Watkins faces new battle as Coca-Cola starts to lose its fizz

Blair Speedy
AUGUST 21, 2014
THE AUSTRALIAN
ANALYSTS are expected to slash earnings forecasts for Coca-Cola Amatil after newly installed boss Alison Watkins flagged a major downturn in earnings for the second half of the year.
CCA reported a net profit of $182.3 million for the six months to the end of June, down 16 per cent from the previous first half, while revenue was up 0.5 per cent at $2.34bn.
The biggest hit came from the Australian business, where earnings before interest and tax fell by 14 per cent to $226m amid lower sales to smaller retailers and reduced demand in supermarkets due to poor consumer sentiment and aggressive competitor discounts.
Merrill Lynch analyst David Errington slammed the company over admissions that it had cut sales staff over 2013 and increased capital expenditure on refrigerators for customers “at a period of time where it made absolutely no economic sense”.
“My interpretation of that is that whoever did it, whoever made the decisions to do it, they had one motive in mind and that was effectively just to make earnings target and compromise the business to make short term earnings target,” he said.
The Indonesian and Papua New Guinea division, Coca-Cola Amatil’s second-largest revenue generator, saw EBIT plunge by 83 per cent to $5.2m amid surging inflation and a decline in the Indonesian rupiah, which added $19m to input costs.
But what most concerned investors were warnings that the company could see an even bigger slide in earnings during the second half. In delivering her first earnings report since taking the reins from Terry Davis in March, Ms Watkins said second half earnings “should exceed the first half” — something the company would generally achieve as a matter of course.
“If you look at the last couple of years, the second half has been around 55 per cent of the full-year result, so we certainly expect that it will be greater than the first half this year, but not to that normal extent, and that does translate into a disappointing 2014 and one that is materially lower than 2013,” she said.
A note from the Macquarie Equities desk described the result as “shocking”, while Citi analyst Gino Rossi said that if the second half result was in line with the first half, full-year earnings before interest and tax would be around 11 per cent below market expectations for EBIT of around $720m.
Shares in Coca-Cola Amatil fell as much as 5 per cent to a two-week low of $9.23 before closing at $9.54, down 20c on the day.
CCA also joined the chorus of companies exposed to discretionary spending which have complained at a collapse in consumer sentiment after the May budget.
“The consumer did take some fright after the budget in May, and the uncertainty over what measures are going to be implemented and when is causing that caution to linger longer, as well as higher unemployment,” Ms Watkins said.
CCA declared an interim dividend of 20c per share, franked at 75 per cent, down from 26.5c paid in the previous first half.