DBRS Morningstar Confirms Issuer Rating on Nestle S.A. at AA (low), Stable, and Assigns Issuer Rating of AA (low), Stable, to Nestlé Finance International Ltd.

DBRS Morningstar confirmed Nestlé S.A.’s (Nestlé or the Company) Issuer Rating at AA (low) and Nestlé Capital Canada Ltd.’s (Nestlé Capital) commercial paper credit rating at R-1 (middle). DBRS Ratings GmbH (DBRS Morningstar) also assigned an Issuer Rating of AA (low) with a Stable trend to Nestlé Finance International Ltd. (Nestlé FI).

Nestlé Capital and Nestlé FI are wholly owned subsidiaries of Nestlé, and their principal activity is to provide financing to the Nestlé Group. Nestlé FI’s AA (low) credit rating is aligned with Nestlé’s credit rating based on a consolidated approach, which takes into account Nestlé’s guarantee of Nestlé FI’s securities and DBRS Morningstar’s assessment of Nestlé FI as a strategically important subsidiary of Nestlé.

KEY CREDIT RATING CONSIDERATIONS
Nestlé’s credit ratings confirmation is supported by its demonstrated ability to pass on increasing input costs while maintaining a relatively stable profitability, despite historically high levels of inflation. As the leading food and beverage company in the world, Nestlé’s superior product and geographic diversification has been a key factor in helping the Company navigate the current economic uncertainties. Furthermore, as inflationary pressures ease, DBRS Morningstar expects global volume sales and gross margins to gradually improve in 2024.

However, the Company’s recent shift to a less conservative financial policy allows for net debt to EBITDA to be between 2.0 times (x) and 3.0x. This change has somewhat reduced Nestlé’s credit rating headroom since DBRS Morningstar’s last review as the Company has maintained a historical level of net debt to EBITDA at below 2.0x. Nevertheless, the Stable trend reflects DBRS Morningstar’s view that Nestlé’s leverage will not increase above a level deemed appropriate for the current AA (low) credit rating.

CREDIT RATING DRIVERS
If credit metrics deteriorate beyond what DBRS Morningstar deems acceptable for the current credit rating (i.e., debt to EBITDA close to 3.0x and/or EBITDA coverage metrics materially lower than current levels) for a sustained period as a result of weaker-than-expected operating performance and/or more aggressive financial management, DBRS Morningstar could consider a negative credit rating action.

Conversely, DBRS Morningstar could take a positive credit rating action if the Company improves its key credit metrics on a normalised and sustainable basis (i.e., debt to EBITDA trending towards 2.0x).

CREDIT RATING RATIONALE
Nestlé’s operating performance in the first nine months of 2023 (9M 2023) was characterised by a slow improvement in volume growth (-0.6% in 9M 2023) from -2.6% recorded in Q4 2022. Meanwhile, organic growth has been strongly positive, led by price increases. The Company’s management provided guidance of annual organic growth of between 7% and 8% for 2023. DBRS Morningstar anticipates volume growth to turn positive in 2024, driven by Nestlé’s anticipated increased spending on marketing and a slower pace of price increases compared with the last two years as the majority of input cost inflation recedes.

DBRS Morningstar also anticipates that Nestlé’s total net sales will be slightly above CHF 94.0 billion in F2023, representing flat growth compared with F2022 because of adverse currency translation effect, and will increase to around CHF 96.5 by F2024.

Despite the reduction in volume sales recorded in F2022 and 9M 2023 as well as the historically high level of inflation that drove a gross margin reduction, Nestlé has maintained relatively stable EBITDA margins of between 21% and 22% in the last five years. This demonstrates a strong resilience in the Company’s operating performances to economic uncertainties, also thanks to the nondiscretionary nature of Nestlé’s portfolio of products and its diversified geographical footprint.

DBRS Morningstar expects easing commodity price inflation to drive gross margin improvements in F2024 by more than 100 basis points compared with F2022 levels. This will be a key driver in the Company growing its EBITDA margin above 22% to CHF21.5 billion from 21.1% in F2022, which DBRS Morningstar anticipates in F2024.

In terms of financial metrics, debt-to-EBITDA leverage increased to 3.0x in the last 12 months ended June 2023 from 2.7x in F2022, which translates to 2.7x on a net-leverage basis. This contrasts with leverage of below or at 2.5x, which the Company maintained from 2018 to 2022 as management shifted to a less conservative financial policy to allow for more flexibility in potential mergers and acquisitions (M&A) transactions or shareholder disbursements. DBRS Morningstar expects gross leverage of between 2.8x and 2.7x in F2023 to F2024, subsequently reducing towards 2.6x as the CHF 20 billion share buybacks program comes to an end in 2024. DBRS Morningstar also does not anticipate major M&A investments in the short to medium term that might further increase Nestlé’s leverage, placing negative pressure on the credit rating.

Nevertheless, despite the Company’s higher leverage and consequent reduction of credit rating headroom, DBRS Morningstar believes that Nestlé’s superior business profile will continue to support its AA (low) credit rating as reflected in the Stable trend.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor 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 (4 July 2023), https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Consumer Products Industry (21 July 2023), https://www.dbrsmorningstar.com/research/417460/global-methodology-for-rating-companies-in-the-consumer-products-industry
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (28 March 2023), https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (24 February 2023), https://www.dbrsmorningstar.com/research/410196/dbrs-morningstar-global-criteria-commercial-paper-liquidity-support-for-nonbank-issuers

The credit 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 analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

The primary sources of information used for this credit rating include publicly available information from the rated entity’s website, including the 2022 annual report, 2023 half-year report, quarterly results and presentations, along with some information directly provided by the Company. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

This credit rating concerns a newly rated issuer (Nestlé Finance International Ltd.). This is the first DBRS Morningstar credit rating on this issuer (Nestlé Finance International Ltd.)

The following additional regulatory disclosures apply to Nestlé Finance International Ltd.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: YES

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

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 credit 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://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/425539/nestle-sa-sensitivity-analysis.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Edoardo Danieli, Assistant Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date:
Nestle S.A.: 15 August 2000
Nestlé Capital Canada Ltd: 16 October 1987
Nestlé Finance International Ltd.: 19 December 2023

Last Rating Date:
Nestlé: 19 December 2022
Nestlé Capital: 19 December 2022
Nestlé Finance International Ltd: Not applicable as there is no last rating date.

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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