Coca-Cola Amatil is relying on new products such as low-sugar Coke, coconut water, iced coffee and cheaper bottled water to underpin a rebound in sales next year after confirming that underlying earnings in 2014 would fall as much as 24 per cent and it would axe 260 jobs.
In a keenly awaited trading update on Monday, CCA managing director Alison Watkins said conditions in Australia were still “challenging”, despite record-breaking warm weather on the east coast in the last few months and a raft of new products including Peats Ridge bottled water, Barista Bros iced coffee and Zico coconut water.
CCA has stepped up cost cutting efforts, announcing that another 260 jobs would be lost in 2015 as part of a plan to reduce costs by $100 million over three years and reinvest the savings into innovation and marketing.
“This latest restructure, together with cost initiatives already in train, gives us a high level of confidence we will achieve our savings targets,” Ms Watkins said.
The latest job losses are in IT, human resources and finance and will take the number of jobs lost in Australia in the last year to more than 400. However, as the roles are not front-line positions they will have no impact on sales, unlike job cuts last year that contributed to a sharp drop in sales. Ms Watkins is adding jobs in sales and spending more on marketing after accusing former management of cutting jobs and promotions to achieve profit targets.
CCA had seen no signs of improvement in grocery stores and operational accounts such as take-away food bars and convenience stores, where sales and volumes fell sharply in the first six months of 2014.
However, sales of new 250-ml cans of Coca-Cola, Sprite and flavoured soft drinks, backed by a new social media marketing campaign, were “tracking ahead of expectations”, she said, and helping to recruit the next generation of Coca-Cola consumers.
The former GrainCorp chief reiterated CCA’s full-year profit guidance, saying second-half earnings before interest and tax were expected to exceed first-half earnings of $316.7 million, before one-off costs.
This implies that underlying earnings before interest and tax will fall from $833 million to $634 million and that underlying net profit will fall from $504 million in 2013 to between $365 million and $405 million.
The update confirmed analysts’ and investors’ worst fears and may lead to further profit downgrades. CCA shares fell 16.5¢ to $9.095, taking losses this calendar year to 24.4 per cent.
At the same time, however, it suggested that the worst was likely over for CCA and that the rebase in earnings flagged by Ms Watkins when she took the helm in March would be completed this calendar year.
Announcing the outcome of a strategic review in October, Ms Watkins forecast a return to profit growth in 2015 and said she was targeting mid-single digit earnings per share growth over the next few years.
“The company had provided guidance for mid single digit [earnings per share] growth off the 2014 base – the missing piece was what the 2014 base was,” CIMB analyst Daniel Broeren said. “Now we know roughly what it is.”
Analysts said second-half volumes would take a hit as retailers destocked after “channel stuffing” last year, but volumes could start to recover next year, buoyed by new products.
“There is still a risk that the 2014 result is below consensus and leads to further downgrades. We had hoped today would be the last of the bad news, but this may be prolonged until the 2014 result,” Citi analyst Gino Rossi said.
In Indonesia, CCA has gained market share but prices and profits remain under pressure. Ms Watkins said previously announced plans to sell a 29.4 per cent stake in Indonesia to major shareholder The Coca-Cola Co for $US500 million ($563 million) to fund new capital expenditure and market development would strengthen CCA’s position.
CCA will release an independent expert’s report and explanatory memorandum in mid-December ahead of a shareholder vote on February 17.
By Sue Mitchell