Coca Cola Company (KO)

Detailed Company Research Report

Catalyst Research
(Based on facts and analysis of facts)

Sector: Consumer Non-Discretionary

CMP: $57.26
Market Capitalization: $133.4bn
P/E (trailing twelve months): 22.3x
Price/ Book: 8.0x
Date: June 1, 2008

Research Report Prepared By:

Catalyst Research

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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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Key Employees and their Biographies

Ahmet C. Bozer, 47, is President of the Eurasia Group.

Alexander B. Cummings, 51, is President of the Africa Group.

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

Glenn G. Jordan S., 51, is President of the Pacific Group.

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.

Dominique Reiniche, 52, is President of the European Union Group.

José Octavio Reyes, 55, is President of the Latin America Group.

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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Details of key properties owned by the company

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 has facilities for administrative operations, manufacturing, processing,

packaging, packing, storage and warehousing throughout the United States and Canada,
including a portion of the Atlanta office complex, which are included in its North America
operating segment. In addition, in North America, it owns nine still beverage production
facilities and four bottled water facilities, has leased one bottled water facility, and owns a
facility that manufactures juice concentrates for foodservice use, all of which are included in
the North America 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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Historical analysis of key operating metrics

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

Source: Company filings

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.

Free cash flow relative to Earnings per share

EPS (Rs.per share) Free cash flow (Rs.per share)
3.0

2.5

2.0

1.5

1.0

0.5

0.0
2002 2003 2004 2005 2006 2007

Source: Company filings

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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Analysis of Performance in Year Ended 2007

Revenues:
Revenues in 2007 increased 20%, to $28,857 million. The growth was primarily driven by structural
changes (8% positive impact on growth) and volume (6% positive impact on growth). The Coca Cola
system sold a total of 22.7 billion cases worldwide, compared to 21.4 bn cases in 2006.

Analysis of revenue growth

Year Ended December 31, all figures in percent 2005 vs. 2004 2006 vs. 2005 2007 vs 2006
Increase in gallon sales 3 4 6
Structural changes 0 -2 8
Price and product/geographic mix 1 2 2
Impact of currency fluctuations versus the U.S. dollar 2 0 4
Total percentage increase 6 4 20
Source: Company filings

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.

"Structural changes" relates to acquisitions or dispositions of bottling or canning operations and

consolidation or deconsolidation of bottling entities for accounting purposes. In 2006, structural
changes increased net operating revenues by 8 percent compared to 2006. These structural changes
included the impact of the acquisition of CCBPI in the first quarter of 2007, the acquisition of the 18
remaining German bottling and distribution operations in September 2007, the acquisition of CCCIL
in the third quarter of 2006, the consolidation of Brucephil effective September 29, 2006 and the
acquisition of several other individually insignificant bottling operations.

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.

Equity in Earnings (Losses) of Associated Companies:

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 Income and EPS:

The total other income was $173 mn for 2007 compared to $195 mn for 2006, a decrease of $22 mn.
In 2007, other income (loss)—net included a gain of approximately $73 mn resulting from the sale of
a portion of the Company’s ownership interest in Coca-Cola Amatil.

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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Significant equity method investments

Coca-Cola Enterprises Inc (35% stake)
The company’s ownership interest in Coca-Cola Enterprises Inc. ("CCE") was
approximately 35 percent at December 31, 2007. CCE is the world’s largest bottler of the
Company’s beverage products. In 2007, sales of concentrates, syrups, mineral waters, juices,
sweeteners and finished products by the Company to CCE were approximately $6.3 billion.
CCE estimates that the territories in which it markets beverage products to retailers (which
include portions of 46 states and the District of Columbia in the United States, the U.S.
Virgin Islands and certain other Caribbean islands, Canada, Great Britain, continental France,
the Netherlands, Luxembourg, Belgium and Monaco) contain approximately 79 percent of
the United States population, 98 percent of the population of Canada, and 100 percent of the
populations of Great Britain, continental France, the Netherlands, Luxembourg, Belgium and
Monaco. In 2007, CCE’s net operating revenues were approximately $20.9 billion. Excluding
fountain products, in 2007, approximately 60 percent of the unit case volume of CCE
consisted of Coca-Cola Trademark Beverages, approximately 33 percent of its unit case
volume consisted of other Company Trademark Beverages and approximately 7 percent of its
unit case volume consisted of beverage products of other companies.

Coca-Cola Hellenic Bottling Company S.A. (23% stake)

As at December 31, 2007, the company’s ownership interest in Coca-Cola Hellenic Bottling
Company S.A. ("Coca-Cola Hellenic") was approximately 23 percent. Coca-Cola Hellenic
has bottling and distribution rights, through direct ownership or joint ventures, in Armenia,
Austria, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, the Czech Republic,
Estonia, Former Yugoslavian Republic of Macedonia, Greece, Hungary, Italy, Latvia,
Lithuania, Moldova, Nigeria, Northern Ireland, Poland, Republic of Ireland, Romania,
Russia, Serbia, Montenegro, Slovakia, Slovenia, Switzerland and Ukraine. Coca-Cola
Hellenic estimates that the territories in which it markets beverage products contain
approximately 67 percent of the population of Italy and 100 percent of the populations of the
other countries named above in which Coca-Cola Hellenic has bottling and distribution
rights. In 2007, Coca-Cola Hellenic’s net sales of beverage products were approximately $8
billion. In 2007, approximately 43 percent of the unit case volume of Coca-Cola Hellenic
consisted of Coca-Cola Trademark Beverages, approximately 51 percent of its unit case
volume consisted of other Company Trademark Beverages and approximately 6 percent of its
unit case volume consisted of beverage products of Coca-Cola Hellenic or other companies.

Coca-Cola FEMSA, S.A.B. de C.V. (32% stake)

The Company’s ownership interest in Coca-Cola FEMSA, S.A.B. de C.V. ("Coca-Cola
FEMSA") was approximately 32 percent at December 31, 2007. Coca-Cola FEMSA is a
Mexican holding company with bottling subsidiaries in a substantial part of central Mexico,
including Mexico City and southeastern Mexico; greater São Paulo, Campinas, Santos, the
state of Matto Grosso do Sul and part of the state of Goias in Brazil; central Guatemala; most
of Colombia; all of Costa Rica, Nicaragua, Panama and Venezuela; and greater Buenos Aires,
Argentina. Coca-Cola FEMSA estimates that the territories in which it markets beverage
products contain approximately 48 percent of the population of Mexico, 16 percent of the
population of Brazil, 98 percent of the population of Colombia, 47 percent of the population
of Guatemala, 100 percent of the populations of Costa Rica, Nicaragua, Panama and
Venezuela, and 31 percent of the population of Argentina. In 2007, Coca-Cola FEMSA’s net
sales of beverage products were approximately $6 billion. In 2007, approximately 63 percent
of the unit case volume of Coca-Cola FEMSA consisted of Coca-Cola Trademark Beverages,

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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.
.

Coca-Cola Amatil Limited (30% stake)

At December 31, 2007, our Company’s ownership interest in Coca-Cola Amatil (“Coca-Cola
Amatil”) was approximately 30 percent. Coca-Cola Amatil has bottling and distribution
rights, through direct ownership or joint ventures, in Australia, New Zealand, Fiji, Papua
New Guinea and Indonesia. Coca-Cola Amatil estimates that the territories in which it
markets beverage products contain 100 percent of the populations of Australia, New Zealand,
Fiji and Papua New Guinea, and 98 percent of the population of Indonesia. In 2007, Coca-
Cola Amatil’s net sales of beverage products from continuing operations were approximately
$2.9 billion. In 2007, approximately 49 percent of the unit case volume of Coca-Cola Amatil
consisted of Coca-Cola Trademark Beverages, approximately 38 percent of its unit case
volume consisted of other Company Trademark Beverages and approximately 13 percent of
its unit case volume consisted of beverage products of Coca-Cola Amatil.

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Recent Developments

28th May 2008:

Coca-Cola Company Expresses Confidence in Second Quarter and Full Year Business
Outlook
The Coca-Cola Company expressed continued confidence in the Company's global business
outlook for the second quarter and full year 2008. It expects that the strength in international
operations, representing over 80 percent of the Company's operating income, is expected to
continue to offset weakness in North America resulting from the difficult economic
environment. The Company said it remains committed to restoring growth in its flagship
North America market and is working collaboratively with its bottling partners. Currency is
estimated to provide a mid-single digit favorable benefit to 2008 operating income. The
Company said it will reinvest a portion of the currency benefit in marketing programs and
productivity initiatives to drive long-term sustainable growth.

16th April, 2008

The Coca-Cola Company reports first quarter 2008 earnings:
Key highlights of first quarter 2008 earnings were:
o First quarter EPS increased 19 percent to $0.64; increased 20 percent to $0.67 after
considering items impacting comparability.
o Worldwide unit case volume up 6 percent for the first quarter and International unit
case volume up 7 percent.
o Solid growth with sparkling beverage unit case volume up 3 percent, led by 5 percent
growth in International, and still beverage unit case volume up 17 percent.
o Strong cash generation with cash from operations increasing 18 percent

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Financial Snapshot and Key Ratios

Fig in $ mn 2002 2003 2004 2005 2006 2007

Income statement
Revenues 19564 21044 21742 23104 24088 28857
Cost of goods sold 7105 7762 7674 8195 8164 10406
SG&A 7001 7488 7890 8739 9431 10945
Other operating expenses - 573 480 85 185 254
Operating profit 5458 5221 5698 6085 6308 7252
Net interest expense -10 2 39 5 27 220
Share of equity associates 384 406 621 680 102 668
Other income/ (expense) -353 -138 -82 -93 195 173
Taxes 1523 1148 1375 1818 1498 1892
Profit after tax 3976 4339 4823 4849 5080 5981
Diluted Shares o/s 2483 2462 2429 2393 2350 2331

Assets 2002 2003 2004 2005 2006 2007

Net property, plant,
equipment 6,097 6,091 5,831 6,903 8,493
Goodwill 3,989 3,836 3,821 5,135 12,219
Investments 5,538 6,252 6,922 6,783 7,777
Other assets 3,322 3,054 2,648 2,701 2,675
Cash & marketable securities 3482 6768 4767 2590 4308
Net working capital
(excl.cash) -66 376 148 229 624
Total capital employed 22,362 26,377 24,137 24,341 36,096

Liabilities 2002 2003 2004 2005 2006 2007

Shareholder equity 11800 14090 15935 16355 16920 21744
Total debt 5423 7178 5700 4582 9329
Other liablilities 2,849 3,264 2,082 2,839 5,023
Total capital employed 22362 26377 24137 24341 36096

Cash Flow 2002 2003 2004 2005 2006 2007

Cash from operations 4742 5456 5968 6423 5957 7150
Capex -782 -725 -414 -811 -1295 -1409
Free Cash Flow 3960 4731 5554 5612 4662 5741

Per Share Data

Figures in $ per diluted
share 2002 2003 2004 2005 2006 2007
Book Value 4.8 5.7 6.6 6.8 7.2 9.3
EPS 1.6 1.8 2.0 2.0 2.2 2.6
Free cash flow 1.6 1.9 2.3 2.3 2.0 2.5

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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