Nestlé Lanka PLC Annual Report 2010 Nestlé Lanka PLC Annual Report 2010 Operational Highlights...

Nestlé Lanka PLC

Annual Report 2010

The world’s leading Nutrition, Health and Wellness Company.

01 Operational Highlights 2010

02 Chairman’s Statement

06 Managing Director’s Review

10 Board of Directors

12 Divisional Heads

13 Corporate Governance

15 Corporate Governance Reporting

17 Report of the Audit Committee

18 Report of the Remuneration Committee

19 Directors’ Responsibility for Financial Reporting

20 Annual Report of the Board of Directors on the Affairs of the Company

25 Financial Report

26 Independent Auditors’ Report

27 Income Statement

28 Balance Sheet

29 Statement of Changes in Equity

30 Cash Flow Statement

31 Notes to the Financial Statements

47 Value Added Statement

48 Ten Year Summary

49 Share Information

50 Notice of Meeting

51 Notes

52 Form of Proxy

55 Attendance Form

Table of contents

1 Nestlé Lanka PLC Annual Report 2010

Operational Highlights 2010

Nestlé Lanka has recorded a turnover growth of 10.3% during the fiscal year.

A contribution of approximately 54% of the Company's value added, amounting to LKR 3.9 billion, has been made to the Government of Sri Lanka as taxes/duties while more than 25.7% was paid to shareholders as dividends.

Nestlé Lanka continues to innovate and renovate existing products in keeping with the Group’s direction of Nutrition, Health and Wellness.

The Company continued its contribution to the rural economy by expanding its dairy development initiatives to the North & East and by procuring significant amounts of local raw material for its wide range of food and beverages products:

o With dairy development expansions in the North and East, Nestlé Lanka now collects milk from over 15,000 farmers every day.

o The Company has contributed Rs.1.49 Bn to the livelihoods of dairy farmers by way of milk purchases.

o 38 million coconuts were procured by the Company to the amount of LKR 721 million to produce value added "Coconut Milk Powder"

Net Revenue Net Profit

Earnings per Share Milk Payments to Farmers


Chairman’s Statement

Dear Shareholders,

It gives me great pleasure to introduce the Annual Report and

Audited Statement of Accounts for Nestlé Lanka PLC for the

year ended 31st December 2010.

Your company has ended the year on a positive note and

achieved all internal targets for the year. The board is

extremely pleased with the vibrancy your Company has shown

- a clear embodiment of our Dream.Dare.Deliver spirit.

Honouring its commitment to help develop the North and

East areas of the country, your Company embarked on an

aggressive dairy development drive in those areas. A notable

mention is the opening of milk chilling centres in Kilinochichi

and Oddusudan, both of which were the first to be opened in

those areas in 30 years. Your company’s contribution towards

the development of the local dairy industry this year has

been nothing short of remarkable and a proud manifestation

of its ‘Creating Shared Value’ philosophy. Fully aligned with

Sri Lanka’s vision of developing domestic dairy production in

the coming years, we will aim to double our local fresh milk

collection during this time.

"2010 has been a year of opportunity, development and growth for Sri Lanka. Nestlé Lanka’s results are a reflection of this new era of dynamism and opportunity in the country. Your Company has accelerated its performance by recording double digit growth both in sales and gross profit despite strong cost pressures."


Chairman’s Statement

Being a part of Nestlé Group, which is a leader in Nutrition,

Health and Wellness operating in over 130 countries across

the world, your Company wants to continue to ensure the

quality, trust and integrity of the brands and products in Sri

Lanka. In line with Nestlé Group’s direction, Nutrition, Health

and Wellness will remain a key focus for your Company.

Your Company’s activities in 2011 will be in line with this.

Your Company will be investing more than 2 billion rupees in

2011 in Sri Lanka to install additional production capacities

and to focus on dairy development initiatives. This is part of a

master plan drawn up for the investment of 10 billion rupees

in Sri Lanka over the next few years. I have no doubt that this

strategic investment plan will help us retain our competitive

positioning and provide a firm foundation for bigger success

in the future.

2010 has been a year of opportunity, development and

growth for Sri Lanka. Nestlé Lanka’s results are a reflection

of this new era of dynamism and opportunity in the country.

Your Company has accelerated its performance by recording

double digit growth both in sales and gross profit despite

strong cost pressures.

Your Directors were therefore pleased to declare an interim

dividend of Rs. 12/- per share which was paid in January 2011

and are recommending a final dividend of Rs.22.50 per share

for your approval.

On behalf of the Board, I thank the entire Nestlé Lanka

team for their hard work, commitment and loyalty in driving

your Company’s performance despite challenging market

conditions. I would also like to take this opportunity to sincerely

thank our stakeholder groups and business partners who

significantly contributed to your Company’s achievements in

2010. Finally, the Board and I thank you, our shareholders,

for the continued confidence and trust placed on us to steer

your company in this challenging environment. We are starting

2011 with continued momentum and look forward to delivering

the right results to you once again.

Antonio Helio WaszykChairman

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Managing Director’s Review

Dear Nestlé Shareholders,

As my first financial year at Nestlé Lanka ends, I’m very pleased

to report that this has been a good year for your Company. We

have ended 2010 strong and your Company is in good shape to

take on the challenges of the New Year 2011.

With a double digit turnover growth during the fiscal year,

your Company has delivered on its promise for 2010. With a

fresh focus on the consumer and a renewed determination to

uphold our consumers’ trust in us as a leading Nutrition, Health

and Wellness Company, your Company has innovated and

renovated and delivered on its promise to provide 'Good Food,

Good Life' to all our Sri Lankan consumers.

Strengthening our core products with enhanced nutritional

profiles whilst maintaining their great taste, I am proud to say

that now MAGGI has more Calcium, NESPRAY has more Iron

and MILO has less sugar.

We successfully launched MAGGI Rasa Musu, an affordable

seasoning for all income groups and fortified with Iron Nutrient

to address the wide spread deficiency of iron in Sri Lanka. It

is available in single use sachets priced at only Rs. 7/-, thus

enabling our consumers at all income levels to have tasty and

healthy meals.

"With a double digit turnover growth during the fiscal year, your Company has delivered on its promise for 2010. With a fresh focus on the consumer and a renewed determination to uphold our consumers’ trust in us as a leading Nutrition, Health and Wellness Company, your Company has innovated and renovated and delivered on its promise to provide 'Good Food, Good Life' to all our Sri Lankan consumers."



We also introduced MAGGI Chinese Remix Noodles, a new

hot and spicy flavor targeting local youth, and brought back

NESTUM Green Gram, a local favourite, in the third quarter

of the year. NESPRAY Enriched with Iron was also launched

to address iron deficiency in children in Sri Lanka and we

also strongly established NESPRAY Everyday as a nutritious,

affordable milk powder for everyone. Most importantly, I am

pleased to state that we have solidified our market leadership

on NESTOMALT and MAGGI Noodles.

2010 has been witness to a good acceleration in our sales. With

renewed vigour and determination, we have achieved solid

growth in all channels and geographies. A notable mention is

the strong development of our distribution and presence in the

newly liberated areas of the North and East.

I’m proud to say that today, being a multi-category and multi-

product business in Sri Lanka, your Company leads the market

in most segments that it operates in and is within the top two

in others. Our success in the market is a testament to our

commitment to ensure quality, taste and nutrition across all

our products, and to continually earn our consumers’ trust by

touching their lives in a positive way.

In line with our philosophy of Creating Shared Value, many

of your Company’s activities for the year were driven with the

objective of creating long term sustainable value for both Nestlé

and society.

Recognizing a requirement for sustainable Nutrition, Health and

Wellness in the country, your Company is currently working with

the Ministry of Education and the University of Peradeniya to

enhance the wellness of our nation. Aiming to address nutrition

concerns in Sri Lanka, the three organizations jointly developed

a Nutrition Awareness programme. Primarily targeted at rural

communities, the first programme has been implemented

in schools in Pannala, Seruwawila and Kandy for over 1,000

children.

Your Company is also contributing to Sri Lanka achieving

its Millennium Development Goals by constructing several

outstanding hygienic facilities to supply clean drinking water.

These facilities are built in schools, hospitals and places of

worship across the island and benefit thousands of people.

In parallel, we conduct water education programmes in rural

schools to promote water conservation.

Dairy Development has also been a key focus area throughout

the year, where we significantly accelerated dairy development

in the North and East. Today your Company is the country’s

largest private sector collector of milk, with the largest number

of milk chilling centres in the country. We have overachieved

on our milk collection target for the year with a 20% growth and

today collect over 100,000 litres of milk from 15,000 farmers

every day.

In addition to our strong focus on local fresh milk production,

your Company also procures significant volumes of local raw

material for our wide range of food and beverage products. For

e.g., 38 million coconuts are procured annually to produce value

added “Coconut Milk powder”, which is exported to about 60

countries and also sold locally. This year, your Company has

contributed over LKR 2 billion directly to the rural economy

through raw material procurement for fresh milk and coconut

products. In addition, we paid LKR 3.9 billion in 2010 as taxes

and duties to the government.

2010 has also proved to be a good year in terms of other

wins and accolades for the company. We were honoured

to be recognized in the LMD Top 50, LMD Most Respected

and Business Today Top 20 and won the prestigious Swarna

Lanka Award for our significant contribution towards local

dairy development. It was also wonderful to be honoured by

the Nestlé Group with NESTOMALT – a truly Nestlé Lanka

brand – winning the MILO Trophy and being placed amongst

the top 20 of the Nestlé worldwide Hit Parade. Another great


moment for us was when the First Lady of Sri Lanka, Madam

Shiranthi Rajapaksa, endorsed our Nestlé Lanka Healthy Kids

programme.

2011 holds big plans for the company, where we will commence

with our long term LKR 10 billion investment plan this year.

These investments highlight the founding philosophy of how we

go about our business; where we believe that companies are

only sustainable and successful over the long term if they create

value not just for their shareholders but also for the societies in

which they operate.

Through our mission of ‘Good Food, Good Life’ and our

strategic direction of Nutrition, Health and Wellness, all of our

future plans aim to enhance the lives of Sri Lankan consumers

with great tasting and nutritious products at affordable prices.

Our local, state-of-the-art manufacturing facility now produces

over 90% of our products, bringing us closer to our dream of

making quality products accessible to the entire nation.

In spite of trying market conditions, our people have continued

to show a wonderful level of enthusiasm for their jobs and

commitment to their Company. I would like to thank them all

from the bottom of our hearts on behalf of the Board and of

all our fellow shareholders for their efforts in 2010. We firmly


believe that our people are our greatest asset; more than

anything else, they make the Company what it is. I am proud to

state that we have a reached a new level of employee relations

with the 9th collective agreement signing between the All Ceylon

Commercial & Industrial Workers Union (ACCIW) and Nestlé

Lanka PLC. This symbolises the long standing relations that

the company has been maintaining with the union, where the

three year agreement that was entered into will most certainly

strengthen the industrial relations of the company even further.

We have dreamed, dared and delivered and will now dream

bigger and push the boundaries of what is possible in a world

of new opportunity.

Alois HofbauerManaging Director


Nes

tlé L

anka

Fac

tory

, Kur

uneg

ala


Board of Directors

1. Mr. Antonio Helio Waszyk

Mr. Antonio Helio Waszyk is the Chairman and Managing Director of Nestlé India Limited and was appointed Chairman to the Board of Nestlé Lanka with effect from 15th October 2009. He is also Director of Nestlé Bangladesh Limited.

Mr. Waszyk, a Brazilian National, joined the Nestlé Group in November 1977. He holds a Bachelor’s Degree in Pharmacy and a Masters Degree in Food Biochemistry and developed his earlier career in the Technical and R&D functions. He has had a distinguished International record, highlights being postings in USA (1988-1990), Brazil (1990-1994), France (1994-1996), Philippines (1996-1998), and Head of Nestlé R&D Centers, Switzerland (1998-2002) and Israel (2002-2004). His last posting was as Head of the Food Strategic Business Unit (SBU), Switzerland.

2. Mr. Alois Hofbauer

Mr. Alois Hofbauer is the Managing Director of Nestlé Lanka PLC. He joined Nestlé Austria in 1990 and has since held a number of Senior Management positions in Sales, Marketing and General Management in Nestlé Austria, Hong Kong, China and Taiwan.

In 1995 he was transferred to Hong Kong for what would prove to be the first of several assignments over the next 15 years in the Greater China Region. During his tenure in Hong Kong, he worked in Brand Management roles of increasing responsibility in the Coffee, Beverages and Confectionery categories. In 1998 he moved into Sales Management in Mainland China, and soon after became

the Head of Marketing of the Coffee and Beverages Group there. He then moved on as Business Development Manager for Dairy in China and was later promoted to Head of the Confectionary Business Unit in the Greater China Region for almost 3 years.

In 2004, he moved to Nestlé Taiwan as General Manager where he lead the business for 6 years until his transfer to Sri Lanka.

3. Mr. Syed Saiful Islam

Mr. Syed Saiful Islam, Vice President - Finance & Control of Nestlé Lanka, has been with the Company from April 2010.

With prior experience in Ericsson and Citibank, Mr. Islam, a Chartered Accountant, joined Nestlé Bangladesh as Financial Accounting Manager in 1999. Moving to Nestlé India in 2000, he worked in the Corporate Office as Manager – Financial Planning and thereafter moved to their Delhi Sales branch as Head of Finance & Control. He returned to Nestlé Bangladesh in 2005 as Corporate Controller and took over as Finance & Control Director in 2006 before moving to Nestlé Lanka in 2010.

1. Mr. Antonio Helio Waszyk 2. Mr. Alois Hofbauer 3. Mr. Syed Saiful Islam


4. Mr. Pierre Schaufelberger 5. Mr. Ranjan Seevaratnam 6. Mr. Mahen Dayananda

4. Mr. Pierre Schaufelberger

Mr. Pierre Schaufelberger, the Zone Regional Manager, started his career with the Group in January 1980 in Vevey. His international career, which was mostly within the Asian hemisphere, started off with Sri Lanka being his first assignment. Through his 31 years with the Group, he has occupied different positions of increasing responsibilities in the Generating Demand functions.

He has an extensive and proven operational record and solid leadership within a variety of Nestlé Market Zones.

5. Mr. Ranjan Seevaratnam

Mr. Ranjan Seevaratnam is an independent Non-Executive Director and the Chairman of the Audit Committee. He is well versed in fiscal matters and has enjoyed a long distinguished tenure as former Partner of KPMG Ford, Rhodes, Thornton & Company. He is currently on the Board of several prominent local companies.

6. Mr. Mahen Dayananda

Mr. Mahen Dayananda is an Independent Non-Executive Director and the Chairman of the Remuneration Committee. An expert on economic issues, Mr. Dayananda chairs several organizations such as Total Tea Concepts (Pvt) Ltd, Indo Asia Teas (Pvt) Limited and Lewis Brown & Co. Limited (holding company of the Delmege Forsyth Group). He is also Chairman of the Monetary Policy Consultative Committee of the Central Bank of Sri Lanka and is the President of the Sri Lanka Institute of Directors.


Divisional Heads

From left to right

1. Mr. Suren Jacob Vice President – Supply Chain

2. Mr. Muhammed Hamza Senior Vice President – Commercial

3. Mr. Alois Hofbauer Managing Director

4. Mr. Syed Saiful Islam Vice President – Finance & Control

5. Mr. Sant-Lal Girdhar Vice President – Technical


Corporate Governance is defined as a mechanism whereby corporate entities ensure transparency and the effective running of their Corporate Sectors. Emphasis on Governance within an organization is such that the company’s business is managed with the objective of balancing corporate achievements within the expectations of law and society.

Nestlé Lanka’s commitment to sound governance is ensured by its best practices and business objectives that do not favour short term profits at the expense of successful long term business development. The Company is a leading manufacturer and marketer of world renowned branded food products and recognizes the fact that it is important to create sustainable long term value for its shareholders, consumers, business partners and employees. Nestlé Lanka recognizes the importance, responsibility and role of the Board of Directors, which is to not only direct and lead the company to profitability and provide an additional return to the company’s shareholders on their investment in the company, but also to look after the interests of its other stakeholders; namely its employees, suppliers, creditors, the community and its environment. Moreover, good governance can operate effectively only if there is an implied consent and willingness on the part of those responsible for the administration of the Company.

Board of Directors

The Board of Directors of Nestlé Lanka consists of six members; one Non-Executive Chairman, two Executive Directors, one Non-Executive Director and two Non-Executive Independent Directors. As per the code of best practices, there is a separation of power of the Chairman from that of the Chief Executive Officer.

Corporate Governance

The Directors’ interest/involvement in the affairs of the Company is explained in page 21.

The Managing Director of the Company acts as the Chief Executive Officer and the Board has entrusted the Managing Director to manage all the affairs of the Company.

The Directors also ensure that the Company is fully compliant with the provisions of the Companies Act and the Listing Rules of the Colombo Stock Exchange. You may refer to pages 15 & 16 for the Compliance table.

Company Secretary

The Company Secretary is qualified to act as per the provisions of the Companies Act No. 7 of 2007 and also functions as the Legal Adviser to the Company.

Management Committee

The members of the Management Committee, inclusive of the Executive Directors and Senior Managers, have been assigned and delegated to guide the Company to achieve its business objectives.

Auditors

The shareholders reappointed the Auditors M/s. KPMG Ford, Rhodes, Thornton & Company and authorized the Directors to fix their remuneration at the 29th Annual General Meeting of the Company held on 11th June 2010.

The independent auditors conduct the annual audit in order to provide an external and objective assurance on the way in which the Financial Statements have been prepared and presented.


Corporate Governance

Internal Control

In keeping with compliance, the guidelines and standards of the Company are regularly monitored and reviewed by the Business Analyst, who reports directly to the Finance Director and is accountable to the Managing Director.

To ensure conformity to the best practices as laid down by the Nestlé Group, international and regional audits are conducted from time to time.

Audit & Remuneration Committee

The Audit Committee Report and Remuneration Committee Report in pages 17 and 18 briefly explain the functions and responsibilities of the respective committees.

Risk Management

Nestlé has always recognized its obligation towards the occupational health and safety of its employees as well as of community members directly or indirectly involved in the Company’s operations. Equally important is your Company’s obligation to protect your interests as a shareholder by managing risks to minimize potential financial loss.

Relationship with Shareholders

The Board emphasizes on the disclosure of financial and non financial information pertaining to the Company. Nestlé Lanka’s Annual Report and Quarterly Financial Statements provide its shareholders complete information through which shareholders can scrutinize the Company’s past performance and analyze future prospects.


Corporate Governance Reporting

DISCLOSURE REGARDING THE BOARD OF DIRECTORS

Rule No Subject Applicable Requirement Compliance Status Details

7.10.1(a) to (c)

Non-Executive Directors

Two or at least one third of the total number of Directors should be Non- Executive Directors

Compliant Four out of six Directors are Non-Executive Directors

7.10.2 (a) Independent Directors Two or one third of Non-Executive Directors (whichever is higher) should be independent

Compliant Two of the Four Non- Executive Directors are independent

7.10.2(b) Independent Directors Each Non-Executive Director should submit a declaration of independence / non-independence in the prescribed format

Compliant The two Non-Executive Independent Directors have submitted to the Company a declaration in the prescribed format.

7.10.3(a) Disclosure relating to Directors

Names of Independent Directors should be disclosed in the Annual Report

Compliant Please refer Page 11 of the Annual Report

7.10.3(c) Brief Resume of each Director in the Annual Report

A brief resume of each Director should be included in the Annual Report, including their area of expertise

Compliant Please refer Page 10-11 of the Annual Report

7.10.4 Directors do not qualify as independent but are specified by the Board as independent

As outlined in section 7.10.3 (c) of the listing rules.

NA NA

DISCLOSURE REGARDING THE REMUNERATION & REMUNERATION COMMITTEE


7.10.5(a) Composition of Remuneration Committee

Shall Comprise of Non–Executive Directors, a majority of whom can be independent.

The Chairman of the Committee shall be a Non-Executive Director.

Compliant

Compliant

Please refer Page 18 of the Annual Report

7.10.5(a) Remuneration Committee

A Listed Company may be permitted to have the same Remuneration Committee, if the parent company is also listed.

NA Parent Company is not listed in Sri Lanka. As such, a separate Remuneration Committee has been formed.

7.10.5(b) Disclosure of the functions of the Remuneration Committee

The Remuneration Committee shall recommend the remuneration payable to the board and the executive officers.


7.10.5 (c) Disclosure in the Annual Report

The names of Directors comprising the Remuneration Committee.

A statement of Remuneration Policy.

The aggregate remuneration paid to Executive and Non - Executive directors

Compliant

Compliant

Compliant



CONTENTS UNDER THE AUDIT COMMITTEE


7.10.6.( a) Composition of Audit Committee

Shall Comprise of Non –Executive Directors, a majority of who can be independent.

The Chairman of the Committee shall be a Non-Executive director.

The Chairman or a member should be a member of a recognized professional accounting body.

Compliant

Compliant

Compliant


7.10.6(a) & ( c)

Audit Committee A Listed Company may be permitted to have the same Audit Committee if the parent company is also listed.

NA Parent Company is not listed in Sri Lanka. As such, a separate Audit Committee has been formed

7.10.6. (b) Functions of the Audit Committee

Should be as outlined in section 7.10.6 (b) of the listing rules.


7.10.6.(c) Disclosure in the Annual Report

The names of the Directors comprising the Audit Committee.

The basis of determination of Auditors’ independence.

A report of the Audit Committee as outlined in section 7.10.6 (c) of the Listing Rules.

Whether the CEO and the CFO attend Audit Committee meetings.

Compliant

Compliant

Compliant

Compliant



Report of the Audit Committee

The Audit Committee comprises of two Non-Executive Independent Directors, Mr. Ranjan Seevaratnam and Mr. Mahen Dayananda. Mr. Seevaratnam acts as the Chairman of the Committee and is a fellow member of the Institute of Chartered Accountants of Sri Lanka. He is also currently on the Board of several listed companies.

The main responsibility of the Audit Committee is to assist the Board of Directors in fulfilling the following;

1. Review of financial information in order to monitor the financial statements of the Company; Annual Report, Accounts and Quarterly Reports prepared for disclosure.

2. Reporting to the Board on the quality and acceptability of the accounting policies and practices.

3. Review of risk management process and regulatory compliance.

4. Reviewing the Company’s internal control system.

5. Assessments on the independence of the Company’s External Auditors' performance.

6. To make recommendations to the Board regarding the appointment, reappointment and removal of External Auditors and approve the remuneration and the terms of engagement of the External Auditors.

The Committee met four times during the period under review. The attendance of the committee members are reflected in the table below.

Date of the meeting Attendance Yes (Y) /No (N)

R. Seevaratnam M. Dayananda

05/02/2010 Y Y

06/05/2010 Y Y

12/08/2010 Y Y

09/11/2010 Y Y

The Managing Director and the Vice President - Finance & Control attended these meetings by invitation, and the Secretary to the Board acted as Secretary to the Audit Committee. Senior Managers were invited to participate as and when required.

The Audit Committee, during the year ended 31/12/2010, reviewed the Company’s Quarterly and Annual Financial Statements prior to the release to the Colombo Stock Exchange. The effectiveness of the internal audit function and the independent performance of the external auditors were analyzed examined and reviewed. The regular compliance declaration submitted by the management were also reviewed by the Committee and independent observations were made.

The Audit Committee has recommended to the Board that KPMG Ford, Rhodes, Thornton & Company be re-appointed as Auditors of the company.

R. SeevaratnamChairman, Audit Committee

NESTLÉ LANKA PLC

21st April 2011


The Board appointed Remuneration Committee comprises of two Non Executive Independent Directors, Mr. M. Dayananda and Mr. R. Seevaratnam.

In order to enhance Corporate Governance and strengthen the Committee’s scope, the Board of Directors appointed the Chairman of the Company, Mr. Antonio Helio Waszyk, as a member of the Committee with effect from 7th January 2011.

The objective of the Committee is to ensure that the Compensation Policy of the Company is consistent and aligned with market reality (the policy is to attract and retain qualified and competent personnel), and also to recommend the remuneration payable to the Executive Directors and Chief Executive Officer of the Company.

Report of the Remuneration Committee

The Committee was assisted by the Vice President - Finance & Control and Human Resources department in providing relevant information.

The members of the Committee met once in the year under review. The Managing Director, Vice President - Finance & Control of the Company and the Board Secretary, who functions as the Secretary to the Remuneration Committee, were invited to the meeting.

M.DayanandaChairman, Remuneration Committee

NESTLÉ LANKA PLC

07 th January 2011


Directors’ Reponsibility for Financial Reporting

The Company's Financial Statements, presented in this report for the year 2010, conform to the requirements of the Sri Lanka Accounting Standards and the Companies Act No. 7 of 2007. They also confirm that the Financial Statements presented by them gives a true and fair view of the Company activities as at that date. The Financial information is consistent with that in the Financial Statements.

The Board of Directors has initiated an efficient and concise system of Internal Control. It also includes Internal Checks and Internal Audits, along with financial and other controls required to carry on the business smoothly whilst safeguarding its assets in a secure, practical, accurate and reliable manner.

The Company's Auditors, M/s KPMG Ford, Rhodes, Thornton & Company, review and carry out random checks on internal controls (wherever considered necessary) towards endorsing their opinion on the Financial Statements.

The management's responsibilities on financial reporting is overseen by the Board of Directors/Audit committee through regular review meetings and approving of financial information contained in the Annual Report, along with the preparation and presentation of Financial Statements.

M/s KPMG Ford, Rhodes, Thornton & Co., are the Auditors appointed by the shareholders. They have audited the Financial Statements submitted by the Board of Directors as well as all supporting financial records, minutes from the shareholders meetings and the Directors meetings and have expressed their opinion which is published under the Independent Auditor’s Report on page 26.

By Order of the Board

NESTLÉ LANKA PLC

Lioshon RajapaksheCompany Secretary

21st April 2011


Annual Report of the Board of Directors on the Affairs of the Company

The Directors of Nestlé Lanka PLC are pleased to present to the shareholders their Report together with the Audited Accounts for the year ended 31st December 2010 and the Auditors’ Report thereon.

DIRECTORS

Mr. A. H. Waszyk, Mr. D. Saudan (resigned w.e.f 31.08.2010), Mr. A. Hofbauer (appointed w.e.f. 01.09.2010), Mr. Syed Saiful Islam, Mr. P. Schaufelberger, Mr. M. Dayananda and Mr. R. Seevaratnam.

In accordance with Articles 56, 57 & 58 of the Articles of Association, Mr. P. Schaufelberger and Mr. M. Dayananda, retired and being eligible, offer themselves for re-election.

REVIEW FOR THE YEAR

The Chairman’s Statement and Managing Director's Review in pages 02 and 06 highlight the Company’s affairs and its performance of the period under review.

RESULTS & DIVIDENDS

The Profits achieved by the Company on a net turnover of Rs. 21.4 billion, after provisioning for all known liabilities and depreciation on Fixed Assets but before taxation, amounts to Rs 2,828 million. After deducting a sum of Rs 927 million as taxation, the profit was Rs 1,901 million. The profit available for appropriation was Rs. 2,016 million, which is obtained by also adding the profit of Rs.115 million brought forward from the past year. The Income Statement for the year 2010 is given on page 27.

The Directors of Nestlé Lanka PLC were pleased to recommend an Interim Dividend of Rs 12/- per share which was paid on 31st January 2011, and a Final Dividend of Rs. 22.50 per share payable on 03rd June 2011 subject to approval by the shareholders at the forthcoming Annual General Meeting on 25th May 2011.

STATED CAPITAL

The Stated Capital of the Company as at 31st December 2010 amounts to Rs. 537,254,630.

ACTIVITY

The Company manufactures a variety of quality products at its factory situated in Kurunegala, under the exclusive permission of the Trademark owner, Societe de Produits Nestle S.A. Vevey, Switzerland. Internationally renowned brands such as NESPRAY, NESTOMALT, CERELAC, MILO and the MAGGI range of products, namely MAGGI Bouillon Cubes and MAGGI Noodles are manufactured in Sri Lanka. Other products manufactured by Nestlé worldwide are also imported to Sri Lanka.


DIRECTORS' INTEREST

(A) IN CONTRACTS

Details of Directors' interest in contracts of the Company are disclosed below. The Directors have no direct or indirect interest or proposed contract other than those disclosed.

The Directors have disclosed all material interests in contracts, if any, involving the Company and have refrained from participating when decisions are taken.

INTEREST REGISTER

Antonio Helio Waszyk - Transactions with Affiliates or related parties.

Company Position Amount Involved

Nestlé India Limited Chairman/Managing Director Disclosed in notes 17, 23, & 24 of Pages 40 & 43 of the Financial Statement.

Nestlé Bangladesh Limited Director -

Alois Hofbauer - (appointed w.e.f. 01.09. 2010) No Transactions with Affiliates or related parties.

Syed Saiful Islam - No Transactions with Affiliates or related parties.

Pierre Schaufelberger - Transactions with Affiliates or related parties.

Company Position Amount Involved

Nestlé Products (Mauritius) Limited Chairman/Managing Director Disclosed in notes 23 & 24 of Page 43 of the Financial Statement.

Nestlé Iran Private Joint Stock Company Director -

Nestlé Pakistan Limited Director Disclosed in note 24 of Page 43 of the Financial Statement.



M. Dayananda - No Transaction with Affiliates

Directorships in other Companies

Company / Associations Position

Lewis Brown & Co. Ltd. Chairman

Monetary Policy Consultative Committee Chairman

Sri Lanka Institute of Directors Chairman

Sri Lanka Business Development Centre Chairman

Total Tea Concepts (Private) Ltd. Chairman

Indo Asia Teas (Pvt) Ltd Chairman

Delmege Teas (Pvt) Ltd Director

The Sanjiv Mendis Memorial Foundation Director

R. Seevaratnam - No Transaction with Affiliates

Directorships in other Companies

Company Position Transaction Amount due as at 31.12.2009 (LKR)

Haycarb Limited Non-Executive Director No -

Dipped Products Limited Non-Executive Director No -

Diesel & Motor Engineering Co. (Ltd) Non-Executive Director Procurement 42,593.60

Acme Packaging Solutions (Pvt) Ltd. Non-Executive Director No 17,841,636.00

Metroof (Pvt) Limited Non-Executive Director No -

Classic Teas (Pvt) Limited Non-Executive Director No -

Tea Small Holders Factories Ltd Non-Executive Director No -

Green Farms Limited Non-Executive Director No -

Hatton National Bank Limited Non-Executive Director Banking 0

Tokyo Cement Limited Non-Executive Director No -

Hayleys MGT PLC Non-Executive Director No -

Lanka Aluminum PLC Non-Executive Director No -

Shaw Wallace and Hedges PLC Non- Executive Director No -

Shaw Wallace Marketing PLC Non-Executive Director Procurement 0

Colombo Fort Land and Building Co. Non-Executive Director No -



POST BALANCE SHEET EVENTS

There were no notable events that occurred subsequent to the date of the Balance Sheet which required adjustment or disclosure in the Financial Statements.

CONCLUSION

The Directors of Nestlé Lanka PLC wish to convey their gratitude and appreciation to the Management and staff of the Company for their dedicated and untiring co-operation during the year under review.

For and on behalf of the BoardNESTLÉ LANKA PLC

Alois Hofbauer Syed Saiful Islam Managing Director Vice President - Finance & Control


21st April 2011

(B) IN SHARES OF THE COMPANY

DirectorShareholding

Management01/01 31/12

Executive

Mr. D. Saudan (Managing Director until 31.08.2010) No No Yes

Mr. A. Hofbauer (Managing Director w.e.f. 01.09.2010) No No Yes

Mr. S. S. Islam - - Yes

Non-ExecutiveMr. A. H. Waszyk - No No

Mr. P. Schaufelberger - No No

Independent Non-Executive

Mr. M. Dayananda No No No

Mr. R. Seevaratnam No No No

CORPORATE GOVERNANCE.

The Corporate Governance practices of the Company are set out in detail in page 13.

PROPERTY, PLANT & EQUIPMENT

Details of Property, Plant and Equipment, additions made during the year and depreciation thereof for the year are shown in Note 12 to the Financial Statements on page 38.

DONATIONS

Total donations made by the Company amounted to a sum of Rs. 3,059,000/=.

AUDITORS

M/s KPMG Ford, Rhodes, Thornton and Company, Chartered Accountants have been the Company’s Auditors in the past and being eligible, offer themselves for re-appointment for the next year. Auditors fees are disclosed in note 7 to the Financial Statement on page 36.

As far as the Directors are aware, the Auditors do not have any relationship (other than that of an Auditor) with the Company or other than those disclosed in note 7 to the Financial Statements on page 36.

The Auditors also do not have any interest in the Company.



Financial ReportIndependent Auditors' Report 26

Income Statement 27

Balance Sheet 28

Statement of Changes in Equity 29

Cash Flow Statement 30

Notes to the Financial Statement 31

Company Highlights

In thousands of Rupees 2010 2009

Net Revenue 21,422,984 19,427,135

Profit before Taxation 2,827,877 2,427,850

As a % of Net Revenue 13% 12%

Profit after Taxation 1,901,115 1,580,315

Return on Capital Employed 74% 89%

Capital Expenditure 769,796 323,555

Shareholders Funds 2,553,462 1,780,582

Key Ratios

Earnings per Share 35.39 29.41

Net Assets per Share 47.53 33.14

Dividend per Share 34.50 30.00

Dividend Cover 1.03 0.98

Dividend Payout Ratio 97% 102%

Current Ratio 1.06 1.01

Market value per share - Highest 800.00 440.00

- Lowest 425.00 251.00

- Average 611.42 345.64

- Last traded 663.00 415.00

Number of Personnel 1,053 973

**

*


Independent Auditors' Report

KPMG Ford, Rhodes, Thornton & Co. Tel : +94 - 11 242 6426(Chartered Accountants) +94 - 11 542 642632A, Sir Mohamed Macan Markar Mawatha, Fax : +94 - 11 244 5872P. O. Box 186, +94 - 11 244 6058Colombo 00300, +94 - 11 254 1249Sri Lanka. +94 - 11 230 7345 Internet : www.lk.kpmg.com

KPMG Ford, Rhodes, Thornton & Co., a Sri Lankan Partnershipand a member firm of the KPMG network of independentmember firms affiliated with KPMG International cooperative ("KPMG International"), a Swiss entity.

A.N. Fernando FCA M.R. Mihular FCA Ms. M.P. Perera FCA P.Y.S. Perera FCA C.P. Jayatilake FCA T.J.S. Rajakarier FCAW.W.J.C. Perera FCA Ms. S. Joseph ACA Ms. S.M.B. Jayasekara ACAW.K.D.C. Abeyrathne ACA S.T.D.L. Perera ACA G.A.U. Karunaratne ACA

Principals - S.R.I. Perera ACMA, LLB, Attorney-at-Law, H.S. Goonewardene ACA

TO THE SHAREHOLDERS OF NESTLÉ LANKA PLC

Report on the Financial Statements

We have audited the accompanying financial statements of Nestlé

Lanka PLC, as at 31st December 2010 which comprise the balance

sheet as at 31st December 2010, and the income statement,

statement of changes in equity and cash flow statement for the

year then ended, and notes to the financial statements set out on

pages 31 to 46.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair

presentation of these financial statements in accordance with

Sri Lanka Accounting Standards. This responsibility includes:

designing, implementing and maintaining internal control relevant

to the preparation and fair presentation of financial statements that

are free from material misstatement, whether due to fraud or error;

selecting and applying appropriate accounting policies; and making

accounting estimates that are reasonable in the circumstances.

Scope of Audit and Basis of Opinion

Our responsibility is to express an opinion on these financial

statements based on our audit. We conducted our audit in

accordance with Sri Lanka Auditing Standards. Those standards

require that we plan and perform the audit to obtain reasonable

assurance whether the financial statements are free from material

misstatement.

An audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial statements. An audit

also includes assessing the accounting policies used and significant

estimates made by management, as well as evaluating the overall

financial statement presentation.

We have obtained all the information and explanations which

to the best of our knowledge and belief were necessary for the

purposes of our audit. We therefore believe that our audit provides

a reasonable basis for our opinion.

Opinion

In our opinion, so far as appears from our examination, the

Company maintained proper accounting records for the year ended

31st December 2010 and the financial statements give a true and

fair view of the Company's state of affairs as at 31st December 2010

and its profit and cash flows for the year then ended in accordance

with Sri Lanka Accounting Standards.

Report on Other Legal and Regulatory Requirements

These financial statements also comply with the requirements of

Section 151(2) of the Companies Act No. 07 of 2007.

Chartered Accountants

Colombo

21" April 2011


Income Statement

For the Year Ended 31st December 2010 2009

Note Rs.‘000s Rs.‘000s

Revenue 5 21,439,008 19,439,934

Turnover Related Taxes (16,024) (12,799)

Net Revenue 21,422,984 19,427,135

Cost of Sales (14,016,536) (12,686,576)

Gross Profit 7,406,448 6,740,559

Other Operating Income / (Expense) 6 24,302 (48,784)

Marketing, Selling and Distribution Expenses (3,339,394) (2,989,054)

Administrative Expenses (1,312,562) (1,311,339)

Results from Operating Activities 7 2,778,794 2,391,382

Finance Income 51,390 44,629

Finance Expenses (2,307) (8,161)

Net Finance Income 8 49,083 36,468

Profit before Taxation 2,827,877 2,427,850

Income Tax Expense 9 (926,762) (847,535)

Profit for the Period 1,901,115 1,580,315

Basic Earnings per Share 10 35.39 29.41

Dividend per Share 11 34.50 30.00

“Notes to the Financial statements” set out on pages 31 to 46 form an integral part of the Financial Statements.

Figures in brackets indicate deductions.


Balance Sheet

Notes to the “Financial statements” set out on pages 31 to 46 form an integral part of the Financial Statements.

I certify that these financial statements are prepared in compliance with the requirements of the Companies Act No. 07 of 2007.

Syed Saiful IslamVice President - Finance & Control

The Board of Directors is responsible for the preparation and presentation of these Financial Statements.

Signed for and on behalf of the Board.

Alois Hofbauer Ranjan SeevaratnamManaging Director Director Colombo21st April 2011

As at 31st December 2010 2009Note Rs.‘000s Rs.‘000s

ASSETSNon-Currrent AssetsProperty, Plant and Equipment 12 2,357,696 1,839,724 Capital Work-in-Progress 13 439,096 217,802

Intangible Assets 14 78,116 111,594

2,874,908 2,169,120 Current AssetsInventories 15 2,131,493 1,479,679 Trade and Other Receivables 16 826,393 657,989 Amounts due from Related Parties 17 95,113 131,510 Cash and Cash Equivalents 18 615,078 969,184

3,668,077 3,238,362

Total Assets 6,542,985 5,407,482

EQUITY AND LIABILITIESEquityStated Capital 19 537,255 537,255 Retained Earnings 2,016,207 1,243,327

2,553,462 1,780,582

Non-Current LiabilitiesRetirement Benefit Obligations 20 475,663 326,665 Deferred Tax Liabilities 21 41,783 104,300

517,446 430,965 Current LiabilitiesTrade and Other Payables 22 1,955,314 1,889,302 Amounts due to Related Parties 23 655,708 474,817 Current Tax Payable 705,754 714,949 Dividends Payable 56,032 52,172 Bank Overdrafts 99,269 64,695

3,472,077 3,195,935 Total Liabilities 3,989,523 3,626,900

Total Equity and Liabilities 6,542,985 5,407,482


Statement of Changes in Equity



For the year ended 31st December 2010Stated Retained Total

Capital EarningsRs.‘000s Rs.‘000s Rs.‘000s

Balance as at 1st January 2009 537,255 1,221,051 1,758,306

2nd Interim Dividend for 2008 (537,255) (537,255)

Final Dividend for 2008 - (537,255) (537,255)

1st Interim Dividend for 2009 (483,529) (483,529)

Profit for the Year - 1,580,315 1,580,315

Balance as at 31st December 2009 537,255 1,243,327 1,780,582

Balance as at 1st January 2010 537,255 1,243,327 1,780,582

2nd Interim Dividend for 2009 - (537,255) (537,255)

Final Dividend for 2009 - (590,980) (590,980)

Profit for the Year 1,901,115 1,901,115

Balance as at 31st December 2010 537,255 2,016,207 2,553,462


Cash Flow Statement

For the year ended 31st December 2010 2009Rs.‘000s Rs.‘000s

Cash Flows from Operating ActivitiesProfit before Taxation 2,827,877 2,427,850 Adjustments for;Depreciation 247,331 208,444 Amortisation 33,478 33,478 Provision for Impairment Losses on Property, Plant and Equipment - net - 27,515 Profit on Sale of Property, Plant and Equipment (2,014) (2,712)Interest Expense 1,053 8,161 Interest Income (50,136) (44,629)Provision for Obsolete Inventories (10,508) 8,654 Inventory Write Off 58,301 39,855 Provision for Doubtful Debts 1,307 3,844 Bad Debts Write Off - 1,497 Provision for Retiring Gratuity 180,287 180,441 Operating Profit before Working Capital Changes 3,286,976 2,892,398

Working Capital Changes(Increase)/ Decrease in Inventories (699,607) 567,094 (Increase)/ Decrease in Trade and Other Receivables (133,314) 38,981 Increase in Trade and Other Payables 246,901 107,419 Cash Generated from Operations 2,700,956 3,605,892

Interest Paid (1,053) (8,161)Income Tax paid (998,474) (824,243)Gratuity Paid (31,289) (56,726)

Net Cash Flows Generated from Operating Activities 1,670,140 - 2,716,762

Cash Flows from Investing ActivitiesPurchase of Property, Plant and Equipment (991,087) (514,022)Proceeds from Sale of Property, Plant and Equipment 6,505 3,750 Interest Received 50,136 44,629 Net Cash Flows Used in Investing Activities (934,446) (465,643)

Cash Flows from Financing ActivitiesDividends Paid (1,124,374) (1,544,578)Net Cash Flows Used in Financing Activities (1,124,374) (1,544,578)

Net Increase/ (Decrease) in Cash and Cash Equivalents (388,680) 706,541 Cash and Cash Equivalents at the Beginning of the Year 904,489 197,948 Cash and Cash Equivalents at the End of the Year (Note 18) 515,809 904,489

Analysis of Cash and Cash Equivalents at the End of the Year

Cash in Hand and Balances with Bank 615,078 969,184 Bank Overdrafts (99,269) (64,695)

515,809 904,489




Notes to the Financial Statements

1 Reporting Entity Nestlé Lanka PLC is a company incorporated and domiciled

in Sri Lanka and listed in the Colombo Stock Exchange. The registered office and the principal place of business is at 440, T.B. Jayah Mawatha, Colombo 10. The Company is in the Food & Beverage Industry.

The Financial Statements were authorized for issue by the Directors on 21st April 2011.

The ultimate holding company is Nestlé S A.

1.1 Principal Activities and Nature of Operations Principal activities of the company include manufacturing,

marketing, selling and distribution of food and beverages products. The Company is also involved in the export of locally manufactured food and beverages products.

2 Basis of Preparation

a) Statement of Compliance The Financial Statements of Nestlé Lanka PLC have been

prepared in accordance with the Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka (ICASL) and the requirements of the Companies Act. No. 07 of 2007.

b) Basis of Measurement The Financial Statements are prepared on the historical cost

basis and applied consistently with no adjustments made for inflationary factors affecting the financial statements.

c) Functional and Presentation Currency The financial statements are presented in Sri Lankan

Rupees, which is the Company’s functional currency. All financial information presented in Sri Lankan Rupees have been rounded to the nearest thousand.

d) Use of Estimates and Judgments The preparation of Financial Statements in conformity with

SLAS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.

e) Going Concern When preparing the Financial Statements, the Directors

have made an assessment of the ability of the company to continue as a going concern in the foreseeable future and they do not foresee a need for liquidation or cessation of trading, taking into account all available information about the future.

3 Significant Accounting Policies The accounting policies set out below have been applied

consistently to all periods presented in these financial statements, and have been applied consistently by the company.

3.1 Foreign Currency Transactions Transactions in foreign currencies are translated at the

foreign exchange rate ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies at the Balance Sheet date are translated to Sri Lankan Rupees at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the Income Statement.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

3.2 Property, Plant and Equipment

a) Recognition and Measurement Property, Plant and Equipment other than Land are stated

at cost, less accumulated depreciation and accumulated Impairment Losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials, direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, and the costs of dismantling and removing the items and restoring the site on which they are located.


Where an item of Property, Plant and Equipment comprises of major components having different useful lives, they are accounted for as separate items of Property, Plant and Equipment.

Gains and losses on disposal of an item of Property, Plant and Equipment are determined by comparing the proceeds from disposal with the carrying amount of Property, Plant and Equipment, and are recognized net within “Other Operating Income” in the Income Statement.

b) Derecognition The carrying amount of an item of Property, Plant and

Equipment is derecognised on disposal or when no future economic benefits are expected from use or disposal. The gain or loss arising from derecognition of an item of Property, Plant and Equipment is included in the income statement when the item is derecognised.

c) Subsequent Expenditure The cost of replacing part of an item of Property, Plant and

Equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the company and its cost can be measured reliably. The costs of the day-to-day servicing of Property, Plant and Equipment are recognized in the Income Statement as incurred.

d) Depreciation Depreciation is recognized in the Income Statement on a

straight-line basis over the estimated useful lives of items of Property, Plant and Equipment. Land is not depreciated. The estimated useful lives are as follows:

2010 2009

Freehold Buildings 35 years 35 years

Leasehold Buildings-Factory 25-35 years 25-35 years

Plant & Machinery 10-25 years 10-25 years

Tools, Furniture & Office Equipment 5 years 5 years

Motor Vehicles 5 years 5 years

Information Systems (IS) equipment 3 -5 years 3 -5 years

Depreciation on an asset begins when it is available for use and ceases at the earlier of the date that the assets are classified as held for sale and the date that the assets are derecognised.

The useful lifetime, depreciation methods and residual values are reassessed annually or on an earlier date where any circumstances indicate such assessment is required.

Improvements on leasehold buildings and buildings constructed on leasehold land are depreciated over the lower of their useful economic life or unexpired period of lease.

e) Capital Work in Progress Capital expenses incurred during the year which are not

completed as at the Balance Sheet date are shown as Capital Work-in-Progress, whilst the capital assets which have been completed during the year and put to use have been transferred to Property, Plant and Equipment.

f) Leased Assets Buildings constructed by the company on leasehold land

are capitalised and included under the category “leasehold building”.

3.3 Intangible Assets Intangible assets that are acquired by the company,

which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses.

a) Basis of Recognition An Intangible Asset is recognised if it is probable that the

future economic benefits that are attributable to the asset will flow to the entity and cost can be measured reliably and carried at cost less accumulated amortisation and accumulated impairment losses.

b) Subsequent Expenditure Subsequent expenditure is capitalised only when it increases

the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in the Income Statement as incurred.

c) Amortisation Amortisation is recognised in the Income Statement on

a straight-line basis over the estimated useful lives of Intangible Assets, other than goodwill, from the date that they are available for use. The estimated useful lives for the current and comparative periods are as follows:

Globe Project 5 years

d) Retirement and Disposal An Intangible Asset is derecognised on disposal or when

no future economic benefits are expected from its use and subsequent disposal.



3.4 Impairment The carrying amounts of the Company’s assets are reviewed

at each Balance Sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated (see Note 2(d) ).

An Impairment Loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment Losses are recognised in the Income Statement.

(a) Calculation of Recoverable Amount The recoverable amount of assets is the greater of their net

selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs.

(b) Reversal of Impairment Impairment Losses recognized in prior periods are assessed

at each reporting date for any indications that the loss has decreased or no longer exists.

An Impairment Loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An Impairment Loss is reversed only to the extent that

the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no Impairment Loss had been recognised.

3.5 Trade and other receivables Trade and Other Receivables are stated at the amount

estimated to be realised. Provision has been made in the Financial Statements for bad and doubtful debts.

3.6 Inventories Inventories are stated at the lower of cost and net realisable

value. In general, cost is determined on a first-in-first-out basis and includes expenditure incurred in acquiring the inventories and bringing them to their existing condition and location. In the case of manufactured inventories and work-in-progress, cost includes all direct expenditure and production overheads based on the normal level of activity.

Net realisable value is the price at which stocks can be sold in the normal course of business after allowing for the cost of realisation and, where appropriate, the cost of conversion from their existing state to a finished condition.

Provision is made where necessary for obsolescence, slow-moving and defective stocks.

3.7 Cash and Cash Equivalents Cash and cash equivalents comprise of cash balances and

call deposits with a maturity period of less than three months. For the purpose of the Statement of Cash Flows, cash and cash equivalents are presented net of bank overdrafts, short term borrowings and short term investments.

Cash Flow Statement The Cash Flow Statement has been prepared using the

Indirect Method in accordance with Sri Lanka Accounting Standard No. 09 – ‘Cashflow Statements’.

3.8 Employee Benefits

(a) Defined Benefit Plan - Retirement Gratuity The liability to Retirement Benefit Obligation under the

payment of Gratuity Act No. 12 of 1983 is a defined benefit plan covering 724 employees of the company. The pre-1996 liability is unfunded and provided for by way of an accounting provision in the Financial Statements of the company in accordance with Sri Lanka Accounting Standard No.16 – Employee Benefits (Revised 2006). The liability subsequent to this date is funded by way of an insurance policy.

An annual valuation of the fund at AVIVA NDB Insurance PLC is carried out by a certified actuary using the “Projected Unit Credit Method” and the premium for the year is charged as an expense to the Income Statement in the period to which it relates.

The actuarial valuation of the defined benefit obligation is carried out by a qualified actuary Mr. Poopalanathan (Acturial and Management Consultants (Pvt) Ltd.) every two years. The Projected Unit Credit Method is used to determine the present value of the defined benefit obligation. The movement of the obligation during the year and assumptions used for actuarial valuation are disclosed in Note 20 to the Financial Statements.

(b) Defined Contribution Plans – Mercantile Services Provident Society and Employee Trust Fund

A defined contribution plan is a post-employment benefit plan



under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in the Income Statement when they are due.

All employees of the company are members of the Mercantile Service Provident Society and Employees’ Trust Fund to which the company contributes 12% and 3% respectively of such employees’ wages or salary.

3.9 Liabilities and Provisions Liabilities and provisions are recognised in the Balance

Sheet when there is a present legal/constructive obligation as a result of the past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. Obligations payable at the demand of the creditor or within one year of the Balance Sheet date are treated as Current Liabilities in the Balance Sheet. Liabilities payable after one year from the Balance Sheet date are treated as Non-Current Liabilities in the Balance Sheet.

a) Dividends Dividends are recognised as a liability in the period in which

they are declared and approved for distribution. b) Trade and Other Payables Trade and Other Payables are stated at their cost. 3.10 Revenue

Sale of Goods

Revenue from the sale of goods is measured at fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated cost and possible return of goods can be estimated reliably and there is no continuing management involvement with goods.

Transfer of risks and rewards vary depending on the individual terms of the contract of sale.

3.11 Other Operating Income

(a) Profit / Loss from Sale of Property, Plant and Equipment Any gains or losses on retirement or disposal of Property,

Plant and Equipment are recognized in the period in which the sale occurs and is classified as other operating income.

(b) Export Subsidy Export subsidy includes the proceeds from an economic

stimulus package approved by the Cabinet of Ministers to reward direct exporters in managing their vulnerabilities and risks associated with the current global economic crisis. An amount of 5% of the export proceeds is measured on FOB basis, corresponding to the export earnings recorded in the respective quarter, confirmed as received within 120 days from the expiry of the quarter has been paid to the company as it recorded such amount of export earnings (FOB) and met the other eligibility criteria as laid down by the EDRS Scheme. This proceed is recognized on cash basis.

3.12 Expenses

Expense Recognition

(a) Revenue Expenditure The profit earned by the Company as shown in the Income

Statement is after providing for all known liabilities and for depreciation of Property, Plant & Equipment.

For the purpose of presenting the Income Statement, the Directors are of the opinion that the function of expenses method presents fairly the elements of the enterprises performance, hence such presentation method is adopted.

(b) Capital Expenditure Expenditure incurred for the purpose of extending or

improving assets of a permanent nature by means to carry on the business or for the purpose of increasing the earning capacity of the business has been treated as capital expenditure.

Gains or losses of revenue nature, on the disposal of Property, Plant and Equipment have been accounted for in the Income Statement.

Operating Lease Payments Payments made under operating leases are recognised in

the Income Statement on a straight – line basis over the term of the lease.

Net Financing Costs Net financing costs comprise interest payable on borrowings,

interest receivable on funds invested and foreign exchange gains and losses that are recognised in the Income Statement.

Interest income is recognised in the Income Statement on accrual basis unless collectability is in doubt.



All interest and other costs incurred in connection with borrowings are expensed as incurred as part of net finance costs.

3.13 Taxation

Income Tax Expense Income tax expense for the year comprises current and

deferred tax. Income tax is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

(a) Current Tax Current tax is the expected tax payable on the taxable income

for the year, using tax rates enacted or substantively enacted at the Balance Sheet date as per the provisions of the Inland Revenue Act No. 10 of 2006 and any adjustment to tax payable in respect of previous years.

(b) Deferred Tax Deferred tax is provided using the Balance Sheet liability

method as per Sri Lanka Accounting Standard 14 (Revised 2005) Income Taxes, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the Balance Sheet date.

3.14 Earnings per Share (EPS) Basic EPS is calculated by dividing the profit or loss

attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year.

3.15 Segment Reporting A segment is a distinguishable component of the company

that is engaged either in providing related products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and returns that are different from those of other segments.

3.16 Borrowing Costs Borrowing costs are recognised as an expense in the year in

which they are incurred.

3.17 Comparative Information Comparative information has been reclassified where necessary

to conform to the current year’s presentation. 3.18 Commitments and Contingencies Contingencies are possible assets or obligations that arise

from a past event and would be confirmed only on the occurrence or non-occurrence of uncertain future events which are beyond the Company’s control.

3.19 Events Occurring After the Balance Sheet Date All material post Balance Sheet events have been considered,

disclosed and adjusted where applicable. 4 New Accounting Standards issued but not effective

as at Balance Sheet date

The Institute of Chartered Accountants of Sri Lanka has issued a new volume of Sri Lankan Accounting Standards which will become applicable for the financial period beginning on or after 1st January 2012. Accordingly, these standards have not been applied in preparing these Financial Statements as they were not effective for the year ended 31st December 2010.

These Sri Lankan Accounting Standards comprise accounting standards prefixed both SLFRS (corresponding to IFRS) and LKAS (corresponding to IAS). Application of Sri Lanka Accounting Standards prefixed SLFRS and LKAS for the first time shall be deemed to be an adoption of SLFRS.




2010 2009Rs.‘000s Rs.‘000s

5 Revenue Local 19,185,922 17,211,333Exports 2,253,086 2,228,601

21,439,008 19,439,9346 Other Operating Income/ (Expense)

Gain on Sale of Property, Plant and Equipment 2,014 2,713Export Subsidy 2,500 10,000 Exchange Gains/ (Losses) 19,788 (61,497)

24,302 (48,784)

7 Profit from OperationsProfit from Operations is stated after charging/(crediting) all expenses including the following;Depreciation 247,331 208,444 Amortisation 33,478 33,478 Impairment Loss - 27,515 Provision for Obsolete Inventories (10,508) 8,654 Inventory Write Off 58,301 39,855 Royalty Payment 778,438 696,298 Lease Payment 360 360 Auditors Remuneration - Audit 2,200 1,980 - Audit related 57 507 - Non Audit 392 600 Provision for Doubtful Debts 1,307 4,554 Bad Debts Write Off - 1,497 Legal Fees 11,746 11,250 Directors' Fees 400 400 Personnel Cost (Note 7.1) 1,105,787 1,046,737

7.1 Personnel CostsExecutive Directors' Emoluments 23,243 21,364 Salaries and Wages 811,220 747,828 Provision for Retiring Gratuity (Note 20) 180,287 180,441 Premium Paid for Gratuity - 17,482 Contributions to Employees' Provident Fund and Mercantile Services Provident Society 73,240 64,074 Contribution to Employees' Trust Fund 17,797 15,548

1,105,787 1,046,7378 Net Finance Income

Finance IncomeInterest on Call Deposits/Others 51,390 42,210Gain on Foreign Currency Revaluation - 2,419

51,390 44,629Finance ExpensesInterest on Short Term Borrowings and Overdrafts (1,053) (8,157)Loss on Foreign Currency Revaluation (1,254) (4)

(2,307) (8,161)

Net Finance Income 49,083 36,468



9.2 Reconciliation between Accounting Profit and Taxable Profit

2010 2009

Rs’000 Rs’000

9 Income Tax Expense Tax on Current year Profits (Note 9.2) 992,100 909,600

SRL on Dividend 1,692 2,335

Reversal of over provision for previous year (4,513) -

Deferred Tax Reversal (Note 21) (62,517) (64,400)

Total Income Tax Expense in the Income Statement 926,762 847,535

9.1 (a) The Corporate Income Tax rate applicable to Nestle Lanka PLC is 35%, while qualifying export profits are taxed at a concessionary rate of 15%. Profits with respect to off-shore business earned in foreign currency and Ready to Drink milk business are exempt from income tax.

(b) The full benefit of Capital Allowances arising in terms of section 25 of the Inland Revenue Act No. 10 of 2006 has been taken

into account in determining Income Tax Expense on profits for the year.

(c) Deferred tax has been computed using the future tax rate of 28% (effective 2011/12). SRL will be abolished with effect from 2011/12.

2010 2009

Rs'000 Rs'000

Accounting Profit Before Tax 2,827,877 2,427,850

Adjustments Relating to Disallowances 689,817 627,075

Adjustments Relating to Capital Allowances (54,096) 28,620

Adjustments Relating to Allowable Income (2,500) (10,000)

Profit from Tax Exempted Undertakings (461,129) (303,521)

Taxable Profit 2,999,969 2,770,024

Income Tax at 15% 43,483 42,233

Income Tax at 35% 948,617 867,367

Income Tax Expense 992,100 909,600

10 Basic Earnings per Share (EPS) The calculation of basic earnings per share is based on the profit for the year attributable to Ordinary Shareholders divided by the weighted average number of Ordinary Shares outstanding during the year.

Net profit attributable to ordinary shareholders and weighted average number of ordinary shares is given below.

2010 2009Profit attributable to the Ordinary Shareholders (Rs'000) 1,901,115 1,580,315Weighted Average Number of Shares 53,725,463 53,725,463Basic Earnings Per Share (Rs.) 35.39 29.41



12 Property, Plant and Equipment

Free hold Land

Freehold Buildings

Lease-hold

Buildings

Plant and Machinery

Tools, Furniture

and Office Equipment

Motor Vehicles

Information Systems

Equipment

Total 2010

Total 2009

Rs.‘000s Rs.‘000s Rs.‘000s Rs.‘000s Rs.‘000s Rs.‘000s Rs.‘000s Rs.‘000s Rs.‘000s

Cost

Balance as at 01st January 17,925 45,169 592,487 2,532,398 660,108 270,310 180,696 4,299,093 4,000,048

Additions during the Year - - 41,246 305,302 130,541 46,829 28,075 551,995 296,220

Transferred from capital working progress - - 17,067 200,734 - - - 217,801 27,335

Disposals during the Year - - (9,645) (95,276) (65,229) (7,403) (15,663) (193,216) (24,510)

Balance as at 31st December 17,925 45,169 641,155 2,943,158 725,420 309,736 193,108 4,875,671 4,299,093

Depreciation

Balance as at 01st January - 21,087 152,531 1,470,870 483,277 189,523 142,081 2,459,369 2,246,882

Charge for the year - 1,089 17,564 122,705 54,144 32,640 19,189 247,331 208,444

Impairment loss - - - - - - - 27,515

On Disposals - - (7,214) (94,110) (64,712) (7,026) (15,663) (188,725) (23,472)

Balance as at 31st December - 22,176 162,881 1,499,465 472,709 215,137 145,607 2,517,975 2,459,369

Written Down Value

As at 31st December 2010 17,925 22,993 478,274 1,443,693 252,711 94,599 47,501 2,357,696

As at 31st December 2009 17,925 24,082 439,956 1,061,528 176,831 80,787 38,615 1,839,724

The Property situated at No.440, T.B. Jayah Mawatha, Colombo 10 (extent - 45,230 sq.ft.) was valued on 31st July 2009 by a chartered valuer. The carrying amounts of Free hold Land and Building (three buildings) had it been at revalued amount is:

-Free hold land Rs. 669,200,000 -Free hold Buildings Rs. 68,800,000

However, the effect on revaluation has not been taken to the financial statements; the said properties are stated at cost.

11 Dividend per Share (a) The Directors have recommended a final dividend of Rs. 22.50 per share for the year ended 31.12.2010, which will be declared

at the Annual General Meeting to be held on 25th May 2011. In accordance with Sri Lanka Accounting Standards 12 (Revised) Events After the Balance Sheet date, the interim dividend and proposed final dividend have not been recognised as a liability as at 31st December 2010.

(b) However for the purpose of computing Dividend per Share, the final dividend to be approved has been taken into consideration, for both years and the First Interim Dividend of Rs. 644,705,556 paid on 31st January 2011.

(c) Calculation of Dividend per share is based on the total dividend attributable to ordinary shareholders of Rs. 1,853,528,474 (2009 – Rs. 1,611,763,890) divided by the weighted average number of ordinary shares as at Balance Sheet date.



2010 2009Rs '000s Rs '000s

13 Capital Work-in-ProgressBalance as at 1st January 217,802 27,335 Capitalised during the year (217,802) (27,335)Additions during the year 439,096 217,802 Balance as at 31st December 439,096 217,802

14 Intangible Assets CostBalance as at 1st January 167,391 167,391 Additions during the year - -Balance as at 31st December 167,391 167,391AmortizationBalance as at 1st January 55,797 22,319Charge for the Year 33,478 33,478Balance as at 31st December 89,275 55,797

Carrying Amount 78,116 111,594

15 InventoriesRaw Materials 627,539 609,594Packing Materials 106,467 74,801Finished Goods 875,614 425,469Energy 13,676 10,872Technical Materials 125,063 124,711Work-in-Progress 63,196 64,684

1,811,555 1,310,131Goods-in-Transit 324,036 184,154

2,135,591 1,494,285Less: Provision for Obsolete Inventory (Note 15.1) (4,098) (14,606)

2,131,493 1,479,67915.1 Provision for Obsolete Inventory

Balance as at 1st January 14,606 5,952Provision/(Reversal) during the year (10,508) 8,654Balance as at 31st December 4,098 14,606

16 Trade and Other ReceivablesTrade Receivables - Net (Note 16.1) 477,703 347,387Other Receivables - Net (Note 16.2) 348,690 310,602

826,393 657,989

16.1 Trade ReceivablesTrade Receivables 524,374 392,751Less: Provision for Doubtful Debts (Note 16.1.1) (46,671) (45,364)

477,703 347,387

16.1.1 Provision for Doubtful Debts Balance as at 1st January 45,364 41,520Provision made during the year 1,307 3,844Balance as at 31st December 46,671 45,364



2010 2009Rs '000s Rs '000s

16.2 Other Receivables Deposits and Prepayments 130,895 59,858Non Trade Receivables 24,542 64,909Loans to Employees (Note 16.2.2) 222,353 214,935

377,790 339,702Less: Provision for Other Receivables (Note 16.2.1) (29,100) (29,100)

348,690 310,60216.2.1 Provision for Other Receivables

Balance as at 1st January 29,100 29,100Provision/(Reversal) during the year - -Balance as at 31st December 29,100 29,100

16.2.2 Loans to Employees (over Rs. 20,000)Balance as at 1st January 214,935 197,471Granted During the Year 79,739 77,465Repaid During the Year (72,321) (60,001)Balance as at 31st December 222,353 214,935

Loans to employees are disbursed to officers of the company excluding Directors. The quantum of each loan in excess of Rs. 20,000 has been granted to 385 officers (2009 - 388 officers).

2010 2009Rs '000s Rs '000s

17 Amounts Due from Related PartiesOsem UK Ltd 3,927 7,792 Nestlé Italiana S.P.A. 9,334 4,075 Nestrade S.A. 10,080 9,354 Nestlé Maghreb S.A. 3,225 - Nestlé Middle East FZE 20,302 31,408 Nestlé Taiwan Ltd 3,703 4,074 Nestlé India Ltd 6,650 9,661 Nestlé Japan Ltd 2,682 2,415 Nestlé Singapore (pte) Ltd 536 349 Nestlé Australia Ltd 6,810 3,188 Nestlé Jamaica Ltd 12,439 24,681 Nestlé Trinidad and Tobago Ltd 9,934 31,712 Nestlé Panama S.A 3,209 2,801 Nestlé Caribbean Inc. 2,282 -

95,113 131,510

18 Cash and Cash EquivalentsFavourable BalancesBalances with Banks 214,978 20,929Cash in Hand 100 100Short Term Investments 400,000 948,155 615,078 969,184Unfavourable BalancesBank Overdrafts (99,269) (64,695)

(99,269) (64,695)

Cash and Cash Equivalents 515,809 904,489



2010 2009Rs.’000s Rs.’000s

53,725,463 Ordinary Shares 537,255 537,255

The holders of Ordinary Shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

20 Employee Benefits

2010Rs.’000s

2009Rs.’000s

PV ofUnfunded Obligation

PV ofFunded

ObligationTotal

PV ofUnfundedObligation

PV of Funded

ObligationTotal

Active Employees 387,060 365,690 752,750 385,978 296,681 682,659 Pensioners 95,935 - 95,935 82,044 - 82,044Total present value of obligations 482,995 365,690 848,685 468,022 296,681 764,703 Fair value of plan assets - (373,022) (373,022) - (348,038) (348,038)Recognised liability for defined benefit obligations 482,995 (7,332) 475,663 468,022 (51,357) 416,665 Unrecognized Past Service Cost - (90,000)Total employee benefits 475,663 326,665

The Company makes contributions to a non contributory defined benefit plan that provides gratuity to employees upon retirement. The plan entitles a retired employee to receive a payment equal to 1/2 of final salary multiplied by the number of completed years of service.

The portion of the unrecognized obligation relating to past service which is not vested is recognized in the Income Statement over 3 years on a straight line basis.

Employees who joined prior to 2006 and who have 10 years of service and attain the age of 55 years are entitled for pension upon retirement. Furthermore, 26 employees who retired are drawing a monthly pension.

The plan is partially funded by a policy obtained from AVIVA NDB Insurance PLC (formally known as Eagle Insurance PLC) on 31st

December 1996 and covers 724 employees attached to Nestlé Lanka PLC. AVIVA NDB Insurance PLC has confirmed that the features of the policy satisfy the definition of a “qualifying insurance policy”. The fund assets (Rs. 373 Mn) and the defined benefit obligations (Rs. 849 Mn) have been netted off in Note 20 above.

(a) Movement in the Present Value of the Defined Benefit Obligations:2010 2009

Rs.’000s Rs.’000sBalance as at 1st January 764,703 711,456Benefits paid by the plan (54,157) (77,520)Current Service Cost 39,340 34,619Interest 76,470 99,604Actuarial (gains)/losses 22,329 (3,496)Balance as at 31st December 848,685 764,703

(b) Movement in the Present Value of Plan Assets:Balance as at 1st January 348,038 328,546Contributions paid into the plan - 14,752Benefits paid by the plan (22,868) (19,523)Expected return on plan assets 33,064 29,569Actuarial (losses)/gains 14,788 (5,306)Balance as at 31st December 373,022 348,038

19 Stated Capital

As at 31st December



(c) The expense is recognized in the following line items in the income statement:2010 2009

Rs.’000s Rs.’000sCost of sales 82,082 80,191Administrative expenses 98,205 115,002

180,287 195,193

Actuarial Assumptions Principle actuarial assumptions at the reporting date (expressed as weighted averages)

2010 2009(1) Rate of Discount 10% 10%(2) Expected Return on plan assets as at 31st December 9.5% 9%(3) Future Salary Increase 9.5% 8%(4) Future Pension Increase 6% 5%

Assumptions regarding future mortality are based on published statistics and mortality tables.The retirement age is assumed as 55 years.

Composition of Insurance Plan Asset is as follows.1. Reporting entity’s own financial instruments – 69,800 shares2. Property occupied by, or other assets used by, the reporting entity – Nil.

Movements in Temporary Differences during the year: 2010 2009

TemporaryDifference Tax Effect Temporary

Difference Tax Effect

Rs'000 Rs'000 Rs'000 Rs'000 Property, Plant and Equipment (814,786) (228,140) (982,221) (275,022)

Retiring Gratuity 574,471 160,852 517,754 144,971

Other provisions 91,089 25,505 91,968 25,751

Net tax (assets)/liabilities (149,225) (41,783) (372,500) (104,300)

21 Deferred Tax Liabilities

2010 2009

Rs'000 Rs'000

Balance as at 1st January 104,300 168,700

Reversal for the year (62,517) (64,400)

Balance as at 31st December 41,783 104,300

2010 2009

Rs'000 Rs'000

22 Trade and Other Payables 1,385,276 1,599,909

Trade Payables 570,038 289,393

Other Payables 1,955,314 1,889,302


Notes to the Financial Statements2010 2009

Rs '000s Rs '000s23 Amounts Due to Related Parties

Nestlé Deutschland Ag 1,122 - Nestlé France Ltd 1,855 - Nestlé Waters France 3927 2,633 Nestlé UK Ltd 3,276 3,655 Nestlé Nederland B.V. - 5,872 Nestrade S.A. 30,609 576 Nestec S.A. 1,489 Societe des Produits Nestle S.A. 197,418 175,269 Nestlé Suisse S.A. 3,119 3,125 Nestlé Products (Mauritius) Ltd - 528 Nestlé Qingdao Ltd - 54 Nestlé Taiwan Ltd. 770 - Nestlé India Ltd. 4,006 25,974 P T Nestle Indonesia 3,309 - Nestlé Products Sdn Bhd 22,417 3,002 Nestlé Asean (Malaysia) Sdn Bhd 6,252 - Nestlé Manufacturing (Mal) Sdn Bhd 93,796 50,282 Nestlé Phillippines Inc 90,098 66,946 CPW Philippines, Inc 6,234 1,750 Nestlé Business Sevices AOA, Inc 146 - Nestlé Singapore (pte) Ltd 106,504 58,694 Nestlé TC Asia-Pacific (Pte) Ltd 23,773 24,621 Nestlé R & D Centre (Pte) Ltd 217 1,309 Nestlé (Thai) Ltd. 6,887 3,631 Nestlé Australia Ltd. 49,973 45,407

655,708 474,817

24 Related Party Disclosure Mr. Antonio Helio Waszyk, the Chairman of the Company, is also the Director of Nestlé Bangladesh Ltd and Chairman and Managing Director of Nestlé India Ltd.

24.1 Transactions with Related Companies

Name of the company Nature of the Relationship

Nature of the Transactions 2010 2009

Rs '000 Rs '000

Osem UK Ltd Affiliates Exports 47,760 73,554 Nestlé Middle East FZE Affiliates Exports 268,362 281,569 Nestrade S.A. Affiliates Exports 20,027 128,681 Nestlé Korea Ltd Affiliates Exports 1,023 383 Nestlé Taiwan Ltd Affiliates Exports 20,290 7,102 Nestlé India Ltd Affiliates Exports 97,733 61,441 Nestlé Japan Ltd Affiliates Exports 24,715 19,452 Nestlé Manufacturing (Malasia) Sdn Bhd Affiliates Exports 0 9,023 Nestlé Singapore (Pte) Ltd. Affiliates Exports 1,710 2,372 Nestlé Australia Ltd Affiliates Exports 45,152 43,875 Nestlé (Png) Ltd Affiliates Exports 12,785 11,812 Nestlé New Zealand Ltd Affiliates Exports 3,087 2,160 Nestlé Canada, Inc. Affiliates Exports 2,873 5,076 Nestlé Panama S.A. Affiliates Exports 3,218 2,800 Nestlé Jamaica Ltd. Affiliates Exports 63,096 80,699 Nestlé Trinidad And Tobago Ltd Affiliates Exports 65,421 80,806 Nestlé Italiana S.P.A. Affiliates Exports 36,498 91,548



Name of the company Nature of the Relationship

Nature of the Transactions 2010 2009

Rs '000s Rs '000s

Societe des produits Nestle.S.A * Affiliates Technical Assistance Fees (778,438) (696,298)

Nestlé Manufacturing (Mal) Sdn Bhd Affiliates Imports (389,491) (354,621)

Nestlé Australia Ltd. Affiliates Imports (30,778) (20,978)

Nestlé Singapore (Pte) Ltd Affiliates Imports (1,044,272) (828,488)

Nestlé Suisse S.A. Affiliates Imports (17,573) (123,500)

Nestlé (Thai) Ltd Affiliates Imports (22,727) (10,781)

P.T. Nestle Indonesia Affiliates Imports (14,799) (8,312)

Nestlé India ltd. Affiliates Technical (21,613) (208,564)

Nestlé Waters France Affiliates Imports (12,808) (8,273)

Nestlé Phillipines Inc Affiliates Imports (737,961) (213,391)

Nestlé Nederlands B.V. Affiliates Imports (6,470) (67,041)

Nestlé (China) Ltd Affiliates Service Charges (24) (4,641)

CPW Phillipines Inc Affiliates Imports (20,727) (21,769)

Nestlé Brazil LTDA Affiliates Imports (398) (354)

Nestlé UK Ltd Affiliates Service Charges (626) (6,655)

Nestlé's Products (Mauritius) Ltd. Affiliates Imports (547) (528)

Nestrade S.A. Affiliates Imports (74,432) (4,076)

Nestlé Korea Ltd. Affiliates Imports (5,600) -

Nestlé R & D Centre (Pte) Ltd. Affiliates Technical (2,873) (10,355)

Nestlé Deutschaland Affiliates Technical (1,197) (3,717)

Nestlé TC Asia Pacific (Pte) Ltd. Affiliates Imports - (9,017)

Nestec SA Affiliates Service Charges (2,373) (2,886)

Nestec SA Affiliates Dividend Payment/RSUP (946,404) (1,415,019)

Nestlé Australia Ltd Affiliates Professional Charges (198,789) (166,085)

Nestlé Quingdao Ltd Affiliates Imports - (75)

Nestlé Egypt S A E Affiliates Service Charges - (298)

Nestlé France Ltd Affiliates Technical (2,533) (148)

Nestlé Middle East FZE Affiliates Service Charges - (143)

Nestlé Pakistan Ltd Affiliates Service Charges (4,683) -

Nestlé Taiwan Ltd Affiliates Service Charges (770) -

Nestlé Business Service AOA Inc Affiliates Service Charges (146) -

24.1 Related Party Transactions Contd….

* Technical Assistance fee computed as a % of net sales is paid to Societe Des Produits Nestlé S.A. according to the terms and conditions in the General License agreement.


24.2 Transaction with Key Management Personnel Key Management Personnel include all the members of the Board of Directors of the company having authority and responsibility

for planning, directing and controlling the activities of the company.

2010 2009

Rs '000 Rs '000

Short Term employee benefits 23,243 21,364

Non Cash benefits 25,691 18,949

Share based payments 11,427 75,508

60,361 115,821

There are no related party transactions other than those disclosed in notes 17, 23, 24.1 and 24.2.

25 Segmental Analysis The different geographical sales regions do not attract significantly different risks nor command different returns. Thus they do not

qualify for segment reporting. Consequently the need to present segment information does not arise.

26 Commitments

(a) Capital Commitments The Capital commitment for the year 2010, which has been approved by the Board but has not been contracted for, is

Rs. 128 Mn.

(b) Lease Commitment The land in which the Nestle Lanka’s factory building is constructed was leased out from the Sri Lankan Government. As per the

lease agreement, the land in Mahayaya Estate was leased for 50 years from 25th March 1981.

The annual amount payable under lease agreement is Rs. 359,693 and the lease is renewable.

2010 2009

Rs '000s Rs '000s

Non cancellable operating lease commitments are as follows

Not later than one year 360 360

Later than one year and not later than five years 1,439 1,439

Later than five years 5,755 6,115

7,554 7,914

27 Contingent Liabilities The company’s distributors are provided with a financing facility with the Company’s bankers.

The bank would accept the liability only up to the full recourse provided by them to the Company’s customers.

As at the end of the year, an amount of Rs. 219 Mn had been granted to the distributors by the bankers, which in the event where distributors default, the company would be liable.



28 Events Occurring after Balance Sheet Date There were no other material events occurring after the Balance Sheet date that require adjustment or disclosure in the financial

statements, other than the following;

An interim dividend of Rs. 12/- per share amounting to Rs. 644,705,556 was paid on 31st January 2011.

The Board of Directors has recommended a final dividend of Rs. 22.50 per share amounting to Rs. 1,208,822,918 for the year ended 31st December 2010. This is to be approved at the Annual General Meeting to be held on 25th May 2011.

29 Directors’ Responsibility The Board of Directors is responsible for the preparation and presentation of Financial Statements.

The Directors' Responsibility Statement is given in page 20 of this annual report.



Value Added Statement

Value Added Statement 2010 2009

Rs '000s Rs '000s

Turnover 21,439,008 19,439,934

Bought out Goods and Services (14,224,504) (12,460,047)

Value added 7,214,504 6,979,887

% Rs 000s % Rs 000s

To Government as Taxes / Duties 54.3 3,916,290 57.2 3,991,720

To Employees as Remuneration 13.1 947,961 12.4 868,101

To Lenders as Interest 0.0 1,053 0.1 8,161

To Shareholders as Dividends 25.7 1,853,528 23.1 1,611,765

Retained with business (including depreciation) 6.9 495,671 7.2 500,140

100.00 7,214,504 100.0 6,979,887

Statement of Value Added 2010 Statement of Value Added 2009


Ten Year Summary

Results 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Rs '000 Rs '000 Rs '000 Rs '000 Rs '000 Rs '000 Rs '000 Rs '000 Rs '000 Rs '000

Statement of Income

Net Revenue 6,647,416 7,467,048 8,079,136 9,897,372 12,779,555 14,128,658 16,255,216 19,111,985 19,427,135 21,422,984

Profit before tax 92,104 239,551 908,669 908,775 1,599,678 2,043,874 2,046,975 2,483,987 2,427,850 2,827,877

Taxation (14,600) (64,218) (426,855) (312,703) (548,554) (688,988) (655,383) (820,894) (847,535) (926,762)

Profit after tax 77,504 175,333 481,814 596,072 1,051,124 1,354,886 1,391,592 1,663,093 1,580,315 1,901,115

Retained profits/ brought forward

19,429 227 952 4,609 144,014 35,009 46,758 95,213 146,542 115,092

Profit available for distribution 96,933 175,560 482,766 600,681 1,195,138 1,389,895 1,438,350 1,758,306 1,726,857 2,016,207

Interim Dividend - - - - (134,314) (537,255) (483,529) (537,255) (483,529) -

Final Dividend (96,706) (174,608) (478,157) (456,667) (1,047,644) (805,882) (859,608) (1,074,510) (1,128,236) -

Retained Profits carried forward

227 952 4,609 144,014 13,180 46,758 95,213 146,541 115,092 2,016,207

Balance Sheet

Share capital 537,255 537,255 537,255 537,255 537,255 537,255 537,255 537,255 537,255 537,255

Reserves 22,056 197,389 504,595 622,510 1,082,653 852,640 954,821 1,221,051 1,243,327 2,016,207

Deferred Liability 107,379 110,485 275,172 271,069 273,635 213,703 206,541 371,650 430,965 517,446

666,690 845,129 1,317,022 1,430,834 1,893,543 1,603,598 1,698,617 2,129,956 2,211,547 3,070,908

Represented by:

Tangible Fixed Assets 907,286 1,171,199 1,111,698 1,311,233 1,373,806 1,263,724 1,809,300 1,780,501 2,057,526 2,796,792

Intangible Assets 145,072 111,594 78,116

Current Assets 1,673,087 1,690,595 1,805,690 1,609,603 1,959,706 2,441,960 3,196,200 3,157,602 3,238,362 3,668,077

Less: Current Liabilities (1,913,683) (2,016,665) (1,600,366) (1,490,002) (1,439,969) (2,102,086) (3,306,883) (2,953,219) (3,195,935) (3,472,077)

Net Current Assets (240,596) (326,070) 205,324 119,601 519,737 339,874 (110,683) 204,383 42,427 196,000

666,690 845,129 1,317,022 1,430,834 1,893,543 1,603,598 1,698,617 2,129,956 2,211,547 3,070,908

Average Market price per share (Rs) 58.02 51.15 66.02 83.90 101.55 180.15 262.85 278.74 345.64 611.42

Earnings per Share (Rs) 1.44 3.26 8.97 11.09 19.56 25.22 25.90 30.96 29.41 35.39

Dividend paid / pro-posed (Rs. 000s) 96,706 174,608 478,157 456,667 1,181,961 1,343,137 1,343,137 1,611,764 1,611,764 1,853,528


Share Information

Analysis of Shareholders according to the Number of Shares as at 31st December 2010

No Names % No. of shares 2010

No. of shares 2009

1 Nestlé S.A 90.82 48,793,746 48,793,746

2 HSBC International Nominees Ltd- JPMCB 0.70 377,000 391,300

3 Mellon-Frontaura Global Frontier Fund LLC 0.39 211,800 251,500

4 Miss Harnam Neesha 0.37 200,100 200,100

5 HSBC International Nominees Ltd –SSBT-Deustche Bank Ag Singapore 0.29 155,600 155,600

6 AIVA NDB Insurance PLC A/C 07 0.28 149,200 51,400

7 Employees Provident Fund 0.26 139,600 125,000

8 Mr. Aloysius Kattar 0.21 111,419 111,419

9 Mr. Radhakrishnan Mariapillai 0.20 110,000 110,000

10 Ceylon Nutritional Foods Ltd Trust 0.19 104,001 104,001

11 HSBC Intl Nom Ltd – UBS Ag Singapore Branch 0.17 90,000 90,000

12 Ceylon Investment PLC A/C No. 1 0.14 76,000 76,000

13 AVIVA NDB Insurance PLC A/C 03 0.13 69,800 0

14 Freudenberg Shipping Agencies Limited 0.11 60,000 60,000

15 Colombo Investment Trust PLC 0.09 50,904 50,904

16 Mr. Bandaranayake Jayampathi Divale 0.09 49,750 49,750

17 MAS Capital (private) Ltd 0.08 42,800 0

18 Mr. Hirdaramani Anil Kumar Lalchand 0.08 40,500 40,500

19 Dr. Chawla Subash 0.07 40,000 40,000

20 Mrs. Singh 0.06 34,700 0

Individual 5,641 2,921,182

Institutional 144 50,804,281

5,785 53,725,463

High/Low market prices Highest Market value : Rs. 800.00 Lowest Market value : Rs. 425.00 Market value as at 31.12.2010 : Rs. 663.00Public holding as at 31.12.2010 = 8.99%

List of 20 Major shareholders based on their shareholdings as at 31st December 2010.

Categories of Shareholders No. of Shareholders No. of Shares

RESIDENT NON RESIDENT TOTAL

1 to 1000 Shares 5,168 833,605 1.55 57 15,928 0.03 5,225 849,533 1.58 1001 to 10,000 Shares 488 1,365,251 2.54 21 88,499 0.16 509 1,453,750 2.70 10,001 to 100,000 Shares 31 770,014 1.43 10 299,700 0.56 41 1,069,714 1.99 100,001 to 1,000,000 Shares 5 614,220 1.14 4 944,500 1.76 9 1,558,720 2.90 Over 1,000,000 Shares 0 0 0.00 1 48,793,746 90.82 1 48,793,746 90.82 5,692 3,583,090 6.67 93 50,142,373 93.33 5,785 53,725,463 100.00

Shareholdings No. of No. of Percentage Number of No. of Percentage Number of No. of Percentage Shareholders Shares (%) Shareholders Shares (%) Shareholders Shares (%)


Notice of Meeting

Note:

1. A member entitled to attend and vote at the Meeting is entitled to appoint a proxy to attend and vote instead of him/her.

2. A proxy need not be a member of the Company.

3. A form of proxy accompanies this notice.

4. Shareholders attending the meeting are requested to complete the Attendance Form as instructed, and handover same at the entrance to the meeting hall for registration.

5. Shareholders/ Proxy holders are requested to bring their National Identity Cards for the purpose of identification.

6. No parcels and other belongings will be permitted to be taken into the meeting hall.

7. Only the shareholder will be permitted to enter the committee room and shareholders are kindly requested to refrain from bringing children in order to avoid any inconvenience.

8. Kindly note that no complimentary gift parcels will be issued at the AGM.

Notice is hereby given that the Thirtieth Annual General Meeting of Nestle Lanka PLC will be held at the Sri Lanka Foundation Institute, No. 100, Independence Square, Colombo 07, on Wednesday, 25th May 2011, at 10.00 am for the following purposes;

Agenda

1. To receive and consider the Annual Report of the Board of Directors on the affairs of the Company, Independent Auditor’s Report and the Audited Accounts for the year ended 31st December 2010.

2. To declare a final dividend as proposed by the Directors.

3. To Re- elect Directors.

4. To reappoint the auditors and authorise the Directors to fix their remuneration.

By Order of the BoardNESTLÉ LANKA PLC.


21st April 2011


Notes


Form of Proxy

Nestlé Lanka PLC

I / We .....................................................................…………………………………………………………………………………...

of ……..............................................................................…………………………………………………………………………….

Being a member/ members of the above named Company hereby appoint :

...............................................................................………………………………………………………………………………... of

..............................................................................………………………………………………………………………... or failing

..............................................………………………………….……… of …......................................………………………………

………………………………………………………...........................................................................…………………….or failing

………………………………………………………………………...........………… as my / our proxy to represent me / us and vote for me / us on my behalf at the Thirtieth Annual General Meeting to be held on Wednesday 25th May 2011 at 10.00 a.m. and at any adjournment thereof.

Signed this ............................................................................. Day of ............................................................................. 2011

Signature : ...........................................................................................

INSTRUCTIONS AS TO THE COMPLETION

1. Kindly perfect the form of proxy legibly by filling in your full name and address in the spaces provided along with the date and your signature.

2. If the proxy form is signed by an Attorney, the related Power of Attorney should also accompany the completed form of proxy registration, if it has not been already registered with the Company.

3. If the shareholder is a Company or Corporate Body, the proxy form should be executed under its common seal in accordance with its Articles of Association or Constitution.

4. The completed form of proxy should be deposited at the Office of the Registrars of the Company at No: 101, Inner Flower Road, Colombo 03, not less than 48 hours before the time appointed for holding of the Meeting to be held at the Sri Lanka Foundation Institute, No. 100, Independence Square, Colombo 07 on Wednesday 25th May 2011 at 10.00 a.m.


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Attendance Form/meñKSfï igyka m;%h$tuTj; jhs;

Notes:

1. Shareholders are kindly requested to bring this attendance form to the Thirtieth Annual General Meeting of Nestle Lanka PLC to be held at the Sri Lanka Foundation Institute No. 100, Independence Square, Colombo 07, on Wednesday, 25th May 2011, at 10.00 am.

2. Kindly note that No complimentary gift parcels will be issued at the AGM.

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Full Name of the Shareholder/fldgialref.a iïmQ¾K ku/gq;Fjhuhpd; KOg; ngah;:

…………………………………………….........................................................……………………

Folio No. /m;abre wxlh/Nfhit ,yf;fk;:

…………………………………………….........................................................……………………

NIC No. /cd;sl ye÷kqïm;a wxlh/Nj.m.m ,yf;fk;:

…………………………………………….........................................................……………………

No. of Shares Held/ysñ fldgia ixLHdj/ngw;wpUf;Fk; gq;Ffspd; vz;zpf;if:

…………………………………………….........................................................……………………

Signature /w;aik/ifnahg;gk;:

…………………………………………….........................................................……………………

CORPORATE INFORMATION

Name of Company:Nestlé Lanka PLC

Registered Office & Head Office:No. 440, T.B. Jayah Mawatha, Colombo 10, Sri Lanka.Tel: (+94 11) 2696304, 2697821, 2699991Fax: (+94 11) 2699437E-mail: [email protected]

Legal Form:A public quoted company with limited liability, incorporated in Sri Lanka on 29th January 1981 and listed on the Main Board of the Colombo Stock Exchange

Company Registration Number:PQ20

Company Secretary:Mr. Lioshon Rajapakshe

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Nestlé Lanka PLCEnhancing the quality of life for Sri Lankan consumers everywhere - one sip, one bite, one drop at a time

Nestlé was founded in 1866 by Henri Nestlé in Vevey, Switzerland, where our headquarters are still located today. Nestlé is today the world's leading Nutrition, Health and Wellness company and the largest Food and Beverage company in the world.

Nestlé has been in Sri Lanka for over 100 years and includes some of the country’s best loved brands in our local portfolio. From a trading company in 1906, we are one of the leading Food and Beverage companies in Sri Lanka today. We have the largest number of milk chilling centres in the Island and are the largest private sector collector of fresh milk in the country. Nestlé Lanka is also the world’s largest exporter of coconut milk powder.

Good Food, Good LifeOur mission of "Good Food, Good Life" is to enhance the lives of Sri Lankan consumers with great tasting and nutritious products at affordable prices. Our local, state-of-the-art manufacturing facility in Kurunegala manufactures 90% of our products, bringing us closer to our vision of producing superior quality products at affordable prices to the entire nation.

Nutrition, Health and WellnessNutrition, Health and Wellness (NHW) is Nestlé’s strategic direction. We want our consumers to be able to make healthy choices about their food and beverages. We aim to make our consumers’ lives more pleasurable because our products not only taste better but are also more nutritious.

Everything we do is driven by our Nutrition, Health and Wellness agenda - Good Food, Good Life - which seeks to offer our consumers products with the best nutritional profile in their categories.

Creating Shared ValueCreating Shared Value (CSV) is the way we do business and the philosophy we abide by in all of our business activities. CSV happens in three specific areas – water, nutrition and rural development - where we can best create value for both society and shareholders.

Registrars:M/s. SSP Corporate Services (Pvt) LtdNo. 101, Inner Flower Road, Colombo 3, Sri Lanka.Tel: 011 2573894, 2576871

Legal Advisors:M/s. DL and F De Saram (Attorneys-at-Law)M/s. Julius and Creasy (Attorneys-at-Law)

Auditors:M/s. KPMG Ford, Rhodes, Thornton and Company (Chartered Accountants)

Bankers:Commercial BankHatton National BankThe Hong Kong and Shanghai Banking Corporation LimitedStandard Chartered Bank

Financial Year:1st January to 31st December

Nestlé Lanka Certifications:

ISO 22000: 2005 (Food Safety Management Systems)

ISO 14001: 2004 (Environmental Management Systems)

ISO 18001: 2007 (Occupational Health & Safety Management Systems)

NQMS (Nestlé Quality Management Systems certified by SGS)

Good Food, Good Life

Nestlé Lanka PLC Annual Report 2010 Nestlé Lanka PLC Annual Report 2010 Operational Highlights...

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