Coca-Cola Amatil shares have posted their biggest gains in five years after the bottler unveiled plans to sell almost 30 per cent of its Indonesian business to The Coca-Cola Co for $US500 million and forecast a return to profit growth in 2015.

The Coca-Cola Co will invest $US500 million ($570 million) in Indonesia in return for a 29.4 per cent equity stake in Coca-Cola Amatil's Indonesian business. Coca-Cola Amatil announced the heads of agreement with The Coca-Cola Co on Thursday as managing director Alison Watkins released the outcome of a wide-ranging strategic review aimed at cutting costs and restoring sales and earnings growth while building a closer relationship with TCCC, its major shareholder and franchisor.

Ms Watkins said CCA's profits, which have fallen for two years, were expected to return to growth in 2015.

CCA is aiming to achieve mid-single digit growth in earnings per share over the next few years and wants to pay out about 80 per cent of earnings in dividends while spending about $310 million a year in capex. This is well below the low-double-digit profit growth achieved in eight of the last 12 years at CCA. However, the market responded well to the news, driving up Coca-Cola Amatil's shares by as much as 6.6 per cent to $9.25, the biggest jump since April 2009.

Ms Watkins's guidance was in line with current market forecasts. Analysts are forecasting a 22 per cent drop in net profit this calendar year to $391 million and a 4.3 per cent rise in profit in 2015 to $408 million. Ms Watkins also announced a flatter management structure at CCA and detailed plans to cut costs by $100 million within three years, with the savings to be reinvested in brand building and revenue management initiatives. "We are confident that the combination of revenue and cost initiatives we have under way will restore the business to growth," Ms Watkins said.

CCA has established a new revenue management team in its key Australian business and has flagged significant changes to its strategy, moving away from a focus on volumes and price-led revenue growth to a focus on transaction growth and revenue growth through a better mix of products and prices. Analysts say poor revenue management and declining service to customers such as takeaway food outlets. CCA will also spend 36 per cent more on mainstream and digital marketing to build brand awareness and relevance - especially in the teen market - and will use digital technology to improve service in the route or convenience channel. CCA is also changing its price architecture, although not necessarily reducing prices, which are now 50 to 60 per cent higher than those of arch rival Pepsi/Schweppes.

Last month the bottler launched a $2 250 ml 'entry' price can and trials are under way for similar new products. About 5 per cent of consumers who have bought the $2 cans are completely new soft drink consumers, CCA said, and single serve transactions have risen 6.6 per cent since the $2 can was introduced. Earlier this week TCCC unveiled the mid-calorie cola Coke Life, which will be introduced in April, and other new "naturally sweetened" low-cal drinks will be rolled out over the next two years.

CCA will also launch a low-priced bottled water, Pure Springs, to better compete with private label water and brands such as Frantelle, while sending more on marketing its market- leading Mt Franklins brand and developing a range of "enhanced" waters. Analysts believe CCA needs to compete in the value-water segment but fear a new budget brand will take sales from Mt Franklin and drag margins down across the group. Ms Watkins said CCA had a strong new product pipeline, thanks to its relationship with TCCC, and was testing new and emerging categories such as coconut water. The acquisition by Atlanta-based Coca-Cola (TCCC) of an equity stake in the Indonesian business was flagged by The Australian Financial Review earlier in October. The equity stake values the Indonesian business at $1.6 billion and is in line with TCCC's 29.4 per cent shareholding in CCA.

CCA said TCCC's investment would support the accelerated expansion of soft drink production, warehousing and cold drink infrastructure in Indonesia to ensure long-term growth and success in the market. Capital expenditure in Indonesia will be increased from around $100 million a year to $150 million a year for the next three to four years and will be directed into production, warehousing and cold drink infrastructure. The increased investment will enable CCA and TCCC to broaden their product offering, develop new consumption occasions and offer a wider range of more affordable products as demand rises from lower and middle income consumers. CCA is the largest player in the Indonesian carbonated soft drinks (CSDs) market but its share of non-CSDs is weak and it is facing increased competition form low-priced rivals such as AJE's Big Cola. CCA Indonesia will also transform its route-to-market model to increase availability to the traditional trade and broaden its customer base.

Ms Watkins expects returns from Indonesia to reach CCA's cost of capital by 2020, after which time CCA expects to be able to self-fund growth through cashflows. The Indonesian deal is conditional on shareholder approval at a meeting in February and will be reviewed by an independent expert. TCCC will be unable to vote at the meeting. Ms Watkins also reaffirmed CCA's commitment to SPC Ardmona and CCA's beer and spirits business.

By Sue Mitchell - smh.com.au

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