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

DBRS Limited (DBRS) confirmed the long-term ratings of PepsiCo, Inc. (Pepsi or the Company) and its related entities at A (high) with Stable trends. DBRS also confirmed Pepsi’s Short-Term Issuer Rating at R-1 (low) with a Stable trend. DBRS discontinued the rating of the Senior Unsecured Debt of the Bottling Group LLC. The rating is being discontinued after Pepsi redeemed Bottling Group LLC’s $750 million January 2019 bond in November 2016. The confirmations acknowledge the stability of Pepsi’s earnings profile in the first nine months ended Q3 F2017 and financial management in line with DBRS’s expectations. The ratings continue to be supported by Pepsi’s strong brands and solid market positions, its product and geographic diversification and its free cash flow-generating capacity. The ratings also benefit from Pepsi’s strong cash generation and robust liquidity. The ratings also consider the intense competitive environment, mature core markets and product categories and on-going changes to consumer preferences and spending patterns.

Going forward, DBRS believes that Pepsi’s earnings profile will continue to benefit from growth in emerging markets and its Productivity Program initiatives in the near term. DBRS expects that revenue will increase in the low-single-digit range in F2018, rising to more than $64 billion driven by price/mix in international markets (Latin America and Asia, Middle East and North Africa). DBRS expects EBITDA margins to improve modestly in F2018, as benefits from the Company’s Productivity Plan (including manufacturing automation, redeveloping its go-to-market systems and implementing simplified organizational structures) will be partially offset by operating cost inflation. As such, DBRS forecasts Pepsi’s EBITDA will increase towards $13.3 billion in F2018.

DBRS expects Pepsi’s financial profile to remain appropriate for the current ratings as free cash flow and some incremental debt are applied toward share repurchases such that credit metrics remain stable. DBRS believes that cash flow from operations will be nearly $9.8 billion in F2018. DBRS expects the Company’s capital expenditure outlay to be within 5% of revenue in F2018 and Pepsi’s dividend outlay to increase modestly, rising toward $4.7 billion in F2018. As a result, DBRS forecasts free cash flow after dividends and before changes in working capital to be around $2.3 billion in F2018. DBRS believes that Pepsi’s practice of using its free cash flow and incremental debt to finance shareholder returns will keep its financial leverage at elevated levels (lease-adjusted debt-to-EBITDAR between 3.0 times (x) and 3.5x and lease-adjusted net debt-to-EBITDAR between 2.0x and 2.5x). Should lease-adjusted debt-to-EBITDAR trend toward 3.50x as a result of weaker-than-expected operating income and/or more aggressive financial management, the ratings could be pressured.

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 principal methodology is Rating Companies in the Consumer Products Industry (August 2017), which can be found on dbrs.com under Methodologies.

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

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

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