UNITED BISCUITS LUXCO S.C.A.
CONSOLIDATED FINANCIAL STATEMENTS FOR THE 53 WEEK PERIOD ENDING 3 JANUARY 2015
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United Biscuits Luxco S.C.A. 2014
MANAGEMENT REPORT
The General Partner presents their strategic report and accounts for the 53 week period ended 3 January 2015.
Principal activity, review of the business, future developments and going concern
On 3 November 2014 the entire share capital of United Biscuits Luxco S.C.A. (“the Company”) and its subsidiaries (“the Group”) was acquired by Yildiz Holdings AS, a Turkish based company. The Group’s key financial and other performance indicators from operations during the period were as follows:
2014 2013 £m £m
Revenue 1,187.0 1,096.1 Adjusted EBITDA 186.1 164.1 (Loss)/profit before tax (35.6) 6.5 Net current assets 61.0 100.6 Shareholder’s equity (70.8) 48.5
Number Number Average number of employees 9,055 7,411
The principal activity of the Group is the manufacture and sale of a range of food products, principally biscuits and savoury snacks.
The Group is the leading manufacturer and marketer of biscuits in the United Kingdom and holds a prominent market position in a number of other jurisdictions. Among the Group’s popular core product brands are: McVitie’s Digestives, Jacobs Cream Crackers, Penguin, go ahead!, McVitie’s Jaffa Cakes, BN, Verkade and Delacre.
On 4 December 2012, the Group accepted an offer from Intersnack for the sale of the assets comprising its bagged snacks business (“KP Snacks”). The disposal was completed on 25 January 2013.
Revenue in 2014 was £1,187.0 million compared with £1,096.1 million in 2013, an increase of £90.9 million, or 8.3%. Revenue comprises sales of platinum brands, drive brands, commercial brands and private label products. Platinum brands are the Group’s most strategic and popular brands which receive priority marketing and innovation support. Drive and commercial brands receive more limited marketing and innovation support. Private label products are sold by multiple retailers under their own brands and are considered non-core to the Group’s business.
Adjusted EBITDA is the primary measure by which management measures business performance and is used by management for the purpose of business decision-making and resource allocation. Adjusted EBITDA represents the operating profit or loss from operations before share of results of joint venture, taxes, financing, exceptional items and depreciation and amortisation expense.
Adjusted EBITDA for 2014 was £186.1 million compared with £164.1 million in 2013, an increase of £22.0 million, or 14%. This increase is mainly due to the acquisition of A&P Foods in Nigeria and overhead cost reductions.
The consolidated financial statements have been prepared on a going concern basis as the directors are satisfied that the Company has adequate financial resources to continue its operations for the foreseeable future. In making this statement, the Company’s directors have reviewed the Company’s budget and available facilities and have made such other enquiries as they considered appropriate.
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Principal risks and uncertainties The Group has established a Risk Oversight Committee that meets to evaluate key risks to the Group. The Company is exposed to financial risk. This is summarised, together with the actions taken by the Group to mitigate any significant exposures, in Note 16 to the Consolidated Financial Statements. In addition, the Company is subject to a number of significant business risks, which it takes all possible actions to mitigate. The Risk Oversight Committee ensures that mitigation plans are adequately developed and tested.
These risks include the following:
Substantial leverage and ability to service debt
The wider Group, including the parent company, UMV Global Foods Company Limited (“UMV”) which holds the external debt, has a high level of debt which requires it to dedicate a substantial portion of its cash flow from operations to its debt service obligations. Its leveraged status could increase its vulnerability to adverse general economic and industry conditions or to a significant business continuity issue, limit its ability to obtain additional financing for working capital, capital expenditures, acquisitions or other purposes, place it at a disadvantage relative to its competitors that have less debt and limit its flexibility in planning for or reacting to changes in its business or industry.
Business strategy implementation The Group’s strategy is to increase its cash flow and profitability by implementing initiatives aimed at achieving cost savings and generating profitable branded growth. If it is unsuccessful at implementing its strategy it may be unable to comply with the financial covenants under the senior facilities agreement, held by UMV.
SIGNIFICANT COMPETITION
The Group operates in highly competitive markets, and its failure to compete effectively might adversely affect the results of its operations. It competes primarily on the strength of its brands, the quality of its products, product innovation and price. The Group’s ability to compete effectively requires continuous efforts in sales and marketing of its existing products, developing new products and cost rationalisation.
Dependence on raw materials The Group’s ability to pass increases in raw materials and energy costs on to its customers could adversely affect the results of its operations. Many of its raw materials and energy costs are volatile and supplies are affected by government policies, the actions of its suppliers, currency movements, political upheavals and acts of God. Consequently, unexpected increases in raw material and energy costs or a material or prolonged supply disruption could adversely affect the results of its operations.
CONTINUAL EVOLUTION OF RETAILERS
The ongoing evolution of the retail food industry in the United Kingdom and continental Western Europe could adversely affect UB’s operating results. Such evolution involves the consolidation of sales channels, strong bargaining power of the major grocery retailers, intensified price competition among these retailers and the rapid growth of the discount retail channel.
SUPPLY AND MANUFACTURING PROCESSES
Product quality and safety issues may result in damage to the reputation of the Group’s brands and the termination of agreements or licences to operate one or more of its brands and may affect its relationship with the company’s customers.
CHALLENGES TO BRANDS AND INTELLECTUAL PROPERTY RIGHTS
Some of the Group’s intellectual property rights could be challenged or lapse. As approximately 88% of its sales are from branded products this could adversely affect the Group’s results.
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RESTRICTIONS ON OPERATIONS
UB’s debt agreements contain significant restrictions limiting its flexibility in operating its business including, among other things, to: borrow money; pay dividends or make other distributions and make asset dispositions. These covenants could materially and adversely affect the Group’s ability to finance its future operations or capital needs or to engage in other business activities that may be in the Group’s best interest.
FUNDING DEFINED BENEFIT PENSION SCHEMES
UB operate defined benefit pension arrangements in the U.K. that have significant liabilities to current, previous and retired employees. In order to take advantage of the higher returns that equities and certain other investments have historically generated, a proportion of the pension plan funds are invested in such assets. This investment strategy carries the risk that a decline in values could increase the Group’s funding deficit, which may require it to increase its contributions.
CHANGES TO TAXATION OR OTHER GOVERNMENT REGULATION
Changes in fiscal legislation and regulation in the various jurisdictions in which UB operates may affect the taxes that it pays. In addition, Government bodies in the Group’s markets have been pursuing various initiatives aimed at increasing health and reducing the incidence of diseases that are seen to be linked to diet. The actions that government bodies may take could have an adverse effect on consumer demand for UB products.
Additional risks not presently known to the Group, or that management currently deem immaterial, may also impair future business operations. The directors who were members of the board at the time of approving the directors’ report are listed on page 5.
FINANCIAL RISK MANAGEMENT OBJECTIVES
In the ordinary course of business, the Group is exposed to a variety of financial risks arising from fluctuations in foreign currency exchange rates, interest rates and commodity prices. To manage these risks effectively, the Group enters into hedging transactions and uses derivative financial instruments, under established internal guidelines and policies, to mitigate the adverse effects of these risks. The Group does not enter into financial instruments for trading or speculative purposes.
The Treasury Management Committee establishes the Group’s financial risk strategy. The strategy is implemented by a central treasury department (Group Treasury), which identifies, evaluates and hedges financial risks, working closely with the Group’s operating units. The Treasury Management Committee ensures that critical controls exist and are operating correctly within Group Treasury. Written policies, approved by the Treasury Management Committee, provide the framework for the management of the Group’s financial risks, and provide specific guidance on areas such as foreign exchange risk, interest rate risk and liquidity risk. Foreign Exchange risk.
The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar, the Euro, Canadian dollar and Australian dollar. Foreign exchange risk arises as follows:
Although the majority of the Group’s operations are in the United Kingdom, its sales destinations are geographically diverse. During the period, the Group had sales in approximately 100 countries. As a result, the Group’s financial position and results of operations are subject to both currency transaction risk and currency translation risk.
Group Treasury is responsible for managing foreign exchange risk arising from future commercial and financing transactions and recognised assets and liabilities, usually by using forward currency contracts. The Group’s risk management policy is to hedge a proportion of its net currency exposure.
Due to the Group’s geographically diversified customer base, it generates a portion of its revenues from sales in currencies other than those in which it regularly operates and incurs expenses. The Group hedges against currency transaction risk by matching cash inflows in a particular currency with its costs. The Group enters into forward foreign currency contracts to hedge against its exposure to foreign currency exchange rate fluctuations in, among other things, the purchase of raw materials, sales in Eire and sales in the International Sales business. The Group also purchases forward foreign currency contracts to hedge against expected net exposure to foreign currency exchange rate fluctuations with particular contractual commitments.
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Restructuring programs
During 2014, the Group continued the implementation of its cost-reduction initiatives. Costs incurred were associated with factory restructuring programs and continued reductions in overheads. Costs associated with the separation and disposal of KP Snacks are included in profit on disposal in 2013.
Research and development
Research and development expenditure plays an essential part in the Group’s commitment to product innovation, health and nutrition, and the development of more effective production and packaging technology.
Suppliers
The Group requires management staff responsible for procurement to negotiate appropriate terms and conditions of trade as competitively as it negotiates prices and other commercial matters.
Employees are bound by the terms of the Group's Code of Business Behaviour and Ethics which sets out expectations regarding trading relationships with suppliers.
At 3 January 2015, the Group had an average of 97 days purchases (2013: 104 days) outstanding in trade creditors.
On behalf of the General Partner
John Sutherland Cem Karakas Director Director
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United Biscuits Luxco S.C.A. 2014
INDEPENDENT AUDITOR’S REPORT
To the Shareholder of United Biscuits LuxCo S.C.A. 2-4 rue Eugène Ruppert L-2453 Luxembourg
We have audited the accompanying consolidated financial statements of United Biscuits LuxCo S.C.A., which comprise the consolidated statement of financial position as at 3 January 2015, the consolidated statement of profit or loss, the consolidated statement of other comprehensive income, the consolidated statement of changes in equity, the consolidated cash flow statement for the period from 29 December 2013 to 3 January 2015, and a summary of significant accounting policies and other explanatory information.
General Partner’s responsibility for the consolidated financial statements
The General Partner is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and for such internal control as the General Partner determines is necessary to enable the preparation and presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Responsibility of the “réviseur d’entreprises agréé”
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the “Commission de Surveillance du Secteur Financier”. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the judgement of the “réviseur d’entreprises agréé”, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the “réviseur d’entreprises agréé” considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the General Partner, as well as evaluating the overall presentation of the consolidated financial statements.
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We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the financial position of United Biscuits LuxCo S.C.A. as of 3 January 2015, and of its financial performance and its cash flows for the period from 29 December 2013 to 3 January 2015 in accordance with International Financial Reporting Standards as adopted by the European Union.
Report on other legal and regulatory requirements
The management report, which is the responsibility of the General Partner, is consistent with the consolidated financial statements.
Other Matter
The consolidated financial statements of United Biscuits LuxCo S.C.A. for the period ended 28 December 2013 and 29 December 2012 are unaudited.
Ernst & Young Société anonyme Cabinet de révision agréé
Olivier JORDANT
Luxembourg, 18 May 2015
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United Biscuits Luxco S.C.A. 2014
Consolidated statement of profit or loss
Notes 53 weeks 52 weeks ending 3 ending 28 January December 2015 2013 £m £m (unaudited)
Revenue 1,187.0 1,096.1 Cost of goods sold (782.0) (735.0) Gross profit 405.0 361.1
Marketing expenses (82.0) (61.1) Other operating expenses (184.2) (181.2)
Operating profit before exceptional operating expenses 138.8 118.8
Operating profit before exceptional operating expenses is comprised as follows: Adjusted EBITDA 186.1 164.1 Depreciation and amortisation expense 3 (42.6) (41.0) Pension administration charges 19 (4.7) (4.3)
Exceptional operating expense 2 (68.8) (15.3) Operating profit 3 70.0 103.5 Financial income 4 0.5 1.7
Financial costs 5 (98.3) (88.3) Other finance expense – pensions 19 (7.8) (10.4) (Loss)/profit from continuing operations before taxes (35.6) 6.5 Income tax expense 6 (4.0) (6.9) Loss from continuing operations (39.6) (0.4) (Loss)/profit after tax from discontinued operations 7 (2.0) 211.7 (Loss)/profit for the period (41.6) 211.3
Attributable to: Equity holders of the parent (43.8) 211.4 Non-controlling interests 2.2 (0.1)
(41.6) 211.3
The accompanying notes will form part of these consolidated financial statements.
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United Biscuits Luxco S.C.A. 2014
Consolidated statement of other comprehensive income
Notes 53 weeks 52 weeks ending 3 ending 28 January December 2015 2013 £m £m (unaudited) (Loss)/profit for the period (41.6) 211.3 Other comprehensive income Items not to be reclassified subsequently to profit or loss Actuarial (loss)/gain on defined benefit pension plans 19 (87.7) 59.0 Tax on items not to be reclassified subsequently to profit or loss 6 17.8 (11.7) Total items not to be reclassified subsequently to profit or loss (69.9) 47.3 Items that may be reclassified to profit or loss (Loss)/gain on cash flow hedges taken to equity (5.4) 3.5 Gain/(loss) on cash flow hedges transferred to the Consolidated 2.8 (4.6) statement of profit or loss Exchange differences on translation of foreign operation (13.8) 3.2 Tax on items that may be reclassified to profit or loss 6 3.2 (0.5) Total items that may be reclassified to profit or loss (13.2) 1.6 Other comprehensive (loss)/profit for the period after tax (83.1) 48.9 Total comprehensive (loss)/profit for the period after tax (124.7) 260.2 Attributable to: Equity holders of the parent (126.9) 260.3 Non-controlling interest 2.2 (0.1) (124.7) 260.2
The accompanying notes form part of these consolidated financial statements.
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Consolidated statement of financial position Notes At 3 Jan At 28 Dec At 29 Dec 2015 2013 2012 £m £m £m (unaudited) (unaudited) ASSETS Non-current assets Intangible assets 8 996.7 958.2 952.7 Property, plant and equipment 9 348.0 305.7 283.7 Retirement benefit asset 19 1.3 1.0 1.0 Deferred tax 6 57.8 41.6 59.4 Derivative financial instruments 16 - - 0.1 Total non current assets 1,403.8 1,306.5 1,296.9 Current assets Inventories 11 67.3 62.3 53.8 Trade and other receivables 12 223.8 222.9 225.7 Derivative financial instruments 16 1.0 2.9 1.5 Cash and cash equivalents 13 75.5 103.1 186.8 Total current assets 367.6 391.2 467.8 Assets classified as held for sale 7 - - 343.5 TOTAL ASSETS 1,771.4 1,697.7 2,108.2
EQUITY AND LIABILITIES Shareholder’s equity Share capital and share premium 18 2.0 2.0 1.7 Treasury shares - (2.1) (0.3) Other reserves (3.8) 9.4 7.8 Retained earnings (72.4) 35.7 (225.4) Equity attributable to equity holders of the parent (74.2) 45.0 (216.2) Non controlling interests 3.4 3.5 - Total equity (70.8) 48.5 (216.2) Non current liabilities Borrowings 15 - 635.7 1,183.7 Shareholder debt 16 & 22 1,217.7 525.3 489.7 Retirement benefit liability 19 259.0 187.0 259.5 Provisions 17 0.3 0.3 1.8 Other non current liabilities 7 36.8 0.3 0.3 Deferred tax 6 21.8 10.0 10.0 Total non current liabilities 1,535.6 1,358.6 1,945.0 Current liabilities Borrowings 15 - - 27.9 Trade and other payables 14 291.3 282.5 273.0 Derivative financial instruments 16 5.5 3.1 2.1 Provisions 17 9.8 5.0 3.5 Total current liabilities 306.6 290.6 306.5 Liabilities directly associated with assets classified as held for sale 7 - - 72.9 Total liabilities 1,842.2 1,649.2 2,324.4
TOTAL EQUITY AND LIABILITIES 1,771.4 1,697.7 2,108.2
The accompanying notes form part of these consolidated financial statements.
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United Biscuits Luxco S.C.A. 2014
Consolidated statement of changes in equity
Share Currency Non- Capital Hedging Treasury Retained Total Translation Total Controlling & Share Reserves shares Earnings Equity Reserve Interests Premium £m £m £m £m £m £m £m £m
At 29 December 2012 (unaudited) 1.7 6.3 1.5 (0.3) (225.4) (216.2) (216.2)
Profit for the period - - - - 211.4 211.4 (0.1) 211.3
Actuarial profits on defined benefit plans net - - - - 47.3 47.3 - 47.3 of tax Net exchange difference on translation of - 2.6 - - - 2.6 - 2.6 foreign operations Net loss on cash flow hedges - - (1.0) - - (1.0) - (1.0)
Total comprehensive income in the period - 2.6 (1.0) - 258.7 260.3 (0.1) 260.2
Share based payments (Note 21) - - - - 2.4 2.4 - 2.4
Issue of shares 0.3 - - - - 0.3 - 0.3
Purchase of own shares - - - (1.8) - (1.8) - (1.8)
Non controlling interests arising on a ------3.6 3.6 business combination (Note 7)
At 28 December 2013 (unaudited) 2.0 8.9 0.5 (2.1) 35.7 45.0 3.5 48.5
(Loss)/profit for the period - - - - (43.8) (43.8) 2.2 (41.6)
Actuarial losses on defined benefit plans net - - - - (69.9) (69.9) - (69.9) of tax Net exchange difference on translation of - (10.9) - - (10.9) - (10.9) foreign operations Net loss on cash flow hedges - - (2.3) - - (2.3) - (2.3)
Total comprehensive income in the period - (10.9) (2.3) - (113.7) (126.9) 2.2 (124.7)
Share based payments (Note 21) - - - - 8.0 8.0 - 8.0
Purchase of own shares - - - (0.6) (0.6) - (0.6)
Disposal of treasury shares - - - 2.7 (2.4) 0.3 - 0.3
Contributed capital - - - - 20.3 20.3 - 20.3
Non-controlling interests arising on the ------14.2 14.2 acquisition of a subsidiary (Note 7)
Valuation of put option (Note 7) - - - - (20.3) (20.3) (16.5) (36.8)
At 3 January 2015 2.0 (2.0) (1.8) - (72.4) (74.2) 3.4 (70.8)
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Consolidated cash flow statement 53 weeks 52 weeks ending 3 ending 28
January December Notes 2015 2013
£m £m (unaudited)
Operating activities
Operating profit from continuing operations 70.0 103.5
Operating (loss)/ profit from discontinued operations 7 (2.0) 0.5
Adjustments for:
Depreciation and amortisation 3, 8 & 9 42.6 41.5
Exceptional operating expense 2 & 7 68.8 15.3
Decrease/(increase) in inventory 0.5 (6.8)
Increase in receivables (24.0) (3.6)
Increase in payables 24.9 14.8
Cash flows relating to financial instruments (0.3) (0.2)
Cash flows relating to restructuring and other provisions (58.1) (14.2)
Difference between pension contribution paid and (21.5) (22.9) amounts recognised in operating profit Cash generated from operations 100.9 127.9
Interest paid (33.8) (50.0)
Interest received 0.1 1.7
Income taxes (paid)/refunded (2.7) (1.9)
Net cash inflow from operating activities 64.5 77.7
Investing activities
Capital expenditure and purchases of intangible 8 & 9 (73.4) (53.5) assets Acquisitions 7 (39.0) (9.8)
Disposals 7 - 482.1
Net cash inflow from investing activities (112.4) 418.8
Financing activities
Purchase of own shares (0.6) (2.1)
Proceeds from disposal of shares 0.3 -
Debt repayment received 5.4 -
Purchase of own debt - (4.3)
Increase in shareholder debt 659.0 -
Repayment of debt 15 (642.5) (574.6)
Net cash used in financing activities 21.6 (581.0)
Decrease in cash and cash equivalents in the period (26.3) (84.5)
Currency translation differences (1.3) 0.8
Cash and cash equivalents at beginning of period 103.1 186.8
Cash and cash equivalents at end of period 13 75.5 103.1
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1. ACCOUNTING POLICIES
Compliance with International Financial Reporting Standards The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union. For all periods up to and including the period ending 28 December 2013 United Biscuits Luxco S.C.A. (“UB Luxco” and together with its subsidiaries the “Group”) prepared standalone financial statements only under Luxembourg Generally Acceptable Accounting Practice. Consolidated financial statements for the group were historically prepared at the United Biscuits Topco Limited level (United Biscuits Topco Limited is the direct subsidiary undertaking of UB Luxco) under IFRS. This is the Group’s first set of consolidated financial statements under IFRS. However, as the Group has not previously prepared consolidated financial statements and as its direct subsidiary prepared such statements under IFRS no restatements are required and no exemptions have been applied. The date of transition to IFRS for the Group is 30 December 2012. Basis of preparation UB Luxco was incorporated under the Luxembourg Companies Law on 24 November 2006 as a “société en commandite par actions” for an unlimited period of time. The registered office of UB Luxco is 2-4 rue Eugene Ruppert, L-2453 Luxembourg. The Group’s business is that of biscuit and baked snacks manufacturing, marketing and selling. The consolidated financial statements presented here are for the 53-week period ended 3 January 2015 together with its comparatives, being for the 52-week period ended 28 December 2013. The Group generally presents its consolidated financial statements based on 13 periods of four calendar weeks. As a result, a normal fiscal year consists of 52 weeks, a first fiscal quarter of four periods (16 weeks) and three fiscal quarters each comprising of three periods (12 weeks). Every five or six years, the final period is lengthened to five weeks, in which case, the fourth quarter consists of 13 weeks and the fiscal year consists of 53 weeks. Unless the context indicates otherwise “2014” means the 53-week period ended 3 January 2015, or the consolidated financial position as at 3 January 2015, “2013” means the 52-week period ended 28 December 2013 or the financial position as at 28 December 2013. The consolidated financial statements have been prepared on the historical cost basis, except for derivative financial instruments, pension assets and share based payments that have been measured at their fair value. The accounting policies set out below have been applied consistently to all periods presented within the financial statements and have been applied consistently by all subsidiaries. The consolidated financial statements are presented in pounds sterling and all references to “sterling” or “£” are to the lawful currency of the United Kingdom. The functional currency of UB Luxco is pounds sterling. All values are rounded to the nearest one hundred thousand pounds, except where otherwise indicated. Basis of preparation – going concern The Board of Directors of the General Partner (the “Directors”) are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future. The Directors reviewed detailed financial forecasts covering the period to December 2015 and summary financial forecasts for the following twelve months. As at 3 January 2015, the Group held cash and cash equivalents of £75.5 million and had total external borrowings of £nil million. Borrowings are instead represented by non current shareholder debt of circa £1.2 billion.
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Basis of consolidation The consolidated financial statements consolidate the results of all companies in the Group. Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtained control, and continue to be consolidated until the date that such control ceases. Intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated on consolidation. UB Luxco’s principal subsidiaries are listed in Note 10. Significant accounting judgements, estimates, and assumptions The preparation of consolidated financial statements requires the use of judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and actions, ultimately actual results may differ from those estimates. The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities arise in connection with the possible impairment of goodwill and intangible assets and the measurement of defined benefit pension obligations, promotional accruals and share based payments. Goodwill and intangible assets impairment review – The Group determines whether goodwill and indefinite life intangible assets are impaired on at least an annual basis and this requires an estimation of the value in use or fair value less costs to sell of the cash generating units to which the intangible assets are allocated. Considerable management judgement is necessary to identify cash generating units, estimate discounted future cash flows and apply a suitable discount rate. Further details are given in Note 8. Defined benefit pension obligations – The cost of pension benefit plans and post-retirement healthcare benefits is determined using actuarial valuations. This involves making assumptions about future changes in salaries, future pension increases, mortality rates and discount rates. Due to the long term nature of these plans, considerable management judgement is necessary and estimates are subject to significant uncertainty. Further details about the assumptions used are given in Note 19. Promotional accruals – The Group accrues for trade discounts and other allowances against agreed promotional activity. Such accruals are subject to a number of variables, e.g. redemption rates and anticipated volumes, and are sensitive to small changes in these variables. These costs are accrued on best estimates. The actual costs may not be known until subsequent years when negotiations with customers are concluded. Such adjustments are recognised in the year when the liability becomes probable. Management considers this to be an area of judgement that is significant due to the volume of such transactions. Share based payments – The cost of incentive programmes which are linked to the Group’s equity is determined using certain valuation models and other assumptions which require management judgement. In particular assumptions on the timing of the exit, which triggers the awards to be exercised, can have a material impact on the charge each period. Further details are given in Note 21. For all periods presented all amounts relating to the operation and disposal of the Snacks business have been classified as discontinued operations in the Consolidated statement of profit or loss. Revenue Revenue comprises sales of products to third parties at amounts invoiced net of trade discounts and rebates, excluding sales related taxes and sales between Group companies. Trade discounts include sales incentives, up-front payments and other non-discretionary payments. Revenue is recognised based on confirmed deliveries to customers, when the risks and rewards associated with the underlying
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products have been substantially transferred. At each balance sheet date any expenditure incurred, but not yet invoiced in relation to trade discounts and other allowances, is estimated and accrued. Adjusted EBITDA Adjusted EBITDA is the primary measure by which the Group’s management measures business performance and is used by the Group’s management for the purpose of business decision-making and resource allocation. Adjusted EBITDA represents the profit or loss before taxes, interest, exceptional operating income and expense and depreciation, amortisation expense and pension administrative charges. Exceptional operating income and expense The Group presents as exceptional operating items those items of income and expense which, in the opinion of the Directors, merit separate presentation to enable users of the consolidated financial statements to better understand the elements of financial performance in the year, to facilitate comparison with prior periods and to assess trends in financial performance more easily. Exceptional operating items include restructuring and other non-recurring expenses, charges for impairment of tangible and intangible assets and profits and losses on the disposal of property, plant and equipment. Restructuring and other non-recurring expenses are one-off costs that are incremental to costs the Group would otherwise incur in relation to its normal operations. Principally, they are costs associated with projects implemented to improve efficiency of the Group’s operations, integrate acquisitions, restructure departments or reduce the cost base of the business. For example, redundancy costs resulting from the closure or integration of a business or part of a business; costs directly associated with implementing improved ways of working and costs of product recalls. Costs associated with an activity that meets the definition of restructuring and other non-recurring expenses are charged to the consolidated statement of profit or loss at the point the Group is effectively committed to incurring those costs. A proportion of the costs incurred for the separation and sale of the bagged snacks business unit were included within exceptional operating expenses as these were borne by the continuing business. Costs associated with the sale of the Group to Yildiz Holdings on 3 November 2014 are also included within exceptional operating expenses. Foreign currencies Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss with the exception of monetary items that are designated as part of the hedge of the Group’s net investment of a foreign operation. These are recognised in the consolidated statement of other comprehensive income until the net investment is disposed of, at which time, the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in the consolidated statement of other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of gain or loss on change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in the consolidated statement of other comprehensive income or profit or loss are also recognised in the consolidated statement of other comprehensive income or profit or loss, respectively). Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date.
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On consolidation, assets and liabilities of foreign operations are translated into sterling at the exchange rate prevailing at the balance sheet date. Income and expense items are translated into sterling at the average rates for the year. Exchange differences arising on the translation of opening net assets of Group companies, together with differences arising from the translation of the net results at average or actual rates to the exchange rate prevailing at the balance sheet date, are recognised in the statement of comprehensive income under the currency exchange reserve. On disposal of a foreign entity, the deferred accumulated amount recognised in other comprehensive income relating to that particular foreign operation is recognised in the consolidated statement of profit or loss. Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at the acquisition date fair value, and the amount of any non-controlling interest in the acquiree. The choice of measurement of non- controlling interest, either at fair value or at the proportionate share of the acquiree’s identifiable net assets is determined on a transaction by transaction basis. Acquisition costs are expensed when incurred. Goodwill is initially measured at cost being the excess of the aggregate of the acquisition date fair value of the consideration transferred and the amount recognised for the non-controlling interest over the net identifiable amounts of the assets acquired and liabilities assumed in exchange of the business combination. Goodwill represents consideration paid by the Group in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognised. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is subject to an annual impairment review or more frequently when events or changes in circumstances indicate an impairment may exist. Any impairment is charged to the consolidated statement of profit or loss in the period in which it arises. Other intangible assets On acquisition, the Group recognises any separately identifiable intangible assets separately from goodwill, initially measuring the intangible assets at fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either indefinite or finite. Intangible assets with indefinite useful lives, as determined by the Directors, are not amortised but are subject to an impairment review on an annual basis or more frequently when events or changes in circumstances indicate an impairment may exist. Purchased brands are deemed to have indefinite lives when there is proven longevity of the brand and continued marketing support is envisaged. Intangible assets with finite useful lives are amortised over their useful lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The Group capitalises computer software at cost and also capitalises internally generated software based on costs incurred where certain specific criteria are met. Computer software is amortised on a straight-line basis over its estimated useful life, up to 5 years. The carrying value of intangible assets with a finite life is reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Any impairment is charged to the consolidated statement of profit or loss in the period it arises. Marketing costs Direct marketing costs including advertising are charged to the consolidated statement of profit or loss in the period in which the service was received or the Group had the right to access the related goods. Non-current assets held for sale and discontinued operations The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non- current assets and disposal groups classified as held for sale are measured at the lower of their carrying
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amount and fair value less costs to sell. The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the consolidated statement of profit or loss. Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. Property, plant and equipment Property, plant and equipment is stated at cost less depreciation and provision for impairment where appropriate. Freehold land is not depreciated. Depreciation is provided on a straight-line basis based on the expected useful lives of assets. Rates of depreciation applied are as follows:
Freehold buildings and long leaseholds 1.5% p.a. Leasehold improvements Shorter of the lease term and useful life of asset Plant, machinery and vehicles 3 – 20% p.a. Fixtures and fittings 10 – 33% p.a.
Assets under construction are capitalised but are not depreciated until such time as they are available for use. Technical stores consist of spare parts and other items for the repair and maintenance of plant and equipment. Major spare parts (costing more than £1,000) are recorded as assets under construction until such time as they are brought into use. All other purchases are expensed. Property, plant and equipment is reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired. Any impairment is charged to the consolidated statement of profit or loss in the period in which it arises. Useful lives and residual values of assets are reviewed annually. Impairment of assets Goodwill arising on business combinations is allocated to the groups of cash–generating units (equivalent to the Group’s business units as described in Note 8). The recoverable amount of the operating segments to which goodwill has been allocated is tested for impairment annually or more frequently when events or changes in circumstances indicate that it might be impaired. Previous impairments of goodwill are not reversed at a later date. The carrying values of property, plant and equipment and intangible assets with finite lives are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Where purchased intangible assets are considered by the General Partner to have an indefinite useful life, they are not amortised but are subject to an impairment review on an annual basis or more frequently if necessary. Intangible assets not yet available for use, for example, computer software under development, are tested for impairment annually. An impairment review is performed by comparing the carrying value of the property, plant and equipment or intangible asset or goodwill with its recoverable amount, the recoverable amount being the higher of the fair value of the asset less costs to sell and the asset’s value in use. An asset’s fair value less costs to sell is the amount that could be obtained on disposal of the asset. The value in use is determined by discounting, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset, the expected future cash flows resulting from
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its continued use, including those on final disposal. Impairment losses are recognised in the consolidated statement of profit or loss immediately. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which it belongs. Considerable management judgement is necessary to estimate discounted future cash flows. Accordingly, actual cash flows could vary considerably from forecasted cash flows. Impairment reversals are permitted to property, plant and equipment or intangible assets (but not to goodwill) only to the extent that the new carrying value does not exceed the amount it would have been had no impairment loss been previously recognised. Leasing commitments Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group and capitalised at their fair value at the date of commencement of the lease or, if lower, at the present value of the minimum lease payments within property, plant and equipment and depreciated over the shorter of the lease term and estimated useful life. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and a reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the consolidated statement of profit or loss. Lease payments relating to operating leases are charged to the consolidated statement of profit or loss on a straight-line basis over the term of the relevant lease, or over the period between rent reviews where these exist. Inventories Inventories are valued at the lower of cost and estimated net realisable value. The cost of products manufactured by the Group comprises direct material and labour costs together with appropriate factory overheads. The cost of raw materials and goods for resale is determined on a first-in, first-out basis. Net realisable value is based on estimated selling price less any further costs expected to be incurred to completion and disposal. Inventory held as consignment stock is recognised as an asset in the balance sheet at cost, as the risks and rewards of ownership have been transferred to the Group. A corresponding liability is also recognised in the consolidated statement of financial position. Trade and other receivables Trade and other receivables are recognised and carried at original invoice amount less an allowance for any amounts that are not collectable. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified. Cash and cash equivalents Cash includes cash in hand and deposits repayable on demand with any qualifying financial institutions, less overdrafts from any qualifying institution repayable on demand. Cash equivalents are bank deposits which mature in three months or less at the date of acquisition. Borrowings Borrowings are initially recognised at fair value, which is represented by the amount of net proceeds received including any premium on issue and after deduction of issue costs. Borrowings are subsequently stated at amortised cost. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement of profit or loss over the period of the borrowings using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument, or where appropriate a shorter period, to the net carrying amount of the financial asset or financial liability.
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Taxes Current tax is based on the results for the year as adjusted for non-assessable or disallowed items. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for in respect of temporary differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit or loss. Deferred tax liabilities are recognised for all taxable temporary differences except in respect of investments in subsidiaries and interests in joint ventures where the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Additionally, where the temporary difference arises from the initial recognition of goodwill or initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit (or loss), deferred tax is not recognised. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilised. Their carrying amount is reviewed at each balance sheet date. Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which the asset or liability is realised based on tax rates and laws enacted or substantively enacted at the balance sheet date. It is recognised in the consolidated statement of profit or loss except when it relates to items recorded directly in equity. Pensions and other post-retirement benefits The Group’s main post-retirement arrangements are in the United Kingdom and are of the defined benefit type, for which contributions are paid into separately administered funds. The Group’s U.K. defined benefit plans are closed to new members and membership of defined contribution plans is available for new employees. The Group also provides additional post-retirement benefits to certain senior managers in the United Kingdom and post-retirement healthcare benefits in the Netherlands, both of which are unfunded. The cost of providing benefits under the defined benefit plans is determined separately for each plan using the projected unit credit method, which attributes entitlement to benefits to the current period (to determine the current service cost) and to the current and prior periods (to determine the present value of the defined benefit obligation) and is based on actuarial advice. When a settlement (eliminating all obligations for benefits already accrued) or a curtailment (reducing future obligations as a result of a material reduction in the scheme membership or a reduction in future entitlement) occurs the obligation and related plan assets are re-measured using current actuarial assumptions and the resultant gain or loss is recognised in the Consolidated statement of profit or loss during the period in which the settlement or curtailment occurs. Actuarial gains and losses are recognised in full in the consolidated statement of other comprehensive income in the period in which they occur. The Group recognises a surplus in schemes only through a reduction in future contributions or where a right to a refund exists. Where the payment in relation to a minimum funding requirement creates a surplus (on an IAS 19R basis) which will be recognised on the basis of a potential refund, the tax on this refund is deemed to be an income tax and consequently no provision is recognised. Contributions to defined contribution plans are recognised in the consolidated statement of profit or loss in the period in which they are payable. Contingencies and provisions In the normal course of business the Group is involved in certain disputes. Provision for contingent liabilities is made when it is deemed probable that an adverse outcome will occur and the amount of the loss can be reasonably estimated. Where the Group is the plaintiff in pursuing claims against third parties, legal and associated expenses are charged to the consolidated statement of profit or loss as incurred. Contingent assets are not recognised in the consolidated financial statements.
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When either a legal or constructive obligation, as a result of a past event, exists at the balance sheet date and where the amount of the obligation can be reasonably estimated a provision is recognised. If the effect is material, expected future cash flows are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Derivative financial instruments and hedging The Group uses certain derivative financial instruments for the purpose of hedging foreign exchange, interest rate and commodity price risks. Under IAS 39 Financial Instruments: Recognition and Measurement, hedging relationships must meet strict criteria to qualify for hedge accounting. For those derivative financial instruments designated as hedges, the hedging relationship is documented at its inception. This documentation identifies the hedging instruments, the hedged items or transactions, the nature of the risks being hedged and how effectiveness will be measured throughout the instruments’ duration. Such hedges are expected at inception to be highly effective. The carrying values of recognised assets and liabilities that are designated as hedged items in fair value hedges that would otherwise be carried at amortised cost, are adjusted to record changes in the fair values attributable to the risks that are being hedged in effective hedge relationships. Hedge accounting is applied where derivative financial instruments are measured to have been highly effective in offsetting the changes in fair value or cash flows of the hedged items. Derivatives outside a hedging relationship are recorded at fair value at the balance sheet date with any gains or losses being recognised in the consolidated statement of profit or loss. Where a hedging instrument fails to meet the criteria for hedge accounting, or where a portion of a qualifying hedging relationship is ineffective, the movement in the fair value of the hedging instrument relating to hedge ineffectiveness is recognised in the consolidated statement of profit or loss immediately.
(a) Cash flow hedges Changes in the fair value of derivative financial instruments that are designated and effective as cash flow hedges of highly probable forecast transactions or firm commitments in foreign currency are recognised in the hedging reserve. Amounts deferred in this way are recognised in the consolidated statement of profit or loss in the same period in which the hedged forecast transaction or firm commitment is recognised in the consolidated statement of profit or loss. Any ineffective portion of the changes in the fair value of designated cash flow hedges is recognised immediately in the consolidated statement of profit or loss. The Group discontinues cash flow hedging when a forecast transaction is no longer expected to occur and amounts previously recognised in equity are transferred to the consolidated statement of profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs and are then recognised in the consolidated statement of profit or loss. (b) Fair value hedges For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged; the derivative is re-measured at fair value and gains and losses from both are taken to profit or loss. For hedged items carried at amortised cost, the adjustment is amortised through the consolidated statement of profit or loss, such that, it is fully amortised at maturity. When an unrecognised firm commitment is designated as a hedged item, this gives rise to an asset or liability in the balance sheet, representing the cumulative change in the fair value of the firm commitment attributable to the hedged risk. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation.
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(c) Hedges of net investment Where foreign currency loans are designated as hedges of net investments in foreign operations the portion of the foreign exchange gain or loss on the borrowing that is determined to be an effective hedge is recognised directly in the currency translation reserve. On disposal of a foreign operation, the cumulative translation differences are transferred to the consolidated statement of profit or loss as part of the gain or loss on disposal. Measurement of fair values A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial assets and liabilities and non-financial assets acquired in a business combination (See Note 16). The Group enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade credit ratings. Derivatives valued using valuation techniques with market observable inputs are mainly interest rate swaps, foreign exchange forward contracts and commodity forward contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including foreign exchange spot and forward rates, interest rate curves and forward rate curves of the underlying commodity. The credit quality of the counterparties and the Group’s own credit quality are also considered and adjusted for when deemed necessary. Share based payments Equity-settled share based payments The Group has issued equity-settled share based payment schemes for which they receive services from employees in consideration for the equity instrument. Equity-settled share based payment schemes are measured at fair value at the grant date by an external valuer using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any service and non-market performance (vesting conditions), other than performance conditions linked to the price of the shares of the Group (market conditions). Any other conditions which are required to be met in order for an employee to become fully entitled to an award are considered to be non-vesting conditions. Like market performance conditions, non-vesting conditions are taken into account in determining the grant date fair value. The cost of equity settled transactions with employees is measured by reference to the fair value and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees became fully entitled to the award (i.e. on exit). At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest. The movement in cumulative expense since the previous balance sheet date is recognised in the consolidated statement of profit or loss, with a corresponding entry in equity.
No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance or service conditions are satisfied. Where an equity-settled award is cancelled (including when a non-vesting condition within the control of the entity or employee is not met), it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the consolidated statement of profit or loss for the award is expensed immediately.
Cash-settled share based payments
The cost of cash-settled transactions is measured initially at fair value at the grant date by an external valuer using an appropriate pricing model, further details of which are given in Note 21. This fair value is expensed, within exceptional operating expenses, over the period until the vesting date with recognition of a corresponding liability. The liability is re-measured to fair value at each reporting date up to, and including the settlement date.
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New Standards and Interpretations
The IASB and the International Financial Reporting Interpretations Committee (“IFRIC”) have issued the following standards, amendments and interpretations which will be effective for future accounting periods of the Group. Some of these standards, amendments and interpretations are not yet endorsed by the European Union. The Group intends to adopt the following standards, amendments and interpretations, which it considers are applicable, when they become effective and endorsed by the European Union:
Effective for European Union accounting periods endorsement status beginning on or after IFRS IAS 1 Disclosure Initiative - Amendments to IAS 1 1 January 2016 Not yet endorsed IAS 19 Defined Benefit Plans: Employee 1 July 2014 Endorsed Contributions - Amendments to IAS 19 IFRS 9 Financial Instruments 1 January 2018 Not yet endorsed IFRS 10 and IAS Sale or Contribution of Assets between an 1 January 2016 Not yet endorsed 28 Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28 IFRS 10, IFRS 12 Investment Entities: Applying the 1 January 2016 Not yet endorsed and IAS 28 Consolidation Exception - Amendments to IFRS 10, IFRS 12 and IAS 28 IAS 27 Equity Method in Separate Financial 1 January 2016 Not yet endorsed Statements - Amendments to IAS 27 IFRS 11 Accounting for Acquisitions of Interests in 1 January 2016 Not yet endorsed Joint Operations - Amendments to IFRS 11 IAS 16 and IAS Clarification of Acceptable Methods of 1 January 2016 Not yet endorsed 38 Depreciation and Amortisation - Amendments to IAS 16 and IAS 38 IFRS 15 Revenue from contracts with customers 1 January 2017 Not yet endorsed
The IASB has issued the Annual Improvements to IFRSs 2010 – 2012 Cycle, IFRSs 2011 – 2013 Cycle and IFRSs 2012 – 2014 Cycle which are collection of amendments to IFRSs. The Group intends to adopt the amendments, which it considers are applicable, when they become effective and endorsed by the European Union:
Effective for European Union accounting periods endorsement status beginning on or after Annual Improvements to IFRSs 2010 – 2012 Cycle IFRS 2 Share-based Payment – Definitions of vesting 1 July 2014 Endorsed conditions IFRS 3 Business combinations – Accounting for 1 July 2014 Endorsed contingent consideration in a business combination IAS 16 and IAS Property Plant & Equipment – Revaluation 1 July 2014 Endorsed 38 method – proportionate restatement of accumulated depreciation/amortisation IAS 24 IAS 24 Related Party Disclosures – Key 1 July 2014 Endorsed management personnel
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Annual Improvements to IFRSs 2011 – 2013 Cycle IFRS 3 Business Combinations – Scope exceptions 1 July 2014 Endorsed for joint ventures IFRS 13 Short term receivables and payables 1 July 2014 Endorsed IFRS 13 Scope of paragraph 52 (portfolio exemption) 1 July 2014 Endorsed
Annual Improvements to IFRSs 2012 – 2014 Cycle IFRS 5 Non-current Assets Held for Sale and 1 January 2016 Not yet endorsed Discontinued Operations - Changes in methods of disposal IFRS 7 Financial Instruments: Disclosures - Servicing 1 January 2016 Not yet endorsed contracts IAS 19 Employee Benefits - Discount rate: regional 1 January 2016 Not yet endorsed market issue
Management does not anticipate that the adoption of the above standards and interpretations will have a material impact on the Group’s financial statements in the initial period of application.
Proposals to issue new or revised IFRSs, as yet unpublished, on leases and other topics may change existing standards, and may therefore affect the accounting policies applied by the Group in future periods.
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2014 £m
Restructuring and other non-recurring expenses (1) (18.9) Disposal costs (5) (38.5) Share based payments cost (4) (11.4) Exceptional operating expense (68.8) 2013 Exceptional costs (1) (11.7) Exceptional gains (2) 1.8 Share based payments cost (4) (2.6) Costs relating to the disposal of KP Snacks (3) (2.8) Exceptional operating expense (15.3)
(1) Restructuring and other non-recurring expenses represent costs incremental to the costs that would otherwise be incurred in relation to normal operations. This includes costs of £12.0 million (2013: £3.8 million) in relation to the modernisation programmes being rolled out in the Group’s UK factories, including new terms and conditions for employees and rationalisation of shift patterns. It also includes costs associated with restructuring head office functions including sales, following the sale of KP Snacks during 2013, and integration and advisor fees of circa £2.0 million (2013: £1.5 million) in relation to newly acquired businesses in Saudi and Nigeria as well as costs incurred on smaller scale, localised efficiency projects in Northern Europe. No analysis of these expenses by function exists. However, they relate to cost of goods sold, distribution, selling and marketing and general administration expenses.
(2) The gain relates to a £1.8m curtailment gain in respect of the defined benefit pension scheme arising from the sale of KP Snacks. (See Note 19)
(3) These costs relate to a rationalisation programme arising as a consequence of the disposal of KP Snacks
(4) Share based payment costs (£11.4m) (2013: £2.6m) are treated as exceptional expenses as the relevant awards vested on the sale of the Group and are therefore not deemed to be part of normal operations.
(5) Costs associated with the sale of the Group to Yildiz Holdings include legal and consultancy fees, fees in connection with the aborted IPO process and incremental staff costs.
2014 2013 £m £m (unaudited)
Operating profit is stated after charging:
Other operating expenses: Distribution expenses 50.3 50.7 Selling and general administration expenses 133.9 130.5 184.2 181.2
The depreciation and amortisation expense by function was as follows: Cost of goods sold 37.2 35.1 Distribution, selling and marketing expenses 1.5 1.5 General and administrative expenses 3.9 4.4 Continued operations 42.6 41.0 Discontinued operations - 0.5 42.6 41.5
Operating lease rentals: Property 5.2 4.9 Plant and equipment 4.8 5 4 10.0 10.3
Net foreign exchange (gain)/loss (0.2) 2.4
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Shareholder fees 1.6 2.0
Research and development 5.1 4.5
Staff costs and directors' emoluments (including KP Snacks to 25 January 2013) Gross wages and salaries, holiday pay and sick pay 222.6 225.0 Social security costs 35.2 35.0 Pension 19.6 11.1 Share based payments 11.4 2.6 288.8 273.7
The average monthly number of employees during the year was as follows:
2014 2013 (unaudited) Manufacturing and production 7,084 5,674 Logistics and site services 843 694 Sales, marketing and administration 1,127 1,043 9,054 7,411
The Group paid the following amounts to its auditors in respect of their audit of the Group's consolidated financial statements and for other services provided to the Group:
2014 2013 £'000 £'000 (unaudited)
Fees payable to the company's auditor for the audit of the company's annual accounts 455 206 Fees payable to the company's auditor for other services: Auditing of accounts of subsidiaries 604 535
1,059 741
Audit related assurance services 14 14 Tax compliance services 2 1 Tax advisory services 3 - Corporate finance services 3,149 - Non audit services - - 4,227 756
Fees relating to the auditing of accounts for subsidiaries include £45,000 related to the audit of the Group's pension scheme (2013: £45,000).
4.
2014 2013 £m £m (unaudited)
Interest income on bank deposits 0.5 1.7
0.5 1.7
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5.
2014 2013 £m £m (unaudited)
Bank credit facility 46.6 47.4 Interest payable on shareholder loan 50.3 39.0 Other financial charges 1.4 1.9 98.3 88.3
6. Tax on profit on ordinary activities: Tax is charged in the consolidated statement of profit or loss as follows:
2014 2013 £m £m (unaudited)
Current income tax UK corporation tax - - Foreign tax 1.5 1.4 Current income tax charge 1.5 1.4 Adjustment relating to prior years - (0.1) Total current income tax 1.5 1.3
Deferred tax Origination and reversal of temporary differences 0.5 1.3 Changes in the corporation tax rate - 5.0 Adjustments relating to prior years 2.0 (0.7) Total deferred tax 2.5 5.6 Tax charge in the consolidated statement of profit or loss on continuing operations 4.0 6.9
Deferred tax on discontinued operations - - Tax charge in the consolidated statement of profit or loss 4.0 6.9
Tax relating to items charged or credited to equity is as follows:
Deferred tax Actuarial (loss)/gain on defined benefit plan (17.8) 12.5 Translation differences on foreign currency net investments (2.6) 0.7 Revaluation of cash flow hedges (0.6) (0.2) Changes in the corporation tax rate - (0.8) Tax (credit)/debit in the statement of other comprehensive income (21.0) 12.2
Reconciliation of the total tax charge The current tax charge on the profit on ordinary activities for the year is higher than the average rate of corporation tax of 29.22% (2013: lower than the average rate of corporation tax of 29.22%).
2014 2013 £m £m (unaudited) (Loss)/profit from continuing operations before taxation (35.6 ) 6.5 Profit from discontinued operations before taxation (2.0) 211.7
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Total profit before taxation (37.6) 218.2 Tax charge on ordinary activities at the statutory rate (11.0 ) 63.8 Expenses not deductible for tax purposes/(non-taxable income) 9.3 (48.0) Reversal of deferred tax liabilities on intangibles - - Reversal of deferred tax assets on capital losses utilised - - Prior year adjustments 2.0 (0.8) Effect of overseas tax rates 3.8 (18.6) Loss carried forward for which no DTA was recognised 1.0 6.9 Tax losses utilised for which no DTA was recognised (1.1) (1.4) Changes in the tax rate - 5.0 Tax charge in the consolidated statement of profit or loss 4.0 6.9
The Dutch Tax Authorities have indicated they intend to raise an assessment in respect of the 2011 results that would disallow interest deductions on an intra-group loan to United Biscuits BV, a potential tax liability of €2.2 million. No tax provision has been made in respect of this as, based on advice received, the Group believes this interest to be deductible and intends to defend its position. Unrecognised tax losses A deferred tax asset has not been recognised on tax losses of approximately £22 million arising in India at 3 January 2015 (2013: £19 million), as it is not anticipated that any of these losses will be able to be offset against profits arising in the foreseeable future. Temporary differences associated with group investments At 3 January 2015, there was no recognised deferred tax liability (2013: nil) for taxes that would be payable on the unremitted earnings of the Group’s subsidiaries as the Group has determined that these undistributed profits will not be distributed in the near future. Overseas dividends received are exempt from UK corporation tax, but may be subject to withholding tax. There are no temporary differences associated with investments in subsidiaries, for which a deferred tax liability has not been recognised but for which a tax liability may arise.
Deferred Tax 2014 2013 £m £m (unaudited) Deferred tax assets Decelerated capital allowances 41.7 38.5 Pensions and other healthcare benefits 52.2 37.4 Other short-term temporary differences 3.1 2.0 Losses carried forward 63.7 67.5 160.7 145.4
Deferred tax liabilities Accelerated capital allowances 2.5 2.9 Intangible assets 118.4 106.2 Other short-term temporary differences 3.8 4.7 124.7 113.8
Net deferred tax asset 36.0 31.6
Disclosed in the balance sheet as follows: Deferred tax asset 57.8 41.6 Deferred tax liability (21.8) (10.0) 36.0 31.6
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(Accelerated)/ Retirement Decelerated benefit capital Intangible obligation allowances Losses assets Other Total £m £m £m £m £m £m
At 29 December 2012 (unaudited) 59.4 37.5 72.1 (119.3) (0.3) 49.4 Movement in consolidated statement of profit or loss - current year (9.3) (2.6) (4.6) 13.1 (2.9) (6.3) Movement in consolidated statement of profit or loss - prior years - 0.7 - - - 0.7 Movement in other comprehensive income (12.7) - - - 0.5 (12.2)
At 28 December 2013 (unaudited) 37.4 35.6 67.5 (106.2) (2.7) 31.6 Movement in consolidated statement of profit or loss - current year (3.0) 5.6 (3.8) - 0.7 (0.5) Movement in consolidated statement of profit or loss - prior years - (2.0) - - - (2.0) Business combination - - - (14.1) - (14.1) Movement in other comprehensive income 17.8 - - 1.9 1.3 21.0
At 3 January 2015 52.2 39.2 63.7 (118.4) (0.7) 36.0
Acquisition of A&P Foods Limited On 8 February 2014, the Group acquired a controlling interest in A&P Foods Limited (“A&P”), one of Nigeria’s largest biscuit and confectionery manufacturers. Combined with its existing strong business in Nigeria, A&P provides the Group with a platform for growth of the McVitie’s brand, enabling a significant acceleration of the Group’s affordability strategy, of introducing locally relevant products in flexible formats and pack sizes. A&P operate three modern factories from two sites in Lagos. The factories manufacture nearly 60,000 tonnes of product each year including sweet and savoury biscuits and confectionery sold under the Haansbro brand. The Group paid cash consideration of 9 billion Naira (c.£37.9m) to acquire a 70% interest in A&P. A fair value exercise was carried out at the point of acquisition and the identifiable assets and liabilities were as follows: £m
Brands 47.0 Tangible assets 16.7 Other non-current assets 0.3 Current assets 9.7 Deferred Tax (14.1) Non-current liabilities (2.0) Current liabilities (10.4) Non-controlling interest (30% of net assets) (14.2)
Net assets acquired 33.0
Purchase price (37.9)
Goodwill 4.9 Goodwill represents the premium paid to acquire an established, profitable business. During the period since acquisition, A&P contributed revenue of £47.0 million and profit after tax of £6.9 million.
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Non controlling interest is measured to be the proportionate share of identifiable assets. The non- controlling interest holds a put option over the remaining 30% of A&P, therefore a non current liability of £36.8 million has been recognised as the fair value of this put option. The put option can be exercised at stipulated times in line with the sales agreement. If a change of control occurs prior to 1 January 2016, however, the non-controlling interest can exercise its put option within 13 months following the change of control and no later than December 2016. The fair value of this put option has been determined by using the earnings valuation model based on anticipated earnings at the earliest time the put option can be exercised. The Group holds a call option over the remaining 30% of A&P which can be exercised at any time following the second anniversary of acquisition of its majority holding. The sale of the Group to Yildiz Holdings AS constituted a change of control for this purpose but the put option has not yet been exercised. The non-controlling interest’s share of net assets, together with its share of profits to date, has been recorded as a liability as at the date of acquisition. The difference between this amount and the fair value of the put option has been recognised in reserves, as will any re-measurements thereafter.
Acquisition of Rana
On 30 October 2013, the Group acquired a controlling interest in a manufacturing site and other assets from Rana Confectionary Products Establishment (“Rana”), a major biscuits manufacturer in the Saudi peninsula. This acquisition gives the Group production capabilities and access to growing markets in the Middle East. The Group, via its subsidiary International Biscuits Limited, paid cash consideration of Saudi Riyals of 66m (c.£10.9m) to acquire a 65% interest. Management has determined that there is no material change to the provisional fair values as set out below: £m (unaudited)
Tangible fixed assets 9.8 Raw materials and consumables 0.6 Non controlling interest (35% of net assets) (3.6) 6.8 Net assets acquired
Purchase price on completion (9.8) Final instalment 28 March 2014 (1.1)
Goodwill 4.1
Goodwill represents the premium paid to facilitate direct entry into the Middle East Region. Non controlling interest is measured as the proportionate share of identifiable assets.
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Disposal of KP Snacks On 25 January 2013 the Group disposed of the trade and assets comprising its bagged snacks business unit (“KP Snacks”). The Group recognised a gain on disposal of £211.3 million, net of disposal costs. In 2012 KP Snacks was classified as a disposal group held for sale and as a discontinued operation in 2011 and 2012. The results of KP Snacks for 2013 through to the disposal date (2012: year to 29 December 2012 and 2011: year to 31 December 2011) are presented below:
2014 2013 £m £m Revenues - 18.0 Cost of goods sold - (12.3) Gross profit - 5.7 Distribution, selling and marketing expenses - (3.5) General and administrative expenses - (1.7) Operating profit before exceptional operating items - 0.5 Exceptional operating items (3) (2.0) (0.1) Gain on the disposal of KP Snacks(2) - 211.3 Share of results of joint venture - - Profit before taxes (2.0) 211.7 Taxes(1) - - Profit from discontinued operations (2.0) 211.7 (1) For tax purposes, the gain on disposal was recognised in 2012 and resulted in a current tax charge of £87.7m. Sufficient brought forward capital losses were available to offset the taxable gain.
(2) Gain on disposal comprises: 2013 £m (unaudited) Proceeds 494.3 Less: disposal costs including legal fees, bank consent fees and other costs directly attributable to the sale of KP Snacks (14.3) Less: assets disposed of: Intangibles (223.7) Property, plant and equipment (53.7) Inventories (10.6) Trade and other receivables (57.1) Add: liabilities disposed of: Trade and other payables 76.4 Gain on disposal 211.3
(3) The exceptional operating item of £2 million in 2014 relates to unrecovered debts in relation to KP Snacks.
The major classes of assets and liabilities of KP Snacks classified as held for sale as at 29 December 2012 were as follow:
2012 £m (unaudited) Intangible assets 223.7 Investment in JV 0.6 Property, plant and equipment 53.4 Inventories 10.6 Trade and other receivables 55.2 Assets classified as held for sale 343.5 Trade and other payables 72.9 Liabilities directly associated with the assets classified as held for sale 72.9
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The net cashflows of KP Snacks in 2013 were as follows:
2013 £m Operating profit before depreciation 1.0 Investing (2.8) Net cash outflow (1.8)
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Purchased Computer Total Goodwill Brands Software £m £m £m £m Cost At 31 December 2011(unaudited) 531.0 642.7 17.6 1,191.3 Additions - - 1.0 1.0 Additions from business combinations - - - - Disposals - - (1.0) (1.0) Transfer from assets under construction (Note 9) - - 1.4 1.4 Transfer to disposal group held for sale (Note 7) (106.7) (117.0) - (223.7) Exchange differences (1.5) (1.1) (0.1) (2.7) At 29 December 2012 (unaudited) 422.8 524.6 18.9 966.3 Additions - - 1.0 1.0 Additions from business combinations 4.1 - - 4.1 Disposals - - (0.1) (0.1) Transfer from assets under construction (Note 7) - - 0.7 0.7 Exchange differences 1.4 1.0 0.1 2.5 At 28 December 2013 (unaudited) 428.3 525.6 20.6 974.5 Additions 1. 6 1. 6 Additions from acquisition of subsidiary (Note 7) 4.9 47.0 - 51.9 Disposals - - (0.5) (0.5) Transfer to fixed assets (Note 9) - - (1.8) (1.8) Exchange differences (6.5) (6.4) (0.1) (13.0) At 3 January 2015 426.7 566.2 19.8 1,012.7
Amortisation At 31 December 2011 (unaudited) - - 11.6 11.6 Charge for the period - - 3.2 3.2 Disposals - - (1.0) (1.0) Exchange differences - - (0.2) (0.2) At 29 December 2012 (unaudited) - - 13.6 13.6 Charge for the period - - 2.8 2.8 Disposals - - (0.1) (0.1) At 28 December 2013 (unaudited) - - 16.3 16.3 Charge for the period - - 0.2 0.2 Disposals - - (0.5) (0.5) At 3 January 2015 - - 16.0 16.0
Carrying amount At 3 January 2015 426.7 566.2 3. 8 996.7 At 28 December 2013 (unaudited) 428.3 525.6 4.3 958.2 At 29 December 2012 (unaudited) 422.8 524.6 5.3 952.7
The Group manufactures and markets a wide range of products in under well-recognised brands including McVitie's, Penguin, go ahead!, McVitie's Jaffa Cakes, Jacob's, Jacob's Cream Crackers, Carr's, Twiglets, BN, Delacre, Verkade, Sultana and Mini Cheddars. With the acquisition of A&P Foods Limited, the Group has acquired the Haansbro brand.
All purchased brands have been deemed to have indefinite useful lives as the Group believes that the value of these brands is maintained indefinitely. The factors that result in indefinite useful lives are: The Group expects to hold and support these brands for an indefinite period. The Group supports these brands through spending on consumer marketing and makes significant investment in promotional support. The brands operate in stable, large and profitable market sectors in which they have established market shares.
There are also no material legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of these intangibles.
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Purchased brands are therefore not subject to amortisation but are tested at least annually for impairment.
Impairment of goodwill and intangible assets with indefinite lives Goodwill and brands acquired through business combinations have been allocated for impairment purposes to the following three business units: U.K. International Sales Northern Europe These operating segments represent the lowest level within the Group at which goodwill and other intangible assets are monitored for internal management purposes. The goodwill related to the Rana and A&P acquisitions has been allocated to the International Sales business unit. The carrying amounts of goodwill and brands allocated to the Group’s cash-generating units were as follows: 2014 2013 2012 £m £m £m (unaudited) (unaudited) Goodwill UK 313.2 313.2 313.2 Northern Europe 67.9 72.4 71.0 International Sales 45.6 42.7 38.6 Total 426.7 428.3 422.8
Brands UK 466.7 466.7 466.7 Northern Europe 48.9 52.0 51.0 International Sales 50.6 6.9 6.9 Total 566.2 525.6 524.6
UK The recoverable amount of the U.K. business unit has been determined based on a value in use calculation using cash flow projections based on financial budgets and forecasts approved by management covering a five-year period. The pre-tax discount rate applied to the cash flow projections was 6.9% (8.1% in 2013 and 7.9% in 2012). Short-term EBITDA growth rates applied ranged from 4.2% to 7.1% (4.0% to 7.1% in 2013 and 1.1% to 4.0% in 2012). A long-term EBITDA growth rate assumption of 1.0% (1.0% in 2013 and 2012) was applied in perpetuity. International Sales The recoverable amount of the Group's International Sales business unit has been determined based on a value in use calculation using cash flow projections based on financial budgets and forecasts approved by management covering a five-year period. The pre-tax discount rate applied to the cash flow projections was 8.4% (8.1% in 2013 and 7.9% in 2012). Short-term EBITDA growth rates applied ranged from 14.2% to 27.1% (10.0% to 18.6% in 2013 and 0.0% to 3.0% in 2012). A long- term EBITDA growth rate assumption of 1.0% (1.0% in 2013 and 2012) was applied in perpetuity. Northern Europe The recoverable amount of the Group's Northern Europe business unit has been determined based on a value in use calculation using cash flow projections based on financial budgets and forecasts approved by management covering a five-year period. The pre-tax discount rate applied to the cash flow projections was 7.5% (9.2% in 2013 and 9.0% in 2012). Short-term EBITDA growth rates applied ranged from -0.3% to 1.3% (3.0% to 13% in 2013 and 3.0 to 4.5% in 2012). A long-term EBITDA growth rate assumption of 1.0% (1.0% in 2013 and 2012) was applied in perpetuity.
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Key assumptions applied to value in use calculations Assumptions regarding future cash flows are based upon actual results in prior periods, adjusted to reflect management’s view of expected developments based upon market conditions. In particular, the following year’s cash flows, which form the basis for future year forecasts, were developed assuming a sustained profitability in Northern Europe and growth in both U.K. and International Sales. The cash flows used are pre-tax cash flows and include all income and costs as well as an estimate of maintenance capital expenditure required to support these cash flows. The calculation of value in use for the U.K., Northern Europe and International Sales business units is most sensitive to the following assumptions: Discount rates – these reflect management’s assessment of the time value of money and the risks specific to the unit’s assets, based on an appropriate Weighted Average Cost of Capital (WACC) anticipated for a market participant investing in the Group and determined using the Capital Asset Pricing Model, reflecting management’s estimate of the specific risk profile associated with the cash flow projections. EBITDA growth rates – estimates are based on conservative industry expectations of growth in the market where each cash-generating unit is located. The business units operate predominantly in stable, large and profitable market sectors where the Group’s brands have proven longevity. Short term forecasts are adjusted to reflect the Group’s relative weight in faster, or slower, growing market categories. Sensitivity to changes in assumptions Management believes that no reasonably possible change in any of the above key assumptions would cause the recoverable amount to be less than the carrying value for any of the business units.
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Leasehold Plant, Machinery Fixtures & Assets under Freehold Improvement & Vehicles Fittings Construction Total £m £m £m £m £m £m Cost At 31 December 2011 (unaudited) 105.2 8.5 373.7 8.7 37.4 533.5 Exchange differences (0.7) - (2.2) - (0.1) (3.0) Additions 4.1 0.4 27.7 2.3 23.9 58.4 Reclassifications 3.0 0.2 20.8 0.8 (24.8) - Transfer to software (Note 8) - - - - (1.4) (1.4) Transfer to disposal group held for sale (17.7) (0.3) (60.4) (1.1) (6.2) (85.7) Disposals - - (0.3) - - (0.3) At 29 December 2012 (unaudited) 93.9 8.8 359.3 10.7 28.8 501.5
Exchange differences 0.3 - 2.1 - - 2.4 Additions 3.0 0.1 24.1 1.5 21.0 49.7 Additions from business combinations - 2.7 7.1 - - 9.8 Reclassifications 1.9 0.1 17.2 0.1 (19.3) - Transfer to software (Note 8) - - - - (0.7) (0.7) At 28 December 2013 (unaudited) 99.1 11.7 409.8 12.3 29.8 562.7 Exchange differences (1.2 ) - (3.9 ) (0.2 ) (0.3) (5.6 ) Additions 5.5 0.5 30.8 1.1 33.9 71.8 Acquired with subsidiary (Note 7) 16.7 16.7 Reclassifications 0.2 15.9 (16.1) - Transfer from software (Note 8) 1.8 - 1.8 At 3 January 2015 103.6 12. 2 471.1 13.2 47.3 647.4
Depreciation At 31 December 2011 (unaudited) 23.8 3.8 176.5 4.2 - 208.3 Exchange differences (0.1) - (0.6) - - (0.7) Charge for the period 4.7 0.6 35.0 2.2 - 42.5 Reclassifications ------Transfer to disposal group held for sale (2.4) (0.2) (29.6) (0.1) - (32.3) Disposals ------At 29 December 2012 (unaudited) 26.0 4.2 181.3 6.3 - 217.8 Exchange differences 0.1 - 0.9 - - 1.0 Charge for the period 3.9 0.5 31.5 2.3 - 38.2 Reclassifications ------At 28 December 2013 (unaudited) 30.0 4.7 213.7 8.6 - 257.0 Exchange differences - - Charge for the period 3.0 0.7 37.4 1.3 - 42. 4 Reclassifications ------At 3 January 2015 33.0 5.4 251.1 9.9 - 299.4 Net book value At 3 January 2015 70.6 6.8 220.0 3.3 47.3 348.0 At 28 December 2013 (unaudited) 69.1 7.0 196.1 3.7 29.8 305.7 At 29 December 2012 (unaudited) 67.9 4.6 178.0 4.4 28.8 283.7
The net book value of leasehold improvements of £6.8 million (2013: £7.0 million; 2012: £4.6 million) is in respect of properties held under operating leases with remaining lease terms of under 50 years (2013 and 2012: 50 years).
The net book value of assets acquired under finance lease arrangements, all of which are either plant, machinery or vehicles, is £nil million (2013: £0.1 million; 2012: £0.2 million).
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Details of the Group’s undertakings
The Group has the following principal investments in subsidiaries:
The only directly owned subsidiary of UB Luxco is United Biscuits Topco Limited. All subsidiaries are 100% owned with the exception of A&P Foods Limited and International Biscuits Company.
Country of Subsidiary undertaking incorporation Class of share held 3 January 2015 28 December 2013
United Biscuits Topco Limited England Ordinary 100.0% 100.0% United Biscuits Bondco Limited England Ordinary 100.0% 100.0% United Biscuits VLNCo Limited England Ordinary 100.0% 100.0% United Biscuits Holdco Limited (*) England Ordinary 100.0% 100.0% United Biscuits Holdco 2 Limited (*) England Ordinary 100.0% 100.0% United Biscuits Bidco Limited (*) England Ordinary 100.0% 100.0% Regentrealm Limited (*) England Ordinary 100.0% 100.0% Finalrealm Limited (*) England Ordinary 100.0% 100.0% United Biscuits (Holdings) Ltd (*) Scotland Ordinary 100.0% 100.0% United Biscuits Group (Investments) Ltd England Ordinary 100.0% 100.0% Deluxestar Ltd England Ordinary 100.0% 100.0% Solvecorp Ltd England Ordinary 100.0% 100.0% Runecorp Ltd England Ordinary 100.0% 100.0% United Biscuits Finance Ltd England Ordinary 100.0% 100.0% United Biscuits Dutchco B.V. (*) Netherlands Ordinary 100.0% 100.0% Koninklijke Verkade N.V. (*) Netherlands Ordinary 100.0% 100.0% UB Biscuits B.V. Netherlands Ordinary 100.0% 100.0% NV Biscuits Delacre S.A. Belgium Ordinary 100.0% 100.0% United Biscuits (Pension Trustees) Limited Scotland Ordinary 100.0% 100.0% UB Foods US Limited (*) England Ordinary 100.0% 100.0% UB Investments plc Scotland Ordinary 100.0% 100.0% McVitie & Price Ltd (*) Scotland Ordinary 100.0% 100.0% UB International Sales Ltd England Ordinary 100.0% 100.0% UB Overseas Limited England Ordinary 100.0% 100.0% United Biscuits (UK) Limited (*) England Ordinary 100.0% 100.0% UB Snackfoods Ireland Ltd Ireland Ordinary 100.0% 100.0% United Biscuits Italy SRL Italy Ordinary 100.0% 100.0% United Biscuits Germany GmbH Germany Ordinary 100.0% 100.0% UB Group Ltd Scotland Ordinary 100.0% 100.0% Ross Young's Holdings Limited England Ordinary 100.0% 100.0% United Biscuits Nigeria Limited Nigeria Ordinary 100.0% 100.0% International Biscuits Company Saudi Arabia Ordinary 65.0% 65.0% United Biscuits Cyprus Limited Cyprus Ordinary 100.0% 100.0% United Biscuits Private Limited India Ordinary 100.0% 100.0% A&P Foods Limited Nigeria Ordinary 70.0% - UB Humber Limited (*) England Ordinary 100.0% 100.0% United Biscuits France SAS (*) France Ordinary 100.0% 100.0% United Biscuits Industries SAS (*) France Ordinary 100.0% 100.0% W. & R. Jacob & Co Ltd N. Ireland Ordinary 100.0% 100.0% Irish Biscuits Ltd N. Ireland Ordinary 100.0% 100.0% (*) Obligors (See note 15).
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2014 2013 2012 £m £m £m (unaudited) (unaudited)
Raw materials and consumables 22.7 15.6 12.4 Work in progress 3.7 3.4 3.5 Finished goods 40.9 43.3 37.9 67.3 62.3 53.8
Raw materials and consumables at 3 January 2015 included £0.8 million (2013: £0.7 million; 2012: £0.7 million) in respect of consignment stock.
Inventories recognised as an expense during 2014 amounted to £620.2 (2013: £590.1 million; 2012: 696.2 million). The amount of inventories written down and recognised as an expense within operating profit during 2014 was £nil million (2013: £nil million).
2014 201 3 2012 £m £m £m (unaudited) (unaudited)
Net trade receivables 194.5 197.2 205.8 Other receivables 5.6 4.2 4.9 Prepayments and accrued income 15.9 15.2 13.4 Other taxes and social security 7.8 6.3 1.6 223.8 222.9 225.7
Trade receivables are stated net of provisions for bad and doubtful debts of £2.9 million (2013: £1.2 million; 2012: £1.0 million). Trade and other receivables are all expected to be settled within one year. Trade receivables are non- interest bearing and represent an average of 57 days sales (2013: 60 days; 2012: 58 days). Details of the Group’s credit risk are set out in Note 16.
2014 201 3 2012 £m £m £m (unaudited) (unaudited)
Cash at bank and in hand 24. 2 45.2 56.5 Short term deposits 51.3 57.9 130.3 75.5 103.1 186.8
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between two days and two weeks depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. The fair value of cash and cash equivalents at 3 January 2015 was £75.5 million (2013: £103.1 million; 2012: £186.8 million). As at 3 January 2015, £1.1 million of cash has been provided to RBS plc as collateral towards bank guarantees which were previously secured against the Senior Facilities.
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2014 2013 2012 £m £m £m (unaudited) (unaudited)
Trade payables 223. 8 217.6 218.4 Other payables 6.2 5.1 4.4 Other taxes and social security costs 7.4 6.8 11.2 Accruals and deferred income 53.9 53.0 39.0 291.3 282.5 273.0
Trade and other payables are non-interest bearing and are settled in accordance with contractual payment terms.
Senior Facilities
There were no borrowings outside of the wider group as at 3 January 2015. Borrowings as at 28 December 2013 and 29 December 2012 were:
201 3 2012 £m £m (unaudited) (unaudited) Current Senior facilities - 27.9 Non-current Senior facilities 635.7 1,183.7 Other loans and finance lease obligations - -
Total senior facilities 635.7 1,211.6
Amortised Debt Principal £m £m Margin % Type Maturity At 28 December 2013 (unaudited) Non current Term Loan B 540.6 550.0 LIBOR +4.50 Bullet 29 July 2020 Term Loan B(€) 95.1 96.8 EURIBOR +4.00 Bullet 29 July 2020 Total Term Loans 635.7 646.8
At 29 December 2012 (unaudited)
Non current Term Loan B 755.8 762.0 LIBOR +2.25 Bullet 15 December 2014 Term Loan B(€) 48.7 49.1 EURIBOR +2.25 Bullet 15 December 2014 Second lien 158.7 160.0 LIBOR +4.0 Bullet 15 June 2016 Mezzanine 220.5 222.3 LIBOR +3.75 Cash Bullet 15 December 2016 And +4.0PIK 1,183.7 1,193.4
Current Capex Facility 27.9 28.0 LIBOR +1.75 2 equal 15 December 2013 instalments 1,211.6 1,221.4 From 15.6.13
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2014 On 3 November 2014 UMV Global Foods Company Limited (“UMV”), a subsidiary of Yildiz Holdings AS, acquired the whole of the issued share capital of the Group. At the point of acquisition the borrowings of the Group totalled £642.5m comprising of senior bank debt and accrued interest. All of this debt was repaid upon acquisition of the Group. The external debt is now held by UMV, the parent company of the Group. The new Senior facilities agreement, entered into by UMV, requires the wider Group to comply with certain financial and non- financial covenants on a quarterly basis. The financial covenants require the maintenance of a maximum net debt to EBITDA ratio. Revolving credit facility of £75 million The Group has access to a £75.0 million revolving credit facility under the new Senior facilities, which is held by the parent company. This facility may be used for general corporate purposes to finance working capital requirements, to refinance indebtedness of the Group and to pay associated fees, costs and expenses. The facility allows for revolving advances, the provision of ancillary facilities to cover the day to day banking requirements of subsidiary companies, and the issuance of letters of credit and bank guarantees up to an aggregate amount of £75 million (2013: £75 million; 2012: £50 million, both under the previous Senior Facilities) outstanding at any time. Each advance made under the revolving facility must be repaid on the last day of the interest period relating to it, although amounts are available to be re-borrowed immediately, subject to the maximum limit available under the facility. At 3 January 2015, an amount of £nil million (2013: £6.0 million 2012: £8.4 million) had been drawn down as ancillary facilities under the revolving facility to cover day to day requirements of the UK business, £nil million (2013: £4.9 million; 2012: £7.3 million) of this being for the provision of overdraft facilities and £nil million (2013 and 2012: £1.1 million) for bank guarantees, of which £nil million were utilised at 3 January 2015 (2013: £0.7 million; 2012: nil). There were no drawings under any of the overdraft facilities at 3 January 2015 (2013 and 2012: nil). The new Senior facilities, held by the parent company, are secured by fixed and floating charges over all the assets of the Company and the Group’s principal UK subsidiaries. The obligors to these facilities are indicated in Note 10. Capital management The Group’s objectives when managing capital are to maximise shareholder value while safeguarding the Group’s ability to continue as a going concern. The Group intends to continue proactively managing its capital structure whilst maintaining flexibility to take advantage of opportunities, which arise, to grow its business. In common with many other privately owned companies, the wider Group, including UMV which holds the external debt, carries a high level of net debt compared to equity. Total capital is calculated as total equity, as shown in the consolidated balance sheet, plus net debt. Net debt is calculated as total borrowings, as shown in the consolidated balance sheet, less cash and cash equivalents. The shareholder loan, discussed in Note 22, is excluded from the definition of net debt since it will be settled in the event of change of ownership of the business. As explained above, the Senior Facilities require the Group to comply with certain financial and non- financial covenants. Throughout 2012, 2013 and 2014 the Group operated within such covenants. At 3 January 2015, A&P Foods Ltd had borrowing facilities available from Standard Chartered Bank, Citigroup, Guaranty Trust Bank and First City Monument Bank of NGN 5,357.2 million (£19.2 million). These facilities may be used for general corporate purposes to finance working capital, to acquire capital equipment, the issuance of letters of credit and bank guarantees. The facilities are secured by mortgage over the company’s fixed property, by general fixed and floating charges over the assets of the company and by the provision of personal guarantees from the minority shareholder. As at 3 January 2015, the company had not drawn on any of these facilities.
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2013 On 25 January 2013, the Group completed the sale of the KP Snacks business and, from the net disposal proceeds, repaid the following borrowings: Term Loan B £310 million; Mezzanine £85 million; and Capex facility £28 million.
On 29 July 2013, the Group completed an amendment and extension to its Senior facilities. The refinancing package included a 7 year £550 million Term Loan B, a 7 year €116 million Term Loan B and an unfunded 5 year £75 million Revolving Credit Facility. For the purpose of IAS 39 this was treated as an extinguishment of the previous debt. This simplified the debt structure of the Group by facilitating the repayment of the Second Lien and Mezzanine debt and extended the maturity of the senior Term Loan B to 29 July 2020. £154m of cash held by the Group was applied to debt repayment. The Senior Facilities agreement required the Group to comply with certain financial and non-financial covenants on a quarterly basis. The financial covenants required the maintenance of a minimum ratio of earnings before interest, taxes, depreciation and amortisation to interest payable and adherence to a maximum leverage ratio.
Financial risk management
The Group is exposed to a variety of financial risks through its activities. The Treasury Management Committee establishes the Group’s financial risk strategy. The strategy is implemented by a central treasury department (Group Treasury), which identifies, evaluates and hedges financial risks, working closely with the Group’s operating units. The Treasury Management Committee ensures that critical controls exist and are operating correctly within Group Treasury. Written policies, approved by the Treasury Management Committee, provide the framework for the management of the Group’s financial risks, and provide specific guidance on areas such as foreign exchange risk, interest rate risk and liquidity risk. All derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. At the period ends, the fair value of foreign exchange forward contracts is calculated using forward exchange market rates at the balance sheet dates. The fair value of interest rate swaps is determined by reference to market values for similar instruments. The fair value of commodity hedges is determined by reference to the market values of the commodities traded on the London International Financial Futures Exchange (“LIFFE”) and Marché à Terme International de France (MATIF) at the balance sheet date. Measurement of fair values A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial assets and liabilities and non-financial assets acquired in a business combination (See Note 7). When measuring the fair value of an asset or liability, the Group uses market observable data as far as possible. Fair values are categorised into different levels in the fair value hierarchy based on the inputs used in the valuation techniques as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included in Level 1 that are
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observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); Level 3: inputs for the asset or liability that are not based on observable data (unobservable inputs). The Group enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade credit ratings. Derivatives valued using valuation techniques with market observable inputs are mainly interest rate swaps, foreign exchange forward contracts and commodity forward contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including foreign exchange spot and forward rates, interest rate curves and forward rate curves of the underlying commodity. The credit quality of the counterparties and the Group’s own credit quality are also considered and adjusted for when deemed necessary. The changes in credit risk had no material effect on the hedge effectiveness assessment for derivatives designated in hedge relationships and other financial instruments recognised at fair value. The fair value of forward foreign exchange contracts is calculated by reference to quoted market forward exchange rates for contracts with similar maturity profiles. The fair value of currency swaps is determined by reference to quoted market spot rates. As a result forward foreign exchange contracts and currency swaps are classified as level 2 within the fair value hierarchy. As at 2012, 2013 2014, the fair value of derivatives is net of a debit and credit valuation adjustment attributable to the Group’s own credit default risk together with derivative counterparty default risk. The changes in counterparty credit risk had no material effect on the hedge effectiveness for derivatives designated in hedge relationships and other financial instruments recognised at fair value. There were no transfers between level 1, 2, and 3 during 2012, 2013 and 2014. For cash and cash equivalents, short-term loans and receivables, overdrafts and other short term liabilities which have a maturity of less than three months the book values approximate the fair values because of their short term nature. For loans and borrowings, the fair value represents the gross borrowings before taking into account unamortised finance costs. For shareholder debt, the fair value has been determined by valuing the debt to maturity and then applying a discount. The valuation to maturity has been based on the following: a) Interest will be capitalised throughout the life of the loan; b) Interest will also accrue on these capitalised amounts; and c) The debt will be fully repaid on maturity. There are no material differences between fair value and book value on any other financial instruments except for loans and borrowings, where carrying value includes deferred finance costs and shareholder debt. The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including the levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of the value.
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2014 Carrying value Fair value Total USD Euro GBP Other Level 1 Level 2 Total £m £m £m £m £m £m £m £m
Derivative assets measured at fair value Cash flow hedges Forward currency contracts 1.0 0.5 0.2 - 0.3 - 1.0 1.0
Non cash flow hedges Forward currency contracts ------
1.0 0.5 0.2 - 0.3 - 1.0 1.0
Of which: Current assets 1.0 Non current assets -
1.0
Derivative liabilities measured at fair value Cash flow hedges Forward currency contracts 2.8 1.8 1.0 - - - 2.8 2.8
Non cash flow hedges Forward currency contracts 2.7 0.7 1.9 - 0.1 - 2.7 2.7
5.5 2.5 2.9 - 0.1 - 5.5 5.5
Of which: Current liabilities 5.5 Non current liabilities -
5.5
Financial assets not measured at fair value Cash and short term deposit 75.5 2.4 45.0 21.1 7.0 - - - Trade receivables 194.5 13.7 30.7 138.6 11.5 - - - Other receivables 5.6 - 3.3 1.5 0.8 - - - 275.6 16.1 79.0 161.2 19.3 - - -
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Financial liabilities not measured at fair value
Trade payables 223. 8 2.0 36.9 176.2 8.7 - - - Other payables 6.2 - 4.5 1.7 - - - - Shareholder loans 1,217.7 - 90.8 1,126.9 - - 2,418.4 2,418.4 Loans and borrowings ------
1,447.7 2.0 132.2 1,304.8 8.7 - 2,418.4 2,418.4
Carrying value Fair value 2013 (unaudited) Total USD Euro GBP Other Level 1 Level 2 Total £m £m £m £m £m £m £m £m
Derivative assets measured at fair value Cash flow hedges Forward currency contracts 1.6 0.6 0.2 - 0.8 - 1.6 1.6 Interest rate swaps 0.5 - - 0.5 - - 0.5 0.5
Fair value hedges Forward currency contracts 0.8 - 0.6 - 0.2 - 0.8 0.8
2.9 0.6 0.8 0.5 1.0 - 2.9 2.9
Of which: Current assets 2.9 Non current assets -
2.9
Derivative liabilities measured at fair value Cash flow hedges Forward currency contracts 2.6 0.8 1.8 - - - 2.6 2.6 Interest rate swaps ------Fair value hedges Forward currency contracts 0.5 0.1 0.4 - - - 0.5 0.5
3.1 0.9 2.2 - - - 3.1 3.1
Of which: Current liabilities 3.1 Non current liabilities -
3.1
Financial assets not measured at fair value Cash and short term deposit 103.1 2.4 53.9 43.0 3.8 - - - Trade receivables 197.2 13.0 39.2 138.6 6.4 - - - Other receivables 4.2 - 2.6 0.5 1.1 - - -
304.5 15.4 95.7 182.1 11.3 - - -
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Financial liabilities not measured at fair value
Trade payables 217.6 1.1 38.7 177.1 0.7 - - -- Other payables 31.6 - 4.3 24.4 2.9 - - Shareholder loans 525.3 - - 525.3 - - 1,497.1 1.497.1 Loans and borrowings 635.7 - 95.1 540.6 - 646.8 - 646.8
1,410.2 1.1 138.1 1,267.4 3.6 646.8 1,497.1 2,143.9
Carrying Value Fair Value
2012 (unaudited) Total USD Euro GBP Other Level 1 Level 2 Total Euro GBP Other Level 1 Level 2 Total £m £m £m £m £m £m £m £m Derivative assets measured at fair value Cash flow hedges Forward currency contracts 1.3 - 1.2 - 0.1 - 1.3 1.3 Interest rate swaps 0.1 - - 0.1 - - 0.1 0.1
Fair value hedges Forward currency contracts 0.2 - 0.2 - - - 0.2 0.2 1.6 - 1.4 0.1 0.1 - 1.6 1.6 Of which: Current assets 1.5 Non current assets 0.1 1.6 Derivative liabilities Measured at fair value Cash flow hedges Forward currency contracts 1.6 0.9 0.7 - - - 1.6 1.6 Interest rate swaps 0.3 - - 0.3 - - 0.3 0.3 Fair value hedges Forward currency contracts 0.2 0.1 0.1 - - - 0.2 0.2 2.1 1.0 0.8 0.3 - - 2.1 2.1 Of which: Current liabilities 2.1 Non current liabilities - 2.1 Financial assets not Measured at fair value Cash and short term deposit 186.8 2.6 56.8 123.8 3.6 - - - Trade receivables 205.8 10.7 45.7 144.1 5.3 - - - Other receivables 4.9 - 3.1 1.0 0.8 - - - 397.5 13.3 105.6 268.9 9.7 - - - Financial liabilities not Measures at fair value Trade payables 218.4 18.3 53.7 145.8 0.6 - - - Other payables 22.7 - 3.3 18.4 1.0 - - - Shareholder loans 489.7 - - 489.7 - - 1,608.9 1,608.9 Loans and borrowings 1,211.6 - 48.7 1,162.9 - 1,221.4 - 1,221.4 1,942.4 18.3 105.7 1,816.8 1.6 1,221.4 1.608.9 2,830.3
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Foreign exchange risk Foreign currency risk arises from future commercial and financing transactions, recognising assets and liabilities denominated in a currency that is not the functional currency of the Group entity undertaking the transaction and from net investments in overseas entities. The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the US dollar, the Euro, the Canadian dollar and the Australian dollar. The Group’s foreign exchange risk management policy is to hedge a proportion of its net currency exposure. Group Treasury is responsible for managing foreign exchange risk arising from future commercial and financing transactions and recognised assets and liabilities usually by forward contracts. The Group has a number of overseas subsidiaries whose net assets are subject to currency translation risk. The Group borrows in local currencies where appropriate to minimise the impact of this risk on the balance sheet. Group policy requires the Group companies to manage their foreign exchange risk against their functional currency. Group companies are required to hedge their foreign exchange exposure with Group Treasury. Group Treasury reviews these exposure reports on a regular basis. To manage foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, entities in the Group use forward contracts, transacted by Group Treasury. Cash flow hedges At 3 January 2015, 28 December 2013 and 29 December 2012, the Group held a number of forward foreign exchange contracts designated as hedges of highly probable forecast transactions. Forward foreign exchange contracts were accounted for as cash flow hedges. The forward contracts are typically taken out with twelve-month maturity dates at regular intervals throughout the year. Gains and losses recognised in the hedging reserve as equity will be released to the consolidated statement of profit or loss at various dates within one year of the balance sheet date.
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Committed outstanding Average Average Average Average FX contracts Rates Rates Rates Rates £m USD EUR CAD AUD
2014
- - - Euro 35.3 1.22 - - - US Dollar 8.8 1.63 - - Other currencies 8.3 1.81 1.86 - - - - 52.4
2013 (unaudited)
- 1.171 - - Euro 78.2 1.516 - - - US Dollar 5.0 - - 1.619 1.724 Other currencies 9.3
92.5
2012 (unaudited)
Euro 73.6 - 1.229 - - US Dollar 53.0 1.596 - - - Other Currencies 5.6 - - 1.593 - 132.2
Non cash flow hedges At 3 January 2015, 28 December 2013 and 29 December 2012 the Group held a number of forward foreign exchange contracts which are accounted for as fair value instruments in the consolidated statement of profit or loss. All such contracts mature within one year.
Committed
outstanding Average Average Average FX contracts Rates Rates Rates £m USD EUR CAD
2014 - - Euro 43.1 1.22 - - US Dollar 9.4 1.64 - - Other currencies 1.6 1.84
54.1
2013 (unaudited) - 1.201 - Euro 43.0 1.550 - - US Dollar 2.6 - - 1.640 Other currencies 2.4
48.0
2012 (unaudited) - 1.244 - Euro 11.3 - - - US Dollar - - - - Other currencies -
11.3
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Sensitivity analysis Hedges of net investment in foreign entities Included in borrowings at 3 January 2015 were loans of €nil million (2013: €116 million), which were designated as hedges of net investments in overseas subsidiaries, used to reduce exposure to foreign exchange risk. Gains or losses on re-translation of these borrowings are transferred to equity to offset any gains or losses on translation of the net investments in the overseas subsidiaries with the exception of any hedge ineffectiveness which is taken to the consolidated statement of profit or loss if applicable. The table below presents a sensitivity analysis of the changes in carrying values of the Group’s monetary assets and liability to reasonably possible weakening in market rates of foreign exchange. Impact on the consolidated Impact on reserves arising from: statement of profit or loss arising from:
10% 10% 10% 10% weakening weakening weakening weakening against US against against US against Dollar EURO Dollar EURO £m £m £m £m
2014
Cash and cash equivalents 0.3 5.1 - - Trade receivables 1.5 3.4 - - Trade payables (0.2) (4.1) - - Shareholder debt - (10.1) - - Currency exchange contracts (assets) - - 0.3 (1.4) Currency exchange contracts (liabilities) (1.0) 4.8 (1.1) 5.3
0.6 (0.9) (0.8) 3.9
2013 (unaudited)
Cash and cash equivalents 0.3 6.0 - - Trade receivables 1.4 4.4 - - Trade payables (0.1) (4.3) - - Loans and borrowings - - - (10.8) Currency exchange contracts (assets) - 2.1 (0.9) (0.4) Currency exchange contracts (liabilities) 0.3 2.7 1.6 8.9
1.9 10.9 0.7 (2.3)
Derivative contracts are used for hedging trade balances and future currency flows and therefore there is no impact due to currency movement. The table below presents a sensitivity analysis of the changes in carrying values of the Group’s monetary assets and liability to reasonably possible strengthening in market rates of foreign exchange.
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Impact on the consolidated Impact on reserves arising from: statement of profit or loss arising from:
10% 10% 10% 10% strengthening strengthening strengthening strengthening against US against against US against Dollar EURO Dollar EURO £m £m £m £m
2014 Cash and cash equivalents (0.2) (4.2) - -
Trade receivables (1.2) (2.8) - - Trade payables 0.2 3.4 - - Shareholder debt 8.3 Currency exchange contracts (assets) - - (0.2) 1.2 Currency exchange contracts (liabilities) (0.9) (3.9) 0.9 (4.4)
(2.1) 0.8 0.7 (3.2)
2013 (unaudited)
Cash and cash equivalents (0.2) (4.9) - - Trade receivables (1.2) (3.6) - - Trade payables 0.1 3.5 - - Loans and borrowings - - - 8.8 Currency exchange contracts (assets) - (1.7) (0.8) 0.3 Currency exchange contracts (liabilities) (0.2) (2.2) (1.3) (7.3)
(1.5) (8.9) (2.1) 1.8
Interest rate risk The Group is exposed to movements in interest rates from borrowings at variable rates. It is the Group’s policy to maintain an appropriate balance between fixed and floating interest rates on borrowings in order to provide a level of certainty to interest expense and to reduce the impact of interest rate fluctuations. To achieve this, the Group had entered into a series of interest rate swaps that have the effect of converting floating rate debt to fixed rate debt. During 2014 the Group had maintained a 70% proportion of Group net debt at fixed rates up to the date of acquisition by Yildiz Holdings AS. On the acquisition date, the existing Senior facilities was repaid and all outstanding interest rate swaps were terminated. Under the new Senior facilities held by UMV, the wider Group will be required to implement a minimum hedging of 66.66% of wider Group debt for a period of at least 3 years. The table below shows the effect of these on the total nominal fixed rate borrowings.
Interest rate risk Fixed rate Effect of interest Effective fixed Swap rate borrowings rate swaps rate borrowings
2014 £m £m £m %
Sterling – shareholder loans 1,12 6.9 - 1,12 6.9 - Euro – shareholder loans 90.8 - 90.8 -
1,217.7 - 1,217.7
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2013 (unaudited) Fixed rate Effect of interest Effective fixed Swap rate borrowings rate swaps rate borrowings £m £m £m %
Sterling – shareholder loans 525.3 - 525.3 - Sterling - third parties - 400.0 400.0 0.512 Euro - 50.1 50.1 0.266
525.3 450.1 975.4
The following table presents a sensitivity analysis of the changes in fair values of the Group’s interest rate swaps and changes to the interest expense on unhedged borrowings from a 1% movement in interest rates. The effect of a 1% movement in interest rates on cash or cash equivalent would not be material.
Increase in interest rates Decrease in interest rates
2014 2013 2014 2013 20 £m £m £m £m£m (unaudited) (unaudited)
Interest rate swaps (liabilities)1 - 3.1 - (3.1)
Unhedged borrowings2 - (2.0) - 2.0
1 Impact on reserves 2 Impact on the Consolidated statement of profit or loss
During 2014, an unrealised gain on revaluation of interest rate swaps of £nil million was recognised directly in equity (2013: £0.7 million loss). Credit risk Credit risk may arise because of non-performance by a counterparty. The Group is exposed to credit risk on its financial instruments including derivative assets and trade receivables. The Group’s policy is for trade receivables to be subject to credit limits, close monitoring and approval procedures. The Group’s policy to manage credit risk on derivative assets is to limit all derivative counterparties and cash transactions to high credit quality financial institutions. The Group is not exposed to concentration of credit risk on its derivative assets as these are spread over several financial institutions. Due to its geographical base and the number and quality of customers, the Group is not exposed to material concentrations of credit risk on its trade receivables. In addition, the Group carries credit insurance to mitigate its exposure to loss.
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Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure, therefore, the maximum credit exposure at the reporting date was:
2014 2013 £m £m (unaudited) Trade receivables 194.5 197.2
Total 194.5 197.2
The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:
2014 2013 £m £m (unaudited) UK 134.2 130.8 Europe 30.0 43.0 Rest of the World 30.3 23.4
Total 194.5 197.2
The ageing analysis of trade receivables at the reporting date was:
2014 2013 £m £m (unaudited) Not past due or impaired 151.3 178.8 Past due 0-30 days but not impaired 32.6 7.4 Past due more than 30 days but not impaired 10.6 11.0 Individually impaired 2.9 1.2
Total 197.4 198.4
The movement in the allowance for impairment in respect of trade receivables during the year was as follows:
2014 2013 £m £m (unaudited) Balance at start of period 1.2 1.0 Charge for the period 2.0 0.3 Unused amounts reversed (0.2) (0.1) Currency translation (0.1) -
Balance at end of period 2.9 1.2
Based on the historic trend and expected performance of the customers, the Group believes that the above allowance for doubtful receivables sufficiently covers the risk of default. The charge for the period of £2 million (2013: £0.3 million) reflects an increase in the doubtful trade receivables in the period. The Group has no collateral in this respect. Liquidity risk Liquidity risk arises when the Group encounters difficulties to meet commitments associated with liabilities and other payment obligations. Such risk may result from inadequate market depth or disruption or refinancing problems.
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The Group’s objective is to manage liquidity risk through the availability of committed credit facilities and compliance with related financial covenants and by maintaining sufficient cash to meet obligations as they fall due. Contractual maturities Details of the contractual maturities and associated undiscounted value at maturity of external borrowings, including estimated interest payments, are set out below: Senior Trade Other Facilities Payables Payables Total £m £m £m £m
2014 Within one year or on demand - 223. 8 6.2 230.0 Between one and two years - - - - Between two and three years - - - - Between three and four years - - - - Between four and five years - - - - After five years - - - -
- 223.8 6.2 230.0
2013 (unaudited) Within one year or on demand 34.4 217.6 31.6 283.6 Between one and two years 33.1 - - 33.1 Between two and three years 36.4 - - 36.4 Between three and four years 40.6 - - 40.6 Between four and five years 43.9 - - 43.9 After five years 693.8 - - 693.8
882.2 217.6 31.6 1,131.4
Details of the contractual maturities and associated value at maturity of the shareholder debt are set out below: Shareholder debt £m 8.0% Notes due 2036 and 2038 3,321.2 Amount due to UMV 657.5 The interest on the shareholder debt compounds annually in arrears on 15 December each year. Interest is being charged by UMV at 8.0% and the loan is repayable in 2023. The following tables indicate the periods in which the cash flows associated with derivatives that are cash flow hedges are expected to occur:
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Interest rate swaps Forward exchange contracts Assets Liabilities Assets Liabilities £m £m £m £m
2014 Within one year or on demand - - - Between one and two years - - - - More than two years - - - -
- - - -
2013 (unaudited) Within one year or on demand 0.5 - 93.6 (95.1) Between one and two years - - - - More than two years - - - -
0.5 - 93.6 (95.1)
(e) Commodity risk The Group’s activities expose it to the risk of changes in commodity prices. The Group’s objective is to minimise the impact of volatility in commodity prices and seeks to cover its raw material requirements by taking out forward contracts to secure supplies at agreed prices. Forward cover is taken in physical markets for periods of at least three months and typically would not exceed 12 months, although, in certain circumstances, this may be extended. In the most volatile of the Group’s commodity markets, fluctuating prices are hedged through the use of futures. Unrealised gains or losses at the year-end may not crystallise as they depend upon market movements between the year-end and the maturity dates of outstanding contracts. Providing a successful hedge relationship can be demonstrated, gains or losses that do materialise are charged to the Group’s operating results when the raw ingredients which these contracts hedge are used. Contracts are settled immediately. From time to time the Group also uses financial derivatives to protect future raw material prices by taking out options. Cash flow hedges The Group’s cash flow hedges relate to commodity contracts, forward foreign exchange contracts and interest rate swaps. An aggregate loss of £5.2 million (2013: £3.5 million gain; 2012: £0.1 million gain) was recognised directly in equity during the period 29 December 2013 to 3 January 2015, of which a loss of £0.1 million related to commodity contracts (2013: £0.1million gain; 2012: £3.9 million gain), a loss of £4.8 million related to forward foreign exchange contracts (2013: £2.7 million gain; 2012: £5.3 million loss) and a loss of £0.5 million related to interest rate swaps (2013: £0.7 million gain; 2012: £1.5 million gain). A gain of £2.9 million (2013: £4.6 million loss; 2012: £6.7 million loss) was recognised in the consolidated statement of profit or loss in relation to cash flow hedges of which a gain of £4.0 million related to commodity contracts was recognised in cost of goods sold and a loss of £1.2 million related to forward foreign exchange contracts was recognised in operating profit.
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17. Early Retirement Rationalisation Onerous Provision Provisions Contracts Total £m £m £m £m At 29 December 2012 (unaudited) 0.3 2.2 2.8 5.3 Consolidated statement of profit or loss charge - 5.2 - 5.2 Unused amounts reversed during the reporting period - - - - Amounts utilised (0.3) (2.3) (2.6) (5.2) Exchange differences - - - - At 28 December 2013 (unaudited) - 5.1 0.2 5.3 Consolidated statement of profit or loss charge - 16.1 - 16.1 Unused amounts reversed during the reporting period - - - - Amounts utilised - (11.3) - (11.3) Exchange differences - - - - At 3 January 2015 - 9.9 0.2 10.1
At 3 January 2015 Current - 9.6 0.2 9.8 Non-current - 0.3 - 0.3 - 9.9 0.2 10.1 At 28 December 2013 (unaudited) Current - 4.8 0.2 5.0 Non-current - 0.3 - 0.3 - 5.1 0.2 5.3 At 29 December 2012 (unaudited) Current - 0.8 2.7 3.5 Non-current 0.3 1.4 0.1 1.8 0.3 2.2 2.8 5.3
Provisions are recorded only where there is a legal or constructive obligation. The early retirement provision comprised of an early retirement scheme operated for employees in the Group’s Northern Europe business unit. Rationalisation provisions principally comprised obligations in relation to overhead reduction and manufacturing-efficiency programs across the Group. Overhead reduction programmes were announced to the relevant employees during 2014 and are expected to be completed during 2015. The provision for onerous contracts relates to the cost of surplus leasehold properties, where unavoidable costs exceed anticipated income. The associated lease commitments are due to expire in 2015. The amount and timing of the utilisation of provisions is subject to considerable uncertainty and the above analysis represents management’s estimate.
18. Share capital and Share premium As at 2014 and 2013, the subscribed capital of the Company is represented as follows: 4 unlimited ordinary shares; Ordinary shares: 174,826 class A shares, 174,826 class B shares, 174,826 class C shares, 174,826 class D shares, 174,826 class E shares, 174,826 class F shares, 174,826 class G shares, 174,826 class H shares, 174,826 class I shares, 174,826 class J shares.
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All shares are fully paid-up of £1.00 each and carry the same rights.
Share premium In order to comply with Luxembourg regulations, a share premium reserve was created in 2013 by the cancellation of a proportion of the shareholder debt. As at 3 January 2015 and 28 December 2013 the share premium reserve totalled £0.3m. Own shares Own shares comprise shares in the Company held by an Employee Benefit Trust, repurchased from management leavers and held as Treasury shares. Number of shares Held by EBT Held to satisfy ‘exit only’ option grants 2013 40,770 34,020 2014 - -
As a result of the sale of the Group no treasury shares are now held. Currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. It is also used to record the effect of hedging net investments in foreign operations. As at 3 January 2015 the balance on the reserve amounted to £(1.6) million (2013: £8.9 million; 2012: £6.3 million). Hedging reserve The hedging reserve records the portion of the gain or loss on a hedging instrument in a cash flow hedge that is deemed to be effective. As at 3 January 2015 the balance on the reserve amounted to £(2.2) million (2013: £0.5 million; 2012: £1.5 million).
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19. The Group has defined benefit type post-retirement arrangements in the United Kingdom, for which contributions are paid into separately administered funds. All of the Group’s defined benefit plans are closed to new members and membership of defined contribution plans is available for new employees. The Group also has unfunded arrangements as follows: additional UK post-retirement benefits for certain senior managers; post-retirement healthcare benefits for certain employees in the Netherlands, and employees in France are entitled to a lump sum payment on retirement, indemnite de depart en retraite (“IDR”). The Group’s retirement benefit assets/(liabilities), comprised the following:
2014 2013 2012 £m £m £m (unaudited) (unaudited) UK Pension - Funded UBUK (194.0) (145.4) (220.0) Jacob's Bakery (38.4) (18.1) (16.8) Other 1.3 1.0 1.0 Pension - Unfunded (19.9) (17.0) (16.0) France IDR - Unfunded (4.7) (4.5) (4.3) (255.7) (184.0) (256.1)
Netherlands Post-retirement healthcare scheme - unfunded (2.0) (2.0) (2.4)
Net post retirement benefit liability (257.7) (186.0) (258.5)
Balance sheet presentation: Post retirement benefit asset 1.3 1.0 1.0 Post retirement benefit liability (259.0) (187.0) (259.5) (257.7) (186.0) (258.5)
The total amount relating to pensions recognised in operating profit for the period from 29 December 2013 to 3 January 2015 was £19.6 million (2013: £15.4 million; 2012: £14.9 million), of which £3.6 million; (2013: £2.6 million; 2012: £1.7 million) related to defined contribution plans. On 25 January 2013, following the disposal of KP Snacks, 687 active members of the UB UK pension plan became deferred members. A curtailment gain of £1.8m arising from this was recognised within exceptional income (Note 2). During the 52-week period ended 28 December 2013, as a result of the new automatic enrolment regulations in the UK, approximately 1,300 employees joined the Group’s defined contribution plans. The total amount relating to IDR recognised in operating profit for the period from 29 December 2013 to 3 January 2015 was £0.2 million (2013: £0.4 million; 2012: £0.1 million). The Netherlands post-retirement benefit healthcare scheme is closed to current employees, therefore no annual service cost is charged in the Consolidated statement of profit or loss. The defined benefit plans operate under trust law and responsibility for their governance lies with Boards of Trustees. Trustee Boards are comprised of representatives appointed by the sponsoring employer and plan participants who act on behalf of members in accordance with the terms of the Trust Deed and Rules and relevant legislation. The Plans assets are held on Trust. Annual increases for benefits in payment are dependent on inflation. The main uncertainties affecting the level of benefits payable are future inflation levels and the actual longevity of the membership.
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The amounts recognised in the consolidated statement of profit or loss and in the consolidated statement of comprehensive income in respect of defined benefit pensions and post retirement healthcare are analysed below: Pension IDR Healthcare Total £m £m £m £m 2014 Consolidated statement of profit or loss Current service cost(1) (11.1) (0.2) - (11.3) Administration charges (4.7) - - (4.7) Operating profit (15.8) (0.2) - (16.0)
Interest charges (7.6) (0.1) (0.1) (7.8) Other finance expense – pensions (7.6) (0.1) (0.1) (7.8) Statement of other comprehensive income Return on plan on assets excluding amounts included in interest expense 142.3 - - 142.3 Experience gains on scheme liabilities (8.7) - - (8.7) Actuarial losses due to changes in financial assumptions (222.0) (0.8) (0.2) (223.0) Actuarial gains due to changes in demographic assumptions 1.7 - - 1.7 Amount recognised in other comprehensive income (86.7) (0.8) (0.2) (87.7)
2013 (unaudited) Consolidated statement of profit or loss Current service cost (1) (8.5) (0.4) - (8.9) Administration charges (4.3) - - (4.3) Operating profit (12.8) (0.4) - (13.2)
Curtailment gain (Note 2) 1.8 - - 1.8
Interest charges (10.4) (0.1) 0.1 (10.4)
Other finance expense - pensions (10.4) (0.1) 0.1 (10.4)
Statement of other comprehensive income Return on plan assets excluding amounts included in interest expense 90.8 - - 90.8 Experience gains/(losses) on scheme liabilities 1.5 - - 1.5 Actuarial losses due to changes in financial assumptions (39.4) 0.1 0.4 (38.9) Actuarial losses due to changes in demographic assumptions 5.6 - - 5.6 Amount recognised in other comprehensive income 58.5 0.1 0.4 59.0
(1) Costs are recognised in cost of goods sold and other operating costs.
The assets and liabilities in the schemes and the net post retirement obligations were: Pension IDR Healthcare Total £m £m £m £m
At 3 January 2015 Assets with a quoted market price: Equities 644.4 - - 644.4 Bonds 715.1 - - 715.1 Hedge funds 51.7 - - 51.7 Cash and currency 7.6 - - 7.6 Assets not quoted in an active market: Property, infrastructure and hedge funds 299.2 - - 299.2 Market value of assets 1,718.0 - - 1,718.0 Present value of scheme liabilities (1,969.0) (4.7) (2.0) (1,975.7) Deficit in the scheme (251.0) (4.7) (2.0) (257.7)
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At 28 December 2013 (unaudited) Assets with a quoted market price: Equities 607.5 - - 607.5 Bonds 637.8 - - 637.8 Hedge funds 10.9 - - 10.9 Cash and currency 16.9 - - 16.9 Assets not quoted in an active market: Property, infrastructure and hedge funds 284.0 - - 284.0 Market value of assets 1,557.1 - - 1,557.1 Present value of scheme liabilities (1,736.6) (4.5) (2.0) (1,743.1) Deficit in the scheme (179.5) (4.5) (2.0) (186.0) At 29 December 2012 (unaudited) Assets with a quoted market price: Equities 535.8 - - 535.8 Bonds 623.5 - - 623.5 Hedge funds 21.9 - - 21.9 Cash and currency - - - Assets not quoted in an active market: Property, infrastructure and hedge funds 264.9 - - 264.9 Market value of assets 1,446.1 - - 1,446.1 Present value of scheme liabilities (1,697.9) (4.3) (2.4) (1,704.6) Deficit in the scheme (251.8) (4.3) (2.4) (258.5)
The Group’s schemes have not invested in any of its own financial instruments nor in properties or other assets used by the Group. Changes in the defined benefit pension obligations are analysed as follows: Pension IDR Healthcare Total £m £m £m £m As at 1 January 2012 (unaudited) 1,584.8 3.1 2.4 1,590.3 Consolidated statement of profit or loss expense: Current service costs and administration charges (*) 13.1 0.1 - 13.2 Interest expense 71.8 0.1 0.1 72.0 Costs recognised in the Consolidated statement of profit or loss 84.9 0.2 0.1 85.2 Re-measurements: Actuarial loss due to financial assumptions change 74.7 1.1 0.2 76.0 Actuarial loss due to demographic assumptions 33.8 - - 33.8 Experience gains (9.8) - - (9.8) Total amount recognised in OCI 98.7 1.1 0.2 100.0 Cash: Employee contributions 6.3 - - 6.3 Payments from the plans: Benefit payments (73.9) (0.2) (0.2) (74.3) Administration costs (2.9) - - - Foreign currency differences - 0.1 (0.1) - As at 29 December 2012 (unaudited) 1,697.9 4.3 2.4 1,704.6 As at 30 December 2012 (unaudited) 1,697.9 4.3 2.4 1,704.6 Consolidated statement of profit or loss expense: Current service costs and administration charges (*) 11.4 0.4 - 11.8 Interest expense 71.6 0.1 (0.1) 71.6 Curtailment gain (1.8) (1.8) Costs recognised in the Consolidated statement of profit or loss 81.2 0.5 (0.1) 81.6 Re-measurements: Actuarial loss due to financial assumptions change 39.4 (0.1) (0.3) 39.0 Actuarial gain due to demographic assumptions (5.6) - - (5.6) Experience gains (1.5) - - (1.5) Total amount recognised in OCI 32.3 (0.1) (0.3) 31.9 Cash: Employee contributions 5.1 - - 5.1 Payments from the plans: Benefit payments (76.7) (0.3) (0.1) (77.1) Administration costs (3.2) - - (3.2) Foreign currency differences - 0.1 0.1 0.2 As at 28 December 2013 (unaudited) 1,736.6 4.5 2.0 1,743.1
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As at 29 December 2013 (unaudited) 1,736.6 4.5 2.0 1,743.1 Consolidated statement of profit or loss expense: Current service costs and administration charges (*) 14.2 0.2 14.4 Interest expense 76.0 0.2 0.1 76.3 Costs recognised in the Consolidated statement of profit or loss 90.2 0.4 0.1 90.7 Re-measurements: Actuarial loss due to financial assumptions change 222.0 0.8 0.2 223.0 Actuarial loss due to demographic assumptions (1.7 ) - - (1. 7) Experience gains losses 8.7 - - 8.7 Total amount recognised in OCI 229.0 0.8 0.2 230.0 Cash: Employee contributions 1.5 1.5 Payments from the plans: Benefit payments (85.2) (0.6 ) (0.2 ) (86.0 ) Administration costs (3.1) - - (3.1) Foreign currency differences (0.4) (0.1) (0.5) As at 3 January 2015 1,96 9.0 4.7 2.0 1,975.7
(*): Excludes company administration costs. The defined benefit obligation comprises £1,949.1 million (2013: £1,719.6 million; 2012: £1,681.8) arising from funded plans and £26.6 million (2013: £23.5 million; 2012: £22.8 million) from plans or arrangement that are unfunded.
Changes in the value of the defined benefit pension assets are analysed as follows:
£m
As at 1 January 2012 (unaudited) 1,374.5 Interest income 63.6 Income recognised in the Consolidated statement of profit or loss 63.6 Re-measurements: Return on plan assets greater than discount rate 45.8 Total amount recognised in OCI 45.8 Cash: Employer contributions 32.7 Employee contributions 6.3 Payments from the plans: Benefits payments (73.9) Administration costs (2.9) As at 29 December 2012 (unaudited) 1,446.1
As at 30 December 2012 (unaudited) 1,446.1 Interest income 61.2 Income recognised in the Consolidated statement of profit or loss 61.2 Re-measurements: Return on plan assets greater than discount rate 90.8 Total amount recognised in OCI 90.8 Cash: Employer contributions 33.8 Employee contributions 5.1 Payments from the plans: Benefits payments (76.7) Administration costs (3.2) As at 28 December 2013 (unaudited) 1,557.1
As at 29 December 2013 (unaudited) 1,557.1 Interest income 68.6 Income recognised in the Consolidated statement of profit or loss 68.6 Re-measurements: Return on plan assets greater than discount rate 142.3 Total amount recognised in OCI 142.3 Cash:
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Employer contributions 36.8 Employee contributions 1.5 Payments from the plans: Benefits payments (85.2) Administration costs (3.1) As at 3 January 2015 1,718.0
Valuation The calculation of the defined benefit obligation is performed annually by external actuaries using the projected unit credit method. Re-measurements arising from defined benefit plans comprise actuarial gains and losses and the return on the plan assets net of costs of managing the plan assets. The Group recognises these immediately in other comprehensive income (OCI) and all other expenses, such as service costs, net interest cost and administration expenses are recognised in the consolidated statement of profit or loss. Service costs and administration expenses are recognised within operating profit whilst interest is included within interest expenses. The following key assumptions are made when calculating the fair value of the Group’s defined benefit pension plans: Key assumptions (a) Pensions
2014 201 3 2012 % % % Rate of salary increases Final salary 3.25 3.45 3.05 CARE 2.90 3.00 2.70
Rate of increase of pensions in payment 2.90 3.00 2.70 Discount rate 3.50 4.40 4.30 Inflation 3.00 3.20 2.80
years years years Average life expectancies: Current male pensioner 21.6 21.6 21.8 Current female pensioner 22.9 22.8 23.0 Male pensioner aged 65 in 2034/2033 22.5 22.5 22.7 Female pensioner aged 65 in 2034/2033 24.0 23.9 24.2
Acting on the advice of the Group’s actuaries, future contributions payable are set at levels that take account of surpluses and deficits. Contributions of approximately £26.0 million per annum in addition to the employer’s regular contribution are being made in order to eliminate the deficit in the UK defined benefit plans on a funding basis and the Group is obliged to make such payments until 2022 in order to eliminate the Plan Deficit. The total contributions to the Group’s defined benefit plans in 2015 are expected to be approximately £40.0 million (2014: £34.9 million; 2013: £32.7 million). The weighted average duration of the defined benefit obligation is 15 years.
(b) Post-retirement healthcare
2014 2013 2012
Discount rate 1.00 2.80 1.80 Inflation 2.00 2.00 2.00 Rate of increase in healthcare costs 2.00 2.00 2.00
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(c) IDR
Discount rate 3.00 3.00 2.80 Salary increase 2.50 2.50 2.50
Risk The pension plans expose the Group to the following risks: Interest rate risk Volatility in financial markets can change the calculation of the defined benefit obligation dramatically as the calculation of the obligation is linked to yields on AA-rated corporate bonds. A decrease in the bond yield will increase the measure of plan liabilities, although this will be partly offset by increases in the value of matching plan assets such as bonds. Inflation risk The UK Plan is linked to inflation. A high rate of inflation will lead to a higher liability. This risk is partially managed by holding inflation-linked bonds in respect of some of the obligation. Investment risk If the return on plan assets is below the discount rate, all else being equal, there will be an increase in the plan deficit. Longevity risk The present value of the plans defined benefit liability is calculated by reference to the best estimate of the mortality of the plan participants both during and after their employment. An increase in the life expectancy of plan participants above that assumed will increase the benefit obligation.
Sensitivity Analysis The sensitivity of the defined benefit obligation to changes in the principal assumptions is as follows (relating to the UK schemes):
Change in Impact on defined assumption benefit obligation % £'m 2013 Discount rate (0.1) 25.3 Discount rate 0.1 (22.3) RPI inflation 0.1 22.7 RPI inflation (0.1) (23.0) Demographic change 1 yr 65.8 Demographic change -1 yr (66.4) 2014 Discount rate (0.1) 30 .9 Discount rate 0.1 (30.3) RPI inflation 0.1 22.0 RPI inflation (0.1) (22.4) Demographic change 1 yr 78.1 Demographic change -1 yr (78.6)
The sensitivities analyses above have been determined based on a method that extrapolates the impact on the defined obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting periods. Whilst the impact of all sensitivities is assessed in isolation, this may not be reflective if a change had an impact across a number of assumptions.
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20. The Group's financial commitments in respect of finance lease and hire purchase obligations and in respect of retirement benefits are set out in Notes 9 and 21. The Group's financial commitments in respect of capital expenditure and commitments are summarised below. Group capital expenditure relating to plant and equipment contracted, but not provided for at 3 January 2015 amounted to £8.5 million (2013: £2.9 million; 2012: £3.1 million). Future minimum commitments for property, plant and equipment under non-cancellable operating leases are as follows:
201 4 2013 2012 £m £m £m (unaudited) (unaudited) Not later than one year 8.0 9.3 10.6 Later than one year but not later than five years 33.2 36.0 28.9 Later than five years 19.2 18.9 26.3 60.4 64.2 65.8
The future minimum sub-lease payments which the Group expects to receive under non-cancellable sub-leases at 3 January 2015 were £0.1 million (2013: £0.2 million; 2012: £0.3 million). Sub-lease rents received in the period from 29 December 2013 to 3 January 2015 were £0.1 million (2013: £0.1 million; 2012: £0.2 million). 21. Prior to the acquisition of the Group by Yildiz Holdings AS, a number of the Group's senior managers held ordinary shares of United Biscuits Luxco S.C.A. These were acquired by the relevant senior managers at estimated market value between December 2006 and December 2010, therefore, no additional share-based payment expense has been recognised. There are no mandatory repurchase requirements in the event that these senior management leave the Group. Since 2011, alternative share- based arrangements have been implemented as follows:
Equity-settled share based payments
In 2011, an unapproved share option plan was established by the Group. The options have an exercise price of £1 and are able to be exercised by the employee to whom they have been granted only on an "Exit Event" and provided the individual remains in service as at the date of the Exit Event. An Exit Event occurs when United Biscuits Luxco S.C.A. is either sold to a third party, is liquidated or its shares are listed on a stock exchange (each of these is referred to as an Exit Event).
In 2011, four members of senior management were granted options over a total of 6,860 ordinary shares in United Biscuits Luxco S.C.A. The options have an exercise price of £1. During this period no options were exercised, forfeited or expired. The weighted average fair value of the options granted during the period was £169.60 with an average remaining contractual life of 10 years.
In 2012, one member of senior management was granted options over a total of 580 ordinary shares in United Biscuits Luxco S.C.A. The options have an exercise price of £1. During this period no options were exercised, forfeited or expired. As such, the total amount of options outstanding at the end of the period totalled 7,440. The weighted average fair value of the options granted during the period was £112.40 with an average remaining contractual maturity of 9.1 years.
In 2013, 4 members of senior management were granted options over a total of 27,420 ordinary shares in United Biscuits Luxco S.C.A. The options have an exercise price of £1. During this period, no options were exercised and 840 options expired. As such, the total amount of options outstanding at the end of the period totalled 34,020. The weighted average fair value of the options granted during the period was £226.80 with an average remaining contractual maturity of 9.6 years.
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In 2014, no members of the senior management were granted options and no options expired. 11,920 bonus awards (cash-settled share based payments) were, however, converted to equity settled options. For these options which were modified to equity based the expense charged in the period has been calculated with reference to the fair value of the option at the modification date. The weighted average fair value of the options granted during the period was £249.00.
On 3 November 2014, the Group was acquired by Yildiz Holdings AS. This qualified as a vesting event under the scheme rules and, as a result, share options granting rights over 45,940 ordinary shares in the Group became vested which resulted in a share based payment charge of £8million being recognised for the period (2013: £2.5m).
Cash-settled share based payments In 2013, the Group agreed to make bonus payments to 9 senior managers on the occurrence of an Exit Event. The bonus amount is equivalent to the senior managers being granted options over 18,090 shares in accordance with the Group's unapproved share option plan. The weighted average fair value of the options granted was £226.80.
In 2014, the Group agreed to make further bonus payments and as such a further 3 senior managers were given bonus amounts equivalent to being granted options over 2,490 shares. The weighted average fair value of the options was £249.0, based on an external valuation of the Group for the purpose of a Listing.
The acquisition of the Group by Yildiz Holdings, as mentioned above, triggered an exit event under the scheme rules. As a result 8,220 options became vested at an average share price of £417.18. A cash settled share based payment charge of £3.4million has been recognised for the period ended 3 January 2015 (2013: £0.1million). The liability associated with these payments was cleared before the end of the period.
The weighted average fair value of the equity and cash settled options in each period is based on an equity valuation of the Group. The results each year have been tested to The Black-Scholes option pricing model and it has been demonstrated that there is no material difference between the equity valuations and this model. The assumptions below have been used for the Black-Scholes model comparison in 2012 and 2013. 2012 2013 Term 3-7yrs 3-7yrs Volatility (1) 36-40% 28-32% Risk-free rate 0.28-1.12% 0.85-2.13% Weighted average share price 113.41 227.83 Expected dividend yield 0% 0% (1) Based on a comparative group.
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22. Except as otherwise disclosed in these financial statements, there have been no transactions with the Group’s related parties, which were material either to the Group or the counterparty and which are required to be disclosed under the provisions of IAS 24 “Related Party Disclosures”. Shareholder Debt
Shareholder loans consist of Preferred Equity Certificates (PECs). UB Luxco issued PECs in December 2006 and December 2008 totalling £330.4 million, these are redeemable in 2036 and 2038 respectively. The PECs are not secured and carry interest at 8% per annum compounded annually in arrears on 15 December each year, which commenced on 15 December 2007 and 15 December 2009 respectively. (See Note 16 for the carrying value). Following the sale of the Group on 3 November 2014, the existing PECs remain in place. Shareholder debt has, however, increased by circa £657m, predominantly relating to repayment of existing bank debt.
Other Employee benefits paid to key management personnel, including directors, for the period 29 December 2013 to 3 January 2015 totalled £25.1 million (2013: £6.6 million), of which £21.0 million (2013: £nil million) related to share based payments arising on the sale of the Group to Yildiz Holding AS. At 3 January 2015 £nil million of loans (2013: £0.7 million) were outstanding to employees in relation to the purchase of shares in UB Luxco at market value. Fees totalling £1.6 million were payable by the Group to Blackstone and PAI under the terms of the shareholder agreement for the period from 29 December 2013 to 3 January 2015 (2013: £2.0 million). There were no outstanding balances due to Blackstone or PAI as at 3 January 2015.
23. EVENTS AFTER BALANCE SHEET DATE No events of significance have taken place between 3 January 2015 and the signing of these accounts.
24. ULTIMATE PARENT COMPANY
From 3 November 2014 UB Luxco is owned by Yildiz Holdings AS. For the period from 3 November to 3 January 2015 the consolidated accounts of Yildiz Holdings AS include the Group’s results. For the period from 29 December 2013 to 2 November 2013 the Group was owned jointly by Blackstone and PAI but there are no group accounts above the UB Luxco level that include UB Luxco and its subsidiaries.
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