DBRS Morningstar Confirms Ratings on Nestlé S.A. and Nestlé Capital Canada Ltd., with Stable Trends

DBRS Ratings Limited (DBRS Morningstar) confirmed Nestlé S.A.’s (Nestlé or the Company) Issuer Rating at AA (low) and Nestlé Capital Canada Ltd.’s (Nestlé Capital) commercial paper (CP) rating at R-1 (middle). All trends are Stable. The confirmations reflect Nestlé's continued solid operating performance despite global inflationary pressures and supply chain constraints, driven by the demand for pet care products and coffee as well as the recovery in out-of-home channels. The Stable trends also reflect DBRS Morningstar's view that the Company is well positioned to manage inflationary pressures through disciplined price increases given the impact on the purchasing power of consumers within the current rating category.

KEY RATING CONSIDERATIONS
Nestlé's business profile should continue to support the current rating category based on its portfolio of strong global brands, product and geographic diversification, and continued focus on efficiency, portfolio optimisation, as well as strong free cash flow (FCF) generation, which makes it relatively resilient to economic cycles. DBRS Morningstar expects organic growth to continue to be supported by the company's efforts to (1) reasonably pass down inflationary costs to its customers; (2) actively manage its portfolio by refocusing the portfolio on premium brands and higher-growth categories and regions; (3) address underperforming or nonstrategic businesses; and (4) grow its ecommerce business. DBRS Morningstar believes that Nestlé will continue to pursue strategic acquisitions, but does not anticipate that there will be any significant divestments in the near term. Accordingly, DBRS Morningstar expects organic growth to increase to around 8% for 2022 to around CHF92 billion and from thereon, to a range of CHF 92 billion to CHF 96 billion over the next few years.. DBRS Morningstar also expects the earnings before interest and taxes (EBIT) margin to remain stable at around 16.5% in the medium term despite inflationary pressures on input, shipping, and packaging costs. As such, DBRS Morningstar forecasts the Company's EBIT to be CHF 14.5 billion for 2022, increasing to almost CHF 16 billion for 2023.

In terms of its financial profile, DBRS Morningstar expects Nestlé to continue to use cash on hand, FCF, proceeds from divestments, and incremental debt to execute its share buyback program and pay dividends. Consequently, DBRS Morningstar expects Nestlé’s financial metrics specifically the net debt-to-EBITDA ratio to temporarily deteriorate to more than 2.0 times (x), from 1.79x at year-end 2021.

DBRS Morningstar notes that some of Nestlé’s financial metrics are expected to weaken to a level beyond those that DBRS Morningstar considers appropriate for the current rating (specifically net debt-to-EBITDA ratio of less than 2.0x). That said, because Nestlé’s other ratios (including cash flow-to-net debt and EBITDA coverage) have remained strong (above 30% and 7.0x, respectively) in addition to the expected recovery of the net debt-to-EBITDA ratio, and because the Company adopts a superior business risk profile, DBRS Morningstar considers Nestlé’s overall credit risk profile to remain commensurate with the AA (low) rating category.

Nevertheless, if the Company’s financial metrics (including the net debt-to-EBITDA ratio) remain considerably higher than 2.0x on a sustained basis and/or there is a weakening in Nestlé’s cash flow-to-net debt and EBITDA coverage to below 30% and 7.0x, respectively, as a result of aggressive financial management and/or weaker-than-expected operating performance, DBRS Morningstar could take a negative rating action. Additionally, DBRS Morningstar notes that weaker-than-expected operating performance could cause a shift in the Company's business risk profile, which in turn could result in the requirement to maintain stronger credit metrics to support the same rating. Although unlikely, if Nestlé returns to a financial policy consistent with the AA rating level (i.e., net debt-to-EBITDA significantly less than 1.50x on a sustained basis) while maintaining a solid operating performance, DBRS Morningstar could take a positive rating action.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (17 May 2022).

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

The principal methodology is “Global Methodology for Rating Companies in the Consumer Products Industry” (2 September 2022). Other methodologies include “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (4 April 2022); “DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers” (1 March 2022); and “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

The primary sources of information used for these ratings include publicly available information from the rated entity’s website, including the 2021 annual report, 2022 half-year report, quarterly results, Pre 9M-2022 analysts’ consensus estimates, and some information directly provided by the Company. DBRS Morningstar considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the 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. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/407547.

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

Lead Analyst: Rana Toukan, Vice President
Rating Committee Chair: Anil Passi, Managing Director
Initial Rating Date: 6 October 2003
Last Rating Date: 15 December 2021

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-- Global Methodology for Rating Companies in the Consumer Products Industry (2 September 2022),
https://www.dbrsmorningstar.com/research/402329.
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (4 April 2022),
https://www.dbrsmorningstar.com/research/394683.
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (1 March 2022),
https://www.dbrsmorningstar.com/research/393065.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022),
https://www.dbrsmorningstar.com/research/396929.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.