DBRS Confirms Coca-Cola Enterprises at “A” and R-1 (low)

DBRS has confirmed the ratings of Coca-Cola Enterprises (CCE or the Company) at A for the Senior Unsecured Debt and at R-1 (low) for the Commercial Paper. The trends are Stable.

As the largest bottler and distributor of Coca-Cola products, CCE possesses a large and relatively stable sales base. However, CCE’s revenue base has been under pressure and delivered low growth in recent years as a result of changing consumer preferences. Profitability has been further challenged by sharp increases in input costs through 2006 and into 2007.

In February 2007, CCE announced a $2.9 billion non-cash impairment charge and restructuring plan. The non-cash impairment charge reflected lower-than-expected return on assets due to lower growth for carbonated soft drinks (CSD) and higher-than-expected costs of goods sold (COGS).

DBRS believes volume growth for CSDs should remain difficult to achieve because of consumer trends and the highly competitive nature of CCE’s markets. DBRS also expects margins to remain under pressure in the near term as cost of sales has increased approximately 7% in 2007. As such, the challenge for CCE will be to maintain and/or grow volumes while implementing price increases and efficiency gains to cover rising costs. Sales growth will increasingly rely on continuous and successful new product development (especially non-CSDs) and investment in marketing. We note that CCE continues to improve its non-CSD portfolio, with the addition of several new products in 2007, including Energy Brands Inc.’s (Energy) enhanced waters. These products should help to offset softness in CSD volumes over the medium to long term.

That said, the DBRS ratings continue to be based on the strength of the business profile and financial metrics of the overall Coke system (i.e., The Coca Cola Company (CCC) and its key bottlers – CCE, Hellenic, FEMSA and Amatil). The ratings for CCE are implicitly supported by the strength of Coke, which has improved its overall operating performance in recent periods as a result of very good and steadily improving geographic diversification. Coke’s ratings were confirmed at AA (low) with a Stable trend following its acquisition of Energy Brands Inc. (see the DBRS Press Release dated May 25, 2007). Strong overall operating performance, combined with steady and significant reduction at the key bottling companies, has benefited the financial profile of the Coke system as a whole.

CCE’s bottling and distribution operation represents approximately 19% of Coke’s global beverage volume, and Coke owns approximately 35% of CCE’s common stock. Thus, while Coke does not guarantee CCE’s debt, the bottler network is critical to the Coke system’s success and in DBRS’s view, it is unlikely that it would let a key bottler fail.

Further debt-financed acquisitions and/or share repurchases of meaningful size within the Coke system over the near to medium term could result in negative pressure on the ratings for Coke and CCE.

Note:
All figures are in U.S. dollars unless otherwise noted.