Rafhan Best Foods Limited - Annual Reports

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Rafhan Best Foods Limited

Annual Report 2000

CONTENTS

COMPANY INFORMATION

Board of Directors

Mr. Diego Bevilacqua (Chairman)

Mr. Suleman Daud (Chief Executive & Managing Director)

Mr. R. Kenneth Henry

Mr. Julian Frost

Mr. M. Yousuf Malik

Mr. Ahsan Rashid

Mian Nisar Ahmed Mannoo

Mian Zulfikar Mannoo

Mian Mohammad Adil Mannoo

Mr. E. A. Nomani

Company Secretary

Mr. Waheed Aslam

Bankers

CitiBank, N.A.

ABN-AMRO Bank, N.V.

Standard Chartered Grindlays Bank Limited

Emirates Bank International

Deutsche Bank

Askari Commercial Bank Limited

National Bank of Pakistan

Auditors

Ford, Rhodes, Robson, Morrow

Chartered Accountants

Legal Advisors

Surridge & Beecheno

Registered Office

52 KM, Lahore - Multan Road

Pernawan, Bhai Pheru

Pakistan

Head Office and

Shahpur Interchange

Shares Department

14 KM, Multan Road

Lahore, Pakistan

A Worldwide Presence

Satisfying a Global Appetite

North America

Bestfoods has consumer foods operations in the

Manufacturing Plants: 16

United States, Canada, and the Caribbean.

Arizona, Indiana, Illinois, North

The division includes three units: grocery products,

Carolina, New Jersey, Puerto Rico

foodservice, and specialty markets.

Texas, Wisconsin, Dominican Republic,

Major brands: Hellmann's, Best Foods, Skippy,

Quebec.

Mazola, Mueller's, Karo, Knorr, Argo.

About 4,500 employees.

Latin America

Bestfoods has 65 years of experience in Latin

Manufacturing Plants: 19

America, where we have operations in 15 countries.

Argentina, Brazil, Chile, Colombia,

The largest businesses are in Argentina, Brazil,

Costa Rica, Mexico, Peru, Venezuela.

Colombia, and Mexico.

Major brands: Knorr, Hellmann's, Mazola, Maizena,

Fruco, AdeS.

About 7,500 employees.

Europe

Bestfoods' largest division is in Europe, where the

Manufacturing Plants: 35

company has businesses in 23 countries.

Austria, Czech Republic, Denmark,

Major brands: Knorr, Pfanni, Alsa, Hellmann's,

France, Germany, Greece, Hungary,

Mazola, Ambrosia, Napolina, Pot Noodle, Lesieur,

Ireland, Italy, Netherlands, Poland,

Starlux.

Portugal, Spain, Sweden, Switzerland UK.

About 12,500 employees.

Africa/Middle East

Our businesses in eight countries of Africa and the

Manufacturing Plants: 23

Middle East are managed through our European

Jordan, Kenya, Morocco, Saudi Arabia,

division.

South Africa, Tunisia, Turkey.

Major brands: Knorr, Telma.

About 5,000 employees.

Asia

Bestfoods has operations in 12 countries, including

Manufacturing Plants: 17

joint ventures in seven countries and a licensing

China, India, Indonesia, Malaysia,

agreement in Japan.

Pakistan, Philippines, Sri Lanka, Taiwan

Major brands: Knorr, Hellmann's, Lady's Choice,

Thailand, Vietnam.

Skippy, Best Foods, Rafhan.

About 4,000 employees.

COMPANY PROFILE

Rafhan Best Foods Limited is an affilate of Bestfoods, USA - one of the largest US food companies, with worldwide

Sales of US$ 8.6 billion in 1999 and an Operating Income of US$ 1.3 billion. Bestfoods has operations in more

than 60 countries and products marketed in more than 110 countries around the world.

Amongst the best known Bestfoods products are: Hellmann's and Best Foods mayonnaise and dressings;

Mazola corn oil and margarine; Skippy peanut butter; Knorr soups, sauces and bouillons; and many other

brands. Bestfoods global Knorr brand comprises one of the world's most extensive line of products.

Rafhan Best Foods Limited has brought high quality, great tasting and convenient foods to Pakistan

that are enjoyed around the world. The five trusted brands in the diverse product portfolio are:

Rafhan:

Custard, Jelly, Pudding, Ice Cream Powder, Kheer Mix, Corn Flour, Glucose-D,

Jams, Corn, Canola and Sunflower oils.

Knorr:

Cubes, Yakhni, Soups, Noodles, Mayonnaise, Sandwich Spreads and Ketchup.

Energile:

Flavoured drinks and Fiesta for children.

Glaxose-D:

Fortified glucose drink.

Caterplan:

Special range of products for hotels, restaurants and caterers.

For more information about Bestfoods, visit the company's web site on the Internet at: http://www.bestfoods.com

Notice of Annual General Meeting

Notice is hereby given that the 3rd Annual General Meeting of the shareholders of Rafhan Best Foods Limited

will be held at 11:00 a.m. on Monday, January 08, 2001 at the Company's registered office, 52 KM, Lahore-

Multan Road, Pernawan, Bhai Pheru to transact the following business:

Ordinary Business

1) To receive, consider and adopt the Audited Accounts of the Company for the year ended September

30, 2000 together with the Reports of the Auditors and Directors thereon.

2) To approve the final dividend on the ordinary shares of the company.

The directors have recommended a final cash dividend of 71%, which together with the interim dividend

of 20% already paid, makes the total dividend of 91% for the year.

3) To appoint Auditors for the ensuing year and fix their remuneration.

The present auditors Messers Ford, Rhodes, Robson, Morrow, Chartered Accountants retire and being

eligible, offer themselves for reappointment.

Special Business

4) To approve amendments in the Articles of Association of the Company by passing a Special Resolution.

A statement U/S 160 of the Companies Ordinance 1984, pertaining to the Special Business to be

transacted at the Annual General Meeting is attached along with this notice. The text of the proposed

Special Resolution is incorporated in the statement U/S 160.

By order of the Board

Waheed Aslam

Lahore: December 16, 2000

Company Secretary

NOTES:

1. The share transfer books of the Company will remain closed from January 02, 2001 to January 08,

2001 (both days inclusive) for the purpose of the Annual General Meeting and to determine entitlement

for cash dividend. No transfer will be accepted for registration during this period.

2. A member entitled to attend, speak and vote at the meeting shall be entitled to appoint another person

as his/her proxy to attend, speak and vote instead of him/her, and a proxy so appointed shall have

such rights with respect to attending, speaking and voting at the meeting as are available to a member.

Proxies, in order to be effective, must be received by the Company not less than 48 hours before the

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

3. Shareholders are requested to notify change of address, if any, immediately.

4. For identification, CDC account holder should present in case of individual the original National Identity

Card or passport and CDC Account and participant's ID number and in case of a corporate entity,

Board of Directors' resolution/Power of attorney with specimen signature of the Nominee. The proxy

shall enclose an attested copy of his/her National Identity Card or passport, in case of individual and

the Board of Directors' resolution/Power of attorney in case of a corporate entity and CDC Account and

participant's ID number.

Statement under Section - 160

of the Companies Ordinance, 1984

This statement is annexed to the Notice of the 3rd Annual General Meeting of Rafhan Best Foods Limited, to

be held on January 08, 2001 and sets out material facts concerning the Special Business to be transacted at

the meeting.

The proposed special resolution is necessary merely to record the change of name of the parent company from

CPC International Inc. to Bestfoods. The draft of the proposed special resolution is as follows:

"RESOLVED AS A SPECIAL RESOLUTION that the Articles of Association of the Company be and are hereby

amended as follows:

I. Sub-article 2(1)(f) shall be deleted in toto and in its place the following new sub-article 2(1)(f) shall be

substituted:

Bestfoods:

Bestfoods of 700 Sylvan Avenue, International Plaza, Englewood Cliffs, New Jersey,

USA and includes its affiliates. Any company or corporation shall be deemed to be

an affiliate of Restfoods for the purposes of these Articles when it owns 51% or more

of the capital stock of Bestfoods or vice versa or where a third company or corporation

owns 51% or more of the capital stock of such company or corporation.

II. The word "CPC" appearing in sub-article 2(1), in articles 49, 55, 63 and 65 shall be deleted and in its

place the word "Bestfoods" shall be substituted in all the aforesaid sub-article 2(1), and articles 49, 55,

63 and 65."

No director of Rafhan Best Foods Limited is either directly or indirectly interested in this amendment.

Directors' Report

The directors have pleasure in presenting the Annual Report, Auditors' Report and Audited Accounts for the

year ended September 30, 2000.

OPERATING RESULTS

A brief summary of the results is as follows:

2000

1999

(Rupees in thousands)

Profit before taxation for the year

228,321

192,419

Taxation

88,300

64,000

------------------

Profit after taxation

140,021

128,419

Unappropriated profit brought forward

397,253

329,794

Appropriations:

Interim dividend @ 20% (1999 @ 45%)

12,315

27,709

Proposed final dividend @ 71% (1999 @ 54%)

43,719

33,251

------------------

56,034

60,960

------------------

Unappropriated profit carried forward

481,240

397,253

==========

Earning per share (Rupees)

==========

DIVIDEND

The directors propose a final dividend @ 71%, which together with interim dividend @ 20% already paid,

makes total dividend of 91% for the year.

CHIEF EXECUTIVE'S REVIEW

The accompanying Chief Executive's Review deals with the performance of the company during the year and

the future outlook. The directors of the company endorse the contents of the review.

PATTERN OF SHAREHOLDING

The pattern of shareholding as at September 30, 2000 is annexed.

HOLDING COMPANY

Bestfoods, a company incorporated in USA, is the holding company owning 73.96% of ordinary share capital

of Rafhan Best Foods Limited.

DIRECTORS

Since the last Report, the following changes have taken place in the Board of Directors:

Mr. John Gorman, nominee director of Bestfoods, USA resigned during the year and a casual vacancy arose.

Mr. Julian Frost was appointed director of the Company to fill the casual vacancy.

AUDITORS

The present auditors M/S Ford, Rhodes, Robson, Morrow, Chartered Accountants, retire and being eligible,

offer themselves for reappointment.

For and on behalf of the Board,

Suleman Daud

November 20, 2000

Chief Executive & Managing Director

Chief Executive's Review

I am pleased to inform you about the good business results for year ending September 30, 2000. We achieved

a strong growth in our business, inspire of tough economic and trade environment during the year. Consequently,

we continued the trend of excellent performance since we became an independent company in 1997. We faced

major challenges during the year due to uncertainty in trade as a result of the tax surveys and imposition of sales

tax at retail level. We lost business due to strikes and shutdown by the trade for almost a month. This resulted

in a significant adverse impact on our Company's results, since we lost valuable days during the peak consumption

period of our Dextrose based products. The trade also reduced its inventories drastically after the start of tax

surveys. In addition, the declining consumer purchasing power and rapid increase in utility/fuel prices adversely

impacted the fast moving consumer goods business. Nevertheless, our team effectively managed the business

during these tough economic conditions, to deliver high growth in both sales and profits. We successfully integrated

the newly acquired Glaxose-D business with our existing operations and further improved

our distribution set-up and sales organization to achieve the desired results from this acquisition.

Operating Results

We achieved a healthy Sales growth of 15% during the current year as a result of volume growth in all major

product categories, successful introduction of new products, distribution expansion and effective marketing

initiatives.

We further improved our profitability through an unprecedented increase of 2.2% of Sales in our Gross Profit

margins during the year, although there was a substantial increase in local as well as imported raw and packaging

material prices during the year. There was also an added pressure on manufacturing and other costs due to

increase in utilities, fuel, and telecommunication rates. However, we were able to offset the higher input cost by

taking several initiatives to improve our gross margins, including optimization of product formulation, effective

purchasing, rationalization of packaging specifications, enhancement of production efficiencies resulting in higher

yields, automation and consolidation of production facilities.

To adequately support our marketing initiatives, we enhanced our marketing investment over the last year, which

helped us to strengthen our brand equity and increase consumer pull for our products. We also expanded our

distribution network and strengthened our sales department after Glaxose-D acquisition. In addition, we leased

new warehouses after consolidation of production facilities at Pernawan Plant, which resulted in higher Selling

Expenses. However, we are confident that these initiatives will help us to generate even better returns in future.

Our Operating Income increased by 16% over last year, inspite of adverse impact of full year amortization of

intangibles related to Glaxose-D acquisition.

We had financed the Glaxose-D acquisition through a long-term bank loan, major portion of which has been paid

back during the year. The balance amount has been converted into short term financing in order to capitalize

on lower interest rates. Consequently, our interest expenses were lower than last year. However, the recent

decision by Government to impose 5% additional surcharge on company income tax has resulted

in higher income taxes for the year. Nevertheless, we achieved 9% growth in profit after tax.

Glaxose-D Acquisition

We successfully completed integration of the Glaxose-D business, which was acquired during 1999. We reorganized

our sales force and expanded distribution network to effectively leverage the strong brand equity of Glaxose-D.

We also launched Glaxose-D with multivitamins in sachet packaging in order to reach down and expand the

product usage. This brand extension is the first product and packaging innovation in the 50-year history of

Glaxose-D. In addition, a new television documentary was produced, based on extensive product research by

Bestfoods in Germany, which effectively highlights the benefits of dextrose for the consumers.

These initiatives coupled with other consumer and trade promotions helped us to achieve double-digit volume

growth and significantly exceed our targets for the year.

Oil Business

The Oil business continued to be under severe pressure during the year as a result of lower oil prices in

international markets. The oversupply of oil resulted in oil glut in the local market due to price cutting and heavy

trade discounts. As a result, major companies in branded oil market experienced a reduction in their volumes

despite increased trade incentives and consumer promotions. In these tough market conditions, we achieved

an unprecedented growth in our major oil segment of Corn Oil. This was achieved primarily through expansion

of distribution coverage, new packages to improve penetration as well as effective consumer and trade promotions.

Our successful "Ask your Doctor" campaign contributed significantly to our volume growth. We were also able

to maintain healthy gross margins through reduction in processing costs and improvement in production yields.

Knorr

We continued our high growth momentum in the Knorr range. Our recipe oriented educational cooking program

"Knorr Kay Zaiqay" helped in demonstrating the multiple product usages to the consumer. We also published

"Knorr Cook Book" to educate the consumer about various recipes using Knorr products. Our consumer promotions

including "Golden Egg" and "Dream Kitchen" received excellent consumer response. We also introduced two

servings soup pack to increase product penetration. We introduced economy pack for Sauces,

which helped us to achieve tremendous volume growth in this business segment during the year.

Desserts

During the last two years, we lost a substantial part of our Desserts business due to Government's restriction

on marriage parties. We reversed the declining trend last year, and substantially improved the growth momentum

during the year. We launched two new flavours in Custard and Pudding Mix. We also relaunched RTE Jelly during

the later half of the year, and the preliminary results have been very encouraging. We introduced improved Kheer

Mix last year in major markets, and expanded the distribution nationwide during 2000. All these initiatives

along with various consumer promotions helped us to achieve double-digit volume growth for the year.

Dextrose

The trade shutdown during the peak consumption period seriously impacted our Dextrose Business. We were

unable to completely recover the sale loss incurred during the critical selling period, due to high seasonality of

this business. However, our pre-season trade investment schemes and introduction of special vans for direct

supply to consumer and retailers helped us to minimize this adverse impact. We also launched Energile "Rusbhara"

nationwide to cater for urban consumers. We have had an excellent initial response to this new product and we

intend to expand its consumer base in future. In addition, we improved logo design of Energile by incorporating

"Comet" to reflect movement, action and energizing effect, which are the core benefits of

Energile. Our initiatives resulted in double-digit volume growth for Dextrose, three years in a row.

Dressings

We continued our focus on "Below the Line" marketing activities to generate consumer trials for Dressings. Our

extensive wet sampling in major stores, recipe demonstrations in prestigious clubs and girls colleges, resulted

in healthy volume growth for this product category.

Caterplan

We had another strong year for our food service division "Caterplan". We expanded our coverage to 12 cities

as well as developed several proprietary products for the International Chain Accounts. We also focused on

the "Front of the House" branding in the fast food chains. We introduced low cost soups to increase penetration

and continued our focus on expanding our business with local eateries through economical and convenient

products.

Future Prospects

The country's economy is still passing through a tough phase. The trade and Government have reached an

agreement over the documentation and tax issues. However, trade's confidence is not yet fully restored.

Consequently, wholesalers and retailers continue to hold minimal inventories. The demand for credit by trade

is still growing in the wake of increasing interest rates and tight liquidity position. The utility and fuel prices also

continue to rise, which is further reducing consumer's disposable income.

Nevertheless, we firmly believe that Pakistan continues to provide excellent opportunities for growth in packaged

food business. There is also a huge potential of exports to Central Asian States. We are in the process of

establishing a representative office in Tashkent in order to take full advantage of these high potential markets.

Our company has adequate resources and highly motivated management team to capitalize on both local and

export opportunities.

We will continue our efforts to introduce innovative products, further expand distribution coverage, run effective

marketing campaigns and identify cost reduction opportunities through out the operations. We are confident

that, Inshallah, our efforts will result in a healthy business growth in the future as well.

Suleman Daud

November 20, 2000

Chief Executive & Managing Director

Leadership

We are dominant market leader in several

product categories including dextrose, pure oils,

desserts, bouillon and soups. Our market

leadership is a result of our relentless efforts to

provide consumers with innovative and high

quality products in convenient packaging to

meet their changing needs. Moreover, the

effectiveness of our marketing initiatives has

also contributed to our dominant market position.

We have taken timely initiatives to induce trade

investment and ran innovative consumer

promotions to attract new consumers. We are

determined to strengthen our leadership in

increasingly challenging markets by focusing

on innovative ways to gain competitive edge.

Teamwork

Our people demonstrate a high degree of team

spirit and commitment. They work closely with

their colleagues in the organisation to achieve

shared goals. They place high value for being

part of a "Winning Team". They keep the interests

of team above their own in order to achieve

Company's objectives. Effective integration of

newly acquired Glaxose-D business and launch

of Knorr Tomato Ketchup are a few examples of

outstanding teamwork of our employees. In

Rafhan Best Foods, diversity of opinion, culture

and background is encouraged. Moreover, best

ideas and consumer insights are pro-actively

shared among the team members.

Growth

The drive for growth has been the hallmark of

Rafhan Best Foods Ltd. The Annual Report of

2000 once again reflects excellent financial

health of our Company, with strong growth in

Net Sales and Operating Income. All major

product categories: dextrose, oils, desserts and

Knorr range contributed to this outstanding

growth, with rapid volume increase and improved

profit margins. We also achieved high growth in

the newly acquired Glaxose-D business for the

second year in a row. Our Caterplan business

continued the high growth momentum by

increasing customer base and expanding our

business with ICAs (McDonalds, KFC, Pizza Hut),

capitalizing on the growing out-of-home eating habit.

Penetration

Rafhan Best Foods' vision "Our products enjoyed

in every home every day" constantly radiates a

passion for growth, which is complimented by

ever-improving product penetration. We

increased the depth and breath of our distribution

nationwide, by expanding coverage in smaller

towns, appointing new dealers and sub-dividing

the large cities to significantly improve our product

availability. To increase our consumer franchise

in lower middle income households, we

successfully introduced low unit price products

in custard, oil and soup ranges.

Innovation

Innovation has played a vital role in making Rafhan

Best Foods as a fast growing and premium

packaged foods Company in Pakistan. We

successfully adapted the global product concepts

to suit the local eating habits. Pulao Cube, Chilli

Garlic Spread and Spicy Noodles are a few

examples of our products, which are highly

appreciated by the consumers in Pakistan. We

also successfully leveraged the brand equities of

Energile and Glaxose-D by launching several new

products, including Energile Rusbhara, a juicy and

refreshing drink. In addition, we introduced

Glaxose-D with multivitamins and minerals for

growing children, soon after its acquisition. In the

traditional desserts market, we launched Rafhan

Kheer Mix in new aluminum foil packaging and

significantly increased our market share. We also