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Indonesian demand keeps Coca-Cola tasty

Whilst difficult trading conditions resulted in Coca-Cola Amatil’s (ASX: CCL) first fall in first-half earnings in seven years, the result was not as bad as originally anticipated, with the group’s earnings before interest and tax (EBIT) falling 6.9% (before significant items).

Originally, the company’s CEO Terry Davis had cautioned the market to expect a fall in EBIT by between 8% and 9%, but the actual result was boosted by strong earnings growth in Indonesia – an area that has been flagged as a key driver of future profits for the company.

In the Indonesia and PNG region, a volume increase of 11.8% and EBIT growth of 12.5% were realised, which were aided by the successful launch of new products and faster growth of the core brand portfolio.

While the group’s Australian beverages business accounts for around 75% of total earnings, it was this region that proved detrimental to Cocal-Cola Amatil’s interim results. A 10.1% decline in beverage earnings was recognised for the region. The company stated that the non-grocery channel performed well, but aggressive competitor pricing in the grocery sector weighed on earnings.

For instance, Mr. Davis slammed supermarket giants Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) earlier this year for selling products below cost whilst putting enormous pressure on suppliers to lower their prices.

Despite the setback in earnings for the period, the company cited continued strength of the balance sheet and financial ratios for being able to maintain its 24c partially franked interim dividend, whilst also declaring a special unfranked dividend of 2.5 cents per share. In total, this represents a 10.4% increase in interim payouts compared to the prior year.

Full-year outlook

Whilst a reduction in operating costs, a strong summer promotional programme and a number of new product releases are amongst the initiatives being undertaken by the group to improve operating performance, Coca-Cola Amatil still expects EBIT to be within the range of flat to a 4% decline on full-year earnings.

However, the company remains positive regarding the prospects in Indonesia as well as its re-entry into the beer market later this year. Although this will not impact profits this year, Mr. Davis stated that the company is “well positioned to hit the ground running with an expanded alcoholic beverages portfolio for 2014.”

Foolish takeaway

Although the company’s short-term results are not ideal, it does give investors an opportunity to stock up on shares at a discounted rate. Whilst Indonesian growth remains strong and the outlook for 2014 and beyond looks attractive, it just may be time to take a sip from this beverage manufacturer.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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