Sector financial performance:

This company, which primarily produces and sells beverage concentrates, fountain syrups, and finished beverages and as well snacks food, has been grouped into non-alcoholic beverage sector.

It seems that companies in this sector are experiencing changes in consumers’ taste and the transmissions of those changes across global markets as the total trend of consumers’ preference is shifting to non-carbonated beverage from traditionally dominating sparkling products. Sales volume data indicates that demand for CSD beverage has been declining globally with an annual rate of about 1% and the demand for non-carbonated beverage increased about 4% annually in the past several years. The global decline in demand for CSD is particularly due to large decline in developed market. For example, the decline in CSD beverage in US market led the whole volume in this market go down by 2-4% in 2016/17 while the decline seems to be being offset by picking up of non-carbonated beverage in 2018.  Globally, driven by increasing in developing market in both CSD and non-carbonated categories, the demand has been increased as indicated by 1-2% annual growth in volume. Accompanying with declining demand for traditional sparkling beverage, we have seen the average price has been rising at an about 2-3% rate globally in the past several years and the price growth rate is lower in US market (1-2%) during the same period. The rising average price has resulted from rising unit price and product mix’s shifting to higher price products.

As a result, as described above, of the changes in consumers’ shifting away from carbonated beverage in US market, the declining demand for CSD beverage hurt more the bottling only companies than brand beverage companies in this industry as indicted by these bottlers’ declining growth rate of can/bottle volume and shrinking gross margin according some of typical bottlers.

Due to strong demand and as well the fact that only a few of brands are dominating market, for those brands owners and manufacturers of beverages the gross margin and operating margin have been kept at high level and seemed to be being improved. In the past several years, with favourable product mix shifting to high price products and reducing commodity costs and business shifting to higher margin operating (franchise), the average gross margin of typical companies in this sector reaches almost to 60% and operating margin to 22%.

However, when talking about the bottlers who have no own brands, their gross margins seem to have decreased largely (down by about 600 basis points in gross margin and by 500 basis points in operating margins, according to a typical bottler). Obviously, the increased margin resulted from shifting of product mix as seen from brand companies was not transferred to bottling sector or at least to some of bottlers who were not able to flexibly adjust their business to adapt new changes in demand.

According our analysis, brand companies’ enterprise price/adjusted EBI is around 31 in a range of 29-35 with interest/EBI ratio of 7%.  Bottlers/private label companies’ enterprise price/sales is about 0.7 with gross margin of 34% and EBI/sales ratio of 0.5%.

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Company performance:

It seems that demand for this company’s beverages products in North America has been weak and declining in the past several years as indicated by decrease in its case volume (CSD mainly) The decrease in volume of beverage is primarily due to decrease in CSD products but as well in  non-carbonation beverage (2017). The price/product mix has been rising in most categories during the same period.

For the first 36 weeks of fiscal 2018 compared with same period of 2017(ended 20180908)

The organic sales (excluding currency and acquisition) of this company increased about 3% primarily attributable to the increase of 2% in price/product mix and increase of 1% in volume. Organic sales of North America Beverage was flat attributable to decrease of 1% in volume (decrease in CSD offset by increase in non-CSD) offset increase of 1% in price.

For fiscal 2017 compared with 2016

The organic sales (excluding currency and acquisition) of this company increased about 2% primarily attributable to the increase of 3% in price/product mix offset by decrease in volume in most categories. Organic sales of North America Beverage decreased 2% attributable to decrease of 3.5% in volume (both CSD and non-CSD) offset increase of 1.5% in price.

The organic sales(excluding currency and acquisition) of this company increased about 2% in first 36 weeks of fiscal 2017 compared with the same period of 2016  primarily attributable to the increase in snacks food and beverage and snacks in other area than north America. Organic sales of North America Beverage decreased 1% attributable to decrease of 2% in volume offset increase of 1% in price.

The organic sales (excluding currency and acquisition) of this company increased about 4% in fiscal 2016 compared with 2015 primarily attributable to the increase in all of its products. Organic sales of North America Beverage increased 2% attributable to increase of 1% in volume and increase of 1% in price.

The organic sales (excluding currency and acquisition) of this company increased about 5% in fiscal 2015 compared with 2014 primarily attributable to the increase in all of its products. Organic sales of North America Beverage increased 3% attributable to increase of 0.5% in volume and increase of 2.5% in price.

Due to the inflation in price or shifting to higher margin products and falling costs, we see an increasing gross margin in the past several years. Its gross margin is around 54- 55% (2018). This company’s operating margin increased to 16% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 29($116/share), which we think, is relatively slightly overvalued compared with its peers considering its relative weaker sales and decreasing margin while its snacks food segment has provided enough growth.