Consumer Products Ana-Maria - PowerPoint Presentation

1. Consumer ProductsAna-Maria LovrichShasha LiangSunny Har

2. AgendaIndustry OverviewCoca-ColaStarbucks & Tim HortonsCompany OverviewFinancial StatementRisk Factors & Management

3. Soft Drink IndustryThe 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.

4. Cost StructureLow 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.”

5. Industry ChangesEntry/exit of major firmsGlobalizationChanging societal concerns, attitudes, and lifestylesLong-term industry growth rateProduct innovation

6. Governmental RegulationsRegulated under the Food and Drugs Act and Regulationsthe Consumer Packaging and Labeling Act. Health Canada's Natural Health Product Regulations the Canadian Environmental Protection Act and the Canadian Environmental Assessment Act

7. Soft Drink IndustryChallenges & Opportunities:Higher degree of competitionHealth problem, e.g. child obesityIncreased packaging costs (PET plastic)Higher transportation and distributions costs

8. Soft Drink IndustryIndustry Major Players (Top 10 Soft Drink Companies in US)Rank CompaniesMarket Share (%)1. Coca-Cola Co.42.02. PepsiCo29.33. Dr PepperSnapple16.74.Cott Corp.4.85. National Beverage2.86. Hansen Natural1.07. Red Bull0.88. Big Red0.59. Rockstar0.510. Private label and other1.6

9. Company Overview

10. Coca-Cola History 1886, created by Dr. Pemberton, Georgia.1895, be sold in the whole U.S.

11. 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.

12. Products: product list 3,500 products in over 200 countries

13. Financial Analysis Revenue StructureOperating RevenuesSale of beverage concentrates & syrupsSale of fountain syrups to fountain retailersSale of finished beveragesRevenues from Financial ActivitiesCost Structure

14. Financial Statement

15. Income Statement of Coca-Cola (in million$)

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17. The Coca-Cola Consolidated Cash Flows Statement (in million$)

18. Risk Factors & Management

19. Risk ManagementBoard and Company’ Roles Anti-Hedging PolicyRisk FactorsFinancial Risks and Strategies

20. 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

21. 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

22. 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.”

23. Risk FactorsObesity and other health concerns Water scarcity and poor quality Continuing uncertainty in the credit and equity markets Fluctuations in foreign currency exchange and interest ratesRelationships with bottling partnersBottling partners’ financial & non-financial conditionIncreases in income tax rates or changes in income tax laws Increase in the cost, disruption of supply or shortage of energy, ingredients, other materials Product safety or quality issues, or negative publicityIntegrate and manage Company-owned or controlled bottling operations

24. Financial Risk ManagementForeign Exchange RiskInterest RiskCommodity RiskOther Market Risk

25. Foreign Exchange RiskStrategies: Foreign currency exchange management75 functional currencies: Weakness in one particular currency offset by strengths in the other currenciesDerivative instruments

26. Foreign Exchange RiskThe Coca-Cola Company Operating Segments (In millions) Three Months Ended (December 31, 2011)

27. 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.”

28. Foreign Exchange RiskTime Total notional value of foreign currency derivatives (in million$)20094.620106.3201110.5

29. 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.”

30. Interest Rate RiskTime Percentage changeChange in interest expenseDecember 31, 20111%$191 million

31. Interest Rate RiskDec 31, 2011Dec 31, 2010Interest 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.”

32. 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.”

33. 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)

34. 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 instrumentsBalance sheet locationDec 31, 2011Dec31, 2010Assets:   Foreign currency contractsPrepaid expenses and other assets17032Commodity contractsPrepaid expenses and other assets24Interest rate swapsOther assets246---Total assets 41836Liabilities:   Foreign currency contractsAccounts payable and accrued expenses41141Commodity contractsAccounts payable and accrued expenses12Interest rate swapsOther liabilities---97Total liabilities 42240

35. Summary of Risk management Gain and loss on risk management:TimeNet gain (loss) on derivatives (in million) (after-tax amount)Accumulated derivative net losses20081---200934(78)2010(120)(198)2011145(53)

36. Industry OverviewTim Hortons & Starbucks

37. Industry OverviewStarbucks and Tim Hortons are in the coffee shop industry which is part of the larger specialty eateries industry.

38. Specialty EateriesFits within the largest segment of disposable income spending, food and beveragesIn the US, industry includes more than 35,000 companies with combined annual revenue of about $25 billionMajor companies include Dunkin' Brands, Krispy Kreme Doughnuts, and Starbucks. The industry is fragmented: the 50 largest firms generate about 45 percent of industry revenue.

39. Top 5 Companies

40. Competitive LandscapeConsumer taste and personal income drive demandThe 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

41. Industry Cost StructureLow to moderate costs for each locationMajor start-up expendituresPropertyEquipmentMajor operating costsLabourCost of sales

42. PESTPolitical Government regulationsEconomicChanges in disposable incomeSocialConsumer preferencesTechnologicalTechnology to improve operational efficiencies

43. Company Overview

44. Starbucks (SBUX)First Starbucks opened in Seattle on March 30, 1971More 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.

45. Upper Management

46. ObjectiveMaintain Starbucks standing as one of the most recognized and respected brands in the world.

47. Strategies to Achieve GoalContinue 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 channelsStarbucks Global ResponsibilityEmployer of choice

48. Core BusinessPurchase and roast high-quality whole bean coffees for saleSell 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.

49. Financial Statement

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51.

52.

53. Revenue by Region

54. Number of Stores

55. Risk Factors & Management

56. 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

57. 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.”

58. 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.

59. 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.

60. Financial Risk ManagementCommodity RiskForeign Exchange RiskEquity Security RiskInterest Rate Risk

61. 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”

62. Commodity RiskCommodity inputsCoffeeDairy productsDieselCost increases are either wholly or partially beyond their controlCosts for commodities can only be partially hedged

63. Commodity RiskStarbucks buys coffee using fixed-price and price-to-be-fixed purchase commitmentsTotal of $1 billion in purchase commitments as of Oct 2, 2011$846 million under fixed-price$193 million under price-to-be-fixed

64. Commodity RiskHave entered into commodity hedgesSensitivity analysis based on a 10% change in the underlying commodity prices in their commodity hedge as of Oct 2, 2011No significant impact

65. Foreign Exchange Risk“We may engage in transactions involving various derivative instruments to hedge revenues, inventory purchases, assets, and liabilities denominated in foreign currencies”

66. Foreign Exchange RiskMajority of transactions in USDPrimary foreign currenciesCanadian dollarBritish poundEuroJapanese yen

67. Foreign Exchange RiskForward FX contracts to hedgePortions of anticipated international revenue streams and inventory purchasesStarbucks’ net investment in Starbucks JapanFree standing derivatives to hedgeThe translation of certain foreign currency denominated payables and receivables

68. Equity Security Price RiskMinimal exposure to price fluctuations on equity mutual funds and equity exchange-traded funds within trading portfolioSensitivity analysis based on a 10% change in the underlying equity prices of their investments as of October 2, 2011No significant impact

69. 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.

70. Interest Rate RiskStarbucks does not hedge the interest rate exposure on their available-for-sale securitiesPerformed 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, 2011No significant impact

71. Derivative InstrumentsCash Flow hedgesCanadian dollar, yen, and the US dollarNet Investment hedgesOther derivatives

72.

73. Company Overview

74. Founder: Tim HortonNational Hockey League All-Star defensemanTim Hortons History

75. 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 History2012Number of RestaurantsCanada3295United States714Gulf Cooperation Council5

76. Tim Hortons offers a wide menu of "Always Fresh" quality food and beverages:Products

77. “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

78. Primary Business Model

79. Increasing same-store sales via marketing and menu opportunitiesInvesting to build our scale and brand in new and existing marketsLeveraging core business strengths and the franchise systemGrowing differently in ways we have not grown beforeGrowth Strategy 2010 - 2013

80. Financial Statement

81. P

82. P

83. P

84. Risk Factors & Management

85. Enterprise Risk Management ProgramDeveloping 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.

86. Growth strategyBrand valueCompetitionInnovationCommodity cost Food Safety & Health concernsDistribution operations & supply chainSuccess of restaurant ownersChanges in franchise laws and regulations...Exchange rate - U.S. & Canadian dollarReal EstateRisk Factors

87. Foreign Exchange RiskCommodity RiskInterest Rate RiskInflation RiskFinancial Risk Management

88. Exposure to foreign exchange risk is primarily related to fluctuations between the Canadian dollar and the U.S. dollarForeign Exchange Risk

89. “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

90. “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

91. 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 itemDerivative Instruments

92. Outstanding Derivatives

93. “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

94. Exposure to price input fluctuations due to unforeseen weather and market volatility. Commodity inputs:CoffeeWheatEdible oilSugarCommodity Risk

95. “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

96. “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

97. Potential Hazard – Franchise Risk

98. Exposure to risk in interest rate fluctuations:RefinancingReinvestingTo 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

99. “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

100. Conclusion

101. Questions?Thank you