Fitch Affirms PepsiCo's IDRs at 'A/F1'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings of PepsiCo, Inc. (PepsiCo), Pepsi-Cola Metropolitan Bottling Company, Inc., and Bottling Group, LLC as follows:

PepsiCo (Parent)

--Long-term Issuer Default Rating (IDR) at 'A';

--Senior unsecured debt at 'A';

--Bank credit facilities at 'A';

--Short-term IDR at 'F1';

--CP program at 'F1'.

Pepsi-Cola Metropolitan Bottling Company, Inc. (Operating Company/Intermediate Holding Co.)

--Long-term IDR at 'A';

--Guaranteed senior notes at 'A'.

Bottling Group, LLC (Operating Company)

--Long-term IDR at 'A';

--Guaranteed senior notes at 'A'.

The Rating Outlook is Stable. PepsiCo had approximately $27.9 billion of debt at Sept. 8, 2012.

Rating Rationale:

PepsiCo's ratings reflect its substantial cash flow generation, significant scale, product diversification, increasing exposure to faster growing emerging markets, and position as the world's second largest food and beverage company. Annual cash flow from operations and free cash flow (FCF) have averaged $7.5 billion and $2.1 billion, respectively since 2007.

PepsiCo's $66.5 billion of net revenue in 2011 was split 52% beverages/48% food and 50% was generated outside of the United States with emerging or developing markets representing about one-third of the total. Russia and Mexico are PepsiCo's largest markets outside of North America with each representing 7% of net sales in 2011. PepsiCo's portfolio consists of 22 brands; including Pepsi, Gatorade, Lay's, Doritos, Quaker, and Tropicana, with more than $1 billion in annual retail sales that are typically No. 1 or No. 2 in their respective categories.

PepsiCo's financial strategy, which Fitch has viewed as aggressive given share repurchase activity concurrent with acquisitions resulting in periodic increases in leverage, is also factored into ratings. Investing in its business, returning cash to shareholders, and maintaining credit ratings that provide ready access to capital encompasses PepsiCo's financial strategy. Share buybacks have averaged a net $2.5 billion per year since 2007 and dividends have grown annually by 6% or more over the past five years to more than $3 billion in 2012. PepsiCo anticipates dividends and share repurchases will total more than $6 billion in 2012.

Operationally PepsiCo is focused on increasing brand support to grow market share, expanding its emerging market presence, growing its nutrition business, reducing overhead, and leveraging technology and processes across its organization. As discussed below, PepsiCo has made noticeable progress on this strategy. Fitch believes PepsiCo's strategic initiatives will help the company to meet its long-term financial targets of mid-single-digit and 6% - 7% constant currency net revenue and operating income growth, respectively, post 2012. Current year operating income is being impacted by an uptick in brand investments and spending to support productivity efforts.

Incremental advertising and marketing spending will total $500 - $600 million in 2012. Acquisitions and strategic alliances are expanding PepsiCo's emerging markets presence while supporting its product goals in nutrition and beverages. Examples include PepsiCo's 2011 purchase of Wimm-Bill-Dann - the leading dairy and juice firm in Russia - for approximately $5.4 billion and its 2012 agreement with China-based Tingyi Holding Corp. (Tingyi). Brand building efforts appear to be paying off as consolidated volumes have been flat while pricing has increased 5% for the year-to-date (YTD) period through Sept. 8, 2012, as discussed below. Finally, the firm's multi-year productivity initiatives are on track to deliver $1 billion plus of savings in 2012 and $3 billion by 2015.

Credit Statistics:

For the latest-twelve-month (LTM) period ended Sept. 8, 2012, total debt-to-operating EBITDA was 2.2x, operating EBITDA-to-gross interest expense was 14.5x, and funds from operations (FFO) adjusted leverage was 3.5x. FCF was in line with PepsiCo's historical average at $2.2 billion. PepsiCo's leverage is modestly higher than similarly rated food and beverage companies but ratings are supported by, as mentioned previously, the company's substantial and stable FCF, significant scale, diversification, and brand leadership.

Fitch expects total debt-to-operating EBITDA leverage to remain in the low 2.0x range during 2012 and 2013. PepsiCo's 2012 operating cash flow will be negatively affected by an approximate $1.3 billion pension and retirement medical plan contribution. Absent additional discretionary contributions, PepsiCo's cash flow growth should improve in 2013 as benefits from its strategic initiatives around brand support and productivity savings are realized.

Recent Operating Performance:

For the YTD period ended Sept. 8, 2012, consolidated net revenue declined 2% to $45.5 billion and operating profit is down 7% to $6.9 billion. Organic revenue growth, which excludes a negative 3% impact from both currency and divestitures, was 5% due mainly to pricing as volume was flat. Operating profit includes $193 million of charges related to PepsiCo's productivity plan and $137 million of charges related to the company's transaction with Tingyi.

Net effective pricing was positive across each division. Volume gains in AMEA (Asia, Middle East and Africa) and Latin America Foods (LAF) were offset by declines in PepsiCo Americas Beverages (PAB), Frito-Lay North America (FLNA), and Quaker Foods North America (QFNA). Volumes were flat in Europe.

Fitch believes increased advertising and marketing spending in North America is gaining traction as quarterly volume performance has improved at FLNA and QFNA through 2012. LAF has remained strong due to good innovation and increased distribution and AMEA stands to benefit from PepsiCo's alliance with China-based Tingyi along with its growth efforts in India. Europe is benefiting from PepsiCo's exposure to faster-growing Eastern European markets such as Russia which is experiencing double-digit volume growth in snacks. Although PAB continues to be work in progress, Fitch views PepsiCo's goal of growing beverages profitably in North America positively.

Liquidity, Covenants, and Maturities:

PepsiCo maintains good liquidity. At Sept. 8, 2012, the firm had $5.7 billion of cash and short-term investments, the majority of which is offshore, and combined capacity of $5.85 billion under its 364-day and four-year revolving credit facilities. PepsiCo's revolvers expire in June 2013 and June 2016, respectively, and are not bound by financial covenants. Fitch recognizes that repatriation of cash could result in incremental taxes but given PepsiCo's financial flexibility believes PepsiCo would more likely use the cash to grow in overseas markets.

Maturities of long-term debt at Dec. 31, 2011 included $2,353 million in 2012, $2,841 million in 2013 and $3,335 million. At Sept. 8, 2012, $3,054 million of PepsiCo's debt was classified as current. PepsiCo has issued more than $6 billion of new debt through Oct. 23, 2012. Net proceeds were used for general corporate purposes, including the repayment of commercial paper and the refinancing of current maturities of long-term debt. At Sept. 8, 2012, PepsiCo had $900 million of commercial paper outstanding.

PepsiCo guarantees all of the senior notes of its bottling subsidiaries - Pepsi-Cola Metropolitan Bottling Company (wholly owned by PepsiCo) and Bottling Group, LLC (wholly owned by Pepsi-Cola Metropolitan Bottling Company). While the notes of the bottling subsidiaries are structurally superior to the notes issued by PepsiCo, Inc., Fitch has chosen not to make a distinction in the ratings at the single-A level as default risk is very low.

WHAT COULD TRIGGER A RATING ACTION

Future developments that may, individually or collectively, lead to a positive rating action include:

--Total debt-to-operating EBITDA below 2.0x and Fitch's belief that PepsiCo would manage its balance sheet to sustain an 'A+' rating.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Significant debt-financed acquisitions or share repurchases and/or deteriorating operating performance that causes total debt-to-operating EBITDA to be sustained above the mid 2.0x level;

--Substantial and sustained declines in cash flow would also likely prompt negative rating actions.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

-- 'Fitch Rates PepsiCo's GBP500MM Sr. Note Issuance 'A'; Outlook Stable' (Oct. 23, 2012);

-- 'Fitch Rates PepsiCo's $2.5B Sr. Note Issuance 'A'; Outlook Stable' (Aug. 8, 2012)

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

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Contacts

Fitch Ratings
Primary Analyst:
Carla Norfleet Taylor, CFA, +1-312-368-3195
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Wesley E. Moultrie II, CPA, +1-312-368-3186
Managing Director
or
Committee Chairperson:
David E. Peterson, +1-312-368-3177
Senior Director
or
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Carla Norfleet Taylor, CFA, +1-312-368-3195
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Wesley E. Moultrie II, CPA, +1-312-368-3186
Managing Director
or
Committee Chairperson:
David E. Peterson, +1-312-368-3177
Senior Director
or
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com