27/10/2014

Thats Life: jobs to go as CCA slashes capex

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Thats Life: jobs to go as CCA slashes capex

PUBLISHED: 27 Oct 2014 PRINT EDITION: 27 Oct 2014
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Coca-Cola Amatil chief executive Alison Watkins is expected this week to unveil a new joint venture in
Indonesia with US partner The Coca Cola Co. Photo: Edwina Pickles
Sue Mitchell
Coca-Cola Amatil and its US partner, The Coca-Cola Co, will this week launch their first new cola product for
seven years, Coke Life, as CCA chief executive Alison Watkins releases the outcome of a strategic review that
will dramatically rebase earnings.
Analysts are expecting Ms Watkins to detail plans to slash capital expenditure and cut costs by at least
$100 million over three years by centralising production, streamlining supply chain and support costs, and culling
products and brands to free up funds to reinvest in marketing and new initiatives to drive volume growth.
The strategic review is likely to involve significant job losses, particularly in production and distribution. However,
analysts believe CCA may add jobs in sales, reversing cuts made in the second half of 2013 that contributed to
a fall in revenues in the Australian beverages business.
After The Australian Financial Review revealed a fortnight ago that the CCA board would visit Atlanta, Georgia to
debate the valuation of assets in Indonesia, Ms Watkins is expected to unveil this week a new operating and
profit-sharing structure in Indonesia with The Coca Cola Co, which has experienced a sharp fall in earnings and
is facing increased competition on price.
Ms Watkins announced the strategic review after issuing a 15 per cent profit warning in April, two months after
taking the helm from long-serving CEO Terry Davis. The former GrainCorp CEO has promised a step-change in
fixed costs and productivity and a new era of innovation and product development, saying CCA is now paying
the price for ignoring changes in consumer preferences, underinvesting in marketing and new products and
placing shorter-term profits ahead of longer-term returns.
Analysts have slashed profit forecasts ahead of the strategic review and now expect 2014 net profit before oneoff costs to fall between 20 per cent and 30 per cent. The remedies required to improve CCAs current operating
performance will be costly and should cause its earnings to retrace before growth can recommence, Merrill
Lynch analyst David Errington said in a report last Thursday.

Low calorie appeal

Analysts also expect CCA and The Coca-Cola Co to unveil new products, including Coke Life, its first new cola
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Thats Life: jobs to go as CCA slashes capex

variety since the highly successful launch of Coke Zero in 2006. CCA registered the Coca-Cola Life brand earlier
this year and has been evaluating its performance in other markets over the last few months.
Analysts say CCA would need to launch Coke Life in October or November to take advantage of the seasonal
surge in soft drink consumption.
Morningstar analyst Daniel Mueller believes Coke Life, which is sweetened with stevia and has 60 per cent
fewer calories than regular Coke, will appeal to consumers demanding low-calorie low-sugar alternatives to
sugary soft drinks. Credit Suisse analyst Larry Gandler is more sceptical, pointing to the launch of steviasweetened Pepsi Next.
Ms Watkins is keen to build a more collaborative relationship with CCAs 29 per cent shareholder, The CocaCola Co, which has been increasingly unhappy with growth in Australia and Indonesia in the last few years. Last
week, The Coca-Cola Co unveiled plans to cut costs by $US3 billion ($3.4 billion) a year by 2019 up from
$US1 billion previously and shift its focus from volume growth to revenue growth. This may come at a cost to
CCA if The Coca-Cola Co seeks to boost margins through higher concentrate prices.
CCA has invested more than $1.3 billion into Indonesia over the last two decades, according to Credit Suisse,
but the business remains significantly cash flow negative and volumes have failed to meet targets. CCA needs
to spend another $1 billion to fully develop the Indonesian market and tackle recent entrants such as Big Cola,
but is reluctant to invest further capital unless it can achieve better returns.
Under one proposal discussed by the CCA board and The Coca-Cola Co in recent weeks, CCA would sell an
equity stake in the Indonesian business for as much as $600 million, which would fund CCAs share of future
capex.

Bottled water option

However, the joint venture proposal has received a mixed reception from analysts. Some say it would create
conflicts of interest and do little to improve profits for CCA because The Coca-Cola Co would seek to make a
return on its investment through higher concentrate costs and lower marketing support. Others, however, said a
joint venture would make sense as long as CCA maintained control.
We believe it would be detrimental to CCA shareholders interests for a joint venture to be formed with TCCC,
Mr Errington said. TCCC would, under rational thinking, require an economic return on its investment, most
likely through economic profits from concentrate sales ... and the joint venture would be between two parties that
have at times had conflicts of interest.
The CCA board is expected to make a final decision on Indonesia on Wednesday, before the strategic review
update on Thursday. If the board decides against a joint venture, CCA may raise capital for further capex in
Indonesia.
Analysts believe CCA could also raise cash by selling its market-leading Mt Franklin bottled water brand to The
Coca-Cola Co. Mt Franklin is one of the few brands that is still owned by CCA and could be worth $600 million
to $800 million, according to analysts.
The sale of Mt Franklin would free up CCA to chase market share in the water market, possibly by launching a
budget-priced product that would better compete with private label water and brands such as Frantelle.
Ms Watkins is also expected to reiterate CCAs commitment to her predecessors alcoholic beverages strategy,
even though earnings from beer and spirits will fall short of forecasts this year.
Analysts believe CCA and its spirits partner Beam could take over additional brands from Beams new owner,
Suntory.
The alcoholic beverages strategy makes sense, one analyst said, but they need some big brands to take to
customers and Heineken and Corona are coming up for renewal in the next few years.
The Australian Financial Review

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