Overview
The Group proved its resilience in the face of economic uncertainty and turmoil by delivering a strong performance for the financial year ending 31 December, 2008. While global uncertainties have undoubtedly had an impact on the Group’s Performance, strong measures and tactical campaigns have helped the Company cushion the impact considerably. The management and Board of Directors’ actions helped ensure that the Group delivered a strong performance; registering double digit growth of 13.5%, with a total sales turnover of RM3.9 billion.

A point to note is that the Group has consistently delivered strong growth performance throughout the year, even in the last quarter of the financial period; which was undoubtedly the most challenging the Company has seen in a long time.

What is just as important is that the sustainable profitable growth has been part of performance measurement. During the period under review, the movement of key commodities was rather mixed, and the overall input costs was higher than the previous financial period. The year under review saw some key commodities prices, such as milk powders and palm oil declining from their peak, whilst coffee bean and cocoa powder prices fluctuated and moved upwards towards the later part of the year. The weaker Ringgit in the second half also saw the prices of imported materials being nudged higher. Overall, the various factors resulted in the gross profit margin slipping from last year’s 32.9% to 31.0% of the turnover.

However, during the period under review, the Group embarked on the Nestlé Continuous Excellence (NCE) journey which saw a concerted focus on consumer flow optimisation across the entire value chain (including R&D) and Total Performance Management (TPM) in the manufacturing plants that included ‘war on waste’. Some of the initiatives from this move have translated into internal savings that has helped the Group be more competitive, thus positively impacting the overall performance.

Efficient working capital management arising from the distributor card programme and better cash management planning has positively impacted the free cash flow for the year. This has allowed the Group to pay and propose a higher dividend for the financial year 2008, which is 68% higher than the previous financial period.

However, the profit margin before tax declined slightly from 11.6% of the turnover in 2007 to 11.4% in 2008, due to higher financing costs resulting from heavy capital expenditures for the year. A lower tax expense, stemming from the Government’s investment tax incentives, pushed the profit margin after tax slightly higher from 8.5% to 8.8% of the turnover.

Finance and Control 
As 2008 was a very challenging year, particularly so in the last quarter, Finance and Control (F&C) continued to play a vital role by providing the “co-pilot” functions to support all the business divisions. Having a pulse on the fast changing economic variables and market environments, F&C was able to feed the business units with new options and quick information to facilitate prompt and effective decision making.

Fully leveraged on the GLOBE platform, we have successfully transferred Accounts Payable, Accounts Receivable and the transactional part of Accounting Operations to the Nestle Business Services-AOA (NBS), based in Manila, Philippines. During the implementation phase, the activities were well coordinated and sequenced. For seamless integration, NBS stationed their staff for three (3) weeks in the market to learn and obtain relevant hands-on experience in handling the local suppliers and customers. Fully satisfied with the ability of the NBS staff to handle the move, the transactions were gradually transferred to NBS during the ramp-up stage and this went live completely at the end of June 2008.

The distributor card programme, which began to roll-out in the beginning of the year, has also been widely implemented among the Long Term Partners (LTP). Almost all of the LTPs have subscribed to the programme and further efforts are being made to include the rest of the customers. The initiative has reduced the balance of Accounts Receivable significantly; improving the working capital requirements.

Sales
The Sales division continued to drive the Distribution and Best-in-Class merchandising of the Group’s portfolio of products in all the Trade Channels. Shopper and Channel insights were conducted regularly and strategically to identify new growth opportunities; resulting in the successful launches of the Popularly Positioned Products (PPP) range, Single Serve Visibility Blitz, and the introduction of the MAGGI CUKUP RASA Dedicated Sales Team.

One of the key initiatives undertaken was to improve our customer relationships and service levels, by accelerating commercial relationships with our trade partners and key retailers through better collaboration, joint business planning and by conducting regular business reviews.

The Sales Team also “strived for excellence” by continuously implementing the Field Management and Distributor Management Best Practices, introducing new technological tools and aids such as hand-held devices to improve effectiveness in the field, while maintaining a positive attitude and mindset.

Coffee & Beverages
The period under review posed considerable challenges to MILO, attributable to the sharp increase in commodity prices in 2007 and the introduction of Private Label competitors. However, MILO products maintained its strong market share and the ubiquitous beverage remains a perennial favourite amongst Malaysian consumers.

During the period under review, MILO GOLD nutritious chocolate malt drink was launched; further strengthening the brand’s nutritional image amongst its consumers by offering a complete MILO drink with more milk and nutrition. The MILO FUZE drink range also continued to grow in popularity and demand due to its attributes of convenience and nutrition for young adults.

The highlight of the year was a new communications campaign, which emphasised the nutritional benefits of MILO chocolate malt powder under the header “10 Reasons MILO Does More for Your Child”. The brand continued its strong legacy of sports development, and sponsorship programmes for the development of grass root sports continued unabated; as part of the commitment to build a healthier society through sports. Some 200 events were held at both the local and international level, which included:

• 2008 Le Tour de Langkawi
• 2008 SEA Junior Table Tennis Championship
• 1st Asian Indoor Hockey Championship
• MILO International Junior All Stars
• Tenpin Bowling Championship
• MILO International Junior All Stars International Squash Championship

Local support included the National Schools Sports Championships, various youth development programmes organised by the Malaysian School Sports Council, Olympic Council of Malaysia, Ministry of Youth and Sports and National Sports Association.

MILO also supported the Malaysian 2008 Beijing Olympic contingent by being the Official Nutritious Chocolate Malt Drink of the contingent. Malaysia was represented by 33 athletes; the largest Malaysian contingent in more than fi ve (5) decades.

The NESCAFÉ brand also turned in a strong performance during the fi nancial period, with the highlight of the year being the re-launch of NESCAFÉ CLASSIC instant coffee utilising a new proprietary technology that delivers stronger coffee aroma and taste; a result of continuous innovation. The re-launch campaign featured well-known local Malaysian celebrities drinking the quintessential coffee drink that is prevalent in almost every household in Malaysia.

Overall, the coffee mixes business enjoyed significant growth, with new renovations such as the NESCAFÉ BODY PARTNER range with ‘Kacip Fatimah & Collagen’ and ‘Soya’ variants being introduced. The Group also launched the new NESCAFÉ 3in1 GOLD – which is the first coffee mix containing premium, freeze dried coffee.

Food
As part of its commitment towards being the leading Nutrition, Health and Wellness company, significant innovation and renovation was conducted for the Foods business, led by the “taste and balance” platform, to ensure that all current products are in line with the new direction. One of the recent innovations – the MAGGI TASTYLITE range of low fat noodles – is fast gaining market share and volume in the Modern Trade channels, and similar trends were recorded for the range of recipe mixes with lower sodium.

An innovative new campaign – the MAGGI brand presents the 1-2-3 of a tasty meal – was also very well received; educating consumers on the importance of balanced servings of carbohydrates, protein, vegetables and fruits at every meal.

Nestlé also continued its Corporate Responsibility efforts by extending its support for local hard-core poor farmers involved in contract chilli manufacturing by using their fresh chillies in the production of MAGGI Chilli Sauces.

In recognition of its communication efforts, the MAGGI 2-Minute Noodles “Tribute” campaign won the coveted Gold Award for marketing effectiveness at the Malaysian Effie Award 2008, which was for significant and breakthrough marketing campaigns based on true performance in the marketplace.

Milks
The successful divestiture of the “canned liquid milks” business in 2007 has enabled the Group to increase focus and resources on strategic business segments where Nestlé can add value for long term, sustainable and profi table growth.

The high price of milk solids continued to be a source of concern, having a significant impact on the business. Despite considerable efforts to improve operational efficiencies to mitigate the higher input costs, the Group was forced to pass on some of this cost increase to the consumer in the form of higher prices.

The Group has continued to invest in key brands including NESVITA OMEGA PLUS reduced fat filled milk powder, with ACTICOL, with added plant sterols (which has proven cholesterol lowering properties), NESVITA 3in1 nutritious cereal drink, COFFEE-MATE coffee creamer and NESPRAY ACTIVE PROTECTION growing up milk (GUM). Continuous innovation and renovation efforts saw the introduction of a new Chocolate variant for NESTUM, new affordable milk powder NESPRAY CERGAS, NESVITA 3in1 nutritious cereal drink with Green Tea and also the launch of NESLAC EXCELLA GOLD milk powder in the super premium GUM category. The Milks category continues to be an engine of growth for the Company.

Conflectionary
The confectionery business continued to break new grounds despite the lackluster economy, with both KIT KAT and MILO products turning in commendable performances. Growth results of KIT KAT from continued communication efforts targeted at calorie and wellness conscious young adults who seek a light wafer finger format.

The MILO product range’s growth was driven by the launch of the MILO Wafer, under the Popularly Positioned Product (PPP) range, which aims to deliver an appropriate nutritionally balanced product at a price that all consumers can afford. This product also included for the first time on the front of pack – Guideline Daily Amount (GDA) which aims to provide user-friendly nutrition information to assist consumers manage their diet on a daily basis.

All the Confectionery products benefitted considerably from continued efforts to drive distribution deeper in the Traditional Trade, which saw the Group’s share in this channel grow by a whopping 50% over the past two years.

Nutrition
Infant Nutrition continued its growth process by focusing on science-based innovation and renovation. A key launch was the improved LACTOGEN infant formula with the addition of PREBIO1 GOS-FOS which consists of a special blend of galacto- oligosaccharide (GOS) and fructo-oligosaccharide (FOS) fibres which improve digestive comfort. Another new product was LACTOGEN 3 formulated milk powder for children, which supports the optimal growth and development of toddlers while providing users continuity and usage extension. Due to the rising cost of raw materials, the introduction of the LACTOGEN infant formula Bag-in-Box (BIB) 700g was timely, as it offered consumers value for money.

Meanwhile, the new NESTLÉ Multi Grain and Mixed Fruits Cereal variant and “My First Solid Food” communication campaign was well received by consumers; further boosting the infant cereals sector.

The products were supported by the roll out of the Nestlé Junior Club website (www.weaning.com.my), which provides expert nutritional advice to mothers, helping them build their confidence in nurturing their child’s development and growth.

Nestlé HealthCare Nutrition continued its strong growth path by offering good tasting and innovative science-based nutritional products, and has gained a reputation for being the consumer preferred and trusted nutritional solution provider. The division continued its efforts to provide nutritional solutions and educational programmes to help diabetics manage their blood sugar level and lead normal lives. There was continuous education to the consumers and medical professionals, sampling activities, consumer promotions and recruitment campaigns.

Two key products include the NUTREN UNTUK DIABETIK nutritional supplement, which is designed to provide nutritional solutions for the management of blood sugar levels, and PEPTAMEN nutritional supplement, which meets the nutritional requirements of critically ill patients and aids in the recovery process.

Nestlé Performance Nutrition also broke new ground with the new formulation containing C2MAX, (formulation of the right ratio of glucose and fructose) which helps to improve performance by 8%. The division aims to help athletes to perform better by meeting their physiological needs. The “POWERBAR Performance System” with Step 1(Energise), 2(Refuel) and 3(Rebuild) helps athletes to select relevant sports nutrition products and consume them at the appropriate time.

Chilled Dairy
Chilled Dairy embodies Nestlé’s focus on Nutrition, Health and Wellness with its range of BLISS Yogurt Drink, NESTLÉ Yogurt and YOCO Cultured Milk Drink. In response to the modern consumers’ need for health, nutrition, convenience, enjoyment and wellbeing, 2008 marked an important milestone for the business as it became the first in the industry to offer a full range of chilled dairy products with “No Artificial Colouring” under the ‘Some Things are Best Left Natural’ communication campaign which received very positive feedback from consumers.

Ice Cream 
Nestlé Ice Cream registered double digit growth resulting from efforts in the Outof- Home and Modern Trade channels. The division continued to spearhead the market with even stronger brand awareness, which saw continuous and sustained brand building efforts even during lacklustre market conditions.

Nestlé Ice Cream continues to lead the market with innovations such as DRUMSTICK Techno, DRUMSTICK Retro ice cream and MAT KOOL Tangle, MAT KOOL Super Blaster and TROPICANA Plus ice confection.

Meanwhile, innovative promotional campaigns and successful launches helped to deliver higher results for the Catering and Premium Tub segments. LA CREMERIA, MILO, CRUNCH and SMARTIES ice cream and DIBS frozen confection tubs are now clearly leading the market with significant market share in the Premium Tub segment.

The Group also re-launched the everyday low price Nestlé branded range of Take- Home Tubs with Hi Calcium, in line with the Nestlé corporate wellness initiatives, to further strengthen the leadership position in the affordable segment. Perennial favourites such as MILO, CRUNCH, TROPHY, and TROPICANA range of Impulse products have also contributed significantly to the overall turnover for the division.

NESTLÉ Professional 
The transformation of the FoodServices Business Unit into Nestlé Professional – a globally-managed business division dedicated to the Out-of-Home food and beverage market – added another pillar to the Company’s long-term, profitable growth strategy.

The move was in response to a revolution in how and where consumers choose to dine and the need of the foodservice industry to deliver more creative and inspiring solutions. Nestlé Professional marks an exciting beginning for Nestlé FoodServices in Malaysia as it blends several winning elements into a single resource that is aimed at fostering long-lasting relationships with foodservice operators - from five (5)- star hotels to the ubiquitous Mamak stalls.

From 2009 onwards, Nestlé Professional will be managed as a global and independent business totally dedicated to respond to the needs of Out-of-Home operators. Currently the market leader in the Out-of-Home sector, it aims to be an inspiring growth partner that delivers creative, branded food and beverage solutions that will enable operators to innovate and satisfy their customers.

Exports
The Exports sector recorded another good year, representing 24% of Nestlé Malaysia’s total business, from the 22% previously. Strides were made to penetrate new markets seeking Halal products and a recent addition to the export footprint is Algeria, which began importing milk powder from Nestlé Malaysia. Further inroads were made in the promotion and distribution of Halal food products to nontraditional markets such as France, the Netherlands and Switzerland.

Nestlé Malaysia’s position as the Centre of Excellence for Halal within the Nestlé Group has gained even more ground and importance, with the successful launch of the range of Asian ethnic products that are becoming increasingly popular in Europe.

Capital Expenditure 
Total capital expenditure for the period under review was RM188 million, up from the RM103 million registered in the previous financial year, which consists of the Manufacturing as well as Sales and Distribution divisions. As in the previous year, the capital investments were in line with the increased market demand and the growing export volume.

A new plant to produce coffee creamer, which is located in Shah Alam was commissioned in 2008. The production line is designed and built according to the latest standards and technologies and will largely supply coffee creamer for the export market.

Efforts are also underway to increase the production capacity of soluble coffee at the factory in Shah Alam, and this is expected to be in operation at the end of 2009. As in previous years, the Group has also made investments in the area of quality assurance and cost saving initiatives.

Human Resources
Our corporate values of Trust, Respect, Involvement and Pride set the foundation for everything that we do at Nestlé, and is prevalent throughout the Company. During the period under review, the Group continued efforts to attract and retain the best talents for the Company. Among the efforts undertaken include:

• Employer branding through participation in Career Fairs and Talks.
• Talent building via the recruitment of Management Trainees, mid-career hires and expatriation of Malaysian talents.
• Training and Development programmes to further hone the skills of the managers and enhance their leadership profile.
• Accelerated career development and progression of promising talents.
• Initiation of wellness programmes and awareness campaigns to encourage employees to put in practise their nutrition knowledge and lead healthy lifestyles, which is in line with Nestlé’s Nutrition, Health and Wellness journey.

In assessing our people engagement, the findings of our organisational climate survey showed encouraging results when benchmarked against other Global FMCGs as well as Malaysian corporations.

Also, in line with the Group’s drive towards a High Performing Culture, the performance based remuneration approach has been extended to include unionised non-management employees, and this was amicably agreed through negotiations with the union.

As part of Nestlé on the Move, Nestlé Continuous Excellence (NCE) was rolledout globally, with a focus on ‘War on Waste’ making Nestlé a “lean” and competitive organisation.

Production, Supply Chain and Purchasing
Keeping pace with the rapid evolution of the business coupled with increased competition in the marketplace, focus was placed on ensuring the highest level of customer service to domestic and export customers, to maintain or increase market shares of 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.

Towards this end, Nestlé has globally rolled-out the Nestlé Continuous Excellence – or NCE – programme, which aims to accelerate the achievement of the 3C’s:

• Delighting the Consumers
• Having a Competitive Advantage
• Excelling in Compliance

The programme is based on a one (1) Team approach, with a 100% engagement of all employees to touch their hearts and minds on a collective war on waste. It combines all the benefits of TPM in the factories with LEAN (a concept to eliminate waste in the value stream) throughout the value chain. Nestlé Malaysia, which introduced the Mission Directed Workteam (MDWT) concept several years back, has seen the people engagement aspect of the MDWT being applied as one of the foundations of the new NCE model. A factory in Shah Alam has the distinction of being one of the 25 worldwide reference factories piloting NCE and rolling out TPM.

Additionally, the Executive Diploma in Manufacturing Management (EDMM) – a collaboration with the Open University of Malaysia, which combines workplace and classroom learning for Nestlé’s First Line Managers, saw the graduation of 48 employees.

While the year under review proved to be very challenging for Purchasing to ensure a steady supply of materials at competitive cost, the local and regional Purchasing teams pressed on with efforts to source alternative suppliers, to improve supply availability in full and on time, while ensuring price competitiveness.

Prospects
The new year poses greater challenges, with uncertainty being a key constant. Every organisation has to further hone its skills and ability to circumvent the changes as they occur, and the Group will continue to drive the business further and ensure that its growth is not derailed.

Notwithstanding the tough economic environment projected in 2009, the Group still expects to deliver a sustained and positive performance. As part of its on going drive – “Nourishing Malaysia”, the Group will take the necessary steps to counter the bearish consumer sentiment and likelihood of tight spending. The Group will continue to focus on its longer-term objectives and strategies to generate demand and continue to expand and implement CAPEX for the manufacturing of Halal products in 2009.

It is key for the Group to be recognised as the leader in Nutrition, Health and Wellness and as the industry benchmark for financial performance; trusted by all stakeholders.

Despite the anticipated volatility in the global financial markets and the anticipated slow down in consumer spending, the Group will strive for sustainable profitable growth and capital efficiency, and will take all the necessary measures and steps to ensure that the Company’s progress remains on track.