Australian beverage manufacturing giant Coca-Cola Amatil (CCA) has seen its net profit after tax decline for the 2013 financial year (FY13) by 8.5 per cent to $215.9 million, which it says is the result of SPC Ardmona’s reduced earnings and “difficult trading conditions” for its Australian beverage business.

However, the Company reported that its moves to expand its beer business are making progress.

CCA said difficult trading conditions in the Australian grocery channel resulted in a 10.1 per cent decline in Australian beverage earnings. It said the grocery channel was also impacted by “aggressive competitor pricing” and a reduction in the level of warehouse inventories of non-alcoholic beverages by grocery retailers. The Company said its carbonated beverage volumes in the Grocery channel had been affected by a 10 point increase the price premium as a result of a major new product launch from its major competitor Pepsi.

“The difficult trading conditions for the Australian beverage business in the grocery channel, combined with the impact on SPC Ardmona (SPCA) earnings from imported private label products and the slowdown in the Papua New Guinea (PNG) economy regrettably led to a reduction in earnings for the first half of 6.9 per cent,” said Terry Davis, CCA’s Group Managing Director.

“The positive for the half was the outstanding performance of the Indonesian business, which delivered double-digit volume and earnings growth whilst improving on its return on invested capital,” Mr Davis said. “The Australian beverage non-grocery channel performed well, delivering volume and earnings growth, while the New Zealand and Fiji businesses also returned to solid earnings growth,” he said.

Progress made in expanding alcoholic beverages

CCA said it made material progress in FY13 in expanding its alcoholic beverages platform, including the extension of a partnership with spirits manufacturer Beam to a new 10 year term to December 2023, and the establishment of a long-term exclusive agreement to distribute the Molson Coors range of premium beers in Australia after 16 December 2013.

The Company said it also entered into a long-term exclusive agreement to distribute the C&C Group of beers and ciders in New Zealand and the Pacific region.

CCA reported that its Fiji alcoholic beverage business performed “ahead of plan” in FY13, and that it had established an export business for its beer and Fiji rum portfolio. It said it was also “well advanced” in the development of a portfolio of Australian premium and craft beers.

CCA said it would be targeting 1 per cent of EBIT growth from alcoholic beverages from 2014.

“CCA is now well positioned as the only independent and large scale manufacturers, distributor and full service provider for premium international alcoholic beverage brands in Australia,” Mr Davis said.

Australian ‘operational efficiency’ program

CCA said it had commenced a “major operation efficiency program” in Australia, including a range of cost out and business restructuring initiatives, which were complete in the first half. These included the closure of bottling operations at Peats Ridge (NSW) and the rationalisation of production at Smithfield (NSW).

The Company said the restructure of Australian operations had resulted in a reduction of 77 full-time positions.

Restructuring of SPCA operations

CCA said the restructuring of its food manufacturing business SPCA continued in FY13, with initiatives being undertaken to materially reduce the cost of doing business.

“Many countries have used the high Australian dollar to dump packaged fruit product into the market at below cost. SPCA has applied for temporary tariff protection and has also lodged an anti-dumping application with the Australian Government,” Mr Davis said.

“The application seeks tariffs ranging from 30 to 50 per cent on imported packaged fruit being dumped into Australia, which would assist in providing a more level playing field for Australian grown and produced product. SPCA has also applied for a government grant to support restructuring, cost out and for future packaged fruit and vegetable innovation,” Mr Davis said.

CCA said SPCA had changed its labelling on a number of its brands to highlight the Australian provenance, and reported a recent growth in retailer support for the SPC and Goulburn Valley packaged fruit. Australian Food News reported earlier in August 2013 that SPCA had signed a supply deal with Woolworths to supply the supermarket’s private label packaged fruit.

SPCA outlook

CCA said the longer-term outlook for SPCA was subject to the outcome of a number of business initiatives being undertaken, including the applications for anti-dumping support and government grants as well as cost reduction and product development initiatives.

The Company said the outlook would also be impacted by the level of retailer and consumer support for SPCA’s Australian-grown products. CCA said it expected the business would have more clarity around the likely longer-term outcomes of some of these initiatives by the end of 2013. The valuation and operating structure of SPCA is to be reviewed by the end of the second half of the 2014 financial year.

Outlook for remainder of 2013

CCA said it now expects the 2013 full calendar year Group EBIT to be within a range of flat to a 4 per cent decline on last year, before significant items.

“While the Australian non-grocery business continues to perform well, the trading conditionsin the grocery channel continue to be challenging,” Mr Davis said. “A number of initiatives are being undertaken to improve the operating performance with a strong summer promotional and marketing program, 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 programs that commenced in the first quarter,” he said.

CCA said it expected momentum in its Indonesian business to continue, but for trading conditions in PNG to remain difficult.

“Looking forward, we remain very positive about the prospects for Indonesia and we will continue to invest ahead of the curve in production and distribution capacity and cold drink coolers. We have a very strong pipeline of new products and packs to be launched over the next 12 months and this is being supported by up-weighted investment and execution of consumer marketing by The Coca-Cola Company,” Mr Davis said.

Group capital expenditure to shift to up-weighted investment in Indonesia

CCA said Group capital expenditure would be around $430 million in 2013, and with the completion of a number of major investments in Australia, capex was expected to reduce to between $325-350 million in 2014.

In 2013, CCA said around 50 per cent of Group capex would be invested in Indonesia and PNG to materially increase production capacity and cold drink cooler penetration as demand for commercial ready-to-drink beverages rapidly increases.

The major investments in Indonesia will include the installation and upgrading of eight production lines, the commissioning of the Cibitung 32,000 square metre warehouse and the commissioning of the new Cikedokan (Jakarta) beverage production facility. CCA said one-way-pack production capacity had increased by 45 per cent since December 2012 and around 60,000 new cold drink coolers would be placed throughout Indonesia in the remainder of 2013, representing a 30 per cent net increase in the number of coolers in the market.

A further trading update will be provided in early November 2013.