coca-cola amatil ltd. - full analysis

Coca-Cola Amatil Ltd.

Primary Credit Analyst:

Paul R Draffin, Melbourne (61) 3-9631-2122; [email protected]

Secondary Contact:

Karan Rathod, Melbourne +613 9631 2011; [email protected]

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

bbbbbb+ 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 summaryTable 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/bbbbbb-/bb+ bb b+

Fair bbb/bbbbbb- 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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