Coca-Cola Amatil Ltd. - Full Analysis

Coca-Cola Amatil Ltd.
Primary Credit Analyst:
Paul R Draffin, Melbourne (61) 3-9631-2122; paul.draffin@standardandpoors.com
Secondary Contact:
Karan Rathod, Melbourne +613 9631 2011; karan.rathod@standardandpoors.com
Table Of Contents
Rationale
Outlook
Standard & Poor's Base-Case Scenario
Company Description
Business Risk
Financial Risk
Liquidity
Group Influence
Ratings Score Snapshot
Reconciliation
Related Criteria And Research
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 22, 2016 1
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Business Risk: SATISFACTORY
Vulnerable Excellent
Financial Risk: INTERMEDIATE
Highly leveraged Minimal
bbb
bbb+ bbb+
Anchor Modifiers Group/Gov't
CORPORATE CREDIT RATING
BBB+/Stable/A-2
Rationale
Business Risk: Satisfactory Financial Risk: Intermediate
• Leading market shares in Australia and New Zealand
• Structural revenue pressures in the carbonated soft
drink (CSD) market
• Strong competition, including from supermarket
home brands
• Large and efficient distribution network
• Key credit measures comfortably within tolerances
for the current rating
• Earnings growth tempered by the structural revenue
shift away from high margin CSDs
• Strong free operating cash flows
• Moderating exposure to the volatile Indonesian
market
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Outlook: Stable
The stable outlook reflects our expectation that Coca-Cola Amatil Ltd. (CCA)'s ongoing focus on costs, marketing,
and product initiatives will support continued modest growth in its earnings. In our view, the stability of the
Australian beverage business is critical to the rating on CCA, as it provides a solid operating base for the company
to expand into more volatile Asian markets. At the current rating, we expect that the company will maintain its
debt to EBITDA between 2x and 3x.
Upside scenario
We could consider an upgrade if CCA maintains its market position and profitability in Australia, while sustaining a
material improvement in its financial risk profile. This would include debt to EBITDA sustained at less than 2x,
supported by a robust financial policy framework.
Downside scenario
Downward rating pressure could arise if we expect that the company's:
• Debt to EBITDA will be sustained above 3x;
• Discretionary cash flow (DCF) position (as measured by DCF to debt) becomes materially negative, substantially
increasing the group's financial risk; or
• Implied support from its major shareholder, The Coca-Cola Co. (TCCC), reduces. The one-notch support from
TCCC incorporates our expectation that at least 75% of CCA's earnings will be from TCCC-related products.
Standard & Poor's Base-Case Scenario
Assumptions Key Metrics
• Continued structural revenue pressures in the CSD
market, resulting in low single-digit revenue growth
over the next two years;
• Unadjusted EBITDA margins of about 18% in the
next two years, supported by recent cost-cutting
initiatives; and
• Capital expenditure and dividends totaling A$600
million to A$700 million per year in the next two
years.
Year end Dec. 31 2015A 2016E 2017E
Debt to EBITDA 2.3x About 2x-2.2x 1.8x-2.2x
FFO to debt 31.0% 30%-35% 32%-38%
DCF to debt 3.8% About 0%-5% 0%-10%
A--Actual. E--Estimate. DCF—Discretionary cash flow.
FFO—Funds from operations.
Company Description
CCA is one of the largest anchor bottlers in the Asia-Pacific region. The company has an exclusive agreement with its
29.2% major shareholder TCCC, to manufacture and distribute TCCC-trademarked products in six countries: Australia,
New Zealand, Indonesia, Fiji, Papua New Guinea (PNG), and Samoa.
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It also sells and distributes spirits under the Jim Beam, Canadian Club, and Makers Mark brands, and produces and
sells beers, ciders, and coffee in Australia. CCA also owns food (primarily fruit) processing and marketing company,
SPC Ardmona.
Business Risk: Satisfactory
Underpinning our business risk assessment on CCA is the group's strong market position as the exclusive Coca-Cola
bottler in Australia and New Zealand. In addition, the group has a strong portfolio of brand names and products;
leading market shares; and a large, efficient distribution network. Tempering these strengths are growing competition
in Australia and New Zealand, and the group's exposure to more volatile Asian markets.
CCA's Australian and New Zealand non-alcoholic beverage businesses generate over 70% of the group's earnings, and
have provided a stable base from which to support its growth in more volatile Asian markets. However, the Australian
operating environment continues to evolve as consumer demand for carbonated soft drinks declines, and competition
intensifies in noncarbonated beverage categories such as bottled water. We expect that this shift will continue to
pressure CCA's volumes, limit price increases, and constrain overall margin growth in the next few years.
We expect CCA to continue to use innovation and effective marketing to maintain low volume growth and relatively
stable margins over the next two years. Furthermore, we consider that the strength of the group's brands, marketing
capability, and extensive distribution network will continue to underpin the group's strong cash flow generation
capability and provide effective barriers to entry.
TCCC's US$500 million investment in the Indonesian business in 2015 has, in our view, significantly reduced the risks
associated with this rapidly growing business. At the same time, CCA has maintained a significant ownership interest
in this large and growing market. TCCC's material investment in Indonesia in the next few years will focus primarily on
improving supply chain infrastructure and cold storage capability. Nonetheless, we expect challenging and volatile
economic conditions in both Indonesia and PNG to periodically create cost pressures in these markets, which together
with strong competition, will maintain margin and earnings volatility in the next few years.
Although the group's nonbeverage businesses offer some modest diversity to the group, we consider these businesses
to be inherently exposed to agricultural risks and exchange rate-driven changes in the competitive landscape.
Importantly however, the rating anticipates that CCA will not commit significant further capital to these businesses
and for their overall contribution to remain relatively immaterial in the context of the broader group.
S&P Base-Case Operating Scenario
• Real GDP Growth in Australia of 2.7% in 2016 and 2.8% in 2017. In Indonesia, real GDP growth of 5.0% in 2016
and 5.2% in 2017;
• Low single-digit group revenue growth in 2016 over the next two years, driven by strong volume growth in
Indonesia and tempered by continued weak growth in Australia;
• Unadjusted EBITDA margins of about 18% in the next two years, supported by recent supply chain
enhancements and other cost-cutting initiatives.
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Peer comparison
Our peer analysis is focused primarily on other bottlers within the TCCC network. In this regard, we view Coca Cola
Enterprises Inc. as a key peer, given its leading bottling and distribution market position in a number of key Western
European markets. In addition, we include in the table below the parent company TCCC.
Table 1
Coca-Cola Amatil Ltd. -- Peer Comparison
Industry Sector: Soft Drink Bottlers
Coca-Cola Bottling Co.
Consolidated
Coca-Cola Enterprises
Inc. The Coca-Cola Co.
Rating as of April 20, 2016 BBB+/Stable/A-2 BBB/Stable/NR BBB+/Stable/A-2 AA-/Stable/A-1+
--Average of past three fiscal years--
(Mil. Mix curr.)
A$ $ $ $
Revenues 5,045.2 1,898.1 7,292.3 45,715.3
EBITDA 959.8 173.3 1,334.7 13,024.3
Funds from operations (FFO) 673.8 114.1 1,022.5 10,711.4
Net income from cont. oper. 248.5 39.3 642.0 7,677.7
Cash flow from operations 672.2 106.0 971.2 10,800.0
Capital expenditures 292.3 103.0 321.7 2,502.0
Free operating cash flow 379.8 3.0 649.5 8,298.0
Discretionary cash flow (9.8) (6.3) 410.8 2,944.7
Cash and short-term
investments
1,160.5 25.5 245.3 20,614.3
Debt 2,359.3 646.0 3,971.5 27,737.4
Equity 1,945.4 279.8 1,556.0 29,921.7
Adjusted ratios
EBITDA margin (%) 19.0 9.1 18.3 28.5
Return on capital (%) 15.6 9.7 13.9 18.1
EBITDA interest coverage (x) 5.7 4.7 10.0 18.0
FFO cash int. cov. (X) 5.8 5.4 11.7 22.7
Debt/EBITDA (x) 2.5 3.7 3.0 2.1
FFO/debt (%) 28.6 17.7 25.7 38.6
Cash flow from
operations/debt (%)
28.5 16.4 24.5 38.9
Free operating cash
flow/debt (%)
16.1 0.5 16.4 29.9
Discretionary cash flow/debt
(%)
(0.4) (1.0) 10.3 10.6
Financial Risk: Intermediate
Our financial risk profile assessment on CCA reflects our expectation that the company will maintain its
debt-to-EBITDA ratio at the stronger end of the 2x and 3x range in the next few years. Although the increasingly
competitive environment in Australia and the economic challenges in Indonesia and PNG present risks to CCA's
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earnings and cash-flow stability, we believe CCA can accommodate these risks within the bounds of the current
ratings.
Under our base case, we expect CCA's earnings to continue growing modestly, supported by cost savings, which
should sustain its FFO-to-debt ratio at more than 30%. Furthermore, we consider that the group's current capital
structure, together with TCCC's capital contribution for the Indonesian business, positions the group on a slight
deleveraging bias. This should provide the company flexibility to absorb some further margin pressure or other
operational underperformance in the next few years, without materially eroding the group's financial risk profile.
Further, we consider the group's balance sheet to be well positioned to accommodate some additional bolt-on
acquisitions or capital management activity at the current rating level.
Although CCA's debt documents do not have any financial covenants, they incorporate an adequate covenant
package, including a material-adverse-effect clause, negative pledge, and cross-default provisions. All of the company's
debt facilities also have a clause regarding the "Bottlers' Agreement" with TCCC. A "default event" occurs if any
Bottlers' Agreement is terminated or cancelled without being renewed or replaced with an agreement having the same
effect, unless it will not have a "material adverse effect" on CCA's consolidated operating profit.
S&P Base-Case Cash Flow And Capital Structure Scenario
Our key capital structure assumptions in the next two years are summarized as follows:
• Further structural changes in the CSD market, resulting in low single-digit revenue growth;
• Funds from operations growing in the 0%-5% range in each of the next two years, supported by ongoing
cost-cutting initiatives; and
• Capital expenditure and dividends totaling A$600 million to A$700 million per year.
Financial summary
Table 2
Coca-Cola Amatil Ltd. -- Financial Summary
--Fiscal year ended Dec. 31--
2015 2014 2013 2012 2011
Rating history BBB+/Stable/A-2 BBB+/Stable/A-2 A-/Stable/A-2 A-/Stable/A-2 A-/Stable/A-2
(Mil. A$)
Revenues 5,112.6 4,961.9 5,061.0 5,118.9 4,835.5
EBITDA 965.4 850.4 1,063.6 1,163.6 1,113.9
Funds from operations (FFO) 698.1 570.0 753.2 838.8 743.8
Net income from continuing operations 393.4 272.1 79.9 457.8 591.8
Cash flow from operations 652.7 612.5 751.3 795.6 657.1
Capital expenditures 246.6 260.5 369.9 419.3 332.3
Free operating cash flow 406.1 352.0 381.4 376.3 324.8
Discretionary cash flow 85.4 (45.0) (69.9) (6.3) (18.9)
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Table 2
Coca-Cola Amatil Ltd. -- Financial Summary (cont.)
--Fiscal year ended Dec. 31--
2015 2014 2013 2012 2011
Cash and short-term investments 1,237.5 818.2 1,425.9 1,178.0 664.9
Debt 2,253.7 2,436.3 2,387.7 2,375.7 2,213.0
Equity 2,409.8 1,686.7 1,739.8 2,063.5 2,020.9
Adjusted ratios
EBITDA margin (%) 18.9 17.1 21.0 22.7 23.0
Return on capital (%) 15.2 13.4 18.2 20.5 20.9
EBITDA interest coverage (x) 6.5 4.9 5.8 6.7 6.9
FFO cash int. cov. (x) 7.5 4.6 5.9 7.0 6.8
Debt/EBITDA (x) 2.3 2.9 2.2 2.0 2.0
FFO/debt (%) 31.0 23.4 31.5 35.3 33.6
Cash flow from operations/debt (%) 29.0 25.1 31.5 33.5 29.7
Free operating cash flow/debt (%) 18.0 14.4 16.0 15.8 14.7
Discretionary cash flow/debt (%) 3.8 (1.8) (2.9) (0.3) (0.9)
N.M. - Not Meaningful.
Liquidity: Adequate
We consider CCA to have adequate liquidity, as we expect that its liquidity sources will exceed its uses by at least 1.2x
in the next 12 months.
Our key assumptions for the group's sources and uses of liquidity over the next 12 months are as follows:
Principal Liquidity Sources Principal Liquidity Uses
• Cash and liquid investments of more than A$1.2
billion at December 2015; and
• Funds from operations (FFO) of about A$650
million-A$700 million.
• Debt maturing of about A$775 million;
• Capital expenditure of about A$300 million-A$350
million; and
• Dividends of about A$320 million-A$370 million.
Debt maturities
Drawn Debt At Dec. 31, 2015
Amount (Mil. A$)
Within 1 year 525
2 years 465
3 years 414
4 years 158
5 years 305
Thereafter 558
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Drawn Debt At Dec. 31,
2015 (cont.)
Amount (Mil. A$)
Total 2,425
Group Influence
We consider the supplier/purchase relationship between TCCC and CCA to be moderately strategic. Underpinning
this relationship are the following key factors: over 75% of CCA's earnings are derived from TCCC products; TCCC
owns 29.2% of CCA's shares; the shared name; and the long-term nature of the licensing agreement between TCCC
and CCA. TCCC's US$500 million investment in the Indonesian business in 2015 further evidences this support. The
downgrade of TCCC on Feb. 25, 2016, has not affected our view on the level of support provided to CCA. Our group
credit profile on the TCCC group is 'aa-'.
Ratings Score Snapshot
Corporate Credit Rating
BBB+/Stable/A-2
Business risk: Satisfactory
• Country risk: Low
• Industry risk: Low
• Competitive position: Satisfactory
Financial risk: Intermediate
• Cash flow/Leverage: Intermediate
Anchor: bbb
Modifiers
• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Financial policy: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Management and governance: Satisfactory (no impact)
• Comparable rating analysis: Neutral (no impact)
Stand-alone credit profile : bbb
• Group credit profile: aa-
• Entity status within group: Moderately strategic (+1 notch from SACP)
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Reconciliation
Table 3
Reconciliation Of Coca-Cola Amatil Ltd. Reported Amounts With Standard & Poor's Adjusted Amounts (Mil.
A$)
--Fiscal year ended Dec. 31, 2015--
Coca-Cola Amatil Ltd. reported amounts
Debt
Shareholders'
equity Revenues EBITDA
Operating
income
Interest
expense EBITDA
Cash flow
from
operations
Capital
expenditures
Reported 2,535.6 2,086.1 5,152.3 930.8 660.6 120.8 930.8 626.8 266.2
Standard & Poor's adjustments
Interest expense
(reported)
-- -- -- -- -- -- (120.8) -- --
Interest income
(reported)
-- -- -- -- -- -- 34.6 -- --
Current tax expense
(reported)
-- -- -- -- -- -- (157.8) -- --
Operating leases 340.0 -- -- 79.0 23.4 23.4 55.6 55.6 --
Postretirement
benefit
obligations/deferred
compensation
20.9 -- -- 4.2 4.2 4.2 4.3 (10.1) --
Surplus cash (655.9) -- -- -- -- -- -- -- --
Capitalized
development costs
-- -- -- (19.6) 7.7 -- (19.6) (19.6) (19.6)
Share-based
compensation
expense
-- -- -- 10.7 -- -- 10.7 -- --
Non-operating
income (expense)
-- -- -- -- 34.6 -- -- -- --
Non-controlling
Interest/Minority
interest
-- 323.7 -- -- -- -- -- -- --
Debt – Derivatives 13.1 -- -- -- -- -- -- -- --
Revenues – Other -- -- (39.7) (39.7) (39.7) -- (39.7) -- --
Total adjustments (281.9) 323.7 (39.7) 34.6 30.2 27.6 (232.7) 25.9 (19.6)
Standard & Poor's adjusted amounts
Debt Equity Revenues EBITDA EBIT
Interest
expense
Funds
from
operations
Cash flow
from
operations
Capital
expenditures
Adjusted 2,253.7 2,409.8 5,112.6 965.4 690.8 148.4 698.1 652.7 246.6
Related Criteria And Research
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Related Criteria
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Methodology: Industry Risk, Nov. 19, 2013
• Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• Group Rating Methodology, Nov. 19, 2013
• Key Credit Factors For The Branded Nondurables Industry, Nov. 19, 2013
• Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
• General: Corporate Methodology, Nov. 19, 2013
• Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
• 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Standard & Poor's (Australia) Pty. Ltd. holds Australian financial services licence number 337565 under the Corporations Act 2001. Standard &
Poor's credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale
client (as defined in Chapter 7 of the Corporations Act).
Business And Financial Risk Matrix
Business Risk Profile
Financial Risk Profile
Minimal Modest Intermediate Significant Aggressive Highly leveraged
Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+
Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb
Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+
Fair bbb/bbb- bbb- bb+ bb bb- b
Weak bb+ bb+ bb bb- b+ b/b-
Vulnerable bb- bb- bb-/b+ b+ b b-
Ratings Detail (As Of April 22, 2016)
Corporate Credit Rating BBB+/Stable/A-2
Senior Unsecured BBB+
Short-Term Debt A-2
Corporate Credit Ratings History
14-Apr-2014 Foreign Currency BBB+/Stable/A-2
15-Jul-2001 A-/Stable/A-2
05-Feb-2001 A/Watch Neg/A-1
14-Apr-2014 Local Currency BBB+/Stable/A-2
15-Jul-2001 A-/Stable/A-2
05-Feb-2001 A/Watch Neg/A-1
Related Entities
Coca-Cola Amatil (Australia) Pty Ltd.
Senior Unsecured BBB+
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable
across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and
debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.
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