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

DBRS Limited (DBRS) has today confirmed the long-term ratings of PepsiCo, Inc. (Pepsi or the Company) and its related entities at A (high) with a Stable trend, and has discontinued Pepsi’s Commercial Paper (CP) rating. DBRS notes that the discontinuation of the CP rating is unrelated to Pepsi’s credit risk profile. DBRS has also assigned a Short-Term Issuer Rating of R-1 (low) with Stable trend to Pepsi. The ratings continue to reflect Pepsi’s strong global market position in the beverages and snack foods industry supported by its effective 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 core markets. The ratings benefit from the Company’s strong cash generation and robust liquidity.

Pepsi’s net reported revenue and EBITDA declined by about 4.5% each in H1 2015 compared with H1 2014, primarily because of the unfavourable impact of foreign exchange movements. Otherwise, excluding the negative impact of foreign currency fluctuations, the Company achieved a 5% growth in consolidated revenues on a constant currency basis because of increases in volume and/or price mix in all of its operating segments (except Europe). The Company continued to generate strong cash flows and has maintained robust liquidity.

Going forward, DBRS expects Pepsi to attain modest organic volume growth over the near term in its various business segments (except Europe, which may experience a marginal decline) and to benefit from effective net pricing as well, resulting in low single-digit revenue growth on a constant currency basis. The unfavourable impact of foreign exchange is, however, expected to offset the Company’s volume and effective net pricing gains, as a result of which DBRS expects the Company to report flat or a marginal decline in revenue over the near term. That said, DBRS believes that the Company’s ongoing productivity plan and efforts to improve net pricing will help the Company achieve modest improvement in operating margins over the near term.

DBRS expects that Pepsi will continue to generate strong cash flow. At the same time DBRS believes that Pepsi may continue to raise domestic debt over the near term (rather than repatriate offshore cash) to supplement free cash flow in meeting its bold shareholder return targets (the Company plans to return approximately $9.0 billion to shareholders in 2015 through dividends and share repurchases). DBRS believes that Pepsi’s practice of using its free cash flow and incremental debt to finance shareholder returns will keep its gross financial leverage at elevated levels. That said, the Company’s strong cash generation, solid interest coverage and robust liquidity remain the basis of DBRS’s stable outlook for Pepsi’s financial risk profile. On the whole, Pepsi’s credit risk profile is 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 methodology is Rating Companies in the Consumer Products Industry (August 2015), 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.