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

DBRS Limited (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 of the ratings is based on the Company’s stable financial profile as well as its solid operating performance year to date in 2015 in the face of challenging political and econom¬ic environments in certain emerging markets and the withdrawal of its Maggi Noodles for an extended period in India. DBRS notes Nestle’s announcement on November 9, 2015, that Maggi Noodles are once again for sale in India. Nestle’s ratings continue to be based on its industry-leading portfolio of global brands, its large size and scale as well as its excellent product and geographic diversification. The ratings also reflect the mature nature of many of Nestle’s prod¬uct lines and core developed markets, its exposure to volatile com¬modity costs and significant marketing, research and development and innovation investments necessary for continued growth.

DBRS believes that Nestle’s earnings profile will remain relative¬ly stable and strong for the current rating over the longer term based on the Company’s strong and diverse portfolio of global brands. Organic growth is expected to continue to be in the mid-single digit per year range over the medium term based on a combination of volume growth, changes in mix and net effective pricing, while foreign exchange could continue to negatively af¬fect top-line growth. Operating margins should remain relatively stable in the near term, but could improve over the medium term as Nestle focuses on cost-reduction and efficiency-improvement initiatives balanced by increasing investments in its brands. Over the longer term, the Company will continue to be somewhat sen¬sitive to volatility in key input costs. As such, DBRS believes that Nestle’s earnings before interest and taxes should con¬tinue to improve on an organic basis toward the CHF 15.0 billion level over the medium term.

DBRS expects Nestle’s financial profile to remain stable over the near to medium term based on the strength of its cash-generating capacity and disciplined financial management. Cash flow from operations should track operating income over the medium term while capital expenditures are expected to remain in the 4% to 5% of sales per-year range as Nestle balances its more rigor¬ous capital allocation strategy and investment in growth. Dividends are expected to continue to rise steadily and could outpace earnings growth as the Company aims to increase shareholder returns. DBRS nevertheless expects that Nestle will continue to generate healthy levels of free cash flow before changes in working capital, which could approach the CHF 3.0 billion level. Free cash flow and cash on hand are expected to continue to be used to complete share repur¬chases in the near term. Over the longer term, DBRS believes that Nestle will continue to use free cash flow, cash on hand and possibly incremental debt to invest in growth and/or increase shareholder returns; however, DBRS expects that Nestle will be managed to maintain lease-adjusted net-debt-to-EBITDAR below 1.5 times, a level which, combined with the strength of the business profile, is considered acceptable for the current rating.

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

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

The applicable methodologies are Rating Companies in the Consumer Products Industry, DBRS Criteria: Guarantees and Other Forms of Explicit Support and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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