DBRS Confirms The Coca-Cola Company at A (high) with a Stable Trend
ConsumersDBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt ratings of The Coca-Cola Company (Coke or the Company) at A (high) and the Company’s Short-Term Issuer Rating at R-1 (low). All trends are Stable. The confirmations are supported by a modest improvement in Coke’s earnings profile and initial progress in reducing financial leverage toward a range more appropriate for the current rating over the past year. The ratings continue to be supported by Coke’s strong brand name, geographic diversification and large size and scale and well-established distribution network. The ratings also consider the intense competitive environment, ongoing changes to consumer preferences, and potential return to more aggressive financial management policies in the medium to longer term.
Coke’s earnings profile improved slightly over the past year, as organic revenue grew due to favourable price/mix and volumes in emerging markets, and operating margins increased following divestitures of lower margin operations in its Bottling Investments segment. Consequently, EBITDA increased over the prior year, despite lower consolidated revenue following Coke’s bottling divestitures. Coke made progress toward, but did not reach, a level of financial leverage that DBRS would consider appropriate for the current rating. The Company reduced a significant portion of its debt, improving its financial leverage, using cash and short-term investments repatriated from foreign subsidiaries in connection with the Tax Cuts and Jobs Act of 2017 and proceeds from its bottling divestitures.
Going forward, DBRS expects that Coke’s earnings profile will remain stable and continue to be supportive of the current rating. DBRS expects revenue and operating income will grow in the low to mid-single digits over the next year, primarily reflecting a favourable price/mix in emerging markets, despite the completion of small remaining bottling divestitures in 2018 and 2019. As such, DBRS expects revenue to increase to around $33.0 billion in F2019 and EBITDA to increase above $11.5 billion in F2019.
DBRS expects that Coke will continue to reduce financial leverage until it reaches a level more appropriate for the current rating over the near term, which DBRS believes is a lease-adjusted gross debt-to-EBITDAR level below 4.0 times. DBRS believes that Coke will be able to reduce financial leverage as it increases EBITDA organically and through bolt-on acquisitions, financed with cash, while keeping any incremental debt-financed share buybacks at modest levels. In F2019, DBRS believes that cash flow from operations should be approximately $9.2 billion, capital expenditures at approximately $1.7 billion and dividend outlay at approximately $7.1 billion. Consequently, DBRS forecasts free cash flow to be above $500 million in F2019. However, over the medium term DBRS expects free cash flow to be around $1 billion. If credit metrics weaken over the next year as a result of weaker-than-expected operating income and/or more aggressive financial management, the ratings could be pressured.
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 & Criteria.
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 was not initiated at the request of the rated entity.
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.
The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.
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