With strong growth and the disposal of its under-performing Filipino unit, Coca-Cola Amatil is fast becoming investor friendly again. David Robertson speaks to the company's investor relation's manager Peter Steel about future growth both home and abroad.

Coca-Cola Amatil seems to have thrown off the uncertainty that dogged its Filipono operations for so long and with a new chief executive on board is hoping to consolidate its position in the Asia-Pacific region.

The last two or three years have not been easy for CCA and its share price has fallen from over A$8 (US$3.93) to around A$3.60 in October last year. But the A$2.26bn sale of the Philippines business, seen by many analysts as an albatross around CCA's neck, has freed resources to tackle its other major dominions - South Korea and Indonesia.

David Kennedy, a former Coca-Cola man from Atlanta, who presided over the Australian bottler's decline in recent years, has left. Investors were not only unhappy with Kennedy's A$3.2m remuneration package but also a $A1.2m incentive payment that many claimed was unjustified.

Terry Davis who was snatched from Foster's where he was managing director of Beringer Blass Wine Estates - and the heir apparent to Foster's boss Ted Kunkel in many eyes will replace Kennedy.

The recruitment of Davis is seen as a major coup for CCA given he was being groomed for the bigger job of running Foster's (although some whispers in the Sydney financial set suggest Davis is jumping before Foster's is bought out by one of the big Europeans - Goldman Sachs has been buying a lot of Australian currency for a client in recent weeks sparking a fresh round of rumours).


Water in particular, which is a CCA brand not Coca-Cola, is an area the company wants to push hard.

Meanwhile, CCA has been enjoying something of a renaissance in recent months with the share price rallying from A$4.20 in June to nearly A$5.45 although, like most companies, its shares have been hit by the malaise caused by September 11th's terrorist attacks. Analysts have upgraded their profit forecasts to between $200m and $210m from $180-$200m previously.

CCA's business splits conveniently in two; firstly the mature (or "established" as CCA calls them) markets of Australia and Oceania (New Zealand, Fiji etc.) and secondly the developing markets of South Korea and Indonesia. The large and steady cash flow of the first is being used to generate business growth in the second.

Australia represents half of CCA's business and it shocked analysts with a staggering 7% volume growth (and 12% profit growth) in the first half on the back of a hot summer and strong numbers following the Olympics. But CCA is eager to point out that this is a freak number and should not be seen as a base line - analysts agree and few expect full year growth to be anywhere near that figure.

"In the first half we grew 7% but that is not necessarily sustainable," says CCA investor relation's manager Peter Steel. "Obviously we're pleased with this growth but if you look over the last 10 years the average has been more like 3% and 1.5% in 1999/2000. So we are not saying we will be able to maintain that 7% long term. People keep telling us that Australia is a mature market but we can still show these levels of growth so there is some way to go yet."

Australian consumption of carbonated soft drinks is 334 8-ounce servings per capita per annum. This compares with 424 in the US and 459 in Mexico so CCA sees an opportunity to grow further even in its established Australasian markets. It is also planning to build its non-carbonated business, which includes Powerade and the water Mount Franklin - both of which are growing at double-digit rates, although admittedly from a small base.

Water in particular, which is a CCA brand not Coca-Cola, is an area the company wants to push hard.

South Korea was bought from Coca-Cola and made A$16.8m last year compared with an A$8m loss in 1999 and a A$17m loss the year before. But given that CCA has about A$1.2bn invested in South Korea - about a quarter of assets - the company needs to get better numbers out of South Korea. A major focus for the coming year, therefore, will be getting a better return on capital, slashing costs and increasing demand in this market.

But South Korea is an undeveloped soft drink market and a relatively affluent society so there is plenty of potential. Carbonated soft drinks make up only 16% of the total drinks market and Coke product consumption is just 20% of Australian levels (water and barley tea are the traditional favourites).

"There are very strong growth trends in South Korea," says Steel. "It is cash flow positive and that is rare in a developing market because of the infrastructure requirements. Indonesia is cash flow negative but only slightly and we see it becoming positive in the near future."

With the biggest population in the region, Indonesia represents a massive opportunity for CCA, which already has 90% of the country's carbonated soft drinks market. Recent years have produced 20% to 30% annual growth rates but in the June quarter that fell to just 11.9% because of consumer uncertainty.

On the whole analysts agree that CCA, particularly with the new CEO, represents a good opportunity but they continue to be worried by capital requirements in the developing markets. There is also the potential of a backlash against Coke products in Indonesia if the US goes to war against Muslim nations.

Coca-Cola has already warned that demand is slowing and analysts are concerned that CCA's volume and earnings could be hit by worsening consumer confidence following the terrorist attacks on the US. In the meantime full year volume growth is still pegged at between 4% and 6% and despite bad news from Coke the Australian bottler put on 16c last week to finish at $5.45.

It looks like a long road back to the heights of previous years for CCA although its two developing markets are capable of delivering the growth required but, as ever with Coke affiliates, it will also be dependent on Atlanta to keep its brands fresh.


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