DBRS Confirms Coca-Cola Company at A (high), R-1 (low), Stable Trends

DBRS has today confirmed the Senior Unsecured Debt rating and Short-Term Issuer Rating of The Coca-Cola Company (Coke or the Company) at A (high) and R-1 (low), respectively with Stable trends. This follows DBRS’s downgrade of Coke’s Senior Unsecured Debt and Short-Term Issuer Rating on October 4, 2010, which resulted from the Company’s transformational acquisition of the North American bottling business of Coca-Cola Enterprises (CCE). Coke acquired CCE’s North American assets and liabilities including the assumption of $8.9 billion of debt for its previous 34% equity stake in CCE. At that time, DBRS recognized the potential for the transaction to generate operational and system synergies that amount to approximately $350 million over four years. On the other hand, the transaction increased pro forma debt-to-EBITDA to approximately 2.0x due to the increase in debt. The more capital-intensive nature of the bottling component of the business and the corresponding increase in leverage needed to complete the acquisitions placed the Company appropriately in the A (high) rating category.

Since the closing of the transaction, performance has remained commensurate with the current rating category. In the first six months of 2011, revenue was approximately $23 billion, versus $16 billion in the same period of 2010. The increase in net sales was driven primarily by the CCE acquisition in North America, the mix of worldwide volume growth, moderate price increases and positive mix. EBITDA margin was 27.6% in the first six months of 2011 compared with 34.3% a year earlier. The decrease reflected both the changed economics of the business with the inclusion of major bottling operations in North America, as well as rising input costs and increased selling, marketing and administration costs in investing in higher growth emerging markets. As such, EBITDA for the first half of the year was $6.4 billion.

In terms of financial profile, Coke generated operating cash flow of approximately $5.8 billion, while increasing capex to $1.2 billion and dividends to $2.1 billion. This resulted in positive free cash flow before changes in working capital of approximately $2.5 billion. Although Coke did not require significant external financing in the first half of 2011 it raised net debt by approximately $2.7 billion, and increased its cash and short-term investment balances. As such, Coke’s debt balance increased to approximately $26 billion at June 30, 2011, from $23.4 billion at the end of 2010.

Going forward, DBRS expects Coke’s earnings profile to remain strong. We anticipate overall top-line growth to continue for the rest of 2011 and into 2012, with the potential for revenue to reach $50 billion for the full year 2011. EBITDA margin is expected to improve modestly as the pace of rising input costs moderates in the second half of the year and as the Company passes on further price increases. As such, DBRS expects Coke to generate EBITDA in the $13 billion range for the full year 2011. Coke’s strong financial profile should remain stable and become more apparent as it cycles through a full year with the recently acquired North American bottling assets. The expected operating income/cash flow relative to debt should settle at an equilibrium that is consistent for the current rating. DBRS forecasts cash flow from operations to be in the $10 billion to $12 billion range for the full year 2011, while capex and dividends should increase to $2.5 billion and $4.5 billion, respectively. Share repurchases are expected to total $2.5 billion for the year. Overall, DBRS expects Coke to continue generating high levels of free cash flow which will be returned to shareholders (both dividend increases and share repurchases) and/or invested in growth opportunities (particularly in emerging markets). That said, we anticipate the Company will manage to maintain debt-to-EBITDA at close to the 2.0x level.

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

The applicable methodology is Rating Consumer Products which can be found on our website under Methodologies.