Food and beverage company Coca-Cola Amatil (CCA) has announced a net profit after tax of $502.8 million, before significant items. Net profit after tax (including significant items) decreased by 82.5 per cent to $79.9 million for the twelve months ended 31 December 2013. Group return on invested capital at 31 December 2013 was 16.5 per cent, before significant items and continued to remain well above the cost of capital.
CCA said the difficult trading conditions for the Australian beverage business in the grocery channel, combined with the impact on SPC Ardmona earnings from imported private label products and the significant slowdown in Papua New Guinea (PNG) economy led to the reduction in earnings.
Following the disappointing result in 2013, CCA said it would undertake a comprehensive review of the operating cost structure to adapt to a more competitive landscape. This review will be in addition to the major operational efficiency programme announced in February 2013, and will seek to “right-size” the business to lower the cost of production and distribution while better leveraging the investments made over the past few years on production and IT infrastructure.
“The positives for the year included the Australian beverage non-grocery channel, which delivered volume and earnings growth, the strong return to growth by New Zealand and Fiji and CCA’s re-entry into the Australian beer and cider market in mid-December,” said Terry Davis, CCA’s Group Managing Director.
Grocery channel
Difficult trading conditions in the Australian grocery channel resulted in a 9.3 per cent decline in Australian beverage earnings, CCA reported. While the non-grocery channel delivered volume and earnings growth, grocery channel performance was impacted by aggressive competitor pricing, requiring higher levels of market support and promotional activity, which impact price realisation and in turn profitability. In addition, CCA said the business was cycling the impact of a material reduction in retailer inventory levels.
CCA said it remained concerned by the generally weak consumer confidence and spending environment and the continued softness of the carbonated beverage category in the grocery channel. The Company noted that while its major competitor had taken price increases outside of the grocery channel, pricing in the grocery channel since January 2014 had declined.
Write down of SPC Ardmona assets
Following the completion of the Company’s asset impairment testing process, CCA said a decision had been taken to write down the carrying value of SPC Ardmona by $404.0 million. This includes the write off of the remaining goodwill of $277.0 million, a $39.7 million write down in the value of brand names and an $87.3 million charge covering write downs in inventory and property, plant and equipment and recognition of the diminution in value of some onerous contracts.
While CCA has undertaken a substantial restructuring of the SPC Ardmona business with initiatives undertaken to materially reduce the cost of doing business, the write down of assets has been made having regard to the ongoing impact of the high Australian dollar and the associated impact on the business’ competitiveness against imported packaged fruit and vegetable products.
Australian Food News reported earlier in February 2014 that CCA had refuted government claims that SPC Ardmona was undeserving of government restructuring support because it was poorly managed or had been run as a “union shop”. The Company denied that the cause of its difficulties were because of “over generous” allowances and conditions for its staff.
CCA said the SPC Ardmona write downs were largely non-cash in nature and would have minimal impact on operations, cash flow or the ability of CCA to pay dividends.
Co-investment in SPC Ardmona with Victorian Government
In February 2013, a $100 million co-investment between CCA and the Victorian Government to revitalise the SPC Ardmona business was announced. CCA will invest $78 million and the Victorian Government will invest $22 million for investment in innovation and efficiency measures for SPC Ardmona over the next three years.
CCA said SPC Ardmona had been “severely damaged” in recent times by a “perfect storm” created by external economic factors. The Company said the high Australian dollar has enabled a flood of cheap imported product to be sold in Australia below the cost of production here while damaging SPC Ardmona’s export markets.
In addition to this investment, CCA will continue to seek the removal of structural barriers which it said are “unfair” and “are not only damaging the food processing sector, but impacting the entire manufacturing industry in Australia”. Specifically, CCA said it would seek measures to prevent the dumping of cheap imports, the levelling of the playing field with respect to tariffs on imports and the enforcement of standards and inspection measures to prevent imports which may have unsafe levels of contaminants like lead.
CCA has denied speculation that it would close the SPC Ardmona business.
“We are very comfortable with the conditions applied to the $22m grant by the Victorian
Government,” Mr Davis said. “If we did not believe in the future of the company CCA would not have made the significant investment of $78million,” he said.
Alcoholic beverages
Over the past 12 months CCA said it had made “significant progress” in developing its alcoholic beverages portfolio, securing access to a world-class, low cost brewery, entering into long-term exclusive agreements to distribute Rekorderlig cider, the Molson Coors premium beers, the Boston Beer Company premium beers and the C&C Group’s beer and cider portfolio in New Zealand and the Pacific region. Together with its own domestic premium and craft beer portfolio, the expanded alcoholic beverages business is targeting to generate around 1 per cent in incremental earnings growth in 2014. In 2013, CCA also extended its partnership with Beam to a new 10 year term to December 2023.
CCA said the successful start-up of brewing at the Australian Beer Company in Griffith in western New South Wales in both international and local beer and cider brands enabled the business to be in market on 17 December with the expanded beer and cider range.
CCA said its Fiji alcoholic beverage business was also performing ahead of plan and had established an export business for the beer and Fiji rum portfolio.
Indonesian business
While strong volume momentum continued for the Indonesian business, rapid cost inflation, currency depreciation and continued economic challenges in PNG impacted segment earnings.
The Indonesia and PNG region delivered volume growth of 6.8 per cent and an Australian dollar EBIT decline of 13.2 per cent. Indonesian volumes grew by over 10 per cent with 5 per cent local currency EBIT growth driven by the successful launch of a number of new products and the rapid growth of the water business.
Significant wage and fuel inflation in the second half however limited earnings growth. The PNG business experienced a significant decline in volumes and earnings due to a significant slowdown in economic activity caused by falling commodity prices, reduced mining activity and increased unemployment levels.
Looking forward, CCA said it remained positive about the prospects for Indonesia and would continue to invest in production and distribution capacity and cold drink coolers to meet increasing demand while delivering productivity improvements which are expected to moderate the impact of inflation driven cost increases in 2014. CCA said there was a strong pipeline of new beverages and packs to be launched over the next 12 months and this was being supported by strong investment and execution of consumer marketing initiatives by The Coca-Cola Company.
New Zealand business
CCA reported strong return to growth in New Zealand with over 10 per cent local currency EBIT growth. New Zealand and Fiji delivered 18 per cent earnings growth with Australian dollar reported regional EBIT benefiting from around eight points of currency translation as a result of the appreciation of the New Zealand dollar.
The New Zealand business experienced a solid recovery with a return to growth following a strong summer trading season. Momentum improved throughout the year as a result of a number of successful new product launches as well as benefitting from the improvement in economic conditions in New Zealand.
Capital Expenditure
Group capital expenditure is expected to reduce to around $350 million in 2014 with around 50 per cent of Group capex to be invested in Indonesia and PNG to increase production capacity and cold drink cooler penetration.
A trading update will be provided at the Company’s Annual General Meeting on 13 May 2014.