DBRS Confirms PepsiCo, Inc. at A (high), Stable Trends

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. DBRS has also discontinued two tranches of Senior Unsecured Debt issued by the Company’s subsidiaries as they were repaid. The ratings continue to reflect Pepsi’s strong market position in the beverages and snack foods industry supported by its wide geographic footprint, effective global distribution network and product innovation initiatives. The ratings also consider the high level of competition in the industry, as well as the mature nature of some of Pepsi’s key core markets. The ratings benefit from the Company’s strong cash generation and robust liquidity.

DBRS considers Pepsi’s earnings profile to be strong for the current rating category. Pepsi’s net revenue, on a reported basis, grew by 1% in year-to-date (YTD) 2014 (36 weeks ended September 6, 2014) compared to YTD 2013 (36 weeks ended September 7, 2013) as increases in volume and net pricing were offset by the impact of foreign exchange fluctuations.

Pepsi managed to increase its EBITDA margin by 50 basis points in YTD 2014 from YTD 2013 as a result of better net pricing and the effect of the Company’s multi-year productivity plan that was initiated in 2012. As such, the Company posted an EBITDA of $9.9 billion in YTD 2014 compared to $9.5 billion in YTD 2013. DBRS also notes that Pepsi posted an EBITDA of $12.7 billion in 2013, which was higher than DBRS’s forecast (made in September 2013) of $10.5 billion.

DBRS considers Pepsi’s cash flow-generating capacity and liquidity to be strong for the current rating category. However, these strengths of its financial profile are moderated by its relatively high gross leverage. Pepsi generated cash flow from operations of $8.9 billion in 2013 (versus $8.3 billion in 2012) and $7.6 billion in YTD 2014 (versus $7.2 billion in YTD 2013). Capital expenditure has been relatively steady and within target levels during this time frame as the Company remains disciplined in this regard. Cash outlays for dividends have also remained fairly steady as increases on a per share basis have effectively been offset by less shares outstanding. Pepsi continued to take advantage of the low interest rate environment to raise debt to supplement free cash flow for share repurchases and short-term investments. Consequently, Pepsi’s gross leverage has crept up from 2.3 times (x) in YTD 2013 to 2.5x in YTD 2014. That said, the Company had cash, cash equivalents and short-term investments of $12.9 billion as of September 6, 2014. As such, the Company’s leverage was lower on a net basis at 1.57x in YTD 2013 and 1.51x in YTD 2014. Additionally, the Company’s EBIT interest coverage has remained relatively strong at 10.9x and 12.8x in 2013 and YTD 2014, respectively.

Going forward, DBRS expects Pepsi’s earnings profile to remain stable based on the Company’s leading market position in several of its product segments and its management’s efforts to improve operational efficiency and productivity. DBRS believes that market competition and evolving consumer preferences will call for Pepsi to increase investment in brand strengthening efforts. Mature markets in developed countries, and shifting consumer trends toward health and nutrition will require Pepsi to expand presence in emerging markets, and accelerate investment in new product development and innovation. DBRS expects growth in Pepsi’s reported revenues, excluding any structural changes, to be in the low single digits over the mid-term. That said, DBRS believes that the Company’s ongoing productivity plan and efforts to improve net pricing will help the Company achieve measurable improvement in operating margins over the near term.

The Company will continue to generate strong cash flow. At the same time DBRS believes that Pepsi may continue to take advantage of the low interest rate environment and raise further debt capital over the near term to supplement free cash flow in meeting its bold shareholder return targets. Consequently its debt levels and gross leverage is likely to remain elevated. That said, the Company’s strong liquidity, cash-generating capacity and interest coverage remain the basis of DBRS’s stable outlook for Pepsi’s credit risk profile. On the whole, Pepsi’s business risk characteristics and financial risk metrics are likely to remain in line with its current rating category over 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.

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

The applicable methodologies are Rating Companies in the Consumer Products Industry (October 2013) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.