consumer products ana-maria lovrich shasha liang sunny har
TRANSCRIPT
Consumer Products
Ana-Maria Lovrich
Shasha Liang
Sunny Har
Agenda
• Industry Overview• Coca-Cola• Starbucks & Tim Hortons
• Company Overview• Financial Statement• Risk Factors & Management
Soft Drink Industry
The soft drink industry makes and bottles non-alcoholic carbonated beverages, including fruit flavored beverages, colas, ginger ales, ginger beers, root beers, iced tea, iced coffee, soda waters, tonic waters and other mixers.
Cost Structure
Low fixed costs relative to high variable costs
“The tendency for competing on price is further limited by Coke and Pepsi’s near-century of competition – a history that has allowed them to learn how to avoid destroying profits in mutually damaging price wars.”
Industry Changes
Entry/exit of major firmsGlobalizationChanging societal concerns, attitudes,
and lifestylesLong-term industry growth rateProduct innovation
Governmental Regulations
Regulated under • the Food and Drugs Act and Regulations• the Consumer Packaging and Labeling Act. • Health Canada's Natural Health Product
Regulations • the Canadian Environmental Protection Act
and the Canadian Environmental Assessment Act
Soft Drink Industry
Challenges & Opportunities:Higher degree of competitionHealth problem, e.g. child obesityIncreased packaging costs (PET plastic)Higher transportation and distributions costs
Soft Drink IndustryIndustry Major Players (Top 10 Soft Drink
Companies in US)Rank Companies Market Share (%)
1. Coca-Cola Co. 42.0
2. PepsiCo 29.3
3. Dr PepperSnapple 16.7
4.Cott Corp. 4.8
5. National Beverage 2.8
6. Hansen Natural 1.0
7. Red Bull 0.8
8. Big Red 0.5
9. Rockstar 0.5
10. Private label and other
1.6
Company Overview
Coca-Cola History
1886, created by Dr. Pemberton, Georgia.1895, be sold in the whole U.S.
Coca-Cola Mission
Our Roadmap starts with our mission, which is
enduring. To refresh the world...To inspire moments of optimism and
happiness...To create value and make a difference.
Products: product list 3,500 products in over 200 countries
Financial Analysis
Revenue StructureOperating RevenuesSale of beverage concentrates & syrupsSale of fountain syrups to fountain retailersSale of finished beveragesRevenues from Financial Activities
Cost Structure
Financial Statement
Income Statement of Coca-Cola (in million$)
The Coca-Cola Consolidated Cash Flows Statement (in million$)
Risk Factors & Management
Risk Management
Board and Company’ Roles
Anti-Hedging Policy
Risk Factors
Financial Risks and Strategies
Risk Management The Board’s Role in Risk Managementunderstand critical risks; allocate responsibilities for risk oversight; evaluate the Company’s risk management; facilitate open communication between
management and Directors; foster an appropriate culture of integrity
and risk awareness
Risk ManagementCompany managemententerprise risk management program,risk management committee,regular internal management disclosure
committee meetings, Codes of Business Conduct, robust product quality standards and
processes, ethics and compliance officecomprehensive internal and external audit
process
Anti-Hedging Policy
“Prohibits Directors, the Company’s executive officers and certain other employees from purchasing any financial instrument that is designed to hedge or offset any decrease in the market value of the Company’s stock, including prepaid variable forward contracts, equity swaps, collars and exchange funds.”
Risk Factors1. Obesity and other health concerns
2. Water scarcity and poor quality
3. Continuing uncertainty in the credit and equity markets
4. Fluctuations in foreign currency exchange and interest rates
5. Relationships with bottling partners
6. Bottling partners’ financial & non-financial condition
7. Increases in income tax rates or changes in income tax laws
8. Increase in the cost, disruption of supply or shortage of energy, ingredients, other materials
9. Product safety or quality issues, or negative publicity
10.Integrate and manage Company-owned or controlled bottling operations
Financial Risk Management
1. Foreign Exchange Risk2. Interest Risk3. Commodity Risk4. Other Market Risk
Foreign Exchange Risk
Strategies: Foreign currency exchange management
75 functional currencies: Weakness in one particular currency offset by strengths in the other currencies
Derivative instruments
Foreign Exchange RiskThe Coca-Cola Company Operating Segments
(In millions) Three Months Ended (December 31, 2011)
Eura
sia
& Afri
ca
Euro
pe
Latin
Am
erica
North
Am
erica
Pacific
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000
Net operating revenues (in million$)
Net operating revenues (in mil-lion$)
Foreign Exchange Risk
“Our Company enters into forward exchange contracts and purchases currency options (principally euro and Japanese yen) and collars to hedge certain portions of forecasted cash flows denominated in foreign currencies. Additionally, we enter into forward exchange contracts to offset the earnings impact related to exchange rate fluctuations on certain monetary assets and liabilities.”
Foreign Exchange Risk
Time Total notional value of foreign currency derivatives (in million$)
2009 4.6
2010 6.3
2011 10.5
Interest Rate Risk
“We monitor our mix of fixed-rate and variable-rate debt, as well as our mix of short-term debt versus long-term debt. From time to time, we enter into interest rate swap agreements to manage our mix of fixed-rate and variable-rate debt.”
Interest Rate Risk
Time Percentage
change
Change in interest expense
December 31, 2011
1% $191 million
Interest Rate Risk
Dec 31, 2011 Dec 31, 2010
Interest rate swap (assets)
246 ---
Interest rate swap ( liabilities)
--- 97
“A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices.”
Commodity Prices Management
“Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing and distribution business. We also use derivative financial instruments to manage our exposure to commodity risks at times.”
Commodity Prices ManagementTime Open commodity
derivatives that qualify for hedge accounting’s notional value (in million$)
Fair value (in million$)
Change in price (%)
Net gain/loss(in million$)
Dec 31, 2011
$26 $1 (10)% $(1)
Time Open commodity derivatives that do not qualify for hedge accounting’s notional value (in million$)
Fair value (in million$)
Change in price(%)
Net gain/loss (in million$)
Dec 31, 2011
$1,165 $7 (10)% $(78)
Summary of Risk management The following table presents the fair values of the Company's
derivative instruments that were designated and qualified as part of a hedging relationship (in millions):
Derivatives designated as hedging instruments
Balance sheet location Dec 31, 2011
Dec31, 2010
Assets: Foreign currency
contractsPrepaid expenses and other assets 170 32
Commodity contracts Prepaid expenses and other assets 2 4Interest rate swaps Other assets 246 ---
Total assets 418 36Liabilities:
Foreign currency contracts
Accounts payable and accrued expenses
41 141
Commodity contracts Accounts payable and accrued expenses
1 2
Interest rate swaps
Other liabilities --- 97
Total liabilities 42 240
Summary of Risk management Gain and loss on risk management:
Time Net gain (loss) on derivatives (in million)
(after-tax amount)
Accumulated derivative net
losses2008 1 ---
2009 34 (78)
2010 (120) (198)
2011 145 (53)
Industry OverviewTim Hortons & Starbucks
Industry Overview
Starbucks and Tim Hortons are in the coffee shop industry which is part of the larger specialty eateries industry.
Specialty Eateries
Fits within the largest segment of disposable income spending, food and beverages
In the US, industry includes more than 35,000 companies with combined annual revenue of about $25 billion
Major companies include Dunkin' Brands, Krispy Kreme Doughnuts, and Starbucks. The industry is fragmented: the 50 largest firms generate about 45 percent of industry revenue.
Top 5 Companies
Competitive Landscape
Consumer taste and personal income drive demand
The profitability depends on efficient operations and high volume sales.
As well as, the ability to secure prime locations, drive store traffic, and deliver high-quality products
Industry Cost Structure
Low to moderate costs for each locationMajor start-up expenditures
PropertyEquipment
Major operating costsLabourCost of sales
PEST
Political Government regulations
EconomicChanges in disposable income
SocialConsumer preferences
TechnologicalTechnology to improve operational
efficiencies
Company Overview
Starbucks (SBUX)
First Starbucks opened in Seattle on March 30, 1971
More than 17,000 retail stores in over 55 countries
Our mission: to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time.
Upper Management
Objective
Maintain Starbucks standing as one of the most recognized and respected brands in the world.
Strategies to Achieve Goal
Continue the disciplined expansion of their store base outside of the US.
Continue to offer consumers new coffee products in multiple forms, across new categories, and through diverse channels
Starbucks Global ResponsibilityEmployer of choice
Core Business
Purchase and roast high-quality whole bean coffees for sale
Sell handcrafted coffee and tea beverages and a variety of fresh food items.
Sell a variety of coffee and tea products License their trademarks through other
channelsPortfolio includes Tazo® Tea, Seattle's Best
Coffee®, and Starbucks VIA® Ready Brew.
Financial Statement
Revenue by Region
69%
22%
7%
2%
USInternationalGlobal Consumer ProductsOther
Number of Stores
Risk Factors & Management
General Risk FactorsHighly dependent on the financial performance of
their US operating segment.Increasingly dependent on the success of their
international operations in order to achieve growth targets.
Economic conditions in the US and certain International markets
International operations are subject to inherent risks of conducting business abroad, such as:foreign currency exchange rate fluctuationschanges in economic, legal, regulatory, social and
political conditions in their marketsInterpretation of laws and regulations
Hedging Philosophy
“Our financial condition and results of operations are sensitive to, and may be
adversely affected by, a number of factors, many of which are largely outside our
control.”
Risk Management PolicyManage exposure to various market-based
risks according to an umbrella risk management policy.
Market-based risks are quantified and evaluated for potential mitigation strategies, such as entering into hedging transactions.
Governs the hedging instruments the business may use and limits the risk to net earnings.
Risk Management PolicyMonitor and limit the amount of associated
counterparty credit risk. Additionally, this policy restricts, among
other things, the amount of market-based risk to be tolerated before implementing approved hedging strategies and prohibits speculative trading activity.
In general, hedging instruments do not have maturities in excess of five years.
Financial Risk Management
1. Commodity Risk2. Foreign Exchange Risk3. Equity Security Risk4. Interest Rate Risk
Commodity Risk
“Increases in the cost of high-quality Arabica coffee beans or other commodities or decreases in the availability of high quality Arabica coffee beans or other commodities could have an adverse impact on our business and financial results”
“Commodity price risk represents Starbucks primary market risk”
Commodity Risk
Commodity inputsCoffeeDairy productsDiesel
Cost increases are either wholly or partially beyond their control
Costs for commodities can only be partially hedged
Commodity Risk
Starbucks buys coffee using fixed-price and price-to-be-fixed purchase commitments
Total of $1 billion in purchase commitments as of Oct 2, 2011$846 million under fixed-price$193 million under price-to-be-fixed
Commodity Risk
Have entered into commodity hedgesSensitivity analysis based on a 10% change
in the underlying commodity prices in their commodity hedge as of Oct 2, 2011
No significant impact
Foreign Exchange Risk
“We may engage in transactions involving various derivative instruments to hedge revenues, inventory purchases, assets, and liabilities denominated in foreign currencies”
Foreign Exchange Risk
Majority of transactions in USDPrimary foreign currencies
Canadian dollarBritish poundEuroJapanese yen
Foreign Exchange RiskForward FX contracts to hedge
Portions of anticipated international revenue streams and inventory purchases
Starbucks’ net investment in Starbucks JapanFree standing derivatives to hedge
The translation of certain foreign currency denominated payables and receivables
Equity Security Price Risk
Minimal exposure to price fluctuations on equity mutual funds and equity exchange-traded funds within trading portfolio
Sensitivity analysis based on a 10% change in the underlying equity prices of their investments as of October 2, 2011
No significant impact
Interest Rate RiskStarbucks uses short-term and long-term
financingMay use interest rate hedges to manage
the effect of interest rate changes on existing debt as well as the anticipated issuance of new debt.
As of October 2, 2011, did not have any interest rate hedge agreements outstanding.
Interest Rate Risk
Starbucks does not hedge the interest rate exposure on their available-for-sale securities
Performed a sensitivity analysis based on a 100 basis point change in the underlying interest rate of their available-for-sale securities as of Oct 2, 2011
No significant impact
Derivative Instruments
Cash Flow hedgesCanadian dollar, yen, and the US dollar
Net Investment hedgesOther derivatives
Company Overview
Founder: Tim HortonNational Hockey League All-Star defenseman
Tim Hortons History
1964 First Tim Hortons opens1995 Wendy’s purchased Tim Hortons2006, Tim Hortons completes IPO
becoming a standalone Canadian public company trading on the NYSE and TSX (THI)
Tim Hortons History
2012 Number of Restaurants
Canada 3295
United States 714
Gulf Cooperation Council 5
Tim Hortons offers a wide menu of "Always Fresh" quality food and beverages:
Products
“Our guiding mission is to deliver superior quality products and services for our guests and communities through leadership, innovation and partnerships. Our vision is to be the quality leader in everything we do.”
Mission Statement
Primary Business Model
1. Increasing same-store sales via marketing and menu opportunities
2. Investing to build our scale and brand in new and existing markets
3. Leveraging core business strengths and the franchise system
4. Growing differently in ways we have not grown before
Growth Strategy 2010 - 2013
Financial Statement
P
P
P
Risk Factors & Management
Enterprise Risk Management Program
Developing of internal performance scorecardsMonitoring stakeholder relationsAssessing sustainability and responsibility
trendsConsidering public policy, consumer, corporate,
general public trends, issues, and developments that may impact Tim Hortons.
1. Growth strategy2. Brand value3. Competition4. Innovation5. Commodity cost 6. Food Safety & Health concerns7. Distribution operations & supply chain8. Success of restaurant owners9. Changes in franchise laws and regulations...16. Exchange rate - U.S. & Canadian dollar17. Real Estate
Risk Factors
1. Foreign Exchange Risk2. Commodity Risk3. Interest Rate Risk4. Inflation Risk
Financial Risk Management
Exposure to foreign exchange risk is primarily related to fluctuations between the Canadian dollar and the U.S. dollar
Foreign Exchange Risk
“We may use derivative products to reduce the risk of a significant impact on our cash flows or net income. Forward currency contracts are entered into to reduce some of the risk related to purchases paid for by the Canadian operations in U.S. dollars, such as coffee, and certain intercompany purchases”
“We do not hedge foreign currency exposure in a manner that would entirely eliminate the effect of changes in foreign currency exchange rates on net income and cash flows.”
“We have a policy forbidding speculating in foreign currency. By their nature, derivative financial instruments involve risk, including the credit risk of non-performance by counterparties, and our maximum potential loss may exceed the amount recognized in our balance sheet. “
“To minimize this risk, except in certain circumstances, we limit the notional amount per counterparty to a maximum of $100.0 million”
Foreign Exchange Risk Philosophy
“Tim Hortons may enter into derivative instruments with maturities ranging up to 7 years to hedge foreign exchange risk and interest rate risk”
Derivative Instruments
Derivatives are recognized and measured as either assets or liabilities at fair value on the Consolidated Balance Sheet
Derivatives that qualify as hedging instruments are generally cash flow hedges as a means to help protect from the cash flow variability of the hedged item
Derivative Instruments
Outstanding Derivatives
“If the U.S. Currency rate changes by 10% the entire year, the annual impact on our net income and annual cash flows would not be material”
Foreign Exchange Risk Measurement
Exposure to price input fluctuations due to unforeseen weather and market volatility.
Commodity inputs:CoffeeWheatEdible oilSugar
Commodity Risk
“We monitor our exposure to commodity prices and our forward hedging program of varied duration, depending upon the type of underlying commodity.”
“We employ various purchasing and pricing contract techniques in an effort to minimize volatility, including setting fixed prices for periods of up to one year with suppliers, setting in advance the price for products to be delivered in the future, and unit pricing based on an average of commodity prices over the corresponding period of time. We purchase a significant amount of green coffee and typically have purchase commitments fixing the price for a minimum of 6 to 12 months depending upon prevailing market conditions. We also typically hedge against the risk of foreign exchange on green coffee prices at the same time.”
“We do not make use of financial instruments to hedge commodity prices, partly because of our other contract pricing techniques”
Commodity Risk Philosophy
“Increases and decreases in commodity costs are largely passed through to restaurant owners, resulting in higher or lower revenues and higher or lower costs of sales from our distribution business”
Commodity Risk Measurement
Potential Hazard – Franchise Risk
Exposure to risk in interest rate fluctuations:RefinancingReinvesting
To minimize this risk, in the past, Tim Hortons has entered into:Interest rate forwardsInterest rate swaps
“If interest rates change by 100 basis points, the impact on our annual net income would not be material”
Interest Rate Risk
“Due to inflation historical financial statements may not accurately reflect all the effects of changing prices on an enterprise”
Factors impacted include:inventories with approximate current market pricesproperty holdings at fixed costs (substantial)commodity priceincreased labour costs
Result: Tim Hortons and restaurant owners may not be able to adjust prices sufficiently in order to offset the effect of the various cost increases.
Inflation Risk
Conclusion
Questions?
Thank you