OVERVIEW
The Group stood up to the test of a very challenging 2007. Backed by strong fundamentals and established brands, Nestlé Malaysia faced all the challenges posed during the year under review to deliver a commendable performance. The Group’s turnover increased by 4.3% to RM3.4 billion, up from the RM3.3 billion recorded previously. On comparable basis, taking into consideration the divestiture of the Canned Liquid Milks business, the Group recorded a double digit growth of 14.9%. Equally important have been the sound and strategic business decisions which were executed flawlessly throughout the entire value chain. The key pillars of the Group’s strategy - Operational Efficiency, Innovation and Renovation, Consumer Communication and Product Availability – have been continuously acted upon, which helped contribute towards the year’s performance.

As part of its portfolio optimisation strategy, effective from 1 February 2007, the Group ceased to sell and market Canned Liquid Milk products. The Group, however, has been appointed as a distribution agent by the buyer to provide “Route-to-Market” agency services for a minimum transitional period of two years. The restructuring has allowed the Group to focus and grow the key strategic categories to strengthen Nestlé’s position of being the leading Nutrition, Health and Wellness Company in Malaysia. The unprecedented upsurge in the prices of major raw materials (i.e. milk solids, palm oil, coffee beans and wheat flour) since the beginning of the year has nudged the Group into managing its business even more efficiently at every point of the value chain. This has affected the Group’s ability to maintain the gross profit margin, which dropped by 80bps against 2006. The Group’s continuous drive for Operational Excellence coupled with a vast programme of internal savings across the value chain helped ease some of the input cost pressures, and resulted in the Group’s profit margin before tax improving by 50bps to 11.6% of the turnover.

Two major investments relating to Innovation and Renovation were made by the Group to produce low fat noodles under the brand MAGGI TASTYLITE and a chocolate-malt drink in the “growing up milk” category under the MILO JUNIOR brand. Several other products were launched during the year which took into account consumers’ changing lifestyles and preferences such as NESCAFÉ BODY PARTNER Tongkat Ali & Ginseng, YOCO cultured milk drink and NESPRAY ACTIVEPROTECTION to name a few. Offering better value, nutritional benefits and high quality, the new products launches have been very well received by the consumers.

FINANCE AND CONTROL 
Finance and Control continued to drive discipline, performance and transparency via an efficient and dynamic planning system, enabling the various businesses to anticipate and take proactive management decisions to achieve the Group’s objectives and targets.

In order to further leverage on the GLOBE platform through shared services for transactions, the Group has started its preparation for a transfer of Financial and Employee services to a newly-created “Nestlé Business Services-AOA”, based in Manila, Philippines. The expected full implementation is planned for the middle of 2008.

To improve the management of working capital, the Group has signed a Memorandum of Understanding with Malayan Banking Berhad and American Express to implement the AMEX Distributor Card Programme. This cashless transaction system will progressively replace manual collections as well as manual updates of payments received from customers. Sales transacted under this programme will be collected by the next day, thus significantly reducing the outstanding receivables days.

SALES
Distribution and ensuring availability of our range of products at all the distribution channels remained the key focus for the sales operations team.

At the front-end of the sales operation, continuous use of Hand-held Terminals by the sales force has transformed Sales IT initiative into a way of life. This has improved the field sales execution especially with regards to sales coverage and customer service.

Complementing this, continuous improvements in the Distributor Management Best Practices provided optimal support and service to the front-end to meet the expectations of the trade.

COFFEE & BEVERAGES
The strong performance of MILO and NESCAFÉ beverages continued in 2007 with both brands growing well in terms of sales, despite strong costprice pressures.

The year under review was especially significant for MILO as the brand celebrated the nation’s 50th Merdeka with Malaysians of all ages and walks of life, from all corners of the country. The MILO brand was present in a big way at the major 50th Merdeka parades, sharing cups of the hugely popular beverage with participants as well as the crowds. A large number of Nestlé staff volunteered to be personally involved for this service during the parades.

The MILO brand also continued to play a strong role in the daily life of Malaysians throughout the year by providing nutrition, energy and great taste to children by supporting junior sports as well as Malaysian teams in international events such as the SEA Games. The remarkable performance of the Malaysian contingent during the SEA Games in Thailand was the perfect tribute to end a memorable year by the nation’s athletes. The MILO brand was proud to play its part by being the Official Nutritious Chocolate Malt Drink of the Malaysian SEA Games contingent, leading a campaign that resulted in 2.3 million signatures in support of the contingent before their departure. Several of these athletes have spent their foundation years at various MILO events and in 2007 the brand was once again involved in more than 200 sporting events ranging from grassroot activities all the way to international competitions.

Several exciting new products were offered under the MILO umbrella with the most significant being:

• MILO JUNIOR 3-4-5, a growing up milk which is tailor-made for the nutritional requirements of children between 3-5 years.
• MILO FUZE AIS KOOL, a cold soluble drink aimed for those who want the nutrition of MILO drink but prefer to drink it cold.
• MILO FUZE 3in1 with Oats, which offers the great taste of MILO combined with the goodness of oats.
• An improved MILO UHT featuring great taste and strong nutritional values with lower sugar content.

All these initiatives have started well and will continue contributing to the dynamic growth and future performance of MILO.

NESCAFÉ started 2007 with the relaunch of the NESCAFÉ 3in1 with an improved recipe and the introduction of NESCAFÉ BODY PARTNER Tongkat Ali & Ginseng. With these initiatives, the coffee mixes business continued to deliver strong growth and gained significant market share. The BODY PARTNER range continues to develop well through its promise of great-tasting coffee products with extra goodness. At the same time NESCAFÉ CLASSIC continued to be the strongest player in the pure soluble segment in terms of market share.

During the year, the presence of NESCAFÉ in the community was further strengthened by developing additional KICK-START events which are aimed at inspiring young Malaysians to achieve their career goals and fulfill their dreams. The brand was also involved in a safety driving campaign and reached out to rural Malays through “Pujaan Muzik” entertainment activities. In East Malaysia, the brand was proud to be a part of Gawai and Kaamatan celebrations.

FOOD
The beginning of the year under review saw the unveiling of the MAGGI Masak-masak Studio and the launch of many new and renovated products that offer a balance of taste and nutrition; providing even more options for Malaysian consumers who have made MAGGI part of their daily lives.

The year was very challenging for the instant noodle business with the simultaneous and sharp increase in the price of wheat flour and palm oil, coupled with heightened competition. The challenges notwithstanding, the brand persevered; with the newly-launched extra hot MAGGI Kari LETUP being very well received and the popularity of the MAGGI Mi Goreng Pluz helping the brand gain additional market share.

In line with Nestlé’s Nutrition, Health, and Wellness direction, the new MAGGI TASTYLITE noodles were launched. The breakthrough technology, which air dries the noodles instead of frying them, can reduce fat content by more than 60% to 80%, depending on the recipe. Sodium content is also significantly reduced by approximately 25%. This innovation in noodlemaking will provide consumers with healthier instant noodle options which are in line with Nestlé’s Nutrition, Health and Wellness direction as well as complement the Government’s efforts to encourage a healthier lifestyle for all Malaysians. A very significant investment was made for this air-dried noodle technology, and similar products will be exported to Singapore, Australia and New Zealand.

There were also significant strides made on the Cooking Aids front, with the new all-in-one MAGGI CUKUPRASA Seasoning and Nasi Goreng range launched. To introduce these new offerings, cooking demonstrations were held for homemakers and food operators at the state-of-the art MAGGI Masak-masak Studio – which were very well received.

To further entrench the MAGGI brand in the hearts and minds of consumers, MAGGI was actively involved in grassroot activities during the Chinese New Year, Pesta Gawai, Tadau Kaamatan and Ramadan as well as events like the Merdeka celebrations, Visit Malaysia Year events and TV3’s popular Jom Heboh carnivals. The popular brand was present at all major celebrations and events throughout the year; further strengthening its presence in the market.

MILKS
In line with the Group’s strategy to focus on fewer, bigger brands in valueadded segments, as well as Nestlé’s evolution into a Nutrition, Health and Wellness company, 2007 saw the successful divestment of the Canned Liquid Milks business. The exercise further helped the Group to channel its focus and resources on strategic segments where Nestlé can add value for long term, sustainable and profitable growth.

The unprecedented increase in the price of milk solids due to a variety of factors compounded by surging demand from China and adverse weather conditions in Australia had a big impact on the Milks business. Despite best efforts to improve operational efficiencies, the Group was forced to pass on some of this cost increase to the consumer in the form of higher prices.

However, the Group continued to invest in key brands including NESTLÉ OMEGA PLUS with ACTICOL (helps lower cholesterol) and NESVITA 3in1 (START RIGHT. DO MORE). The Innovation and Renovation was spearheaded by the successful re-launch of NESPRAY ACTIVEPROTECTION, NESVITA 3in1 Chocolate and NESTUM Sarapan Berkhasiat all-family cereal.

CHOCOLATE & CONFLECTIONERY
Significant growth was recorded for key brands such as KIT KAT and MILO. The performance of KIT KAT is attributed to continued investment in communication which builds on the relevance of the product and the light eating format to today’s young adults who are very conscious of their dietary intake.

The growth for MILO was based around the new smaller packs, which makes the product more accessible and affordable for consumers.

NUTRITION
Innovation and Renovation drove Infant Nutrition, in line with the commitment to provide science-based and nutritionally superior benefits though products that offer specific nutritional needs to consumers. The launch of NESTLÉ GOLD Infant Cereals is the first in Malaysia, which has been enhanced with Nestlé’s proprietary BL BIFIDUS probiotic culture; a beneficial bacterium that can help to enhance the immune status and reduce the incidence of diarrhoea in babies. In addition, NAN 3 was launched specifically for children above 1 year old. These have helped to further strengthen the Group’s position as the market leader in Infant Nutrition.

HealthCare Nutrition was driven by Diabetes Nutrition and Critical Care platforms in both the retail and medical channels. This was achieved by focusing on continuous education to the consumer and medical professionals, sampling activities, consumer promotions and recruitment campaigns.

With more Malaysians maintaining a healthier and active lifestyle through regular exercise and sports activities, POWERBAR (for Performance Nutrition) is the trusted and preferred brand in helping to enhance the health and wellness of active individuals by providing convenient nutritional products. Three new variants (POWERBAR Gel Green Apple, POWERBAR Gel Double Latte and POWERBAR Endurance Beverage System Fruit Punch) were introduced to meet the nutrition and energy needs of elite athletes and individuals seeking to optimise their sports performance.

CHILLED DAIRY
Chilled Dairy achieved a strong growth both in the Yogurt and Yogurt Drink categories. The marketing campaign done for the BLISS Yogurt Drink has helped to nurture stronger consumer awareness. The introduction of the BLISS 0% Fat range has further strengthened the Group’s market leadership in this category. YOCO cultured milk drink is another successful innovation which was launched in 2007. The introduction of the YOCO character and strong proposition of calcium for stronger bones has provided Nestlé a strong entry point into the cultured milk drink market.

ICE CREAM  
During the year under review, Ice Cream has further consolidated its leadership position by recording double digit growth in Modern Trade and out-of-home channels. It has also become a supplier to most major Quick Service Restaurants (QSR) in the country. Strong emphasis in Innovation and Renovation has enabled the business to develop many new and successful products such as DRUMSTICK SPIRO, SPIDERMAN and MAT KOOL WHOOSH. Whilst in the premium tub category, the LA CREMERIA range was the choice of consumers and emerged as the market leader.

NESTLÉ PROFESSIONAL 
Eating out of home is a way of life for Malaysians and this segment represents a very important market for Nestlé Malaysia. The Malaysian foodservice market is multi-faceted and very exciting, and is dominated by three main national food cuisines – Malay, Chinese and Indian. There has also been a strong upsurge in the Western, fast food and the café culture with the hawker business maintaining its place as the mainstay of the market.

Generally Malaysians are becoming more health conscious and at the same time more adventurous in their attitudes towards new food concepts and food products. These two trends are inter-linked and Nestlé Professional is exploring this growing segment further by looking at new trends and building further on its Innovation and Renovation pipelines to help deliver creative solutions to food operators. Among the new product ranges introduced during the period under review include the MAGGI Rendang Paste, MAGGI White Sauce and NESCAFÉ Tongkat Ali & Ginseng.

EXPORTS
The exports sector grew substantially during the period under review; recording more than 40% growth over the previous corresponding period. The business represents 22% of Nestlé Malaysia’s total turnover and the strong growth was the result of major developments and new launches in various product categories for which the Group has a competitive advantage such as Milk Powders, Culinary (MAGGI), MILO, Infant Cereals, Liquid Beverages and air-dried noodles towards the end of 2007.

There was notable volume growth of Milk Powder exports into existing importing markets within the Middle East, aided by the new Milk product range that the region started to source from Malaysia. In addition, new markets in Northern and Central West Africa were also being developed in the later part of 2007, which further added to the growth volume.

CAPITAL EXPENDITURE 
Total capital expenditure for the period under review was RM103.3 million, up from the RM87.4 million registered in the previous financial year, consisting of Manufacturing as well as Sales and Distribution. The capital investments were in line with the increased market demand and the growing demand for export volumes.

Additionally, most of the investments made during the financial period under review were related to innovation. New processes to produce low fat noodles and a dedicated production line to produce chocolate-malt drink in the “growing up” category were successfully commissioned and fully operational. Investments were also made in areas of quality assurance and cost saving initiatives.

HUMAN RESOURCES
The year under review saw the continuation of the Group’s efforts to achieve its vision of being ‘A GREAT Place to Perform – The Best Brand For Your Career’ supported by the 3 Employee Value Propositions - Rewarding Career, Enriching Development and Balanced Quality Work Life.

Using GREAT as enablers (Growing Talent, Resourcing Organisation, Engaging Workforce, Aligning Company’s Objective, Transforming Work Culture), the Group’s initiatives centered around the evolving structure of the Businesses. The highlights during the year to strengthen the capabilities and knowledge of the workforce included more focused training and development plans aimed at continuously upgrading the personnel’s skills and competencies.

The Human Resource department continued to seek and acquire the best fit and high calibre talents especially for mid-career hires as well as Management Trainees. Talent Management continues to be the main focus in ensuring continuity in the Group’s business leadership. Various initiatives have been rolled out to reinforce Nestlé’s employer branding.

To ensure that it keeps Engaging the Workforce, Nestlé strives to continue reinforcing the performance culture and unleash the potential of its personnel towards more value-added deliverables in support of the Group’s results.

To keep all its strategies and plans aligned with the Group’s objectives, HR continues to work closely with the respective Businesses and functions in ensuring timely recruitment of staff, focused talent management, implement succession and development plans, while a creative retention strategy through performance-based remuneration has been extended to the management and non-management personnel.

To transform the Work Culture, HR focuses on initiatives that promote and encourage inspiring leadership, which will lead the Group to becoming an even more innovative, dynamic and agile organisation.

PURCHASING, PRODUCTION AND SUPPLY CHAIN
Moving in tandem with the rapid evolution of the business coupled with heightened competition in the market, greater focus was placed on ensuring the highest level of service to domestic and export customers, and maintaining or increasing the market share lead of key product categories. An important factor in ensuring customer satisfaction is the provision of supply of products at the right quantity, time, quality and taste, freshness, convenience and cost. To ensure these objectives, the Finance & Control, Production and Supply Chain Divisions adopted an integrated approach to teamwork and projects related to customers, ensuring reliable and constant customer service which would exceed the demands of all customers. From the second half of the period under review, an “Operations” concept was implemented to identify common projects which will unlock the maximum benefits of the “value chain”.

Meanwhile, in the area of Quality, the Group has covered the entire chain right up to the retailers. All third party warehouses are in compliance with Nestlé’s quality standards. This also applies and extends to the area of Safety, where the Company significantly increased the level of awareness; thus reducing the number of incidents in the Supply Chain area.

Nestlé’s “Operational Excellence” programme covering Purchasing, Production and Supply Chain has generated savings beyond the projections, allowing the Company to partly mitigate the tremendous increases it faced in the light of burgeoning raw material prices and has helped the Group contain the quantum of increases for its product pricing.

On the Purchasing side, the Nestlé team has pursued its drive towards sourcing high quality raw and packaging materials, while implementing more efficient sourcing for Services and other Materials. The Team has further enhanced relationships with key suppliers, providing them with means to innovate or renovate their offerings. A lot of attention has been placed on working capital management as well, in the light of the unprecedented high cost environment. These efforts have allowed all Business Units to benefit from additional value to their final products, including the various materials used when selling in the trade. Purchasing will continue its full integration in the “Operations concept”, which is key to further improving efficiencies from an end-to-end perspective.

On the Production side, Nestlé has continued its people development initiatives. The graduation of the first “batch” of First Line Managers will be in March 2008, when they will each receive an Executive Diploma in Manufacturing Management. The “Technical Operators” programme was also very successful, leading to nearly 150 operators being promoted to a higher-skill level. Nestlé’s journey towards becoming a “World Class Manufacturer” is well underway and will be further strengthened in the short to medium term.

The Supply Chain group focused on customer service levels, ensuring on time supply and operations savings; meeting or exceeding most of their targets. New initiatives launched included a Task Force to reduce market returns and manage factory waste in 2008, Safety, Health and Environment improvements in warehousing and transportation and the integration of planning teams within the Business Units.

PROSPECT
The new year will be very challenging as we are faced with an operating landscape where the prices of commodities, palm oil and wheat flour have more than doubled from early 2007 while coffee beans and cocoa rose sharply too. These prices are expected to remain at high and unprecedented levels for quite a while, although the price of milk solids is expected to soften slightly in the second half of the year. The Group will keep pursuing its initiatives to further optimise its operations to mitigate as much as possible the impact of higher input costs.

The Group will also constantly drive for higher sales and continue to protect and grow its market share. Major investments based upon our strong Halal R&D capabilities have been planned for 2008, to introduce new products as well as to increase the capacity to meet the rising demand in the country as well as for exports. Innovation and Renovation will remain key to offering consumers new, exciting, convenient, affordable and nutritious products. The Group will strive to ensure that its on-going yearly profitability level will be protected moving forward. As already indicated earlier, 2008 will be marked by more volatile quarterly readings than in previous years, but the Group will strive for sustainable, capital efficient and profitable growth and will take all the necessary measures and steps to ensure that the Company’s progress remains on track.