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

DBRS has today confirmed the long- and short-term ratings of PepsiCo, Inc. (Pepsi or the Company) at A (high) and R-1 (low), respectively, with Stable trends. The ratings confirmation reflects recovering operating performance in H1 2013 following a period of softness that spanned late 2011 and 2012. The ratings continue to be based on Pepsi’s strong brands and leading market positions, its well-diversified product portfolio, geographic diversification and its strong free cash flow-generating capacity. The rating also considers the high level of competition in the industry, as well as the mature nature of some of Pepsi’s key core markets.

Pepsi announced an initiative (Productivity Plan) aimed at improving top-line growth and reducing costs at the beginning of 2012. Early results indicate the plan is having some effect, as reported revenue increased by 1.7% in H1 2013 versus flat growth in H1 2012. EBITDA margins improved year-over-year (YOY) in H1 2013 despite increased spending on marketing and advertising, due largely to ~$500 million in cost savings and lower commodity costs. As such, reported EBITDA increased to $5.9 billion in H1 2013 versus $5.5 billion in H1 2012 and $5.8 billion in H1 2011.

In terms of financial profile, Pepsi continued to generate strong levels of free cash flow, sufficient to fund its share repurchase program. However, the Company has taken advantage of the low interest rate environment and issued $1.3 billion of debt in H1 2013. As such, Pepsi’s cash balance has increased to $8.1 billion at the end of H1 2013 from $6.6 billion in 2012.

Despite this increase in gross debt, Pepsi’s credit metrics have remained relatively stable due to the improvement in operating income (i.e., debt-to-EBITDA of 2.31 times (x) in the last 12 months (LTM) ended Q2 2013 versus 2.30x in 2012, and EBIT coverage of 14.0x in the LTM ended Q2 2013 versus 13.7x in 2012). DBRS notes that on a net debt basis, Pepsi’s credit metrics have improved (i.e., net debt-to-EBITDA of 1.67x in the LTM ended Q2 2013 versus 1.76x in 2012).

Going forward, DBRS expects Pepsi’s earnings will continue to benefit from its strategic and productivity initiatives. Organic net revenue growth is expected to be in the low to mid-single digits, driven largely by the combination of positive pricing and volume growth in its emerging markets segment. DBRS expects EBITDA margins to improve modestly in 2013 from total cost savings of approximately $900 million from the Productivity Plan. As such, DBRS expects Pepsi’s EBITDA will increase modestly toward $10.5 billion in 2013.

Pepsi’s financial profile should remain appropriate for the current rating category supported by its strong free cash flow-generating capacity. Cash flow from operations is expected to continue to track operating income, increasing back toward $9 billion in 2013 and 2014. With a modest increase in capital expenditures (capex) and a consistent dividend policy, Pepsi should continue to generate free cash flow before changes in working capital of close to $3 billion in 2013. DBRS expects the majority of free cash flow will continue to be used for share repurchases and key credit metrics should remain relatively stable in the near term (i.e., debt-to-EBITDA between 2.30x and 2.50x and EBIT coverage of ~14.0x). DBRS anticipates that Pepsi may use its cash on hand for investment in growth, particularly in the emerging markets, and/or additional returns to shareholders in the near term.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.