DBRS Confirms Nestlé S.A. and Nestlé Capital Canada Ltd. at AA (high), R-1 (high), Stable Trend

DBRS has today confirmed the long- and short-term ratings of Nestle S.A. and Nestle Capital Canada Ltd. (Nestle or the Company) at AA (high) and R-1 (high), respectively. The trends remain Stable. Nestle continues to benefit from its leading brands, size/scale and exceptional product and geographic diversification. The Company displayed solid operating results in 2010 as sales from continuing operations were CHF 104.6 billion, a 4% increase, year-over-year (yoy). Growth was well distributed and positive among all product segments and geographic regions, except Europe which experienced its third consecutive yoy decline in sales. EBIT margins increased moderately to 13.4% in 2010 from 13.1% the previous year as Nestle continued to grow sales, improve mix and create operating efficiencies. Organic growth in Q1 2011 continued to be strong (+6.4%), but negative net foreign exchange rates (-9.8%) resulted in a 1.2% decrease in sales.

In terms of the financial profile, cash flow from continuing operations remained robust (CHF 12 billion in 2010), while capex remained stable. Dividends increased moderately to CHF 5.4 billion as the Company continues to focus on returning value to shareholders. Nestle’s disposal of its 52% share of Alcon on August 25, 2010, generated a cash inflow of CHF 27.6 billion, the proceeds of which, along with free cash flow were used to fund the CHF 4 billion acquisition of Kraft Foods, North American pizza business, as well as nearly CHF 12.1 billion in share repurchases. Total debt decreased by approximately CHF 3.3 billion in 2010 to CHF 20.1 billion leading to improved debt-to-EBITDA of 1.2x from 1.4x the previous year.

Going forward, DBRS expects the Company’s strong earnings profile to remain stable in the near- to medium-term on the basis of continued organic revenue growth within the Company’s target of 5% to 6%. Margins should come under pressure in the near term as a result of rising commodity costs. Nestle is, however, expected to be able to at least partially offset rising costs, by seeking improvements in all stages of the value chain: leveraging procurement capabilities, increasing operational efficiencies, accelerating innovation and increasing prices. DBRS expects that EBIT will increase to the CHF 14.5 billion to CHF 15.5 billion range in 2011 and 2012. Nestle’s financial profile should remain stable as cash flow from operations should track earnings and remain in the CHF 13 billion to CHF 14 billion range in 2011 and 2012. Capex is expected to increase to nearly CHF 5.5 billion in 2011 while dividends should rise by 15% to CHF 6.1 billion.

Nestle is expected to complete approximately CHF 10 billion of share repurchases in 2011, based on the latest share repurchase program established in 2010. As such, rising free cash flow and the significant levels of cash and cash equivalents on hand, are expected to be used for investment in growth and/or to provide additional returns to shareholders, as opposed to reducing debt levels. Nevertheless, growth in operating income should lead to at least stable debt-to-EBITDA.

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

The rating for Nestle Capital Canada Ltd. is based on the parent, Nestle S.A.

The applicable methodology is Consumer Products, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.