DBRS Morningstar Confirms PepsiCo, Inc.’s Issuer Rating at A (high), Stable Trend, and Discontinues and Withdraws the Senior Unsecured Debt Rating

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of PepsiCo, Inc. (Pepsi or the Company) at A (high) and the Short-Term Issuer Rating at R-1 (low), both with Stable trends. DBRS Morningstar also discontinued and withdrew Pepsi’s Senior Unsecured Debt rating. The discontinuation does not reflect any change in DBRS Morningstar’s view of Pepsi’s credit quality. The ratings confirmations are supported by the solid growth in operating income, which strengthened the Company’s financial profile within the rating category. Pepsi’s ratings continue to be supported by its diversified portfolio of leading brands, wide geographic footprint and large size, scale, and efficient operations. The ratings also consider the intense competitive environment and the mature nature of some of Pepsi’s core markets and product categories as well as changing consumer preferences.

DBRS Morningstar expects Pepsi’s earnings to remain stable over the near to medium term, supported by the Company's leading market position in several of its product segments and benefits from cost reduction and productivity saving initiatives. In the near term, revenue is forecast to grow to approximately $69.5 billion. Organic revenue is expected to increase by a mid-single digit percentage on a constant currency basis, driven by price/mix growth across all divisions, while developing and emerging markets continue to drive volume growth. Bolt-on acquisitions, including that of Pioneer Foods Group Limited (Pioneer Foods), which is expected to close in the first quarter of F2020, should also contribute to the topline. However, DBRS Morningstar anticipates that revenue will continue to be pressured by adverse foreign currency fluctuations. DBRS Morningstar believes that commodity and operating cost inflation, as well as adverse foreign currency fluctuations, would continue to put downward pressure on margins, which would more than offset the benefits of net pricing increases and productivity savings. The Company's acquisition of Rockstar Energy Beverages (Rockstar), which is expected to close in the first half of F2020, is not expected to make a significant contribution to revenue or EBITDA in the near term. As such, EBITDA is forecast to increase to approximately $13.8 billion in the near term, from $13.6 billion in F2019.

Despite the expected growth in earnings, DBRS Morningstar forecasts that free cash flow after dividends and before changes in working capital would be negative in F2020 as the Company’s ongoing infrastructure investment increases capital expenditure to just over 7% of revenue. Additionally, Pepsi’s dividend outlay is expected to rise to approximately $5.5 billion in F2020. DBRS Morningstar anticipates that acquisitions, including that of Rockstar for $3.85 billion, Pioneer Foods for approximately $1.8 billion, and Hangzhou Haomusi Food Co., Ltd (Be & Cheery) for just over $700 million, would be debt funded. DBRS Morningstar also expects share buybacks of approximately $2 billion to be debt funded. As such, debt-to-EBITDA is forecast to range between 2.5 times (x) and 3.0x in the near term. Should debt-to-EBITDA trend toward 3.5x as a result of weaker-than-expected operating performance and/or more aggressive financial management, the ratings will be pressured. Although unlikely, a positive rating action could be influenced by a material reduction in leverage on a sustainable basis.

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

The principal methodologies are Rating Companies in the Consumer Products Industry and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, 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 Morningstar 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada