With its promise of Good Food, Good Life, Nestlé has been a part of homes and hearts of Pakistanis for three decades now. At Nestlé, we are proud to be in all the stories that brighten up your life, sweeten up your moments and turn everything good that you have, into great. ABOUT THE COVER We aim to provide a workplace that generates equal opportunities for everyone, and in which people are treated with dignity and respect. Decent employment, diversity and inclusion are integral to Nestlé’s culture. They are rooted in our values and purpose, which are based on respect – for ourselves, for others, for diversity and for the future. For our employees, Nestlé is an extension of their homes, which is why we call it Nestlé Gharana (Nestlé family). CONTENTS OUR PURPOSE AND AMBITION 02 TECHNICAL 38 DIRECTORS’ REPORT TO THE SHAREHOLDERS 05 AGRICULTURE SERVICES 42 ANNEXURE TO DIRECTORS’ REPORT ON FINANCE & CONTROL AND INFORMATION TECHNOLOGY 44 CORPORATE GOVERNANCE 12 NESTLÉ BUSINESS EXCELLENCE 45 REVIEW REPORT BY THE CHAIRMAN 13 SALES 46 COMPANY PERFORMANCE 2018 14 CONSUMER COMMUNICATION 48 STATEMENT OF WEALTH CREATION AND ITS DISTRIBUTION 16 NUTRITION, HEALTH AND WELLNESS 50 KEY FINANCIAL DATA (SIX YEARS AT A GLANCE) 17 INNOVATION 51 PATTERN OF SHAREHOLDING 18 SEEING IS BELIEVING 52 STATEMENT OF COMPLIANCE WITH THE CODE OF CORPORATE OUR BRANDS 54 GOVERNANCE 21 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF COMPANY 68 INDEPENDENT AUDITOR’S REVIEW REPORT 23 STATEMENT OF FINANCIAL POSITION 72 BOARD OF DIRECTORS 24 STATEMENT OF PROFIT OR LOSS 74 COMPANY DIRECTORY 25 STATEMENT OF COMPREHENSIVE INCOME 75 NOTICE OF MEETING 26 STATEMENT OF CHANGES IN EQUITY 76 ABOUT NESTLÉ 30 STATEMENT OF CASH FLOWS 77 MANAGEMENT COMMITTEE 32 NOTES TO THE FINANCIAL STATEMENTS 78 HUMAN RESOURCES 34 FORM OF PROXY 123 SUPPLY CHAIN 36 01 OUR PURPOSE OUR AMBITION Nestlé’s purpose is enhancing quality of life and contributing Through enhancing quality of life and contributing to a to a healthier future. We want to help shape a better and healthier future, we aim to deliver sustainable, industry- healthier world. We also want to inspire people to live leading financial performance and earn trust. healthier lives. This is how we contribute to society while ensuring the long-term success of our company. Globally, we have defined three overarching ambitions for 2030 which guide our work and support the achievement of the United Nations Sustainable Development Goals: 02 Nestlé Pakistan Limited Help 50 million children Help to improve 30 Strive for zero live healthier lives million livelihoods in environmental impact in communities directly our operations connected to our business activities 03 DIRECTORS’ REPORT TO THE SHAREHOLDERS The Directors of the Company are pleased to present the Annual Report along with the audited financial statements for the year ended December 31, 2018. FINANCIAL PERFORMANCE During 2018, Pakistan’s economy showed mixed performance. Persistent increase in imports overshadowed a recovery in exports which further increased the trade deficit. This led to increased pressure on foreign exchange reserves which resulted in the depreciation of the Rupee. The pass-through of significant Rupee depreciation coupled with higher international commodity prices started to reflect in higher year-on-year inflation. The Company recorded a revenue growth of 2.0% for the year despite increasingly difficult economic conditions and competitive pressures. However, the operating profit was impacted by higher input and energy costs due to Rupee devaluation and global increase in the prices of commodities. Nestlé Pakistan continues to be committed to enhancing its product base through innovation and renovation which remains an integral part of the Company’s vision to positively enhance the quality of life of our consumers. The major new product launches during 2018 included: NESTLÉ FRUITA VITALS PET, NESTLÉ MILKPAK 500ml, NESTLÉ NAN 1 with Human Milk Oligosaccharides (HMO), NESTLÉ CERELAC Savory Spinach & Pumpkin, NESTLÉ NAN Hypo Allergenic (HA). PKR Million 2018 2017 Change Sales 124,615 122,215 +2.0% Gross Profit margin 33.2% 36.6% -340 bps Operating Profit margin 16.0% 19.3% -330 bps Net Profit after tax 11,545 14,642 -21.2% Net Profit after tax (%) 9.3% 12.0% -270 bps Earnings per share 254.57 322.86 -21.2% KEY FINANCIAL INDICATORS • Sales grew by PKR 2.4 billion, a growth of 2.0% largely driven by pricing. • We delivered a Gross Margin of 33.2% (-340 bps). The major factors behind the decline was due to significant Rupee devaluation and increased commodity prices, which could not be fully compensated with pricing and cost saving initiatives. • Net Profit after tax reported was 9.3% (-270 bps). The drop mainly resulted from reduction in gross profit. DIVIDENDS In view of the financial performance of the Company, the Board of Directors has recommended to pay final cash dividend of PKR 63 per share, in addition to the interim cash dividend already paid of PKR185 per share, which brings the total dividend for the year to PKR 248 per share for 2018 compared to 320 per share in 2017. 05 DIRECTORS’ REPORT TO THE SHAREHOLDERS d) International Financial Reporting Standards, as INVESTMENT PROJECTS applicable in Pakistan and the requirements of With a market driven approach and commitment to satisfy Companies Act, 2017 have been followed in preparation the needs of our consumers, in 2018 Nestlé Pakistan made of the financial statements; and any departure thereof investments of PKR 4.5 billion including expansion and has been adequately disclosed and explained; development projects. Highlights are here under: e) The system of internal control is sound in design and has been effectively implemented and monitored; Project Description PKR Million f) There are no significant doubts upon the Company’s Sheikhupura Factory - Extension and operational reliability 2,396 ability to continue as a going concern; Kabirwala Factory - Extension and operational reliability 872 g) There has been no material departure from the best Water Plants - Extension and operational reliability 473 practices of corporate governance, as detailed in the Extension of distribution and sales facilities 435 listing regulations; Milk collection infrastructure development 72 h) The value of investments of employees funds are as follows (PKR millions): Others 285 Investments of approximately PKR 4.1 billion are planned Audited Audited for 2019, primarily in respect of operational reliability and 2018 2017 capacity increase in order to meet consumer demands. Provident Fund 3,466 3,542 Gratuity Fund 1,706 1,708 CORPORATE & FINANCIAL Pension Fund 2,922 2,729 Statements regarding the following are annexed or disclosed REPORTING FRAMEWORK in the notes to the accounts: Nestlé Pakistan is committed to maintain high standards of corporate governance without any exception. The Directors (i) Key financial data for the last six years are pleased to state that the Company is compliant with the provisions of the Code of Corporate Governance as required (ii) Pattern of Shareholding by SECP and formed as part of Pakistan Stock Exchange (iii) Trading in shares of the Company by its listing regulations. Statement of Compliance with Code of Directors, CEO, CFO and Company Secretary Corporate Governance is as under: (iv) Number of Board meetings held during the year and attendance by each Director The Directors confirm that: a) The financial statements prepared by the Management of the Company presents fairly its state of affairs, the REMUNERATION POLICY OF results of its operations, cash flow and changes in NON-EXECUTIVE DIRECTORS equity; The fee of the Non-Executive and Independent Directors b) Proper books of accounts of the Company have been for attending the Board and Committee meetings of the maintained; Company is determined by the Board from time to time. c) Appropriate accounting policies have been consistently applied in preparation of financial statements and EXTERNAL AUDITORS accounting estimates are based on reasonable and Messrs KPMG Taseer Hadi & Company, Chartered prudent judgment; Accountants have completed their assignment for the year 2018 and retire at the conclusion of the 41st Annual General Meeting. Being eligible, they have offered themselves for 06 Nestlé Pakistan Limited re-appointment and pursuant to recommendation of Board platforms and employee relations management for building Audit Committee, Board of Directors has endorsed and high performance teams to achieve organizational goals recommended same for Shareholders’ approval. while diversity and commitment to compliance continued to remain at the heart of our agenda. HOLDING COMPANY Few of the highlights are: Nestlé S.A., a Company incorporated in Switzerland (the Our focus has been on Employee Relations through holding Company), holds 26,778,229 ordinary shares continuous and consistent employee engagement sessions, representing 59% equity interest in the Company. The with the purpose of strengthening our relationship with the principal activity of the Company is manufacturing, employees. These activities included Sports Galas, Connect processing and sale of food products including imported Sessions, connecting with families of our employees and products. employee recognition program. Additional focus was given on improving the quality of employee services and promoting HUMAN RESOURCES diversity and inclusion. MANAGEMENT & EMPLOYEES’ Considering the importance of industrial peace for long-term success of business, representatives of blue collar staff RELATIONS (Union) were on boarded at every step so they can also In 2018, we continued to spread positive energy across actively participate in spreading positive energy amongst the organization by transforming our people processes in order employees and can work side by side of the management to provide better services to our employees and sustain an staff. As a result of better negotiation and relationship with edge over competition. Transformation of the end-to-end HR the Union, we were able to sign the Charter for next two process through technology and process redesigning brings years in a peaceful manner.