(The following statement was released by the rating agency) Fitch Ratings-Sydney-March 24: Fitch Ratings has affirmed Australia-based Coca-Cola Amatil Limited's (CCL) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB' and its Short-Term IDR at 'F2'. The Outlook is Stable. The affirmation follows a review of the company's performance in 2019 and Fitch's assessment of the impact of the COVID-19 pandemic. CCL's Fitch-adjusted EBIT rose by 3%, but its EBIT margin contracted by around 40bp due to the company's price reductions and marketing efforts, especially in Australia and Indonesia. Fitch believes that the escalation of containment measures in response to COVID-19 will have an impact on CCL's on-the-go (OTG) segment that includes fast food outlets, cafes and convenience stores, and we expect the Australian beverage business to continue to be a drag on group earnings. However, the company's credit metrics remain consistent for its rating. CCL's ratings continue to benefit from a one-notch uplift from its standalone credit profile, reflecting CCL's close strategic ties with its parent, The Coca-Cola Company (NYSE:KO) (Coca-Cola, A/Stable). Key Rating Drivers Weak Australian EBIT: Australian EBIT was down by nearly 2% in 2019 due in part to expansion of its sales force under CCL's accelerated growth plan. CCL reported sales volume growth in Australia for the first time since 2012, but Fitch believes this came at the cost of narrower profit margin. Therefore, we believe CCL's ability to either increase its revenue per can ahead of its cost inflation or reduce its costs, while maintaining sales volume growth, will be necessary to achieve EBIT growth in Australia. Coronavirus Effects; Adequate Leverage Headroom: Fitch believes the spread of COVID-19 will create some uncertainty over the short-term for CCL, especially for its Australian business which is a significant cash generator. However, around 60% of CCL's sales in Australia are through the grocery channel, which is still accessible despite restrictions on movements. CCL is well-placed to withstand an economic downturn in Australia, and the other geographies it operates in, for the next 6-12 months as the demand for the company's products is relatively stable. The company's credit metrics should remain within our rating sensitivities. Structural Challenges in Australia: CCL's sparkling beverages (cola and other flavours) face a shift in consumer preference towards healthier options. This is compounded by CCL's weaker market position in the still beverages of water, juice and tea, where competition is stiffer due to a more fragmented market structure. CCL introduced Coca-Cola with no sugar and reduced sugar to address the challenge. ESG - Social and Governance: CCL has an ESG Relevance Score of 4 for Exposure to Social Impacts as it is vulnerable to changes in public-health regulations. It also has an ESG Relevance Score of 4 for Management Strategy due to its weak performance in Australia. These factors have a negative impact on the credit profile and they are relevant to the ratings in conjunction with other factors. Major Coca-Cola Bottler: CCL's 'BBB' rating benefits from a one-notch uplift from its standalone credit profile of 'bbb-' to reflect its close strategic ties to Coca-Cola, the global soft drink giant. Coca-Cola is CCL's main shareholder, with a 31% share, and nominates two of CCL's nine board members. CCL is a major bottler for Coca-Cola and provides Coca-Cola with access to over 285 million consumers in the Asia-Pacific region. Legal and operational linkages between CCL and Coca-Cola are weak to moderate, in Fitch's opinion, but the strong strategic relationship drives the one notch of support. Derivation Summary CCL's smaller scale and weak market position in Australasia compared with its global peer, Coca-Cola European Partners plc (BBB+/Stable) resulted in one-notch rating gap. Turkey-based Coca-Cola Icecek has a smaller scale and lower margin than CCL, resulting in a Long-Term Local-Currency IDR of 'BBB-'. Coca-Cola Icecek's Long-Term Foreign-Currency IDR is constrained by Turkey's Country Ceiling of 'BB-' and hence the multiple notch difference between the Foreign-Currency IDRs of CCL and Coca-Cola Icecek. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - Revenue fall of 11% in 2020 on a like-for-like basis, which includes around 15% of volume reduction in the OTG channel in Australia during 2Q20 and 3Q20, along with weak sales volume in Indonesia and New Zealand, due to the coronavirus pandemic. Revenue to recover in 2021 following our expectations of an economic rebound and sales volume to increase by 15% CCL's EBITDA margin to soften to around 15% in 2020 followed by recovery in 2021 driven by the international and the alcohol and coffee businesses, which will offset CCL's relatively weak performance in Australia. Profitability to narrow in 2020 given the significant impact to sales from the higher-margin OTG channel - The alcohol and coffee business to expand as CCL continues to gain scale with low-cost infrastructure and partnerships with leading liquor brands - Capex of around 6% of revenue over the next four years - Dividend payout ratio at 80%-90% of net profit after tax - Fitch treated cash held in Papua New Guinea as restricted cash and excluded this from its net leverage calculation RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - A turnaround in the Australian beverages business, as indicated by sustained EBIT growth. - FFO adjusted net leverage falling below 2.5x on a sustained basis (2019: 2.6x). Developments that May, Individually or Collectively, Lead to Negative Rating Action - Evidence of weakening strategic linkages between CCL and Coca-Cola; for example, CCL becoming operationally less significant to Coca-Cola. - FFO adjusted net leverage rising above 3.5x or FFO fixed-charge cover declining below 3.5x (2019: 4.8x), both on a long-term basis. Liquidity and Debt Structure Strong Liquidity Profile: CCL's strong liquidity position at end-2019 was underpinned by its cash of AUD642 million (excluding cash in Papua New Guinea), about AUD420 million in committed undrawn facilities and strong relationships with local and international banks. This compares with short-term debt of around AUD320 million. ESG Considerations Coca-Cola Amatil Limited: 4.2; Management Strategy: 4, Exposure to Social Impacts: 4 Coca-Cola Amatil Limited; Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F2 ----senior unsecured; Long Term Rating; Affirmed; BBB Contacts: Primary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Kelly Amato, CFA Director +61 2 8256 0348 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325
Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) https://www.fitchratings.com/site/re/10090792 Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019) https://www.fitchratings.com/site/re/10089196 Sector Navigators (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023790 Short-Term Ratings Criteria (pub. 06 Mar 2020) https://www.fitchratings.com/site/re/10112342 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10115209 Solicitation Status https://www.fitchratings.com/site/pr/10115209#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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