Nestle-DL-F&N

8/10/2019 Nestle-DL-F&N

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Nottingham University Business School

MBA Programme

Accounting and Finance

N14M01

Nestle Malaysia Bhd

An Assessment of Financial Performance,

Sustainability and Strategy

Sirsanath, BANERJEE, ID : 014803

Alwyn Chee Hua, KOAY, ID : 015855

Shen Yang, KUAH, ID : 016302

Ling Kim, LEE, ID : 015871

Shing Loo, LIM, ID : 016301

(Word count 4223)

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Executive Summary

This report serves to outline our review and findings of the companys financial position and

performance, strategic and sustainability initiatives within the packaged foods of the F&B industry

within Malaysia, in order to provide recommendation for future improvements.

The main findings of the review are as follows:

Overview:

Volatile global economy since 2008 has given rise to unstable growth in industries worldwide,

nonetheless, Malaysia and the F&B industry are generally resilient towards this volatility, and the

general outlook for future performance is on a moderately positive direction.

Our SWOT analysis indicates multiple strengths and concurrent opportunities and threats to be

addressed, while the Porters 5 Forces Analysis has shown that the industry outlook is generally

favourable towards our company, largely due to our strong brand name and position.

Key Financial Ratio Analysis:

Overall, the financial ratios fall within an average industry performance, however, more attention

should be directed towards the liquidity position which could potentially affect the overall

performance in the near term. Generally operating efficiencies and return on equities are well-

managed for maximising shareholders value.

Corporate Governance:

Corporate governance is well addressed within the company although more efforts towards

transparency in terms of figure justifications in the company financial statements should be strictly

adhered to boost shareholders confidence.

Sustainability:

We have pioneered the Malaysian F&B manufacturing industry in terms of implementing GRI

reporting practices, while actively integrating CSR activities into our value chain. This hassignificantly added value to our business performance in terms of operational efficiencies and added

brand equity.

Moving forward, we have highlighted the recommendations for future improvements which are

outlined at the end of the report.


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Contents

List of Figures .......................................................................................................................................... 2

List of Tables ........................................................................................................................................... 2

List of Abbreviations ............................................................................................................................... 3

1) Introduction .................................................................................................................................... 4

2) Environmental Overview ................................................................................................................ 4

2.1) Global and Malaysian Economy Outlook .................................................................................... 4

2.2) The Industry Outlook .................................................................................................................. 5

3) Companys Information................................................................................................................... 5

3.1) Companys Background.............................................................................................................. 5

3.2) Product and Service Offerings and Segmental Analysis ............................................................. 6

3.3) Industry Analysis ......................................................................................................................... 7

3.4) SWOT Analysis ............................................................................................................................ 9

3.5) Future Prospects ....................................................................................................................... 10

4) Quantitative Analysis (Financial Ratios) ........................................................................................ 11

4.1) Profitability Ratio ..................................................................................................................... 11

4.2) Activity Ratio ............................................................................................................................ 13

4.3) Liquidity Ratio .......................................................................................................................... 15

4.4) Leverage Ratio .......................................................................................................................... 174.5) Checklist of Ratio...................................................................................................................... 18

4.6) Trend Analysis .......................................................................................................................... 19

4.7) Common Size Analysis.............................................................................................................. 19

5) Qualitative Analysis ....................................................................................................................... 20

5.1) Integrated ReportingCreating Shared Value .......................................................................... 20

5.1) Corporate Governance .......................................................................................................... 22

5.2) Earnings Management .......................................................................................................... 22

5.3) Sustainability ......................................................................................................................... 236) Conclusion and Recommendations............................................................................................... 24

7) Reference ...................................................................................................................................... 26


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LIST OF FIGURESFigure 1 Nestl Operative Functions...................................................................................................... 5

Figure 2 Nestl Sales by Product............................................................................................................ 6

Figure 3 Nestl Channel Sales................................................................................................................ 7

Figure 4 Porters 5-Forces for Nestl...................................................................................................... 7

Figure 5 Return on Equity Ratio........................................................................................................... 11

Figure 6 Gross Operating Margin......................................................................................................... 12

Figure 7 Profit Margin Ratio................................................................................................................. 12

Figure 8 Average Collection Period...................................................................................................... 13

Figure 9 Average Age of Payables....................................................................................................... 14

Figure 10 Average Number of Days in Stock....................................................................................... 14

Figure 11 Total Assets Ratio................................................................................................................. 15Figure 12 Current Ratio........................................................................................................................ 15

Figure 13 Cash Ratio............................................................................................................................ 16

Figure 14 Debt to Equity Ratio............................................................................................................. 17

Figure 15 Index Number of Nestl....................................................................................................... 19

Figure 16 Nestl's Governance of CSV, Sustainability and Compliance............................................. 20

Figure 17 Development of CSV Strategy Globally and How it Rolled out in Malaysia...................... 20

Figure 18 Nestl Creating Shared Value Concept Components........................................................... 21

Figure 19 Nestl's Shared Value........................................................................................................... 21

Figure 20 Nestl's Sustainability Indicator........................................................................................... 23

LIST OF TABLESTable 1 SWOT Analysis......................................................................................................................... 9

Table 2 Table of Checklist.................................................................................................................... 18

Table 3 Sustainability Activities Undertaken by Nestl from 2009 to date............Error! Bookmark not

defined.


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LIST OF ABBREVIATIONS

Abbreviation Complete Term

A&P Advertising and Promotional

ACCA Association of Charted Certified Accountants

BOD Board of Directors

CSR Corporate Social Responsibility

DL Dutch Lady Milk Industries Berhad

F&B Food and Beverage

F&N Fraser & Neave Holdings Berhad

FMCG Fast Moving Consumer Goods

GBP Great Britain Pound

GRI Global Reporting Initiatives

GST Goods & Services Tax

IFRS International Financial Reporting Standards

KLSE Kuala Lumpur Stock Exchange

MCCG Malaysian Code of Governance

MD Managing DirectorNestle / Our Company Nestle Malaysia Berhad

SGD Singapore Dollars

THB Thailand Baht

USD U.S. Dollars


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1)

INTRODUCTIONThe Malaysian economy has been in a volatile position since the 2008 sub-prime recession. Coupled

with increasing costs of living but stagnant disposable income, this has led consumers trending

towards cheaper alternative goods in the market. The BOD of Nestl is concerned with the situation

and has requested a strategic and financial assessment of the Companys performance over a 5 year

period, benchmarked against two major competitors.

Nestl is a leading F&B Company in Malaysia with 75% of sales derived from the Beverage and

Dairy segments. As such, two other major players in the market, F&N and DL, who operate in

similar segments, are selected for benchmarking purposes.

This report initiates with an overview of the global economy and events, subsequently covering

background and situational analysis via SWOT and Porters Five Forces Analysis. Further, the

quantitative (financial ratios) and qualitative (corporate governance and sustainability) would also be

discussed. The report shall end with an overall conclusion on our performance and recommendations

for improvement.

2) ENVIRONMENTAL OVERVIEW2.1) Global and Malaysian Economy Outlook

The World Bank (2014) forecasted that the 2014 global economy is expected to be bumpy, while

anticipating stagnant growth in developing countries. Notwithstanding the above, the Malaysian

economy is expected to be experience positive growth with an improved business environment

(World Bank, 2014).

The global economic outlook exerts influence in the local food production scene most notably via the

increasing commodity prices, directly affecting raw material costs of production. Current significant

event being the Ebola outbreak in the Africas, a cocoa producing continent, where cocoa powder and

related commodity product prices are increasing due to the restricted accessibilities to the locations ofproduce.

The instable global economy and events are risks for us as we import several raw materials from other

countries. Hence, consistent awareness towards our surroundings given the exposure to different

economic conditions is much needed to sustain good business performance.


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2.2) The Industry Outlook

The Economic Report of Malaysia (2014), outlines favorable growth in the F&B industry for the

years 2014 and 2015. A further nascent trend observed includes the ever-changing demographic

profiles leading to increased consumption on consumer segments; the role of technology and online

shopping; and significant focus on inclusive development for the community and environment.

However, Malaysian governments GST implementation on 1 April 2015 may pose a negative factor

for consumer sentiments, and this may impact revenues and profit prospects of the company in the

coming financial years 2014-2015. It will be a pivotal year ahead to ensure that Real Internal Growth

is maintained amidst heavy capital expenditure incurrence, coupled with possibilities of a slowdown

in consumer spending. Nonetheless, Choong (2014) has advised that the F&B industry could claim an

input tax refund based on the final GST paid.

3) COMPANYS INFORMATION

3.1) Companys Background

Nestl Malaysia Berhad has its roots in Malaysia for more than a century, starting out as the Anglo-

Swiss Condensed Milk company producing sweetened condensed milk since 1912. Listed in KLSE

since 1983 with a market capitalization of RM 16 billion, it has evolved into a major player in the

Malaysian F&B industry with turnover of RM4.8 billion in year 2013 and 300 products commanding

almost 50% of the processed food market share. (The Malaysian Insider, 2014).

Up to 95% of products are manufactured locally, with 7 manufacturing bases nationwide spread

across Peninsular and East Malaysia; and a National Distribution Center. Equipped with a 5,800

people-strong workforce, the size and scale of our dominance in the Malaysian processed food

segment is greatly reflected. Further, we append the Companys operative functions as follows:-

Figure 1 Nestl Operative Functions


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Under the purview of the Zone Asia Oceania and Africa (Zone AOA) segment within Nestl Globals

management structure, we have reasonable control and autonomy to suit and adapt business

operations to the local and regional needs, while aligned closely to our global Swiss parent Nestl SA.

Our mission is to be a leader in Nutrition, Health and Wellness, and to be the industry reference for

financial performance (Nestl Global, 2014). With this, we are proud to report that our growth stays

consistent with our global mission, whereby financial performance is on an improving trend over the

past five years.

3.2) Product and Service Offerings and Segmental Analysis

Nestl Malaysias businesses span across product categories of the F&B umbrella with the Beverage

and Dairy segment being the major contributor followed by Foods. A recent sales segregation by

product categories is appended in the next chart.

Source: Nestl Malaysia Analyst Briefing 11 Nov 2013 s.9Figure 2 Nestl Sales by Product

From a geographical perspective, a quarter of Nestl Malaysias revenues are from export sales to its

counterparts in the region (Fig. 3), largely due to increasing Halal products demand. Today, Nestl

Malaysia is the biggest Halal producer amongst the Nestl world and prides being the Halal Center of

Excellence for the Nestl Group.


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Figure 3 Nestl Channel Sales

3.3) Industry Analysis

In Malaysia, the food processing sector is largely fragmented with small and medium enterprises

representing more than 80% of the total number of establishments throughout various product

categories (Market Watch, 2012). Nestl Malaysias industry analysis based on the Porters 5-forces

is as follows:-

Figure 4 Porters 5-Forces for Nestl


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The outlook seems to be in our favour albeit having a fragmented industry with strong existing

substitutes and relatively high supplier concentration. The threats of potential entrants are relatively

deterred due to unrealistic production economies of scale being either unfeasibly small or expensively

large; in terms of capital outlays for a production setup and effective distribution force.

Nonetheless, substitute threat is significant over the long term due to price sensitivity being prevalent

in this sector, as this is attributed to an effect of a commoditization risk where dominant Nestl

products are subject to me-too lower priced house brands, resulting in our market share erosion in

the long run.

Despite these real challenges, we remain resilient due to the strong brand value and effective

distribution network which are vital factors for this industry.


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3.4) SWOT Analysis

Table 1 SWOT Analysis

Strengths Weaknesses

Strong Product and Brand Portfolio to

cater to diverse customer base, beneficial

for innovation process and enhancing

future revenue stream.

Too largea size for quick and effective

changes or decisions to be made.

Operational Efficiency, via effi cient cost

management or strong pricing strategy,

evident through strong operating margins

Commoditization of product brands with

high market share (eg MILO, Nescaf and

MAGGI) leading to high imitative value.

Strong Research and Development

Activity, to support new productexpansion and increase customer base.

Decentralized organizationalstructure

enabling glocal approach to capture local

markets

Effective distribution channelsthrough

Long Term Partners, and retail business

partners

Opportunities Threats

Rising Aging Population Trends, provides

consumer base for specialty foods such as

nutraceuticals which can be captured

alongside Nestl Malaysias strong R&D

value capabilities

Exposure to fluctuating raw material

commodity prices such as cocoa, coffee,

and milk solids.

Globally Rising Consumer Spending in

Growth Markets gives rise to

opportunities of non-discretionary item

spending increases, i.e . confectionery

market opportunities

Intensified competition from fragmented

mass of small-scale manufacturers which

may collectively erode sales, therefore

facing competition from a broad range of

food products.

Export opportunities, being the Halal hub,

vast market network for Halal products to

be offered to other Nestl markets.

Evolving Consumer Preferences could

affect success of new product launches if

not able to effectively meet consumers

evolving needs and demands and thus

increasing operating costs and

profitability erosion.

Retailers commonly use popular Nestl

products as Loss-Leaders in pricing

strategy, potentially reducing brand

equity

Internal Origin (attributes of the organization)

External Origin (attributes of the environment)

Nestl: SWOT ANALYSIS


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3.5) Future Prospects

From a corporate perspective, our new MD, Mr Alois Hofbauer (appointed 1 Jan 2013) spearheads the

company towards a good start with the execution of CAPEX commitments in strengthening

manufacturing capabilities within the liquid drinks and confectionery sector, we are confident in his

lead towards sustainable growth in the right directions.

Continuously strong and efficient A&P activities is key to ensure consumer top of mind reflected

through recent A&P executions such as the NestlMore Goodness, More Val ue campaigns which

stresses on enhanced value(The Malaysian Insider, 2014). Simultaneously, prudent operations

management for cost efficiencies, in line with sustainability efforts are also vital in adding value to the

product life cycle. This shall facilitate in maintaining healthy growth and to mitigate possibilities of

slowdown in sales.

It is also vital to address alternative channel distribution strategies as increased dependence on Key

Account customers such as Giant, Tesco, Jusco, and Carrefour will lead to a proliferation of loss

leader pricing. This will only erode Nestls brand equity and poses a huge risk in safeguarding the

strong leadership positions amongst brands such as MILO, NESCAFE and MAGGI. (Bouckley, 2012)


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4)

QUANTITATIVE ANALYSIS (FINANCIAL RATIOS)

As part of our assessment of the Companys performance, our financial ratios are computed and

benchmarked against our competitors. A detailed computation is available in the Appendices.

4.1) Profitability Ratio

Figure 5 Return on Equity Ratio

Overall, our ROE value is increasing at a steady manner within the 0.6 - 0.7 range over a period of

five years, mainly attributable to the simultaneous increase in sales and equity. Although DL appears

to have a better ROE ratio compared to us in 2013, their retained earnings in equity is in fact on a

decreasing trend and this may indicate a negative growth on their part.

It was noted that F&N experienced a substantial drop in their ROE from 2011 onwards mainly due to

a drop of net income from 2011 to 2013. Losing the distribution rights of Coca Cola have

significantly impacted their income as it contributes 30% of the groups business (27 June 2011) (The

Star, 2012). As mentioned in Malaysia Corporate Digest (2013). Notwithstanding, plummeting sales

during years 2012 and 2013 were also due to the inventory loss as a result from the Thailand floods

and relocation of a new plant in Pulau Indah, Klang (October 2011).

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

20132012201120102009

RATIO

RETURN ON EQUITY RATIO

F&N

DUTCH LADY

NESTLE


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Figure 6 Gross Operating Margin

Based on the above gross profit margin, it appears that our Company is in a better position compared

to F&N and DL. However, all three companies noted increases in operating expenses, mainly

attributed to price hikes in several commodities such as milk solids and cocoa powder (BorneoPost

Online, 2011).

Kennedy (2014) reports that the price of cocoa beans are expected to increase continuously due to

recent external threats such as the Ebola epidemic in the Africas, a main supplier for cocoa. This is

not favourable as cocoa is our main raw material for several products.

Figure 7 Profit Margin Ratio

0.00

0.05

0.10

0.15

0.20

0.25

0.300.35

0.40

0.45

20132012201120102009

RAITO

GROSS OPERATING MARGIN

F&N

DUTCH LADY

NESTLE

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

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RATIO

PROFIT MARGIN RATIO

F&N

DUTCH LADY

NESTLE


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In addition, an increasing trend in our profit margin can also be observed despite having higher

expenses. Based on the 2013 Annual Report, our exports have decreased over the past year; while

concurrently incurring higher marketing expenses to boost domestic demand to make up for the

export decreases. In doing so, we have also launch several new products (e.g. Greek Yogurt) to the

Malaysian market during the period.

Nonetheless, the expenses mentioned above prove to be worthwhile investments as higher net profit

was reflected.

In short, relative to our competitors, our profitability ratios indicate that our performance are on a

positive note.

4.2) Activity Ratio

Figure 8 Average Collection Period

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

20132012201120102009

D

AYS

AVERAGE COLLECTION PERIOD

F&N

DUTCH LADYNESTLE


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Figure 9 Average Age of Payables

As observed from the above figures, our company enjoys a payable period of over 3 months whereas

the sum of collection period from our debtors is slightly over 1 month. Based on the result, it

indicates that our trade debtors have been paying their debts at a timely manner whereas our creditors

have leveraged at our reputational brand name and hence, allowing us longer repayment terms (Elliot

and Elliot, 2009).

While it may seem an advantage, it is advisable for the Company to monitor and shorten the payable

period to ensure good supplier rapport is maintained.

Figure 10 Average Number of Days in Stock

On average, our stock turnover falls between 2-3 months and has been reducing since 2012. On a

positive note, this indicates that there are more demand for our products in the market and as such, the

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

20132012201120102009

DAYS

AVERAGE AGE OF PAYABLES

F&N

DUTCH LADY

NESTLE

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

20132012201120102009

DAYS

AVERAGE NUMBER OF DAYS IN STOCK

F&N

DUTCH LADY

NESTLE


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stock turnover became sooner. We expect the above trend to continue in the future from our active

marketing and promotional activities.

Figure 11 Total Assets Ratio

Generally, our total assets ratio is consistent and this indicates the efficiency of assets in generating

sales. However, in year 2013, we observe a slight decrease and DL has outperformed us, this is

mainly attributable to our investment in additional capacity (i.e. factory) in Shah Alam to enhance

production capacity, the factory commenced operation in May 2014 (The Edge, 2014). We expect

total assets ratio to improve in the near future.

4.3) Liquidity Ratio

Figure 12 Current Ratio

0.00

0.50

1.00

1.50

2.00

2.50

3.00

20132012201120102009

RATIO

TOTAL ASSETS RATIO

F&N

DUTCH LADY

NESTLE

0.00

0.50

1.00

1.50

2.00

2.50

3.00

20132012201120102009

RATIO

CURRENT RATIO

F&N

DUTCH LADY

NESTLE


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Figure 13 Cash Ratio

Generally, our current and cash ratio is unfavourable compared to our competitors. The decrease is

mainly due to a significant reduction in cash and bank balances as well as bank deposits. Our trade

and non-trade payables to related companies constitute a huge portion of current liabilities (about 95%)

and they are unsecured, interest free and repayable on demand. However, our liquidity continues to be

constrained due to low current asset levels and weak cash positions. Our company witnessed several

trade and non-trade payables to related partiesduring the current financial year (for eg. an increase

from RM1m in 2012 to RM80m in 2013 payable to related companies).

Our receivables are partially secured either by bank guarantees or traded shares. As at the end of the

reporting period, the total collateral assigned to the Group was RM51,887,000 (2012: RM62,866,000).

(Nestle Annual Report, 2013)

A further discussion on the above is available in Appendix 44 under the Earnings Management

section.

Moreover, our company has notable foreign exchange transactions and is exposed to currency risks

essentially with the current volatile global economy. The rising inflation and weaker Ringgits could

have an adverse impact on Nestl (The Star Online, 2014). It is advisable for us to improve our

working capital position to avoid cash shortage during emergency situations.

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

20132012201120102009

RATIO

CASH RATIO

F&N

DUTCH LADY

NESTLE


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4.4) Leverage Ratio

Figure 14 Debt to Equity Ratio

Our leverage ratio has decreased substantially over the five years. We have reduced our total

borrowings by 76% in the year 2012 vide repayment of loans from a related company (Nestls

Annual Report, 2012). Further, our Company shareholders equity has also increased, which is

reflected in the retained earnings and reserves of the Company. This is a positive indication as we

have more capital to invest in the research and development activities instead of financing it via third-

party borrowings, which could lead to potential default risk and high interest payment.

We appear to be in a better position than F&N as the debt-equity ratio appears to be lower while the

Company, despite being an established brand, continues to grow consistently. Moreover, we are also

better than DL as although the latter is prudent in taking any borrowings, its equity is on a decreasing

trend, which potentially indicates they are not maximising their shareholders value.

Generally, we are not a highly-leveraged company. However, awareness in this current economy

trend would be advisable, essentially in the current economy situation which is highly volatile.

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

20132012201120102009

RATIO

DEBT/EQUITY RATIO

F&N

DUTCH LADY

NESTLE


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4.6) Trend Analysis

Figure 15 Index Number of Nestl

Based on the above, we recorded a steady growth of 5-7 % over a 5 years duration in all turnover,

operating profit and net profit.

In terms of operating profit, the highest percentage change in growth was recorded on year 2011

(18.86%) and the growth percentage is in a decreasing trend up to 2013. According to the annual

reports, the apparent reason was due to loss recorded in cash flow hedging. In addition, we are alsoexposed to foreign exchange risk, essentially in the process of sales and purchases with foreign

countries. Based on the annual reports, the currencies which could lead to the above risks includes

SGD, USD, GBP and THB.

However, according to Elliot and Elliot (2009), while trend analysis provides a quick summary on the

financial statements performance, it omits inflation outcomes into consideration and thus, do not

signify a Companys actual performance.

4.7) Common Size Analysis

Elliot and Elliot (2009) have explained that the main benefit of common size ratio is to facilitate the

comparisons for companies of different sizes. We have conducted the above comparisons and it is

available in the Appendices.

The analysis concludes that our Companys performance is average compared to our competitors.

Similar to the financial ratios, it appears that DL is generally better at managing their expenses (e.g.Cost of Sales). However, as highlighted in the annual reports, our Company have been incurring

80.00

100.00

120.00

140.00

160.00

180.00

20132012201120102009

INDEX

INDEX NUMBER OF NESTLE

Turnover

Operating Profit

Net Profit


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higher marketing expenses to boost domestic sales and launch of new products. We expect

improvement in expenses in the near future.

The common size Balance sheet has also shown that our Companys current liabilities comprise of the

highest related party transactions, which may trigger shareholders scepticism as no clear justification

is provided in the financial reports.

5) QUALITATIVE ANALYSIS5.1) Integrated ReportingCreating Shared Value

Tan et al (2013) encouraged firms in Malaysia to commence with the Integrated Reporting practice as

it is associated with several benefits including greater transparency and enhancing brand value.

Generally, we are conscious on linking sustainability issues in the organizationsoverall strategy and

have demonstrated and clearly illustrated adherence to the disclosures as set out in the Global

Reporting Initiative G3 Sustainability reporting Disclosure guidelines in the recent 107-page Nestl in

Society: Creating Shared Value and Meeting Our Commitments 2013 report (pages 64-101), a sample

page is enclosed in the Appendix (Aghashahi et al, 2013 and Nestl, 2000).

Figure 16 Nestl's Governance of CSV, Sustainability and Compliance

Figure 17 Development of CSV Strategy Globally and How it Rolled out in Malaysia


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Figure 16 and 17 illustrate how Nestls inclusion of Governance and Sustainability initiatives within

their strategic executions of the company is being carried out. Generally, the Creating Shared Value

concept resonates with the fundamental of businesses in creating shareholder value for business

owners and the society and encompasses the following components:-

Figure 18 Nestl Creating Shared Value Concept Components

Furthermore, the Shared Value concept is also applied across our Value Chain of suppliers,

manufacturers and consumers vide the product life cycle approach. It addresses the impact on the

value chain without comprising growth, and creating win-win situations for the benefit of both Nestl

and the society.

Source: Nestl CSR PresentationFigure 19 Nestl's Shared Value


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Moving forward, we shall deliberate on the 2 qualitative aspects in relation to our financial

performance through Corporate Governance and Sustainability.

Kolk (2006) commented that corporate transparency is significant as it represents a Companys

accountability to its stakeholders. In addition to quantitative performance, accountability should also

include corporate governance which assess a Companys independence and sustainability reporting

that focuses on a Companys triple bottom line (i.e. economic, environmental and social) activities.

(Schooley, Renner and Allen (2010) and Kolk (2006)).

5.1) Corporate Governance

The Institute of Chartered Accountants of England and Wales (2008) has defined corporate

governance as a system controlled by a Company. It concerns with the relationship and

responsibilities of the board, management, shareholders and other relevant stakeholders within a legal

regulatory framework. Generally, Nestl has excellent corporate governance system evidenced by the

structure and independence of the Board of Directors and its internal controls etc. The MCCG 2012

has been used to benchmark our Companys practice and is presented in Appendix 43.

Meanwhile, F&N and DLs corporate governance system has also fulfilled most of the

recommendations as stated in MCCG. However, we appear to have a stronger Board of Directors and

sub-committees (i.e. Audit Committee, Compensation Committee and Nomination Committee)

compared to its competitors as the majority of its members consist of independent non-executive

directors.

5.2) Earnings Management

Alexander, Britton and Jorissen (2007) and Deechow and Skinner (2000) has commented that

accounting standards such as the IFRS and the accounting method choices of a Company played a

role in earnings management although they are not desirable as the adjusted figures will mislead thestakeholders with regards to the Companys actual economic performance. Walton and Aerts (2009)

and Lev (2003) added that the main reasons for managers to manipulate their accounts includes:- (i)

Personal Advantages; (ii ) To attract perpetuation support of investors and suppliers; and (ii i)

Fulf il li ng contractual agreements.

Based on our financial statements, it is questionable whether transactions have been manipulated. A

simple analysis of the above is available at Appendix 44.


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Nevertheless, our Companys financial statements have been audited by KPMG Malaysia and the

audited reports had been evaluated as Unqualified. It is therefore arguable that earnings

management in our Company is deemed to be mild and falls within the acceptable range under IFRS

and the relevant supporting documents were furnished to the auditors during the audit process.

Mulford and Comiskey (2002) has commented that earnings management that are deemed to be

conservative and acceptable are not necessarily harmful as it could be practiced to keep a Companys

net income at a sustainable level.

5.3) Sustainability

Goodman and Redclift (1991) explained that sustainability is more than a new word for the

environment, and the inter-relatedness between both environmental and developmental issues in the

pursuit of sustainability. Elliott and Elliott (2009) added that due to increasing social pressure,

companies nowadays are expected to act ethically, essentially in their relationships with stakeholders

that have a legitimate interest. This is contrary to the conventional Friedmans approach which

emphasize that companies should only be responsible on maximizing shareholders value (Elliott and

Elliott, 2009).

In addition, we have quantified the aspects of sustainability indicators by using the Input Output

Analysis concept of defining the costs of sustainability (Gray et al, 1993 and Nestl, 2013). A

summary of our Companys sustainability indicators of is appended in Figure 20.

Figure 20 Nestl's Sustainability Indicator

Based on the 2013 Performance Indicators, Nestl has provided a detailed explanation on each

indicator listed above and is enclosed in Appendix 40.

In short, our sustainability activities are among the paramount of the Companies in Malaysia and they

adhere to the Integrated Reporting requirements. As such, this has brought upon several awards


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including the Malaysian ACCA sustainability award in 2011 and The Prime Ministers Hibiscus

Award 2013 (Bernama Media, 2011 and Berita Micci, 2014).

6)

CONCLUSION AND RECOMMENDATIONSSubsequent to assessing our Companys performance from a quantitative and qualitative perspective,

it is concluded that our performance is generally encouraging. The following recommendations are

put forth for improvements:-

(a) Raw Materi als

Since the occurrence of the Ebola epidemic, the price of cocoa from our main supplier in

Africa has increased significantly. Other main raw material such as sugar and milk solids (due

to drought in NZ) has also been observed.

Based on the above, our Purchasing Department may consider alternative suppliers which

offer a lower price for similar quality raw materials. For instance, Listiyorini and Rusmana

(2014) has reported that an alternative exporter for cocoa, Indonesia offers a lower global

price for the said commodity (i.e. USD2,500 per tonne as opposed to global average price of

USD3,000 per tonneAppendix 35).

(b) New Product Development

We would recommend to steer new product development activities in relation to observablemarket trends in the aging population growth coupled with increased discretionary income

spending. Nutraceutical products are food products providing health and medical benefits,

which includes prevention and possibly treatment of diseases is a segment which would augur

well in this line.

(c) Expansion of I ntegrated Agri cultural Support for Local Farmers

To expand current CSR projects into other potential local raw materials (eg. Incorporating

local fruits into confectionery and beverages products). This is in order to capitalize onsuppliersintegration and improve operational efficiencies, while benefitting the society and

community as a whole.

(d) L iquidity Positi on

For the fiscal year 2013, the company reported current assets of MYR929.99mn, compared to

current liabilities of MYR1071.86mn. Nestle also recorded receivables of MYR497.29mn.

The company's current ratio was 0.87 at the end of fiscal year 2013, as compared to 0.90 in

2012. It also recorded increased quick ratio and cash ratio of 0.49 and 0.01 as compared to0.46 and 0.03 respectively in 2012. A negative current ratio indicates that the company is in a


28/35

weak financial position. The performance of the company depends largely on the cash

reserves and its ability to generate cash from operations. Lack of sufficient cash or cash

equivalents could hamper the operations of the company.

We must focus on optimizing our short term resources and reducing the working capital cycle

without disturbing day-to-day operations of the business.

(e) Transparency

Generally, our corporate governance and sustainability activities are good but we would

encourage higher transparency in terms of the preparation of financial statements.

With the increasing awareness of transparency practices and the occurrence of many

accounting frauds globally, investors have become more risk averse. Higher transparency in

terms of proper justifications for transactions like related party loans and a more detailed

report of its expenses would be encouraged.

(f ) New I nvestment Big Data

Finally we recommend considering investments in Big Data solutions. SAS has defined big

data as the availability of structured and unstructured data to promote accurate analysis.

Goyal, Hancock and Hatami (2012) states that the above is expected to enhance immediate

feedback from customers and suppliers. In the long run, it will also promote higher

transparency, hence better performance management, cross-functional collaboration and

talent management.


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7)

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