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 Stable trends. DBRS has also confirmed Pepsi’s Short-Term Issuer Rating of R-1 (low) with a Stable trend. The confirmations acknowledge modest top-line growth on a constant currency basis and incorporate the Company’s planned cost-reduction initiatives. The ratings continue to be based on Pepsi’s strong brands and leading market positions, its well-diversified product portfolio, geographic diversification and its size and scale. The ratings also benefit from the Company’s strong cash generation and robust liquidity. The ratings consider the high level of competition in the industry, the mature nature of some of Pepsi’s core markets and the relatively high level of the Company’s gross financial leverage.

Pepsi’s operating performance (on a constant currency basis) has been steady over the last 12 months, while cash generation continued to be strong and liquidity remained robust.

Going forward, DBRS expects Pepsi to attain low-single-digit consolidated organic revenue growth on a constant currency basis over the near to medium term while benefiting from its focus on nutritious products, notable breadth of snacks and beverage products and effective net pricing. However, the unfavourable impact of foreign exchange is 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 cost reductions under its productivity plan and efforts to improve product and price mix will help the Company achieve modest improvement in operating margins over the near to medium term. As such, DBRS forecasts the Company’s EBITDA to be between $12.5 billion and $13.0 billion in 2016, and $13.0 billion and $13.5 billion in 2017.

Pepsi’s capital expenditure is expected to remain steady within 5% of net revenue over the near to medium term and dividends are likely to grow modestly, resulting in free cash flow (after dividends and before working capital changes) in the range of $2.5 billion to $2.75 billion in 2016, and $2.75 billion to $3.0 billion in 2017. DBRS believes that Pepsi will continue to raise domestic debt over the near term to supplement free cash flow for share repurchases (the Company plans to repurchase shares of approximately $3 billion in 2016). DBRS anticipates 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 (mid to high 2 times (x), albeit below 2x on a net basis). 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.

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 Companies in the Consumer Products Industry (September 2016), which can be found on our website under Methodologies.

The Senior Unsecured Debt of Bottling Group LLC and The PepsiCo Bottling Group, Inc. are guaranteed by PepsiCo, Inc.

The full report providing additional information and 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.