Nestle Report

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::. Business Description…… Nestle Pakistan Limited Formerly known as Nestle Milkpak Limited. The Group's principal activities are to manufacture, process and sell food products and ancillary equipment. The food products include diary, confectionery and culinary products, coffee and beverage and drinking water. The major brands include MILKPAK UHT, NESTLE EVERYDAY, LACTOGEN and NESCAFE.

::. Company Profile…… Name: Ticker: Exchanges: 2005 Sales: Major Industry: Sub Industry: Country: Employees:

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Nestle Pakistan Limited NESTLE KAR 17,142,000,000 FOOD & BEVERAGES DIVERSIFIED FOOD PAKISTAN 1958

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::. Business Principles…… Since Henri Nestlé developed the first milk food for infants in 1867, and saved the life of a neighbor’s child, the Nestlé Company has aimed to build a business based on sound human values and principles. While our Nestlé Corporate Business Principles will continue to evolve and adapt to a changing world, our basic foundation is unchanged from the time of the origins of our Company, and reflects the basic ideas of fairness, honesty, and a general concern for people. Nestlé is committed to the following Business Principles in all countries, taking into account local legislation, cultural and religious practices: •

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Nestlé's business objective is to manufacture and market the Company's products in such a way as to create value that can be sustained over the long term for shareholders, employees, consumers, and business partners. Nestlé does not favor short-term profit at the expense of successful long-term business development. Nestlé recognizes that its consumers have a sincere and legitimate interest in the behavior, beliefs and actions of the Company behind brands in which they place their trust and that without its consumers the Company would not exist. Nestlé believes that, as a general rule, legislation is the most effective safeguard of responsible conduct, although in certain areas, additional guidance to staff in the form of voluntary business principles is beneficial in order to ensure that the highest standards are met throughout the organization. Nestlé is conscious of the fact that the success of a corporation is a reflection of the professionalism, conduct and the responsible attitude of its management and employees. Therefore recruitment of the right people and ongoing training and development are crucial. Nestlé continues to maintain its commitment to follow and respect all applicable local laws in each of its markets.

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::. Board of Directors……

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::. History…… 1866 -1905 In the 1860s Henri Nestlé, a pharmacist, developed a food for babies who were unable to breastfeed. His first success was a premature infant who could not tolerate his mother's milk or any of the usual substitutes. People quickly recognized the value of the new product, after Nestlé's new formula saved the child's life, and soon, Farine Lactée Henri Nestlé was being sold in much of Europe. 1905-1918 In 1905 Nestlé merged with the Anglo-Swiss Condensed Milk Company. By the early 1900s, the company was operating factories in the United States, Britain, Germany and Spain. World War I created new demand for dairy products in the form of government contracts. By the end of the war, Nestlé's production had more than doubled. 1918 -1938 After the war Government contracts dried up and consumers switched back to fresh milk. However, Nestlé's management responded quickly, streamlining operations and reducing debt. The 1920s saw Nestlé's first expansion into new products, with chocolate the Company's second most important activity 1938 -1944 Nestlé felt the effects of World War II immediately. Profits dropped from $20 million in 1938 to $6 million in 1939. Factories were established in developing countries, particularly Latin America. Ironically, the war helped with the introduction of the Company's newest product, Nescafé, which was a staple drink of the US military. Nestlé's production and sales rose in the wartime economy. 1944 -1975 The end of World War II was the beginning of a dynamic phase for Nestlé. Growth accelerated and companies were acquired. In 1947 came the merger with Maggi

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seasonings and soups. Crosse & Blackwell followed in 1960, as did Findus (1963), Libby's (1971) and Stouffer's (1973). Diversification came with a shareholding in L'Oréal in 1974. 1975 -1981 Nestlé's growth in the developing world partially offset a slowdown in the Company's traditional markets. Nestlé made its second venture outside the food industry by acquiring Alcon Laboratories Inc.. 1981 -1996 Nestlé divested a number of businesses1980 / 1984. In 1984, Nestlé's improved bottom line allowed the Company to launch a new round of acquisitions, the most important being American food giant Carnation. 1996+ The first half of the 1990s proved to be favorable for Nestlé: trade barriers crumbled and world markets developed into more or less integrated trading areas. Since 1996 there have been acquisitions including San Pellegrino (1997), Spillers Petfoods (1998) and Ralston Purina (2002). There were two major acquisitions in North America, both in 2002: in July, Nestlé merged its U.S. ice cream business into Dreyer's, and in August, a USD 2.6bn acquisition was announced of Chef America, Inc..

::. Business Success Stories in Pakistan The joint venture between Milkpak Ltd. And Nestle S.A. came about in 1988 and the company was renamed as Nestle Milkpak Ltd. Prior to that, Milkpak Ltd., produced UHT milk, butter, cream, desi ghee and fruit drinks at Sheikhupura factory. 21 branded product lines were added during 1990 to 1998. Nestle Milkpak operates the largest and an extremely efficient milk collection system in the country, which enables it to collect the highest quality milk for production of UHT and powder milks as well as other milk based products. The company voluntarily provides extension services of farmers in the area of animal husbandry and livestock breed improvement. Nestle Milkpak entered the export market in 1993 with exports of Rs.3.2 million to Afghanistan. Growing steadily over the years, its exports stood at Rs.321 million by June, 1998. Currently, it's overseas markets include the UAE, UK, USA, Sri Lanka, Malaysia, Bangladesh, Afghanistan and Central Asian States. In the social sector, the company provides over 1,100 job opportunities for skilled, unskilled and professional manpower. It plays a remarkable role in vitalizing the rural

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economy by disbursing over Rs.1.37 billion annually against milk purchases, benefiting over five million household members of the dairy farmers. In line with its universal commitment, Nestle Milkpak fully complies with its responsibilities forwards the protection of the environment. By making available the processed and packaged dairy products to urban consumers, it helps in arresting urban environmental degradation caused by the influx of cattle into towns. Within it's own production facilities, the company takes pains to operate an elaborate water treatment system to cleanse its industrial wastewater before releasing it for irrigation.

::. At a Glance…… Nestlé with headquarters in Vevey, Switzerland was founded in 1866 by Henri Nestlé and is today the world's biggest food and beverage company. Sales at the end of 2005 were CHF 91 bn, with a net profit of CHF 8 bn. We employ around 250,000 people and have factories or operations in almost every country in the world. The Company's strategy is guided by several fundamental principles. Nestlé's existing products grow through innovation and renovation while maintaining a balance in geographic activities and product lines. Long-term potential is never sacrificed for short-term performance. The Company's priority is to bring the best and most relevant products to people, wherever they are, whatever their needs, throughout their lives.

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::. Key Brands…… Today Nestlé is present in different markets with the following main Brands: Coffee Water Other beverages Shelf stable Chilled Ice cream Infant nutrition Performance nutrition HealthCare nutrition Bouillons, soups, seasonings, pasta, sauces Frozen foods (prepared dishes, pizzas) Refrigerated products (cold meat products, dough, pasta, pizzas, sauces, snacks) Chocolate, confectionery and biscuits FoodServices and professional products Petcare

Nescafé, Taster’s Choice, Ricoré, Ricoffy, Nespresso, Bonka, Zoégas, Loumidis Nestlé Pure Life, Nestlé Aquarel, Perrier, Vittel, Contrex, S.Pellegrino, Acqua Panna, Levissima, Arrowhead, Poland Spring, Deer Park, Ozarka, Hépar, Ice Mountain, Zephyrhills Nestea, Nesquik, Nescau, Milo, Carnation, Libby’s, Caro, Nestomalt, Nestlé Nestlé, Nido, Nespray, Ninho, Carnation, Milkmaid, La Lechera, Moça, Klim, Gloria, Svelty, Molico, Nestlé Omega Plus, Bear Brand, Coffee-Mate Nestlé, Sveltesse, La Laitière, La Lechera, Ski, Yoco, Svelty, Molico, LC1, Chiquitin Nestlé, Antica Gelateria del Corso, Dreyer's/Edy's, Drumstick/Extrême, Maxibon/Tandem, Mega, Mövenpick, Sin Parar/Sem Parar/Non Stop Nestlé, Nan, Lactogen, Beba, Nestogen, Cerelac, Neslac, Nestum, Guigoz, Good Start PowerBar, Pria, Musashi Nutren, Clinutren, Peptamen, Modulen Maggi, Buitoni, Thomy, Winiary,Torchin Stouffer’s, Lean Cuisine, Hot Pockets, Buitoni, Maggi Nestlé, Buitoni, Herta, Toll House

Nestlé, Crunch, Cailler, Galak/Milkybar, Kit Kat, Smarties, Butterfinger, Aero, Polo Chef, Davigel, Minor’s

Purina, Friskies, Fancy Feast, Alpo, Gourmet, Mon Petit, Felix, Dog Chow, Cat Chow, Pro Plan, Purina ONE, Beneful, Tidy Cats Pharmaceutical company Alcon Pharmaceutical and Galderma, Laboratoires innéov cosmetic joint ventures Associated company L’Oréal (equity interest)

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::. Consumer Services… At Nestlé, we are committed to offering consumers high-quality food products that are safe, tasty and affordable. The Nestlé Seal of Guarantee is a symbol of this commitment. We also believe in maintaining regular contact with our consumers. This applies both to how we present our products and to how we address our consumers' questions and concerns. When Henri Nestlé prepared his first boxes of infant formula for sale, he put his address on the packages so people would know where to go if they had questions. Today, our Consumer Relationship Panel with the words "Talk to Nestlé" expresses the same commitment. This is why we have a worldwide Nestlé Consumer Services network devoted to caring for our consumers. Our people have expertise in a wide range of areas such as nutrition, food science, food safety and culinary expertise. They provide the prompt, efficient and high quality service that consumers expect from Nestlé. In addition, we teach them talk with consumers and above all, to listen. Listening helps us to understand what people want. Nestlé uses the insights gained from relationships with consumers to drive product development. At Nestlé, we care for our consumers because our success depends on meeting their needs and expectations. Through listening and understanding, we can make products that they will want to use all through their lives.

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::. Quality at Nestle’…… Everyday, millions of people all over the world show their confidence in us by choosing Nestlé products. This confidence is based on our quality image and a reputation for high standards that has been built up over many years.

Quality is the cornerstone of our success Every product on the shelf, every service and every customer contact helps to shape this image. A Nestlé brand name on a product is a promise to the customer that it is safe to consume, that it complies with all regulations and that it meets high standards of quality. Customers expect us to keep this promise every time. Under no circumstances will we compromise on the safety of a product and every effort must be made to avoid hazards to health. Likewise, compliance with all relevant laws and regulations is a must and is not negotiable. People, equipment and instruments are made available to ensure safety and conformity of Nestlé products at all times. The effort is worth it. Companies with huge quality standards make fewer mistakes, waste less time and money and are more productive. They also make higher profits. Quality is our most successful product. It is the key to our success, today and tomorrow.

The customer comes first We want to win and keep customers: distributors, supermarkets, hotels, shopkeepers and the final consumers. They have very different requirements. Trade customers expect excellent service, correct information and timely delivery. Consumers consider taste, appearance and price when they make their choice. Our task is to understand what customers want and respond to their expectations rapidly and effectively. We serve various groups of consumers and there is demand for products at different levels of perceived quality and price. All customers, however, expect value for their money – good quality at a reasonable price. When offering quality to customers we also mean environmental quality. Nestlé shares society’s concern for the environment and is committed to environmentally sound business practices throughout the world. Customers are central to our business and we must always respect their needs and preferences.

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Quality is a competitive advantage We live in a competitive world and must never forget that our customers have a choice. If they are not satisfied with a Nestlé product, they will switch to another brand. Our goal, therefore, is to provide superior value in every product category and market sector in which we compete. The pursuit of highest quality at any price is no guarantee for success, nor is a single-minded cost-cutting approach. Lasting competitive advantage is gained from a balanced search for optimal value to customers, by simultaneous improvement of quality and reduction cost. Success can never be taken for granted. We must watch and learn from our competitors. If they do something better, we must improve our own performance. We can achieve competitive advantage through Quality.

Quality is a joint effort Operating companies are fully responsible for maintaining agreed quality standards. Not only Production units, but also Marketing, Purchasing, Distribution and Sales have a vital role to play in providing quality to customers. This implies a thorough knowledge of the products and services we offer. Quality units at different levels of the organization provide specific support, promote quality awareness, assume guardianship and audit the system. Quality departments monitor operations against agreed standards and must intervene in case of nonconformity. Quality policy and principles, the mandatory standards and the recommended tools for implementation are laid down in the Nestlé Quality System which is applicable throughout the group. Further directions are given through instructions, norms and guidelines, often specific to a product. Our business products, such as raw material producers, packaging suppliers, contract manufacturers and distributors are expected to share our concern for Quality. They too must set up an adequate quality system, so as to meet our requirements consistently. The quality efforts must be shared by every function and department in the company as well as our business partners.

Quality is made by people Adequate equipment, procedures and systems are needed to make Quality; so are involved and dedicated people. Each and every Nestlé employee must do his best to provide quality products and services.

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Training and teamwork are crucial to the successful implementation of high quality standards. Continuous training ensures that everyone understands his tasks and has the necessary skills to carry them out. Teamwork allows us to achieve results that are greater than the sum of individual efforts. We motivate employees by demonstrating management commitment to Quality, by setting challenging goals and by giving them responsibility and recognition. It is through employee involvement that goals and targets can be achieved in the shortest time. Quality must be a way of life for everyone in the company.

Quality is action Quality is the result of deliberate action. It is the responsibility of senior managers to communicate the quality objectives and to provide the resources necessary for their implementation. It is then up to all employees to make Quality happen throughout the company. Progress is followed by listening to our customers and by measuring our performance. Shortcomings and mistakes must be analyzed and corrected. Problems must be anticipated and prevented before they occur. We also must identify and take advantage of opportunities. To stand still is to fall behind. So we must strive for continuous improvement in every area. It is through many small improvements as well as through major breakthroughs that we will achieve excellence. At Nestlé, Quality is our first priority. Let us practice it every day.

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Classification of Ratio Analysis

Primary/Secondary • Primary • Secondary Interested Group • Owner’s Point of View • Lender’s Point of view • Management’s Point of View Fundamental • • • •

Liquidity Activity Solvency Profitability

Here ratios will be calculated according to the Fundamental Classification. Yunas & Faisal

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::. Liquidity Ratios …… Ratios

2005

2004

Change

Current Ratio Quick Ratio Cash Ratio Net Working Capital

0.81 0.467 0.244 -814510

1.00 0.28 0.0404 3860

0.19 0.187 0.2036 818370

Liquidity Ratios 1.2 1 0.8 0.6 0.4 0.2 0

Year 2004 Year 2005

Current Ratio

Quick ratio

Cash Ratio

::. Comments …

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::. Profitability Ratios …… Ratios

2005

2004

Change

Net Profit Ratio Operating Profit Ratio GP Ratio Operating Ratio Return on Assets Return on Equity Return on Investment Return on Fixed Assets

6.701 12.33 27.91 15.58 12.99 58.696 31.13 22.57

7.65 11.98 27.96 15.98 17.57 66.139 40.07 30.58

0.949 0.35 0.05 0.4 4.58 7.443 8.94 8.01

Profitability Ratios

Year 2004 Year 2005

O Ne t pe r a Pro tin fit g R a Pr of tio it R at io G O pe P R r a R atin tio et ur g R n at o io R et n A ur R ss et n et s R urn on et E o q ur n u n I on nve ity s Fi xe tme n d As t se ts

70 60 50 40 30 20 10 0

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::. Market Ratios …… Ratios

2005

2004

Degree of Financial Leverage Earning Per Share Price Earning Ratio Book Value of Share Dividend Yield Ratio Dividend Payout Ratio Percentage of Earning Retained

129.65

109.29

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Change

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Activity Ratios Ratios

2005

2004

Change

Inventory Turn Over

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