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

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. The confirmations acknowledge the stress on near-term earnings as a result of the Coronavirus Disease (COVID-19) pandemic, and that the earnings profile will remain pressured in the near to medium term due to a weaker macroeconomic environment and, in particular, a weaker consumer. That said, the confirmations incorporate DBRS Morningstar’s expectation that the impact thereof on Pepsi’s credit risk profile will be absorbed within the current rating category. Pepsi’s current ratings continue to be supported by its diversified portfolio of leading brands, wide geographic footprint, and large size, scale and efficient operations. The current ratings also consider the intense competitive environment, the mature nature of some of the Company’s core markets and product categories, and changing consumer preferences.

DBRS Morningstar’s confirmations of Pepsi’s Issuer Rating and Short-Term Issuer Rating on March 13, 2020, were supported by the solid growth in operating income that strengthened the Company’s financial profile within the A (high) rating category. At that time, DBRS Morningstar forecast that F2020 EBITDA would increase to $13.8 billion in line with revenue growth, and that leverage would range between 2.5 times (x) and 3.0x.

Since then, DBRS Morningstar’s outlook on Pepsi’s earnings has softened as a result of the coronavirus pandemic and its related macroeconomic effects.

In F2020, Pepsi’s topline will be pressured by the contraction in demand from the away-from-home channel due to the restrictions placed on on-site dining, and entertainment, sporting and other events, which will likely more than offset revenue growth from the at-home and e-commerce channels. While the Company’s near-term earnings will be stressed by the coronavirus pandemic, DBRS Morningstar acknowledges that Pepsi’s product diversification between and within its snack foods and beverage categories should partially defend it against revenue volatility. Bolt-on acquisitions, including Pioneer Foods Group Limited (Pioneer Foods) which closed in March 2020, are expected to make a modest contribution to revenue. DBRS Morningstar expects the shift in demand to at-home consumption, coupled with commodity and operating cost inflation, to have an adverse impact on operating income and EBITDA margins. This could more than offset the benefits from revenue-generating and cost-saving initiatives. Furthermore, DBRS Morningstar expects adverse foreign currency fluctuations to further soften operating income. While Pepsi’s earnings should begin to improve over the medium term, DBRS Morningstar believes that the Company could remain challenged to recover earnings to F2019 levels due to a weaker macroeconomic environment and, in particular, a weaker consumer.

DBRS Morningstar believes that the near-term decline in operating income and corresponding cash flow will weaken Pepsi’s financial profile and key credit metrics. DBRS Morningstar forecasts free cash flow after dividends and before changes in working capital to be negative in F2020. This view is based on the expectation that operating cash flow will contract, capital expenditure will remain at 7% of revenue as the Company continues to invest in its business, and dividends of $5.5 billion will be returned to shareholders. In addition to the debt-funded acquisition of Pioneer Foods for $1.2 billion, DBRS Morningstar anticipates that the acquisitions of Rockstar Energy Beverages for $3.85 billion and Hangzhou Haomusi Food Co., Ltd (Be & Cheery) for just over $700 million, will be debt funded. DBRS Morningstar also expects share buybacks of approximately $2 billion to be debt funded. Consequently, Pepsi’s leverage is forecast to modestly and temporarily weaken beyond the 3.5x level considered appropriate for the current A (high) rating. Maintenance of the Stable trend over the medium term would require leverage to improve below 3.5x, based primarily on the recovery in operating income. A negative rating action could result if the operating performance deteriorates well beyond current expectations, whether or not the Company uses capital conserving measures to improve credit metrics through debt reduction. Additionally, any further debt-funded acquisitions in the current environment could also lead to a negative rating action. Conversely, DBRS Morningstar believes that a positive rating action is unlikely in the current environment due to the uncertainty surrounding the coronavirus pandemic.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Consumer Products Industry (August 15, 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 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.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577