NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES. Half-Yearly Financial Report. June 30, (Unaudited)

Transcription

1 Half-Yearly Financial Report June 30, 2015

2 Table of Contents Page Management Report 3 Responsibility Statement 6 Consolidated Interim Financial Statements Consolidated Balance Sheet 7 Consolidated Income Statement 8 Consolidated Statement of Comprehensive Income 9 Consolidated Statement of Changes in Equity 10 Consolidated Statement of Cash Flows 11 Notes to the Consolidated Interim Financial Statements 12 2

3 Management Report Nestlé Holdings, Inc. ( NHI ) (hereinafter, together with its subsidiaries, referred to as the Company ) is a wholly owned subsidiary of NIMCO US, Inc., which is an indirectly wholly owned subsidiary of Nestlé S.A., incorporated in Switzerland, which is the holding company of the Nestlé group of companies (hereinafter, referred to as the Nestlé Group ). NHI is the holding company for Nestlé S.A. s principal operating subsidiaries in the United States, other than Nestlé Waters North America Inc., Prometheus Laboratories Inc., Nestlé Health Science-Pamlab, Inc., and Galderma Laboratories, Inc. The Company manufactures food and beverages, as well as products related to the nutrition, health, and wellness industries. The Company s products are primarily distributed in the United States. Key Figures Change (Dollars in millions) Sales $ 9, ,919.2 (0.9)% Costs of goods sold (5,490.1) (5,545.6) (1.0)% as a percentage of sales (55.8)% (55.9)% Trading operating profit 1, ,186.2 (4.0)% as a percentage of sales 11.6% 12.0% Net financial expenses (120.4) (117.8) 2.2% Income tax expense (130.8) (421.9) (69.0)% Net income % as a percentage of sales 9.0% 6.3% Operating cash flows % as a percentage of sales 7.6% 5.0% Capital expenditures % as a percentage of sales 2.0% 1.9% Overview The United States economy in the first six months of 2015 continued to be adversely impacted by concerns over the labor market and soft consumer demand. Despite these economic challenges, the Company increased investment in its brands and continued to execute its proven strategies and operational efficiencies. 3

4 Sales For the first six months ending, consolidated sales totaled $9.8 and $9.9 billion, respectively. The main factors per segment are as follows: Nestlé USA Brands sales were $4.3 and $4.4 billion for the six months ending, respectively. The Company relaunched the frozen meals brands with the new Lean Cuisine Market Place and Stouffers Fit Kitchen ranges. The first signs are promising and indicate that the Company is meeting the fast-changing expectations of consumers. New additions to the Snack Bites range helped deliver solid growth for Hot Pockets, and the Company saw some improvement in frozen pizza. In the ice cream category, new products delivered solid growth for Haägen Dazs in super premium and Outshine for snacks. Coffee-mate also delivered growth, supported by innovations like Natural Bliss and Coffee-mate 2GO. Some prominent brands in this segment include Coffee-mate, Nescafé, Nesquik, Stouffer s, DiGiorno, Lean Cuisine, Hot Pockets, Nestlé Crunch, Butterfinger, Nestlé Toll House and Dreyer s/edy s. Nestlé Purina PetCare sales were $3.5 billion for each of the six months ending. Growth came from Fancy Feast cat food, the Pro Plan platform for dog food, and cat litter, which was offset by the negative impact from the Beneful case. Some notable brands in this segment include Beneful, Alpo, Purina ONE, Purina Dog Chow, Pro Plan, Fancy Feast, Friskies, Purina Cat Chow and Tidys Cats Litter. Nutrition sales were $1.0 billion for each of the six months ending. Innovation in Gerber infant cereals range continued to support growth and there were new product launches in the meals and drinks category. In addition, there was growth in the juvenile life insurance business. A notable brand in this segment is Gerber. Other business sales were $1.1 billion for each of the six months ending. Nestlé Professional is regaining growth momentum. In addition, there was growth in the Nestlé Health Science business and in the Nespresso brand coffee. Profitability Trading operating profit was $1.1 and $1.2 billion for each of the six months ending. There was a decrease as a percentage of sales from 12.0% in 2014 to 11.6% in 2015, primarily due to decreases in sales and increases in marketing and general expenses. Cost of goods sold was $5.5 billion for each of the six months ending, which equaled 55.8% and 55.9% of sales for each period, respectively. Distribution expenses were $0.9 billion for each of the six months ending, which equaled approximately 9.3% of sales for both periods. Marketing, general and administrative expenses were $1.7 billion for each of the six months ending June 30, 2015 and There was an increase in these expenses as a percentage of sales from 17.2% in 2014 to 17.6% in 2015, primarily due to increases in media communication. Net other trading expenses were $16.6 and $6.6 million for each of the six months ending June 30, 2015 and The increase was primarily due to the decrease in other trading income, which relates mainly to returns on company-owned life insurance and there was an increase in the impairment of property, plant and equipment and 4

5 intangible assets, which was offset by a decrease in losses on deferred compensation and litigation and onerous contracts. Net Profit Margin Other Items of Interest Net financial expenses increased by $2.6 million in the first six months of 2015 primarily due to a decrease in interest income on defined benefit assets partially offset by interest rate fluctuations. The Company s income tax expense decreased by $291.1 million in the first six months of 2015 in comparison to the same period last year, primarily as a result of adjustments to prior years taxes. Cash Flow Operating cash flow increased from $0.5 billion in the six months ending June 30, 2014 to $0.7 billion in the six months ending June 30, The change is primarily due to the effect of higher net income, resulting from adjustments to prior years taxes. Principal Risks and Uncertainties In the course of its business, the Company is exposed to certain risks and uncertainties: risk of damage to consumer trust, credit risk, liquidity risk, market risk (including foreign currency and interest rate), commodity price risk, risk of disruption of supplies, settlement risk and other risks. The Company believes that its principal risks and uncertainties for the remaining six months of the financial year have not changed since the issuance of the 2014 NHI Annual Financial Report. The detailed discussion of these risks and uncertainties and the Company s objectives, policies and processes for managing these risks and uncertainties were disclosed in the Management Report section under the heading Principal Risks and Uncertainties and in the Notes to the Consolidated Financial Statements, in particular, Note 12, included in the 2014 NHI Annual Financial Report. Outlook Although the economic outlook remains challenging, there are opportunities to leverage the Company s competitive advantages, deliver on growth opportunities and benefit from the drive for continuous improvement. The Company is committed to supporting the Nestlé Group in achieving its financial objectives including organic growth of around 5% with improvements in margins and underlying earnings per share in constant currencies, and capital efficiency. 5

6 Responsibility Statement Steve Presley, Chief Financial Officer, confirms that to the best of his knowledge: (a) the financial statements, which have been prepared in accordance with IAS 34, give a true and fair view of the assets, liabilities, financial position and profit or loss of NHI, or the undertakings included in the consolidation taken as a whole as required by DTR 4.2.4; and (b) the interim management report includes a fair review of the information required by DTR August 19,

7 Consolidated Balance Sheet As at June 30, 2015 and December 31, 2014 (Dollars in thousands, except capital stock par value and shares) Assets June 30, 2015 December 31, 2014 Current assets: Cash and cash equivalents $ 419, ,345 Short-term investments 59,398 93,618 Trade and other receivables, net 5,762,131 4,505,006 Inventories, net 2,038,225 1,733,983 Derivative assets 126,091 90,270 Assets held for sale 31,992 31,190 Prepayments 169,627 86,432 Total current assets 8,607,380 6,808,844 Non-current assets: Property, plant and equipment, net 5,088,613 5,189,840 Employee benefits assets 383, ,715 Investments in joint ventures and associated companies 9,022 8,361 Deferred tax assets 909, ,149 Financial assets 3,858,698 3,859,581 Goodwill 16,762,813 16,762,813 Intangible assets, net 1,043,611 1,001,960 Liabilities and Equity Total non-current assets 28,055,793 28,022,419 Total assets $ 36,663,173 34,831,263 Current liabilities: Trade and other payables $ 1,400,656 1,390,882 Financial liabilities 5,196,756 3,434,847 Provisions 70,001 90,994 Derivative liabilities 664, ,086 Accruals 1,550,768 1,522,166 Total current liabilities 8,883,113 6,970,975 Non-current liabilities: Financial liabilities 8,424,405 9,197,417 Employee benefits liabilities 1,801,532 1,884,271 Deferred tax liabilities 2,040,954 2,051,283 Provisions 56,398 55,904 Other accrued liabilities 1,817,469 1,938,708 Total non-current liabilities 14,140,758 15,127,583 Total liabilities 23,023,871 22,098,558 Equity: Capital stock, $100 par value. Authorized, issued, and outstanding, 1,000 shares Additional paid-in capital 5,624,297 5,624,297 Other equity reserves (926,558) (950,266) Accumulated earnings 8,941,463 8,058,574 Total equity 13,639,302 12,732,705 Total liabilities and equity $ 36,663,173 34,831,263 7

8 Consolidated Income Statement For the Six-month Period Ended Note Sales 2 $ 9,834,835 9,919,190 Cost of goods sold (5,490,136) (5,545,559) Distribution expenses (914,811) (922,343) Marketing, general and administrative expenses (1,733,041) (1,709,979) Royalties to affiliated company (542,041) (548,485) Net other trading expenses 6 (16,647) (6,644) Trading operating profit 1,138,159 1,186,180 Net other operating expenses 6 (5,739) (23,634) Operating profit 1,132,420 1,162,546 Net financial expenses 7 (120,432) (117,804) Share of results from associated companies 827 3,523 Income from continuing operations before income taxes 1,012,815 1,048,265 Income tax expense 8 (130,808) (421,852) Income from continuing operations 882, ,413 Income from discontinued operations, net of taxes 882 1,029 Net income $ 882, ,442 See accompanying notes to consolidated interim financial statements. 8

9 Consolidated Statement of Comprehensive Income For the Six-month Period Ended Net income $ 882, ,442 Other comprehensive income (loss): Foreign currency translation differences for foreign operations (100) Fair value adjustments on available-for-sale financial instruments: Recognized in fair value reserve * (148,103) 94,407 Reclassified from fair value reserve to income statement * 22,577 13,698 Fair value adjustments on cash flow hedges: Recognized in hedging reserve * (158) (20,727) Reclassified from hedging reserve * 19,668 20,607 Income taxes on fair value adjustments on available-for-sale financial instruments and cash flow hedges 35,667 (37,799) Total items that are or may be reclassified subsequently to the income statement (70,349) 70,086 Remeasurement of defined benefit plans 154,192 (37,641) Income taxes on remeasurement of defined benefit plans (60,135) 14,680 Total items that will never be reclassified to the income statement 94,057 (22,961) Other comprehensive income 23,708 47,125 Total comprehensive income $ 906, ,567 * Included in other equity reserves. 9

10 Consolidated Statement of Changes in Equity For the Six-month period ended Capital Additional Other equity Accumulated stock paid-in capital reserves earnings Total Equity as at January 1, 2014 $ 100 5,624,297 (793,862) 7,734,934 12,565,469 Net income 627, ,442 Other comprehensive income (loss): Foreign currency translation differences for foreign operations (100) (100) Fair value adjustments on available-for-sale financial instruments 108, ,105 Fair value adjustments on cash flow hedges (120) (120) Remeasurement of defined benefit plans (37,641) (37,641) Taxes on other comprehensive income (23,119) (23,119) Total other comprehensive income 47,125 47,125 Total comprehensive income 47, , ,567 Equity as at June 30, ,624,297 (746,737) 8,362,376 13,240,036 Equity as at January 1, ,624,297 (950,266) 8,058,574 12,732,705 Net income 882, ,889 Other comprehensive income (loss): Foreign currency translation differences for foreign operations Fair value adjustments on available-for-sale financial instruments (125,526) (125,526) Fair value adjustments on cash flow hedges 19,510 19,510 Remeasurement of defined benefit plans 154, ,192 Taxes on other comprehensive income (24,468) (24,468) Total other comprehensive income 23,708 23,708 Total comprehensive income 23, , ,597 Equity as at June 30, 2015 $ 100 5,624,297 (926,558) 8,941,463 13,639,302 10

11 Consolidated Statement of Cash Flows For the Six-month Period Ended Note Cash flows from operating activities: Net income $ 882, ,442 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant, and equipment 283, ,539 Loss on sales of property, plant and equipment 8,710 12,375 Impairment of property, plant and equipment Amortization of intangible assets 42,599 64,964 Impairment of intangibles assets 6,300 Loss on disposal of assets held for sale and other 5,357 3,484 Increase in cash surrender value of Company-owned life insurance policies (15,621) (36,868) Decrease in provisions (20,499) (19,616) Increase in deferred income taxes 6,715 68,205 Taxes on other comprehensive loss (24,468) (23,120) Change in working capital (excluding effects from acquisitions and divestitures): Trade and other receivables, net (180,562) 178,553 Inventories, net (305,422) (482,609) Prepayments and other current assets (80,323) (54,548) Trade and other payables and liabilities 175,219 86,546 Increase in working capital (391,088) (272,058) Share of results from investments in associated companies (1,709) (4,552) Dividends from associated companies Non-monetary movements on financial assets and liabilities 11,874 1,649 Movements of trading derivatives (1,553) (2,081) Movements of operating derivatives 5,638 5,521 Other employee benefits, net (51,292) (192,747) Total adjustments (135,359) (130,807) Net cash provided by operating activities 747, ,635 Cash flows from investing activities: Expenditure on property, plant and equipment (198,680) (193,317) Proceeds from sale of property, plant and equipment 3,836 1,277 Proceeds from business divestitures 2,092 Expenditure on intangible assets (90,917) (82,161) Investments in non-current financial assets (133,923) (146,331) Other movements ,854 Net cash used in investing activities (417,364) (400,678) Cash flows from financing activities: Net borrowings of commercial paper 1,157, ,882 Net (repayment) borrowings of line of credit facilities (39,032) 65,338 Bonds issued 5 1,036,381 Bonds repaid 5 (550,011) Loans to affiliates/parent issued, net 10 (1,324,876) (602,478) Notes to affiliates repaid 10 (250,000) Cash movement on derivatives hedging bond principal, net 2,075 Other changes in financial liabilities 27,787 (19,338) Net cash used in financing activities (178,595) (79,151) Net increase in cash and cash equivalents 151,571 16,806 Cash and cash equivalents at beginning of the period 268, ,294 Effect of exchange rate changes on opening balances (100) Cash and cash equivalents at end of the period $ 419, ,000 Supplemental information: Cash paid for: Interest $ 90,576 94,339 Taxes 100,248 93,550 See accompanying notes to consolidated interim financial statements. 11

12 Notes to the Consolidated Interim Financial Statements (1) Accounting Policies Basis of Preparation These financial statements are the unaudited consolidated interim financial statements of Nestlé Holdings Inc. ( NHI ) (hereinafter, together with its subsidiaries, referred to as the Company ) for the six-month period ended June 30, They have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting, and should be read in conjunction with NHI s consolidated financial statements for the year ended December 31, The accounting conventions and accounting policies are the same as those applied in NHI s consolidated financial statements for the year ended December 31, 2014, except for those mentioned below, in the section Changes in accounting policies. The preparation of NHI s consolidated interim financial statements requires management to exercise judgment and to make estimates and assumptions that affect the application of policies, reported amounts of revenues, expenses, assets and liabilities and disclosures. The key sources of estimation uncertainty within these consolidated interim financial statements remain the same as those applied to NHI s consolidated financial statements for the year ended December 31, Changes in accounting policies A number of standards have been modified on miscellaneous points with effect from January 1, Such changes include Defined Benefit Plans (Employee Contributions, Amendments to IAS 19) and Annual Improvements (which made amendments to IFRS 2 Share-base Payment, IFRS 3 Business Combinations and IFRS 8 Operating Segments among others). None of these amendments had a material effect on NHI s unaudited consolidated interim financial statements for the six-month period ended June 30, Changes in IFRS that may affect the Company after June 30, 2015 The following new standards and amendments to existing standards have been published and are mandatory for accounting periods beginning on or after January 1, The Company has not early adopted them. IFRS 9 Financial Instruments The standard addresses the accounting principles for the financial reporting of financial assets and financial liabilities, including classification, measurement, impairment, derecognition and hedge accounting. The standard will affect the Company s accounting for its available-for-sale financial assets, as IFRS 9 only permits the recognition of fair value gains and losses in other comprehensive income under some circumstances and gains and losses on certain instruments with specific cash flow characteristics are never reclassified to the income statement at a later date. 12

13 Notes to the Consolidated Interim Financial Statements There is no expected impact on the Company s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss, and the Company does not have any such liabilities. The Company is currently assessing the impact of the new impairment and hedge accounting requirements. In particular, it is expected that the new component hedge model may bring improved alignment between the risk management strategies and their accounting treatment. This standard is mandatory for the accounting period beginning on January 1, IFRS 15 Revenue from Contract with Customers This standard combines, enhances and replaces specific guidance on recognizing revenue with a single standard. It defines a new five-step model to recognize revenue from customer contracts. The Company is currently assessing the potential impact of this new standard. The International Accounting Standards Board decided at its July 2015 meeting to set January 1, 2018 as the mandatory effective date of this standard. Improvements and other amendments to IFRS/IAS A number of standards have been modified on miscellaneous points. None of these amendments are expected to have a material effect on NHI s consolidated financial statements. 13

14 Notes to the Consolidated Interim Financial Statements (2) Segmental Information Segmental information is as follows: Brands (a) PetCare Nutrition (a) Other (a) Total 2015 Sales $ 4,268,474 3,459, ,111 1,122,401 9,834,835 Trading operating profit (b) 275, , ,067 90,008 1,143, Sales $ 4,393,542 3,473, ,365 1,053,626 9,919,190 Trading operating profit (b) 355, , ,138 32,755 1,189,830 Reconciliation of total segment trading operating profit to income from continuing operations before income taxes is as follows: Total segment trading operating profit $ 1,143,700 1,189,830 Intangibles amortization (3,024) (3,524) Other (2,517) (126) Trading operating profit 1,138,159 1,186,180 Net other operating expenses (5,739) (23,634) Operating profit 1,132,420 1,162,546 Net financial expenses (120,432) (117,804) Share of results from associated companies 827 3,523 Income from continuing operations before income taxes $ 1,012,815 1,048,265 (a) (b) Nestlé USA Brands primarily consists of beverage, prepared foods, ice cream, confections and other food products. Nutrition primarily consists of infant and baby food products. Other consists of Nestlé Professional, Nespresso, and Nestlé Health Sciences, which do not meet the criteria for separate disclosure. The Company determines trading operating profit by allocating corporate expenses to its operating segments based on activity-based cost drivers. 14

15 Notes to the Consolidated Interim Financial Statements (3) Seasonality The Company s businesses are subject to the effects of slight seasonality. This is primarily concentrated in the Nestlé USA Brands segment, with more demand in the second half of the year during the holiday season. Trading operating profit margins have historically improved in the second half of the year due to increased absorption of fixed costs directly related to the increase in second half sales. Consequently, the operating results for the six months ended June 30, 2015 are not necessarily indicative of results to be expected for the full year. (4) Fair Value Hierarchy of Financial Instruments June 30, 2015 December 31, 2014 Derivative assets $ 28,880 10,621 Bonds and debt funds 88,602 51,504 Equity and equity funds 82,612 81,840 Other financial assets 3,342 3,570 Derivative liabilities (12,979) (21,021) Prices quoted in active markets (Level 1) 190, ,514 Derivative assets 97,211 79,649 Bonds and debt funds 2,594,949 2,642,589 Equity and equity funds 286, ,070 Investments in life insurance company general accounts 522, ,898 Other financial assets 21,976 17,681 Derivative liabilities (651,953) (511,065) Valuation techniques based on observable market data (Level 2) 2,871,934 3,038,822 Valuation techniques based on unobservable input (Level 3) 151, ,510 Total financial instruments at fair value $ 3,214,163 3,309,846 The fair values categorized in Level 2 above were determined from discounted cash flows and marketbased valuation parameters (primarily interest rates, foreign exchange rates and underlying asset prices). Derivative assets and derivative liabilities are included within the same respective lines of the Consolidated Balance Sheet. All other classes of financial assets disclosed in the table above are included within shortterm investments and financial assets of the Consolidated Balance Sheet. As of June 30, 2015, the carrying amount of bonds issued is $7,105,872 (December 31, 2014: $7,229,274), compared to a fair value of $7,240,790 (December 31, 2014: $7,367,516). This fair value is categorized as Level 2, measured on the basis of quoted prices. For all other financial assets and liabilities, the carrying amount is a reasonable approximation of the fair value. 15

16 Notes to the Consolidated Interim Financial Statements (5) Bonds No bonds were issued or repaid by NHI under the Debt Issuance Programme (DIP) during the six months ending June 30, (6) Net Other Trading and Operating Income/(Expenses) Net other trading expenses are as follows: Other trading income (a) $ 18,349 37,139 Losses (or cost) on deferred compensation Restructuring costs Impairment of property, plant and equipment and intangible assets Litigation and onerous contracts (b) (11,039) (23,045) (6,928) (2,361) (6,404) (348) (6,459) (17,998) Miscellaneous trading expenses (4,166) (31) Other trading expenses (34,996) (43,783) Net other trading expenses $ (16,647) (6,644) Net other operating expenses are as follows: Miscellaneous operating income $ 1,486 1,402 Other operating income 1,486 1,402 Natural disaster (14,035) Loss on disposal of businesses (6,399) (5,063) Miscellaneous operating expenses (826) (5,938) Other operating expenses (7,225) (25,036) Net other operating expenses $ (5,739) (23,634) (a) Relates mainly to returns on company-owned life insurance. (b) Relating principally to a number of separate legal cases, liabilities linked to voluntary product withdrawals and various separate onerous contracts. 16

17 Notes to the Consolidated Interim Financial Statements (7) Net Financial Expenses Interest income $ 19,993 10,966 Interest expense (125,958) (122,114) Net financing cost (105,965) (111,148) Interest income on defined benefit plans 7,023 17,525 Interest expense on defined benefit plans (21,353) (23,737) Net interest expense on defined benefit plans (14,330) (6,212) Other (137) (444) Net financial expenses $ (120,432) (117,804) Interest expense on amounts due to affiliated and associated companies and bond and commercial paper guarantee fees to Nestlé S.A. amounted to $(36,313) and $(38,167) in 2015 and 2014, respectively. Interest income on amounts due from affiliated and associated companies amounted to $19,938 and $10,067 in 2015 and 2014, respectively. (8) Income Taxes Reconciliation of income from continuing operations before income taxes multiplied by the applicable tax rate to income tax expense is as follows: Tax at theoretical rate Permanent differences on company-owned life insurance policies Tax effect of non-deductible or non-taxable items Prior years' taxes $ (390,696) (405,075) 8,710 15,451 26,215 19, ,503 (49,973) Other taxes (5,540) (2,166) Income tax expense $ (130,808) (421,852) Effective tax rate 13% 40% 17

18 Notes to the Consolidated Interim Financial Statements (9) Events after the Balance Sheet Date Other than the following, the Company was not aware of specific events or transactions occurring after June 30, 2015, and up to August 19, 2015 that would have a material impact on the presentation of the accompanying consolidated interim financial statements. In July 2015, Nestlé Purina PetCare Company, a subsidiary of NHI, has signed an agreement to acquire Merrick Pet Care, Inc., a natural and organic pet food company. Completion of the transaction is expected to close over the next several months. (10) Transactions with Related Parties Loans from Nestlé S.A.: At January 1 $ 1,600,083 1,850,098 Accrued interest (336) Loan repayments (250,000) At June 30 $ 1,600,083 1,599,762 Loans to NIMCO US, Inc. (Parent): At January 1 $ 916, ,277 Loans granted during the period 1,222, ,833 At June 30 $ 2,139,499 1,071,110 Loans from affiliates: At January 1 $ 320, ,673 Loans received during the period 15,971 1,245 Accrued interest 322 Loan repayments (2,437) (9,892) At June 30 $ 334, ,348 Loans to affiliates: At January 1 $ 1,324, ,105 Loans granted during the period 226, ,946 Loan repayments (110,564) (32,948) At June 30 $ 1,440, ,103 The above loans with related parties are in the trade and other receivables, trade and other payables, and current and non-current financial liabilities balances of the consolidated balance sheet. 18