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Coca Cola Report June 2008
Coca Cola Report June 2008
CMP: $57.26
Market Capitalization: $133.4bn
P/E (trailing twelve months): 22.3x
Price/ Book: 8.0x
Date: June 1, 2008
Business Model
Introduction:
The Coca-Cola Company is the largest manufacturer, distributor and marketer of nonalcoholic
beverage concentrates and syrups in the world. Finished beverage products bearing its trademarks,
sold in the United States since 1886, are now sold in more than 200 countries. Along with Coca-Cola,
which is recognized as the world's most valuable brand, the company markets four of the world's top
five nonalcoholic sparkling brands, including Diet Coke, Fanta and Sprite. In this report, the terms
"the Company," "it" or "its" mean The Coca-Cola Company and all entities included in its
consolidated financial statements.
The company’s business is nonalcoholic beverages—principally sparkling beverages, but also a
variety of still beverages. It manufactures beverage concentrates and syrups, which it sells to bottling
and canning operations, fountain wholesalers and some fountain retailers, as well as some finished
beverages, which it sells primarily to distributors. The Company owns or licenses more than 400
brands, including diet and light beverages, waters, juice and juice drinks, teas, coffees, and energy and
sports drinks. In addition, it has ownership interests in numerous bottling and canning operations,
although most of these operations are independently owned and managed.
Operating Structure:
The Company's operating structure is the basis for its internal financial reporting. As of
December 31, 2007, its operating structure included the following operating segments, the
first seven of which are sometimes referred to as "operating groups" or "groups:"
Africa
Eurasia
European Union
Latin America
North America
Pacific
Bottling Investments
Corporate
Products:
The Company manufactures and sells beverage concentrates, sometimes referred to as
"beverage bases," and syrups, including fountain syrups, and some finished beverages.
Distribution:
The company sells the concentrates and syrups for bottled and canned beverages to
authorized bottling and canning operations. In addition to concentrates and syrups for
sparkling beverages and flavored still beverages, it also sells concentrates (in powder form)
for purified water products such as Dasani to authorized bottling operations.
Authorized bottlers and canners either combine its syrups with sparkling water or combine its
concentrates with sweeteners (depending on the product), water and sparkling water to
produce finished sparkling beverages. The finished sparkling beverages are packaged in
authorized containers bearing the company’s trademarks—such as cans and refillable and
non-refillable glass and plastic bottles ("bottle/can products")—and are then sold to retailers
("bottle/can retailers") or, in some cases, wholesalers.
For its fountain products in the United States, the company manufactures fountain syrups and
sells them to authorized fountain wholesalers and some fountain retailers. The wholesalers
are authorized to sell the Company's fountain syrups by a non-exclusive appointment from it
that neither restricts the company in setting the prices at which it sells fountain syrups to the
wholesalers, nor restricts the territory in which the wholesalers may resell in the United
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States. Outside the United States, fountain syrups typically are manufactured by authorized
bottlers from concentrates sold to them by the Company. The bottlers then typically sell the
fountain syrups to wholesalers or directly to fountain retailers.
Finished beverages manufactured by the company includes a variety of sparkling and still
beverages. The Company sells most of these beverages to authorized bottlers or distributors,
who in turn sell these products to retailers or, in some cases, wholesalers. It manufactures and
sells juice and juice-drink products and certain water products to retailers and wholesalers in
the United States and numerous other countries, both directly and through a network of
business partners, including certain Coca-Cola bottlers.
Operating Metrics:
The Company measures the volume of products sold in two ways: (1) unit cases of finished
products and (2) gallons. A "unit case" means a unit of measurement equal to 192 U.S. fluid
ounces of finished beverage (24 eight-ounce servings); and "unit case volume" means the
number of unit cases (or unit case equivalents) of Company beverage products directly or
indirectly sold by the Company and its bottling partners ("Coca-Cola system") to customers.
Unit case volume primarily consists of beverage products bearing the Company’s trademarks.
Note: In the report, words like “the company” or “its” or “it” refer to the company which is
analyzed in the entire research report and whose name appears on the front-page of this
report.
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J. Alexander M. Douglas, Jr., 46, is Senior Vice President and President of the North
America Group.
Gary P. Fayard, 55, is Executive Vice President and Chief Financial Officer of the Company.
Irial Finan, 50, is Executive Vice President of the Company and President, Bottling
Investments and Supply Chain.
E. Neville Isdell, 64, is Chairman of the Board of Directors and Chief Executive Officer of
the Company
Geoffrey J. Kelly, 63, is Senior Vice President and General Counsel of the Company.
Muhtar Kent, 55, is currently President and Chief Operating Officer of the Company.
Robert P. Leechman, 51, is Vice President and Chief Customer and Commercial Officer of
the Company.
Thomas G. Mattia, 59, is Senior Vice President of the Company and Director of Worldwide
Public Affairs and Communications.
Cynthia P. McCague, 57, is Senior Vice President of the Company and Director of Human
Resources.
Danny L. Strickland, 59, is Senior Vice President of the Company and Chief Innovation and
Technology Officer.
Joseph V. Tripodi, 52, is Senior Vice President and Chief Marketing and Commercial Officer
of the Company.
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The Coca Cola Company’s worldwide headquarters is located on a 35-acre office complex in
Atlanta, Georgia. The complex includes the approximately 621,000 square foot headquarters
building, the approximately 870,000 square foot Coca-Cola North America (“CCNA”)
building and the approximately 264,000 square foot Coca-Cola Plaza building. The complex
also includes several other buildings, including technical and engineering facilities, a learning
center and a reception center. The Company has leased approximately 250,000 square feet of
office space at 10 Glenlake Parkway, Atlanta, Georgia, which has been currently subleased to
third parties. In addition, it has leased approximately 218,000 square feet of office space at
Northridge Business Park, Dunwoody, Georgia. The Company owns or has leased additional
real estate, including a Company-owned office and retail building at 711 Fifth Avenue in
New York, New York. These properties are primarily included in the Corporate operating
segment.
The Company owns or holds a majority interest in or otherwise consolidates under applicable
accounting rules bottling operations that own 136 principal beverage bottling and canning
plants located throughout the world. These plants are included in the Bottling Investments
operating segment.
The Company owns a facility in Brussels, Belgium, which consists of approximately 315,000
square feet of office and technical space. This facility is included in the European Union
operating segment. It also owns or has leased real estate, office space and other facilities
throughout the world which are used for administrative facilities, warehouses and retail
operations. In addition, as of December 31, 2007, the Company owned and operated 30
principal beverage concentrate and/or syrup manufacturing plants located throughout the
world. These properties are generally included in the geographic operating segment in which
they are located.
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Margin Analysis
Gross margin (%) Operating Profit Margin (%)
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2002 2003 2004 2005 2006 2007
As can be seen from the above graph, Coca Cola’s gross margins have increased from 63.7% in 2002
to 63.9% in 2007, indicating tremendous pricing power. Thus, the company has been able to pass on a
higher price increase to its customers relative to the rise in raw material prices. However, the
operating profit margin has declined 280 basis points to 25.1%, from 27.9% in 2002.
2.5
2.0
1.5
1.0
0.5
0.0
2002 2003 2004 2005 2006 2007
As can be seen from the above graph, Coca Cola’s free cash flow per share (FCF) has remained
consistently above the earnings per share (EPS) number in the years 2003 to 2005. However, in 2006,
the FCF per share at $2 per share was slightly lower than the EPS of $2.2 per share. The trend was
maintained in 2007, with FCF per share at $2.5 and EPS at $2.6 per share.
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Volume growth was led by growth in Eurasia, which grew by 16%, complemented by a 10% growth
in Africa. However, the overall growth was dragged down due to a 1% decline in volume in North
America reflecting a 1% decline in the Foodservice and Hospitality Division due to the challenging
restaurant industry environment.
Price and product/geographic mix increased sales by 2 percent in 2007 over 2006 primarily due to
favorable pricing and product/package mix across the majority of the operating segments.
Currency fluctuations increased sales by 4% in 2007 over 2006 primarily due to depreciation in US $
vis-à-vis currencies of other operating geographies, especially euro.
Operating Expenses:
Cost of goods sold increased by 27.5% to $10,406 mn, faster than the 19.8% sales growth due to
acquisitions and consolidations of certain bottling operations.
The selling, general and administrative expenses increased 16.1% to $10,945 mn. This increase was
driven by a 28.2% increase in selling expenses, which increased to $5,029 mn mainly due to
consolidation in bottling investments, while the general and administrative expenses increased 7.6%
to $2,829 mn.
Operating Profit:
Operating profit increased by 15% to $7,252 mn as the operating profit margin decreased by 110 bps
to 25.1% in 2007. The decline was led by a decline in gross margin and by increase in SG&A as a
percentage of sales.
The company’s share of equity in earnings of associated companies for 2007 was $668 mn, compared
to $102 mn in 2006, an increase of 554.9%. Equity income in 2007 inreased by $566 mn due to the
impact of the company’s proportionate share of an impairment charge recorded by one of its
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associates - CCE. CCE recorded a $2.9 billion pretax ($1.8 billion after tax) impairment of its North
American franchise rights in 2006.
Net interest expense was $220 mn. The effective tax rate was at 24%, an increase of 130 basis points
over 2006 due to higher tax incidence on income from the gains on the sale of a portion of the
company’s equity interest in Coca-Cola Amatil and Vonpar (at a tax rate of 58%).
All the above resulted in profit after tax increasing to $5,981 mn in 2007, an increase of 17.7% over
the corresponding period previous year.. The total diluted shares outstanding decreased by 1% to 2327
mn shares in 2007, resulting in the diluted EPS increasing by 19% to $2.57 per share.
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approximately 33 percent of its unit case volume consisted of other Company Trademark
Beverages and approximately 4 percent of its unit case volume consisted of beverage
products of Coca-Cola FEMSA or other companies.
.
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Recent Developments
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Margin Numbers
Figures in % 2002 2003 2004 2005 2006 2007
Gross margin (%) 63.7% 63.1% 64.7% 64.5% 66.1% 63.9%
Operating Profit Margin (%) 27.9% 24.8% 26.2% 26.3% 26.2% 25.1%
Net Margin (%) 20.3% 20.6% 22.2% 21.0% 21.1% 20.7%
Debt/ Equity (x) 38.5% 45.0% 34.9% 27.1% 42.9%
RoE (%) 34% 32% 30% 31% 31%
Source: Company Filings
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