Consumer Products

Ana-Maria LovrichShasha 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 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.”

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 29.33. Dr PepperSnapple 16.7

4.Cott Corp. 4.85. National Beverage 2.8

6. Hansen Natural 1.07. Red Bull 0.88. Big Red 0.59. 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 ManagementBoard 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

rates5. Relationships with bottling partners6. Bottling partners’ financial & non-financial condition7. 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 publicity10.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)

Euras

ia & Af

rica

Europ

e

Latin

Ameri

ca

North A

merica

Pacifi

c$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 4.62010 6.32011 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 EateriesFits 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

PESTPolitical

Government regulationsEconomic

Changes in disposable incomeSocial

Consumer preferencesTechnological

Technology 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 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.

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 RiskCommodity inputs

CoffeeDairy 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 3295United States 714Gulf 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 system4. 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