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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of The Coca-Cola Company (Coke or the Company) at A (high) with a Stable trend. The rating confirmation acknowledges Coke's sound operating performance against a challenging macroeconomic backdrop presented by surging inflation, as evidenced by the Company's ability to take significant pricing actions while continuing to grow volumes. The Stable trend reflects DBRS Morningstar's expectation that Coke will continue to navigate this challenging operating environment, including potential payments associated with the dispute with the Internal Revenue Services (IRS), within the context of the current A (high) rating category. The rating continues to be supported by Coke’s strong brands, solid market positions, geographic diversification, large size and scale, and efficient operations. The rating also continues to consider the intense competitive environment, Coke’s mature core markets and product categories, and ongoing changes to consumer preferences.

Coke’s earnings profile is expected to remain relatively stable and strong for the current A (high) rating, underpinned by the Company's strong brands, solid market positions, and efficient operations. DBRS Morningstar forecasts revenue to approach $45 billion in 2023, from $43 billion in 2022, primarily driven by pricing actions and relatively stable volumes, partially moderated by continued unfavorable foreign exchange effects, and grow to approximately $47 billion in 2024. DBRS Morningstar believes that Coke should be able to maintain relatively stable EBITDA margins, with benefits from pricing actions as well as cost saving and efficiency improvement initiatives expected to at least offset inflationary pressures in 2023. Consequently, DBRS Morningstar forecasts EBITDA to grow to above $14 billion in 2023 and to approximately $15 billion in 2024, from $13.6 billion in 2022.

Despite the expected growth in earnings, DBRS Morningstar expects Coke’s free cash flow (FCF) after dividends but before changes in working capital to decline from 2022 levels but remain above $2.0 billion in 2023, as a result of higher interest costs on its variable debt, one-time cash outflows related to recent transactions, increased capital expenditures of $1.9 billion, and a larger cash dividend outlay of $7.8 billion, before growing again in 2024. Excluding any payments associated with the IRS dispute, DBRS Morningstar believes that the Company will continue to use its FCF in a balanced manner, including for share buy backs and acquisitions, while maintaining relatively stable debt levels. With regard to the IRS dispute, DBRS Morningstar 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 $5.2 billion, in a manner that allows Coke to maintain its current A (high) rating.

That said, should credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA increases above 3.5 times (x)) as a result of weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured. Conversely, although unlikely, DBRS Morningstar could take a positive 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.

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

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

The principal methodology applicable to the rating is the Global Methodology for Rating Companies in the Consumer Products Industry (https://www.dbrsmorningstar.com/research/402329; September 2, 2022).

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

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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@dbrsmorningstar.com.

This rating was not initiated at the request of the rated entity.

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

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. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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