standard bugbear, pricing pressure in supermarkets and weak new product ideas
These combined to crunch margins and earnings in its most important business, the Australian beverages business.
That is what Ms Watkins told shareholders was happening back in May and she was proven right yesterday as earnings before interest and tax in Australia (responsible for more than 80% of profits) fell 14.1% to $226.5 million.
But earnings in Indonesia plunged 83.4% to $5.2 million, dragging group EBIT down 15.3% to $316.7 million.
Given that performance in Indonesia (which has seen consumer spending under pressure, a lengthy Presidential election and a sluggish Indonesian economy so far in 2014) it’s no wonder Ms Watkins and the board are looking for partners (or even sell) the Indonesian operations.
Ms Watkins, who took the helm from long-serving CEO Terry Davis in March, has warned of a major restructuring and a “step-change” in fixed costs and productivity, saying CCA is facing structural issues that are challenging its business model and its ability to deliver long-term sustainable growth.
“It is clear that CCA is facing a number of immediate challenges, particularly in the Australian beverage and Indonesian markets,” Ms Watkins said yesterday after unveiling the result.
Most of the details of the strategic review, which could involve major job cuts, are expected to be unveiled in October. But in a worrying move, analysts were told yesterday the company is cutting spending on the trade route (as it tries to get efficiencies).
As the trade route is the key business in the company and where the margins are highest, some analysts wonder if this is not a short sighted move that will damage the company in the medium to longer term.
Analysts say that under Mr Davis, CCA failed to notice and then meet changing consumer drinking habits.
It raised soft drink prices every year (which allowed consumers to look elsewhere at other beverages such as waters, tea and coffee, even though CCA has presence in some of these markets).
As well, there was the half a billion dollars wasted on the diversification into the troubled SPC Ardmona fruit and vegetable business, which has been losing sales to imported packaged fruit and vegetables.
And looking to the rest of 2014, the company was gloomy, warning of significant change from review and hinting at job losses. But earnings in the second half should be better than the first six months. But for the year earnings look like being below 2013’s level.
"The expected trading conditions have continued and indeed since the Federal Budget in May we have experienced further deterioration and evidence of consumer promotional fatigue consistent with weaker consumer sentiment," the company said in its 2015 outlook statement.
“The Australian business will be challenged in the second half by stronger grocery comparatives relative to the first half, a continuation of difficult pricing conditions and we are targeting to finish the year with lower levels of inventory in the trade.
"In addition, in conjunction with our partner The Coca-Cola Company, we will increase the level of brand marketing investment to strengthen our brand equity to deliver ongoing volume growth.
“We have made significant progress with the review of the Australian business with revenue generating and cost savings initiatives expected to begin to deliver benefits during 2015.
“We expect the Indonesian business to continue to deliver strong volume growth as the beverage market continues to grow rapidly, however we expect pricing and profitability will continue to be under pressure with the increased levels of competition in the market and ongoing cost pressures.
"We are currently developing joint growth plans for the market with our partner The Coca Cola Company and will provide further details in October.
“Alcoholic beverages are expected to deliver a decline in full year earnings driven by an expectation of continued weakness in the dark spirits category, partly offset by contributions from our Paradise Beverages business.
“While it’s too early for full year guidance, we expect earnings for 2014 to be materially below 2013. Second half earnings however should exceed the first half, before significant items.
“Finally, this is a difficult year for our employees and shareholders. We are making some hard decisions and implementing a range of positive changes that will provide a foundation for sustainable growth in the years to come. CCA is a great company with very strong foundations.
"Highly capable, accountable leaders will be central to our success and I know through this journey we will provide them with exciting new challenges and opportunities to grow, as well as the satisfaction of achieving results,” the company said yesterday.
CCL Results Video
