Fitch Ratings has affirmed Coca-Cola Icecek's (CCI) Long-Term Foreign- (FC) and Local-Currency (LC) Issuer Default Ratings (IDRs) and senior unsecured long-term rating at 'BBB-'.

The Rating Outlook remains Positive.

The Positive Outlook reflects our expectation that the company's financial profile will remain resilient, with consistently strong operating profitability counterbalancing a weak operating environment in a number of CCI's markets of operations. Inherent foreign-exchange (FX) risks related to hard-currency- denominated debt and part of operating costs remain the key rating constraints.

The ratings continue to be supported by CCI's leading positions in its core markets, the resilient nature of the soft drinks business and CCI's strong capital structure.

CCI's ratings continue to benefit from a single-notch uplift for strategic support from parent, The Coca-Cola Company (TCCC; A/Stable) as per Fitch's Parent and Subsidiary Linkage Criteria.

Key Rating Drivers

High but Manageable FX Risks: As of end-April 2022, about 88% of CCI's debt and 25% of its production costs were denominated in hard currencies, in contrast with revenue, which is mainly in emerging markets' local currencies. Although this results in high FX risks, they are managed by CCI via improving geographic diversification and its policy of keeping a major part of its cash in hard currencies. The sharp depreciation of the Turkish lira against the US dollar in 2H21-1H22 is partly mitigated by growing revenue from international markets (2021: 60% of total revenue), which mostly saw more stable exchange rates in 2021 and lower volatility than the Turkish lira.

Limited Impact from Ukrainian Conflict: Although we expect the war in Ukraine to affect CCI's operations indirectly through cost inflation and logistics disruption, demand in CCI's markets remain unaffected by the conflict. We forecast growth of organic physical sales of around 10% in 2022, mostly in markets outside Turkey, further enhanced by the full-year contribution of operations in Uzbekistan.

Inflationary Challenges to Operating Profitability: We forecast higher material and logistics costs to affect CCI's cost structure over the next 12-18 months. We believe that improving or even maintaining the favourable product mix in a potentially stagflation environment can be difficult. Proactive procurement and hedging should help reduce the impact on operating profitability in 2022. Overall profits for 2022 will also benefit from the effect of full year consolidation of Uzbekistan operations. For 2023 our profitability forecast for CCI is lower by 200bp than in 2021.

Strong Cash Flow Generation: Resilient operating profitability and capex forecast at 6%-8% of revenue in 2022-2025 should allow CCI to generate free cash flow (FCF) margins in mid-to-high single digits. We also continue to assume that CCI will adhere to its maximum dividend pay-out of 50% of net distributable income and to favour cash accumulation and deleveraging, with the aim of building up financial flexibility to maintain a low-risk balance sheet. This flexibility may also be deployed for potential M&A to grow the business in new geographies.

Weak Operating Environment: The operating environment in CCI's core markets (Turkey, Pakistan, Iraq and Kazakhstan), which we assess at 'bb' and below, continues to moderately affect its ratings. These countries are characterised by historically high volatility in geopolitical events and macro-economic conditions, which tend to result in high inflation and FX fluctuations, as is currently the case in Turkey. We see these dynamics as a threat to consumer sentiment across the region, even though CCI has a strong record of operating under these challenging conditions.

Conservative Capital Structure Intact: CCI's conservative financial policy targets net debt at below 2x EBITDA (2021: 1.5x), albeit with tolerance for a temporary breach for value-enhancing M&A opportunities. Even with this conservative target CCI acquired Coca-Cola Bottlers Uzbekistan with ample leverage headroom and hence without a breach of rating sensitivities. We project leverage ratios to remain well below target over the coming years, supported by sufficient FCF generation and cash reserves to cover upcoming debt maturities.

One-Notch Uplift for TCCC Support: Fitch applies a 'bottom-up plus one notch' approach to CCI's Standalone Credit Profile (SCP) of 'bb+', reflecting our assessment of TCCC's 'Medium' operational and strategic incentives for supporting CCI. This is based on shared brands and marketing functions, as well as strategic, operational and innovation support provided by TCCC. We assess legal incentives as 'Weak'. Overall, TCCC's moderate ownership of CCI at 20% constrains the uplift to a single notch. In our view this level of ownership creates some uncertainty at the current rating about the extent of potential support to CCI in case of need, given also the existence of a majority shareholder, Anadolu Efes Biracilik ve Malt Sanayii A.S. (AEFES, BB+/RWN), and the company's public listing.

Insulated Ring-Fencing from AEFES: Under its Parent-Subsidiary Linkage methodology, Fitch views CCI's credit profile as insulated from that of its weaker parent, AEFES, which holds 50.3% of CCI's shares. This is because AEFES's ability to control CCI is constrained by important voting rights of the other shareholder, TCCC. Moreover, CCI's and AEFES's treasury functions and debt structures are fully ring-fenced from each other.

Kazakhstan Country Ceiling: We apply Kazakhstan's 'BBB+' Country Ceiling to CCI's rating instead of that of Turkey where CCI is incorporated. Given CCI's conservative capital structure with projected hard-currency interest expenses of over TRY400 million, we calculate that cash flows from Kazakhstan (2021: 24% of EBITDA) should continue to cover CCI's hard-currency interest charges with sufficient headroom. We expect this headroom to be maintained over the next four years.

Fitch assesses transfer and convertibility risks for Kazakhstan as low, despite political protests earlier in 2022. We do not foresee any potential difficulties for CCI to upstream cash flows, either through dividends or intercompany loans, from Kazakhstan to Turkey.

Derivation Summary

CCI is among the 10-largest bottlers in the TCCC system in sales volumes, and one of the highest-rated corporates in Turkey. Compared with its main peers, Coca-Cola Europacific Partners (CCEP; BBB+/Stable), and Coca-Cola Femsa (A/Stable), CCI is smaller and operates in more volatile emerging markets and has greater exposure to FX risks. This is balanced by improved profitability, now in line with or exceeding its main peers', and by CCI's conservative capital structure with leverage metrics that are commensurate with the 'A' rating category, as per Fitch's Sector Navigator for Non-Alcoholic Beverages.

CCI's ratings benefit from a one-notch uplift for potential support from TCCC. This is in line with Fitch's approach to CCEP, whose ratings also benefit from our assessment of TCCC's 'Medium' operational and strategic incentives for supporting CCEP.

At the same time, CCI's SCP reflects moderate pressure from a weak operating environment in the markets in which it operates.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Turkish lira/US dollar on average at 14.5 in 2022, weakening to 20.5 in 2023 and 21.5 in 2024 and 22 in 2025

Turkish sales volumes growing in low single digits in 2022-2025. Given heightened inflationary pressure we assume around 60% growth at the average selling price in 2022, reducing to around 50% in 2023

International sales volumes growing at high teens in 2022, including the acquisition of bottling operations in Uzbekistan completed in September 2021, decreasing to low single digits over 2023-2025. We assume mid-teens price increase in 2022 and of around 10% in 2023

Consolidated EBITDA margin reducing to around 19.2% in 2022 on negative FX impact and commodity pressures on profitability in Turkey, declining further to 18.4% in 2023 after expiration of hedges, before gradually improving toward 20.1% by 2025

Capex at around 8% of net sales in 2022, gradually decreasing to 7% in 2023, 6.5% in 2024 and 2025

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to an upgrade:

As we do not expect changes in the strength of ties with TCCC, an upgrade would depend on CCI's SCP, based on the following factors:

EBITDA margin sustained above 20% (2021: 20.5%) translating into mid-single-digit FCF margins

Enhanced geographic diversity, either organically or through M&A, without impairing the operating- environment score (currently bb-)

Conservative financial structure with funds from operations (FFO) net leverage remaining sustainably below 2.0x (2021: 1.7x) or net debt/EBITDA below 1.7x (2021:1.5x)

Factors that could, individually or collectively, lead to a revision of the Outlook to Stable

Decline in EBITDA margin to below 18% on a sustained basis, translating into low single-digit FCF margins

FFO net leverage sustainably above 2.0x or net debt/EBITDA above 1.7x

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Adverse impact of weaker operating and macro environments in CCI's core markets on credit metrics not accompanied by adequate cash-preservation measures, such as dividend-and-capex reduction

Increased volatility of FCF (after capex and dividends)

FFO net leverage above 3.0x, or net debt/EBITDA above 2.7x

FFO interest coverage below 5x (2021: 7.7x) or EBITDA/interest paid below 6.5x (2021: 8.8x)

EBITDA margin below 14%

Weakening linkages with TCCC

A downgrade of the Country Ceiling of Kazakhstan or insufficient EBITDA generated in the country to cover hard-currency interest expenses in the medium term would result in a downgrade of the Long-Term FC IDR

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity: At end-April 2022, liquidity was supported by a cash balance of USD566 million- equivalent, with 69% in hard currencies, of which 95% is outside Turkey. Given the issue of its USD500 million 2029 bond in January 2022, together with our expectation of positive FCF, we expect upcoming debt maturities to be met comfortably through to 2024.

Liquidity is also supported by USD900 million-equivalent undrawn and uncommitted credit facilities in Turkey, Pakistan, Kazakhstan, Turkmenistan and Azerbaijan, which can be utilised in hard currencies or local currency according to market conditions. Fitch does not, however, include availability under uncommitted credit lines in its liquidity calculation.

Summary of Financial Adjustments

N/A

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

Entity / Debt

Rating

Prior

Coca-Cola Icecek

LT IDR

BBB-

Affirmed

BBB-

LC LT IDR

BBB-

Affirmed

BBB-

senior unsecured

LT

BBB-

Affirmed

BBB-

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Additional information is available on www.fitchratings.com

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