CCA: Forget The Results, It’s All About The Review

Like Telstra, Coca Cola Amatil’s current share price is all about what is to happen and how the future will pan out, rather than the recent past, especially the 2006 earnings which were released yesterday.

Like Telstra, which says its earnings are turning, CCA has confidence about the outlook (as any company would these days) but this is overlaid by rising expectations of a top to tail review of the company and its operations here in Australia and in Asia.

From what the company and CEO, Terry Davis said yesterday, this review, the results of which will be revealed on April 18, contain the potential for significant cost cuts and staff sackings, as well asset sales (Korea especially) and a change in approach to business.

It is likely to result in some poor publicity for the company, if baldy handled, especially with the suggestion (see below) that the company is looking at ‘international sourcing’ for its SPC Ardmona subsidiary. That means looking at importing fruit and juice from foreign suppliers.

But CCA management were quick to deny that late yesterday, several hours are making the statement.

The anticipation of the review and significant cost reductions have been building for five months or so, even since it was disclosed last year. It has helped the share price rise above $8 (a recent high of $8.04) and stay there yesterday, despite a mixed result.

The 2006 figures were however dragged down by the sluggish first half with the company’s second half showing improvement as commodity price pressures eased, new products kicked in and hot weather helped demand.

But it was the rising costs of sugar, aluminium and PET resin which hit the CCA result in 2006. It reported an 11.9 per cent fall in net earnings to $282.4 million, although its revenue rose 6.7 per cent to $4.44 billion.

CCA said the higher cost of sugar, aluminium and PET resin drove increases of $151.9 million in cost of goods sold (COGS) for beverages in 2006, a rise of 7.8 per cent rise over the year.

And that plus problems in South Korea had an impact.

CCA said that before significant items, its profit was up 0.9 per cent to $323.5 million, towards the top end of the November upgrade earnings range of $312 million to $325 million.

At the first half earnings before significant items were up 0.1 per cent to $145 million but down 21.3 per cent after significant items to $114 million.

“In 2006, the core focus for CCA was to recover commodity driven cost increases. This was successfully achieved throughout the second half by successful execution of stronger revenue management initiatives. As a result, group EBIT margins in the second half increased to a strong 14.3%, up from 14.2% in the second half of 2005.

“We believe we have weathered the peak in commodity cost input increases. The business has experienced good price realisation in the year to date and as a result, we feel confident of an improved EBIT result in 2007, ” said Mr Davis. “There will still be commodity driven COGS increases in 2007 so the priority for this year will continue to be price realisation through higher levels of innovation backed by outstanding in-market execution.”

But while that confidence is to be expected, for the market and especially big investors, it will all turn on the breadth and believability of the review.

Here’s what the company said about that review in yesterday’s statement:

As part of the next three year business planning process, CCA is undertaking a strategic review of the business across all geographic locations. The review, with the detail of outcomes and priorities, will be announced on 18 April 2007 and shall address the following key areas:

* Australia & New Zealand – The restructure of the sales force from state based to channel focused teams in order to strengthen CCA’s customer service capability. CCA will also investigate the opportunity to consolidate the Australian and New Zealand businesses to build stronger alignment, improve resource allocation and better leverage the scale of the Australian business.

* South Korea – The Coca-Cola Company (TCCC) and CCA are working with McKinsey & Company to assess growth and other structural initiatives for the South Korean business. In addition, CCA has enlisted the services of investment bank Goldman Sachs JBWere to assist in the assessment of the best ownership options for the South Korean business which may or may not result in the divestiture of some or all of CCA’s South Korean operations.

* Alcohol strategy – Options shall be assessed to fast track CCA’s presence in the alcoholic beverages sector.

* SPCA – SPCA to assess opportunities to scale up international sourcing and sales development in the food business.

* Information systems – Assessment of the opportunity to undertake a major base technology system upgrade in collaboration with TCCC and other major Coke bottlers to implement a new global sales and back office technology platform.

* Corporate function review – CCA to review its corporate costs and structure. In anticipation of this, corporate overheads have been allocated to the business units in the 2006 result, providing greater transparency and accountability of the corporate function to the business units.

* Commodity management – CCA to review options as to its approach to managing commodity procurement in order to moderate the impact of short term volatility in commodity input costs on the business.


Now what investors expect from that is: job losses and lower costs from the changes to the Australian and NZ sales structure, and the possible consolidation of operations in both countries, the sale of South Korea (hopefully) and if not, some significant changes designed to raise earnings quickly, cost cuts in head office (corporate costs and structure ‘review’), spending on the IT upgrade (always dangerous

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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