DBRS Ratings Limited (DBRS Morningstar) confirmed the 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). All trends are Stable. The confirmations and Stable trends reflect DBRS Morningstar's view that the Company is well positioned to weather the Coronavirus Disease (COVID-19) pandemic as well as the macroeconomic after effects within the current rating category. Although group sales for the nine months (9M) were down 9.4% versus the same period last year, the decline was primarily due to foreign exchange and divestures as organic growth proved to be resilient in light of the pandemic. Organic growth reached 3.5% during the 9M 2020 within Nestle's target growth rate of 3.5% to 5%. Nestlé’s industry-leading portfolio of global brands, its position as the world’s largest food and beverages company, its exceptional product and regional diversification, as well as the Company’s strong free cash flow (FCF)-generating capacity continue to support the ratings. Nestlé’s ratings also consider the intense competitive environment that impedes profitability of some its business units, exposure to volatile input and operating costs, as well as the mature nature of some of its products and markets.
Nestlé’s earnings profile should continue to support the current rating category based on its strong global brands, geographic diversification, and continued focus on efficiency, portfolio optimisation, and investment on environmental, social, and governance (ESG) initiatives. While DBRS Morningstar expects total sales to be lower as the company continues its strategic divestment of businesses, organic growth is expected to continue to be in line with expectations at around 3.5%-4% per year over the medium term. Organic growth remains resilient as the Company continues to (1) refocus its portfolio on higher-growth categories and regions; (2) address underperforming or nonstrategic businesses; (3) grow its ecommerce business; and (4) actively manage its portfolio. DBRS Morningstar expects EBIT margins to continue improving to reach the target goal of between 17.5% and 18.5% by 2021 from 17.4% for the last 12 months (LTM) ended H1 2020. Margins are expected to benefit from an increased portion of revenues from higher-margin products and regions. As such, DBRS Morningstar forecasts EBIT to also increase in the near-to-medium term to more than CHF 15.4 billion as planned divestitures are expected to negatively impact total sales in the short term.
In terms of financial profile, DBRS Morningstar expects that the Company will continue to use cash on hand, FCF, incremental debt of an additional CHF 2 billion per year, and net proceeds from future divestitures to execute its three-year share buyback program, which began in January 2020. Therefore, DBRS Morningstar does not expect financial metrics to improve meaningfully in the near term (i.e., from a net debt-to-EBITDA level of slightly below 2.0 times (x) versus previous years of 1.75x for the LTM dated 30 June 2020, 1.35x at year-end 2019, 1.57x at year-end 2018, and 1.15x at year-end F2017). DBRS Morningstar considers the Company’s overall credit risk profile to remain consistent with the AA (low) rating category, commensurate with its business risk profile.
Nonetheless, if Nestlé’s financial metrics deteriorate beyond a range acceptable for the current ratings (i.e., net debt-to-EBITDA meaningfully above 2.0x on a sustained basis) as a result of prolonged weaker-than-expected operating performance, more aggressive financial management, a negative rating action could result. Although unlikely, if Nestlé returns to a financial policy consistent with the AA rating level (i.e., net debt-to-EBITDA significantly below 1.50x on a sustained basis) while maintaining a solid operating performance, a positive rating action could result.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in CHF unless otherwise noted.
The principal applicable methodology is the “Rating Companies in the Consumer Products Industry” (30 July 2020). Other applicable methodologies include the “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (22 January 2020); “DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers” (10 March 2020); and “Criteria Rating Corporate Holding Companies and their Subsidiaries” (2 November 2020). These can be found can be found at: https://www.dbrsmorningstar.com/about/methodologies.
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 primary sources of information used for these ratings include publicly available information from the rated entity’s website, including the 2019 Annual Report, quarterly results, analysts’ consensus guidance numbers, and some information directly provided by the Issuer. DBRS Morningstar considers the information available to it for the purposes of providing these ratings 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 12-month period. DBRS Morningstar trends 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/371642
Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. 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 2019
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
-- Rating Companies in the Consumer Products Industry (30 July 2020),
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (10 March 2020), https://www.dbrsmorningstar.com/research/357788/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers.
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (22 January 2020), https://www.dbrsmorningstar.com/research/355781/dbrs-morningstar-publishes-updated-guarantee-criteria.
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (2 November 2020),
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.