Four Pillars of Global Trade Finance Assignment

ANCHAL,ANCHAL

300369664

BUSN 3200-002

SIMON PARKER

DATE – 27 January 2023

About the Company

“Nestle is a manufacturer and marketer of food products and beverages. The company's product

portfolio comprises baby foods, bottled water, cereals, chocolates and confectionery, coffee,

culinary products, chilled and frozen foods, dairy products, nutritional products, ice cream, and

pet products. Its major brands include Aero, Alpo, Milkybar, Nestle Ice Cream, Cerelac,

Nescafe, Nespresso, Nestea, Milo, Maggi, Buitoni, Cailler, Movenpick, Freshly, Purina, Boost,

Gerber, and KitKat.” (Nestle Home, n.d.-b)

“Nestlé was formed in 1905 by the merger of the "Anglo-Swiss Milk Company", which was

established in 1866 by brothers George and Charles Page, and "Farine Lactée Henri Nestlé"

founded in 1867 by Henri Nestlé.” (The Nestlé Company History, n.d.)

Following are two pillars which I choose to define international business of Nestle:

1. Risk Mitigation

 Country risk: “The company has a presence in diverse territories which insulates it from

the risk associated with economic and political factors of a specific region. The

company's majority of the revenue is from the Americas (44.73%), followed by Europe

and MENA (29.10%), and Asia, Oceania, and Sub-Saharan Africa (29.10%). By country,

the US generates the highest revenue (30.84%), followed by China (7.10%)”. (Nestlé’s

2021 Annual Report, n.d.) The company received a 4.09 out of 5 rating for its country

risk.

Diversifying the portfolio across the various countries can result in reducing the potential

volatility of doing business in a single economic zone. By engaging in international commerce, it

benefited from value improvements wherever it takes place while also assisting in the
stabilisation of global financial markets. Country risk should be a factor in the value of any

major multinational firm since it should be a result of a company's activities. In the last portion,

we'll also go over how to transfer values between different currencies for capital planning and

valuation, as well as how to prevent currency mismatches.

 Currency risk: “Nestlé S.A. is a Swiss company and owns a prestigious position being

the world’s leading nutrition, health and wellness group” (Publication of 2016 Annual

Report, n.d.). According to its annual report (2015), this company is exposed to many

risks caused by movements in foreign currency exchange rates, interest rate and market

prices. “The foreign exchange risk comes from transactions and translations of foreign

operations in Swiss Francs (CHF). “The interest rate risk faces the borrowings at fixed

and variable rates. The market price risk comes from commodity price and equity price.

The former risk arises from world commodity market for the supplies of coffee, cocoa

beans, sugar and others. The later risk arises from the fluctuations of the prices of

investments held.” (Nestle annual reports, 2015)”. Therefore, to control these risks, this

international firm makes use of financial derivatives products.

Exchange rate fluctuations While NFI (Nestle finance international) uses short-term hedging for

trading activities, NFI does not believe that it is appropriate or practical to hedge long-term

translation exposure. NFI is subject to some currency fluctuations, both in terms of its trading

activities and the translation of its financial statements. NFI does, however, attempt to reduce its

exposure to this translation risk by tying the currencies of its trading cash flow to those of its

debt using contracts for interest and currency swaps that are broadly similar. NFI's financial

situation might suffer if it encounters significant currency fluctuations or has trouble utilizing

contracts with comparable interest rates and currency swaps.

  Commercial risk: “The company's primary exposure is to the food sector, followed by

non-alcoholic beverages. More than half of Nestle's revenue comes from food (66%), and

the rest from non-alcoholic beverages. Low-profit margins and weak growth projections

characterize the food and non-alcoholic beverage sectors, resulting in an average industry

risk.” 

There are risks outside the company control which are interest rates, exchange rates, politics, and

weather are just a few of these. Information breaches, noncompliance, lack of insurance, rapid

growth, and many other internal risks are within company control.

Source: https://www.globaldata.com/data-insights/consumer/nestle-sa-risk-profile/

2. Financing: Financing of the Nestlé Group companies: “The principal business activity of

NFI is the financing of companies directly or indirectly controlled by Nestlé S.A. This

financing represents the majority of the transactions with related parties in quantity and in
 amounts. There is no experience of loss for credit default resulting from this activity, NFI

assesses the impairment risk in Note 1. The majority loans are done for a period of 3

years and have no guarantee. In 2019, interest rates on these loans are mainly ranged

from Euribor or Libor 1 month to 6 months with a margin from 5 to 513bps.”  (Nestlé

Finance International Ltd. Annual Financial Report, 2019)

Loans and Receivables: Non-derivative financial assets with fixed or determinable payments,

such as loans and receivables, are not quoted in a market. Loans made within the Nestlé Group,

loans made to outside parties, trade and other receivables, and accrued interest on loans are all

included in this category of financial assets.

“Subsequent to initial measurement, intra Nestlé Group loans and receivables are carried at

amortised cost using the effective interest rate method less appropriate allowances for doubtful

receivables.” (Nestle Annual Financial Report 2018, n.d.)

The losses that Nestle finance ltd. estimates could result from the failure or inability of debtors to

make payments when due are reflected in allowances for doubtful receivables.
 References:

Home. (n.d.-b). Nestlé Global. https://www.nestle.com/

The Nestlé Company History. (n.d.). Nestlé. https://www.corporate.nestle.ca/en/aboutus/nestle-

company-history

Nestle Annual Review 2015. (2015, December 31). Retrieved January 27, 2023,

from https://www.nestle.com/sites/default/files/asset-library/documents/library/

documents/annual_reports/2015-annual-review-en.pdf

Publication of 2016 Annual Report. (n.d.). Nestlé

Global. https://www.nestle.com/media/mediaeventscalendar/allevents/2016-annual-report

Nestlé’s 2021 Annual Report. (n.d.). Nestlé Global. https://www.nestle.com/investors/annual-report

Nestlé Finance International Ltd. Annual Financial Report for the year ended 31 December 2019.

(2019, December 31). https://www.nestle.com/sites/default/files/2020-05/nestle-finance-

international-ltd-financial-statements-2019.pdf

Nestle Finance International LTD. Annual Fiancial Report. (2018, December 31). Nestle. Retrieved

January 27, 2023, from https://www.nestle.com/sites/default/files/2020-05/nestle-finance-

international-ltd-financial-statements-2018.pdf