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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of PepsiCo, Inc. (Pepsi or the Company) at A (high) with a Stable trend. The rating confirmation acknowledges Pepsi's solid operating performance in 2022 against the challenging macroeconomic backdrop presented by rising inflation and supply chain disruptions. The Stable trend reflects DBRS Morningstar's expectation that the Company will continue to navigate this challenging operating environment within the current A (high) rating category. Pepsi's rating continues to be supported by its diversified portfolio of leading brands, wide geographic footprint, and economies of scale. The 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.

Pepsi’s earnings profile is expected to remain stable over the medium term, supported by its leading brands, channel and product diversification, and the benefits from its cost-saving and productivity-improving initiatives. DBRS Morningstar forecasts revenue to grow in the mid-single digits to approximately $90 billion in 2023 from $86.4 billion in 2022, driven by further pricing actions, which could more than offset modest volume declines and the negative effect of unfavourable foreign exchange volatility. In 2024, revenue is forecast to increase to approximately $94.5 billion, mainly attributable to volume recovery and growth. DBRS Morningstar anticipates that the benefits from Pepsi’s cost-saving and productivity-improving initiatives, coupled with some pricing actions, should offset persistent inflationary cost pressures in 2023, resulting in relatively stable EBITDA margins in that year. These initiatives should drive EBITDA margin recovery in 2024. Consequently, DBRS Morningstar projects EBITDA to increase to approximately $16 billion in 2023 from above $15 billion in 2022, and to reach approximately $17 billion in 2024.

This projected earnings growth, coupled with DBRS Morningstar's expectation that debt levels will remain relatively stable in the near to medium term, should strengthen Pepsi's financial profile and improve its credit metrics within the current rating category. DBRS Morningstar believes that operating cash flows will continue to trend in line with earnings, growing to approximately $12.5 billion in 2023 from $11.7 billion in 2022. These internally generated cash flows will be directed toward (1) capital expenditure (capex), which DBRS Morningstar forecasts to remain relatively flat at 2022 levels of around $5 billion; (2) dividends of $6.7 billion; and (3) share repurchases of approximately $1.0 billion. As such, DBRS Morningstar forecasts debt-to-EBITDA to improve to approximately 2.5 times (x) in 2023 from 2.7x in 2022. Looking ahead to 2024, DBRS Morningstar anticipates capex and increasing shareholder returns and share repurchases will continue to be financed by internally generated cash flows and, as such, forecasts debt-to-EBITDA to improve below 2.5x in 2024. Should credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA increases 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, DBRS Morningstar could take a positive rating action should the Company’s business risk profile meaningfully strengthen, combined with a commensurate improvement in credit metrics on a normalized and sustainable basis.

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

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/396929 (May 17, 2022).

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

The principal methodology applicable to the rating is the Global Methodology for Rating Companies in the Consumer Products Industry (https://www.dbrsmorningstar.com/research/402329; September 2, 2022).

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

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.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 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.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com

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