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

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt ratings of The Coca-Cola Company (Coke or the Company) at A (high), both with Stable trends. DBRS has also confirmed the Company’s Short-Term Issuer Rating at R-1 (low) with a Stable trend. The confirmations acknowledge the decline in Coke’s consolidated net revenue and operating income as a result of the Company’s decision to divest significant Bottling Investments and focus on product innovation in addition to the Company’s continued use of incremental debt to increase dividend distributions and share repurchases, despite the significant proceeds Coke received from divesting its Bottling Investments. The ratings continue to be supported by Coke’s strong brand name, geographic diversification and well established distribution network. The ratings also consider the intense competitive environment, potential for aggressive financial management policies and ongoing changes to consumer preferences and spending patterns.

Going forward, DBRS expects that Coke’s earnings profile (excluding Bottling Investments) should remain stable and improve modestly in the near term as the Company benefits primarily from its productivity and reinvestment program. DBRS forecasts consolidated net revenue (including revenue from Coke’s bottling investments) to decline in the mid- to high-single-digits and be around $31 million in F2018. The decline in revenue will reflect the full-year effect of the Bottling Investment divestitures in the United States and China, partially offset by favourable price/mix in Coke’s core business. DBRS expects EBITDA margins to improve modestly as the Company benefits from cost savings achieved from its productivity and reinvestment program and Bottling Investment divestitures. As a result, DBRS expects EBITDA to increase toward $11.0 billion in F2018.

DBRS believes that cash flow from operations should be approximately $9.0 billion in F2018. DBRS expects Coke’s capital expenditures and dividend outlay to be approximately $1.9 billion and $6.5 billion, respectively, in F2018. As a result, DBRS forecasts free cash flow after dividends and before changes in working capital to be above $600 million in F2018. DBRS believes that Coke will use free cash flow for bolt-on acquisitions as the Company reduces share buybacks in the near term to offset common share issuance. Although financial leverage as measured by lease-adjusted gross debt-to-EBITDAR is aggressive for the current rating, DBRS also considers lease-adjusted net debt-to-EBITDAR based on the Company’s large balance of cash, short-term investments and marketable securities.

DBRS expects lease-adjusted gross debt-to-EBITDAR to decline over the near to medium term, without the difference in gross debt and net debt shrinking. DBRS will carefully monitor the Company’s use of cash, short-term investments and marketable securities, particularly if changes to the U.S. tax code increase the incentive to repatriate overseas cash. Should credit metrics continue to weaken over the next two to four quarters as a result of the use of incremental debt to finance share repurchases (over and above repurchases required to offset the anti-dilutive effect of common share issuance), a negative rating action could result.

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

The principal methodology is Rating Companies in the Consumer Products Industry, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

The rated entity or its related entities did participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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