the coca-cola company company report

THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY [INSER STUDENT’S NAME], A MASTERS IN FINANCE STUDENT

OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN

A MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (PLEASE REFER TO THE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT)

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MASTERS IN FINANCE

▪ The consumption of carbonated soft drinks is slowing

down worldwide due to the increasing health consciousness that

led people to look for more natural beverages, with less sugar and

less chemicals, recording a minimal growth rate of 0.1% in volume

terms in 2016.

▪ Refranchising of bottling partners undergo. Through

some structural changes the company reduced its sales by 5.5% in

2016 but at the same time was able to increase its EBITDA

margins in 1% by reducing its exposure to the low margins of

bottling operations.

▪ Changing the portfolio of beverages. The company is

now investing in healthier beverages with natural ingredients and

even functional benefits as those are the ones growing more,

beign bottle water the beverage with higher consumption volume

growth, recording a rate of 5.8% in 2016.

▪ Sugary drink tax. Several countries and states have

successfully passed sugar taxes and many others are expected to

pass it. This measure increases consumers aversion to sugary

products.

Company description

The Coca-Cola Company, headquartered in Atlanta, Georgia is a

manufacturer and distributer of non-alcoholic beverages

worldwide. The company owns or licenses over 500 brands of

sparkling and still beverages including 4 of the world’s top 5 non-

alcoholic beverage brands and is present in more than 200

countries.

THE COCA-COLA COMPANY COMPANY REPORT

NON-ALCOHOLIC BEVERAGES JANUARY 2018

STUDENT: LORENA CUTELO [email protected]

A changing business

… chasing consumer’s preferences

Recommendation: HOLD

Price Target FY18: 47.76 €

Price (as of 3-Jan-18) 45.43 €

Source: Bloomberg

52-week range (€) 39.12-47.04

Market Cap (€m) 177 780

Outstanding Shares (m) 4 288

Source: Bloomberg

(Values in € millions) 2015 2016 2017F

Revenues 44 294 41 863 42 510

EBITDA Margin 24% 25% 26%

NOPLAT 6 668 6 930 7 269

Net Income 7 366 6 550 8 006

ROIC 12% 14% 16%

Source: Company’s Annual Report

Share Price Performance


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Table of Contents

EXECUTIVE SUMMARY .......................................................................... 3

COMPANY OVERVIEW ........................................................................... 4

COMPANY DESCRIPTION ........................................................................................ 4 SHAREHOLDER STRUCTURE ................................................................................... 6

THE SECTOR ........................................................................................... 7

EUROPE MIDDLE EAST & AFRICA ......................................................................... 8 MACROECONOMIC SCENARIO .............................................................................. 8

Industry Analysis ................................................................................... 9 LATIN AMERICA .................................................................................................... 9

Macroeconomic Scenario ................................................................... 11 Industry Analysis ................................................................................. 12

NORTH AMERICA ................................................................................................. 13 Macroeconomic Scenario ................................................................... 13 Industry Analysis ................................................................................. 14

ASIA PACIFIC ....................................................................................................... 15 Macroeconomic Scenario ................................................................... 15 Industry Analysis ................................................................................. 16

COMPETITION ........................................................................................17

VALUATION ............................................................................................21

REVENUES ........................................................................................................... 21 COSTS .................................................................................................................. 23 NET WORKING CAPITAL AND CAPITAL EXPENDITURE ........................................ 24

FINANCIALS ...........................................................................................24

WEIGHTED AVERAGE COST OF CAPITAL ............................................................. 24 MULTIPLE VALUATION ........................................................................................ 25 SENSITIVITY ANALYSIS ....................................................................................... 26

APPENDIX ..............................................................................................27

FINANCIAL STATEMENTS ..................................................................................... 27 Income Statement (million USD$) ...................................................... 27 Balance Sheet (million USD$) ............................................................ 28 Cash Flow Statement (million USD$) ................................................. 29

REPORT RECOMMENDATIONS ........................................................................... 30


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Executive summary The Coca-Cola Company, headquartered in Atlanta, Georgia, is an American

multinational corporation. One of the world’s top non-alcoholic beverage

manufacturer and distributor. With a distribution system made up by TCCC1 and

more than 250 partners, it owns or licenses more than 500 brands that sells in

over 200 countries.

Over the past few years the company has been suffering from shifting consumers

preferences to healthier and more natural options. As a consequence, the sales

of the carbonated soft drinks segment have been slowing down worldwide

leading Coca-Cola’s CSD2 volume consumption to grow by a minimal rate of

0.1% worldwide and more severely decline in North America by 0.6% in 2016

where the consumption have declined by over 12% during the last decade. In the

other hand, water consumption has been increasing significantly recording a

consumption growth rate of 5.8% in volume terms in 2016.

A sugar tax rate has been already implemented in some countries and states and

is expected to be successfully implemented in some other regions in the future.

However, these regions together are yet not significant enough and as TCCC is

not the final seller of the products it is not the one suffering the biggest impact of

these laws, instead, the ones selling the products to final consumers are. In the

other hand, this law helps decrease sugary products consumption and increase

consumer’s aversion to sugary products.

To respond to these new consumers preferences and at the same time offset the

main consequence derived from the new taxes, the decreased consumption of

sugary products, Coca-Cola has been investing in healthier beverages, with less

sugar, less chemicals and more natural ingredients increasing in this way the

consumption of still beverages in Asia Pacific by 5%, by 3% in North America and

EMEA3 and by 2% in Latin America in 2016. In addition, the company is also

reformulating the recipes of the existing products and offering smaller packs as

an option to consume fewer calories.

By the end of November 2017, the company completed the refranchising of all

North America bottling partners and earlier this year also completed China’s

refranchising. The company has also plans to make structural changes in Europe

and Africa. These structural changes allowed the company to reduce its

exposure to the low margins of the bottling business from a EBITDA margin of

1 TCCC is the abbreviation for The Coca-Cola Company 2 CSD is the abbreviation for Carbonated Soft Drinks 3 EMEA is the abbreviation for Europe, Middle East and Africa

CDS a declining category…

TCCC changing portfolio…

Some structural changes …


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Figure 1: Competitor’s Global Presence

24% in 2015 to 25% in 2016 and are expected to reach 26% by the end of 2017.

However, these structural changes have decreased sales by 5.5% in 2016 once

they no longer have a big part of bottling and distribution companies’ sales.

Coca-Cola has also signed a strategic agreement with Monster Beverage Corp.

in 2015 agreeing to transfer the ownership of its global energy drinks in exchange

of the ownership of Monster’s non-energy drinks business and a 16.7% stake in

Monster Beverage Corp.

Through this analysis was concluded that the industry is going through some

years of change and TCCC is correctly reacting to it. The efforts to reinvent

products and creating a portfolio of beverages that suits better the consumers’

preferences are paying off. At the same time, the impactful structural changes

made in the company are allowing it to improve its efficiency in the long term.

Measuring the upsides and downsides, under this analysis, the scenario of Coca-

Cola is positive, however, exponential gains are not expected, yielding a final

recommendation to HOLD, with a target price of $47.76.

Company overview

Company description

The Coca-Cola Company (NYSE4: KO), founded in 1886 and headquartered in

Atlanta, Georgia, is one of the world’s largest beverage company. It offers ready-

to-drink beverages with carbonation (sparkling) and without carbonation (still),

including waters, flavored waters and enhanced waters, juices and juice drinks,

energy drinks, dairy, sports drinks, ready-to-drink teas and coffees in more than

500 brands, 4 of which belong to the world’s top 5 nonalcoholic beverage brands:

Coca-Cola, Diet Coke, Fanta and Sprite. Besides those 4 brands, some other

famous brand names include: Minute Maid juices, Powerade sports drinks,

Nestea, Schweppes, Aquarius, Smartwater, Vitaminwater, Zico coconut water, Del

Valle juices and nectars, Georgia coffee and AdeS soy-based beverages. With 21

brands that generate more than $1 billion USD in annual retail sales, Coca-Cola

has the strongest portfolio of brands in the industry. TCCC is present in more than

200 countries, a wide global presence that only PepsiCo can equal.

The business is divided in two main parts:

• The “concentrate operations” in which they focus on manufacturing,

marketing and selling concentrates and syrups to authorized bottling and

canning operations that mix them to produce finished beverages and then

pack them in authorized containers.

4 NYSE is the abbreviation for New York Stock Exchange

21 brands that generate over $1 billion USD in annual retail sales…

Source: Each company website


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Finished beverages are then sold to wholesalers or directly to retailers.

Outside the United States the company also sells concentrates for

fountain beverages to bottling partners that then sell them to fountain

retailers such as restaurants and convenience stores.

• The “finished products operations” that manufactures, markets and sells

sparkling and still beverages to retailers, distributors or wholesalers. In the

United States the company also manufactures fountains syrups and sells

them directly to fountain retailers, like restaurants, cafes and convince

stores, that sell beverages for immediate consumption.

The operating structure of the company is constituted with the following operating

segments: “Europe, Middle East and Africa” that accounted for 29% of company

total unit case volume in 2016 with net operating revenues of $7014 million of

which the biggest share of 19% came from Middle East & North Africa, 8% from

South Africa and 8% from Germany; “Latin America” that accounted for 28% of

company total unit case volume in 2016 with net operating revenues of $3 746

million of which 45% came from Mexico 22% from Brazil and 19% from South

Latin; “North America” that accounted for 20% of company total unit case volume

in 2016 with net operating revenues of $6 437 million with the biggest share of

94% coming from United States of America and the other 6% from Canada; “Asia

Pacific” that accounted for 23% of company total unit case volume in 2016 with

net operating revenues of $4 788 million of which 37% came from China,15% from

Japan and 13% from India; “Bottling Operation” with net operating revenues of

$19 751million and “Corporate”.

Coca-Cola is often thought to be produced and distributed around the world by a

single company. In reality, the portfolio of beverages is produced, bottled and

distributed by a business system made up of “The Coca-Cola Company” and

nearly 250 Coca-Cola bottlers that are independent contractors. This large

distribution system is one of the company's main advantages over competition.

Even though most of the products are bottled, distributed and sold by independent

bottling partners, from time to time The Coca Cola Company acquires or takes

control of bottling operations, usually in underperforming markets, to try to improve

their performance. In this way The Coca Cola company not only establishes an

appropriate capital structure for the bottler, but it also assists in the development

of the business and helps focus the bottler’s sales and marketing programs. But,

in order to improve its efficiency Coca Cola is now putting in practice a

refranchising plan. In other words, the Company is now divesting/ reducing

ownership in bottling partners. It already finished refranchising bottling operations

Figure 3: Sales per region in million $USD from 2014 - 2016

Source: Company’s annual report

Figure 5: Unit Case Volume distribution per region in 2016

Source: Company’s annual report

Figure 2: Main Competitor’s Net Profit Margin

Source: Financial Times Website

Figure 4: Main Competitor’s Debt to Equity Ratio

Source: Bloomberg


PAGE 6/32

in the US and China has also plans to make structural changes in Europe and

Africa. By doing this, Coca Cola is now able to refocus on building its core brands

and reduce its exposure to the low margins of the bottling business.

In the past June 2015, the company signed a strategic agreement with Monster

Beverage Corp. With this agreement TCCC transferred ownership of its global

energy drinks business to Monster while Monster transferred its non-energy drinks

business including Hansen’s Natural Sodas, Peace Tea, Hubert’s Lemonade and

Hansen’s Juice Products, to TCCC. In addition, TCCC acquired a 16.7% stake in

Monster Beverage Copr and has two directors in the board of directors of Monster.

The Company claims to be serious about making positive contributions to the

world. About a third of the product’s portfolio is now low-calorie or no calorie at all.

They are continuously working to reduce their environmental impact as well as

creating economic opportunities where they operate, in fact, they employ

approximately 100 300 people in more than 200 countries.

Shareholder structure

Having traded in the public markets for nearly a century, the first stock of Coca-

Cola Company was putted on public sale in the New York Stock Exchange in

1919 with the stock symbol “CCO” that was replaced in 1923 by the actual “KO”. y

the time it was putted on public sale, Coca-Cola shares worth just $25 million.

After that, the value has soared to a market capitalization of nearly $178 billion.

The Company shares are also well known for its powerful legacy of 55 years of

consecutive dividend increases, with an increase of over 37% during the last 5

years, increasing from $1.02 in 2012 to $1.40 in 2016. In addition, the company’s

investors had positive capital gains almost every year over the last decade, being

the only exception 2008 that recorded a capital loss of $5.54 USD caused by the

global financial crisis.

Over 66% of Coca-Cola shares have institutional ownership (large entities that

manage funds on the behalf of others). The attention of the particularly meaningful

investor Warren Buffet, CEO5 of Berkshire Hathaway, an American

multinational conglomerate holding company, was attracted by Coca-Cola shares

in 1988 when he began purchasing them. Today, Berkshire Hathaway is the

largest Coca-Cola shareholder controlling 9.3% of the outstanding shares followed

by The Vanguard Group, an American investment management company, with

5 CEO is the abrreviation for Chief Executive Officer

Figure 6: Workforce per region

Source: Company’s Annual Review

Figure 7: Coca-Cola Yearly Dividends and Capital Gains in $USD

Source: Yahoo Finance

Source: Yahoo Finance

Figure 8: Institutional Holdings


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6.4% and State Street Global Advisors, the investment management division

of State Street Corporation and the world's third largest asset manager, with 3.8%.

Regarding the 33.3% of non-institutional investors, the major shareholder is the

Vanguard Total Stock Market Index Fund, a fund designed to provide investors

with exposure to the entire U.S. equity market that holds 2.15% of the company’s

shares. Followed by the Vanguard 500 Index Investors Fund, the industry’s first

index fund for individual investors, with 1.52% and the SPDR6 S&P500 ETF, an

exchange-traded fund which trades on the NYSE with 1.06%.

The Sector

The soft drinks industry is composed of two major manufacturing systems, the

Flavoring Syrup and Concentrate Manufacturing and the Soft Drink Manufacturing.

6 SPDR is the abbreviation for Standard & Poor's Depositary Receipts

Top Institutional Holders Shares Held

%

Berkshire Hathaway Inc. 400,000,000 9.3

The Vanguard Group, Inc. 273,897,295 6.4

State Street Global Advisors (US) 165,438,565 3.8

BlackRock Institutional Trust Company, N.A. 160,694,279 3.7

Capital World Investors 148,860,129 3.5

Fidelity Management & Research Company 88,248,673 2.0

Capital Research Global Investors 79,080,741 1.8

Wellington Management Company, LLP 62,855,491 1.5

Capital International Investors 38,223,601 0.9

Norges Bank Investment Management (NBIM) 35,000,470 0.8

Top Non-Institutional Holders Shares Held

%

Vanguard Total Stock Mkt Idx 91,571,437 2.15

Vanguard 500 Index Inv 64,620,821 1.52

SPDR® S&P 500 ETF 45,213,295 1.06

Vanguard Institutional Index I 39,406,517 0.92

VA CollegeAmerica WA Mutual 529B 38,657,200 0.91

VA CollegeAmerica Inc Fund of Amer 529E 35,582,000 0.83

VA CollegeAmerica Amercn Bal 529E 34,173,000 0.8

VA CollegeAmerica Cap Inc Bldr 529E 29,412,900 0.69

Vanguard Growth Index Inv 25,286,221 0.59

VA CollegeAmerica Fundamental Invs 529E 25,135,000 0.59


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The first manufactures flavoring syrup, concentrates and related products for use

in soda fountains or for manufacturing soft drinks that are primarily sold to soft

drink producers while the second, blends ingredients such as water, syrups, and

sweeteners, and then packages and distributes these beverages for sale.

The industry as a whole is going through some major changes. In a global

analysis, consumers consumption patterns around the world are modifying due to

increased health consciousness. People are looking for more natural beverages,

with less chemicals, less sugar, and sometimes with more and diverse functional

benefits. In addition, there’s also concerns about artificial sweeteners. As a

consequence, the growth of soft carbonated drinks sales volume has been

slowing down worldwide, with a more severe impact in North America where the

sales volume of carbonated soft drinks has declined nearly 17% over the last 10

years.

While sugary sodas are suffering from a severe decline, new healthier

beverages, or at least perceived as healthier, are entering the market. Flavored

and enhanced water, energy drinks, sport drinks, ready to drink coffees and

ready to drink teas are some healthier options gaining market share with this

change in consumers preferences. Besides the increase of healthier beverages,

most of the core soft drinks brands are reformulating soda’s recipes to reduce

their calories and selling beverages in smaller cans and bottles.

Even though the industry in global is sharing these challenges, the dynamics of

each region influences the industry performance. The consumption of soft drinks

may vary depending on several macroeconomic factors, like GDP7 growth,

consumers spending, economic conditions, consumption trends among others.

As such, follows an analysis of the main geographical areas where The Coca-

Cola company performs.

Europe Middle East & Africa

Macroeconomic Scenario

The western part of Europe is under some uncertainties caused by the Brexit vote

once the consequences of it are still unclear, while the Eastern part of Europe is

expected see long-term benefits in the next few years, as a consequence of the

integration in the world economy and is also seeing an increase in tourism

services.

7 GDP is the abbreviation for gross domestic product

Figure 9: Worldwide Consumption Volume in million liters

Source: Euromonitor

Figure 10: TCCC’s geographical presence in EMEA

Source: Company’s 2016 At-a-glance report


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The Middle East and Africa region is going through some of the toughest years.

Uncountable deaths are the worst consequence of Syria, Iraq, Libya and Yemen

civil war. This has also resulted in the worst refugee crisis since World War II.

Countries such as Algeria and Iran, stable oil exporters, are also struggling due to

low oil prices, undiversified economies and high rates of unemployment. The Sub-

Saharan Africa growth is mainly driven by Nigeria, South Africa and Angola, the

continent’s strongest economies. Once the economic recovery from the recession

of Nigeria and South Africa remain a bit slow, the economic growth of the global

Sub-Saharan Africa is still moderate. The prospects for the Sub-Saharan Africa

region remain challenging thus growth is expected to remain below its values

before the crisis.

Despite this, the EMEA area together recorded a reasonable real GDP growth of

2.4%, a growth that is expected to maintain over the next few years. Inflation

reached 4.2% in 2016 and is expected to increase to 5.2% in 2017 according to

Euromonitor prevision yielding an average inflation rate of 4.6% from 2017 to

2021.

Private final consumption suffered a drastic drop of 12.5% in 2015 and a softer

decline of 0.5% in 2016, however, this is expected to rebound over the next few

years mainly due to lighter fiscal contractions and tax cuts in the Western Europe.

Even though the unemployment rate decreased in the Eastern Europe area, the

era of violence in middle east has made unemployment rates come to its highest

values in the Middle East and slightly increase when considering the entire EMEA

area from 9.2% in 2015 to 9.4% in 2016.

The Western Europe is the region that is ageing faster in the world, but on the

other hand in Middle East and Africa the population is considerably younger than

in other parts of the world, bringing the median age of population in the EMEA to

26.8 years.

Industry Analysis

The soft drink industry in EMEA has grown 3.29% in volume terms in 2016

reaching a consumption of 243 895 million liters. The best performing sub region

for carbonates in the world, in terms of per capita increasing consumption and

also percentage growth, is Middle East and Africa that recorded a percentage

growth in consumption of 5.1% alone while, when considering the entire EMEA

area recorded a more modest growth of 1.3%. This might be justified by the

favorable demographics of the region once the average population age in EMEA

Figure 11: EMEA statistics and demographics of 2016

Note: Diabetes prevalence is the percentage of adult population (aged 20-79) with diabetes type 1 or 2.

Source: Euromonitor

Figure 12: EMEA’s GDP over the period 1977-2016 (current USD$)

Source: Euromonitor

Figure 13: EMEA’s Private final consumption expenditure over the period 2006-2016 (current USD$)

Source: Euromonitor


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Figure 16: RTD Coffee consumption in EMEA in million liters

Source: Euromonitor

is the youngest in the world with a large segment of people entering the consumer

class for the first time. Some markets in Africa still have low rates of consumption

per capita and therefore have strong market potential. However, carbonate sales

in Europe, as in many other parts of the world, are being affected by the healthy

lifestyle trend of people reducing the consumption of sugar and artificial

sweeteners in addition to the slow population and economic growth. Soft drink

producers, grouped in the European association UNESDA, have achieved an

average calorie reduction of 12% between 2000 and 2015, mainly due to the

modification of recipes of sugary drinks. Now UNESDA aims to accelerate the

process to achieve a further 10% reduction by 2020. To try to achieve this goal,

one of the main tools that is being used is implementation of a sugary tax.

Hungary has been taxing sugar them since 2011. In 2012 the France introduced a

tax on sugary drinks or drinks with artificial sweetener at €0.075 a liter. In 2017 the

world Health Organization urged countries to start taxing sugary drinks. After the

announcement Portugal introduced a sugar tax on soft drinks under which drinks

with more than 80 grams of sugar per liter will be taxed at €16.46 per 100 liters.

Drinks with fewer than 80 grams of sugar will pay a reduced tax of €8.22 per 100

litres. The tax will raise the price of a standard 330-millilitre can of Coca-Cola,

which contains 35 grams of sugar, by 0.055€.

Ready-to-drink coffee has been growing at a considerable growth rate, it has

increased by 9% in volume term between 2011 and 2016 in Western Europe,

although it remains a small part of the soft drinks market and brands will have to

innovate and improve the coffee experience to make consumers swift from to-go

brewed coffee or even from other beverages like energy drinks. In Europe, middle

East and Africa together the consumption annual growth rate of RTD coffee in

2016 was 3.9%.

As consumers become increasingly conscious about health issues and the

consequences of sugar and artificial sweeteners, bottled water gains market within

the soft drinks category. In 2016, bottled water accounted for over half of the

volume sales of the soft drinks category and reported a consumption annual

growth of 4.51%. The overall consumption of soft drinks in Europe, Middle East

and Africa during the next few years is expected to growth at an average annual

growth rate of 3.5%.


Figure 14: Coca-Cola’s 2016 Unit Case Volume Mix by Geography in EMEA

Figure 15: Soft drinks distribution by category in EMEA in 2016

Source: Euromonitor


PAGE 11/32

Latin America


Latin America was the hardest-hit developing region during the global

deceleration. During six years of continuous slowdown in the economy, including a

more severe recession in 2015 and 2016 when the real GDP growth decreased

0.6% recording a GDP of $5 201 billion in 2016, lower than the previous $5 359

billion in 2015 and $6 276 billion in 2014. Latin America suffered adverse effects

on household incomes and unemployment that recorded a rate o 8.4% in 2016

putting 39% of Latin Americans in risk of falling back into poverty again. However,

the situation in changing, with an expected GDP growth rate of 1-1.5% for 2017

and an average growth of 2.3% for the next 5 years, according to Euromonitor

forecast, the economy is starting to grow again. Nonetheless, the scenario varies

from country to country and the return to an aggregate growth is mainly thanks to

Argentina and Brazil that are coming out of recession. Mexico, Peru, Chile and

Colombia are growing at a slow pace of around 2%-3% while Bolivia and

Dominican Republic are the one with a more robust growth of nearly 4%.

Growth in 2017 is coming mainly from a small recovery in exports and from

imports substitution, while investment remains depressed. One reason are the

political uncertainties. Starting with the fact that Donald Trump, president of the

United States, is renegotiating the North American Free-Trade Agreement

(NAFTA) with Mexico and Canada to try to make it less free. He is also trying to

impose protectionist measures and continues to threaten to deport millions of

Mexicans and Central Americans from the United States. And second because

between November 2017 and October 2018 presidential elections are set to take

place in Brazil, Colombia, Mexico and Chile.

Despite the reasons stated above, Latin America growth is dependent on the

improvement of education and inadequate infrastructures, on the address to the

problem of badly design taxes and regulations and on the strengthening of the

business environment and ending corruption.

The annual population decreased by 3.5% in 2016 however, is expected to

recover in 2017 increasing by 11.1%, yielding an average growth rate of 6.6%

over the next five years. Latin America is also ageing very quickly, the median age

of the population that was 29.7years in 2016 is expected to rise by 5 years until

2030.

Figure 17: TCCC’s geographical presence in Latin America


Figure 18: Latin America statistics and demographics of 2016

Source: Euromonitor

Figure 19: Latin America GDP (current USD$) in trillions

Note1: Diabetes prevalence is the percentage of adult population (aged 20-79) with diabetes type 1 or 2.

Source: Euromonitor


PAGE 12/32

Industry Analysis

Latin America reached sales of 113 378 million liter of soft drinks in 2016, what

represents an increase of 1.45% when comparing it with the previous year.

Latin America is the second largest carbonate beverage market, after North

America, in value terms, with recorded retail sales of $37.9 billion in 2016. The

biggest carbonates markets in Latin America are Brazil, Mexico and Argentina that

together account for nearly 72% of all Latin America carbonate sales. Even though

this is a mature market, the consumption of sugary sparkling beverages has been

falling over the past few years due to increasing health awareness and

consequently more concerns about the negative effects of sugar. In addition, in

2014 the Maxican government imposed a 10% tax on all sugar-added beverages

that resulted in a drop of nearly 3% in sales in volume terms in Mexico. The

region’s population growth is also a drawback once this is expected to fall below

1% the next few years. The economic troubles felt in Brazil and Argentina led

consumers to cut back on their spending helped increasing even more the drop in

consumption of these beverages. As those economies recover and Mexicans get

used to the new sugar tax the sparkling beverage market is expected to return to

growth, according to Euromonitor analysis during the next 5 years the

consumption of carbonates in Latin America in volume terms is expected to

increase in average by 1.1%.

Everyday there’s more people in Latin America looking for beverages with

functional benefits. The consumption of sports and energy drinks in this region is

still moderate representing only 1.5% of the total soft drinks market, and the

market is still relatively immature (relatively mature on sports drinks and immature

on energy drinks), what can justify the fact that the growth of this type of

beverages has been wildly fluctuating over the past few years, recording a

consumption annual growth of 6.2% in 2016 in volume terms. However, when

compared in value terms, Latin America is the fastest growing region in the world

of Sports and Energy drinks with a recorded annual growth of 8% and the

category still has a lot of potential to grow in the near future. The consumption of

sports drinks in Latin America exceeds the world average. The main drivers of

consumption growth of sports drinks in Latin America are the income, once that

people get more concerned about their athletic performance as their income rises,

and also population growth. However, energy drinks’ consumption is still low, and

the consumption growth depends on income and also on population age once that

the older consumers get the less energy drinks they consume.

Figure 20: Coca-Cola’s 2016 Unit Case Volume Mix by Geography in Latin America


Figure 21: Soft drinks distribution by category in Latin America in 2015 and 2016

Source: Euromonitor

Figure 22: Carbonate beverages consumption in Latin America in million liters

Source: Euromonitor


PAGE 13/32

Also as a form of functional hydration there’s coconut water, that has gain a lot of

market especially in Brazil, where the consumption of it has overtook the

consumption of sport drinks since 2013. Even though this product is especially

strong in Brazil there’s a lot of potential to expand in other parts of Latin America.

Due to the increasing health awareness, the consumption of bottled water has

been increasing in Latin America recording a consumption annual growth of

4.29% in 2016 in volume terms. In addition, extreme heat and air dryness in some

regions, the constant problems in public water felt in Mexico, and the economic

slowdown helped increase the demand for bottled water.

The expected consumption annual growth of the overall category of Soft Drinks in

Latin America in volume terms is 2.5%, during the next few years.

North America


The longest-lasting US recession since the Great Depression was the one

that finished in 2009. The US economy has been improving modestly since

then backed up by a robust labor market, increasing wages, steady gains in

private final consumption, a buoyant housing market and a rebound in private

investment. Canada was also able to improve its financial situation after the

recession thanks to cautious financial policies and an increase in household

consumption in addition to the commodity boom. In 2015, with the drop in

exports, oil prices falling and the cut of business investment the real GDP

growth decreased to only 0.9% in this country. However, in 2016, an increase

in consumption and a strong performance in the service sector allowed the

growth to rebound.

The two countries together, forming the North America region, recovered after

the recession achieving a real GDP growth of 2.6% in 2010, a figure that has

only been surpassed in 2015 with a recorded growth of 2.7%. In 2016 the rate

dropped to a more modest 1.5% while inflation increased from 0.2% in 2015

to 1.3% in 2016.

Canada is expected to increase its energy production next year, allowing

related industries to grow, is also expected to increase exports and implement

an expansionary fiscal policy, which together with a cheaper dollar will back

Figure 24: TCCC’s geographical presence in North America


Figure 25: North America statistics and demographics of 2016

Note1: Diabetes prevalence is the percentage of adult population (aged 20-79) with diabetes type 1 or 2. Note2:Obese population is measured as a percentage of population aged 15+.

Source: Euromonitor

Figure 23: Sports and Energy drinks consumption in Latin America in million liters

Source: Euromonitor


PAGE 14/32

up an increase in real GDP growth. The North America region is expected to

record an average real GDP growth of 2.2% in the next 5 years.

Even though more than 50% of all households have lower income today than

in 2000, the solid job market in addition to the increase in consumer

borrowing provided support to the private final consumption that grew by 3.7%

in 2016 and is expected to grow by 4.7% in 2017. Unemployment dropped for

the sixth consecutive year recording a rate of 5.1% in 2016.

Despite the modest growth, there’s some uncertainties specially in the US

around infrastructure spending, health care and crucial policy decisions such

as new protectionist trends and tax policy that could block the economy

growth. Some other risks are the tension that is being felt with North Korea,

and also with Mexico and other central American countries caused by issues

of illegal immigration.

Industry Analysis

In 2016, the soft drinks industry in North America recorded sales of 123 003

million liters, corresponding to a growth of 1.9% when compared to the previous

year.

Carbonate beverages in North America have been declining during the last

decade and 2016 was not an exception. This phenomenon was mainly driven by

the increasing consumers concerns about the consumption of sugar and artificial

sweeteners and its health consequences in addition to the tax on sugar-added

beverages that was implemented in some areas. In the United States of America,

Philadelphia became the first major city in the country to tax not only the sugar-

added beverages but also the artificially sweetened soft drinks at $0.015 per

ounce and was then followed by several states. Some of them are Boulder

(Colorado), Cook County (Illinois), Portland (Oregon), Seattle (Washington) and

San Francisco (California). What’s performing well are the new smaller pack sizes

such as the 7.5oz mini-cans and the 8.5oz aluminium bottles that offer consumers

a lower calorie option and at the same time keep the margins to producers. The

consumption annual growth rate of carbonates in North America in 2016 in volume

terms was -0.65% and these drinks are expected to keep declining as the anti-

sugar trend is alive.

This increasing awareness of consumers about their health has prompted the

replace of sugar and artificial sweeteners with more natural and healthier options.

Coconut water has increased and even takes a new role as beverage base for

carbonates and sports drinks. Coconut water is marketed has having greater

Figure 26: North America GDP (current USD$) in trillions

Source: Euromonitor

Figure 27: Coca-Cola’s 2016 Unit Case Volume Mix by Geography in North America

Source: Euromonitor


Figure 28: Soft drinks distribution by category in North America in 2015 and 2016


PAGE 15/32

hydration properties and helping lower cholesterol due to its electrolyte

composition. In the same way, the consumption of bottled water increased by

4.8% in 2016 recording a volume of sales of 43 900 million liters.

The overall growth of soft drinks category is expected to remain positive but is

now coming from less robust beverage types like Ready-To-Drinks (RTD) tea and

sports drinks. The expected consumption annual growth rate of the overall

category of soft drinks in the next few years is 0.7%.

Asia Pacific


The Asia-Pacific region, driven mainly by China and India continues to be the

world leader in growth with a real GDP growth of 5.4% in 2016, slightly lower than

5.6% in 2015 and 5.7% in 2014. The Chinese economy is one of the main engines

of growth in the world, with a record of nearly three decades of continuous growth,

with private final consumption and public investment in infrastructure as the

strongest drivers. However, the Chinese economy has been slowing down due to

rising protectionism sentiments, lack of growth in export and also, cooling property

market. Despite these, with some policy stimulus the growth is expected to keep

above 6% over the next few years.

India is one of the world’s fastest-growing large economies and the third-largest

economy in the World measured in terms of purchasing power parity, following

China and the United States. It’s growth have been mainly supported by steady

gains in consumption, the fall in oil price and an increase in foreign direct

investment inflows. Public investment is expected to gain strength, but private

sector investment is flat. In New Delhi, the capital of India, there’s a plan

under way to make the manufacturing sector one of the leading sources of

growth, the “made in India” program. The program’s goal is to raise the

manufacturing share of GDP from 17% (2015) to 25%.

Within the healthy rates of growth in the overall Asia Pacific economy, Japanese

economy prospects are the less favorable. With the Great East Japan earthquake

and tsunami in 2011, the private consumption and the stock building suffered a

sharp decline provoking an abrupt stop in the economic growth. More recently, a

recovery in demand for Japanese goods, the accommodative monetary policy of

the Central Bank, and the increasing performance of tourism sector allowed Japan

to achieve a GDP growth of 1% in 2016.

Figure 29: CSD consumption in North America America in million liters

Source: Euromonitor

Figure 30: TCCC’s geographical presence in North America


Figure 31: Latin America statistics and demographics of 2016

Note1: Diabetes prevalence is the percentage of adult population (aged 20-79) with diabetes type 1 or 2.

Source: Euromonitor

Source: Euromonitor


PAGE 16/32

Indonesia is one of the best performing emerging markets thanks to an

increase in private consumption, supported by gains in unemployment rates

and wages, a boom in commodity prices and its large domestic market . Is

also the world’s fourth most populous nation. Even though the increase in

worldwide trade protectionism is a threat to the growth of Indones ia, GDP is

expected to slightly grow the next few years due to increases in private final

consumption, low interest rates that can promote private investments and

growth in exports in addition to the fact that Indonesia has low public debt,

large domestic markets and a young population. However, the quality of

public spending is critical given the lack of funds.

As such the Asia-Pacific entire region is expected to keep a real GDP growth over

the next five years ranging from 5.4% to 5.6%. Inflation in 2016 was 3%, the same

as the previous year and has softened when compared to 3.9% in 2014 influenced

by the fall of commodity prices and stronger local currencies. This reduced

inflation pressure creates room for continued accommodative monetary policy.

Private final consumption increased by 5.0% in 2016 and is expected to keep

growing during the next few years at an average rate of 6.9%. This is supported

by a increasing wages and a reduced unemployment rate of 4.3% in 2016.

Population in Asia Pacific has been growing at a steady rate of 1%.

Industry Analysis

Asia Pacific recorded sales of 198 702 million liters of soft drinks in 2016,

representing an increase of 4.7% when compared with the previous year.

As in the other parts of the world, the consumers increasing health awareness has

led consumers to reduce their sugar and sweeteners consumption. As carbonates

are usually high in these ingredients, and thus suffer from an unhealthy image,

this type of beverage was the one suffering more with this trend, and Asia Pacific

was not an exception. The consumption growth rate of carbonates in Asia Pacific

has been slowing down the past few years and recorded a small growth of 1.5% in

2016 in volume terms. In order to reduce the negative impact in sales, producers

have been innovating. Some have introduced new features like high elements of

caffeine, referred to as “Kyo-Tansan” trying to gain a wider market of consumers,

while some other producers decided to offer their products in smaller pack sizes,

improving their convenience for on-the-go consumption, offering an option with

less calories and at the same time attracting price-sensitive consumers. Smaller

pack sizes are now offered not only on carbonates but also in juice drinks, RTD

tea among other categories.

Figure 32: Asia Pacific GDP (current USD$) in millions


Source: Euromonitor

Figure 33: Coca-Cola’s 2016 Unit Case Volume Mix by Geography in Asia Pacific

Figure 34: Soft drinks distribution by category in Asia Pacific in 2015 and 2016

Source: Euromonitor


PAGE 17/32

In line with the healthier lifestyle trend and the growing household income, some

other drinks saw their consumption rising in 2016. Hybrid beverages, that mix

water with fruit juice, energy drinks and lactobacillus are increasing their popularity

because of its capacity to meet consumers needs for flavor and are healthy ate

the same time. In Asia Pacific, bottled water recorded a consumption growth rate

of 8.4% in 2016 and Sports and Energy Drinks recorded a consumption growth

rate of 6.0% both in volume terms. Over four fifths of Ready-To-Drink coffee are

consumed in Asia Pacific, with Japan being the largest consumer of RTD Coffee

in the world by far. However, market maturity and the competition of fresh brewed

coffee are limiting further growth, recording a consumption growth rate of RTD

coffee in 2016 of 2.49%.

The overall consumption of soft drinks in Asia Pacific in expected to growth at an

average annual rate of nearly 5% during the next few years in volume terms.

Competition

The Coca-Cola Company faces a large number of competitors ranging from small

to very large and well-established companies that sell sparkling beverages,

waters, flavored waters, juices, ready-to-drink teas and coffees, sports drinks,

dairy or energy drinks. Many of those competitors are specific to a country or

region and thus they affect Coca-Cola Company sales in a regional way but not

globally. In some markets Coca Cola competitors also include beer companies or

retailers that developed their own private label beverage brand. However, the

main competitors are present globally and affect the TCCC sales and market

share worldwide. The primary competitor of TCCC in pretty much every country is

PepsiCo, thus, this company as well as some of the other main competitors are

analysis bellow:

PepsiCo. - PepsiCo in an American multinational food and beverage

company, headquartered in Purchase, New York. PepsiCo was created in 1965

with the merger of Pepsi-Cola and Frito-Lay. It is the world’s second largest soft

drinks company by value, behind TCCC. Today the company has a portfolio of 22

brands including some of the world’s most recognizable brands of soft drinks

such as Pepsi, Gatorade and Tropicana, each generating over $1 billion in annual

retail sales in 2016 and sold around the world in more than 200 countries.

Although PepsiCo is present worldwide it’s main markets are the US, that account

for 56% of PepsiCo total revenue, followed by Canada, the UK, Mexico and

Russia. The five countries together account for about three quarters of total

Figure 35: Bottled Water volume consumption in Asia Pacific in million liters

Source: Euromonitor

Figure 36: Company Logo

Source: PepsiCo Website


PAGE 18/32

revenue. Over two thirds of all PepsiCo soft drinks sales come from areas in which

Coca-Cola is also present and the two companies compete head-on almost

everywhere. Even though Coca-Cola is dominant in the majority of categories,

PepsiCo has the edge in sports drinks, where Gatorade sells more than various

Coca-Cola brands, such as Powerade, nearly everywhere. PepsiCo also

outperforms TCCC in RTD coffee due to a strategic partnership that was able to

create with Starbucks . Especially problematic for PepsiCo is, however, the fact

that TCCC is outperforming in bottled water category as this category will be a

large contributor to soft drinks growth worldwide in the next few years. PepsiCo

has been losing ground to TCCC in soft drinks, especially in major markets such

as the US and China. However, PepsiCo outperformed TCCC in a few markets

such as Canada, Saudi Arabia and Egypt, but these just some exceptions.

PepsiCo’s soft drinks operations are still primarily focused on carbonates, which

accounted for 61% of soft drinks revenues in 2016. However, within the

carbonates category the relative importance of cola has been changing severely.

While PepsiCo’s cola volumes have been falling since 2011, volumes of non-cola

carbonates increased by 10% a trend that is expected to continue once

developing markets tend to have a stronger inclination to non-cola carbonates.

This increase was led by brands such as Mountain Dew and Mirinda. In 2016

PepsiCo reported net revenues of nearly $63billion, 48% of which has come from

the beverage segment. Currently PepsiCo has a market capitalization of

approximately $149.4 billion and has a market share of 10.3% in the soft drink

market and a more robust 19.8% in the carbonate drinks segment measured in

off-trade sales value.

Dr Pepper Snapple Group Inc. - Dr Pepper Snapple is an American

soft drink company, headquartered in Plano, Texas. Crated in May 2008, Dr

Pepper Snapple Group Inc. is the result of a demerge of Cadbury Schweppes

beverage segment. It offers carbonated soft drinks, juices, teas, mixers, waters

and other beverages belonging to a portfolio of more than 50 brands. Dr Pepper

Snapple is the world’s fifth largest soft drinks company and third largest carbonate

and juice company. The company account for about 9% of North America soft

drinks market. However, the company is considerably smaller than its major

competitors, therefore is really dependent on the American market being the US

responsible for more than 83% of global sales volume. It only has operations in

Latin and North America, outside of which the most important brands, such as Dr


Source: Dr. Pepper Snapple Group Website


PAGE 19/32

Pepper and Snapple, are licensed to other companies. For instance, Dr Pepper is

distributed in Europe by Suntory and in Asia by The Coca-Cola Company.

The company has a diversified portfolio of brands, being the majority of them

carbonates, more precisely 76% of sales correspond to carbonate beverages.

Given the negative outlook of the carbonates segment in North America, this could

be a major threat, however, Dr Pepper Snapple Group is much more reliant on the

still buoyant mixers category than its major competitor, TCCC and PepsiCo.

Because of that, its exposure to the carbonates category is less of an issue than

for its competitors. Also unlike is two main competitors, DPSG cola sales account

for only 2% of carbonate sales, a positive point given cola’s poor performance in

recent years. Besides this, the juice category saw a big jump in importance in Dr

Pepper Snapple Group portfolio with the acquisition of Bai Brands LLC in 2016.

RTD teas volume is also growing but at a slower pace than its rivals such as Pure

Leaf and Gold Peak.

In 2016 Dr Pepper Snapple Group reported net revenues of $6 519 billion.

Currently its market capitalization is approximately $16.6 billion, and it has a

market share of 2.3% of the total soft drink category and 5.6% in the carbonate

drinks segment measured in off-trade sales value.

Nestlé S.A. – Nestlé is a Swiss multinational consumer goods company, one

of the largest in the world, that sells soft drinks, hot drinks, packaged food and pet

care from more than 2000 brands such as Nestea, Nesquik, Poland Spring, Nestle

Pure Life and Perrier. Founded in Anglo-Swiss in 1866 by Henry Nestlé to sell

condensed milk, the company is headquartered in Vaud, Switzerland. Nestlé

operates in approximately 191 countries and is the global leader in bottled water,

fourth in concentrates and RTD coffee and the third largest soft drinks company

by value. The best performing category of the company are soft drinks while

packaged food is the one struggling the most. Whithin the soft drinks category,

bottled water accounts for about three quarters of all soft drinks revenues. One of

the main strengths of Nestlé is its size and wide brand offering in bottler water.

Nestlé has a mains advantage over The Coca-Cola Company and PepsiCo

because it has rebranded its presence towards healthy products, a high-growth

category. The most important market for Nestlé is North America that is

responsible for around 41% of Nestlé’s revenues and where Nestlé is the

dominant brand of bottled water. In Asia Pacific the main driver of growth is RTD

coffee that led to a sales regional growth of 9% on average between 2011 and

2016. In 2016 the company reported net revenues of CHF 85.9 billion,


Source: Nestlé Website


PAGE 20/32

approximately $91.3 billion, of which CHF 27.2 billion, approximately $27.8 billion

were from powdered or liquid beverages and bottled water. Currently its market

capitalization is nearly $269.8 billion and Nestle has a market share of 2.9% in the

soft drinks category and 9.4% in the bottled water category measured in off-trade

sales value.

.

Monster Beverage Corporation – Monster Beverage Corporation was

founded in 1935 by Hubert Hansen and his sons as a fresh juice company. In

2002 introduced Monster Energy drinks in its portfolio and in 2012 changed its

name to Monster Beverage Corporation. Today the corporation manufactures

energy drinks, ready-to-drink coffee, ready-to-drink tea, natural soft drinks of

known brands such as Monster Energy, Hansen’s Natural Soda, Hubert’s

Lemonade, Peace Tea and Blue Sky and the products are sold in approximately

128 countries. In June 2015 Monster entered a long-term strategic partnership

with The Coca-Cola Company. Monster transferred its carbonates, juice and RTD

tea brands to TCCC, while TCCC transferred ownership of its global energy drinks

business to Monster and owns a 16.7% stake in Monster Beverage Corp. This

partnership allowed Monster to access the world’s top beverage distribution

system and to become the world’s number one player in global energy drinks in

off-trade volume terms. The main strength of Monster over competition is its focus

on product innovation, the corporation is continuously introducing new flavors and

product varieties. With reported net revenues of approximately $3.4 billion, 2016

was the 24th consecutive year of increased sales. Currently its market

capitalization is nearly $25.12 billion, and it has a market share of 13.5% in the

Sports and Energy segment and 1.5% in the soft drinks market measured in off-

trade sales value.

Danone – Danone is a French multinational company of packaged food and

beverages. The company is divided in four main segments: Fresh Dairy Products,

Waters, Early Life Nutrition, and Medical Nutrition and sells its products in over

130 countries over . Within the soft drinks category, it sells bottled water, sports

and energy drinks and concentrates. It leads the dairy market and holds a

significant position in the bottled water segment in which has a market share of

8.7% (measured in off-trade sales value). One of the main strengths of Danone is

that the company is entirely focused on health and wellness, one of the fastest

growing categories due to the shifting consumer preferences, where bottled water

is playing an integral part in its growth strategy.



Source: Monster Beverage Corporation Website

Source: Danone Website


PAGE 21/32

The water segment keeps growing as the company increases its effort to promote

flavored waters and changes the material used in bottles to make them kids-

friendly. The company is expanding to high growth markets such as, Asia and

Africa. Danone has a global coverage, however its product coverage is limited, in

contrasct with Nestle that also sells RTD tea and RTD coffee, Danone does not

has another categories to fall back on within soft drinks. In 2016 the company

reported net revenues of approximately €11.05 billion the equivalent of $13.72

billion and had a market share of 2.1% in the soft drinks category measured in off-

trade sales value.

Red Bull GmbH - Red Bull GmbH is an Austrian privately owned company

that sells the Red Bull Energy Drink and owns motor racing teams and football

clubs in multiple countries to complement its sponsorship of athletes in extreme

sports. Founded in 1984 and headquartered Fuschl am See, Austria, the Red Bull

Energy Drink is now sold worldwide in more than 171 countries. Red Bull has a

strong and consistent image that is globally associated with energy drinks. Its

geographic presence enables long term growth even if some markets reach

maturity and allow it to reach a market share of 18% in the Sports and Energy

beverages worldwide. Once this is a privately held company financial information

is limited, but its known that in 2016 the company reported sales of €5.11 billion,

the equivalent to $6.10 billion, and its market share in the soft drinks category was

1.8% measured in off-trade sales value.

Valuation

Revenues

The portfolio of beverages of TCCC are sold in more than 200 countries

worldwide. Thus, to more precisely forecast the company’s revenues those were

geographically divided. The division used matches the operating segments of the

company, and these are: Europe, Middle East and Africa; Latin America; North

America; Asia Pacific. In addition, the revenues corresponding to the Bottling

Investments and Corporate segments were also forecasted individually.

By deeply analysing the macroeconomic scenario and the industry in each of the

segments was possible to estimate the consumption growth of soft drinks in each

of the regions for the forecasted period. As justified in the “The Sector” section

these expected growth rates are 3.5% in Europe, Middle East and Africa, 2.48%

in Latin America, 0.7% in North America and 5% in Asia Pacific.


Source: Danone Website


PAGE 22/32

After the total consumption volume of soft drinks for the next few years was

estimated, based on the strategy plans of the company and the analysis made to

the competitors the growth of the market share in each region was forecasted. In

a general way, TCCC is already well established in the majority of the regions

and presented constant market shares in all of them over the past years, thus,

excluding some major facts that might affect it, the market shares is expected to

keep the same constancy in the next years.

With these two drivers estimated, the consumption volume of beverages sold by

TCCC for the next 5 years was obtained. Regarding the price per liter, once

TCCC’s brands are generally mature and well positioned there’s not a big

fluctuation in prices, thus, prices increase at the inflation rate of each region.

The Bottling Investments operating segment includes all Company-owned or

consolidated bottling operations, regardless of geographic location. Thus, its

revenues are mainly affected by structural changes such as acquisitions and

divestitures of bottling, distribution or canning operations. Due to the

deconsolidation of the German bottling operations and the North America

refranchising activities, the Net Operating Income of the Bottling Investments

Segment saw a drop of nearly 14% in 2016. To estimate the revenues growth of

the Bottling Investments segment, the future structural changes that the company

has undergo and the ones that has planned for the next few years were analyzed.

Finishing the refranchising of all North American bottling operations, refranchising

Chinese bottling operations as well as make some structural changes in Europe

and Africa, the company’s plans for the next 5 years, were analyzed to predict an

average decrease of 4.8% in the Bottling Investments segment.


PAGE 23/32

Costs

Considering the nature of the business, the main bulk of costs comes from cost

of goods sold, selling and distribution and also advertising. The cost of goods

sold has constantly been 39% of revenues over the past few year and, taking into

account that sales will not have a drastic improvement the margin was kept and

no benefit from economy of scale was considered.

Regarding selling and distribution expenses, even though they depend on

general sales, as stated in the company’s report, they are primarily related to

company-owned bottling operations, and are primarily denominated in U.S

dollars. As this cost is generally transacted in local currency, foreign currency

exchange rate fluctuations do not have a significant impact on it. As such, they

present a pretty constant proportion of Bottling Investment revenues from 2014

onwards, when a change in the way the company reported the revenues of this

operating segment changed.

Due to the high competitiveness of the non-alcoholic beverage industry, TCCC is

required to make large spends on advertising through several channels so it

doesn’t lose market share over competitors. This spending, that accounted for

nearly 7% of total revenues in 2012 and 2013 are getting more expensive by the

year. This expense is getting higher in both absolute terms and with respect to

the revenue base. By 2016 this percentage increased to 10% of total revenues

with an absolute value of $4 004 million. This increasing advertising needs are

mainly driven by 2 reasons. With the weakening of the industry, and the

consumption of sugary sodas declining the company needs to increase the

support of its products with stronger consumer-facing media. Also, with

consumer preferences changing at a fast pace and Coca-Cola making constant

changes in its portfolio of products to respond to it, the company makes

significant advertising commitments to inform consumers about the changes. As

such, this proportion is expected to slightly increase over time achieving an

expected 12.5% by 2021 due to the fast-changing environment.

Figure 42: Advertisment expenses in million $USD

Source: Company’s Annual Report


PAGE 24/32

Net Working Capital and Capital Expenditure

Regarding capital expenditure, property, plant and equipment has been

decreasing since 2014, recording a decline of 14% in 2016. This drop was

primarily a result of North America’s bottling operations refranchising as well as

the company’s Chinese bottling operations being reclassified as held for sale.

Structural changes as those reduce the proportion of assets corresponding to

property, plant and equipment that in 2012 and 2013 accounted for 17% and in

2016 for just 12%. Once more structural changes are under execution and some

other are planned for the next few years, this proportion is expected to keep its

lower levels.

Net working capital measures a company’s short-term liquidity, in other words, if

the company is able to pay back to its creditors in the short term. Thus, it can

provide a general idea of how efficiently a company manages its assets. The

principal driver of net working capital needs are the company revenues. As such,

to forecast The Coca Cola Company net working capital an average of multiple

past ratios based on revenues were used. However, some exceptions to this were

needed. Inventories are tied up to input prices, as such, they were forecasted

based on cost of goods sold which are tied up to the same input prices. Accrued

marketing expenses were also forecasted in a different way once they are

proportional to the company’s advertisement expenses.

Financials

Weighted Average Cost of Capital

To value The Coca-Cola Company with the discounted cash flow method the

forecasted free cash flows were discounted using the weighted average cost of

capital. WACC8, commonly referred to as the company’s cost of capital, is the

average cost of the company’s sources of financing, debt and equity.

TCCC’s debt is composed by a mix of short-term and long-term debt and also

fixed-rate and variable-rate debt that enables the company to get a lower overall

cost of borrowing. As of December 31, 2016, the company’s short-term

borrowings consisted primarily of $12 330 million in commercial paper and $9 598

million in lines of credit and other short-term credit facilities. During 2016, the

Company issued Australian dollar-, euro- and U.S. dollar-denominated debt of

AUD1,000 million, €500 million and $3,725 million, respectively. To estimate the

8 WACC is the abbreviation for weighted average cost of capital

Figure 43: Cost of Debt Calculation

Source: Analyst Estimates


PAGE 25/32

company’s cost of debt it was used the interest rate of a 10-year note issued by

Coca-Cola, the annualized default probability considering the Moody's rating of

Coca-Cola long term debt of "Aa3" and a recovery rate of 31.3%. Through this, a

cost of debt of 2.22% was obtained.

The Capital Asset Pricing Model was used to estimate the cost of equity of

TCCC. The general idea behind CAPM9 is that investors need to be compensated

for the time they have their money invested and for the risk their taking. The time

value of money is represented by the risk-free rate for which a 10-years US

Government bond was used as a proxy yielding a 2.44% risk-free rate. The risk-

taking compensation was calculated using the market risk premium and the

industry beta levered with Coca-Cola’s financial structure. For the market risk

premium, the MSCI World Index returns (MXWO), a broad global equity

benchmark that represents large and mid-cap equity performance across 23

developed markets, were used. To estimate the beta that reflects the company’s

riskiness relative to the average company a set of seven industry comparable

companies were used. The average of the industry comparable company’s

unlevered betas was then levered to the company’s capital structure predicting a

beta of 0.65. In addition, a 95% confidence interval showed a lower beta of 0.25

and a upper beta of 0.80. These values yielded a cost of equity of 5.74%.

The mix of short-term and long term-debt with equity financing allowed The Coca-

Cola company to have an average cost of capital of 5.23%.

Multiple Valuation

In addition to the Discounted Cash Flow method, a multiple analysis was also

made to assess how TCCC is valued amongst its peers. From the initial set of

seven companies referred above, 5 were excluded from the multiple valuation.

From those four companies three were, Nestlé SA (NESN), Unilever (UNA) and

PepsiCo (PEP) once, even though their very strong on the beverage industry, their

core business is packaged foods and thus they have a very different structure and

are not directly comparable. The other two companies excluded were Boston Beer

company (SAM) and Craft Brew Alliance (BREW) because, even though they

work on the beverage industry they work on a very specific segment of it, the

alcoholic beverages market, the beer segment. Thus, the structure of these

companies is not comparable with TCCC.

9 CAPM is the abbreviation for capital asset pricing model

Figure 44: Cost of Equity Calculation

Figure 45: WACC Calculation




PAGE 26/32

With the remaining comparable companies, Dr. Pepper Snapple Group (DPS) and

Monster Beverage Corporation (MNST), an analysis was made using the Price to

EBITDA10 multiple (P/EBITDA), the price to sales (P/sales) and price to book

value of equity (P/equity). The most accurate multiple is probably the price to book

value of equity, once that TCCC has a similar ROIC and ROA compared with the

peers. The three multiples used yield an average price for TCCC of $171 620

million, a price lower than the one in the market. This might indicate that the

company may be overvalued on the market. However, this would be a very

impulsive conclusion. One should always keep in mind that even excluding the

companies that are not directly comparable, the ones remaining still have very

different capital structures, margins, do not work in the exact same markets and

are not subject to the same risks, all factors that end up affecting this type of

valuation.

Sensitivity Analysis

A sensitivity analysis was made to assess how weighted average cost of capital

and continuing value’s growth rate impact the final target price. The weighted

average cost of capital may vary due to changes in the cost of debt, the cost of

equity or in the capital structure of the company. Within these, the most probable

to vary is the cost of debt due to movements in the considered beta. Changes in

the continuing value’s growth rate are also probable to occur due to its

unpredictable nature. As such, a sensitivity analysis was conducted and, once the

return on invested capital is higher than the company’s WACC, an increase in the

growth rate results in higher final price target. In the other hand, a higher WACC

results in a lower final price target.

10 EBITDA is the abbreviation for earnings before interest, taxes, depreciation and amortization


PAGE 27/32

Appendix

Financial Statements

Income Statement (million USD$)


PAGE 28/32

Balance Sheet (million USD$)


PAGE 29/32

Cash Flow Statement (million USD$)


PAGE 30/32

Disclosures and Disclaimers

Report Recommendations

Buy Expected total return (including expected capital gains and expected dividend yield)

of more than 10% over a 12-month period.

Hold Expected total return (including expected capital gains and expected dividend yield)

between 0% and 10% over a 12-month period.

Sell Expected negative total return (including expected capital gains and expected

dividend yield) over a 12-month period.

This report was prepared by Lorena Gonzalez Cutelo, a Master in Finance’s student of Nova School of

Business & Economics (“Nova SBE”), within the context of the Field Lab – Equity Research.

This report is issued and published exclusively for academic purposes, namely for academic evaluation and

masters graduation purposes, within the context of said Field Lab – Equity Research. It is not to be construed

as an offer or a solicitation of an offer to buy or sell any security or financial instrument.

This report was supervised by a Nova SBE faculty member, acting merely in an academic capacity, who

revised the valuation methodology and the financial model.

Given the exclusive academic purpose of the reports produced by Nova SBE students, it is Nova SBE

understanding that Nova SBE, the author, the present report and its publishing, are excluded from the

persons and activities requiring previous registration from local regulatory authorities. As such, Nova SBE, its

faculty and the author of this report have not sought or obtained registration with or certification as financial

analyst by any local regulator, in any jurisdiction. In Portugal, the author of this report is not registered with or

qualified under COMISSÃO DO MERCADO DE VALORES MOBILIÁRIOS (“CMVM”, the Portuguese Securities Market

Authority) as a financial analyst. Rosário André - as the academic supervisor of the author - is registered as a

financial analyst with CMVM. No approval for publication or distribution of this report was required and/or

obtained from any local authority, given the exclusive academic nature of the report.

The additional disclaimers also apply:

USA: Pursuant to Section 202 (a) (11) of the Investment Advisers Act of 1940, neither Nova SBE nor the

author of this report are to be qualified as an investment adviser and, thus, registration with the Securities and

Exchange Commission (“SEC”, United States of America’s securities market authority) is not necessary.

Neither the Author nor Nova SBE receive any compensation of any kind for the preparation of the Reports.


PAGE 31/32

Germany: Pursuant to §34c of the WpHG (Wertpapierhandelsgesetz, i.e., the German Securities Trading

Act), this entity is not required to register with or otherwise notify the Bundesanstalt für

Finanzdienstleistungsaufsicht (“BaFin”, the German Federal Financial Supervisory Authority). It should be

noted that Nova SBE is a fully-owned state university and there is no relation between the student’s equity

reports and any fund raising programme.

UK: Pursuant to section 22 of the Financial Services and Markets Act 2000 (the “FSMA”), for an activity to be

a regulated activity, it must be carried on “by way of business”. All regulated activities are subject to prior

authorization by the Financial Conduct Authority (“FCA”). However, this Report serves an exclusively

academic purpose and, as such, was not prepared by way of business.The author - a Masters’ student - is

the sole and exclusive responsible for the information, estimates and forecasts contained herein, and for

the opinions expressed, which exclusively reflect his/her own judgment at the date of the report. Nova SBE

and its faculty have no single and formal position in relation to the most appropriate valuation method,

estimates or projections used in the report and may not be held liable by the author’s choice of the latter.

The information contained in this report was compiled by students from public sources believed to be reliable,

but Nova SBE, its faculty, or the students make no representation that it is accurate or complete, and accept

no liability whatsoever for any direct or indirect loss resulting from the use of this report or of its content.

Students are free to choose the target companies of the reports. Therefore, Nova SBE may start covering

and/or suspend the coverage of any listed company, at any time, without prior notice. The students or Nova

SBE are not responsible for updating this report, and the opinions and recommendations expressed herein

may change without further notice.

The target company or security of this report may be simultaneously covered by more than one student.

Because each student is free to choose the valuation method, and make his/her own assumptions and

estimates, the resulting projections, price target and recommendations may differ widely, even when referring

to the same security. Moreover, changing market conditions and/or changing subjective opinions may lead to

significantly different valuation results. Other students’ opinions, estimates and recommendations, as well as

the advisor and other faculty members’ opinions may be inconsistent with the views expressed in this report.

Any recipient of this report should understand that statements regarding future prospects and performance

are, by nature, subjective, and may be fallible.

This report does not necessarily mention and/or analyze all possible risks arising from the investment in the

target company and/or security, namely the possible exchange rate risk resulting from the security being

denominated in a currency either than the investor’s currency, among many other risks.

The purpose of publishing this report is merely academic and it is not intended for distribution among private

investors. The information and opinions expressed in this report are not intended to be available to any

person other than Portuguese natural or legal persons or persons domiciled in Portugal.


PAGE 32/32

While preparing this report, students did not have in consideration the specific investment objectives, financial

situation or particular needs of any specific person. Investors should seek financial advice regarding the

appropriateness of investing in any security, namely in the security covered by this report.

The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion

about the target company and its securities. He/ She has not received or been promised any direct or indirect

compensation for expressing the opinions or recommendation included in this report.

The content of each report have been shown or made public to restricted parties prior to its publication in

Nova SBE’s website or in Bloomberg Professional, for academic purposes such as its distribution among

faculty members for students’ academic evaluation.

Nova SBE is a state-owned university, mainly financed by state subsidies, students tuition fees and

companies, through donations, or indirectly by hiring educational programs, among other possibilities. Thus,

Nova SBE may have received compensation from the target company during the last 12 months, related to its

fund raising programs, or indirectly through the sale of educational, consulting or research services.

Nevertheless, no compensation eventually received by Nova SBE is in any way related to or dependent on

the opinions expressed in this report. The Nova School of Business & Economics does not deal for or

otherwise offer any investment or intermediation services to market counterparties, private or intermediate

customers.

This report may not be reproduced, distributed or published, in whole or in part, without the explicit previous

consent of its author, unless when used by Nova SBE for academic purposes only. At any time, Nova SBE

may decide to suspend this report reproduction or distribution without further notice. Neither this document

nor any copy of it may be taken, transmitted or distributed, directly or indirectly, in any country either than

Portugal or to any resident outside this country. The dissemination of this document other than in Portugal or

to Portuguese citizens is therefore prohibited and unlawful.

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