DBRS Morningstar Confirms PepsiCo Inc.’s Issuer Rating at A (high) with a Stable Trend and Discontinues the Short-Term Issuer Rating

DBRS Limited (DBRS Morningstar) confirmed PepsiCo, Inc.’s (Pepsi or the Company) Issuer Rating at A (high) with a Stable trend. DBRS Morningstar also discontinued and withdrew Pepsi’s Short-Term Issuer Rating. The discontinuation does not reflect any change in DBRS Morningstar’s view of the Company’s credit quality. The rating confirmation acknowledges Pepsi’s solid operating performance in 2021 against the backdrop of an evolving Coronavirus Disease (COVID-19) pandemic. The Stable trend reflects DBRS Morningstar’s expectations that the Company will navigate the challenging operating environment presented by rising inflation, increasing labour costs, and supply chain disruptions in a manner that maintains its earnings profile. Pepsi’s ratings continue to be supported by its diversified portfolio of leading brands, wide geographic footprint, efficient operations, and economies of scale. The rating also continues to reflect the intense competitive environment in which the Company operates, the mature nature of some of its core markets and product categories, and changing consumer preferences.

In 2021, EBITDA increased to approximately $14.7 billion from approximately $13.7 billion in 2020, supported by the diversification of Pepsi’s at-home and away-from-home channels, the Company’s product diversification between and within its snack and beverage categories and its efficiency-improving initiatives. Earnings also benefitted from pricing efforts, lower pandemic-related costs, and favourable foreign exchange fluctuations. This was partially offset and moderated by the impact of challenging market conditions, including input cost inflation, and higher operating costs related to labour and supply-chain disruptions. While operating income increased year-over-year, operating cash flows remained flat in 2021 because of higher pension and medical plan contributions and cash tax payments. This, together with increased capital expenditure (capex) of $4.6 billion and a larger dividend outlay of $5.8 billion, resulted in free cash flow (FCF) before changes in working capital declining below $460 million. In 2021, Pepsi reported an approximately $720 million cash inflow from working capital, compared with a cash outflow of more than $300 million in 2020, which bolstered its cash position. The Company applied its cash on hand and internally generated cash flows, together with $1.1 billion from the maturity of short-term investments, toward net debt repayments of $4.1 billion. As a result of the combined benefit of EBITDA growth and net debt repayment, lease-adjusted debt-to-EBITDA improved to 2.89 times (x) in 2021, from 3.35x in 2020.

DBRS Morningstar believes that Pepsi’s earnings profile will remain stable in the near to medium term, supported by its leading brands, channel and product diversification, and efficiency-improving initiatives. DBRS Morningstar forecasts revenue to grow in the mid-single digits in 2022, as pricing efforts will more than offset a modest decline in volumes. Pepsi will continue to take pricing actions in response to ongoing commodity, inflationary, and operating pressures, which DBRS Morningstar anticipates will negatively affect volumes, particularly in developing markets. Volumes will also decline following the sale of select juice brands in the first quarter of 2022 (the Juice Transaction) for approximately $3.5 billion. That said, DBRS Morningstar believes that a normalization in consumption in line with global population mobility will moderate these volume declines. In the near term, DBRS Morningstar believes that margins will remain pressured by challenging market conditions, notwithstanding the Company’s price increases and efficiency-improving initiatives. As such, DBRS Morningstar forecasts EBITDA to be approximately $14.8 billion in 2022. In the medium term, DBRS Morningstar forecasts EBITDA to grow toward $16 billion, on the back of input and operating cost relief and efficiency-improving initiatives.

The forecast growth in operating income and corresponding cash flow will strengthen Pepsi’s financial profile and improve credit metrics in the medium term. DBRS Morningstar forecasts FCF before changes in working capital to be more than $600 million in 2022, as operating cash flow trends in line with earnings, capex remains elevated, and the Company increases the cash dividend outlay to $6.2 billion. DBRS Morningstar expects Pepsi to use its FCF and proceeds from the Juice Transaction for $1.5 billion of share repurchases and to invest in growth, while maintaining stable debt levels. As EBITDA and debt are expected to remain relatively flat on 2021 levels, DBRS Morningstar forecasts lease-adjusted debt-to-EBITDA to be 2.87x in 2022 and to improve to 2.65x in the medium term based primarily on the expected growth in EBITDA. Should credit metrics deteriorate for a sustained period (i.e. lease-adjusted debt-to-EBITDA increases above 3.50x) as a result of weaker-than-expected operating performance and/or more aggressive financial management, the ratings will be pressured. Although unlikely, DBRS Morningstar could take a positive rating action should the Company’s business risk profile meaningfully strengthen and credit metrics improve on a normalised and sustainable basis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Companies in the Consumer Products Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382072), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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@dbrsmorningstar.com.

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

The rated entity or its related entities did not 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.

This is an unsolicited credit rating.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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

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