DBRS Confirms PepsiCo, Inc. and PepsiCo Canada at A (high) and R-1 (low), Stable

DBRS has 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, with Stable trends. The ratings continue to be supported by Pepsi’s strong brand name and leading market positions. DBRS, however, notes concerns that Pepsi’s credit risk profile may face pressures in the near term by a challenging operating environment, which could be combined with more aggressive financial management in the form of higher levels of debt-financed share repurchases.

In 2011, Pepsi’s earnings profile continued to benefit from its leading portfolio of brands in beverages and snack foods, the size and scale of its operations and its geographic and product diversification. That said, despite continued revenue growth, intense competition and significant input cost increases have pressured margins and operating income. In 2011, the Company’s financial profile began returning toward expected levels on the basis of its strong cash flow generating capacity, recovering from heightened leverage after recent acquisitions in 2010 and through 2011.

Going forward, DBRS expects Pepsi’s earnings profile will be challenged in the near- to medium-term, based on high levels of input cost inflation and global competition. That said, DBRS believes that Pepsi’s earnings profile will remain relatively strong over the long term, based on its strong brands and market positions in both snacks and beverages and its continued focus on growth in emerging markets. Top-line growth is expected to be in the low- to mid-single digits in 2012, driven primarily by growth in emerging markets, in combination with stable performance in mature markets as net effective pricing is expected to offset moderate declines in volume. Margins should remain under significant pressure in 2012 as high levels of input cost inflation are coupled with planned increases in marketing and advertising expenditures, along with new investments in the Company’s distribution networks. As such, DBRS expects EBITDA will remain relatively flat in 2012, but should begin to display signs of improvement thereafter as the Company begins to benefit from its investments.

DBRS expects Pepsi’s financial profile could weaken somewhat in the near term, as the possibility of more aggressive financial management may be coupled with a challenging operating environment. Cash flow from operations could decline temporarily in 2012 toward $8 billion, but is expected to begin increasing the following year. Capex should decline moderately in 2012 as the Company focuses on improving productivity and improving return on invested capital. Dividends should increase moderately in 2012, consistent with historical practice, while Pepsi is expected to use cash flow as well as incremental debt to fund a minimum of $3 billion of share repurchases in 2012. Should Pepsi’s credit metrics deteriorate through 2012 due to softness in earnings performance and/or increased leverage (i.e., debt-to-EBITDA meaningfully above current levels), a negative trend could result on long-term ratings.

Notes:
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.