DBRS Ratings Limited (DBRS Morningstar) has confirmed its Issuer Rating of Nestle S.A. (Nestle or the company) at AA (low) and the Commercial Paper (CP) rating of Nestle Capital Canada Ltd. at R-1 (middle), both with Stable trends.
The confirmations are underpinned by Nestle's strong operating performance, including continued sales growth and steady margin improvements over the last 12 months ended 30 June 2019 (LTM ended H1 2019), while also incorporating the leverage increase associated with its current CHF 20 billion share buyback programme announced in 2017. The ratings continue to be supported by Nestle's industry-leading portfolio of global brands, its position as the world's largest food company, its exceptional product and regional diversification as well as the company's strong free cash flow (FCF)-generating capacity. Nestle's ratings also consider the intense competitive environment, exposure to volatile input and operating costs as well as the mature nature of some of its products and markets.
Nestle'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 Morningstar expects organic growth to improve towards 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 underperforming or nonstrategic businesses; (3) grow its e-commerce business; and (4) actively manage its portfolio. DBRS Morningstar expects EBIT margins to increase to Nestle's target of between 17.5% and 18.5% by 2020 from 17.1% for the LTM ended H1 2019. Margins are expected to benefit from an increased portion of revenues from higher-margin products and regions. As such, DBRS Morningstar forecasts EBIT to likely reach between CHF 16.5 billion to CHF 17.5 billion in the near term from CHF 15.9 billion during the LTM ended H1 2019.
That said, in terms of financial profile, DBRS Morningstar expects that the company will continue use cash on hand, FCF, incremental debt and net proceeds from future divestitures to execute the company's new share buyback programme beginning in 2020. As such, DBRS Morningstar expects financial metrics not to meaningfully improve in the near term (i.e. from a lease-adjusted net debt-to-EBITDA level of slightly below 2.0 times (x) versus previous years of 1.57x at year-end 2018 and 1.15x at year-end F2017). Nevertheless, DBRS Morningstar expects the company's overall credit risk profile to remain consistent with the AA (low) rating for a company with Nestle's business risk profile. However, if Nestle's financial metrics deteriorate beyond a range acceptable for the current rating (i.e. adjusted net debt-to-EBITDA meaningfully above 2.0x on a sustained basis) as a result of more aggressive financial management and/or weaker-than-expected operating performance, a negative rating action could result. Although unlikely, if Nestle returns to a financial policy consistent with the AA rating level (i.e., lease-adjusted net debt-to-EBITDA significantly below 1.50x on a sustained basis) while maintaining solid operating performance, a positive rating action could result.
Notes:
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.
Ratings issued and monitored by DBRS Ratings Limited are noted as such on the DBRS Morningstar website; however, the language and related statements in previously published press releases in respect of the relevant rating will not be changed retroactively and will remain as part of DBRS's historical record. The ratings issued and monitored in the European Union are marked as such in their respective rating tables.
As part of this transfer, these markings will remain unchanged on all active ratings related to the above-mentioned issuer. For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com. As part of this transfer, these markings will remain unchanged on all active ratings related to the above-mentioned issuer.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.
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Ratings
Nestle Capital Canada Ltd.
Date Issued Debt Rated Action Rating Trend Issued
i
US = USA Issued, NRSRO
CA = Canada Issued, NRSRO
EU = EU Issued, NRSRO
E = EU endorsed
Unsolicited Participating With Access
Unsolicited Participating Without Access
Unsolicited Non-Participating
04-Dec-19 Commercial Paper Confirmed R-1 (middle) Stb EU
Nestle S.A.
Date Issued Debt Rated Action Rating Trend Issued
i
US = USA Issued, NRSRO
CA = Canada Issued, NRSRO
EU = EU Issued, NRSRO
E = EU endorsed
Unsolicited Participating With Access
Unsolicited Participating Without Access
Unsolicited Non-Participating
04-Dec-19 Issuer Rating Confirmed AA (low) Stb EUE
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NESTLÉ S.A. 
