TEXT-Fitch affirms PepsiCo's IDRs at 'A/F1'
Nov 16 - 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: