Australian food and beverage company Coca-Cola Amatil (CCA) has presented the results of its strategic review to investors.

The strategic review, announced at the Company’s Annual General Meeting in May 2014, was conducted in response to deteriorating market conditions across the Group with the objective of restoring CCA to sustainable earnings growth. Australian Food News reported in August 2014 that had announced a profit of $182.3 million for the first half of 2014, a drop of 19 per cent compared to the previous year before significant items.

CCA said concrete progress had been made implementing strategies to strengthen the market leadership position of the Company in its two major markets, Australasia and Indonesia:

• CCA and The Coca-Cola Company announced another Coca-Cola campaign in Australia and New Zealand with #colouryoursummer, which CCA said kick starts a continuous cycle of up-weighted marketing investment aimed at “bringing back the magic” of Coca-Cola;
• The commitment to bringing innovative new products to the market comes to life in April 2015 with the launch of Coke Life in Australia and New Zealand;
• A next-generation digital technology platform, which CCA said would “significantly enhance the route-to-market model and deliver a step change in customer service in Australia and New Zealand”; and
• In Indonesia, CCA and The Coca-Cola Company have developed a plan to accelerate the growth of the Indonesian business to strengthen the Company’s market leadership position. The Coca-Cola Company will inject US$500 million into CCA Indonesia, taking a 29.4 per cent equity interest in CCA Indonesia. Capex will be up-weighted to ~A$150m pa for the next 3-4 years to fund infrastructure expansion to enable the business to broaden its product offering, develop new consumption occasions and offer a greater range of affordable packages.

“The strategic review process has been comprehensive, structured and well-resourced and has confirmed our significant strengths and clarified our competitive advantages,” said Alison Watkins, CCA’s Group Managing Director.

Ms Watkins said she believed the plans would enable CCA to “return to growth and generate attractive and sustainable returns for our shareholders”.

Three broad themes

The plans have been developed reflecting three broad Group strategic themes:

• Strengthening our category leadership position in each of our markets;
• Making a step change in our productivity and in-market execution; and
• Building better alignment with The Coca-Cola Company.

“In parallel we’ve made changes to our organisational structure, leadership and to our partnership with The Coca-Cola Company,” Ms Watkins said.

“We now have a flatter organisation structure and more accountable Group Leadership Team,” Ms Watkins said. “Each business has recent new leadership with sound experience and strong values. We have refreshed our vision and values within the organisation to provide a clear sense of direction and purpose to our employee base,” she said.

The outcomes of the review for each business unit are as follows:

Stabilise earnings in Australasia and return to growth

The Australian beverage business will strengthen its category leadership position by rebuilding brand equity in Coca-Cola and with innovation geared toward “better for you” products in both CSDs and stills. Together with partner The Coca-Cola Company, CCA said it was materially up-weighting marketing investment and developing more targeted recruitment strategies. CCA said the new product development pipeline was “strong and well developed” with Coke Life, a lower calorie and naturally sweetened Coca-Cola offering, to be launched in April 2015.

CCA said it was reengineering the price pack architecture across channels with new frequency and entry level packs aimed at increasing affordability and meeting the desire for smaller packages while providing greater differentiation of packages across the channels.

“We are rolling out a next-generation digital technology platform which will significantly enhance the route-to-market model and deliver a step change in customer service,” Ms Watkins said. “At the same time we are restructuring the cost base to deliver ongoing productivity gains and continue to expect to achieve savings of over $100 million over the next three years which will be deployed to fund increased brand building and revenue management initiatives,” she said.

Ms Watkins said CCA had commenced implementation with the major change initiatives to be in place by mid-2015 and that the Company was confident of returning the business to delivering sustainable earnings growth.

Expand market presence in Indonesia to ‘realise the market’s potential’

Ms Watkins said Indonesia was “an exciting growth market for CCA”.

“With consistent growth in demand from Indonesia’s emerging middle class we now have the opportunity to increase our appeal to a broader range of consumers to ensure we continue to be a leading player in the market over the longer-term,” Ms Watkins said. “To achieve that position will require significant levels of investment into the market to capitalise on the growing demand,” she said.

In order to strengthen its market position, Ms Watkins said CCA had developed a joint system plan with The Coca-Cola Company to broaden its product offering with new products, new consumption occasions and a greater range of affordable packs.

At the same time Ms Watkins said CCA would transform its route-to-market model to increase its relevance and availability to the traditional trade and broaden its customer base.

“We will also be targeting improved productivity and efficiency from our production and logistics by better leveraging our scale,” Ms Watkins said.

The Coca-Cola Company will inject US$500 million into CCA Indonesia, taking a 29.4 per cent equity interest in CCA Indonesia and capex will be up-weighted to fund expansion of production, warehousing and cold drink infrastructure. Ms Watkins said the objective was for CCAI to be able to self-fund growth from operating cash flows from 2020.

“The plan has targets to progressively improve returns on capital over and above CCA Indonesia’s cost of capital over the medium term,” Ms Watkins said.

Continue to build alcoholic beverage portfolio in Australia and New Zealand

Ms Watkins said CCA would continue to build its alcoholic beverage portfolio by strengthening its product offering and customer servicing capability to the licensed channel.

“We will do this by leveraging CCA’s large-scale sales, manufacturing and distribution infrastructure assets,” Ms Watkins said. “We have a number of strong alcoholic beverage brand owner partners as well as the opportunity to develop our CCA brands. Growth needs to be paced and our medium term focus will be to build credibility by winning with our existing partners,” she said.

Invest to restore SPC to a profitable, modern food business

Ms Watkins said CCA had a transformation plan to revitalise the brand portfolio and return the business to growth.

“We have a strong pipeline of innovative fruit-based snack products backed by a disciplined capex plan that will modernise our production facilities and establish a lower cost position,” Ms Watkins said.

Financial outlook

CCA is targeting to return to mid single-digit growth in earnings per share over the next few years with no further decline expected after 2014.

“We are confident that the combination of revenue and cost initiatives we have underway will restore the business to growth,” Ms Watkins said. “The pace of recovery will however depend on the success of revenue initiatives in Australia and Indonesian economic factors,” she said.

“With free cash flow generation expected to remain strong, the business is well-placed to target a dividend payout ratio of over 80 per cent over the next three years,” Ms Watkins said. “We expect to maintain a conservative balance sheet position which provides us with flexibility to fund future growth opportunities,” she said.

Capex is expected to be around $310 million pa for the next three years, below the level of Group depreciation. The core Australian and New Zealand business have been well capitalised with a base of high quality existing assets and excess production capacity as a result of high levels of capital investment over the last five years. Indonesian capex is expected to be around A$150 million pa for 3-4 years supported by The Coca-Cola Company’s US$500m capital injection. As previously announced, SPC will invest $100 million over next three years comprising a $78 million CCA investment and $22 million in funding from the Victorian government.

CCA will provide a trading update in early December.