The Coca-Cola Amatil Ltd (ASX: CCL) share price rose 4% to $9.03 this morning after the company released its full year results. Revenues fell 3% to $5,024 million, and earnings before interest, tax, depreciation and amortisation (EBITDA) fell 0.7% to $679 million.
Net profit after tax was up an illusory 80% to $445 million – this was due to significant one-off impacts in the prior year. Using the more representative underlying numbers (which exclude those one-off impacts), net profit after tax fell 0.4% to $416 million. Earnings per share rose 2.2% to 55.9 cents, and dividends increased to 47 cents per share (46 cents last year).
The Australian beverages segment continues to struggle, with 'underlying EBIT' (earnings before interest and tax) falling 6% to $413 million. Other segments grew strongly, with NZ & Fiji growing 5% to $105 million, Indonesia & PNG growing 31% to $91 million, and Alcohol & Coffee growing 11% to $50 million. While growth in the other segments is excellent, the Australian beverages segment is over 4x as large as the next largest, and it is very difficult to offset a decline there with growth elsewhere.
Amatil has $1.3 billion in net debt ($2.3 billion total) which includes around $1 billion in cash in the bank.
I think Coca-Cola Amatil is in an impossible position. It keeps raising prices to cover cost increases, even though it faces fierce competition from the lower-cost Pepsi, as well as increasing competition in other segments. Both still and sparkling beverage volumes (formerly areas of strength) declined in the half, and the new Fuze tea struggled to gain traction. There is also a wider switch to healthier alternatives underway.
I have no real criticisms of the company's international divisions or its alcohol & coffee division – Amatil is good at this stuff and it is making solid progress. However – given that its core business essentially appears to be in secular decline – I do not agree with the company's decision to keep cranking up debt to make buybacks and increase dividends. I also think the company's net debt position is not as good as it appears. A lot of the cash at bank is earmarked for investment in Indonesia.
Shareholders can earn nice returns out of a declining business if the company pays down debt and opportunistically buys back shares at the right price. Yet Amatil's price increases in the core Australian business could also accelerate the decline, given stiff competition. I like Amatil and it's a business that I've spent a lot of time looking at over the years. It's not run as conservatively as I would like, however, and as a result I'm in no rush to go out and buy it. Somewhere below $8 I might start to get interested.
