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

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt rating of The Coca-Cola Company (Coke or the Company) at A (high) and the Short-Term Issuer Rating at R-1 (low), all with Stable trends. The ratings confirmation reflects Coke’s flattening operating performance in H1 2013 following two years of market share gains. The ratings continue to be based on Coke’s leading global market positions and strong brand name, as well as its strong free cash flow generating capacity. The ratings also consider the intensely competitive environment, as well as the mature nature of some of Coke’s core markets.

Coke’s operating performance leveled off in H1 2013 after consecutive years of strong performance, due partially to slower growth in emerging markets and recovering market share of its main competitor. On a constant currency basis and excluding the impact of structural changes, revenue increased by 2% year over year (YOY) in H1 2013. The increase in organic revenue was based on positive pricing and product mix despite slower volume growth. Operating margins improved modestly in H1 2013 due to the disposal of the lower-margin bottling operations in the Philippines, lower stock option expenses and cost savings from the Company’s productivity initiatives, partially offset by higher advertising expenses. On a reported basis, the Company’s EBITDA remained relatively flat in H1 YOY 2013.

In terms of financial profile, Coke continued to generate strong levels of free cash flow before changes in working capital, sufficient to fund its share repurchase activity. However, Coke continued to take advantage of the low interest rate environment and increased balance sheet debt by $3.3 billion in H1 2013, resulting in an increase in Coke’s cash balance to $16 billion at the end of H1 2013 versus $13.5 billion in 2012. The increase in gross debt resulted in the deterioration of Coke’s key credit metrics (i.e., debt-to-EBITDA of 2.75x in the LTM ended Q2 2013, versus 2.50x in 2012). On a net debt basis, however, Coke’s credit metrics remained relatively stable (i.e., net debt-to-EBITDA of 1.51x in the LTM ended Q2 2013 versus 1.47x in 2012).

Going forward, DBRS expects Coke’s revenue, excluding structural changes, to increase in the low single digits in the near term, based on positive pricing, as well as slower volume growth from emerging markets and flat volumes in its mature markets. Operating margins should improve modestly in the near term as the Company benefits from the sale of lower-margin bottling operations and cost savings from its productivity initiatives, partially offset by higher advertising and marketing expenses. As such, operating income, excluding the impact of structural changes, should also increase in the low single digits in the near term.

DBRS expects Coke’s financial profile to continue to be supported by its strong free cash flow generating capacity. Cash flow from operations is expected to track operating income, remaining flat at approximately $12 billion in 2013. With relatively stable capex and a consistent dividend policy, Coke should generate free cash flow before changes in working capital of approximately $4.5 billion to $5.0 billion. DBRS expects the majority of free cash flow will be utilized toward share repurchases (~$3.5 billion in 2013) and tuck-in acquisitions. DBRS does not anticipate debt to increase materially from H1 2013 levels, which should allow Coke’s key credit metrics to remain relatively stable.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.