Morningstar DBRS Confirms The Coca-Cola Company's Issuer Rating at A (high) with a Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of The Coca-Cola Company (Coke or the Company) at A (high) with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation acknowledges Coke’s solid operating performance, primarily attributable to pricing initiatives and modest volume growth in a particularly challenging operating environment that pressured consumer purchasing power. The Stable trend reflects Morningstar DBRS’ expectation that the Company will continue to navigate this challenging operating environment and its effect on the Company’s operating performance, as well as potential payments associated with the dispute with the Internal Revenue Services (IRS), within the context of the A (high) credit rating.

In 2023, revenue increased by 6% year-over-year (YOY) to approximately $45.8 billion, as pricing initiatives and low-single-digit volume growth more than offset foreign currency headwinds and the effect of refranchising and subsequent disposal of some Company-owned bottling operations. EBITDA margins remained flat on 2022 levels of 31.6%, as the benefit from pricing initiatives; favourable package and channel mix; and lower selling, general, and administrative (SG&A) expenses stemming from the refranchising more than offset the impact of rising commodity prices, increased employee benefit costs, and higher advertising and marketing expenses. Consequently, EBITDA increased to approximately $14.5 billion in 2023 from $13.6 billion in 2022. Notwithstanding the growth in operating income, free cash flow (FCF) after dividends but before changes in working capital and lease principal payments increased by only $100 million YOY to approximately $3.0 billion because of higher capital expenditure (capex) and a larger cash dividend outlay in 2023. The Company applied its available liquidity, FCFs, and additional indebtedness to finance share repurchases. As such, debt-to-EBITDA remained stable on 2022 levels of 2.9 times (x), well within the 3.5x threshold considered appropriate for the current credit rating category.

CREDIT RATING DRIVERS
Should Coke’s credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA increases above 3.5x) as a result of weaker-than-expected operating performance and/or more aggressive financial management, the credit rating will be pressured.

Conversely, although unlikely, Morningstar DBRS could take a positive credit rating action should the Company’s business risk profile meaningfully strengthen, combined with a commensurate improvement in credit metrics on a normalized and sustainable basis.

EARNINGS OUTLOOK
Morningstar DBRS expects Coke’s earnings profile to remain relatively stable over the medium term, underpinned by the Company’s strong brands, solid market position, and efficient operations. Morningstar DBRS forecasts revenue to increase to approximately $46.0 billion in 2024 and $48.0 billion in 2025 from approximately $45.8 billion in 2023, primarily attributable to pricing initiatives, including carryover pricing increases from prior years. However, in the context of the current challenging operating environment, Morningstar DBRS anticipates that Coke could be pressured to grow volumes. The topline could also be negatively affected by refranchising and disposal of additional Company-owned bottling operations. Morningstar DBRS believes that Coke should be able to grow EBITDA margins to approximately 32.5% in 2024 from 31.6% in 2023, and subsequently maintain EBITDA margins at this level. This is attributable to continued pricing initiatives, a sustained favourable product mix, gradually moderating inflationary pressure, improving operating leverage and lower SG&A expenses stemming from further refranchising. As such, Morningstar DBRS forecasts EBITDA to increase to around $15.0 billion and $15.5 billion in 2024 and 2025, respectively, compared with approximately $14.5 billion in 2023.

FINANCIAL OUTLOOK
The projected growth in operating income, combined with Morningstar DBRS’ expectation that debt levels will remain relatively stable in 2024 and 2025, should strengthen Coke’s financial profile and improve credit metrics within the current credit rating category. Morningstar DBRS forecasts operating cash flow to increase to more than $13.0 billion in 2024 and toward $14.0 billion in 2025 from $12.8 billion in 2023, well in excess of the Company’s growing capex and cash dividend outlay requirements. Excluding any payments associated with the IRS dispute, Morningstar DBRS believes that Coke will use its available liquidity, FCF after changes in working capital, and lease principal payments of approximately $2.5 billion and proceeds from the refranchising in a balanced manner, including for share repurchases, while maintaining relatively stable debt levels. With regard to the IRS dispute, Morningstar DBRS believes that Coke has sufficient liquidity and access to incremental capital to manage any potential payments, which, according to the Company, could aggregate to approximately $5.8 billion plus additional interest accrued, in a manner that allows Coke to maintain its current A (high) credit rating.

CREDIT RATING RATIONALE
Coke’s credit rating continues to be supported by its strong brands, solid market positions, geographic diversification, large size and scale, and efficient operations. The credit rating also continues to consider the intense competitive environment, the Company’s mature core markets and product categories, and ongoing changes to consumer preferences.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of The Coca-Cola Company, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of The Coca-Cola Company, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of The Coca-Cola Company, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Consumer Products Industry (July 21, 2023)
https://dbrs.morningstar.com/research/417460/global-methodology-for-rating-companies-in-the-consumer-products-industry

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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@morningstar.com.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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