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

DBRS has today confirmed the Issuer Rating of Nestle S.A. (Nestle or the Company) at AA and its Commercial Paper rating at R-1 (middle), both with Stable trends. The confirmation is based on the Company’s solid operating performance, despite challenged consumers in developed countries and slowing growth in emerging markets. Nestle’s ratings continue to be based on its industry-leading portfolio of global brands, its large size and scale, and its excellent product and geographic diversification. The ratings also reflect the mature nature of many of the Company’s product lines and core markets, its exposure to volatile commodity costs and significant research and development (R&D) and innovation requirements to sustain growth.

Nestle’s earnings profile remained strong for the current rating category in 2012 and H1 2013, as sales increased to approximately EUR 94.8 billion for the LTM ended Q3 2013, based primarily on organic growth (volume and price), as well as acquisitions. EBIT margins were relatively flat in 2012 and H1 2013, as lower input costs and improved efficiency were largely offset by substantial increases on marketing and advertising. As a result of the above factors, EBIT increased to nearly EUR 15 billion for the LTM ended Q2 2013, versus EUR 14.4 billion in 2012 and EUR 13.1 billion in 2011.

The Company’s leverage increased somewhat in H2 2012 and H1 2013, subsequent to the completion of the Company’s acquisition of Pfizer Nutrition on December 1, 2012. Free cash flow before changes in working capital increased moderately in H1 2013, based primarily on higher cash flow from operations as moderating capex was more than offset by higher dividends. Free cash flow, cash on hand and incremental debt were used to fund the acquisition of Pfizer Nutrition, which, combined with seasonal changes in working capital in H1 2013, resulted in balance sheet debt of approximately EUR 28.6 billion and net debt of EUR 22.2 billion at the end of Q2 2013.

Going forward, DBRS expects Nestle’s earnings profile will remain stable, based on its portfolio of global brands, product diversification and strong presence in emerging growth markets. Sales should continue to grow in the mid-single-digit range per year, based on a combination of volume growth and net effective pricing. EBIT margins could improve modestly in the near term as the Company continues to focus on improving efficiency and completes strategic reviews of underperforming units. In the medium term, EBIT margins will continue to display sensitivity to volatility in key input costs. As such, based on organic growth, EBIT should continue to improve toward the EUR 16 billion level in the near to medium term.

In terms of financial profile, Nestle is expected to remain relatively stable and in a range commensurate with the current rating category, based on the Company’s substantial cash flow generating capacity. Free cash flow is expected to remain healthy as capex declines toward normal levels in the near term, while dividends continue to increase steadily. Free cash flow is expected to be used for moderate debt repayment (including the repayment of short-term debt used to fund working capital in H1 2013) in the near term. Over the longer term, however, Nestle is expected to use free cash flow primarily to invest in growth and/or complete share repurchases. As such, DBRS expects the Company will maintain net debt-to-EBITDA in the 1.0 times (x) range going forward, a level considered acceptable for the current rating category.

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

The applicable methodology is Rating Companies in the Consumer Products Industry, which can be found on our website under Methodologies.

The rating and report for Nestle Capital Canada Ltd. are based on the parent, Nestle S.A.