DBRS Morningstar Confirms PepsiCo, Inc. at A (high) and R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed PepsiCo, Inc.’s (Pepsi or the Company) Issuer Rating at A (high) and Short-Term Issuer Rating at R-1 (low), both with Stable trends. The rating confirmations reflect the stability of Pepsi’s business risk profile despite the pressure on earnings caused by the Coronavirus Disease (COVID-19) pandemic in 2020. While uncertainties relating to the pace of the global vaccine distribution, relaxation of coronavirus containment measures, and their related macroeconomic aftereffects remain, the rating confirmations and Stable trends also reflect DBRS Morningstar’s view that Pepsi is well placed to navigate the current environment within the A (high) 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 continue to consider 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 2020, EBITDA increased to approximately $13.7 billion from approximately $13.6 billion in 2019 as the diversification of Pepsi’s operations between the at-home and away-from-home channels, the Company’s product diversification between and within its snack and beverage categories, and its efficiency-improving efforts partially defended it against earnings volatility. Earnings also benefitted from pricing efforts and contributions from the newly acquired Rockstar Energy Beverages (Rockstar), Pioneer Foods Group Limited (Pioneer Foods), and Hangzhou Haomusi Food Co., Ltd. (Be & Cheery). This was partially offset and moderated by away-from-home beverage volume contraction in most of Pepsi’s geographies, higher commodity prices, an uptick in operating costs stemming from the coronavirus pandemic, and unfavourable foreign exchange fluctuations.

In terms of the Company’s financial profile, free cash flow (FCF) after dividends and before changes in working capital was approximately $1.2 billion in 2020, almost double that of 2019 levels. The growth in FCF was attributable to an increase in operating cash flow that trended in line with earnings growth, while capital expenditure (capex) remained relatively flat year over year at approximately $4.2 billion and the dividend outlay increased to $5.5 billion from $5.3 billion in 2019. Pepsi raised net debt of approximately $11.3 billion in 2020, which, together with internally generated cash flows, were applied to finance the acquisitions of Rockstar for approximately $3.85 billion, Pioneer Foods for approximately $1.2 billion, and Be & Cheery for approximately $0.7 billion, as well as share buybacks of approximately $1.8 billion. Consequently, debt-to-EBITDA weakened to 3.35 times (x) in 2020 from 2.47x in 2019. That said, leverage remained within the 3.5x threshold considered appropriate for the current A (high) rating category.

DBRS Morningstar believes that the ongoing impact of the coronavirus pandemic and related containment measures, coupled with the global availability of vaccines, will influence Pepsi’s earnings trajectory in the near term. The Company’s away-from-home snack and beverage volumes will continue to trend in line with population mobility and should recover by the second half of 2021 as the dissemination of vaccines gains momentum globally. The topline should also continue to benefit from strong at-home snack volumes as pandemic-related behavioural shifts, including more people working from home and increased at-home cooking, remain. Consequently, revenue is forecast to increase in the low-to-mid single digits in the near-term. DBRS Morningstar believes that EBITDA margins will improve in 2021 because of the shift in channel mix to the higher-margin away-from-home channel. Margins should also benefit from operating leverage and Pepsi’s ongoing efficiency-improving efforts. This should more than offset the impact of commodity and operating cost inflation and exchange rate volatility. While costs associated with the pandemic should moderate, some expenses, including enhanced cleaning and sanitization costs, are expected to persist in the near term. As such, DBRS Morningstar forecasts EBITDA to increase above $14.3 billion in 2021. In the medium term, DBRS Morningstar anticipates that EBITDA will grow toward $14.9 billion as the impact of the coronavirus pandemic on the channel mix normalizes and earnings continue to benefit from operating leverage.

The anticipated growth in operating income and corresponding cash flow will strengthen Pepsi’s financial profile and key credit metrics. DBRS Morningstar forecasts FCF after dividends and before changes in working capital to be under $1 billion in 2021, as operating cash flow increases in tandem with earnings growth, capex remains between 6% to 7% of revenue, and the Company increases shareholder dividends to approximately $5.8 billion. As Pepsi is not planning any significant merger and acquisition activity and is refraining from material share buybacks, DBRS Morningstar does not expect the Company’s debt levels to change significantly in 2021. Consequently, debt-to-EBITDA is forecast to improve to below 3.2x in 2021 and to improve further to below 3.1x in 2022 based primarily on the growth in operating income. Should leverage increase above 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 below 3x on a normalized and sustainable basis, based primarily on the growth in operating income.

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 methodologies are Rating Companies in the Consumer Products Industry (July 30, 2020; https://www.dbrsmorningstar.com/research/364690/rating-companies-in-the-consumer-products-industry) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships), 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 (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 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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