DBRS Confirms The Coca Cola Company at A (high), Stable Trend

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 continued dominant position in the non-alcoholic ready to drink beverages sector supported by its strong global operating system. The ratings confirmation also recognizes the strategic and operational initiatives the company has been pursuing this year to achieve volume growth and improve productivity. The ratings consider the challenges that Coke faces with regards to sustaining its earnings and financial profile in a fiercely competitive industry while navigating through increasing consumer cognizance in developed countries of harmful effects of sugar-sweetened beverages. The ratings also benefit from the Company’s strong cash generating capacity and robust liquidity.

Coke possesses an earnings profile that DBRS considers to be strong for the current rating category. The magnitude and stability of operating income stems from the Company’s leading market position, geographic diversification, efficient global distribution system, and ability to innovate. The Company recorded 2% growth in global unit case volumes in H1 2014, and increased the global price/mix by 2% over the same period. Efforts to improve productivity helped the company improve its operating margin to 25.2% in the first half of 2014 from 24.8% in the comparable time period in 2013. DBRS notes that this operating performance reflects an initial momentum achieved this year by Coke consequent to its focus and execution of strategic priorities of accelerating growth of sparkling beverages, expanding the still beverage portfolio, maximizing productivity, enhancing the global system capabilities, and investing in the next generation of leaders.

DBRS considers Coke’s cash flow generating capacity and liquidity to be strong for the current rating category. However, the strengths of its financial profile are moderated by its relatively high gross leverage. Coke’s relatively high gross leverage is in part a consequence of a low interest rate environment resulting in debt continuing to be an instrument of choice to supplement free cash flow for strategic acquisitions, investments and share repurchases. While the Company’s gross leverage (debt to EBITDA) has gradually crept up to relatively high levels over the recent past (2.9 times (x) in 2013 and 3.18x in the last twelve months, the Company’s high cash balances result in leverage increase that is less pronounced on a net basis. Additionally, Coke’s interest coverage ratio (EBIT coverage) has remained steady and strong over the past few years – more recently it was 23x and 25x in 2013 and H1 2014 respectively. Coke’s financial profile is further supported by its strong liquidity which includes $18.1 billion in cash and $6.3 billion in short term investments at the end of first half of 2014.

Going forward, DBRS expects Coke’s earnings profile to remain stable based on the Company’s leading market position and management’s strategic initiatives to meet market challenges. DBRS believes market competition and evolving consumer preferences will require Coke to increase investment in brand strengthening efforts and increase marketing expenditure in order to maintain or gain value share in its product segments. Continued investment in relationships with bottling partners will likely help Coke to protect its position as the world’s largest non-alcoholic beverage company. That said, managing public concern about obesity-causing sugar-sweetened beverages, innovating in an environment of evolving consumer preferences, and finding ways to grow in a mature market, are expected to remain some key challenges for Coke. Over the near term, excluding any new structural changes, DBRS expects the Company to maintain revenues and improve operating margins modestly.

DBRS expects the Company will continue to use its free cash flow for share repurchases, and for strategic acquisitions/investments to expand its product portfolio beyond carbonated soft drinks. DBRS believes Coke may also continue to take advantage of the low interest rate environment and raise further debt capital in this cause over the near term consequent to which its debt levels and gross leverage is likely to remain elevated. That said, he company’s strong liquidity, cash generating capacity, and interest coverage remain the basis of DBRS’ stable outlook for Coke’s credit risk profile. On the whole, Coke’s business risk characteristics and the financial risk metrics are likely to remain in line with its current rating category over the near term.

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.

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

The applicable methodology is Rating Companies in the Consumer Products Industry (October 2013), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.