Morningstar DBRS Confirms Nestle S.A.'s Issuer Rating at AA (low) With a Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed Nestlé S.A.'s (Nestlé or the Company) Issuer Rating at AA (low) and Nestlé Capital Canada Ltd.'s (Nestlé Capital) Commercial Paper credit rating at R-1 (middle). Morningstar DBRS also confirmed an Issuer Rating of AA (low) with a Stable trend to Nestlé Finance International Ltd. (Nestlé FI).

Nestlé Capital and Nestlé FI are wholly owned subsidiaries of Nestlé, and their principal activity is to provide financing to the Nestlé Group. Nestlé FI's AA (low) credit rating is aligned with Nestlé's credit rating based on a consolidated approach, which considers Nestlé's guarantee of Nestlé FI's securities and Morningstar DBRS' assessment of Nestlé FI as a strategically important subsidiary of Nestlé.

KEY CREDIT RATING CONSIDERATIONS
Nestlé's AA (low) credit ratings reflect the Company's world-leading quality and the breadth of its brand portfolio, excellent geographic diversification, large scale, and very efficient production processes. The credit rating confirmations are supported by Nestlé's continuous ability to generate positive organic growth and maintain high and healthy EBITDA margins despite macroeconomics headwinds.

In 2024, Nestlé has reshuffled its management team, changing the CEO and CFO. The Company's new corporate strategy focuses on growing volumes of sales and market shares, following years of strong price increases but paired with weak or negative volume growth. This should stem mainly from increasing investments on advertising and marketing, which since 2022 have decreased well below the target of 9% of sales to preserve EBITDA margins during periods of lower gross profits. Furthermore, management pointed to a medium-term underlying operating profit margins target of 17% and above, which is aligned with the H1 2024 result of 17.4%. There is also a renewed focus on increased free cash flow in coming years, which the Company plans to generate also through reduced capital and working capital expenditures.

Overall, Morningstar DBRS considers this new management strategy to be neutral for the Company's credit ratings because it does not materially change Nestlé's credit considerations. One key credit focus going forward will be Nestlé's adherence to its financial policy of maintaining net financial leverage between 2.0 times (x) and 3.0x. Current financial policy remains somewhat more aggressive than in the past, when the Company used to maintain net leverage below 2.0x, effectively reducing Nestlé's credit headroom under the AA (low) credit rating.

CREDIT RATING DRIVERS
If credit metrics deteriorate beyond what Morningstar DBRS deems acceptable for the current credit rating (i.e., debt-to-EBITDA remains at or above 3.0x and/or EBITDA coverage metrics materially lower than current levels) for a sustained period because of weaker-than-expected operating performance and/or more aggressive financial management, Morningstar DBRS could consider taking a negative credit rating action.

Conversely, Morningstar DBRS could take a positive credit rating action if the Company improves its key credit metrics on a normalised and sustainable basis (i.e., debt-to-EBITDA trending towards 2.0x).

EARNINGS OUTLOOK
Morningstar DBRS anticipates that Nestlé's sales will decrease by 2% in F2024 to CHF 91.3 billion from CHF 93.4 billion in F2023 (including 'other revenues'), principally on the back of negative foreign exchange impacts. On the other hand, Morningstar DBRS' organic growth expectations for F2024 are aligned with the management guidance of +2%, driven by growth in emerging markets. Looking ahead, Morningstar DBRS anticipates organic growth close to 3% per year between 2025 and 2027, sustained by price inflation and positive volume sales growth (real internal growth as reported by the Company) thanks to incremental investments in marketing and advertising. Morningstar DBRS does not expect mergers and acquisitions to have a material impact on revenues.

Nevertheless, Morningstar DBRS forecasts that the increasing cost for marketing and advertising towards 9.0% of sales, from 7.7% in F2023, will dent the Group's EBITDA margin in the short term before producing positive effects in terms of operating leverage. Morningstar DBRS expects Nestlé's EBITDA margin to reduce to 20.7% in F2024 and to 20.3% in F2025 from 20.9% in F2023 (including dividends received from associated entities such L'Oréal S.A. in our EBITDA calculation); however, Morningstar DBRS expects the Company's EBITDA margin to improve to 21% in the medium-term, sustained also by CHF 2.5 billion of further cost savings targeted by Management.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates EBITDA gross leverage to peak at 3.0x in F2024 and subsequently decrease to between 2.8x and 2.9x in 2025-26. This is consistent with the higher end of the Company's net leverage target of 2.0x to 3.0x. While Morningstar DBRS expects gross debt to remain stable and close to CHF 60 billion over the next three years, EBITDA in absolute terms should increase from F2025 onwards, trending back to CHF 20 billion in F2025 from the CHF 19.7 expected in F2024 (including dividends received from associated entities) thanks to increasing sales and improving margins. Relatively high gross leverage for the AA (low) rating category is partly balanced by its 20.1% stake in L'Oréal S.A.

CREDIT Rating rationale
Nestlé is the largest food and beverage company in the world, with a portfolio of over 2,000 leading consumer brands in several product categories from coffee to pet food. The Company benefits from its product diversification and strong ability to invest in product innovation and marketing, allowing it to adapt to changing consumers trends.

The Company has demonstrated strong and stable revenues throughout the years despite challenging economic conditions, keeping Morningstar DBRS adjusted EBITDA margins between 21% and 22% over the last five years. Additionally, Nestlé has continued to achieve positive organic revenue growth over the same period, with average organic sales growth of 6% from 2019 to 2023, benefiting from its significant global footprint and sustained growth in emerging markets such as the Philippines, Central Africa, India, Brazil, and China. During the first nine months of 2024, emerging markets recorded 3.5% organic sales growth compared with 1.1% in developed markets.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

Weighting of BRA Factors 
In the analysis of Nestlé, the relative weighting of the BRA factors was approximately equal. 

Weighting of FRA Factors 
In the analysis of Nestlé, the relative weighting of the FRA factors was approximately equal. 

Weighting of the BRA and the FRA 
In the analysis of Nestlé, the BRA carries greater weight than the FRA. 
 
Notes:
All figures are in Swiss francs unless otherwise noted.

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Consumer Products Industry (14 August 2024), https://dbrs.morningstar.com/research/437890
-- Morningstar DBRS Global Corporate Criteria (15 April 2024), https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

Morningstar DBRS notes that this press release was amended on 30 December 2024 to indicate the most recent description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied.

Morningstar DBRS notes that this press release was amended on 6 March 2025 to incorporate the disclosure confirming that this subsidiary Nestlé Finance International LTD is unsolicited.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for this credit rating include publicly available information from the rated entity's website, including the audited annual reports, interim and quarterly results, and presentations, along with information directly provided by the Company. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

The following additional regulatory disclosures apply to Nestlé Finance International Ltd.:

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: YES

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/444902/.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Edoardo Danieli, Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date:
Nestle S.A.: 15 August 2000
Nestlé Capital Canada Ltd: 16 October 1987
Nestlé Finance International Ltd.: 19 December 2023
Last Rating Date: 19 December 2023

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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