Coca-Cola Amatil's H1 net profit down 27.8% to AU$153.6M on charges related to SPC Ardmona business restructuring, higher resin costs, natural disasters, stronger Australian dollar; total revenue up 2.4% to AU$2.26B
August 9, 2011
– HIGHLIGHTS OF 2011 INTERIM RESULT
For the first half of 2011, Coca-Cola Amatil (CCA) delivered net profit after tax (NPAT) of $234.1 million, before significant items, representing an increase of 5.5% on the 2010 half year result, or an increase of around 6.5% before the impact of currency translation on offshore earnings. Reported NPAT, which is after significant items, declined after including an $80.5 million after tax significant item relating to the restructuring of the SPC Ardmona business.
Earnings before interest and tax (EBIT), before significant items, increased by $12.3 million, or 3.3%, to $386.1 million. Earnings per share (EPS) increased by 4.4% to 30.9 cents per share, before significant items. The earnings growth and strong cash flow has supported a 7.3% increase in the fully franked interim dividend from 20.5 cents to 22.0 cents per share.
CCA’s balance sheet remains strong with interest cover increasing from 5.6x to 6.1x and return on invested capital (ROIC) increasing from 17.3% to 17.6%, before significant items.
CCA’s Group Managing Director, Mr Terry Davis said, “I believe that the operating performance in the first half has been solid given the business has had to manage external headwinds, as well as the cycling of a very strong first half result in 2010. The combination of devastating natural disasters in Australia and New Zealand, rapid increases in resin costs and the impact of translation on offshore earnings from the stronger Australian dollar reduced our net profit growth by around 5% for the half.”
“The successful execution of our infrastructure programs in expanding manufacturing capacity and improving operational efficiency has again delivered a reduction in operating costs and further improvements in our customer servicing capability. Combined with the restructuring of the SPC Ardmona business, I believe these initiatives will continue to widen the operating capability lead on our competitors.”
CCA GROUP EBIT SUMMARY
Australia delivered a solid result with EBIT increasing by 3.0% to $281.0 million on trading revenue growth of 1.6%. The business has had to deal with the impact on volumes and a short-term increase in costs caused by the destructive floods in Queensland and Victoria and Cyclone Yasi which occurred during the peak summer trading season. As well, the generally softer consumer spending environment experienced in 2010 continued into 2011, limiting category growth. The business continued to benefit from successful new product and package innovation, increased brand availability due to additional cold drink cooler placements and efficiency gains from Project Zero.
New Zealand & Fiji – The New Zealand business delivered local currency earnings in line with last year. This was a very commendable outcome given the impact on earnings from lower demand attributable to the Christchurch earthquake in February. While the physical damage was localised to Christchurch, the flow on affect to consumer confidence and consumption was felt across New Zealand. Over the half, the business has maintained its strong market share position and fully recovered its cost of goods sold (COGS) increases.
Indonesia & PNG – The Indonesian business delivered a solid result with local currency EBIT increasing by over 20%. The continued growth in one-way-pack (OWP) products and the significant investments CCA has made in reducing its cost of doing business were the major contributors to the profit growth for the half. OWPs delivered strong volume growth of close to 20% and CCA’s market share continues to grow strongly in the fast growing modern food store channel. Inflation on food and other goods continued to be a challenge for lower income consumers resulting in lower demand for returnable glass bottle products. The PNG business also delivered another strong earnings result as the economy continues to benefit from increased mining investment and high commodity prices. The improvements made in its production efficiencies through increased investment in manufacturing capability also made a strong contribution to profit growth.
Alcohol, Food & Services earnings grew 1.7% driven by a solid result from the Services division and the first time inclusion of revenue and earnings arising from the new agreement with Beam in April to sell spirits and ARTDs as a principal rather than as an agent.
SPC Ardmona (SPCA) recorded an earnings decline as the business continued to exit a number of unprofitable export and domestic private label activities. The stronger Australian dollar continues to impact SPCA’s competitiveness against cheap imported brands and private label categories in Australia and its earnings from international operations with export sales declining by 35% over the last 12 months.
Pacific Beverages JV The premium beer portfolio has continued to grow volumes with Peroni and Bluetongue performing ahead of market growth primarily as a result of the successful scale up of draught beer capacity at the new Bluetongue brewery in NSW and a number of other innovations which helped drive increased demand in the on-premise channel.
SPC Ardmona Business Restructure
CCA has undertaken a comprehensive review of its SPC Ardmona business. The scope of the review was to develop an appropriate operating framework in light of the difficult trading conditions facing the business as a result of the sustained strengthening of the Australian dollar.
The review determined that SPCA has excess manufacturing capacity and as a result the current three manufacturing sites in Victoria will be consolidated into two, resulting in the closure of the Mooroopna manufacturing site. The review also found that as a consequence of the stronger Australian dollar SPCA is currently not competitive in many export markets and has seen domestic grocery private label contracts move to imported products. As a result, excess inventory that needs to be sold below cost has been written down to its net realisable value.
CCA’s Group Managing Director Terry Davis said, “We remain firmly committed to maintaining our manufacturing base in Australia and by proactively restructuring the SPC Ardmona business we believe we can lower its cost base so it can regain its competitive position in the market place. The strengthening of the Australian dollar over the past three years has regrettably led to a significant increase in the volume of cheap packaged fruit and vegetable products being imported into Australia. It has also led to a material increase in the share of the private label category which is being supplied primarily by imported products. The stronger dollar has also negatively impacted the competitiveness of SPCA’s export business with exports halving over the past four years.”
SPCA has recognised a charge of $80.5 million after tax as a significant item in the first half result for the write-down and write-off of excess inventory, the write-off of assets at the Mooroopna facility which are no longer required, as well as costs relating to the restructure. The write-down is largely non-cash.
The consolidation of manufacturing into the Shepparton facility will lead to a reduction of around 150 positions in the business. CCA will offer every affected employee alternative employment opportunities within CCA’s beverage business. Costs associated with potential employee redundancies and relocation costs may be in the range of $10-15 million after tax, depending on the take up of roles within CCA and this additional cost will be incurred over the next 12 months.
Going forward, SPCA will refocus its activities into the higher growth, higher margin snacking market. Mr Davis said, “We have a number of new products in the pipeline with a strategy to increase our presence in the growing snack category by leveraging the Goulburn Valley and SPC brands into a broader range of snacking categories and by further expanding our range of brands into the convenience and other channels.”
The consolidation will be undertaken on a staged basis over the next 12 months. Assuming the Australian dollar remains at present levels, SPCA expects to generate an additional $10-15 million in EBIT per annum in 2013 driven by production benefits, which will flow through to COGS following the 2012 fruit season, and contributions from new earnings streams.
Impact of Carbon Emissions Legislation
The Federal Government announced its carbon pricing mechanism scheme in July with an emissions threshold for inclusion in the tax of 25,000 tonnes of carbon per annum per facility. Emissions from each of CCA’s manufacturing and distribution facilities is below the threshold level for inclusion and as a consequence CCA does not expect to have a direct carbon tax liability. However, like many other businesses, there will be increased input costs as a consequence of the flow on impact from suppliers that are liable to pay the carbon tax and these will inevitably flow through to higher consumer prices.
CCA’s Group Managing Director, Mr Terry Davis said, “Whilst we would expect to generate stronger earnings growth in the second half of this year, the direction of current trading conditions in Australia remains uncertain as consumers deal with the continued increase in food, fuel, utility costs and interest rates as well as the uncertainty surrounding cost of living increases into the future.”
CCA will continue to focus on executing its organic growth strategy. Mr Davis said, “The business continues to deliver efficiency and customer service improvements ahead of internal targets from the strong pipeline of capital projects, with returns generated on invested capital increasing to a record level of 17.6% for the half. The rollout of Project Zero initiatives shall extend through to at least 2015 with opportunities recently identified for a number of additional projects to be executed in 2012 and 2013.”
The outlook for growth in the Indonesian & PNG business remains strong. Mr Davis said, “Our Indonesian & PNG business continues to deliver material improvements in performance, driven by improved capability, increases in manufacturing capacity and a material increase in cold drink cooler placements. Our up-weighted capital investment in the region over the last three years is delivering CCA with a more efficient and scalable manufacturing and distribution platform to grow the business. These initiatives have materially lowered our cost of doing business in Indonesia and we will continue to invest in capacity expansion ahead of the curve with further reductions in operating costs to be delivered over the next 12-18 months.”
CCA’s alcoholic beverages business continues to enhance earnings growth. “The successful rollout of locally produced draught beer and the recent extension of our relationship with Beam Global for a further ten years provides an additional earnings stream for the business that further leverages CCA’s capability and delivers on CCA’s goal to broaden its beverage portfolio,” said Mr Davis.
For 2011, excluding Indonesia, CCA continues to expect beverage COGS per unit case to increase by 4-4.5% on a constant currency basis. Due to the continuing volatility in the Indonesian Rupiah and ongoing high inflation, as well as the mix impact of higher value, higher cost products, high single-digit growth in COGS is expected for Indonesia.
The effective tax rate for 2011 is expected to be 28-29% with the Australian operations benefitting from investment allowances relating to 2010 qualifying capex spend.
A further trading update will be provided in November 2011.
DETAILED FINANCIAL COMMENTARY
Group ROIC1 increased to 17.6%, an increase of 0.3 points. The increase was driven by the growth in earnings, effective cash management and the efficient utilisation of CCA’s asset base, including the realisation of efficiency gains from Project Zero, CCA’s major infrastructure capital investment program.
Capital employed increased by $149.8 million to $3.55 billion due primarily to the increase in property, plant & equipment of $93.5 million, a result of CCA’s up-weighted capital expenditure program. Working capital reduced by $86.6 million primarily driven by the write-down of inventory to net realisable value as part of the restructure of the SPC Ardmona business.
The business delivered a strong operating cash flow of $287.2 million, an increase of $67.7 million, or over 30%, on last year driven by higher earnings, improved cash management and better working capital management.
Operating cash flow funded a $16.8 million increase in capital expenditure as CCA continued to invest in high returning projects including PET bottle and preform self-manufacture.
NET DEBT & INTEREST COVER
The balance sheet remains in a very strong position with EBIT interest cover showing strong improvement, from 5.6x to 6.1x, with net debt only marginally increasing to $1.77 billion. Improved operating cash flows ensured a limited increase in net debt despite higher capital expenditure for the half and the funding of over $55 million in higher cash dividend payments for the 2010 final dividend as a result of the removal of the DRP discount in August 2010.
DEBT MATURITY PROFILE
The following table summarises CCA’s drawn facility maturity profile as at 1 July 2011.
CCA has total committed debt facilities of approximately $2.3 billion with an average maturity of 4.5 years as at 1 July 2011. In early July the business completed the refinancing of all 2011 and 2012 maturing debt.
BEVERAGE COST OF GOODS SOLD
On a constant currency2 basis and excluding Indonesia, CCA’s beverage COGS per unit case increased by 4.3% for the first half of 2011. In Indonesia, local currency COGS per unit case increased by around 10%.
The increase in COGS was due to higher commodity input costs, in particular PET resin which has risen over 40% in price over the last nine months. The rate of increase in commodity costs was partially offset by supply chain efficiencies and better than expected returns on Project Zero investments, and was fully recovered across all regions through improved pricing and mix.
The business expects to spend between $375-385 million on capacity and capability improvements in 2011. For the first half, capital expenditure increased by $16.8 million to $168.3 million, or 7.6% of trading revenue. The major areas of capital expenditure included Project Zero initiatives across the Group and the continued rollout of cold drink coolers.
Project Zero continues to deliver on its cost savings targets. Expenditure on Project Zero initiatives for the first half exceeded $90 million and included investments in three PET bottle self-manufacture lines in Australia and one each in New Zealand, Indonesia and Papua New Guinea. In addition, the business commenced construction of a PET bottle preform and closure injection moulding plant at its Eastern Creek facility in NSW which is due for completion in early 2012.
CCA invested over $60 million on cold drink coolers across the Group. CCA’s cooler investment continues to be an important driver of cold drink market share gains in Australia and New Zealand with up-weighted investment in Indonesia to significantly increase the penetration of coolers in the marketplace.
CCA’s effective tax rate was 27.5%. The business continued to benefit from investment tax allowances for the Australian based operations relating to 2010 qualifying capex spend.
The interim dividend has been increased by 7.3% to 22.0 cents per share fully franked at the 30% corporate tax rate, representing a payout ratio of 71.3%.
The Record Date for determining dividend entitlements is 18 August 2011 and the interim dividend will be paid on 4 October 2011. CCA continues to expect that it will be able to fully frank its dividends for the foreseeable future.
DETAILED OPERATIONS REVIEW
AUSTRALIA – BEVERAGES
The Australian beverage business delivered a solid result with EBIT increasing by 3.0% to $281.0 million on trading revenue growth of 1.6%. The business has had to deal with the impact on volumes and a short-term increase in costs caused by the destructive floods in Queensland and Victoria and Cyclone Yasi which occurred during the peak summer trading season. As well, the generally softer consumer spending environment experienced in 2010 continued into 2011, limiting category growth. Notwithstanding the difficult conditions, mix improvements, Project Zero efficiency gains and cost out initiatives underpinned the growth in margins from 19.9% to 20.2%.
The business has maintained its strong market share position despite a high level of competitor discounting activity in the grocery channel during May and June. New product development for the half was focussed on the rollout of new packages and flavour extensions. The frozen beverage portfolio continues to grow strongly with volume growth of over 20% as a result of the expansion of the customer base combined with the introduction of new flavours.
CCA’s significant investments in manufacturing and distribution capability through Project Zero, as well as the successful implementation of the OAisys customer service technology platform, delivered a further lift in service capability and further reduced CCA’s cost base. Key gains are coming from the first two PET bottle self-manufacture (‘blowfill’) lines installed in Northmead in April 2010, freight and efficiency benefits from the Victorian can line commissioned last October, as well as various efficiency gains resulting from other technology investments.
In June, a new blowfill line was successfully commissioned in Victoria and another two lines will be operational in Adelaide by September. In addition, the business commenced construction of a PET bottle preform and closure injection moulding plant at its Eastern Creek facility in June. The business is on track to be around 40% self-sufficient in the self- manufacture of its PET bottles by the end of 2011 and will be producing preforms and closures by March 2012 which will result in material savings in PET resin, reduced freight and other operating costs.
Finally, the Australian beverage operation generated a solid and growing contribution from the alcoholic beverage business as a result of the sales force, service and distribution fees received from the Pacific Beverages’ and Beam Global portfolio.
NEW ZEALAND & FIJI
The New Zealand business delivered local currency earnings in line with last year. This was a very commendable outcome given the impact on earnings from lower demand attributable to the Christchurch earthquake in February. While the physical damage was localised to Christchurch, the flow on affect to consumer confidence and consumption was felt across New Zealand.
The business has maintained its strong market share position over the half. New product development was focussed on flavour extensions with Powerade Black successfully launched in the lead up to the Rugby World Cup, quickly establishing itself as the No. 1 Powerade flavour and driving overall growth for the Powerade brand.
The first blowfill line was commissioned in Auckland and is delivering efficiency gains in line with expectations. The infrastructure damage incurred as a consequence of the February earthquake led to a delay in the construction of the Christchurch blowfill line which commenced in July.
The New Zealand business is deriving a small but rapidly growing contribution from the premium beer business. Pacific Beverages now accounts for over 4% share of the premium beer market in New Zealand, a doubling of its share over the last 18 months.
The Fiji business, which represents less than 1% of group earnings, delivered local currency earnings in line with last year, a good result given challenging trading conditions which included a significant decline in tourism and the imposition of an increase in the VAT from 12.5% to 15%.
INDONESIA & PNG
Indonesia & PNG delivered a strong earnings result, with EBIT increasing by 23.9% to $22.3 million and margin improvement of 0.9 points to 6.4%.
The Indonesian business delivered a solid result with local currency EBIT increasing by over 20%. The continued growth in one-way-pack (OWP) products and the significant manufacturing and distribution investments CCA has made to reduce its cost of doing business were the major contributors to the profit growth for the half. Local currency revenue per unit case increased by 10% due to the combination of COGS increases and the impact of the continued consumer- driven shift into the higher cost, higher margin OWP products.
OWPs delivered volume growth of close to 20% supported by the acceleration of cold drink cooler placements, improved in-market execution and the addition of over 50,000 new retailer customers. The modern food store channel continues to grow strongly with volumes increasing by over 15%. CCA continues to strengthen its position in this rapidly growing channel with a 2.5 percentage point increase in its share of the non-alcoholic ready-to-drink beverage category and now holds a 39% market share.
A highlight for the year was the volume growth of Minute Maid Pulpy Juice which grew by over 30%. Brand Coca-Cola, Sprite and Fanta in OWP format also posted strong performances, growing over 20%. Volumes however for the lower value returnable glass bottle packs in the traditional channel declined as high food and other inflation affected the discretionary income levels of consumers in the lower income demographic.
The business continues to target a spend of approximately $100 million per annum on capital expenditure in the region over the next three years, representing 25-30% of Group capex. Over the past six months more than 20,000 new cold drink cooler doors were placed, increasing total cooler doors in Indonesia to over 220,000. A new multi-beverage production line was installed in Jakarta and when fully commissioned during the second half will result in a 24% increase in Indonesian PET bottle production capacity.
The PNG business also delivered another strong earnings result as the economy continues to benefit from increased mining investment and high commodity prices. The continued focus on higher value immediate consumption packs, strong revenue management, increased promotional activity and improved execution in the market all contributed to the strong result with a highlight being the strong performance of brand Coca-Cola which grew by over 20%. The improvements made in its production efficiencies through increased investment in manufacturing and distribution capability also made a strong contribution to profit growth.
ALCOHOL, FOOD & SERVICES
A solid result from the Services division as well as the first time inclusion of the new alcohol earnings stream generated from the sales of the Beam spirits portfolio have helped to offset an earnings decline from SPC Ardmona (SPCA) as the business exited a number of unprofitable export and private label activities.
In March, CCA announced that it had entered into a new 10 year agreement with Beam Global Spirits for the manufacture, sales and distribution of the Beam premium spirits portfolio in Australia, Beam Global’s second largest market in the world. The new arrangements with Beam Global made CCA responsible for the sales and distribution of the entire Beam portfolio in Australia in its own right. This sales and distribution responsibility had previously been carried out on behalf of Pacific Beverages. Since 1 April 2011, revenue and earnings of the Beam portfolio are being recognised within the Alcohol, Food & Services segment.
SPCA recorded an earnings decline as the business continued to exit a number of unprofitable export and domestic private label activities. The stronger Australian dollar continues to impact SPCA’s competitiveness against cheap imported brands and private label categories in Australia and its earnings from international operations with export sales declining by 35% over the last 12 months.
The Services business achieved solid earnings growth driven by improved earnings from refrigeration and equipment management services, higher demand for refrigeration servicing contracts and lower operating costs as a result of efficiency gains.
Review of operations
The Group’s net profit attributable to members of the Company for the half year was $153.6 million, compared to $212.7 million for the corresponding period in 2010. The net profit attributable to members for the half year includes significant items of $80.5 million loss after income tax, relating to the restructuring of the SPC Ardmona (SPCA) business. The corresponding period in 2010 includes a significant item of $9.3 million income tax expense, which relates to changes in the New Zealand tax legislation, whereby future tax deductibility of building depreciation was removed.
The Group’s trading revenue for the half year was $2,211.1 million, compared to $2,139.5 million for the corresponding period in 2010. The Group’s earnings before interest and tax (EBIT) and significant items for the half year was $386.1 million, compared to $373.8 million for the corresponding period in 2010.
Operating cash flow was $287.2 million, compared to $219.5 million for the corresponding period in 2010. Operating cash flow for the half year includes significant items of $0.8 million (outflow) relating to the SPCA business.
Further details of the operations of the Group during the half year are set out in the attached financial report.