DBRS Comments on The Coca-Cola Company’s 2019 Financial Outlook

DBRS Limited (DBRS) notes that, on February 14, 2019, The Coca-Cola Company (Coke or the Company) released its 2019 financial outlook. Coke expects full-year 2019 consolidated revenues to grow by about 8% to 9%, including organic revenue growth of approximately 4% as well as benefits from acquisitions, divestitures and structural items of 8% to 9%, but partially offset by negative currency-related effects of 3% to 4%. The Company anticipates full-year 2019 consolidated operating income to grow slower than revenue at about 3% to 5% based on currency-neutral operating income growth of 10% to 11% and a negative currency impact of 6% to 7%. DBRS believes that Coke’s newly announced guidance reflects an increasingly pessimistic view of growth rates for carbonated soft drinks in developed and emerging markets as well more negative foreign-exchange rate assumptions.

On January 19, 2019, DBRS confirmed Coke’s Issuer Rating and Senior Unsecured Debt rating at A (high) and its Short-Term Issuer Rating at R-1 (low). All trends remained Stable. For full-year 2019, DBRS expected operating income to grow in line with revenues, such that EBITDA would increase above $11.5 billion and the Company would continue to reduce financial leverage (i.e., lease-adjusted gross debt-to-EBITDAR would decline to a level below 4.0 times (x)) over the near term. Based on the Company’s updated outlook, DBRS now expects EBITDA to grow to around $11.0 billion. DBRS now forecasts that, while Coke will continue to reduce financial leverage over the near to medium term, it will likely reach its targeted financial leverage of below 4.0x in 2020 rather than 2019.

Although Coke’s guidance for operating income growth in 2019 is lower than DBRS’s initial expectations, DBRS believes that the downward revision can be absorbed within the current rating category as it is largely the result of macroeconomic and currency headwinds as opposed to eroding business competitiveness. However, if operating income struggles to grow in the low- to mid-single digits and/or financial leverage increases over the next year as a result of weaker-than-expected operating income and/or more aggressive financial management, the ratings could be pressured.

The current ratings continue to be supported by Coke’s strong brand name, geographic diversification, 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.

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.

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