Morningstar DBRS Confirms PepsiCo Inc.’s Issuer Rating at A (high) with a Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of PepsiCo Inc. (Pepsi or the Company) at A (high) with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation and Stable trend reflect Morningstar DBRS’ expectation that Pepsi’s credit risk profile will remain strong for the current credit rating category, notwithstanding the negative impact of some volume moderation on the Company’s operating performance as the challenging macroeconomic environment continues to pressure consumer purchasing power.

CREDIT RATING DRIVERS
Should Pepsi’s credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA increases above 3.5 times (x)) as a result of weaker-than-expected operating performance and/or more aggressive financial management, the credit rating will be pressured.

Conversely, although unlikely, Morningstar DBRS could take a positive credit rating action should the Company’s business risk profile meaningfully strengthen with a commensurate improvement in credit metrics on a normalized and sustainable basis.

EARNINGS OUTLOOK
Morningstar DBRS expects Pepsi’s earnings profile to remain relatively stable over the medium term, underpinned by the Company’s strong brands, solid market position, and product and channel diversification. Morningstar DBRS forecasts revenue to increase to more than $95.5 billion in 2024 and $99.0 billion in 2025 compared with $91.0 billion in 2023, primarily attributable to the carry-forward benefit of pricing actions from previous years. However, in the context of the current challenging macroeconomic environment, Morningstar DBRS anticipates that the Company could be pressured to maintain and grow volumes. Morningstar DBRS believes that Pepsi should be able to maintain relatively stable EBITDA margins in 2024 and 2025, as agricultural commodity prices remain elevated and increased costs associated with the Company’s investments in its brands, including advertising and promotion, innovation, and channel expansion are offset by gradually moderating inflationary pressures and the benefits from Pepsi’s cost-saving and efficiency-improving initiatives. Consequently, Morningstar DBRS projects EBITDA to increase to approximately $17.5 billion in 2024 and $18.0 billion in 2025 from $16.8 billion in 2023.

FINANCIAL OUTLOOK
The projected growth in earnings, combined with Morningstar DBRS’ expectation that debt levels will remain relatively stable in 2024 and 2025, should strengthen Pepsi’s financial profile and improve credit metrics within the current credit rating category. Morningstar DBRS believes that operating cash flows will continue to trend in line with earnings, increasing toward and above $15.0 billion in 2024 and 2025, respectively, from less than $13.8 billion in 2023, well in excess of the Company’s growing capital expenditure and cash dividend outlay requirements. Morningstar DBRS believes that Pepsi will continue to use its free cash flow in a balanced manner, including for share repurchases, while maintaining relatively stable debt levels. Combined with Morningstar DBRS’ projected earnings growth, debt-to-EBITDA is expected to improve to approximately 2.5x by 2025 from 2.7x in 2023.

CREDIT RATING RATIONALE
Pepsi's credit rating is supported by its diversified portfolio of leading brands, wide geographic footprint, and economies of scale. The credit rating also reflects 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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of PepsiCo Inc., the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of PepsiCo Inc., the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of PepsiCo Inc., the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology: Global Methodology for Rating Companies in the Consumer Products Industry (July 21, 2023), https://dbrs.morningstar.com/research/417460.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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 [email protected].

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at [email protected].

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