DBRS Confirms PepsiCo, Inc. at AA (low) and R-1 (middle) and PepsiCo Canada ULC at R-1 (middle), Stable Trends

DBRS has today confirmed PepsiCo, Inc. (Pepsi or the Company) at AA (low) and R-1(middle) and PepsiCo Canada ULC at R-1 (middle). The trends remain Stable.

Pepsi’s well-established brands, market position and improving diversification continue to drive strong earnings growth across all segments despite the increasing pressure of rising commodity costs.

Pepsi continues to realize strong revenue growth, driven primarily by pricing, volume growth and acquisitions. Very strong volume growth in PepsiCo International (PI) combined with consistent growth in Frito-Lay North America (FLNA) has helped offset lower volumes at Pepsi Beverages North America (PBNA). PBNA volumes continue to be affected by declining carbonated soft drink (CSD) consumption, offset only partially by solid non-CSD growth. F2007 operating income grew slightly less than revenue as rising raw material and commodity costs have begun to pressure margins, albeit to a lesser extent than expected.

DBRS expects Pepsi to continue generating strong top-line and earnings growth as the Company benefits from continued growth in PI, acquisitions, product innovation and pricing. In F2007, Pepsi made several acquisitions, including Naked Juice Company, Bluebird Foods and a minority interest in a Ukraine juice company. In Q1 F2008, Pepsi acquired a 76% stake in JSC Lebedyansky, Russia’s leading branded juice company. Theses transactions continue to improve Pepsi’s geographic and product diversification (i.e., away from CSDs) and should help maintain growth over the longer term. DBRS expects increased pressure on margins in F2008 as commodity and raw material costs continue to rise. DBRS expects that further pricing increases, combined with stable volume growth, should continue to support respectable earnings gains, albeit at a lower rate than in F2007.

Pepsi’s financial profile continues to remain strong as rising cash flow helps support increased debt-financed share repurchases. The Company completed $4.3 billion worth of share repurchases in F2007. DBRS expects share repurchases to increase in F2008, again resulting in increased indebtedness at Pepsi over the coming year. While slowing earnings growth and aggressive financial management may increase leverage modestly, DBRS believes the Company’s strong financial profile should continue to support the current ratings easily.

DBRS notes that net debt and financial leverage remain relatively stable at Pepsi’s key bottling companies, most notably at the 35%-owned The Pepsi Bottling Group, Inc., where Pepsi guarantees $2.3 billion of debt.

Notes:
All figures are in U.S. dollars unless otherwise noted.
PepsiCo Canada ULC’s Commercial Paper is guaranteed by PepsiCo, Inc.