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

DBRS Limited (DBRS) confirmed the Issuer Rating of Nestlé S.A. (Nestlé or the Company) at AA (low) and the Commercial Paper (CP) rating of Nestlé Capital Canada Ltd. at R-1 (middle), all with Stable trends. The confirmations are supported by Nestlé’s sound operating performance, including continued solid volume growth and steady margin improvements during the last 12 months ended June 30, 2018 (LTM ended H1 2018), while also incorporating the leverage increase associated with its CHF 20 billion share buyback program. The ratings continue to be supported by Nestlé’s industry-leading portfolio of global brands, position as the world’s largest food company with exceptional diversification and the Company’s strong free cash flow (FCF)-generating capacity. Nestlé’s ratings also reflect intense competition, exposure to volatile input and operating costs as well as the mature nature of many of its products and markets, which require significant investment for continued growth.

Nestlé’s earnings profile is expected to remain supportive of the current ratings based on its strong global brands, excellent geographic diversification and continued focus on innovation, efficiency and portfolio improvements. DBRS expects organic growth to improve toward the mid-single-digit per-year range over the medium term as the Company continues to (1) invest in higher-growth categories and regions; (2) address underperformers; (3) grow its e-commerce business; and (4) actively manage its portfolio. EBIT margins are expected to improve to between 17.5% and 18.5% by 2020 from 16.2% for the LTM ended H1 2018 as Nestlé aims to eliminate CHF 2.0 billion to CHF 2.5 billion in structural non-consumer-facing costs versus 2016. Additionally, EBIT margins should benefit from an increased portion of revenues from higher-margin products, categories and regions. As such, DBRS forecasts EBIT to improve on an organic basis toward the CHF 16.0 billion to CHF 17.0 billion level over the near to medium term from CHF 14.7 billion during the LTM ended H1 2018.

In terms of Nestlé’s financial profile, DBRS expects that the Company will use cash on hand, FCF, incremental debt and net proceeds from possible divestitures to complete ongoing share buybacks. DBRS estimates that this will result in a material increase of debt and leverage (i.e., lease-adjusted net debt-to-EBITDAR above 1.70 times (x) versus 1.15x and 1.04x at year-end F2017 and F2016, respectively). That said, DBRS expects leverage to remain consistent with the AA (low) rating for a company with Nestlé’s business risk profile (i.e., lease-adjusted net debt-to-EBITDAR not meaningfully above 2.0x). However, if Nestlé’s financial profile weakens beyond a range acceptable for the current rating as a result of more aggressive financial management and/or weaker-than-expected operating performance, a negative rating action could result.

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

The Commercial Paper of Nestlé Capital Canada Ltd. is guaranteed by Nestle S.A.

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

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 under Related Documents or by contacting us at info@dbrs.com.

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

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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