DBRS Morningstar Confirms Nestlé S.A. and Nestlé Capital Canada Ltd. at AA (low) and R-1 (middle), with a Stable Trend

DBRS Ratings Limited (DBRS Morningstar) has confirmed its Issuer Rating of Nestlé S.A. (Nestlé or the company) at AA (low) and the Commercial Paper (CP) rating of Nestlé Capital Canada Ltd. at R-1 (middle), both with Stable trends. The confirmations are underpinned by Nestlé’s strong operating performance, including continued sales growth and steady margin improvements over the last 12 months ended 30 June 2019 (LTM ended H1 2019), while also incorporating the leverage increase associated with its current CHF 20 billion share buyback programme announced in 2017. The ratings continue to be supported by Nestlé’s industry-leading portfolio of global brands, its position as the world’s largest food company, its exceptional product and regional diversification as well as the company’s strong free cash flow (FCF)-generating capacity. Nestlé’s ratings also consider the intense competitive environment, exposure to volatile input and operating costs as well as the mature nature of some of its products and markets.

Nestlé’s earnings profile is expected to remain supportive of the current ratings based on its strong global brands, excellent geographic diversification and continued focus on innovation, efficiency and portfolio improvements. DBRS Morningstar expects organic growth to improve towards the mid-single-digit per-year range over the medium term as the company continues to (1) invest in higher-growth categories and regions; (2) address underperforming or nonstrategic businesses; (3) grow its e-commerce business; and (4) actively manage its portfolio. DBRS Morningstar expects EBIT margins to increase to Nestle’s target of between 17.5% and 18.5% by 2020 from 17.1% for the LTM ended H1 2019. Margins are expected to benefit from an increased portion of revenues from higher-margin products and regions. As such, DBRS Morningstar forecasts EBIT to likely reach between CHF 16.5 billion to CHF 17.5 billion in the near term from CHF 15.9 billion during the LTM ended H1 2019.

That said, in terms of financial profile, DBRS Morningstar expects that the company will continue use cash on hand, FCF, incremental debt and net proceeds from future divestitures to execute the company’s new share buyback programme beginning in 2020. As such, DBRS Morningstar expects financial metrics not to meaningfully improve in the near term (i.e. from a lease-adjusted net debt-to-EBITDA level of slightly below 2.0 times (x) versus previous years of 1.57x at year-end 2018 and 1.15x at year-end F2017). Nevertheless, DBRS Morningstar expects the company’s overall credit risk profile to remain consistent with the AA (low) rating for a company with Nestlé’s business risk profile. However, if Nestlé’s financial metrics deteriorate beyond a range acceptable for the current rating (i.e. adjusted net debt-to-EBITDA meaningfully above 2.0x on a sustained basis) as a result of more aggressive financial management and/or weaker-than-expected operating performance, a negative rating action could result. Although unlikely, if Nestlé returns to a financial policy consistent with the AA rating level (i.e., lease-adjusted net debt-to-EBITDA significantly below 1.50x on a sustained basis) while maintaining solid operating performance, a positive rating action could result.

Notes:
All figures are in Swiss Franc unless otherwise noted.

The principal applicable methodology is the Rating Companies in the Consumer Products Industry (August 2019). Other applicable methodologies include the DBRS Morningstar Criteria: DBRS Criteria: Guarantees and Other Forms of Support (January 2019). These can be found can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include publicly available information from the rated entity’s website as well as information provided directly from Nestle SA. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Rana Toukan, Vice President
Rating Committee Chair: Anil Passi, Managing Director
Initial Rating Date: 15 August 2000
Last Rating Date: 4 December 2018

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This press release was amended on 10 January 2020 to add missing EU regulatory disclosures.