Coca-Cola Amatil Coke in the ARVO Event

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1 AUSTRALIA CCL AU Price (at 09:09, 22 Aug 2012 GMT) Neutral A$13.92 Volatility index Low 12-month target A$ month TSR % +4.8 Valuation A$ DCF (WACC 8.0%, beta 1.0, ERP 5.0%, RFR 3.3%, TGR 3.0%) GICS sector Food, Beverage & Tobacco Market cap A$m 10, day avg turnover A$m 21.3 Number shares on issue m Investment fundamentals Year end 31 Dec 2011A 2012E 2013E 2014E Revenue m 4, , , ,919.1 EBIT m ,077.5 Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x CCL AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 2012 (all figures in AUD unless noted) 22 August 2012 Macquarie Securities (Australia) Limited Coke in the ARVO Event (CCL) reported a 5.6% increase 1H12 NPAT (pre ISI s) to $247.1m. An interim dividend of 24cps was declared. We discuss. Impact Beverages revenue (A$ reported) increased by 7.4% (+1.7% pcp) while global beverage volume increased by 4.6% (-0.7% pcp) to 267muc. Revenue per case increased by 2.7% (+2.4% pcp) while total costs per case increased by 3.4% (+2.0% pcp). There is a good visual relationship between COGs (+3.0% constant currency ex-indonesia) increases and pricing as CCL implements a full cost recovery strategy. However, EBIT/case was flat (+4.3% pcp) as total costs/case rose faster (+3.4%). This is the first period we can recall where beverage EBIT growth hasn t exceeded revenue growth despite operational innovation (Project Zero and OAisys) which continue to reduce variable costs. We think this outcome was driven by poor performance in New Zealand. The above business model metrics drove a 3.8% (+3.6% pcp) increase in global beverage EBIT. Including Alcohol, Food and Services (EBIT growth +3.7%) group EBIT increased by 4.1% (+3.3% pcp) to $402m. The big news of the day was the CCL JV with Casella to expand its new brewery in Griffith to a 500,000HL facility, which would allow production of volume equivalent to c.15% (c.5.5m cases) of the premium beer market. The announcement was clearly designed to showcase CCL s capability ahead of re-entering the beer market on 17 December CCL made it easy to value the beer prize. CCL estimates the premium beer market profit pool (EBIT level) at $200m and is targeting c.15% so EBIT potential in the early years is c.$30m. The manufacturing component of the value chain will be shared with Casella; the distribution, trade and consumer marketing will be controlled by CCL. CCL's capital contribution to the brewery will be c.$46m. Casella has one beer brand, ARVO! Has CCL found new points of distribution in ALDI? If you have walked an ADLI store recently you will likely have seen brand Coke and Mt Franklin ranged. While Coke has been ranged before, these brands are included as special buys which are described as one-off drops and displayed in the middle of the store. To get into core range you first have to be ranged as a special buy to see if you sell. We expect CCL is looking for core ranging along side c.15 other recognisable Australian core ranged national brands. With c. 282 stores and positive comps, ALDI is perhaps the biggest untapped channel. Earnings and target price revision EPS: FY12-1.7%, FY13-1%, FY %. SPT increased 15cps to $ Price catalyst 12-month price target: A$13.99 based on a DCF methodology. Catalyst: Trading update November. Action and recommendation Maintain Neutral. CCL has cleverly taken command of its growth but current market valuations seem to reflect upside from re-entry into the beer market in CY14. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 Analysis (CCL) reported a 60.9% increase in 1H12 reported NPAT to $247.2m. 1H12 adjusted NPAT was $247.1m or a 5.6% increase on pcp and adjusts for restructuring costs in the pcp. A detailed result snapshot is shown below. Fig 1 CCL 1H12 result snapshot Trading revenue 1H11 1H12 $m % Beverage A$m % Alcohol, Food & Services A$m % Trading revenue A$m % COGs A$m % Gross Profit A$m % Other income Rendering of services A$m % Rental and sundry income A$m % other income A$m % Trading profit A$m % Expenses Selling A$m % Warehousing A$m % Admin A$m % Total Expenses A$m % Associates A$m % Beverages EBIT A$m % Alcohol, Food & Services A$m % Total EBIT (pre ISIs) A$m % Ratio analysis bps Dep'n and Amort A$m % EBITDA (pre ISIs) A$m % Gross profit % 44.5% 44.1% -45 Selling % 13.8% 13.2% -61 Warehousing % 8.0% 7.9% -13 Admin % 7.1% 7.1% 6 Total expenses % 28.9% 28.2% -68 Global beverage per case analysis Total Beverage Volume muc % Global beverage revenue per case $/case % Cost per case $/case % EBIT per case $/case % The traditional leverage in the CCL model was not observed in the 1H12 result. Trading revenue increased by 8.9% to $2.41bn while trading profit increased by just 5.4% to $1,082m. This resulted in EBIT (pre ISIs) growing at half the rate of revenue growth coming in at 4.1% to $402.1m. Net interest decreased by 12.8% to $55m due to lower net debt and interest earnt on proceeds from PacBev sale. Tax expense increased by 12.5% to $100m representing a higher effective tax rate of 28.8% due to R&D and investment tax allowances in the pcp. Beverage unit analysis Beverage trading revenue increased by 7.4% to $2,078.6m while beverage EBIT grew by just 3.8% to $352.3m. Revenue grew faster than EBIT due to a mix channel shift from higher margin convenience/route consumption to the higher volume and lower margin grocery channel. This was due to poor weather in 1Q and grocery promotional campaigns run in 2Q with cans, fuel and Olympics. CCL have a strategy of commodity cost recovery through pricing however, global revenue per case grew at a lesser rate than COGS inflation this half. Constant currency COGS inflation ex Indonesia grew by 3% while neither the Australian or NZ/Fiji regions achieved price per case inflation above COGS. Again, this is explained by the mix shift that occurred during the period. Statutory NSR/case increased by 2.7% to $7.76/case. Costs on a per-case basis increased by 3.4% to $6.45/case resulting in a 0.7% decrease in EBIT/case to $1.32/case. 22 August

3 MAT growth Macquarie Private Wealth Tapping a new brewery for beer market re-entry CCL announced it has entered into an agreement with Casella to loan $46m to fund the acquisition and expansion of its new brewery in Griffith to a 500,000HL facility, which would allow production of volume equivalent to c.15% (c.5.5m cases) of the premium beer market. The loan will then convert into a JV after CCL s beer exclusion period ends (16 Dec 13). Its quite easy to understand why CCL wants to stick to the premium beer market when observing the Nielsen scan data over the past few years. The premium beer segment is currently the only beer segment that is in growth showing 9.7% value growth for the 12 months to June In comparison the total Australian beer market reported a 0.3% value decline over the same time period with growth in the Australian liquor market confined to premium beer, ciders and to a lesser degree wine. Fig 2 Premium beer the only beer segment in growth! Fig 3 Premium International brand positioning 15% 10% 5% 0% -5% -10% Prem. Value Prem. Price Prem. Vol Total Beer market value Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Source: Nielsen, Macquarie Research, August 2012 Source: Nielsen, Macquarie Research, August 2012 The announcement was clearly designed to showcase CCL s capability ahead of re-entering the beer market on 17 December 2013 with trade feedback suggesting that there are international premium beer brands such as Heineken and Corona that are keen for another player in the beer market to provide sales, marketing and distribution capability and independence. The chart above shows a comparison of the leading international beer brands in Australia. While the largest player is Corona, its growth is a subdued 2% when compared to many of the other leading brands in the segment. The market wants to value this capability and CCL made it easy. CCL sees the premium beer market profit pool (EBIT level) at $200m and is targeting c.15% so EBIT potential in the early years is c.$30m. The manufacturing component of the value chain will be shared with Casella; the distribution, trade and consumer marketing will be controlled by CCL. New points of Distribution, ALDI? Has CCL found new points of distribution in ALDI? If you have walked an ADLI store recently you likely will have seen brand Coke and Mt Franklin ranged. The rationale for such a listing is compelling. ALDI now has c. 282 stores along the Eastern seaboard. Consumer and trade feedback suggests ALDI is growing with positive comps. In the figure below consumer preference (and patronage) for grocery brands is shown. ALDI is growing c. 5x faster than Coles (space growth c.7% alone). Consistent with ALDI stores in the UK where core ranged national brands can account for c.11% of the merchandise offer, there are c.75 brands in ALDI s 1200 SKU range of which c.15 might be recognisable as Australian core ranged national brands With c.282 stores and positive comps, ALDI is perhaps the biggest untapped channel Total sales are around $5.3bn of which c. $4.4bn would be packaged grocery. With just one SKU per category CCL is poised to pick up business new business in this channel known as the hard discounter. 60% 40% TIGER 20% GUINNESS 0% -20% -40% ASAHI BUDWEISER PERONI BECKS STELLA ARTOIS CARLSBERG HEINEKEN CORONA - 1 RMS August

4 While Coke has been ranged before, these brands are included as special buys which are described as one-off drops and displayed in the middle of the store. To get into core range (displayed around the outside of the store) you first have to be ranged as a special buy to see if you sell. We expect CCL is looking for core ranging along side c.15 other recognisable Australian core ranged national brands. Fig 4 Consumer perspective on retailer brands Fig 5 Unnamed grocery categories 4Q12 volume growth Aldi 10.0% WOW Coles IGA Aldi Coles Independents 8.0% 6.0% 4.0% WOW 2.0% IGA Market 0.0% -2.0% -4.0% Staple A Staple B Impulse A Impulse B Source: Industry sources, Macquarie Research, August 2012 Source: Industry sources, Macquarie Research, August 2012 Australian segment No Down Down activity in NARTDs There must be some truce regarding price reductions in NARTDs. There was certainly no evidence of Down Down activity in this category despite a number of promotional programs across 2Q12 to drives volumes. Can activity saw prices reach their lowest in three years (c cents/can) perhaps reflecting the fact Coke 24cans were involved in the Coles My5 list. Woolworths also got involved with a fuel offer on Coke 15-can packs. Trade feedback suggests volume in these two SKUs increased between 20% and 60%. Despite all the activity trade feedback suggests the NARTD category grew volume and value by c.2.5% and c. 5.0% respectively. CCL segment result showed slightly different metrics with volume growth of 3.1% and pricing of 1.8%. The larger volume growth skewed toward cans worked against CCL business model producing margin expansion. Fig 6 Australian result snapshot Australia 1H11 1H12 $m % Volume MUC % Reported Revenue A$m % Costs A$m % Reported EBIT A$m % Reported EBIT Margin % 20.2% 20.2% (0.00) Per Case Analysis Volume MUC % Revenue per case A$ % Cost per case A$ % EBIT per case A$ % 22 August

5 Fig 7 Divisional result snapshots Divisional Tables Australia 1H11 1H12 $m % Volume MUC % Reported Revenue A$m % Costs A$m % Reported EBIT A$m % Reported EBIT Margin % 20.2% 20.2% (0.00) Per Case Analysis Volume MUC % Revenue per case A$ % Cost per case A$ % EBIT per case A$ % New Zealand & FIJI 1H11 1H12 $m % Volume MUC % Reported Revenue A$m % Reported EBIT A$m % Reported EBIT Margin % 18.8% 16.3% (2.51) Native Currency AUD/NZD exchange rate % Revenue NZ$ % Costs NZ$ % Underlying EBIT NZ$ % Per case analysis Volume MUC % Revenue per case NZ$ % Cost per case NZ$ % EBIT per case NZ$ % Indonesia & PNG 1H11 FY12 $m % Volume MUC % Reported Revenue A$m % Reported EBIT A$m % Reported EBIT Margin % 6.4% 6.2% 0.92 Native Currency AUD/IDRexchange rate 8,639 9, % Revenue IDR bn 3,032 4,047 1, % Costs IDR bn 2,840 3, % EBIT IDR bn % Per case analysis Volume MUC % Revenue per case IDR ' % Cost per case IDR ' % EBIT per case IDR ' % 22 August

6 Fig 8 Summary financials - (Dec Yr End) Profit & Loss 1H11A 2H11A 1H12A 1H12E Profit & Loss 2011A 2012E 2013E 2014E Total Revenue $m 2,253 2,645 2,428 2,838 Total Revenue $m EBITDA $m EBITDA $m 1,074 1,166 1,263 1,361 - Depreciation & Amortisation $m Depreciation & Amortisation $m EBIT (pre ISI's) $m EBIT (pre ISI's) $m ,077 - Net Interest $m Net Interest $m Pretax Profit $m Pretax Profit $m Taxation Expense $m Taxation Expense $m Net Profit $m Net Profit $m Minority Interests $m Minority Interests $m Reported Net Profit (pre ISI's) $m Reported Net Profit (pre ISI's) $m ISI's (after tax) ISI's (after tax) $m Reported Net Profit $m Reported Net Profit $m Adjusted Profit $m Adjusted Profit $m Net operating cashflow $m Net operating cashflow $m Gross cashflow $m Gross cashflow Investment fundamentals 1H11A 2H11A 1H12A 1H12E Investment fundamentals 2011A 2012E 2013E 2014E EPS (adj and diluted) c EPS (adj and diluted) $m EPS Growth % 5.5% 4.7% 4.5% 5.3% EPS Growth $m 5.0% 4.9% 8.6% 8.0% CFPS c CFPS $m CFPS Growth % 0% 0% 0% 0% CFPS Growth $m 9.2% 11.2% 11.9% 4.6% DPS c DPS $m Yield % 1.9% 2.6% 2.1% 2.8% Yield $m 4.5% 4.9% 5.2% 5.9% Payout % 71% 77% 74% 79% Payout $m 74% 77% 76% 79% Franking % Franking $m Weighted Diluted Shares Outstanding m Weighted Diluted Shares Outstanding $m Divisional Earnings 1H11A 2H11A 1H12A 1H12E Divisional Earnings 2011A 2012E 2013E 2014E Australia $m Australia $m NZ & Fiji $m NZ & Fiji $m Indonesia & PNG $m Indonesia & PNG $m Food & Services $m Food & Services $m PacBev JV PacBev JV $m Corporate $m Corporate $m Total CCL EBIT(A) $m Total CCL EBIT(A) Key Ratios 2012E 2013E 2014E Cash Flow Statement 2011A 2012E 2013E 2014E Profit & Loss Ratios EBITDA $m 1,074 1,166 1,263 1,361 Sales Revenue Growth % Inc. in Working Capital $m EBIT Growth % Tax Paid $m EBITDA/Sales % Net interest paid $m EBIT/Sales % Other $m Effective Tax Rate % Net Operating Cashflow $m PE (Adjusted) x Capital Expenditure $m Payout Ratio (DPS/Adjusted EPS) % Sale of Businesses / Assets $m EV/EBITDA x's Acquisitions of Bus/Bottlers $m EV/EBITA x's Other $m Balance Sheet Ratios Net Cashflow in Investing $m ROFE (EBITA/Avg debt + equity) % 24.2% 25.8% 26.5% - Dividends Paid (includes DRP) $m ROE (Adjusted Net profit / S/H equity) c 26.7% 26.9% 27.2% + Other $m ROA (EBIT/Total assets) c 14.3% 14.9% 15.4% - repayments of borrowings (net) $m Net Debt/equity* % 72% 67% 64% Net Cashflow from Financing $m Interest Cover x Surplus funds for debt paydown $m NTA per share c Balance Sheet 2011A 2012E 2013E 2014E Cash and Deposits $m Trade Debtors $m ,017 Other Current Assets 1, ,009 1,080 Property Plant and Equipment $m 1,772 2,031 2,174 2,330 Intangibles $m Investments in Bottler Agreements $m Other Non-Current Assets $m Total Assets $m 6,029 6,463 6,704 7,007 S-Term Borrowings $m Trade Creditors $m Other Current Liabilities $m L-Term Borrowings $m 2,202 2,136 2,147 2,166 Other Non-Current Liabilities $m Current Share Price Total Liabilities $m 3,995 4,270 4,336 4, Aug-12 Total Shareholders Funds $m 2,034 2,192 2,368 2, August

7 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2012 AU/NZ Asia RSA USA CA EUR Outperform 55.67% 61.00% 53.43% 42.58% 69.23% 46.60% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients) Neutral 30.50% 22.11% 36.99% 52.41% 28.02% 33.69% (for US coverage by MCUSA, 8.14% of stocks followed are investment banking clients) Underperform 13.83% 16.89% 9.59% 5.01% 2.75% 19.71% (for US coverage by MCUSA, 0.45% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie Bank Limited makes a market in the securities in respect of Limited. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. 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