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Rating Action:

Moody's affirms Nestlé's Aa2 rating; stable outlook

28 Jun 2017

Milan, June 28, 2017 -- Moody's Investors Service ("Moody's") has today affirmed the Aa2 issuer rating of the world's largest food manufacturer Nestlé S.A. and the Aa2/Prime-1 senior unsecured long-term and short-term ratings of its guaranteed subsidiaries (together "Nestlé" or "the group"). The affirmation follows the group's decision to distribute up to CHF20.0 billion ($20.7 billion or €18.4 billion) to shareholders over the next three years. The outlook on the ratings remains stable.

"Today's rating affirmation reflects our view that Nestlé's superior business profile and predictable cash flow generation offset the expected deterioration in its credit metrics, and that despite the shift in financial policy signaled by its decision to return up to CHF20 billion to shareholders over the next three years, we expect the group to continue to pursue a financial policy that preserves credit strength consistent with the current rating," says Paolo Leschiutta, a Moody's Vice President -- Senior Credit Officer and lead analyst for Nestlé. "Nestlé's business and geographic diversifications, sound and stable cash flow generation together with the flexibility provided by its stake in L'Oreal compensate for our expectation that its financial ratios will be weaker relative to some peer companies in the Aa rating category."

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

On 27 June, Nestlé announced the decision to return up to CHF20.0 billion ($20.7 billion or €18.4 billion) to shareholders over the next three years. The group plans to backload some of the return to shareholders towards the end of the period in order to maintain flexibility to pursue acquisitions in case attractive assets become available in the meantime. Nevertheless, Moody's expects Nestlé's credit metrics to deteriorate over this period with its retained cash flow to net debt ratio dropping towards 25% during 2019 and 2020, which is below our previous guidance for its Aa2 rating, from 31.3% at the end of 2016, and its funds from operations to net debt to drop to 45% from around 65% (both on a Moody's-adjusted basis).

Despite the fact that credit metrics over the next several years are likely to be weaker than previously expected, we believe that the Aa2 rating remains appropriate due to Nestlé's very stable business profile with strong funds from operations, which result in substantial flexibility for the company to manage its financial profile over the medium term by balancing reinvestment against cash returned to shareholders. Despite the phasing and conditionality of the share buyback programme, if fully executed it will absorb most of the flexibility available to the group. Failure to improve operating performance or deterioration in Nestlé's business profile could put pressure on the rating.

The strong business profile is underpinned by Nestlé's (1) position as the largest food and beverage group in the world by revenues; (2) high degree of diversification by segment, product and geography, with a growing presence in emerging markets; (3) high-quality brand portfolio; (4) substantial assets that could be monetized, including its investment in L'Oréal S.A. (Prime-1); and (5) strong executional capabilities, which have resulted in steady organic growth in low to mid-single-digit percentages for the past decade and improvement in profitability on an organic basis.

Moody's also expects that part of the cash outflow related to the share buyback will be financed with some of the cash available on balance sheet and part of expected annual free cash flow generation. In this respect we note that the company had CHF9.3 billion as at December 2016 of cash on balance sheet, including CHF1.3 billion of marketable securities, although most of this was used to pay dividend during the first half of the year. In addition the company generates annual free cash flow of around CHF2.5 billion post capex and dividend payment, and we would expect part of it to remain available to fund the buyback programme. Nestlé has also recently announced the intention to dispose of its US confectionary business which proceeds might also reduce the negative impact on credit metrics, albeit this might take a while to conclude.

In addition, today's decision reflects Moody's view that Nestlé maintains stronger metrics than those of some of its lower rated peers and the rating agency's expectations that the group might reduce its share buyback programme in case of material deterioration in operating performance. To this extent Moody's notes, in common with the broader food and beverage industry, the slight decline in the group's top-line growth in recent years due to the ongoing soft trading conditions across Europe and slower growth in emerging markets. Moody's expects nonetheless that Nestlé will grow its organic revenues by low single digit rates over the next two to three years. Furthermore, the group announced at the beginning of 2017 its intention to step up restructuring costs to CHF500 million in 2017 which will contribute to improve structural costs by 200 basis points by 2020, although part of these savings will be reinvested in the business to increase organic growth. Higher restructuring costs during 2017 will result in stable operating margins, albeit Moody's expect gradual improvements in Nestlé profitability beyond 2017.

The recently announced buyback programme will likely require additional funding by the group. Nevertheless, Moody's views Nestlé's liquidity profile as strong, despite continued use of its commercial paper (CP) programme, owing to its availability under existing credit lines and the group's excellent access to debt capital markets. Nestlé also benefits from its 23.2% stake in L'Oréal S.A., which could also be, at least partially, monetised if necessary. Existing sources of liquidity, together with an expectation of stable cash flow generation from operations (CHF15.6 billion in 2016) are sufficient to cover the group's capital expenditure (around CHF4.7 billion in 2016, including intangible assets), dividend payments (CHF7.4 billion in 2016, including dividends to non-controlling interest) and short-term debt (CHF12.1 billion as of 31 December 2016, including the above-mentioned CP utilisation).

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Nestlé's solid cash flow generation, and Moody's expectations that, beyond the announced share buyback programme, the group will maintain a conservative financial policy balancing spending related to acquisitions and dividends. Moody's also expects gradual improvements in credit metrics beyond 2020.

WHAT COULD CHANGE THE RATING UP/DOWN

An upgrade is unlikely in the near-term considering the group's increased tolerance for an higher leverage. However, upward rating pressure could develop from the maintenance of a strong business profile, combined with an improvement in credit metrics, particularly funds from operations/net debt remaining sustainably above 60% and retained cash flow/net debt remaining in the high 30s in percentage terms.

Downward pressure could develop from a combination of (1) retained cash flow/net debt falling significantly below 30% for a prolonged period of time; and (2) failure to achieve improvements in Moody's EBIT margin from the current 15.6% beyond 2017 in line with Nestlé's strategy, or (3) significant decline from Nestlé's current very strong market positions in its main businesses.

Affirmations:

..Issuer: Nestle S.A.

.... Issuer Rating, Affirmed Aa2

..Issuer: Nestle Australia Ltd.

....BACKED Senior Unsecured Commercial Paper, Affirmed P-1

..Issuer: Nestle Capital Corporation

....BACKED Senior Unsecured Commercial Paper, Affirmed P-1

..Issuer: Nestle Finance International Ltd.

....BACKED Senior Unsecured Commercial Paper, Affirmed P-1

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa2

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Aa2

..Issuer: Nestle Holdings (U.K.) PLC

....BACKED Commercial Paper, Affirmed P-1

....BACKED Senior Unsecured Commercial Paper, Affirmed P-1

..Issuer: Nestle Holdings, Inc.

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa2

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Aa2

Outlook Actions:

..Issuer: Nestle S.A.

....Outlook, Remains Stable

..Issuer: Nestle Australia Ltd.

....Outlook, Remains Stable

..Issuer: Nestle Capital Corporation

....Outlook, Remains Stable

..Issuer: Nestle Finance International Ltd.

....Outlook, Remains Stable

..Issuer: Nestle Holdings (U.K.) PLC

....Outlook, Remains Stable

..Issuer: Nestle Holdings, Inc.

....Outlook, Remains Stable

The principal methodology used in these ratings was Global Packaged Goods published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Nestlé S.A. is the world's largest food group and its global brands (e.g. Nestlé, Purina, Nescafé, Maggi, Nespresso and Nido) cover a wide range of food and beverage products. Nestlé has been a global group for many years, and several of its brands are unique to particular countries, with products tailored to local tastes. In line with its business strategy, Nestlé has strengthened its Nutrition, Health and Wellness business with a number of acquisitions in recent years. Nestlé's growth is increasingly being driven by a portfolio of "billionaire" brands and its increasing presence in emerging markets. The group also operates through joint ventures, such as Cereal Partners Worldwide (unrated) with General Mills, Inc. (A3 stable) outside North America.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Paolo Leschiutta
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yasmina Serghini
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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