Edited Transcript of CCL.AX earnings conference call or presentation 20-Aug-20 12:00am GMT

Last but not least, we continued to support consumers and communities through a range of initiatives such as cash and beverage donations, and the production and donation of hand sanitizer to frontline workers in Indonesia and Fiji. Ensuring business continuity over this period has been imperative. To achieve this, we established an appropriate governance structure featuring daily business continuity and risk reviews as well as ongoing monitoring and adaptation of our near-term COVID response plan.

From a financial perspective, we stress tested our balance sheet, P&L and liquidity position across a range of scenarios, and reprioritized our 2020 projects. We also implemented measures to bring our expenditure in line with the COVID-19 trading environment and deferred noncritical projects to reduce CapEx for the year by $100 million.

Let’s turn now to a high-level overview of our financial performance during the half, noting that Greg will cover the financials in more detail shortly. We had a strong start to the year with group trading revenue up 2.4% in the first quarter despite the adverse impact of the bushfires on our Australian business early in the year. By the second quarter of 2020, the full brunt of COVID across all our markets started to be felt, coinciding with our peak Easter and Ramadan trading periods. Compounding the challenges that COVID posed were the floods in Indonesia and Cyclone Harold in Fiji. As a result, group trading revenue declined by 9.2% in the half. Ongoing EBITDA was down 19.4%, reflecting the impact of lower volumes and shifts in channel and pack mix on margins. We were able to partially offset some of this decline through cost savings, delivering $60 million of the $140 million in savings earmarked for FY ’20. Ongoing EBIT was down 34.4% on the first half of 2019, reflecting the fixed nature of depreciation, and ongoing NPAT was down 35.3% at $112.1 million.

What’s been pleasing about our performance this half is the strong cash generation of our business and our ability to reduce net debt by $49.9 million. Importantly, our cash realization ratio of 111.8% is a testament to the quality of the earnings of our business. In a sign of confidence in the strength and resilience of our business, the Board has declared an unfranked interim dividend of $0.09 per share representing a payout ratio of 58%.

Within the context of these challenging conditions, we’ve seen consumers turn to their favorite brands, enabling us to achieve market share gains in both Australia and New Zealand driven by the strong performance of the Coca-Cola trademark brands. Sustainability has continued to be a priority, and I’m pleased to report that in addition to signing a heads of agreement with Dynapack to build a bottle-to-bottle grade PET recycling facility in Indonesia, we also achieved an 8.8% sugar reduction in our Australian portfolio, bringing us a step closer to our target of reducing sugar by 10% by the end of 2020.

From a people perspective, it was heartening to achieve an improvement in our employee engagement scores in the first half of 2020 compared to last year. A great outcome given the unique circumstances faced with staff working remotely, and redeployment required to address channel closures when COVID lockdown restrictions were implemented.

I’ll now hand over to Greg, who will take you through our financial performance in more detail.

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [3]

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Thank you, Alison. Good morning, everybody. Starting with our income statement on Slide 11. As Alison noted, it’s been a pretty volatile period in each of our markets. And whilst the specifics in each market differed, generally speaking, widespread outlet closures and restricted trading led to lower overall volumes and therefore, revenues.

As a result, revenue fell by $220.5 million compared to the same period last year. With declines across our regions, ranging in local currency from 23% in Indonesia to 2.3% in New Zealand. Although revenue declined in line with volume, the restrictions had a greater impact on margins. This reflects our loss of volume over a largely fixed cost base, and was exacerbated by the change in our channel mix towards grocery as well as increased take-home consumption. Peter and Alison will talk in more detail to these dynamics when we get to the business segment section of the presentation.

We’re able to offset some of this impact through our cost-out program. By the end of June, we delivered $60 million in savings including $9 million in direct marketing costs, and we’re on track to deliver $140 million in savings for the full year. Consequently, EBITDA was $370.5 million, a decrease of 19.4%. I’ll focus on EBITDA today more so than in previous presentations. Given the largely fixed and noncash nature of depreciation and amortization, EBITDA provides greater insight into comparative performance and the quality of underlying earnings. For these reasons, we saw EBIT decline by 34.4%, and ongoing NPAT decreased by 35.3% to $112.1 million.

Our statutory result included the after-tax impact of the noncash impairment charges announced on the 23rd of July 2020, which I will cover in more detail in a moment. As a result, we reported a statutory loss after tax of $8.7 million.

On Slide 12, you can see the composition of the $121 million nontrading items we incurred in the half. The number mainly comprises noncash impairment charges posttax and postminorities. This equates to $162 million preminorities and is well within the range announced in July. The impairments relate to — predominantly to the carrying value of the Indonesian and Paradise Beverages, Fijian and Samoan businesses. They reflect the impact on — of COVID on our cash flows in these markets, and the constraints in relation to valuing these businesses as prescribed in the relevant accounting standards.

As you know, these impairments are noncash accounting adjustments. And while we expect these markets to take some time to recover, we remain confident about the long-term prospects of each of these businesses.

You can also see we’ve recognized favorable tax adjustments in our Indonesian and New Zealand businesses as nontrading items where tax-related stimulus was introduced. These credits reflect the extent to which such changes favorably impacted our deferred tax balances.

Okay. On Slide 13, we provided a month-by-month chart showing revenue changes across our Australian, New Zealand and Indonesian businesses compared to the prior corresponding periods. It really does tell the story of an extraordinary 6 months, and provides insight into the relative performance of each of our key businesses prior to and since the pandemic began.

In Australia, after exiting 2019 with real momentum, the bushfires had a marked impact on revenue in January and February. With COVID-related trading restrictions and social distancing measures commencing in mid-March, we saw an initial uplift in grocery sales as consumers began panic buying and stockpiling for lockdown. April represented the month where restrictions were most severe. Trading began to lift as restrictions progressively eased from mid-May, returning to growth in July.

Now as you know, the approach to the health crisis in New Zealand was to eradicate the virus. This played out in our revenues with a slightly more pronounced decline in April as more stringent restrictions were introduced, before a sharp recovery as the economy began opening up. Pleasingly, returning to growth in June and continuing into July.

In Indonesia, the impact of the pandemic has been most severe, given the compounding effect of coinciding with the festive season recommenced in April. Now Alison will provide further details shortly. Suffice to say, COVID struck in a period when volumes typically double their pre-festive levels. As a result, volumes during April and May were down 40% to 50% on the prior year as our Indonesian business cycled the 2 largest volume months ever recorded by our business.

So we’ll turn to Slide 14. Here, we provide a breakdown of our EBITDA performance by geographic segment. As you can see, the impact of trading from the previous slide is playing out in the relative profitability of each of our businesses.

Our Australian business experienced an EBITDA decline of 24% on the prior corresponding period. In addition to overall decline in volume, Australia really felt the impact of the shift in volume to our grocery channel and the increase in at-home consumption. That said, as Peter will explain shortly, given these conditions, the Australian business has outperformed its competitors, winning market share in key categories.

In the Pacific, the EBITDA decline was less pronounced, down 4% on pcp, largely on the back of a strong performance in New Zealand. The first quarter saw the New Zealand business continuing its momentum delivering low single-digit revenue growth and double-digit EBIT growth. While volume for the half was down 5.6% due to COVID restrictions, revenue was only down 2.3% on a constant-currency basis, reflecting the benefit of price increases in the second half last year, favorably impacting comparisons. It should be noted that EBITDA included New Zealand’s $7 million in government stimulus. All in all, a terrific result under the circumstances.

Our Fijian business, on the other hand, was hard hit due to its dependency on tourism which has been severely hit by the travel restrictions and the flow and effect to the economy.

Our Indonesian and PNG segment was significantly challenged in the half delivering a 27.2% decline in EBITDA. I’ll leave Alison to provide more detail about the dynamics in Indonesia in a moment, other than to note that Indonesia responded rapidly in terms of costs, and it finished the half EBITDA positive in its own right. PNG experienced a short, sharp shutdown returning to volume growth in May and June as COVID restrictions eased.

Okay. Let’s look at our cash flows on Slide 15, that’s obviously a key measure in a period like this. Our working capital was very encouraging. We unwound $85 million of working capital during the period, with all loans, receivables, payables and inventory, well-managed across each of our businesses. The performance in Indonesia was particularly good, given the build for a festive trading period that largely didn’t eventuate. Debtors aging invariably increased during the period as we sought to help our smaller customers through the crisis. Pleasingly, our percentage of debtors over 60 days only increased by 1.8% on a gross basis at a group level. I would note, we booked an extra $7 million in debtor provisions during the period through our normal trading, which represents around 1% of that increase.

Net interest and other finance costs increased by $6.5 million in the half primarily due to changes in the timing of accruals and cash flows. As a result, our operating cash flows were only down $10.6 million with strong working capital management, countering much of the $89 million decline in EBITDA. The ability to deliver $328.8 million in operating cash is, I think, an excellent result given the prevailing conditions.

Capital expenditure increased by $14.5 million to $112.5 million driven by the funding of New Zealand and PNG projects that we’re committed to in 2019. We expect this to ease in the second half and remain on track for CapEx of around $200 million for the full year.

So with all that, our free cash flow at $216.7 million was strong. And importantly, our cash realization ratio was 111.8%, up 15.2 points on the first half 2019. An excellent result reflecting our disciplined management of working capital during the period.

Last but not least, let’s have a look at our balance sheet on Slide 16. We entered this crisis with strong financial foundations, and this continues to be the case. I’m pleased to report that our net debt decreased by $49.9 million in the half to $1.7 billion. This represents just under 2 turns of EBITDA and includes $523 million of lease-related liabilities. Adjusted for this, our net debt position is around 1.5 turns of EBITDA.

Our ability to deliver a net debt reduction is even more significant given we paid the FY ’19 final dividend in March, which equated to $188.2 million.

Now during the half, we took steps to further strengthen our debt facilities. We increased total facilities to $2.7 billion as of the 26th of June and extended the debt maturity profile to 5.8 years. We’re also holding approximately $1.6 billion of liquidity. This includes close to $1 billion in cash and $600 million in undrawn facilities. Within this cash balance, we hold around $600 million in Indonesia, PNG and other regional businesses. And while we’ve reduced this balance by $190 million over the last 6 months, we typically exclude it from our liquidity calculations. Adjusted for this, we hold $1 billion in liquidity.

So we’ve strengthened our facilities, we’ve extended our maturity profile and we only have around $200 million of debt due for repayment in the next 12 months. We presently have $1 billion in liquidity, and continue to demonstrate strong cash flow generation. Importantly, we have no bank covenants. As a result, we’re in an excellent position to ride out the crisis and capitalize on any opportunities that might emerge. So on that note, I’ll hand over to Peter who’ll provide you with more color around the performance of the Australian business.

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Peter West, Coca-Cola Amatil Limited – MD of Australia [4]

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Thank you, Greg, and good morning, everyone. Let’s start with the financial performance of the Australian business.

As Alison and Greg have mentioned, the beverage category was impacted in the first 6 weeks of the year by bushfires across the country. The business rebounded in mid-Feb. And as the first 6 weeks of the year are relatively small to the full year, we were confident in our ability to recapture volume with strong plans across the Easter festive period. By March, however, the onset of COVID resulted in panic buying in grocery, followed by significant impacts to on-the-go customers, leading to peak Easter volume uplifts being unable to be realized in lockdown. As a result, our total trading revenue for the half was down 8.8%. This decline was comprised of a 5% decline in our Alcohol & Coffee revenue and a 9% decline in our nonalcoholic ready-to-drink revenue.

Looking firstly at our NARTD revenue, you can see from the table that our revenue per unit case was down 1.4%. This reflects a 2.5% decline in revenue per unit case from channel and product mix partially offset by an increase in container deposit schemes across charges in the half. Our half 1 ’20 performance needs to be looked at in the context of the broader NARTD category. What has been pleasing to see is our ability to grow our share in a measured market, with our volume share growing 1.3 percentage points in the half. This was driven by the Coca-Cola Trademark, and in particular, Coca-Cola No Sugar, and is a testament to the strength of our brands and our strong market execution.

Our Alcohol & Coffee business was also adversely impacted in the half, with alcohol affected by the closure of on-premise outlets. And our coffee business severely impacted by government restrictions on cafés and pubs and clubs.

Moving down the table, you can see that our EBITDA was $186.3 million, down 23.6% on half 1 ’19, and EBIT was down 35.5% at $118.7 million. There was a twofold impact on EBIT this half. First, there was a shift to lower margin channels and packs, which we’ve spoken about. And secondly, the lower volumes resulted in lower absorption of our fixed cost base, which we were able to partially mitigate through cost initiatives which delivered $37 million of savings in the half.

Turning now to our NARTD channel performance. On this slide, you can see the marked differences in performance of each of our channels as consumer buying patterns responded to the COVID restrictions. In the grocery channel, following a period of stockpiling in March and early April, we saw volumes normalize in May and June resulting in a 2.4% increase for the half. There was, however, a distinct change in consumer behavior with shoppers buying larger take-home packs and fewer front-of-store cold drinks.

In the convenience and petrol channel, our customers were significantly impacted by the reduction in fuel sales and shopper numbers. Our volumes declined by 7% despite growth in May and June. This decline was less pronounced in the broader market enabling us to achieve volume and value share growth.

Our on-the-go channel was the most severely impacted with volume, excluding national on-premise, down 25% on half 1 ’19 and national on-premise volume down 18%. The channel was significantly impacted to closures and restrictions on trading. As an example, in April, 44% of our on-the-go customers were closed, and of those that were opened, 65% were operating with restricted trading.

We saw an improvement in terms of volume and outlet count late in the half led by our state immediate consumption and national on-premise subchannels, in line with reopenings as restrictions eased. What has been notable is the increase in volumes sold through online platforms. We’ve had instances where Amatil’s sales through individual food aggregator platforms doubled over the COVID period.

Now let’s take a closer look at what impacts these lower volumes and changes in consumer behavior had on our margins. The graph on this slide shows the shift on volume from a high-margin on-the-go and C&P channels to our lower-margin grocery channels, with grocery volume making up 57% of a total NARTD volume in half 1 ’20, up from 51% in half 1 ’19. This trend was even more pronounced in the second quarter with grocery contributing 59% of total NARTD volume.

In addition to shifts in this channel mix, we all saw a shift in the pack mix. And if you look at the graph on the right-hand side, you can see a pronounced decline in our high-margin Coca-Cola Trademark single-serve packs and growth in our lower margin multi-pack cans and multi-serve bottles. This is indicative of the increased at-home consumption, reflecting outlet closures and government-imposed COVID restrictions on consumer movements since March. The impact of the volume declines we experienced in the half, coupled with the shift from high-margin to low-margin channels and packs, had a pronounced impact on our EBIT margins which declined by 3.7 points.

Turning now to the NARTD category performance. In the table we provided, you can see the composition of our volume in half 1 ’20 versus half 1 ’19 by category. What is interesting about this table is that it shows some fundamental changes in consumer preferences. The main callout is the strong performance of Coca-Cola No Sugar and our energy category, which grew 6.7% and 2.4%, respectively, in the half, an outstanding result given the prevailing trading conditions. The strength of the Coca-Cola Trademark or Amatil outperformed the measured market cola category in volume growth with both Classic Cola and Coca-Cola No Sugar achieving gains in value and volume share. Taking into consideration year-to-date performance to the second week of August, the Coca-Cola Trademark has returned to volume growth of plus 1%.

In relation to the energy category, what was particularly pleasing to note was that we achieved volume growth despite cycling the 2019 Coke energy launch, and we outperformed the energy market, delivering both value and volume share gains.

The categories that were hardest hit were water and other stills, which declined in volume by 20% and 12%, respectively, reflecting significant restrictions on mobility and activities such as community sports, gym attendance and entertainment. An interesting callout in the water category was the 14% growth in volume that our sparkling water achieved in the grocery channel.

Our Alcohol & Coffee business also demonstrated some notable trends. As you can see from the chart on this slide, within our alcohol business, spirits was the star performer achieving volume growth and maintaining value market share driven by share gains in vodka, gin and scotch.

Looking at specific brands, it was pleasing to see the Jim Beam trademark delivered a significant improvement in volume trajectory. Whilst Canadian Club performance was impacted by on-premise outlet closures, it was pleasing to achieve double-digit volume growth in June. Our beer and cider categories were also challenged by outlet closures and trading restrictions.

The hardest hit category was our coffee business. Volume in this category was severely impacted by café, and pub and club outlet closures, although modest signs of improvement have started to emerge since May in the on-the-go channel.

So let’s take a look at what’s happened since the 30th of June and what our key priorities have been in this evolving market. On this slide, you can see a graph that charts our NARTD volumes compared to the prior corresponding period on a 10-day rolling average basis since December. Overlaying this, we’ve shown key events that have impacted our volumes.

You can see the adverse impact that bushfires had at the start of the year. By March and early April, you can see volume growth as consumers engaged in panic buying. And by late April and early May, COVID lockdown restrictions were in place and the declines in our volumes was dramatic. As COVID restrictions started to ease, you can see the week-on-week improvement in our volumes, with July delivering growth on last year. And as we enter August, you can see this growth slowdown reflecting the resurgence of COVID infections in Victoria and the reinstatement of pandemic restrictions. What is of note is that the performance has varied by state, depending on the level of restrictions implemented and by postcode, with performance outside the CBD typically stronger due to the large contingent of people working from home.

I’d like to take a moment now to focus more closely on what we’ve been seeing in terms of trading performance in July and the first 2 weeks of August.

Our performance in July was pleasing. We saw total Australian volumes grow by 3% on last year with NARTD volumes up approximately 2% led by all cola variants and our at-home packs. Energy also performed well continuing to achieve solid volume growth, and our sports category returned to growth. The NARTD-measured market as a whole grew in July, which has been an encouraging trend. Importantly, Amatil outperformed the market, achieving volume and value share gains.

From a channel perspective, our grocery and C&P channels achieved an impressive 17% growth in volume in the month compared to last year. Whilst our on-the-go channel remained challenged, we did see it stabilize with volumes minus 17% on July 2019. Our alcohol business grew volume by approximately 19% in July as on-premise outlets reopened and socializing resumed. There was also ongoing strong growth at home consumption of spirits, a trend that we’ve noticed since the second quarter of ’20 and an increase in demand for Premix. Our coffee business continued to be challenged in July with volume declining 9% due to COVID restrictions in on-the-go outlets. Some of this decline was offset by growth in our grocery coffee volumes.

In the first 2 weeks of August, we’ve seen total Australian volumes up marginally on the prior corresponding period, reflecting the uncertainty arising from the resurgence of COVID infections in Victoria.

Before I wrap up, it’s worthwhile to take a look at the wider market implications of the pandemic on consumer behavior, not only in terms of immediate response, but also more broadly in terms of possible evolving shopping trends. In the initial COVID lockdown phase, with restrictions on mobility, consumers shopped less frequency — less frequently across all retailers with increased basket size. There was a clear move to shopping Monday to Friday and less on weekends with a significant and structural shift to online. For example, many of our quick service restaurants experienced growth in food aggregators from 9% of sales to 17% of sales.

The clearest change in the move to the restricted trading phase was the strong rebound of the petrol and convenience channel, demonstrating a return to mobility, and an avoidance of public transport, which we get to see in our vending results. Whilst patrons embraced the returns to hotels, clubs and restaurants, albeit with less space due to social distancing, nevertheless, we’ve seen softer volumes than last year.

We’ve seen in-home consumption performed strongly over the last 12 weeks, and an increasing trend towards entertaining from home. There has been an uneven impact in the performance of our customers. With strong demand from traditional takeaway of foodservice areas such as pizza, burgers, fish and chips with a decline in sushi and Asian cuisine. A transition of volume away from CBD areas to suburban and regional areas as a large proportion of employees work from home and e-commerce has been a revelation across all customers. These trends have implications for our business.

From a portfolio perspective, we’ve seen increased demand for popular brands, take-home PET and multi-serve packs, and a skew towards healthier beverages such as Coca-Cola No Sugar and diets and lights. Demand, however, for immediate consumption cold drinks has declined with a reduction in shopper numbers, although it appears to be rebounding with increased consumer mobility.

As restrictions change, we can quickly assess which of these trends become permanent structural change, and be agile in our response to ensure we capitalize on the opportunities.

So what does all of this mean for our business and our accelerated Australian growth plan? From a category perspective, we continue to drive the strong performance in the Coca-Cola Trademark, focusing on Coca-Cola No Sugar to lead recovery. We’ll also continue our momentum in energy through innovation and precision execution.

In terms of channels, our primary focus is on ensuring we recapture core range availability in our small stores, which have been impacted by closures and restricted trading. I’m pleased to report that in July, we gained an additional 13,000 core ranging points versus June in the state immediate consumption channel as restrictions lifted. We will also amplify our online presence and enhance our product range across e-commerce platforms, and ensure impactful activation during key selling weeks, such as Footy Finals and the important fourth quarter festive trading period.

Overriding all of this is our program of work to adjust our cost to serve to the prevailing market conditions and to leverage our data-driven initiatives to ensure we are agile in responding to geographic and channel shifts. We are focused on ensuring our network is responsive and supportive of our customer base needs.

I will now hand back to Alison, who will talk about the performance of the businesses outside of Australia.

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Alison Mary Watkins, Coca-Cola Amatil Limited – Group MD & Executive Director [5]

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Thank you, Peter. Starting with our Pacific business. On this slide, you can see the key financial metrics for our Pacific business.

This segment delivered the lowest decline in trading revenue in the half, down 4.8% on the first half of 2019, reflecting volume decline of 8% and revenue per case growth of 3.3%. Ongoing EBITDA was down 4.2% and EBIT was down 8%. Our EBIT margin declined by 0.5 points.

This financial result reflects a resilient performance by our New Zealand business, which had a strong start to the year, delivering revenue and EBIT growth in the first quarter. The brunt of the pandemic on on-the-go and license customer outlet closures was felt in April and May, resulting in volume declines of 5.6% for the half. Strong revenue management partly mitigated the decline in volumes as did disciplined cost management and a COVID-related government subsidy of NZD 7 million.

Our Fijian business was more adversely impacted during the half given the prevailing tough economic climate, which was exacerbated by COVID’s impact on tourism. This resulted in significant volume, revenue and EBIT declines.

Let’s take a closer look at our New Zealand business and drivers of its performance. From the graph on the right-hand side, you can see the impact on our volumes by channel during the half with grocery growing and a dramatic contraction in our on-the-go channel. Since COVID restrictions started to be eased in late May, we’ve seen improvement in trading conditions, most notably in our on-the-go channel, which delivered revenue growth in June.

In addition to channel mix shift, we also experienced increased at-home consumption with growth in demand for multi-pack cans and take-home packs. A callout this half was the strong performance of our Coca-Cola Trademark brands, with Coca-Cola No Sugar delivering double-digit volume and revenue growth, and Classic Cola delivering revenue growth. This brings us to our July and early August trading update and our priorities for the remainder of the year.

On this slide, we’ve charted the week-by-week volume changes in our New Zealand business compared with the prior corresponding period. You can see the solid growth we experienced in the first quarter, followed by a dramatic decline in April and early may due to the COVID lockdown restrictions. As these restrictions eased in late May, you can see the recovery in our business. Volume normalized in July, following 4% growth in June, reflecting initial pent-up consumer demand in response to the lifting of restrictions. In the first 2 weeks of August, volume grew by 13%, although this is largely a function of a cycling price increases implemented in late July in 2019, which resulted in a short-term drop in consumer demand.

Fiji remains challenged with nonalcoholic ready-to-drink volume declining by 25% in July, reflecting the ongoing impacts of the pandemic on tourism and the subdued economic climate in this market. In the first 2 weeks of August, we’ve seen improvement with total volume down 6% on the prior comparative period.

Let’s move on now to our Indonesia and PNG business. You can see in the table on this slide that trading revenue for this segment was down 13.6% on last year, and volume was down 17.1%. Ongoing EBITDA was down 27.2%, and EBIT was down 59.7% reflecting the impact of depreciation. EBIT margin declined 4.7 points.

At our previous trading updates, we noted that Indonesia had a solid start to the year, delivering its eighth consecutive quarter of volume growth in the first quarter of 2020. The onset of COVID, however, dramatically impacted the business, given it coincided with the heaviest trading period of the year in this market. There’s been a rapid deterioration of the broader macroeconomic environment with pressure on disposable income and affordability increasing. In the first half of 2020, we saw our Indonesian volumes declined by 19%. To address this deterioration, we focused on tight management of costs, delivering $16 million in operational efficiencies.

In PNG, we saw a modest volume declines of 2.5%, despite trading disruptions resulting from the declaration of a state of emergency in March. As restrictions eased, a recovery was experienced with volume growth achieved in May and June.

I’d like to spend some time now to take you through the magnitude of the impact of COVID restrictions on our Indonesian business during the festive period. You can see from this slide that in 2020, the festive trading period delivered a 30% volume uplift relative to the pre-festive period commencing on 1 January. This is significantly lower than the 99% uplift in 2019 and the 97% uplift in 2018. In traditional trade, our festive volumes were down 35% compared to last year, and modern trade volumes were down 29%. Given traditional trade contributed 67% of our first half 2020 volume, the adverse impact was compounded.

We’ve noted a number of times during this presentation the challenging macroeconomic environment in Indonesia, and I’d like to drill down a little further on this and provide you with some color on how we’re responding. Indonesia’s latest GDP figures show a decline of 5.3%, the weakest rate since 1999. Consumer confidence levels are at 15-year lows and unemployment levels are high, resulting in affordability pressures. In response, we’ve adjusted routines in the field and implemented targeted plans to address changing demand patterns. As we move out of the festive trading period, we adjusted our manufacturing plans, reduced stock, implemented cost savings, introduced further supply chain efficiencies and developed an enhanced presence across our online shopping and e-commerce platforms.

This brings us to the start of the second half of 2020, and our Indonesia and PNG priorities over the next 6 months. To fully appreciate the trading environment in Indonesia and PNG, we need to take a look at what’s been happening in terms of new daily COVID infection rates. In Indonesia, the rate of infections is growing. And since Idul Fitri on the 24th of May, there’s been a spike in COVID cases. This has resulted in a deterioration in the economic outlook, and affordability remains a key issue.

Consumers are prioritizing value packs and at-home consumption with demand through e-commerce and digital platforms growing.

In PNG, despite low infection rates in the first half of the year, you can see an uptick in July with the majority of new COVID cases in Port Moresby, where lockdown restrictions were implemented on the 28th of July.

Let’s take a look now at how this impacted our July and early August trading. In Indonesia, we’ve seen some stabilization with trading volumes down 19% in July and down 20% in the first 2 weeks of August. While trading conditions remain challenging, there are some modest greenshoots with our sparkling and juice affordable packs performing well and our 1.5-liter and 1-liter at-home packs delivering volume growth.

In PNG, volumes declined by 1.4% in July and were flat in the first 2 weeks of August, reflecting changes in promotional activity, which offset the adverse impact of increasing COVID infection rates.

Given the prevailing macroeconomic conditions in Indonesia and the rising COVID infection rates, our areas of focus in the second half of 2020 will be on addressing consumer affordability. We will reset price and drive availability of our small, affordable packs through bundling and price promotion, and expand availability of our multi-serve ranges for at-home consumption. E-commerce will be a focus for us. With us increasing our presence in the e-commerce channels, developing our existing B2B relationships to expand our penetration of this market, and leveraging food aggregators to facilitate distribution via wholesalers and third-party Coca-Cola official distributors.

Execution in these challenging times is critical, so we will implement tailored programs for each market segment and take further actions to reduce our costs, including a head count reduction of about 350 people in our supply chain.

This brings us to our group strategy update — and an update on our progress. This slide shows you how our trading volumes are tracking month-on-month since April. At a group level, you can see a month-on-month improvement from negative 33% in April to negative 5% in July and negative 3% in the first 2 weeks of August. The fourth quarter will be critical to our second half ’20 performance, and we’re preparing to ensure that we’re well positioned to leverage this important trading period across all of our business segments.

I’ve stated on a number of occasions that the impacts of COVID-19 are continuing to evolve. Our approach to addressing these challenges is set out diagrammatically on this page. We responded to the immediate pandemic challenges with resolve by implementing a cross-functional commercial response plan. Our next focus was to instigate resilience measures, concentrating on protecting cash, managing costs, preserving capital, maintaining liquidity and supporting our customers. We’re now at the rebuild and reshape fighting fit stage, where we continue to be agile in adjusting to the evolving operating environment while maintaining a strong customer focus and a disciplined approach to cost management.

Beyond the $140 million of cost savings announced earlier this year, we’re taking further action to reduce our ongoing cost structure, and we will continue to recalibrate according to the requirements of our customers. As time progresses, we’ll turn our attention to the reimagine phase by revisiting our strategic priorities, executing changes to adapt to the next normal, and ensuring that we can capitalize on opportunities that build on our regional beverages powerhouse strategy.

To wrap up today, I’d like to emphasize the fact that despite the challenges we faced this year, we are uniquely placed to emerge a stronger, better business. From a financial and operating perspective, we have ample debt facilities with longer maturities and no debt covenants. Our strong cash flows and liquidity provide us with the resilience we need to trade through the current conditions, and the firepower to pursue strategic opportunities that may arise. Our cost management initiatives and reduced FY ’20 CapEx ensure we are a fit-for-purpose organization.

Our diverse routes to market and channels have not only enabled us to circumnavigate the pandemic, but position us well to emerge with an enhanced market position. We have the ability to flex resources as markets evolve, and have built a stronger presence in e-commerce and on food aggregator platforms.

Our market share growth in the first half of 2020 means we are ideally placed to leverage opportunities that arise as markets emerge from the pandemic. And our strong partnerships, including the global insights we’re privy to as part of the Coca-Cola system mean that we can preempt risks and leverage beneficial prospects.

As the market leader in at-home offerings, we are ideally placed to capitalize on consumer preferences for strong brands during uncertain times. And to benefit from the shift in consumer shopping behavior towards no-sugar offerings and energy drinks. Given the impacts of COVID-19 are continuing to evolve, and the likelihood of a protracted economic recovery, it’s premature to draw any conclusions about the trading impact of the pandemic at this stage or to provide any earnings guidance. What we can say confidently is that despite the prevailing challenges, we have a clear path forward to weather the current conditions and a well-considered and comprehensive plan for the medium to long term. We expect we’ll have a clear pattern on trading trends that we can update you on at our Investor Day later this year.

I’ll now open to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question is from Michael Simotas from Jefferies.

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Michael Simotas, Jefferies LLC, Research Division – Equity Analyst [2]

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My first question probably for Peter. You spoke a couple of times about some signs of structural changes that you’re seeing in the Australian consumer landscape. I wouldn’t expect you to comment on the timing. But based on those changes, are you confident that when COVID is eventually behind us, your product mix, channel mix and volume can return to the level where we can see the sort of profitability that we saw last year?

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Peter West, Coca-Cola Amatil Limited – MD of Australia [3]

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Michael, so the reason I’m very optimistic about the beverage category is it’s open-ended in consumption. It’s incredibly impulsive. Scale brands really do have a significant advantage. And I would say our role is to activate and convert people to beverages where they shop. And depending on where they shop based on restrictions is significantly different. So in restrictions, that sort of notion of going out to lunch is very different if I’m at home, the types of places that I visit in the occasions.

So where we do have some confidence and optimism is certainly the differences that we’re seeing by state. And WA is probably the lead example where we actually finished the half in volume growth at a total business. And then we finished in volume growth on NARTD, alcohol and coffee. And then if you go to the July performance and the first 2 weeks of August, we’ve been in double-digit growth in WA, and a return to growth in the on the go channel in WA. So the mobility has a significant impact on where people shop.

The one area that we think will be a structural change is around e-commerce, and that’s because a lot more new users have come into the category. Some of the platform providers would actually say they’ll find it hard to lap the peak of this year because of how many people surged on during the pandemic, but we sort of think that will provide a structural change to the way people shop. And we see varied performances across our retailers of how well prepared they are for e-commerce. So that’s probably the one area that we think will be a change into the future. And then if I use our food partners, we see people convert at a 20% of the beverage to food up to 80% depending upon just their skill and knowledge. So we’ve really doubled down on this whole e-commerce with food, especially with bundling. So that’s probably the biggest change. But there’s no doubt that mobility — restrictions have a significant impact on mobility which impacts where people shop.

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Michael Simotas, Jefferies LLC, Research Division – Equity Analyst [4]

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Okay. That’s helpful. Maybe just a couple of quick follow-ups on that. In WA, how does your channel mix look relative to what it looked before COVID? And then just second to that, the beverages category seem to lag a lot of other FMCG categories in grocery. Do you think that’s just a function of lack of mobility and lack of entertaining? Or just consumers not prioritizing these products during the period?

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Peter West, Coca-Cola Amatil Limited – MD of Australia [5]

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Well, there was no doubt in that lockdown phase in grocery that there were other categories that — where there really was much stronger panic buying. So when it came to things like toilet paper, rice, a lot of those sort of staples that people were. The biggest change we saw was when restrictions changed where people could entertain at home. And when people can entertain at home, the category became very buoyant and it’s been very buoyant in home consumption over the last 12 weeks. So that’s been the biggest change that we have experienced.

And then the restrictions did impact the WA business in On-The-Go, but it’s rebounded as the restrictions have changed. We still got subchannels in WA that remain challenged. So for example, entertainment of going to the movies, events. So whilst Optus Stadium is open, it’s not getting the same numbers that it was accommodation because you just don’t have the same number of people staying and you’re getting a difference between the performance outside of Perth as well as a lot more people are doing regional in terms of where they spend their time. So the geographic change is perhaps one of the most significant that we’re seeing.

And I’ll sort of bring to life the example of the Sydney CBD as an example. It was declined as all the offices essentially shut. The CBD is in decline in the last 4 weeks by 45%. If you talk to most stores that are open, they’re trading about half the levels that they were, and that volume has moved to the suburbs. And so we’re seeing growth in suburbs. So the geographic changes that we’re seeing is perhaps some of the most significant.

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Operator [6]

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Your next question is from Shaun Cousins from JPMorgan.

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Shaun Robert Cousins, JPMorgan Chase & Co, Research Division – Senior Analyst [7]

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Maybe another one for you, Peter, just a little bit around the discussion on July and August. Did July get any boost from sort of pantry stocking that sort of 17% grocery sort of trend there? And is the trajectory of mix that you’ve seen within July and August across channel and pack, is that sort of similar to what you saw in terms of the first half ’20? I’m just curious around are you getting similar sort of EBIT margin declines there or some of the cost savings that you’ve been able to access and/or less operating. And sorry, has the mix been better as well for you?

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Peter West, Coca-Cola Amatil Limited – MD of Australia [8]

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Yes. Shaun, so I’d probably just start by talking about the EBIT performance. So if you look at the deterioration year-on-year, 40% of that is to do with sort of product and channel mix. And 60% of it is really to do with the fixed costs that we have in the business. So if I go to channel and product mix, is there are sort of 2 parts to it. So if I go to the grocery stores, what we’ve essentially seen is that people are shopping less often. So depending on which retailer you talk to, it could be a sort of a 10% reduction in shopper numbers. So if you sort of picture from a beverage perspective, people who might go in and only buy a drink were down. People who are buying small baskets who also buy a drink and then large basket is dramatically up. So that creates a change in the front of store. And the front of store for us, we tend to have by retailer somewhere between a 65 to 75 share of the front of store.

The biggest change that we experienced in grocery was as restrictions changed, and people started to engage again with family and friends. And then whilst restaurants’, pubs’, cafes’ reopening, they just can’t take the same sort of numbers, and we saw more in-home entertainment. And then we’ve seen that slightly change as there’s been a bit more restrictions in Victoria and the flow-on impact to New South Wales.

So the key thing that we’ve really managed to the half is incredible volatility by month, and also volatility by pack size. And we’ve put inside a cost agenda to offset that. But we also had the one-off costs that are also in the numbers. So we did have some debtor provisions that we’ve taken up. We also had some aged stock that we had to manage as we had volatility, some cold drink equipment that we’ve written off. So there are some sort of one-offs that are within that number as well. So it’s been incredibly volatile, and us responding to both shop-out restrictions and movements and then the knock-on impact to customers.

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Shaun Robert Cousins, JPMorgan Chase & Co, Research Division – Senior Analyst [9]

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And sorry, maybe just in that cost agenda, can you maybe sort of talk a little bit, sorry pardon me, those one-off costs? What would they have been collectively, the debtor provision, [aid] stock and sort of some writing offs of fixed equipment?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [10]

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Yes. It’s Greg Barnes here. Look, the way I would think about the margin on that business on a go-forward basis, is you’ve got to look through around — somewhere in the order of $20 million to $25 million of sort of timing related in the second — first, second half of last year versus as well as things that have occurred in this year. So as Peter said, debt as we write-down $7 million as a group. $4 million to $5 million of that’s in Australia. Similar numbers in terms of investment in, say, Feet On The Street relative to the previous year. Cold drink equipment and stock write-downs are very similar number. So it’s really nothing material in isolation. But in aggregate, along with some timing issues in the comparative gives you a sort of in the order of $20 million, $25 million as something you should adjust for to get a read-through margin.

I sort of look at it on an incremental margin basis, what is that revenue versus the dollar and EBITDA done if you add back the savings. And once you adjust for those other events I’ve talked to, you’re sort of in that sort of mid- to high 50s percent, I guess, incremental margin, if you like, which is a better guide than the raw numbers.

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Shaun Robert Cousins, JPMorgan Chase & Co, Research Division – Senior Analyst [11]

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Okay. That’s helpful. Maybe a little bit more on costs, maybe jumping to Indonesia. Can you just talk a little bit about the $16 million in the first half realized? Does that annualize in the second half? And then does the cost — I think, the 350 staff members in the supply chain that won’t be with the company, does that sort of add to that? I’m just curious around how we build the cost saving profile for calendar ’20, given $16 million in the first half and obviously, there’s some supply chain announcements that you’ve made today as well, please?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [12]

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Yes, for sure. So look, the best guide, firstly, at a group level, is the $120 million of costs that we guided to last time plus the $20 million of DME. So we’re still committed to that number. And at a group level, half that — the costs, excluding the DME is, I guess, recurring savings is the best way to think about it. In Indonesia, that’s a reasonable read through. I think for the full year, we’re sort of looking at somewhere in the order of, call it, $15 million, $16 million will be associated with Indonesia for the full year plus the DME on top of that.

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Shaun Robert Cousins, JPMorgan Chase & Co, Research Division – Senior Analyst [13]

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Sorry, you generated $16 million of savings in the first half. So that’s it?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [14]

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Yes. In plus — so the $16 million plus DME for the full year will be the number. The supply chain number that you’re talking to, the 350, will be in the back half of the year, that’s worth, call it, $4 million to $5 million.

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Shaun Robert Cousins, JPMorgan Chase & Co, Research Division – Senior Analyst [15]

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$4 million to $5 million.

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [16]

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Annualized.

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Shaun Robert Cousins, JPMorgan Chase & Co, Research Division – Senior Analyst [17]

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Sorry. $4 million to $5 million in the half or $4 million to $5 million on a 12-month basis?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [18]

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Annualized, 12-month basis.

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Shaun Robert Cousins, JPMorgan Chase & Co, Research Division – Senior Analyst [19]

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Okay. It’s the half then. Yes, okay. No worries. And maybe just a final question. I guess just when you’re thinking about the water category, Peter, how much of the — how should we think about that as being a margin impact as well? And that’s obviously quite impacted by COVID, how are you getting hurt by, I guess, less immediate consumption and then also like the channels there? Just in that, that category looks quite difficult. And I’m typically thinking about still rather than sparkling water because sparkling’s doing rather well.

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Peter West, Coca-Cola Amatil Limited – MD of Australia [20]

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Yes. So at our Investor Day last year, Shaun, we sort of highlighted that we started to see that the still water category flatten out and moved to decline. And our sort of forward view was going to be that it was going to be a category that was relatively flat to small declines over time. And that instead, we’d see a move to sparkling water as a change. Now this year, that impact’s being compounded because of restrictions. If you go to lots of places that have got food courts, and the overtrading water that have been closed, community sport, gymnasiums, there’s a whole raft there that have really impacted. And so we will see that category come back as to next year.

Now we would still hold that coal or energy areas of our accelerated growth plan are a greater opportunity for us. And I’d say, in particular, we’ve been really buoyant by the performance of the Coke brand. And in particular, the Coke No Sugar. So we’ll continue to drive that prioritization and agenda. But the water category ultimately, that being in slight decline, we think is a really positive thing for us and distinctive beverages of the market.

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Shaun Robert Cousins, JPMorgan Chase & Co, Research Division – Senior Analyst [21]

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Is that because water gives you a lower margin?

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Peter West, Coca-Cola Amatil Limited – MD of Australia [22]

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Yes.

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Operator [23]

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Our next question is from Craig Woolford from Citi.

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Craig John Woolford, Citigroup Inc., Research Division – MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [24]

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I just had sort of questions around the cost savings. You called out $60 million of cost savings. If I just look at the movement in [CODB], including in D&A, it’s about a $38 million movement from first half ’19 to first half ’20. So just trying to understand the way you’ve measured cost savings and what other costs you’re actually growing there. And then my second part was just — can you give us a feel as to what proportion of your cost of sales is fixed?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [25]

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Yes. Okay. Look, it’s Greg here. I’ll take the first question. So the savings that were advised, back in about April, were relative to plan as opposed to year-on-year. So this — and the $60 million is in reference to that $140 million. I think the core answer to your question is what I touched on with Shaun before, which is those movements year-on-year and some of the one-offs that have sort of flowed through our trading result, such as debtor write-offs of $7 million in the group. So that’s the core to that.

On the variable versus fixed, I think I probably gave you a good read of that on the answer on Australia of around that sort of high 50% sort of gross margin, if you like, on incremental revenue. That’s a good steer on Australia, and it actually worked out pretty consistently across other parts of the group.

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Craig John Woolford, Citigroup Inc., Research Division – MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [26]

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So that incremental margin you were talking to was — I would have defined incremental margin as the movement in EBITDA compared with the movement in revenue, but you’re talking about gross profit there, are you?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [27]

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I’m talking about relative to EBITDA, that’s right, yes. But it implies the same [thing].

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Craig John Woolford, Citigroup Inc., Research Division – MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [28]

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Yes. Look, the reason for the question is it looks like COGS per case was up reasonably significantly, which is not a surprise because of the lower volumes. But getting a handle on that, given our volumes have improved is quite important to the second half.

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Peter West, Coca-Cola Amatil Limited – MD of Australia [29]

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Yes. So from an Australian — and Craig, the fixed costs were a bigger impact than the channel and product mix. So at a warehouse level at operations with less volume going through. And then if you go to the sales, fixed costs, not only do we have the people, the cars and so forth. We’ve got 145,000 pieces of equipment that we have deployed in the market. And the example I’d give from the Victorian lockdown at the moment is the 4,000 vending machines in Victoria. And we’ve got 2,000 machines that haven’t vended 1 unit in the last 4 weeks. So they sit in beautiful spots like airports, railway stations, universities. They’re on every platform of Southern Cross station. We’ve got great locations, and you vend nothing in a 4-week period. So that sales fixed cost number is, in our mind, an investment into the future because we do rebound and look to rebound quickly by the coverage model that we have.

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Craig John Woolford, Citigroup Inc., Research Division – MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [30]

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Sure. And then maybe just a question for Alison, just on this fighting bit catchphrase you’re using. Just wanted to understand how much you’re looking at cost savings. Obviously, you have productivity, but how much you’re looking at cost savings as a focus there? And the reason is there’s been 5 years of cost reductions. There’s $160 million coming the half of which DME is going to be ongoing. It just feels like there’s another ways of cost savings. And I’m wondering whether you’re cutting into muscle, doing anything further.

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Alison Mary Watkins, Coca-Cola Amatil Limited – Group MD & Executive Director [31]

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Yes. No, Craig, I think we’ll look forward to — I think we’ll have an investor session a little bit later in the year, and we look forward to providing some more specifics on the Fighting Fit program. But broadly speaking, obviously, each of our markets is in quite different settings. And so the Fighting Fit program looks very different in each market. For us, we’ve got this $120 million that we committed to earlier in the year. And as we said, that’s sort of broadly 50-50 in a sense of what’s ongoing versus things like incentives and discretionary spend, which in the normal course, would come back. So broadly, our goal is to bake that in. So that $120 million is able to be fully realized next year as well. And I think where we’re heading, as I said, it will be different in different markets. But certainly, we are doing some work at the moment around our group office and also around Australia.

And look, we do — as Peter said, there’s always more opportunities for us. We want to start with the customer and the needs of our customers are changing. We need to make sure that we’ve got the right resources and the flexibility to respond as those market dynamics continue to change. But every cost that’s not involved in directly servicing a customer will come under scrutiny. And then just the change, I suppose, in structure as well that we had last year. So we integrated Alcohol & Coffee, you might recall into our geographies. We’ve sold SPC. We do see some opportunities that fall out from that as well. So I think that’s quite a realistic target for us.

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Operator [32]

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Our next question is from Richard Barwick from CLSA.

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Richard Barwick, CLSA Limited, Research Division – Research Analyst [33]

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I’m going to follow-on from Craig’s question sort of moving on to what the reimagine, what that’s going to look like. And in particular, can you just give us a bit of detail what’s the regional beverages powerhouse strategy? Sorry if I missed that if it was touched on during the press.

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Alison Mary Watkins, Coca-Cola Amatil Limited – Group MD & Executive Director [34]

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Yes. No, no, no. Richard, and again, we’ll talk a little bit more about that at our Investor Day. But we did, last year, outlined our regional beverages powerhouse strategy, which is really our overall ambition as a group, our growth ambition. Obviously, we’ve got great positions in the businesses and the categories that we’re in. But we really see that the beverages space provides a lot of room for growth, whether it’s around expanding our presence in categories where we’re not as strong, whether it’s new territories potentially that’s more of a medium-term type of opportunity or related businesses in the beverages space. And obviously, we’re getting a lot more involved in areas like recycling, and we see further opportunities there.

So there are a number of areas that we still absolutely very committed to that ambition, that longer-term ambition. And I think for us, in the sort of the near term, we’ve got some pretty clear objectives as we get through this highly sort of uncertain time. And it’s really about making sure that we play and focus on the strengths of our portfolio and of our business model. So particularly the connections that we have with so many customers and the diversity of our channels, the strength of our portfolio. So as you’ve heard, brands like Coke, like Monster, like Jim Beam doing really well in these times. So we really want to make the most of those strengths and come through this period of significant disruption stronger in the sense of market share gains that then we can sustain.

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Richard Barwick, CLSA Limited, Research Division – Research Analyst [35]

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Okay. And the other one I was going to ask, I don’t even know how you go about answering it. But just looking back, Page 13 of the presentation, it really brings to life the strong finish you had to last year, where your revenue growth really picked up September, October, November, December. And there wasn’t — we didn’t really see the bushfire impact at December, it wasn’t evident that sort of shown through — it didn’t come through until January. So you’re not far off moving into a period where you’re actually starting to cycle some reasonable growth. How do you feel about that on a — maybe if you’re using WA as an example in terms of the least lockdown areas and so on. How do you feel about cycling those sort of growth rates? Is it just — is it even in the realms of possibility, you could be in positive territory by the end of the year?

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Alison Mary Watkins, Coca-Cola Amatil Limited – Group MD & Executive Director [36]

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Look, I think, Richard, we’re very cautious about making any forward-looking statements at the moment. As we’ve seen, it really is highly uncertain time. So you can be very assured we will be trying as hard as we possibly can. And as Peter said, WA, I think, gives us a lot of inspiration and confidence of what’s possible if the markets do get back into a steady state. And clearly, with the end of the year approaching particularly around the Christmas occasion, that’s so important for all of our markets, and we know no matter what, there will still be a Christmas, and there’ll still be people wanting to celebrate, so we’ll be making the most of it.

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Richard Barwick, CLSA Limited, Research Division – Research Analyst [37]

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Okay. And just actually one other one, Alison. Obviously, lots of chat around more time spent at home and just the switch in, I guess, the way that people will look to celebrate and entertain and that sort of thing. Does — are there opportunities or what steps can you take to perhaps premiumize the offer in terms of what people might be looking to drink at home? So where I’m going with that is, yes, people have friends around or family, whatever, they might be looking to drink Coke. But is any of the research you’ve done or is there any suggestion that there might be a — people might look to actually premiumize that at-home experience given that they won’t be going out as much?

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Alison Mary Watkins, Coca-Cola Amatil Limited – Group MD & Executive Director [38]

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Yes. Look, I might ask Peter to comment on that. But as an overall observation across all of our markets, the importance of the at-home occasion, and it’s really getting a lot more nuanced about the many different occasions, is very much a focus for us and for our partners, Coca-Cola Company and also Beam Suntory. So to your point, I think there are definitely opportunities there. And so it’s going to be something that we’ll be giving a lot more focus to.

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Peter West, Coca-Cola Amatil Limited – MD of Australia [39]

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Yes. I would say the key trend that we’ve experienced is very much a flight back to core brands and to popular brands and sort of trust across all of the key categories. We think that puts us in a position of strength when it comes to, therefore, the focus on our Christmas activation. We’ve not really seen this move to private label. Like in general, the private label has sort of grown like the category hasn’t sort of — hasn’t been a sort of a surge in value across the board. So we would say, executing the core brands with very strong programs.

The key challenge for us is Footy Finals, which is a big activation. Normally, September moves to October, which date it’s actually on might change. And then, obviously, a very strong Christmas program. So working with our brand partners, we’ve got incredibly strong activation focus. And I think it’s just going to be a bit unusual for the retailers to try to grapple with this year, which is the tourists who would normally come in, the Australians who would leave, people who would go to restaurants and cafés at Christmas and their ability to fit the same sort of number. So there’s a bit of uncertainty as to how all of that will play out relative to a history where retailers and categories have a certain nuance of how they behave.

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Operator [40]

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Your next question is from Andrew McLennan from Goldman Sachs.

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Andrew J. McLennan, Goldman Sachs Group, Inc., Research Division – Consumer and Retail Analyst [41]

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I was just wondering, possibly for Peter this question. Just in relation to that relative performance between Australia and New Zealand, it’s really quite significant. Obviously, there’s a large number of moving parts including some written-off costs within that Australian performance. But I’m just wondering if you could point to a couple of key areas where the performance differential has come from. I’m just wondering whether the relative pricing between the channels is one factor or whether the strongest start to first quarter. Is there something you can explain there?

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Alison Mary Watkins, Coca-Cola Amatil Limited – Group MD & Executive Director [42]

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Yes. Maybe I’ll just comment, and then Peter or Greg, feel free to add anything. But yes, I mean, overall, it’s a sensational performance from New Zealand. And certainly, both of those factors are playing into that. They did get off to a really good start to the year. And poor old Peter, I don’t think he’s had 1 month of normal trading. We’ve either been grappling with bushfires or the COVID situation.

So New Zealand clearly did lock down very hard during that sort of April-May period, but then bounced back very quickly. So they were back into growth as well. So their overall market grew during the half. Our business did very well. And we have benefit, I would say, from some good work by the team over there around managing the relativities between channels. So while obviously, the on-the-go channels were impacted pretty severely there, the team have done some good work such that the impact of those mix shifts is not as pronounced as we see here in Australia. And then I think the final thing to mention would be Australia — in New Zealand, we also did receive about NZD 7 million of government support during the half.

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Peter West, Coca-Cola Amatil Limited – MD of Australia [43]

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Yes. So my quick add to that, Andrew, would be if we go to our sort of grocery channel, we’re just under a 32 volume share in just under a 36 value share. So we operate at a premium to the market within the grocery channel and price accordingly. And then I’d say New Zealand from a market structure is in a much stronger share position. It has the Schweppes brand as a part of that portfolio there. And therefore, the channel splits that they have from that are not as pronounced as what we see in Australia. And then I think the team in New Zealand have — the focus on small stores over many years that have really given the business its strength is still a journey that were on here in Australia.

When we got to February before the COVID, we were really pleased with the investment in the Feet On The Street and the share core ranging points that we had. But then when your customer base shots, you have to recapture that again. So that’s the journey that’s ahead of us. But we’ve got now a lot more experience in our team being able to execute that with a bit of speed.

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Andrew J. McLennan, Goldman Sachs Group, Inc., Research Division – Consumer and Retail Analyst [44]

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Well, it makes sense to raise the topic then on some of the cost to serve changes you’re looking to do. I mean how do you balance out what needs to be done on a temporary basis given current conditions versus what needs to be done on a more permanent basis? Is that a huge constraint? Or do you feel that you can manage the cost down for these conditions better over the next sort of 12 months or so on a temporary basis?

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Peter West, Coca-Cola Amatil Limited – MD of Australia [45]

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Yes. It’s certainly volatile and moving and where normally you’d be putting plans in place. Here, what we’re doing is scenario modeling. And based upon the scenario modeling, how do we manage that? And as we scenario model into next year, if some of the restrictions impact certain customers and their ability to rebound, how do you model that? So an example might be a stadium.

If a full stadium was 90,000, in the future, a full stadium’s 30,000, so how do we manage for that? So it’s still a little bit early to tell. But there will definitely be a geography change. And it will be out of areas like CBD into suburbs. And therefore, how do we manage that in terms of the way we cover and deliver. We also know with our fleet that there’s an opportunity — there’ll be some underperforming equipment for us to manage as a consequence of that. And then we would recognize that we’re better to be prepared for mix that could come at us by lowering our overall costs. And we look at it between areas that are a sales investment. So frontline roles that are absolutely paramount to overhead of the business, which support, and we always would look for opportunities to streamline. So that’s things like offices. As you sort of fast forward working in this environment, what office space do you need? How do you manage that? A combination of home and offices, you can then reduce that footprint. So there’s a whole series of initiatives that we believe we can continue to lower our cost.

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Andrew J. McLennan, Goldman Sachs Group, Inc., Research Division – Consumer and Retail Analyst [46]

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Okay. And I’ve just got one quick follow-on around working capital, if I can, Greg. Just in relation to — it looks like payables and receivables didn’t show up any sort of strange activity here. So the cash flow looks pretty good. I’m just wondering, was there any sort of temporary factors within those metrics that we need to take into account?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [47]

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Look, nothing of note. I mean you would probably argue that at December, some of the debtors perhaps weren’t collected as sort of quickly as you’d typically like. So maybe we get a bit of a benefit from a slightly sort of softer opening position. But there’s nothing unusual in there that I’m aware of. And we keep a pretty close eye on it month-to-month, as you can imagine, particularly debtors across all the businesses. I’m reviewing them with the CFOs of each business. So pretty comfortable with the aging of those. And the guys have done a good job working through their inventory. And particularly in Indonesia, I’d have to say, they did a terrific job responding very quickly.

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Operator [48]

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Your next question is from Larry Gandler from Crédit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division – Director [49]

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I missed most of this call so forgive me if this question was asked, but my question’s on Indonesia. It looks like the latest trading is markedly different than, say, 1H and even July. I’m just wondering, does that also mean that we could see markedly different profit in the second half on the basis that if I understood some of the comments on the call, there’ll be no further cost savings or minimal further cost savings in Indonesia, PNG in the second half.

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Alison Mary Watkins, Coca-Cola Amatil Limited – Group MD & Executive Director [50]

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It’s — I think it’s a bit hard to say, Larry, just because of the uncertainty around the health situation there. We’ve got a situation where, by and large, it’s not so much about the restrictions that are being imposed. It’s more about consumers self-regulating and the level of movement in the country being well down. People are staying away from workplaces, staying off public transport and really staying closer to home and in their suburbs and town.

So we’re fairly cautious about the prospects of a recovery there. As we said, focus will be very much on capitalizing on the opportunities around affordability, which we are really well placed to doing. Now we’ve got the 250-ml affordable pack, which you’re familiar with, alongside the 390-pack in sparkling. There’s some good plans there that I think can strengthen our affordability for the consumer without compromising our profitability, continuing to drive the at-home occasion with the larger pack sizes, which are delivering us some good growth. Working in the local areas. So the local provision stores, we’ve been doing very, very well. So having the size of the sales force that we’ve got and those connections, we’ve been able to flex pretty well. And the overall at-home occasions, which is a big area of focus for us.

So we’re really pleased. The juice, which has been — we’ve struggled with Minute Maid Pulpy in recent years, but we’ve really turned its performance. And that’s been an affordability play, but one that is delivering definitely a net benefit. And then in sparkling, also some really encouraging progress there. But I think so much depends on the consumer and how the health situation continues to play through. And hopefully, we will see consumers feeling a little bit more confident to get out and about over the next coming months. So I think it’s worth saying, while — and you know very well, I think that the hard work that we’ve done has reduced our cost base and the productivity of the business, and we’re in a much better position as a result of that.

So in EBITDA terms, the business is still substantially positive. In profit terms, of course, there is quite a bit of depreciation there. So it’s sort of — was more or less breakeven for the half, let’s say. But still remains very positive in EBITDA terms. And the actions that the team took to find further productivity gains as well as to manage through that difficult peak period with the extraordinary changes, we’re really pleased with them. And I think we’ve got a business there that, as we see it, we’ve got a great growth option. We’ve got a strength we can capitalize on in the near term. And we don’t have downside risk because of the work that we’ve done that has now got a much lower sort of breakeven, if you like, in the business, which I think is a good position to be in, in that market.

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Larry Gandler, Crédit Suisse AG, Research Division – Director [51]

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Okay. So that’s an important piece of information there. Indonesia sort of broke even in 1H and the profit generation is largely coming from PNG there. And am I correct to understand that the cost savings will — from $16 million, will sort of — there’ll be a modest increase in that sort of accrual rather than doubling of those cost savings?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [52]

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Why don’t I clarify that. So the Indonesia — just to clarify, Indonesian profitability, actually, at an EBITDA level, it represents more of the combined EBITDA PNG business, more than 50% of the combination. Having heavily invested in Indonesia for many years, you can imagine taking into account D&A, that the EBIT is not as significant and it was around that breakeven line as you suggested. But EBITDA-wise, it’s more than half of the combined contribution to that segment.

On the — from a cost perspective, just to clarify, the cost delivered in the half are broadly replicable in the second half. I think it was probably Michael and I, or Shaun and I got it a little bit tied between what was DME and what was overhead. But in short, we expect to be able to deliver similar cost savings in the second half as what were delivered in the first. So if you’re looking at second half year-on-year, you should factor in those savings.

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Operator [53]

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Your next question is from Ross Curran from Macquarie.

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Ross Curran, Macquarie Research – Analyst [54]

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I just got 2 quick questions. The first is, has there been any change in your SME debtor position for Victoria in the past few weeks?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [55]

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Yes. Look, I’ll pick that up, Ross. We’re obviously monitoring it very closely. And if they were debtor collection issues, they would probably take a little bit longer than the time that’s lapsed to play out in truth. But we are monitoring it carefully. Actually, our debtor position exiting July was actually further improved again. So we’re pretty encouraged with how it’s being managed.

I mean just I guess a couple of points of reference. We’re talking about typically relatively small customers. So we have in place pretty tight policies around credit limits. And where extensions have been required through the broader pandemic, we’ve been working very closely with our customers on that. So it’s not as if an individual customer will be immaterial or will get away from us. And we do have pretty tight credit limits on that, that ensures it doesn’t get too far away from us. But your point is not lost, and we’re monitoring it very carefully. But so far, so good.

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Ross Curran, Macquarie Research – Analyst [56]

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And then secondly, just on marketing and brand expenditure, how have the conversations gone with KO around your plans for marketing and brand expense into FY ’21?

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Alison Mary Watkins, Coca-Cola Amatil Limited – Group MD & Executive Director [57]

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For FY ’21, did you say, Ross? Or I mean for —

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Ross Curran, Macquarie Research – Analyst [58]

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So are they taking into account the fact that this [spike] might drag on for longer? And those savings that you’ve got through FY ’20, are you able to keep the marketing level at this FY ’20 level? Or does it [depend] on a material step-up into next year?

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Alison Mary Watkins, Coca-Cola Amatil Limited – Group MD & Executive Director [59]

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Yes. Look, we haven’t formed a view on that. I would say, so far, yes, obviously, we have — between us, we’ve reined in our marketing expenditure, as you’d expect. Although, we’re still very committed to the right kind of support, very targeted support, against those critical selling periods and obviously, Footy Finals and Christmas coming up. And so it’s a fairly, a thoughtful approach, a considered approach, I’d say. But yes, we’ve still got a long way to go before I think we’ve landed anything for 2021. Peter, did you want to…

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Peter West, Coca-Cola Amatil Limited – MD of Australia [60]

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Yes. I just would say with the 2020, we’ve put a strong focus on just the amount of sponsorships that we’re involved in, and we probably have something like 150 separate agreements. And clearly, if different bodies can’t activate, then we’ve renegotiated those within the rate that we’re paying for the year. So if an AFL season was going to be a certain number of games and it’s less than, there’s clearly a discussion and a negotiation that happens on all of the agreements that we have that leads to a reduction. And I do think, in general, the world of sponsorship that heads into ’21 and ’22 is going to be very different, which is probably the effectiveness of some of those sponsorships and ultimately the rates that people will pay.

So I think that all of the sporting world is gearing up for probably a reduction in how those incomes will look into the future, and we’d certainly include ourselves on those programs. And especially then when you move to stadiums that are maybe only 30% or 50% of what they used to be. So all those various sponsorships will change into the future.

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Operator [61]

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Your next question is from Aryan Norozi from UBS.

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Aryan Norozi, UBS Investment Bank, Research Division – Associate Analyst [62]

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The first one for me is just on the one-off cost. You mentioned there’s $20 million or $25 million in the first half, but then you had about $7 million (sic) [NZD 7 million] government existing, so $13 million to $18 million on a net basis. How do we think about that into second half ’20, please, on those costs? How much of those annualized are just in base now?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [63]

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Look, very little. And I wouldn’t categorize them all as sort of one-off costs. Some of it’s just timing related year-on-year. But yes look, I think the reason for calling them out is to give you a bit of a guide on the second half and our go-forward position. So I don’t think you need to worry about that being annualized and playing out.

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Aryan Norozi, UBS Investment Bank, Research Division – Associate Analyst [64]

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Sure. Sure And second one, I know this is very hard and very qualitative. But I mean, as restaurants’ spend obviously shifted to delivery, do you have any qualitative commentary around what the drinks attachment rate is when food is ordered through an aggregator versus in a restaurant? Or any comments from your restaurant partners?

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Peter West, Coca-Cola Amatil Limited – MD of Australia [65]

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The good news for a lot of people who use aggregators is their ticket size is dramatically up versus what the average is if somebody comes in. And their ability to convert a beverage, there’s lots of great learnings of how we make that work. So if I was sort of signaling what is our Victorian team doing in lockdown, their focus is food aggregators because it’s the ability to put an image with a bundle that dramatically changes the conversion. So that’s probably been an area that we have step changed our focus and performance. And we’ve seen some pretty dramatic impacts as we do it.

So we could see a retailer converted only down to 10% and we could see it up to 80%. So there’s lots of learnings as to how that plays. And because we have that — we have a workplace post where teams share their success and just some of the individual successes that are coming through now from just getting the images right. How we place that on a, whether it’s a Menulog or an Uber Eats, what level of suggested selling, they dramatically changed the conversion rate. So put a lot of focus, and we’re seeing some nice success in that area.

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Aryan Norozi, UBS Investment Bank, Research Division – Associate Analyst [66]

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I’m sorry, might sneak in one last one. You gave us some good color around what portion of the EBIT decline year-on-year was operating leverage versus mix. Can you just do that for the actual EBIT margin fall of 3.7 percentage points? Just so — because the sales are moving all over the place. How would margin be split out? If you can give any color, please.

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Peter West, Coca-Cola Amatil Limited – MD of Australia [67]

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The way we sort of think of that is really about 40% of it is to do with channel in portfolio and 60% is fixed costs of the business. And if you sort of picture the impact in those key months when we effectively changed every shift patent in a factory, we changed every delivery. For grocery customers, we’re delivering on Saturdays with extra costs over — and Sundays over a number of weeks. So you then just have this fixed cost impact that plays out. And a key part of that for us in our fixed cost is we do have a heavy sales investment in sales infrastructure of equipment. And then all of a sudden, you’ve got a lot less volume going through that equipment that plays out. So we think of it as 40% channel portfolio and 60% to do with fixed cost.

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Aryan Norozi, UBS Investment Bank, Research Division – Associate Analyst [68]

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Of the 3.7% margin fall you’re talking about?

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Greg D. Barnes, Coca-Cola Amatil Limited – Group CFO [69]

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Of the profit decline in Australia, yes.

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Operator [70]

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Thank you. There are no further questions at this time. I will now hand back to Ana Metelo, Group Head of Investor Relations.

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Ana Metelo, Coca-Cola Amatil Limited – IR Advisor [71]

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Thanks again to everyone for joining this morning.