DBRS Confirms PepsiCo, Inc. and Discontinues Pepsi Bottling Group, Inc.

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of PepsiCo, Inc. (Pepsi or the Company) at A (high) and Pepsi’s Short-Term Issuer Rating at R-1 (low), all with Stable trends. DBRS also discontinued and withdrew Pepsi Bottling Group, Inc.’s (PBG) Senior Unsecured Debt rating, as Pepsi tendered or exchanged a substantial portion of the PBG notes outstanding in Q4 2018, such that the remainder is immaterial. The confirmations are based on Pepsi’s relatively stable earnings and financial profiles in the last 12 months (LTM) ended Q3 F2018. 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 consider the intense competitive environment, mature nature of certain markets and product categories.

Pepsi’s earnings profile remained supportive of the current ratings as margins declined moderately due to commodity cost and operating cost inflation being greater than the benefits of price/mix, volume and productivity initiatives, causing EBITDA to be flat. Pepsi’s financial profile regained some efficiency it had lost in prior years by reducing a significant portion of debt, improving financial leverage. The Company used cash and short-term investments repatriated from foreign subsidiaries, in connection with the “Tax Cuts and Jobs Act of 2017.”

Going forward, DBRS believes Pepsi’s earnings profile will remain stable based on growth in emerging markets and its productivity initiatives. DBRS expects revenue will increase by 1% to 2% to approximately $66 billion in F2019, driven by price/mix and volume in emerging markets. DBRS expects EBITDA margins to improve modestly in F2019, as benefits from the Company’s Productivity Plan will be partially offset by commodity cost and operating cost inflation. As such, DBRS forecasts Pepsi’s EBITDA to increase above $13.6 billion in F2019, from $13.2 billion at LTM Q3 F2018.

DBRS expects Pepsi’s financial profile to remain stable and therefore supportive of the overall credit risk profile, based on the Company’s strong and steady free generating capacity and its consistent practice of applying free cash and incremental debt to dividends and share repurchases such that credit metrics remain stable. DBRS believes cash flow from operations will be nearly $10.3 billion in F2019. DBRS expects Pepsi’s capital expenditure outlay to be within 5% of revenue in F2019, and the Company’s dividend outlay to increase significantly towards $5.5 billion in F2019. Consequently, DBRS forecasts free cash flow after dividends and before changes in working capital to be around $1.6 billion in F2019. 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 current levels (lease-adjusted debt-to-EBITDAR between 2.75 times (x) and 3.25x). It is unlikely the ratings could move up, however, should financial leverage trend toward 3.50x as a result of weaker-than-expected operating income and/or more aggressive financial management, the ratings could be pressured.

DBRS notes that the above press release was amended on December 18, 2018, to correct the status of the issuer to solicited from unsolicited. The amendment was minor and would not impact the understanding of the reader.

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

The principal methodologies are Rating Companies in the Consumer Products Industry and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

This rating was not initiated at the request of the rated entity.

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

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