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

DBRS Limited (DBRS) has today confirmed the long-term ratings of The Coca-Cola Company (Coke or the Company) at A (high) with a Stable trend. DBRS has also confirmed the Company’s Short-Term Issuer Rating of R-1 (low) with Stable trend. The confirmations acknowledge soft top-line growth and incorporate the Company’s productivity enhancement and bottling divestiture initiatives. The ratings continue to be based on Coke’s strong brands and leading market position, extensive geographic diversification, well-established distribution network and its overall size and scale. The ratings also benefit from the Company’s strong cash-generating capacity and robust liquidity. The ratings consider the high level of competition in the industry, the mature nature of Coke’s core markets and the relatively high level of the Company’s gross financial leverage.

The Company’s organic revenues on a constant currency basis increased approximately 2% in H1 2016 over the same period of the previous year based primarily on price increases and product mix improvement. The Company’s adjusted EBITDA increased to $6.3 billion in H1 2016 from $6.1 billion in H1 2015 primarily because of lower selling, general and administrative expenses and the impact of acquisitions/divestitures. The Company continued with its practice to use incremental debt to supplement free cash flow for share repurchases resulting in lease-adjusted debt-to-EBITDA persisting at levels relatively high for the rating.

Over the near to medium term, DBRS expects the Company should achieve low-single-digit growth in consolidated revenues excluding the impact of currency fluctuations and acquisitions/divestitures. This is based on flat to slightly negative volume growth in developed markets, modestly positive volume growth in Asia Pacific and Latin America and overall price and product mix improvement. Reported revenue is likely to decline modestly due to the continued, albeit moderating, negative impact of foreign exchange. EBITDA margin should trend steadily towards the low to mid-30% range after the completion of the Company’s refranchising and productivity initiatives by 2019. As such, DBRS forecasts Coke’s EBITDA to be between $11 billion and $11.5 billion in 2016, and $11.5 billion and $12.0 billion in 2017.

DBRS expects the Company’s capital expenditure will be in the range of $2.5 billion to $3.0 billion in 2016 (declining modestly in the following year) and free cash flow after dividends to reach lows of approximately $1 billion in 2016 and 2017. Since the Company intends to repurchase shares to the tune of $2.0 billion to $2.5 billion in each of 2016 and 2017, gross debt would increase without consideration of proceeds from any divestitures and result in further pressure on the rating. This may be alleviated should the Company use adequate levels of proceeds from bottler divestitures to reduce its debt.

DBRS believes that Coca-Cola’s gross financial leverage will remain elevated (mid to high 3 times (x) range) in the near term as the Company will continue with its chosen practice to borrow funds to supplement free cash flow for share repurchases. That said, DBRS expects the Company’s refranchising activities will enable it to reduce debt levels (in the range of $4 billion to $5 billion over the next two years) with cash generated from bottler sales. Productivity improvement initiatives should facilitate core EBITDA (excluding EBITDA from any divested bottlers) growth. Consequently, DBRS expects Coke will be able to reduce its lease-adjusted gross debt-to-EBITDA from current highs toward 3x in the medium term.

DBRS will continue to monitor the balance between shareholder returns and deleveraging initiatives. Should the Company deliver weaker-than-expected operating income and/or not deleverage as anticipated over the medium term, its credit ratings could come under pressure for a negative action.

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 (September 2016), which can be found on our website under Methodologies.

The full report providing additional information and analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.