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. The ratings continue to be supported by the Company’s strong brand name and leading global market position, but also reflect the highly competitive nature of the industry and exposure to volatile input costs. DBRS’ confirmation acknowledges Coke’s relatively strong operating performance over the past two years, balanced by Coke’s recent increases in returns to shareholders and corresponding rise in debt levels.

In F2011, revenue increased 33% to $46.5 billion, primarily reflecting the full-year inclusion of Coca-Cola Enterprises’ (CCE) North American bottling operation. Positive world-wide volume growth continued to be largely driven by strong performance in high-growth international markets as North American organic volume growth remained relatively flat at 1%. In the past two years, Coke has gained share in the global non-alcoholic beverage market by capturing nearly 30% of the industry’s volume growth. Although EBITDA margins decreased modestly to 26% in F2011 (versus 28% in F2010) as a result of higher commodity costs and the inclusion of the lower-margin bottling operation, Coke has been relatively successful at passing on cost increases to consumers. As such, EBITDA increased to $12.1 billion from $9.9 billion a year earlier. In the first half of F2012, revenue increased by 4.2% to $24.2 billion while EBITDA margins remained relatively flat from a year earlier at 27.9%, leading to an increase in EBITDA to approximately $12.5 billion for the last 12 months (LTM) ended H1 F2012.

In terms of financial profile, Coke continued to generate strong operating cash flow that remains more than sufficient to cover the Company’s capex and dividend requirements. Through F2011, Coke’s free cash flow as well as additional debt was utilized toward completing small tuck-in acquisitions and approximately $4.5 billion in gross share repurchases. As such, balance-sheet debt increased approximately $5 billion at year-end F2011 to $28.5 billion. Despite higher debt balances, debt-to-EBITDA at the end of F2011 remained relatively flat from a year earlier at 2.36 times (x).

During H1 F2012, higher tuck-in acquisitions and share repurchases resulted in a further increase in balance sheet debt of $2.7 billion. As such, Coke’s key credit metrics (i.e., debt-to-EBITDA) deteriorated to 2.61x for the LTM ended H1 F2012, which remains at the high end relative to peers in the current rating category.

Going forward, DBRS estimates top-line growth to continue in the mid-single digit range, based primarily on strong levels of volume growth in emerging markets and relatively stable volumes in North America. EBITDA margins should remain relatively stable in F2012 but could improve modestly as input cost inflation moderates. As such, DBRS expects the Company’s EBITDA will increase toward the $13 billion level in F2012. In terms of financial profile, DBRS expects Coke to continue to generate strong levels of free cash flow that will be used to invest in growth and fund returns to shareholders (gross share repurchases expected to be in the range of $4 billion to $5 billion) resulting in relatively flat debt levels. A positive rating action could result from an improvement in key credit metrics (i.e., debt-to-EBITDA toward the 2x level) that is based on continued strong operating performance and/or moderation of debt financed returns to shareholders.

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

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