DBRS Confirms PepsiCo and Related Entities at A (high) and R-1 (low)

DBRS has today confirmed the long- and short-term ratings of PepsiCo, Inc. and PepsiCo Canada ULC (Pepsi or the Company) at A (high) and R-1 (low), respectively. The trends are Stable. Pepsi’s earnings profile remains strong, based on its leading brands in beverages and salty snack foods, the size and scale of its operations and its impressive geographic and product diversification. Pepsi’s net sales increased by 33.8% to nearly $58 billion in 2010, from $43.2 billion in 2009. The increase in net sales was driven primarily by the beverages segments, as a result of revenue generated by the 2010 acquisitions of Pepsi’s largest North American bottlers, Pepsi Bottling Group and Pepsi Americas.

Organic growth in 2010 was the result of a strong and growing presence in emerging markets – particularly in the Asia, Middle East & Africa segment, which displayed net revenue growth of 19%. EBIT margins declined in 2010 to 14.4%, from 18.6% in 2009, reflecting the inclusion of the lower-margin bottling businesses. On February 3, 2011, Pepsi acquired an additional 66% of the outstanding shares of Wimm-Bill-Dann (WBD) for $3.8 billion, raising its ownership interest to 77% and making Pepsi the largest food-and-beverage business in Russia. Q1 2011 net revenue increased by 27% year-over-year (yoy), driven by organic volume growth in global snacks (+3%) and beverages (+3.5%), and the inclusion of the bottler acquisitions. Pepsi’s financial profile was recalibrated with the bottler acquisitions. The more capital-intensive nature of the bottling component of the business and the corresponding financing necessary to complete the acquisitions placed the Company in the A (high) category.

Total debt increased to nearly $25 billion, resulting in gross debt-to-EBITDA of 2.3 times (x) in 2010 versus 0.8x in 2009. That said, Pepsi remains an inherently strong free cash flow generating company, delivering free cash flow before working capital of $1.45 billion in 2010.

Going forward, DBRS expects overall growth in the 6% to 8% range, based on Pepsi’s strength in emerging markets, and improved economic conditions in developed regions. On the other hand, high levels of commodity inflation and intense competition in beverages will make it difficult for Pepsi to achieve improvements to EBIT margins, despite synergy expectations from recent acquisitions. DBRS forecasts that EBIT will increase to the $8.5 billion to $9.5 billion range in 2011 and 2012. In terms of financial profile, Pepsi should stabilize as the recent acquisitions continue to contribute to free cash flow generating capacity and debt levels begin to settle at a new equilibrium. Efforts to return value to shareholders should continue in 2011, with a steady increase in dividends as well as the expected completion of $2.5 billion in share repurchases. As such, PepsiCo would be expected to near free cash flow breakeven in 2011; however, the acquisition of WBD in Q1 will further increase the level of debt by the end of the year. DBRS does not expect the recent trend of increasing net debt to continue beyond 2011, at which time, combined with EBITDA generated from recent acquisitions, DBRS expects Pepsi’s debt-to-EBITDA will begin to return toward the 2.0x level.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating the Consumer Products Industry, which can be found on our website under Methodologies.