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 the Commercial Paper rating of Nestle Capital Canada Ltd. at R-1 (middle), both with Stable trends. The confirmation is based on the Company’s solid operating performance and stable financial profile. 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 many of its 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 stable in 2013 and through Q3 2014, despite sales and earnings being negatively affected by the devaluation of many global currencies relative to the Swiss franc. The Company’s financial profile remained acceptable for the current rating, as Nestle continued to generate significant free cash flow in 2013 and H1 2014 and used such to help reduce debt levels previously elevated from the acquisition of Wyeth Nutrition in 2012. On July 8, 2014, Nestle sold 48.5 million of its L’Oréal shares to L’Oréal in exchange for the remaining 50% interest in Galderma S.A. that Nestle did not own, and EUR 3.4 billion of cash.

Going forward, Nestle’s earnings profile is expected to remain stable, based on its strong portfolio of global brands and superior geographic and product diversification. The Company should continue to grow organically in the mid-single-digit per year range over the medium term, based on a combination of volume growth, mix and net effective pricing. Operating margins could improve modestly in the near term as the Company continues to focus on portfolio optimization and balancing efficiency improvements and brand investments. As such, DBRS believes Nestle’s EBIT should improve on an organic basis, toward the CHF 15 billion level in the medium term.

Nestle’s financial profile should remain consistent with the current AA rating, based on the strength of its free cash generating capacity. Cash flow from operations should continue to track operating income, while capex is expected to remain relatively flat in the range of 4% to 5% of sales (or approximately CHF 4.5 billion) in the near term. Dividends are expected to continue to grow at a rate that could outpace earnings growth, as the Company remains focused on steadily increasing shareholder returns. As such, free cash flow before changes in working capital should remain in the CHF 1.8 billion to CHF 2.0 billion range. DBRS believes that Nestle will use its free cash flow, as well as cash on hand (including proceeds from the sale of the L’Oréal shares) to complete its recently announced CHF 8.0 billion share buyback program by the end of 2015. Over the longer term, DBRS believes Nestle will continue to use free cash flow, cash on hand and incremental debt to invest in growth and to increase returns to shareholders. DBRS expects, however, that Nestle will maintain lease-adjusted net-debt-to-EBITDAR below 1.5x, a level considered acceptable for the current rating category.

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

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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