Annual Report

2012

Table of contents
Chairman’s Statement .............................................................................. Mission and Vision .................................................................................... Company Overview ................................................................................... Board of Directors’ Report ...................................................................... Board of Directors’ Profile ....................................................................... Our Brands ................................................................................................. Our Human Resources ............................................................................. Our Social Responsibility ......................................................................... Detailed Review of Principal Activities for 2012 ................................... Sales by Product Group ............................................................................ Operating Costs .......................................................................................... Share of Results of Associates and Joint Ventures ............................... Cash Flows .................................................................................................. Distribution Policy ....................................................................................... Board Meetings and Directors’ Disclosure ............................................. Senior Management Disclosure ............................................................... Related Party Transactions ....................................................................... Segmental Reporting and Geographical Analysis ................................. Subsidiaries ................................................................................................. Risk Management ....................................................................................... Corporate Governance ............................................................................... Audit and Risk Committee ......................................................................... Nomination and Remuneration Committee ............................................ Key Financial Highlights of the Last Five Years ....................................... General Assembly Meeting ....................................................................... Certification .................................................................................................. Auditor’s Report ........................................................................................ 5 7 9 11 12 15 25 29 36 36 38 40 41 44 45 47 48 50 52 53 53 53 53 54 55 55 59

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Chairman’s Statement
Reinforcing our Market Leadership
Dear Shareholders, On behalf of the Board of Directors, I am delighted to present Almarai’s Annual Report, covering the year ended 31 December 2012. Fiscal expansion and recovery in global credit growth have helped enhance consumer confidence. This positive economic environment has been supportive of the food and beverage industry in the region despite the persistent volatility in commodity prices. Despite these economic pressures, Almarai has maintained a very sharp focus on the quality of its products and distribution thereof and with the blessings of Almighty Allah, 2012 proved to be another record year. Sales increased by 24.3% to SAR 9,883.0 million (2011: SAR 7,951.0 million), yielding Net Operating Income of SAR 1,672.9 million (2011: SAR 1,517.6 million). 2012 saw significant progress against our long term strategy in respect of portfolio diversification, geographic expansion and vertical integration, all aiming to develop and secure Almarai’s future. Thanks to a proven business model delivering a continued expansion, and the first time consolidation of International Dairy and Juice (“IDJ”, a joint venture with PepsiCo), established core businesses, dairy and dairy foods, continue to drive profitable cashflow generation. Sales have reached SAR 6,680.1 million with healthy a growth rate of 17.5% (11.6% without IDJ) driven by the strength of our brand and continued focus on quality throughout our systems. During 2012, the growth engines have been the juice and bakery segments. Almarai is leading the market in Juice with consumer driven portfolio management and focused distribution across the GCC delivering a growth rate of 20.7%, 40.0% with IDJ. The bakery segment is being driven forward by our innovation. This, combined with wider product offering and improved quality and availability, resulted in a year on year growth of 33.6%. Poultry sales, supported by major packaging initiatives and geographic expansion, have grown by 58.0% to reach SAR 504.4 million in 2012. In line with group strategy, product portfolio diversification will improve as Almarai prepares for the commissioning of its significant investment into poultry facilities and capacities in 2013. All prospects, based on the progress made to date are very encouraging meaning, Almarai is well positioned to materialise its long term vision in poultry.

Following the acquisition of a controlling stake of IDJ in March 2012, Almarai can now fully reflect the results of geographic expansion. The joint venture partners believe that this change of control will enhance growth prospects and profitability of the dairy and juice segments outside the GCC countries moving forward. 2012 has seen the development of Almarai’s footprint in Argentina with Fondomonte, a fully owned subsidiary, now managing and farming approximately 23,000 hectares. Fondomonte has invested in agricultural equipment and human resources and established a major structural and economic base from which to satisfy a significant proportion of Almarai’s animal feed requirements in the future. This is the first step towards Almarai’s commitment to be fully dependant on imported feed stuff in the long term and to effectively protect the Kingdom’s water reserves. In November 2012 the region’s first infant nutrition manufacturing facility was commissioned after successfully completing a rigorous and stringent testing process. This investment, in addition to the poultry investment due for completion in the first quarter of 2013, is instrumental to Almarai’s portfolio diversification strategy in 2013 and beyond. In addition to Almarai’s capital expenditure programme, we continued to invest in local talent with the company a proud employer of over 5,000 Saudi nationals, qualifying Almarai as an excellent and green employer according to Nitaqat regulations. In addition, Almarai’s Dairy and Food Polytechnic, established in 2011 and located in Al Kharj, is currently training and developing in excess of 280 local students. This progress towards Almarai’s long term strategy in addition to Almarai’s position as leader within the regional food and beverage industry represents a strong basis for future value creation. Based on these results, the Almarai Board recommends a Dividend of SAR 1.25 per share, amounting to SAR 500.0 million and representing a Dividend Payout Ratio of 34.7%. Since IPO, the total annual return to shareholders, including share appreciation, is 16.6%. I would like to express my thanks to my fellow Directors, to the executive leadership team and to all Almarai’s employees for their outstanding contribution over the last 12 months. Finally, I thank our Shareholders, who have continued to support Almarai in delivering upon its Mission of providing quality and nutritious food and beverages that enrich our consumers’ lives every day.

HH Prince Sultan bin Mohammed bin Saud Al Kabeer Chairman
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Vision
To be the consumers’ preferred choice by leading in chosen markets with superior food & beverage products.

Mission
To provide quality and nutritious food & beverages that enrich our consumers’ lives every day.

Values
Adaptable: We are agile and flexible in our work, confidently taking bold decisions that benefit our stakeholders. Sharing: We work together as one, openly collaborating and sharing skills & knowledge to enable our people to be the best. Passionate: We are proud of the work we do, and strive for exceptional results. Innovative: We are driven to improve our business everyday and to maximize the creative potential of our people. Respect: We earn respect by embracing fairness, trust and integrity in all our relationships. Excellence: We are diligent in our work and consistently deliver the best quality in everything we do.

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Overview
Drawing on the tremendous potential of developing the traditional dairy industry to meet the fast-growing needs of the Saudi market, His Highness Prince Sultan Bin Mohammed Bin Saud Al Kabeer established Almarai Company in 1977. Following years of visionary expansion and diligent product development, Almarai has evolved as the largest vertically integrated dairy company in the world. Almarai is also the largest manufacturer and distributor of beverages and food products in the region. Ranked as the MENA region’s number one brand specialized in consumer products, Almarai is now the undisputed market leader across its product categories in all GCC countries. Almarai, which initially started with dairy products, has evolved into a fully-integrated food production company by expanding its product portfolio to include juices, bakery products, poultry, and infant formula under the brand names, “Almarai”, “L’usine”, “7DAYS”, “Alyoum”, and “Almarai Enfa”. This extraordinary growth has enabled Almarai to establish a preeminent position in the region. Almarai’s investment in diversification and growth has been further strengthened in the past five years. The company entered the bakery segment by acquiring the Jeddah-based Western Bakeries in 2007. It acquired Hail Agricultural Development Company in 2009, thus foraying into the poultry segment, and launched the new “Alyoum” brand, which has become wellestablished in Saudi Arabia’s poultry market segment.
Enters poultry segment by acquiring Hail Agricultural Development Company. Following this investment and introducing world-class production facilities and expanding its production, Almarai launches its new label Alyoum.

In 2010, Almarai established the International Pediatric Nutrition Company (IPNC), a joint venture with Mead Johnson Nutrition to provide world-class infant nutrition products. In line with its ambitious strategy to grow and to broaden its horizons regionally, Almarai expanded its business operations into Egypt and Jordan by acquiring Teeba and Beyti, respectively, in 2009 and 2010. Thus forming a joint venture with PepsiCo and launching the International Dairy and Juice Company (IDJ), a step aimed at further expanding the company’s markets in the dairy and juice segments across the MENA region. In December 2011, Almarai acquired Fondomonte SA, which owns and operates farms in Argentine, to help secure feed for its dairy and poultry units in Saudi Arabia. As a result, the company has further expanded its Almarai umbrella brand, and has established strong presence across several new markets outside Saudi Arabia including the UAE, Kuwait, Qatar, Bahrain, Oman, and Egypt. The expansion strategy has given strength to Almarai’s brands, building on its slogan:“Quality You Can Trust”, Almarai has remained committed to high quality food products throughout its development stages. It is now firmly recognized as offering the best nutritional value that meets the consumers’ highest expectations and satisfies their tastes.

Historical Milestones
2005
Almarai evolves from a privately owned company into a joint stock company with shares listed on the Saudi Stock Exchange.

Acquires Fondomonte SA, which owns and operates farms in Argentina, to help secure feed required for dairy and poultry units in Saudi Arabia.

Almarai infant formula products receive all approvals, and pass all required quality tests to become qualified for production.

2007
Almarai enters the bakery & confectionery market by acquiring Western Bakeries. The production mechanisms are upgraded, and Almarai’s portfolio grows to incorporate the L’usine label.

2009
Establishes International Dairy and Juice (IDJ) Company as a joint venture with PepsiCo, for expanding its business activities outside the GCC markets.

2010
Establishes the region’s first infant nutrition plant at Al Kharj, as well as the International Pediatric Nutrition Company (IPNC) – a 50-50 joint venture with Mead Johnson Nutrition offering infant nutrition under the brand names Almarai Enfa and Almarai Enfagrow.

2011

2012

Through a joint venture with the internationally renowned food company Chipita, Almarai launches its new product, 7DAYS croissants, which has gained immense popularity among customers .

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Board of Directors’ Report
We are pleased to present the Board Report for the year 2012, encompassing a review of Almarai’s operating and financial performance. We hope that, with the blessings of Almighty Allah, we will succeed in 2013 and beyond with the continued progression of our growth and expansionary plans.

Overview: First time consolidation of IDJ and a Foundation for Growth
Almarai achieved sales of SAR 9,883.0 million in 2012 – a record for the Group, representing an increase of 24.3% over the previous year (17.8% without International Dairy and Juice (“IDJ”, a joint venture with PepsiCo)). Net Operating Income also reached record levels at SAR 1,672.9 million. Cash flow from operating activities amounted to SAR 2,384.4 million, representing 24.1% of sales. Sales growth was strong across all product categories and was inflated by the first time consolidation of IDJ. Fresh dairy grew by 16.9% (11.7% without IDJ), long-life dairy by 33.5% (11.6% without IDJ), cheese and butter by 10.7% (9.4% without IDJ), fruit juice by 40.0% (20.7% without IDJ) and bakery by 33.6%. Poultry delivered the strongest growth during the 12 months with growth of 58.0% versus 2011. Almarai’s largest product group, fresh and long-life dairy sales reached SAR 5,078.3 million, which is another successful year with a combined growth of 19.9% (11.8% without IDJ). Almarai branded dairy products remain the consumer’s preferred choice throughout the Gulf Cooperation Council (GCC) countries. Cheese and Butter sales grew 10.7% (9.4% without IDJ) compared to last year and with annual sales in 2012 of SAR 1,601.8 million. It represents the second largest product range within Almarai’s portfolio. Despite the very competitive environment for this category, Almarai, through its diversified product offering, successfully increased its market share during the year. Almarai fruit juice continued to deliver strong growth with Sales of SAR 1,243.2 million representing an increase of 40.0% over 2011 (20.7% without IDJ). Driven by innovation, an unwavering commitment on quality and superior distribution in the marketplace, Almarai’s juice portfolio is the market leader in five out of six GCC countries. 2012 bakery sales growth of 33.6% resulted in total Sales of SAR 1,290.6 million. Expanded distribution throughout the GCC countries, coupled with the leveraging of our new production facility in Al Kharj, has facilitated this exceptional growth achievement. The focus on consistently delivering better product quality, effective communication, attractive packaging and unmatched distribution and sales reach, have combined to see poultry sales growth 58.0% to SAR 504.4 million. The ongoing focus for Almarai’s poultry business will be the delivery of the significant investment announced by the Board in June 2011. 2012 saw commodities soften slightly from the record price levels reached in 2011 which impacted local and global players in the food and beverage industry. Improving commodity prices combined with a more favourable product and geographical mix, somehow offset by the dilutive impact of consolidating IDJ ensured product margins remained consistent from 2011 to 2012. The Group’s commitment to its profitable growth is materialised through its ongoing investment in capital projects which amounted to SAR 3,182.2 million in 2012 in line with its strategic plan. This investment positions Almarai to serve the GCC consumers quality products across an ever increasing diversified product offering. As per its long term strategy, the Group is continuously looking into new business opportunities that will compliment its product portfolio and geographic span. Our continued commitment to the preservation of the environment was evidenced by our use of leading edge technology and processes throughout our supply chain to ensure water conservation. In addition, Almarai imported 100% of the alfalfa feed necessary to produce the dairy products exported outside of the Kingdom, whereas the statutory requirement was 40%. We would like to express our thanks to Almarai’s investors, for placing their trust in the Board of Directors. We would also like to extend our appreciation to Almarai’s management team and over 28,000 employees who have demonstrated whole-hearted commitment to the Group’s continuing development and exemplary performance. Finally, we should not forget our loyal consumers, who have ensured that, yet again, Almarai remains the most successful food and beverage group in the GCC countries. Board of Directors February 25 2012
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Board of Directors’ Profile
Established Almarai in 1977, and is the Chairman of its Board of Directors. Has several investment interests, including: Al Yamama Saudi Cement Company (est. 1961), Arabian Shield Cooperative Insurance Company, and Al-Tayyar Travel Group. Contributed to establishing several other companies, including: Saudi Yemeni Cement Company (Yemen), Al Farabi Petrochemical Company Ltd., Zain Saudi Telecom, Jusour Petro Chemicals Company, ARASCO, Al Salam Bank (Bahrain), Arcapita Bank (Bahrain), Dana Gas (UAE), Tatweer Construction (Qatar), Ras Al Khaima Petroleum (UAE), IBC Company (Lebanon), Kuwaiti Chinese Holding Company (Kuwait), Kuwaiti Sudanese Holding Company (Kuwait), Kuwaiti Jordanian Holding Company (Kuwait), First Education Company (Kuwait), and Kingdom Schools Company. Key Positions Chairman of the Arab Union for Cement & Buildings Materials Company, Arabian Shield Cooperative Insurance Company, Al-Tayyar Travel Group, Nova Al Jezera Establishment, Arab Cubs Establishment, and Technical Projects & Contracting Establishment. Managing Director, Al Yamama Saudi Cement Company.

HH Prince Sultan bin Mohammed bin Saud Al Kabeer Chairman of the Board

Social and Humanitarian Positions Member of the Board of Trustees of King Abdul Aziz and His Men for the Care of Talents, the Equestrian Club, the Graduates Association in the Capital Model Institute, and the Piety Charity Society. Honorary Chairman of the Saudi Heart Association, the Saudi Chest Medication & Surgery Association, the Saudi Hearing Disability Association, and the Saudi Hypertension Association.

Member of the Board of Directors of Al Tayyar Travel Group, the Technical Investments Company, and the Arabian Shield Cooperative Insurance Company. Chairman of the Assembly of Mobility Disabilities for Adults, as well as an active member and founder of 13 charities. Holds a bachelor degree in Civil Engineering from Marquette University, USA. Has worked in the government and the private sectors since 1980, and has major business interests in various companies across the Middle East.

Engr. Nasser bin Mohammed Humoud Al Muttawa Director

Member of the Boards of Directors of the Red Sea Housing Services Company, Herfy Company, Fitaihi Company, and Al Obeikan Investment Group. PhD in Civil Engineering, University of Arizona, USA.

Dr. Ibrahim bin Hassan Mohammed Al Madhoun Director

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Chairman of Taiba Holding Company. Member of the Board of Directors of Banque Saudi Fransi, The Savola Group, Yanbu Cement Company, Jeddah Development & Urban Regeneration Company, Civil Aviation Authority, and a former member of the Municipal Council of Jeddah. Holds a degree in Business Administration from Chapman University, California, USA.

Ibrahim bin Mohammed Bin Ibrahim Alissa Director

Managing Director, Savola Group. Member of the Board of Directors of the Saudi Investment Bank, and Herfy Food Services Company. Member of the Board of the General Organization for Social Insurance. Member of several boards and subcommittees of Savola Group. BSc in Mechanical Engineering from King Fahad Petroleum & Minerals University; Master’s degree in Engineering; Master’s degree in Engineering Science (Mechanical Engineering), UC, Berkley, USA. PHD in Mechanical Engineering, University of Washington, Seattle, USA (1982).

Dr. Abdulraouf bin Mohammed Abdullah Mana’a Director

Chairman of the Boards of Directors of Al Muhaideb & Sons Group, The Savola Group, Amwal Al Khaleej Commercial Investments Company, Swicorp Joussour Company, and Aloula Real Estate Development Company. Member of the Boards of Directors of The Saudi British Bank (SABB), National Industrialization Company, Arabian Pipes Company, Al Yamama Steel Industries Company, and the Arabian Company for Water and Power Development (ACWA Power). Appointed by the Government as a Board Member of the Social Responsibility Board, and Centennial Fund. BBA from Chapman University, California, USA.

Suliman bin Abdulgader Al Muhaideb Director

Joined Almarai in 1979. Appointed Managing Director in 1997. Board member of the Arcapita Bank of Bahrain, Arabian Agricultural Services Company (ARASCO), and Al Jazirah Corporation for Press, Printing and Publishing, and Member of the National Committee for Biodiversity. B.A. in Agricultural Economics, from King Saud University, Saudi Arabia.

Abdulrahman bin Abdulaziz Al Muhanna Managing Director

Board member of The Savola Group, United Sugar Company, Banque Saudi Fransi, Saudi Arabian General Investment Authority, Afia International Company, Jeddah Chamber of Commerce and Industry, and Jeddah Development & Urban Regeneration Company. Active member of Young Managers. Member of the Board of the Mecca region. BSc in Industrial Engineering from King Saud University, Saudi Arabia.; MBA from St. Edward’s University, USA (1994); and Diploma in Science and Technical Bread from Pittsburgh Institute, USA

Engr. Musa bin Omran Al Omran Director

Chairman of Projects and Technical Contracting Company, and Ashbal Al Arab Establishment. Member of the Board of Faraby Al Khaleej Petrochemical Company, Zain Saudi Telecom, Kuwaiti Chinese Holding Company, Kuwaiti Sudanese Holding Company, Integrated Transportation Company, and Jassour Company. MBA from King Saud University, Saudi Arabia.

Prince Naif Bin Sultan bin Mohammed Al Kabeer Director

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Our Brands
Focused on innovation, Almarai regularly introduces new products in addition to enhancing the efficiency of its product portfolio. To achieve this, the company has launched a strategic initiative, Almarai Innovation Management (AIM). Upholding its credo, ‘Quality You Can Trust,’ Almarai has developed several brands, thus offering customers a wide selection of products that cater to their daily needs. Under the Almarai umbrella brand, the company offers a range of food and beverages including fresh and long-life dairy products, fresh yoghurt, desserts, cheese and natural juices. Almarai's L’usine and 7DAYS brands represent several bakery products from breads to puffs, croissants and cakes. Alyoum is Almarai’s poultry brand, and completes the company's product portfolio. It features a wide selection of poultry products delivered to the retail shelf on a daily basis, providing high nutritional value to consumers. Under Almarai Enfa and Almarai Enfagrow, the company has introduced two new infant formula products which offer the nutritional value babies need throughout the different stages of their growth. “Great Brands of Tomorrow”, a report published by Credit Suisse Research Institute, identifies Almarai as one of the world’s fastest growing brands, and is the only Arabic and Middle Eastern company to be labelled a future brand, alongside Apple, Facebook, Amazon, Mercedes-Benz, Hyundai, and other global brands. The report underlines that Almarai Company, through its investment and development strategies, has succeeded in a short period of time to achieve considerable growth, lending it the trust and credibility to walk shoulder to shoulder with the world's biggest brands.

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Dairy Liquids

Backed by daily and sustained veterinary care and a system of high-quality feeding, Almarai’s herd produces 2.5 million liters of milk per day. A single cow produces an average of 40 liters of milk per day, which is double the European average. Almarai’s Dairy Liquids portfolio includes a range of fresh and long-life products for the whole family from fresh laban and milk to delicious flavored milk products and the advanced Lactofree (lactose-free milk): Vetal Milk, and Vetal Laban. Almarai Dairy Liquids are available in all GCC countries.

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Yoghurt and Desserts

Almarai yoghurt is made from 100% natural, fresh, calcium-rich cows milk. From zabadi, ghishta, and labneh to fruit yoghurt and crème caramel, Almarai’s products are suited for the whole family.

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Foods

Leveraging its unparalleled experience in healthy nutrition, Almarai offers a wide collection of high quality cheeses and dairy products to satisfy the family's different tastes. In addition to cream cheese, cheese slices, feta, mozzarella, and others, the Almarai product range includes butter, cream, and ghee. All products are constantly developed to meet the world's highest standards. Highlighting the company’s commitment to product innovation.

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Juices

Offering distinctive flavors, Almarai's Fruit Juice portfolio includes outstanding, world-class quality juices, which bring a unique refreshing taste to the Arabic food table. Almarai’s juice experts travel the world to select the best fruits from their natural habitats to produce the quality of juices that satisfy consumers, while offering high nutritional value. Since the introduction of Almarai’s fruit juices in 1999, it has become the market leader in the segment in the GCC. In 2012, the product range was extended to include “Lemon Honey Ginger” juice.

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Bakery

L'usine
The leading Almarai brand in Saudi Arabia's bakery sector, L'usine offers a variety of high quality products including breads, ready-to-eat pastries, croissants and other baked confectioneries. L'usine products are distinguished for their freshness, high quality and nutritional value – referred to as the three essential values. Committed to become a leading brand in the sector, L’usine offers the finest bakery products for every need. There are five product categories under L’usine: bread, pastries, cakes, maamoul and sambosa leaves, which are all available across the GCC region. In 2012, L’usine introduced its new bundle of products including the sliced multi-grain bread and pita bread.

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Bakery

7DAYS
Almarai-Chipita’s joint venture, 7DAYS was launched in 2009, gaining immense popularity for its high quality and delicious taste. The brand features several products, with the newest, introduced in 2012, being the 7DAYS Mini Croissants, 7DAYS Cake Bars and 7DAYS Wafer Sticks. The 7DAYS Mini Croissants commercial received the highest number of likes in the MENA region on its Facebook page in 2012.

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Poultry
With investment value reaching over 4 billion Saudi riyals, Almarai has strengthened the overall company infrastructure with the addition of a new world-class poultry production unit and upgrading its central operations, supported by a power station, water facilities and waste processing units. Housing compounds for Almarai employees have also been constructed. The growth in poultry product sales by Almarai in 2012 is regarded as the most efficient among all companies in this segment. Thousands of customers across the region are served every day through a state-of-the-art transportation and delivery system, with the latest technology used from tracking and facilitating production to the sales process.

Alyoum
Further strengthening consumer trust in its commitment to the highest quality products, Almarai invested significantly in the poultry segment to launch a new brand, Alyoum, in 2010. Offering a wide selection of fresh poultry products, the Alyoum range – building on its name that means ‘today’ in Arabic – is set apart for freshness and premium quality. The products are distributed to retailers on a daily basis ensuring that they reach consumers fresh. Alyoum products include whole chicken and selected cuts that are packed in fully sealed trays to ensure the highest hygiene standards. The production process comprises multiple stages starting with receiving livestock from Almarai farms, preparing it, and distributing the final product to the targeted markets in Saudi Arabia and across the GCC region. Almarai has commenced the continual process of expanding and upgrading the business operations of Hail Agricultural Development Company.

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Infant Formula

Marking the first of its kind in the region, Almarai commenced construction of a manufacturing plant for infant formula in Al Kharj in 2009. The next year, the company founded the International Pediatric Nutrition Company (IPNC), a 50-50 joint venture with Mead Johnson. Under the two brands, Almarai Enfa and Almarai Enfagrow, the company produced infant formula for a trial period in May 2012. Reiterating Almarai’s commitment to the highest quality standards, the products underwent a long and meticulous chain of tests and experiments to ensure that they meet all national and international standards. In mid-December 2012, Almarai received all approvals and passed all quality tests that mark the conformance of the products to the required standards. Almarai has now become fully qualified for commercial production to meet the market's needs of infant formula for babies and infants up to three years of age.

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Our Human Resources
As of 2012, Almarai has over 28,000 employees across its operations. The number of employees has increased by 26% compared to 2011, with 6,000 new personnel added to meet the remarkable growth of the company across all sectors. Upholding the principle that human resources are the integral part of sustainable growth, Almarai continuously invests in recruiting talented professionals who add value to the organization. The company also focuses on refining its employees’ skills and enhancing their leadership competencies. Providing a competitive work environment with the opportunity for every staff member to grow and strengthen his skills, Almarai is committed to the Saudization policy – Tawteen – to recruit qualified Saudi nationals across its different operations. Almarai has achieved high Saudization rates which earned the company and its subsidiaries the Excellent and Green classifications as per the Saudi Ministry of Labour’s Nitaqat program to promote Saudi national employment. To date, Almarai employs over 5,000 Saudi nationals and plans to increase the number to 12,000 in the next five years.

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Employment Nationalization (Tawteen)
Committed to Saudization, Almarai continued its efforts throughout 2012 to attract qualified and ambitious Saudi youth, underlining its commitment to recruit and to train Saudi nationals. Through its Saudization policy, Almarai aims to nurture a talent pool of Saudi professionals who are trained and experienced to undertake diverse career responsibilities. Almarai's joint programs with the Human Resources Development Fund provide Saudi youth a strong platform to develop their skills by training and working for the company. Almarai has also launched its own professional training programme, “Future Managers”, which provides the opportunity for accomplished university graduates to be trained as successful managers. In 2012, seventy trainees graduated as part of the program. Almarai's efforts culminated in classifying all its companies as Excellent and Green in the “Nitaqat” programme in Saudi Arabia.

Training and Development
To develop their professional competencies and to enhance performance and productivity at the workplace, Almarai continuously evaluates the training needs of its employees. Training is a key component of the company’s human resources development policy. In 2012, Almarai further focused on strengthening the training needs of employees through several on-the-job training programs that provided technical and practical skills to enhance the work efficiency of employees. Almarai also provides individual training courses for employees at specialized institutes where needed.

Su pp

Work Environment
Almarai has several management policies to ensure a competitive and stimulating work environment. These include the following:

ve r ti o

St a

e bl

. Supporting the occupational role of the employees, and providing a stable career path. . Undertaking employee opinion surveys to measure their occupational satisfaction. . Evaluating employees’ performance, and rewarding accomplished professions with moral . Introducing policies to encourage employees, and reviewing wages periodically. . Encouraging positive communication among employees through periodic meetings. . Applying international occupational safety and health standards within the work environment. The continual development of its work environment has always been a top priority of Almarai, consequently establishing its credentials as one of the best professional entities in the Kingdom. and financial support.

Our Work Environment

fe

s Po

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iti ve

Sa

2012: Key Accomplishments
27,000
Sustained career opportunities for over 3,794 Saudi nationals across Almarai and its subsidiaries in all key cities and principalities in the Kingdom at an average of 228 employees per month. Implemented special program for new university graduates to work in managerial and leadership positions, a program to provide necessary skills and expertise and was held in cooperation with an international entity specialised in training young leaders; 100 university graduates took part in 2012. 280 students enrolled for Dairy and Food Polytechnic (DFP) program for the academic year 2011-2012.

Number of Employees

28,000

. . . . . . . . .

25,000 23,000 21,000 19,000
17,391

22,224

17,000 15,000 13,000 11,000
9,506

16,042

70 interns trained as part of the Future Managers program.

Signed several agreements with leading technical institutes specialized in training and qualifying Saudi youth to work for Almarai. Established “Almarai Center for Heavy Vehicle Driving”, for training and immediate hiring of Saudi nationals to drive Almarai fleet in accordance with the highest safety standards. Implemented a free English learning program, targeting Saudi youth in the city of AlKharj, as part of the company’s social responsibility initiatives. Organised the yearly summer training program , attended by over 400 students.

11,998

9,000 7,000 5,000 3,000

Signing agreements with several charities including: The Riyadh Orphans Charitable Society (ENSAN), and the National Committee for the Care of Prisoners, Released Prisoners, and their Families and its charitable social fund, for training and employing people registered under it.

0
2007 2008 2009 2010 2011 2012

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Our Social Responsibility
Almarai places the highest priority on social responsibility and sustainable development. The company’s responsibility towards society covers all stakeholders including investors, consumers, employees, the community as a whole, and the environment. The social responsibility commitments of Almarai are under four areas: science & training, charities, environment, and sports. The company supports many events through active partnerships and through collaboration with different social organizations across their activities. Almarai also adopts the policy of caring for the environment and natural resources.

Science and Training

Environment

Sports

Charitable Support

The Scope of Almarai’s Social Responsibility
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1

Science and Training

As part of its social responsibility, Almarai adopts and supports scientific innovation by granting a number of prestigious awards, including: Almarai Award of Scientific Innovation: The award was launched in 2001 in cooperation with the King Abdulaziz City for Science and Technology, and aims to strengthen scientific capability through supporting scientists and researchers in the fields of fundamental science, applied and developmental sciences, and innovation in the Kingdom of Saudi Arabia. Almarai Education Excellence Award for GCC Arab Students: Launched in 2006, it provides support to students who are enrolled in the public education system in the GCC countries. The award aims at encouraging outstanding students, developing their abilities and talent, and supporting their achievements. Almarai Award for Veterinary Excellence: Initiated in 2010, the award supports the veterinary profession and aims at reinforcing the importance of the veterinarian's role in protecting the general health of Saudi Arabia's livestock – a national treasure. Training: Building on Almarai's focus on training Saudi youth to work for the private sector, particularly in the food industry, the company established the Dairy and Food Polytechnic (DFP) in cooperation with the Technical and Vocational Training Corporation, and the Human Resources Development Fund. The initiative aims at training Saudi youth in the food industry by providing them with the necessary skills and knowledge to leverage the best opportunities for a rewarding career. The institute enrols 600 students, and 200 graduate students every year. To enable Saudi youth to enter the work system effectively, Almarai has continuously contributed to cooperative training of university students in all fields of study, and also offers yearly opportunities for summer internships.

initiative, more than 2,000 blankets were distributed to needy families in remote towns and villages across the Kingdom’s colder regions. The areas covered included: Hail, Qassim, Mecca, Medina, Asir, Jouf and Tabuk. The initiative aims to help the needy families throughout the year. Food Basket: Almarai also launched the Food Basket charitable program in 2012. Aid was provided to over 4,000 families, selected by the local mosques of 18 principalities across the Kingdom, and covered over six towns and villages. Every family received a food basket containing 22 healthy products from Almarai. Cultural Support: Almarai sponsors several cultural events and festivals, such as the Al Janadriyah Heritage and Cultural Festival.

3

The Environment

Water: Realizing the importance of preserving water, an exhaustible and precious natural resource, Almarai implements business models that take into consideration the water shortage in the region. Almarai has also introduced several advanced technologies to reduce water usage and to enhance water use efficiency. In line with this policy, Almarai has invested in large farms in Argentine for effectively managing the import of feed. Environmental Standards: Almarai applies the ISO 14001:2004 environmental standards, reiterating its commitment to the highest environment management system. This ensures a healthy balance between profits and sustainable environment, taking into consideration current and future risks.

2

Charitable Activities

4

Sports Events

Charities: Almarai supports several social and humanitarian programs and activities that contribute to strengthening social cohesion. In addition to direct financial support of over 75 charities annually, Almarai sponsors various activities such as: Warmer Winter: Almarai started its proprietary charitable program, Warmer Winter, in 2012. As part of the

Sports Events: Underscoring the importance of sports in enhancing overall health and well-being, Almarai sponsors several sports activities including the International Hail Rally, and the Annual Equestrian Races in Riyadh and Jeddah. The company also sponsors a number of other sports events in golf, bowling, and basketball.

Annual Report 2012 | 31

32 | Annual Report 2012

New Products

Introduced by Almarai in 2012
Almarai continued to develop existing products as well as introducing new ones. This has been part of an ongoing research to offer high quality nutiritious food products that meet consumer expectations. In 2012, Almarai has introduced over 20 new products under various brands.

March 2012 L’usine – Strawberry Puff February 2012 Kiwi-Lime juice, 200 ml Lemon with Mint juice, 200 ml March 2012 Multi- flavored Al Jarrah Cheese May 2012 Almarai Up April 2012 L’usine - Pita Bread July 2012 Jumbo Swiss Roll 7DAYS November 2012 Lemon Honey Ginger juice

February 2012 L’usine - Crispy Sticks

February

March

April

May

July

October

November

February 2012 Milk Shake

March 2012 7DAYS - Mini Croissants Toffee April 2012 Mixed Apple Juice

April 2012 Vetal Laban, 360ml October 2012 Wafer Sticks – 7DAYS

February 2012 L’usine - Multigrain Sliced Bread

Annual Report 2012 | 33

34 | Annual Report 2012

Food Safety
A Steadfast Commitment
In 2012, Almarai continued to uphold its record-setting food safety standards across all segments by reviewing and re-evaluating the standards of the food safety management system ISO22000-2005, which guarantees careful monitoring for food safety. Almarai added this standard to poultry, farming, and infant formula segments in 2012. All these segments received the certificate for the first time, joining the status of dairy farms and factories, bakery, juices, and poultry segments in food safety standards. Almarai also undertook a comprehensive review of the occupational safety and health standard BS OHSAS 18001:2007 to ensure pre-emptive monitoring of all health and safety risks, and to enhance the safe work environment by reducing the possibility of accidents. In May 2012, Sales Management merged the Quality, Health, Safety, and Environment systems (QHSE) into one Integrated Management System (IMS). The new IMS combines all the elements of a commercial business in one system, designed to achieve customer satisfaction by implementing the company's policies and procedures, and committing to the highest international standards.

Annual Report 2012 | 35

Detailed Review of Principal Activities of 2012
Continued growth whilst building our future
A review of the financial performance demonstrates once again our ability to consistently deliver robust growth. The compound annual sales growth rate since 2008 of 18.4% (16.8% without IDJ) is a reflection of the superior quality of the Group’s products supported by our ongoing programme of intensive investment in production infrastructure, distribution capabilities and marketing, as well as entry into new categories and acquisitions. As a result, in 2012, sales and net operating income amounted to SAR 9,883.0 million and SAR 1,672.9 million respectively. The chart below illustrates the continuous growth in sales and EBIT margin.

Sales by Product Group*
Fresh Dairy Long-Life Dairy Cheese & Butter Fruit Juice Bakery Other Sales Sub-Total Poultry Arable & Horticulture Total Sales

Year ended 31 December 2012
4,062.1 1,016.2 1,601.8 1,243.2 1,290.6 49.4 9,263.3 504.4 115.3 9,883.0

Sales and EBIT* Margin %
12,000 20.7% 10,000 21.1% 21.8% 21.1% 19.1% 16.9% 20% 25%

2011
3,475.7 761.1 1,446.6 888.1 966.4 21.2 7,559.2 319.2 72.6 7,951.0

% change
16.9 % 33.5 % 10.7 %
8,000

33.6 % 132.8 % 22.5 % 58.0 % 58.8 % 24.3 %

SAR Million

40.0 %

15% 6,000 10% 4,000 5%

* SAR Million

0

9,883.0

5,868.8

6,930.9

5,029.9

3,769.8

7,951.0

2,000

0

2007

2008
Sales

2009

2010

2011

2012

EBIT Margin %

*Earning before finance charges and Zakat

36 | Annual Report 2012

All major categories delivered robust growth, contributing to the Group’s overall Sales growth of 24.3% (17.8% without IDJ). The following chart gives a breakdown of sales by product group:

Sales by Product Group

Cheese & Butter 16.2%

Bakery 13.1% Fruit Juice 12.6% Poultry 5.1% Arable & Horticulture 1.2% Other Sales 0.5% Long-Life Dairy 10.2%

Fresh Dairy 41.1%

Annual Report 2012 | 37

Fresh Dairy
Almarai’s flagship product group includes locally-produced fresh milk and laban, zabadi (plain yoghurt), fruit yoghurts and cream and dairy desserts. Fresh Dairy sales grew by 16.9% yearon-year (11.7% without IDJ) to reach SAR 4,062.1 million, representing 41.1% of total sales. In 2012, growth momentum continued as a result of comprehensive marketing campaigns and innovation programmes. The entire Almarai range was revitalised by harmonising the packaging graphics with a fresh consistent look further strengthening the brands consumer appeal. Key innovation initiatives delivered incremental gains included Almarai-up, Milkshake and new packaging formats targeted at leveraging the rapidly growing ‘on the go’ consumption occasion. Catering to increasing health and wellness demands from the GCC consumer, the Almarai Vetal advanced nutrition brand was extended and now encompasses key fresh dairy categories of Laban, Milk, Zabadi and fruit yoghurts. The success of these products has surpassed our most optimistic projections and exceeded initial market share targets.

This innovation combined with an unwavering commitment to product quality was rewarded with annual sales growth of 40.0% (20.7% without IDJ) to SAR 1,243.2 million, reinforcing the brand’s strong market leadership.

Bakery
Almarai bakery products are marketed under the L’usine brand (with a portfolio of bread, pastry, cakes, and biscuits and the 7 Days brand (pastry and cakes). The distribution footprint for both brands was expanded to cover all markets of the GCC in 2011 and strengthened over 2012. New product launches in 2012 included: L’Usine (Multigrain Sliced Bread, Strawberry Puffs, Custard Puffs) and 7 Days (Mini Croissants and Toffee Croissants). Superior product formulations, new product development, increased distribution, improved trade marketing and new packaging graphics has seen bakery sales grow to SAR 1,290.6 million, up 33.6% on the previous year.

Poultry
2012 was the third full year of Almarai’s presence in the poultry segment since the acquisition of Hail Agricultural Development Company (“HADCO”) in October 2009. The poultry range, under the Alyoum brand, comprises fresh whole chickens and portion packs (including wings, drumsticks, whole legs, thighs, mixed parts and breast fillets). During 2012 Almarai introduced hygienically proofed shrink packaging for whole birds and continues to concentrate on delivering the significant investment announced by the Board in June 2011. The focus on consistently delivering better product quality, effective communication, attractive packaging and unmatched distribution and sales reach, have combined to see revenues grow 58.0% to SAR 504.4 million.

Long-Life Dairy
This category comprises UHT milk, evaporated milk, whipping cream, cooking cream and sterilised cream. The combination of product improvement, marketing and focused distribution strategies resulted in sales growth from 2011 of 33.5% (11.6% without IDJ) to SAR 1,016.2 million for 2012.

Cheese and Butter
This product group is made up of processed cheese in jars, cheese triangles, slices, blocks, tins and squares; natural cheese including Feta, Halloumi and Mozzarella; and culinary products including butter, cream and ghee. Almarai’s product development in this product group saw the roll out of the innovative jar design across the entire range of spreadable cheese in addition to the introduction of new flavours. In line with the complete Almarai portfolio, the cheese and butter portfolio benefited from substantially improved packaging graphics with increased consumer appeal. Robust sales performance was achieved with growth of 10.7% (9.4% without IDJ) delivering sales of SAR 1,601.8 million.

Arable & Horticulture
Sales from arable and horticultural operations, which include dates, olive oil, grapes and wheat, grew to SAR 115.3 million.

Operating Costs
During 2012, commodity prices softened slightly improving the ratio of Direct Material Costs to Sales, with a decrease from 43.2% in 2011 to 42.6% before consolidating IDJ. The first time consolidation of IDJ, along with its dilutive effect on margin, increased this ration to 43.3%. Selling & Distribution Expenses and General & Administration Expenses, increased by 24.3%. The key contributing factors to this increase were: first time consolidation of IDJ, distribution expansion of bakery and poultry products throughout the GCC countries; portfolio changes resulting from Almarai’s diversification into new categories; enhancing the infrastructure of the organisation to address the increasing complexity of the business and preparing the foundation for future growth.

Fruit Juice
Almarai’s juice segment reached record highs in 2012 with focussed distribution and trade marketing initiatives supported by product innovation and consistent communication. Almarai introduced four new flavours (Strawberry Banana, Mixed Apple, Mixed Orange and the first winter seasonal flavour) to complement the existing 16 flavours across four different pack sizes.

38 | Annual Report 2012

Almarai is continuously investing in local talent and as such Almarai intends to be at the forefront of compliance to the progressive labour laws and regulations. The resulting increasing localisation has adversely affected operating costs, including Other Cost of Sales.

Depreciation and Disposal of Assets
Biological assets include the dairy herd, poultry flocks and horticultural crops. Net biological asset appreciation represents the growth in such assets, capitalised in accordance with our accounting policy and in line with SOCPA standards. The accounting policy is outlined in the Financial Statements. Depreciation and disposal of assets increased by SAR 111.0 million due to the ongoing investment in our farming, production and distribution facilities. This increase is net of the SAR 47.2 million gain realised from sale of land in Al Kharj to the government during 2012.
Year ended 31 December 2012 % of Sales 2011 % of Sales Change in %

Operating Costs*

Direct Material Costs Other Cost of Sales Selling & Distribution Expenses General & Administration Expenses Total Operating Costs

4,279.2 2,092.7 1,616.7 221.4 8,210.1

43.2% 21.2% 16.4% 2.2% 83.1%

3,433.4 1,521.0 1,213.2 265.7 6,433.4

43.2% 19.1% 15.3% 3.3% 80.9%

24.6% 37.6% 33.3% (16.7%) 27.6%

Operating Costs may also be viewed by the nature of the expenditure incurred:
Operating Costs* Year ended 31 December 2012 % of Sales 2011 % of Sales

* SAR Million

Change in %

Direct Material Costs Employee Costs Operating Overheads Marketing Expenses Insurance Depreciation & Disposal of Assets Total Operating Costs

4,279.2 1,776.1 960.2 487.2 23.7 683.8 8,210.1

43.2% 18.0% 9.7% 4.9% 0.2% 6.9% 83.1%

3,433.4 1,353.3 654.0 397.3 22.6 572.8 6,433.4

43.2% 17.0% 8.2% 5.0% 0.3% 7.2% 80.9%

24.6% 31.2% 46.8% 22.6% 5.1% 19.4 % 27.6%

* SAR Million
Annual Report 2012 | 39

Share of Results of Associates and Joint Ventures
Investments in Associated Companies include International Pediatric Nutrition Company (a joint venture company with Mead Johnson Nutrition) and Pure Breed Company (an Associate Company). International Dairy & Juice (a joint venture company with PepsiCo) became a consolidated subsidiary when Almarai increased its shareholding from 48% to 52% in March 2012.

Associates & Joint Ventures*

Opening Balance

Capital Introduced

Share of Results for The Year

Distributions

Transfers to Consolidated Subsidiary

Closing Balance

International Dairy & Juice Limited Pure Breed Company International Pediatric Nutrition Company Almarai Company WLL Total

489.5 34.7 10.3 0.2 534.7

23.5 23.5

(6.7) 4.3 (22.1) (24.5)

(2.1) (2.1)

(482.8) (482.8)

36.9 11.7 0.2 48.8

* SAR Million

Statutory Payments
Statutory payments during the year were:

Statutory Payments*

Year ended 31 December 2012 2011

Customs duty Zakat and Income Tax G.O.S.I. Ministry Fees Others Total Payments

105.0 44.6 41.0 36.7 5.7 232.9

92.6 32.5 25.5 38.7 3.7 193.1

* SAR Million

40 | Annual Report 2012

Zakat
Zakat is calculated at the higher of net adjusted income or Zakat base as required by the Department of Zakat and Income Tax (DZIT). In 2012, the Zakat charge is based on the net adjusted income method. The Company has filed its Zakat returns for all the years up to 2011 and settled its Zakat liabilities accordingly. The Zakat assessments have been agreed with the DZIT for all the years up to 2006 while the 2007 to 2011 Zakat returns are still under review by DZIT. HADCO has filed its Zakat returns for all years up to 31 December 2008 and has settled its Zakat liabilities accordingly. The Zakat assessments have been agreed with the DZIT for all years up to 31 December 2002. From 2009 onwards HADCO is not required to file a return as results are consolidated into the Almarai Group return.
Cash Flow Statement* Year ended 31 December 2012 From Operating Activities Used in Investing Activities From Financing Activities Increase in Cash Cash at beginning of period Cash at end of period 2011

2,384.4 (2,932.9) 693.8 145.3 272.0 417.3

1,924.0 (3,237.5) 1,344.7 31.2 240.8 272.0

Net Income
Net income increased to SAR 1,440.6 million in 2012 from SAR 1,139.5 million in 2011, representing 14.6% and 14.3% of sales respectively.

* SAR Million

Cash Flows
Cash flows from operating activities reached SAR 2,384.4 million, compared to SAR 1,924.0 million in 2011 and equating to 24.1% of total sales. Operating cash flow and increased borrowings funded Almarai’s SAR 2,932.9 million investment programme for the year, the acquisition of the controlling stake for the IDJ joint venture as well as paying shareholder dividends. Continued heavy investment will enable Almarai to satisfy growth in consumer demand and maintain/grow market share in all GCC countries, while also financing diversification into new business areas, by product category and geographically. Improved management of working capital in relation to receivables and payables was offset by increased investment in inventory. As a percentage of sales, operating net working capital reduced from 10.1% to 9.4%.

3,000.0

Cash Flows from Operating Activities SAR Million

2,500.0

2,000.0

1,500.0

1,000.0

-

2008

2009

2010

2011

2012

Annual Report 2012 | 41

2,384.4

1,965.0

1,924.0

1,802.2

1,016.1

500.0

Cash Flows from Operating Activities* 2012 Net Income Depreciation & Disposal of Assets Impairment loss Bank Charges Accrued Share of Results of Associates and Joint Ventures Change in Employees’ Termination Benefits Share of Minority Interest in Net Income of a Consolidated Subsidiary Changes in Net Operating Working Capital Cash Flows from Operating Activities

Year ended 31 December 2011

1440.6 683.8 157.5 24.6 49.8 (0.7) 28.9 2,384.4

1139.5 572.8 160.2 135 42.3 38.4 7.4 (171.6) 1,924.0

* SAR Million
Cash Flows Used in Investing Activities* 2012 Capital Expenditure (including biological assets) Proceeds from disposals Acquisition of Investments and Financial Assets Acquisition of Subsidiaries, Net of Cash Acquired Dividend received from an Associate Cash Flows Used in Investing Activities Year ended 31 December 2011

(3,182.2) 245.7 (23.5) 24.9 2.2 (2,932.9)

(3,054.7) 147.2 (17.5) (315.6) 3.1 (3,237.5)

* SAR Million
Capital Expenditure* 2012 Dairy and Juice Bakery Poultry Arable and Horticulture Other Activities Total 2011 Total

Replacement New Capex Total Capital Commitments

(233.6) (825.7) (1,059.3) (1,232.6)

(2.1) (144.3) (146.5) (79.0)

(0.5) (1,841.0) (1,841.5) (321.0)

(20.7) (28.5) (49.2) (16.2)

0.0 (85.7) (85.7) (50.3)

(257.0) (2,925.3) (3,182.3) (1,699.1)

(73.1) (2,981.6) (3,054.7) (1,930.6)

* SAR Million 42 | Annual Report 2012

Building Our Future
In 2012, Almarai invested SAR 3,182.2 million in continuing the process of putting the platforms for future growth in place. This investment is spread across Almarai’s diversified operations: Poultry • The capital investment consists of the design and construction of a state-of-the-art integrated Poultry Processing facility with a potential capacity of 180 millions birds per annum, a rendering plant and the related distribution infrastructure throughout the GCC countries. These facilities will be commissioned in the three steps during 2013, with the first primary processing line to be commissioned during first quarter of 2013.

Financing
The strong cash flow generating capability of Almarai has enabled the Group to obtain additional credit facilities to finance the investments mentioned above including its first ever Sukuk issue raising SAR 1,000.0 million with a seven year maturity. The Sukuk issuance bears a return based on SIBOR plus a pre-determined margin payable semi-annually in arrears.

Cash Flows from Financing Activities* Dairy Farming, Manufacturing and Distribution • Continued robust growth in our core product groups (dairy, juice, cheese & butter and bakery) requires investment in our supply chain to serve consumer demand. • Our farming, manufacturing and distribution capabilities were all improved with increased capacity to satisfy this growth. 2013 will be a key year for Almarai as the poultry facilities and infant nutrition plant are commissioned and these new businesses continue to gain momentum.
Increase in Loans Borrowings from government financial Institutions Repayments Receipts Borrowings from Islamic banking facilities (Murabaha) Repayments Receipts Borrowings from Sukuk Issue Receipts Commercial Facilities for Foreign Subsidiaries Receipts Dividends Paid Distribution to Minority Interest Bank Charges Paid Purchase of Treasury Shares Deferred Charges Cash Flows from Financing Activities

Year ended 31 December 2012
1,480.9

2011
2,077.5

(150.5) 183.7

(127.9) 475.6

(1,000.5) 1,420.9

(418.0) 2,147.8

1,000.0

-

27.3 (511.8) (0.8) (277.6) 3.1 693.8

(515.6) (89.2) (97.8) (30.3) 1,344.7

* SAR Million

Annual Report 2012 | 43

Almarai has obtained partial financing facilities in respect of its major investment programmes from Saudi Industrial Development Fund (SIDF), a Government financial institution in Saudi Arabia. This SIDF financing is not commission-bearing, carries an initial evaluation cost and ongoing follow-up costs. SIDF Loan is not subject to commission rate risk. Recognizing the need for further financing to fund our future plans, the Group secured an additional SAR 1,800.0 million of Islamic banking facilities (Murabaha) with a maturity of greater than five years and an additional SAR 771.8 million of SIDF facilities with a maturity of more than five years. As at 31 December 2012, SAR 2,658.3 million and SAR 972.3 million of Islamic banking facilities and SIDF facilities respectively were unutilized and available for draw down. Finance charges (expense) increased from SAR 135.0 million to SAR 157.5 million primarily due to higher loan utilization while SAR 75.1 million of borrowing cost was capitalised to Property, Plant and Equipment during 2012 (SAR 56.7 million in 2011).

Distribution Policy
As per Article 44 of Almarai’s by-laws, after deducting all general expenses and other costs, the Company’s annual net profits shall be allocated as follows: (a) Ten percent (10%) of the annual net profits shall be set aside to form a statutory reserve. Such setting aside may be discontinued by the Ordinary General Assembly when said reserve totals one-half (1/2) of the Company’s capital. (b) These shall be paid to the holders of preferred shares the specified percentage pertaining to such shares. (c) The Ordinary General Assembly may, upon request of the Board of Directors, set aside a percentage of the annual net profits to form an additional reserve to be allocated for the purpose or purposes decided by the Ordinary General Assembly. (d) Out of the balance of the profits, if any, there shall be paid to the Shareholders an initial payment of not less than five percent (5%) percent of the paid-up capital. (e) No more than five percent (5%) of the remaining amount shall be paid as compensation to the members of the Board of Directors. (f) The balance shall be distributed among the Shareholders as an additional share of the profits or transferred to retained profits account. The Company may distribute semi-annual and quarterly profits after it has completed the necessary procedures put in place by the competent authorities.

6,000

Facilities and Utilisation
5,027.1

5,000

4,000

3,776.6

SAR Million

3,000

2,844.6

2,838.1 2,067.2

2,000
1,414.3 1,208.5

At the Extraordinary General Assembly of 2 April 2012, Almarai shareholders approved a dividend distribution for 2011 of SAR 2.25 per share (based on 230 million shares), amounting to SAR 517.5 million. For 2012, the Board of Directors proposes a dividend of SAR 1.25 per share (based on 400 million shares), amounting to SAR 500.0 million.
34.0

1,000

0 2012 2013
Facilities

2014 - 2016
Maturity Year Utilisation

2017 >

44 | Annual Report 2012

Board Meetings and Directors’ Disclosure
During the year we held five board meetings and attendance was as per the table below.

Directors Name and other Public Company Directorships

Classification

First Meeting (31.01.2012)

Second Meeting (03.04.2012)

Third Meeting (28.05.2012)

Fourth Meeting (18.09.2012)

Fifth Meeting (10.12.2012)

Total

HH Prince Sultan bin Mohammed bin Saud Al Kabeer (Chairman of the Board of Almarai Company). Yamama Cement Company, Arabian Shield Insurance Company, Al Tayyar Travel Group Abdulrahman bin Abdulaziz Al Muhanna (Managing Director of Almarai Company)

Non Executive

-

4

4

4

-

3

Executive

4

4

4

4

4

5

Engr. Nasser Mohammed Al Muttawa Arabian Shield Insurance Company, Al Tayyar Travel Group

Independent

4

-

4

4

4

4

HH Prince Naif bin Sultan bin Mohammed bin Saud Al Kabeer Zain KSA Ibrahim Mohammed Al Issa Banque Saudi Fransi, The Savola Group, Taibah for Investments, Yanbu Cement Company Mosa Omran Mohammed Al Omran The Savola Group, Banque Saudi Fransi, Arabian Cement Co.

Non Executive

4

4

4

4

4

5

Non Executive

4

4

4

4

4

5

Independent

4

-

4

4

4

4

Dr. Abdulraof Mohammed Mana’a The Savola Group, The Saudi Investment Bank, Herfy Food Services Company, Knowledge Economic City Suliman Abdulqader Al Muhaideb The Saudi British Bank, The Savola Group, National Industrialization Company

Non Executive

4

4

4

4

-

4

Non Executive

4

4

4

4

4

5

Ibrahim Hassan Al Madhon Read Sea Company, Herfy Food Services Company, Fitaihi Holding Group

Independent

4

4

4

4

4

5

The Company’s By-Laws stipulate that the election of Board members is by cumulative vote at the General Assembly Meeting.

Annual Report 2012 | 45

Directors’ Disclosure

Board of Directors 01.01.2012
HH Prince Sultan bin Mohammed bin Saud Al Kabeer Abdulrahman bin Abdulaziz Al Muhanna Engr. Nasser Mohammed Al Muttawa HH Prince Naif bin Sultan bin Mohammed bin Saud Al Kabeer Ibrahim Mohammed Al Issa Mosa Omran Mohammed Al Omran Abdulraof Mohammed Mana’a Suliman Abdulqader Al Muhaideb Ibrahim Hassan Al Madhon Total

Number of Shares Net Change

Debt Instruments (SAR) % Change

31.12.2012

01.01.2012

Net Change

31.12.2012

% Change

114,782,615 1,410,434 574,857 3,478,261 5,217 3,496,128 3,478 3,478 3,478 123,757,946

(108,434) (21,923) (1,739) 522 (131,574)

114,782,615 1,302,000 552,934 3,478,261 5,217 3,496,128 1,739 3,478 4,000 123,626,372

(7.7%) (3.8%) (50.0%) 15.0% (0.1%)

-

-

-

-

Spouses and Minor Children 01.01.2012
Wife of HH Prince Sultan bin Mohammed bin Saud Al Kabeer Wife of Abdulrahman bin Abdulaziz Al Muhanna Lama Abdulrahman bin Abdulaziz Al Muhanna Abdulaziz Abdulrahman bin Abdulaziz Al Muhanna Wife of Mosa Omran Mohammed Al Omran Total

Number of Shares Net Change

Debt Instruments (SAR) % Change

31.12.2012

01.01.2012

Net Change

31.12.2012

% Change

2,516,182 19,130 8,696 184,347 2,728,355

(8,696) 9,000 304

2,516,182 19,130 9,000 184,347 2,728,659

(100.0% ) 100.0% 0.0%

-

-

-

-

46 | Annual Report 2012

Senior Management Disclosure
Number of Shares Debt Instruments (SAR) % Change

Senior Management 01.01.2012 Abdulrahman A. Al Fadley Abdullah M. Abdulkarim Abdulrahman S. AlTuraigi Georges P. Schorderet Paul Gay Andrew Mackie Majed Nofel Abdullah N. Al Bader Total

Net Change

31.12.2012

01.01.2012

Net Change

31.12.2012

% Change

3,478 173 417 95,652 12,763 173 104 112,760

5,348 217 5,565

3,478 173 417 101,000 217 12,763 173 104 118,325

5.6% 100.0% 4.9%

-

-

-

-

Annual Report 2012 | 47

Related Party Transactions
During the normal course of its operations, the Group had the following significant transactions with related parties during the years ended 31 December 2012 and 31 December 2011 along with their balances:
Nature of Transaction* 2012 2011

Sales to: Savola Group International Dairy & Juice Ltd. International Pediatric Nutrition Co. Total Sales

375.6 14.2 16.9 406.7

349.6 88.0 6.9 444.5

Purchases From: Savola Group Savola Packaging Systems Co. Ltd. United Sugar Co. Afia International

105.0 119.5 10.3 234.8

54.8 117.1 171.9

Managed Arable Farm Al Kabeer Farms - Forage Thodhia Farm - Forage Rental Thodhia Farm - Dairy

50.3 0.8 51.1

49.8 2.9 0.8 53.5

Arabian Shield Insurance Co. Pure Breed Co. Abdul Aziz Al Muhanna (Land Rent)

46.1 12.3 0.2 58.6 344.6

45.6 5.8 0.2 51.6 277.0

Total Purchases

* SAR Million 48 | Annual Report 2012

Transactions for the year 2012

Member*

Nature of Dealing

Amount

Period

Conditions

Savola Group Savola Group Savola Packaging Systems Co. Ltd. United Sugar Company Afia International Company Product Sales Packaging Purchasing Sugar Purchasing Soya Bean Oil Purchasing

375.6 105.0 119.5 10.3

One Year One Year One Year One Year

The Prevailing business conditions The Prevailing business conditions The Prevailing business conditions The Prevailing business conditions

Chairman/Prince Sultan bin Mohammed bin Saud Al Kabeer Al Kabeer Farms - Forage Rental Thodhia Farm - Dairy Arabian Shield Insurance Co. Contract Management and Procurement Feed Lease Contract Insurance

50.3 0.8 46.1

One Year One Year One Year

The Prevailing business conditions The Prevailing business conditions The Prevailing business conditions

Mr. Abdulaziz Ibrahim Al Muhana Rent of Land for Distribution Center in Sharjah Lease Contract

0.2

From 10th April 2001 to 9th April 2021

The Prevailing business conditions

* SAR Million
Pricing and terms of payment for these transactions are at arm’s length and are reviewed annually at Board Meetings and the Annual General Meeting.

Annual Report 2012 | 49

Segmental Reporting and Geographical Analysis
The Group’s principal business activities involve manufacturing and trading of dairy and juice products under the Almarai, Beyti and Teeba brands, bakery products under the brands L’usine and 7DAYS, poultry products under the Alyoum brand, arable and horticultural products as well as other activities. The investment in infant nutrition and Zain are included under other activities. Selected financial information for the years ended 31 December 2012 and 2011, categorised by segments, are as follows:

Segmental Reporting*
2012 Sales Third Party Sales Depreciation Share of Results of Associates and Joint Ventures Income before Minority Interest

Dairy & Juice

Bakery

Poultry

Arable & Horticulture
386.0 115.3 (68.3) 30.9

Other Activities

Almarai Group

7,988.4 7,972.7 (481.3) (6.7) 1,371.8

1,290.6 1,290.6 (114.2) 171.8

504.4 504.4 (50.3) 4.3 (96.8)

(22.1) (37.8)

10,169.4 9,883.0 (714.2) (24.6) 1,439.9

Share of Net Assets in Associates and Joint Ventures Additions to Non-Current Assets Non-Current Assets Total Assets Total Liabilities Return on Net Operating Assets Return on Net Assets

0.2 2,594.3 8,184.1 11,047.0 (10,050.0) 17.5% 16.3%

180.5 1,786.7 2,002.5 (233.5) 17.8% 9.6%

36.9 1,833.2 3,559.9 3,728.6 (287.5) -4.4% -3.7%

21.6 1,433.2 1,736.2 (243.7) 2.0% 1.9%

11.7 109.3 993.7 1,004.4 (533.0) n/a n/a

48.8 4,738.9 15,957.6 19,518.6 (11,347.7) 9.8% 9.4%

* SAR Million

50 | Annual Report 2012

Segmental Reporting*
2011 Sales Third Party Sales Depreciation Share of Results of Associates and Joint Ventures Impairment Loss Income before Minority Interest Share of Net Assets in Associates and Joint Ventures Additions to Non-Current Assets Non-Current Assets Total Assets Total Liabilities Return on Net Operating Assets Return on Net Assets

Dairy & Juice

Bakery

Poultry

Arable & Horticulture
321.5 72.6 (58.7) 52.7 502.2 1,471.1 1,699.6 (205.3) 4.1% 3.9%

Other Activities

Almarai Group

6,606.2 6,592.8 (331.1) (24.0) 1,204.7 489.7 1,562.0 7,046.8 9,064.8 (7,676.4) 20.3% 18.8%

1,037.0 966.4 (90.3) 118.0 242.5 1,745.5 1,920.1 (281.5) 15.0% 7.6%

319.2 319.2 (39.0) 5.1 (33.5) 34.7 1,184.3 1,770.0 1,938.0 (187.1) -4.4% -2.9%

(23.4) (160.2) (195.0) 10.3 313.7 1,030.2 1,034.0 (528.5) n/a n/a

8,284.0 7,951.0 (519.1) (42.3) (160.2) 1,146.9 534.7 3,804.6 13,063.6 15,656.4 (8,878.8) 12.7% 10.5%

* SAR Million
The business activities and operating assets of the Group are mainly concentrated in the GCC. Selected financial information as at 31 December 2012 and 2011, categorised by geographic segments are as follows:

Geographical Analysis* 2012 Saudi Arabia Other GCC Countries Other Countries Total

Sales

Non-Current Assets

2011

2012

2011

6,650.6 2,575.4 657.0 9,883.0

5,656.4 2,198.5 96.1 7,951.0

14,053.0 300.5 1,604.1 15,957.6

12,003.3 169.9 890.4 13,063.6

* SAR Million

Annual Report 2012 | 51

Subsidiaries
Name of Subsidiary
Almarai Investment Company Limited Almarai Baby Food Company Limited Hail Agricultural Development Company Western Bakeries Company Limited International Baking Services Company Limited Modern Food Industries Limited Agricultural Input Company Limited (Mudkhalat) Nourlac Company Limited Fondomonte El Descanso S.A. Fondomonte Inversiones Argentina S.A. Fondomonte Sandoval S.A. Agro Terra S.A. Almarai Company Bahrain S.P.C. Almarai International Holding W.L.L. Almarai Investment Holding Company W.L.L. IDJ Bahrain Holding Company W.L.L. International Dairy and Juice Limited International Dairy and Juice (Egypt) Limited
International Company for Agricultural Industries Projects (Beyti) (SAE)

Country of Incorporation Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Argentina Argentina Argentina Argentina Bahrain Bahrain Bahrain Bahrain Bermuda Egypt Egypt Jersey Jordan Jordan Jordan Jordan Jordan Luxembourg Oman Oman Spain United Arab Emirates United Arab Emirates

Direct and Beneficial Ownership Interest

Shares

Country of Operation n/a Saudi Arabia Saudi Arabia Saudi Arabia n/a Saudi Arabia Saudi Arabia n/a Argentina Argentina Argentina n/a Bahrain n/a n/a n/a n/a n/a Egypt Jersey Jordan Jordan Jordan Jordan Jordan n/a Oman Oman n/a United Arab Emirates n/a

Business Activity
Holding Company
Manufacturing and Trading Company

2012
100 % 100 % 100 % 100 % 100 % 60 % 52 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 52 % 52 % 52 % 52 % 100 % 39 % 39 % 39 % 39 % 39 % 0% 90 % 100 % 100 % 52 % 100 %

2011
100 % 100 % 100 % 100 % 100 % 60 % 52 % 0% 100 % 100 % 100 % 100 % 100 % 100 % 100 % 48 % 48 % 48 % 48 % 100 % 36 % 36 % 36 % 36 % 36 % 100 % 90 % 100 % 100 % 48 % 0%

Capital SAR 1,000,000 SAR 200,000,000 SAR 300,000,000 SAR 200,000,000 SAR 500,000 SAR 70,000,000 SAR 25,000,000 SAR 3,000,000 ARG 27,475,914 ARG 17,849,997 ARG 4,383,432 ARG 475,875 BHD 100,000 BHD 250,000 BHD 250,000 BHD 250,000 USD 7,000,000 EGP 50,000,000 EGP 317,159,000 JOD 49,675,352 JOD 500,000 JOD 500,000 JOD 750,000 JOD 250,000 USD 58,000,000 OMR 150,000 OMR 20,000 EUR 13,047,134 USD 22,042,183 AED 300,000 (Unpaid)

Issued 100,000 20,000,000 30,000,000 200,000 500 70,000 250 3,000 27,475,914 17,849,997 4,383,432 475,875 1,000 2,500 2,500 2,500 7,000,000 5,000,000 31,715,900 49,675,352 500,000 500,000 750,000 250,000 58,000,000 150,000 20,000 13,047,134 22,042,183 300

Poultry / Agricultural Company Bakery Company Holding Company Bakery Company Agricultural Company Trading Company Agricultural Company Agricultural Company Agricultural Company Dormant Sales Company Holding Company Holding Company Holding Company Holding Company Holding Company
Manufacturing and Trading Company

Markley Holdings Limited Teeba Investment for Developed Food Processing Al Rawabi for juice and UHT milk Manufacturing Al Muthedoon for Dairy Production Al Atheer Agricultural Company Al Namouthjya for Plastic Production Blue Yulan S.A. Arabian Planets for Trade and Marketing L.L.C. Alyoum for Food Products Company L.L.C. Fondomonte Inversiones S.L. International Dairy and Juice (Dubai) Limited Almarai Emirates Company L.L.C.

Dormant Manufacturing Company Manufacturing Company Manufacturing Company Agricultural Company Manufacturing Company Holding Company Sales Company Sales Company Holding Company Holding Company Sales Company

52 | Annual Report 2012

Risk Management

Risk taking is an integral part of doing business. Risks are managed through the operational processes where risks are identified, probability of occurrence assessed and potential consequences estimated. Actions are then taken to reduce or mitigate the risk exposures and limit potential unfavourable consequences. Risks are broadly categorised into operational risks and financial risks. Almarai’s approach to risk management leverages the scale and diversity of our business activities and balances central co-ordination with well defined risk management responsibilities within each operational unit. Risk management tools such as reviews, policies, procedures and reports are in place on all major categories of risk including, but not limited to, overall business risk in the Company’s operations, treasury risk (including currency and borrowing risks), procurement, insurance and litigation. Further details on financial risk management can be seen in note 23 of the Consolidated Financial Statements.

on the adequacy and effectiveness of the Group’s Corporate Governance, Risk Management and Internal Control processes. In 2012 the statement confirmed that subject to the satisfactory progression of agreed action plans those activities and controls examined were suitably designed to achieve the objectives required by management and that those controls reviewed were operating with sufficient effectiveness to provide reasonable but not absolute assurance that the related objectives were achieved during 2012. The Head of Internal Audit reports directly to the Audit and Risk Committee and formally presents the results of the Annual Plan of internal control reviews at least five times a year, with a summary audit opinion for the year at the first Audit and Risk Committee for the preceding year in the January meeting. The Audit and Risk Committee fully discharges its responsibilities as required in Article 14 of the Corporate Governance Regulations and in particular supervises the internal audit function in relation to the annual review of internal controls to ensure its effectiveness in executing activities and duties as specified by the Board. The effectiveness of Internal Audit is also monitored through the monthly reporting of the departments Balanced Scorecard that details 13 Key Performance Indicators. All internal control reports contain actions plans that are monitored for implementation by Internal Audit and the Audit and Risk Committee. The Internal Audit Annual Report is reviewed by the Audit and Risk Committee and is made available to the Board of Directors following the first Audit and Risk Committee of each calendar year.

Corporate Governance

Almarai is dedicated to maintaining the highest standards of quality and performance in all of its activities. This applies equally to the area of Corporate Governance, where the Group is committed to best practice principles in all of its dealings. The Group has a comprehensive Corporate Governance Manual setting out rules for directors and officers to adhere to, in order to protect and further the interests of the Company and its stakeholders. The Board of Directors, with the assistance of sub-committees like the Audit and Risk Committee, continually support strong corporate governance practices and regularly review the Group’s governance and control practices. The Company implemented all required provisions of the Corporate Governance Regulations issued by the CMA.

Nomination and Remuneration Committee

In accordance with Capital Market Authority (CMA) requirements, Almarai has constituted a Nomination and Remuneration Committee, in line with the recommendations of the Board of Directors and the approval of the General Assembly. This committee met twice during the year 2012. The committee members are: a) HH Prince Sultan bin Mohammed bin Saud Al Kabeer, Chairman b) Abdulrahman bin Abdulaziz Al Muhanna c) Mosa Omran Mohammed Al-Omran d) Abdulrahman Al Fadley The Nomination and Remuneration Committee looks at the appointment, composition, capacity and remuneration of the Board of Directors and the senior management of the Group. The purpose of the committee is to ensure that the directors of the Company are able to oversee the affairs of the Group in the interests of all shareholders and that the remuneration paid to directors and senior management is appropriate for the roles performed.
Description Salaries and Compensation Allowances Annual and Periodic Bonuses Incentive Schemes Compensation or benefits Total
Executive Board Member Non Executive/ Independent Board Member Highest Paid Five Executives*

Audit and Risk Committee

The Audit and Risk Committee is a vital part of Almarai’s commitment to strong Corporate Governance. The Committee is comprised of a Chairman with over a decade of related industry experience and three experienced non-executives. The Committee reports to the Almarai Board of Directors, formally submitting Committee minutes and detailed quarterly reports. The Committee has an annual plan of activity and met five times during 2012. The Committee members are: a) Dr. Abdulrahman Al Turaigi, Chairman b) Dr. Muhammad A. H. Ikhwan c) Mr. Farraj Abo Thenian d) Mr. Sulaiman N. Alhatlan The Committee maintains a close oversight of financial, governance and risk related matters in the Group, and monitors audit activities in order to gain sufficient comfort in the adequacy of internal control systems, the safeguards over the assets of the Group and the integrity of the Group's financial statements. Almarai has a modern professional Internal Audit department that review controls and activities established by the Group to manage the risks that it has identified to its business objectives as set out in the Internal Audit Plan dated 1 January 2012, approved by the Audit and Risk Committee. The Internal Audit Plan is aligned to the three key themes of Corporate Governance, Risk Management and Internal Control. The Head of Internal Audit provides an annual statement

1,386,000 486,000 1,200,000 260,000 3,332,000

356,800 1,600,000 1,360,000 3,316,800

6,655,317 834,000 11,785,818 460,000 19,735,135

* Including CEO and CFO
Annual Report 2012 | 53

Key Financial Highlights of the Last Five Years – Results, Assets, Liabilities and Key Indicators

Key Financial Highlights* Operational Performance Total Sales Cost of Sales Gross Profit Selling and Distribution expenses General and Administration expenses Share of Results of Associates and Joint Ventures Impaiment Loss Financing Cost and Bank Charges Income before Zakat Zakat Minority Interest Net income Balance Sheet Net Operating Working Capital Property, Plant and Equipment Biological Assets Net Operating Assets Intangible Assets - Goodwill Investment and Financial Assets Net Assets Net Debt Employee Termination Benefits Deferred Tax (Net) Total Equity Net Capital Employed Total Assets Total Liabilities 932 13,416 901 15,249 1,335 295 16,880 8,305 287 116 8,171 16,880 19,519 11,348 805 10,508 818 12,131 821 907 13,859 6,749 243 88 6,778 13,859 15,656 8,879

Year ended 31 December

2012
9,883 (6,372) 3,511 (1,617) (221) (25) (157) 1,491 (51) 1 1,441

2011
7,951 (4,954) 2,997 (1,213) (266) (42) (160) (135) 1,180 (33) (7) 1,140

2010
6,931 (4,195) 2,736 (1,046) (230) (6) (121) 1,333 (26) (22) 1,285

2009
5,869 (3,503) 2,366 (887) (200) (2) (148) 1,129 (29) (3) 1,097

2008
5,030 (3,031) 1,999 (751) (187) (125) 936 (25) (1) 910

660 7,867 770 9,296 793 981 11,071 4,679 206 6,185 11,071 12,571 6,386

711 6,282 735 7,728 793 995 9,517 3,951 166 5,400 9,517 10,987 5,587

837 4,704 639 6,180 549 529 7,258 3,499 128 3,631 7,258 8,181 4,550

* SAR Million

54 | Annual Report 2012

Key Financial Highlights Cash Flow Cash Flow from Operating Activities Cash Flow used in Investing activities Dividend paid Key Indicators Return on sales Return on Shareholders Equity* Return on Total Equity* Return on Net Operating Assets* Net debt to equity ratio Current ratio Revenue growth rate Dividends payout ratio Shares Issued (in millions) Earnings per Share (SAR)** Dividend Proposed 14.6% 20.2% 19.3% 12.2% 101.6% 96.8% 24.3% 34.7% 400 3.60 500 14.3% 17.7% 17.7% 14.2% 99.6% 91.8% 14.7% 45.4% 400 2.85 518

Year ended 31 December

2012
2,384 2,933 512

2011
1,924 3,237 516

2010
1,965 2,189 455

2009
1,802 1,711 380

2008
1,016 1,572 270

18.5% 22.3% 22.6% 17.1% 75.6% 115.0% 18.1% 40.3% 400 3.21 518

18.7% 25.6% 26.9% 18.7% 73.2% 151.5% 16.7% 41.9% 384 2.86 460

18.1% 27.3% 27.2% 19.7% 96.4% 136.5% 33.4% 42.0% 379 2.40 382

* SAR Million
* 2009 calculated on quarterly average as a result of the HADCO acquistion. All other years based on average of opening and closing balances ** Based on 400 million shares.

General Assembly Meeting
The Extraordinary general Assembly Meeting will take place on 2nd of April 2013 at the Riyadh Holiday Inn Al Izdehar Hotel - Al Lula'ah Hall at 7:00 p.m.

Certification
We certify that: • Proper books of account have been maintained; • The system of internal control is sound in design and has been effectively implemented; and • There are no significant doubts concerning the Group’s ability to continue as a going concern.

Board of Directors
25 February 2013

Annual Report 2012 | 55

Almarai

58 | Annual Report 2012

Auditor’s Report

AUDITORS’ REPORT TO THE SHAREHOLDERS OF ALMARAI COMPANY (A SAUDI JOINT STOCK COMPANY) SCOPE OF AUDIT: We have audited the accompanying consolidated balance sheet of Almarai Company, a Saudi Joint Stock Company (the “Company”), and its subsidiaries (the “Group”) as of 31 December 2012 and the related consolidated statements of income, cash flows and changes in equity for the year then ended. These consolidated financial statements are the responsibility of the Group’s management and have been prepared by them in accordance with the provisions of Article 123 of the Regulations for Companies and submitted to us together with all the information and explanations which we required. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the Kingdom of Saudi Arabia. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of 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 principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable degree of assurance to enable us to express an opinion on the consolidated financial statements. UNQUALIFIED OPINION: In our opinion, the consolidated financial statements taken as a whole: i) present fairly, in all material respects, the consolidated financial position of the Group as of 31 December 2012 and the results of its operations and its cash flows for the year then ended in accordance with accounting standards generally accepted in the Kingdom of Saudi Arabia. ii) comply with the requirements of the Regulations for Companies and the Company’s By-laws in so far as they affect the preparation and presentation of the consolidated financial statements. for Ernst & Young

Abdulaziz A. Al-Sowailim Certified Public Accountant Registration No. 277 Riyadh: 5 Rabi Awal 1434H (17 January 2013)

Annual Report 2012 | 59

Consolidated Balance Sheet as at 31 December 2012
SAR ‘000 SAR ‘000
Restated Note 4 2011

Notes

2012

Restated Note 4 2011

Notes

2012

LIABILITIES AND EQUITY LIABILITIES Current Liabilities Short Term Loans

ASSETS Current Assets Cash and Cash Equivalents Derivative Financial Instruments Receivables and Prepayments Inventories Total Current Assets Non Current Assets Investments and Financial Assets Property, Plant and Equipment Biological Assets Intangible Assets - Goodwill Deferred Charges Deferred Tax Asset Total Non Current Assets TOTAL ASSETS

12 13 24

1,399,818 2,176,575 102,977 3,679,370

1,208,501 1,515,772 96,374 2,820,647

5 24 6 7

417,304 34,934 791,688 2,317,097 3,561,023

271,979 109 623,756 1,696,998 2,592,842

Payables and Accruals Derivative Financial Instruments Total Current Liabilities Non Current Liabilities Long Term Loans Employees’ Termination Benefits Deferred Tax Liability Total Non Current Liabilities TOTAL LIABILITIES

12

7,254,743 287,056 126,489 7,668,288 11,347,658

5,716,663 243,481 97,983 6,058,127 8,878,774

8 9 10 11

244,327 13,415,836 901,029 1,335,455 50,756 10,222 15,957,625 19,518,648

852,746 10,508,181 817,618 821,263 53,836 9,940 13,063,584 15,656,426

EQUITY Shareholders’ Equity Share Capital Share Premium Statutory Reserve Other Reserves Treasury Shares Retained Earnings Total Shareholders’ Equity Minority Interest TOTAL EQUITY TOTAL LIABILITIES AND EQUITY

14

4,000,000 912,917 (189,861) (95,282) 2,921,667 7,549,441 621,549 8,170,990 19,518,648

2,300,000 1,600,500 768,854 (95,238) (97,757) 2,242,102 6,718,461 59,191 6,777,652 15,656,426

The accompanying notes form an integral part of these consolidated financial statements.

60 | Annual Report 2012

Consolidated Statement of Income for the Year Ended 31 December 2012

SAR ‘000

Notes

2012

2011

Sales

15 16

9،882،996 (6,371,919) 3,511,077

7,950,989 (4,954,469) 2,996,520

Cost of Sales Gross Profit

Selling and Distribution Expenses General and Administration Expenses Net Operating Income Share of Results of Associates and Joint Ventures Finance Charges Income from Main Operations Impairment Loss
Income before Zakat, Income Tax and Minority Interest

17 18

(1,616,749) (221,402) 1,672,926

(1,213,232) (265,678) 1,517,610 (42,298) (134,965) 1,340,347 (160,237) 1,180,110 (33,173) 1,146,937 (7,423)

8

(24,583) (157,487) 1,490,856 1,490,856

Zakat and Income Tax Income before Minority Interest Minority Interest

20

(50,946) 1,439,910 718

Net Income for the Year 21

1,440,628

1,139,514

Earnings per Share (SAR)

Attributable to Income from Main Operations Attributable to Net Income for the Year

3.73 3.60

3.35 2.85

The accompanying notes form an integral part of these consolidated financial statements.
Annual Report 2012 | 61

Consolidated Statement of Cash Flows for the Year Ended 31 December 2012

SAR ‘000

Notes

2012

Restated 2011

SAR ‘000

Notes

2012

Restated 2011

Operating Activities Net Income for the Year Adjustments for:

Investing Activities

1,440,628

1,139,514

Additions to Property, Plant and Equipment Additions to Biological Assets

9 10 22 22 8 4

(3,137,978) (44,222) 98,144 147,599 (23,501) 24,905 2,134 (2,932,919)

(3,035,332) (19,358) 23,528 123,646 (17,500) (315,580) 3,139 (3,237,457)

Depreciation of Property, Plant and Equipment Net Appreciation of Biological Assets Profit on Sale of Property, Plant and Equipment Loss on Sale of Biological Assets Impairment Loss Finance Charges Accrued Share of Results of Associates and Joint Ventures Change in Employees’ Termination Benefits Share Based Payment Expense
Share of Minority Interest in Net Income of Consolidated Subsidiaries

22 22 22 22

924,861 (210,708) (77,122) 46,758

732,730 (213,636) (8,471) 62,151 160,237

Proceeds from the Sale of Property, Plant and Equipment

Proceeds from the Sale of Biological Assets

Acquisition of Investments and Financial Assets
Acquisition of Subsidiaries, Net of Cash Acquired

Dividend received from an Associate
Cash Flows used in Investing Activities

157,487 24,583 43,575 6,227 (718)

134,965 42,298 37,393 1,027 7,423

Financing Activities Net Increase in Loans Dividends Paid Distribution to Minority Interests Finance Charges Paid 1,480,924 (511,842) (784) (277,576) 3,080 693,802 145,325 271,979 417,305 2,077,529 (515,640) (89,177) (97,757) (30,286) 1,344,669 31,229 240,750 271,979

Changes in: Receivables and Prepayments Inventories Deferred Tax Payables and Accruals Cash Flows from Operating Activities (91,133) (504,542) (637) 625,183 2,384,442 9,595 (386,107) 204,898 1,924,017

Purchase of Treasury Shares Change in Deferred Charges Cash Flows from Financing Activities Increase in Cash and Cash Equivalents Cash and Cash Equivalents at 1 January Cash and Cash Equivalents at 31 December

The accompanying notes form an integral part of these consolidated financial statements.

62 | Annual Report 2012

Consolidated Statement of Changes in Equity for the Year Ended 31 December 2012

SAR ‘000

Attributable to equity holders of the parent
Share Capital Share Premium Statutory Reserve Other Reserves Treasury Shares Retained Earnings
Total Shareholder’s Equity

Minority Interest

Total Equity

Balance at 1 January 2011 Net Income for the Year Transfers from Retained Earnings Purchase of Treasury Shares Share Based Payment Transactions Net Movement on Financial Investments Dividends Approved Net Movement on Cash Flow Hedges

2,300,000 -

1,600,500 -

654,903 113,951 -

(155,828) 1,027 83,237 (23,674)

(97,757) -

1,734,039 1,139,514 (113,951) (517,500) -

6,133,614 1,139,514 (97,757) 1,027 83,237 (517,500) (23,674)

51,768 7,423 -

6,185,382 1,146,937 (97,757) 1,027 83,237 (517,500) (23,674)

Balance at 31 December 2011 Net Income for the Year Transfers from Retained Earnings Acquisition of Subsidiaries Net Movement on Treasury Shares Share Based Payment Transactions Net Movement on Financial Investments Distribution to Minority Interests Dividends Approved Net Movement on Cash Flow Hedges Bonus Share Issue Currency Translation Adjustment

2,300,000 1,700,000 4,000,000

1,600,500 (1,600,500) -

768,854 144,063 912,917

(95,238) 6,227 (122,444) 28,221 (6,627) (189,861)

(97,757) 2,475 (95,282)

2,242,102 1,440,628 (144,063) (517,500) 99,500 2,921,667

6,718,461 1,440,628 2,475 6,227 (122,444) (517,500) 28,221 (6,627) 7,549,441

59,191 (718) 563,860 (784) 621,549

6,777,652 1,439,910 563,860 2,475 6,227 (122,444) (784) (517,500) 28,221

(6,627) 8,170,990

Balance at 31 December 2012

The accompanying notes form an integral part of these consolidated financial statements.
Annual Report 2012 | 63

Notes to the Consolidated Financial Statements
1 - The Company, its Subsidiaries and its Business Description
Almarai Company (the “Company”) is a Saudi Joint Stock Company, which was converted on 2 Rajab 1426 A.H. (8 August 2005). The Company initially commenced trading on 19 Dl’ Hijjah 1411 A.H. (1 July 1991) and operates under Commercial Registration No. 1010084223. Prior to the consolidation of activities in 1991, the core business traded between 1976 and 1991 under the Almarai brand name. The Company and its subsidiaries (together, “the Group”) are a major integrated consumer food group in the Middle East with leading market shares in Saudi Arabia and the neighbouring Gulf Cooperation Council (GCC) countries. The dairy, fruit juices and related food business is operated under the Almarai, Beyti and Teeba brand names. All raw milk production and related processing along with dairy food manufacturing activities are undertaken in Saudi Arabia, United Arab Emirates (UAE), Egypt and Jordan. Final consumer products are distributed from the manufacturing facilities in these countries to local distribution centres by the Group’s long haul distribution fleet. Bakery products are manufactured and traded by Western Bakeries Company Limited and Modern Food Industries Limited under the brand names L’usine and 7 Days respectively. International Baking Services Company Limited has ceased trading. These are Limited Liability companies registered in Saudi Arabia and based in Jeddah. Poultry products are manufactured and traded by Hail Agricultural Development Company (HADCO) under the Alyoum brand. HADCO is a closed joint stock company registered in Saudi Arabia and based in Hail. Almarai Baby Food Company Limited is a limited liability company registered in Saudi Arabia. It owns a modern infant formula manufacturing plant in Al Kharj, which is leased to International Pediatric Nutrition Company (a joint venture between Mead Johnson and the Company). The distribution centres in the GCC countries (except for Bahrain and Oman) are managed by the Group and operate within Distributor Agency Agreements as follows: Kuwait Qatar United Arab Emirates - Al Kharafi Brothers Dairy Products Company Limited - Khalid for Foodstuff and Trading Company - Bustan Al Khaleej Establishment The Group operates in Bahrain through its subsidiary Almarai Company Bahrain S.P.C and in Oman through its subsidiaries Arabian Planets for Trade and Marketing L.L.C. and Alyoum for Food Products Company L.L.C. The Group owns and operates arable farms in Argentina through three of its Argentinean subsidiaries Fondomonte Inversiones Argentina S.A., Fondomonte El Descanso S.A. and Fondomonte Sandoval S.A. The Group’s Head Office is located at the following address: Exit 7, North Circle Road Al Izdihar District P.O. Box 8524 Riyadh 11492 Saudi Arabia On 10 Safar 1433 A.H. (4 January 2012) Almarai Emirates Company L.L.C (UAE) was incorporated (which is 100% owned by the Group) for the purpose of trading in United Arab Emirates. Trading has not yet commenced. On 5 Jumad Awwal 1433 A.H. (28 March 2012) the Company, through its subsidiary Almarai Investment Holding Company W.L.L., increased its shareholding in International Dairy and Juice Limited (IDJ) from 48% to 52% through an equity contribution of USD 22.4 million (SAR 83.8 million). IDJ was incorporated on 14 February 2009 between the Company and PepsiCo, focusing on new business opportunities in dairy and juice products in the Middle East, Africa and Southeast Asia excluding the GCC countries. IDJ’s main businesses are the dairy and juice activities of the IDJ operating companies in Egypt and Jordan, as well as exporting Almarai products into the IDJ designated territories. On 10 Shaaban 1433 A.H. (10 July 2012) Nourlac Company Limited was incorporated (which is 100% owned by the Group) for the purpose of trading infant formula. Trading has not yet commenced.

64 | Annual Report 2012

1 - The Company, its Subsidiaries and its Business Description - continued
On 6 Safar 1434 A.H. (19 December 2012), Almarai Investment Holding Company W.L.L., a subsidiary of the Company and the sole shareholder of Blue Yulan S.A. resolved to appoint a liquidator. This holding company is superfluous to the Group structure requirements and the ownership and trading activities of Fondomonte remained within the Group. All assets and liabilities of Blue Yulan S.A. have been taken over and absorbed by Almarai Investment Holding Company W.L.L. and the liquidation was completed on 15 Safar 1434. A.H. (28 December 2012).

Details of the subsidiary companies are as follows:
Direct and Beneficial Ownership Interest

Name of Subsidiary
Almarai Investment Company Limited Almarai Baby Food Company Limited Hail Agricultural Development Company Western Bakeries Company Limited International Baking Services Company Limited Modern Food Industries Limited Agricultural Input Company Limited (Mudkhalat) Nourlac Company Limited Fondomonte El Descanso S.A. Fondomonte Inversiones Argentina S.A. Fondomonte Sandoval S.A. Agro Terra S.A. Almarai Company Bahrain S.P.C. Almarai International Holding W.L.L. Almarai Investment Holding Company W.L.L. IDJ Bahrain Holding Company W.L.L.

Country of Incorporation
Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Argentina Argentina Argentina Argentina Bahrain Bahrain Bahrain Bahrain

Business Activity
Holding Company Manufacturing and Trading Company Poultry / Agricultural Company Bakery Company Holding Company Bakery Company Agricultural Company Trading Company Agricultural Company Agricultural Company Agricultural Company Dormant Sales Company Holding Company Holding Company Holding Company

Functional Currency
SAR SAR SAR SAR SAR SAR SAR SAR ARG ARG ARG ARG BHD BHD BHD BHD

Shares Capital
SAR 1,000,000 SAR 200,000,000 SAR 300,000,000 SAR 200,000,000 SAR 500,000 SAR 70,000,000 SAR 25,000,000 SAR 3,000,000 ARG 27,475,914 ARG 17, 849,997 ARG 4,383,432 ARG 475,875 BHD 100,000 BHD 250,000 BHD 250,000 BHD 250,000

2012
100 % 100 % 100 % 100 % 100 % 60 % 52 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 52 %

2011
100 % 100 % 100 % 100 % 100 % 60 % 52 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 48%

Issued
100,000 20,000,000 30,000,000 200,000 500 70,000 250 3,000 27,475,914 17,849,997 4,383,432 475,875 1,000 2,500 2,500 2,500

Annual Report 2012 | 65

Notes to the Consolidated Financial Statements

Name of Subsidiary
International Dairy and Juice Limited International Dairy and Juice (Egypt) Limited International Company for Agricultural Industries Projects (Beyti) (SAE) Markley Holdings Limited Teeba Investment for Developed Food Processing Al Rawabi for juice and UHT milk Manufacturing Al Muthedoon for Dairy Production Al Atheer Agricultural Company Al Namouthjya for Plastic Production Blue Yulan S.A. Arabian Planets for Trade and Marketing L.L.C. Alyoum for Food Products Company L.L.C. Fondomonte Inversiones S.L. International Dairy and Juice (Dubai) Limited Almarai Emirates Company L.L.C.

Country of Incorporation
Bermuda Egypt Egypt Jersey Jordan Jordan Jordan Jordan Jordan Luxembourg Oman Oman Spain
United Arab Emirates United Arab Emirates

Business Activity
Holding Company Holding Company Manufacturing & Trading Company Dormant Manufacturing Company Manufacturing Company Manufacturing Company Agricultural Company Manufacturing Company Holding Company Sales Company Sales Company Holding Company Holding Company Sales Company

Functional Currency
USD EGP EGP GBP JOD JOD JOD JOD JOD EUR OMR OMR EUR AED AED

Direct and Beneficial Ownership Interest

Shares Capital
USD 7,000,000 EGP 50,000,000 EGP 317,159,000 JOD 49,675,352 JOD 500,000 JOD 500,000 JOD 750,000 JOD 250,000 USD 58,000,000 OMR 150,000 OMR 20,000 EUR 13,047,134 USD 22,042,183
AED 300,000 (Unpaid)

2012
52 % 52 % 52 % 100 % 39 % 39 % 39 % 39 % 39 % 90 % 100 % 100 % 52 % 100 %

2011
48 % 48 % 48 % 100 % 36 % 36 % 36 % 36 % 36 % 100 % 90 % 100 % 100 % 48 % -

Issued
7,000,000 5,000,000 31,715,900 49,675,352 500,000 500,000 750,000 250,000 58,000,000 150,000 20,000 13,047,134 22,042,183 300

66 | Annual Report 2012

2 - Basis of Accounting, Preparation, Consolidation and Presentation of Consolidated Financial Statements
(a) The consolidated financial statements have been prepared on the accrual basis under the historical cost convention (except for derivative financial instruments and investments that have been measured at fair value) and in compliance with the accounting standards issued by the Saudi Organisation for Certified Public Accountants (SOCPA). (b) When necessary, prior period comparatives have been regrouped or adjusted on a basis consistent with current period classification. (c) These consolidated financial statements include assets, liabilities and the results of the operations of Almarai Company (“the Company”) and its subsidiaries (“the Group”) as set out in note (1) above. A subsidiary company is that in which the Company has, directly or indirectly, a long term investment comprising an interest of more than 50% in the voting capital or over which it exerts practical control. A subsidiary company is consolidated from the date on which the Company obtains control until the date that control ceases. The consolidated financial statements are prepared on the basis of the individual financial statements of the Company and the financial statements of its subsidiaries, as adjusted by the elimination of all significant inter group balances and transactions. The Company and its Subsidiaries have identical reporting periods. Minority interests represent the portion of profit or loss and net assets not controlled by the Group and are presented separately in the consolidated statement of income and within equity in the consolidated balance sheet. (d) The figures in these consolidated financial statements are rounded to the nearest thousand.

or which are more than three months due. Bad debts are written off as incurred. D. Inventory Valuation Inventory is stated at the lower of cost and net realisable value. In general, cost is determined on a weighted average basis and includes transport and handling costs. In the case of manufactured products, cost includes all direct expenditure based on the normal level of activity. Net realisable value comprises estimated selling price less further production costs to completion and appropriate selling and distribution costs. Provision is made, where necessary, for obsolete, slow moving and defective stocks. E. Investments in Securities Investments in securities are measured and carried in the consolidated balance sheet at fair value with unrealised gains or losses recognised directly in equity. When the investment is disposed of or impaired the cumulative gain or loss previously recorded in equity is recognised in the consolidated statement of income. Where there is no market for the investments, cost is taken as the most appropriate, objective and reliable measurement of fair value of the investments. F. Investment in Associates and Joint Ventures The investments in associates and joint ventures are accounted for under the equity method of accounting when the Company exercises significant influence over the entity and where the entity is not a subsidiary. Investments in associates and joint ventures are carried in the consolidated balance sheet at cost, plus post-acquisition changes in the Company’s share of net assets of the associates and joint ventures less any impairment in value. The consolidated statement of income reflects the Company’s share of the results of its associates and joint ventures. Unrealized gains and losses resulting from transactions between the Company, its associates and joint ventures are eliminated to the extent of the Company’s interest in the associates and joint ventures. G. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and depreciated on a straight line basis according to the following useful economic lives: Buildings 5 – 33 years Plant, Machinery and Equipment 1 – 20 years Motor Vehicles 6 – 8 years Land and Capital Work in Progress are not depreciated. H. Biological Assets Biological assets are stated at cost of purchase or at the cost of rearing or growing to the point of commercial production, less accumulated depreciation. The costs of immature biological assets are determined by the cost of rearing or growing to their respective age.

3 - Significant Accounting Policies
A. Use of Estimates The preparation of consolidated financial statements, in conformity with accounting standards generally accepted in Saudi Arabia, requires the use of estimates and assumptions. Such estimates and assumptions may affect the balances reported for certain assets and liabilities as well as the disclosure of certain contingent assets and liabilities as at the balance sheet date. Any estimates or assumptions affecting assets and liabilities may also affect the reported revenues and expenses for the same reporting period. Although these estimates are based on management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates. B. Cash and Cash Equivalents For the purposes of the consolidated statement of cash flows, cash and cash equivalents consists of cash at bank, cash on hand, and short-term deposits that are readily convertible into known amounts of cash and have a maturity of three months or less when purchased. C. Accounts Receivable Accounts receivable are carried at the original invoiced amount less any provision made for doubtful debts. Provision is made for all debts for which the collection is considered doubtful

Annual Report 2012 | 67

Biological assets are depreciated on a straight line basis to their estimated residual value based on commercial production periods ranging from 36 weeks to 50 years summarized below: Dairy Herd Plantations Poultry Flock 4 years 12 – 50 years 36 weeks

settled, based on laws that have been enacted in the respective countries at the reporting date. Deferred income tax assets are recognised for all deductible temporary differences and carry-forward of unused tax assets and unused tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax assets and unused tax losses can be utilised. The carrying amount of deferred income tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. N. Derivative Financial Instruments and Hedging Forward foreign exchange contracts are entered into to hedge exposure to changes in currency rates on purchases and other expenditures of the Group. Commission rate swap agreements are entered into to hedge the exposure to commission rate changes of the Group’s borrowings. Forward purchase commodity contracts are entered into to hedge exposure to changes in the price of commodities used by the Group. All hedges are expected to be in the range of 80 – 125% effective and are assessed on an ongoing basis. All hedges are treated as cash flow hedges and gains / losses at market valuation are recorded as derivative financial instruments in the consolidated balance sheet and taken to other reserves in Shareholders’ Equity. When the hedging instrument matures or expires any associated gain or loss in Other Reserves is reclassified to the consolidated statement of income, or the underlying asset purchased that was subject to the hedge. O. Employees’ Termination Benefits Employees’ termination benefits are payable as a lump sum to all employees employed under the terms and conditions of the respective GCC Labour and Workman Laws on termination of their employment contracts. The liability is calculated as the current value of the vested benefits to which the employee is entitled, should the employee leave at the balance sheet date. Termination payments are based on the employees’ final salaries and allowances and their cumulative years of service, in compliance with the conditions stated in the laws of the respective GCC countries. P. Statutory Reserve In accordance with its by-laws and the Regulations for Companies in Saudi Arabia, the Company is required each year to transfer 10% of its net income to a Statutory Reserve until such reserve equals 50% of its share capital. This Statutory Reserve is not available for distribution to Shareholders. Q. Treasury Shares Own equity instruments that are reacquired (treasury shares) are recognised at cost and presented as a deduction from equity and are adjusted for any transaction costs, dividends and gains or losses on sale of such shares. No gain or loss is recognised in the consolidated statement of income on the purchase, sale, issue or cancellation of the Company’s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognised in share premium. Any share options, as contemplated in the following

I. Impairment The carrying values of property, plant and equipment, biological assets and investments and financial assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. Impairment losses are expensed in the consolidated statement of income. For property, plant and equipment and biological assets, where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized as income immediately in the consolidated statement of income. J. Intangibles - Goodwill Goodwill represents the difference between the cost of businesses acquired and the Group’s share in the net fair value of the acquiree’s assets, liabilities and contingent liabilities at the date of acquisition. Goodwill arising on acquisitions is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. K. Accounts payable and accruals Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not. L. Zakat and Income Tax Zakat is provided for in the consolidated financial statements on the basis of an estimated Zakat assessment carried out in accordance with Saudi Department of Zakat and Income Tax (DZIT) regulations. Income tax for foreign entities is provided for in the consolidated financial statements on the basis of an estimated income tax assessment carried out in accordance with the relevant income tax regulations of the countries in which they operate. Adjustments arising from final Zakat and income tax assessments are recorded in the period in which such assessments are made. M. Deferred Tax Deferred income tax is provided for foreign subsidiaries, using the liability method, on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is

68 | Annual Report 2012

paragraph exercised during a reporting period, are satisfied with treasury shares. R. Share Based Payment Transactions Employees of the Company receive remuneration in the form of share based payment transactions under the Employee Stock Participation Program, whereby employees render services as consideration for the option to purchase equity instruments at a predetermined price (equity settled transactions). The cost of equity settled transactions is recognised, together with a corresponding increase in other capital reserves, in equity, over the period in which the service conditions are fulfilled. The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest. The consolidated statement of income expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in Employee Costs. When the terms of an equity settled transaction award are modified, the minimum expense recognised is the expense as if the terms had not been modified, if the original terms of the award are met. An additional expense is recognised for any modification that increases the total fair value of the share based payment transaction, or is otherwise beneficial to the employee as measured at the date of the modification. When an equity settled award is terminated, it is treated as if it vested on the date of termination, and any expense not yet recognised for the award is recognised immediately. This includes any award where non vesting conditions within the control of either the entity or the employee are not met. However, if a new award is substituted for the terminated award, and designated as a replacement award on the date that it is granted, the terminated and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. S. Conversion of Foreign Currency Transactions During the financial period foreign currency transactions are converted and booked in Saudi Riyals at standard exchange rates which are periodically set to reflect average market rates or forward rates if the transactions were so covered. At the balance sheet date, assets and liabilities denominated in foreign currencies are converted into Saudi Riyals at the exchange rates ruling on such date or at the forward purchase rates if so covered. Any resulting exchange variances are charged or credited to the consolidated statement of income as appropriate. The functional currencies of foreign subsidiaries are listed in note 1. As at the reporting date, the assets and liabilities of these subsidiaries are translated into the functional and presentation currency of the Group, Saudi Riyal (SAR), at the rate of exchange ruling at the balance sheet date and their income statements are translated at the weighted average exchange rates for the period. Components of equity, other than retained earnings, are translated at the rate ruling at the date of occurrence of each component. Translation adjustments in respect of these components of equity are recorded as a separate component of shareholders’ equity.

T. Revenue Recognition Products are sold principally on a sale or return basis. Revenue is recognised on delivery of products to customers by the Group or its distributors, at which time risk and reward passes, subject to the physical return of expired products. Adjustment is made in respect of known actual returns. Revenue from the sale of wheat guaranteed to be sold to the Government is recognised upon completion of harvest but the profit on any undelivered quantities is deferred until delivered to the Government. U. Government Grants Government grants are recognized when there is a reasonable assurance that they will be received from the state authority. When the grant relates to an expense item, it is recognized as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. V. Selling, Distribution, General and Administration Expenses Selling, Distribution, General and Administration Expenses include direct and indirect costs not specifically part of Cost of Sales as required under accounting standards generally accepted in Saudi Arabia. Allocations between Cost of Sales and Selling, Distribution, General and Administration Expenses, when required, are made on a consistent basis. The Group charges payments in respect of long term agreements with customers and distributors to Selling and Distribution Expenses. W. Management Fees The fees charged in respect of the management of Arable Farms are credited to General and Administration Expenses. X. Operating Leases Rentals in respect of operating leases are charged to the consolidated statement of income over the terms of the leases. Y. Borrowing Costs Borrowing costs that are directly attributable to the construction of an asset are capitalized up to stage when substantially all the activities necessary to prepare the qualifying asset for its intended use are completed and, thereafter, such costs are charged to the consolidated statement of income. Z. Segmental Reporting A segment is a distinguishable component of the group that is engaged either in selling/ providing products or services (a business segment) or in selling/providing products or services within a particular economic environment (a geographic segment), which is subject to risks and rewards that are different from those of other segments.

Annual Report 2012 | 69

4 - Business Combination
Acquisition of Blue Yulan S.A. On 23 Muharram 1433 A.H. (19 December 2011) the company, through its subsidiary Almarai Investment Holding Company W.L.L., acquired 100% of the outstanding share capital of Blue Yulan S.A. for a cash consideration of SAR 313.8 million (USD 83.5 million). The assets and liabilities of Blue Yulan S.A. as at acquisition date are consolidated by the Group. The net assets recognised in the 31 December 2011 financial statements were based on a provisional assessment and after the final purchase price allocation carried out by management the balances have been restated. The final purchase price allocation was based on audited financial statements. The Group has restated and accounted for the transaction based on the carrying values of the assets and liabilities (with the exception of land) as of the acquisition date which is summarised below. There is no change to the prior year net income.
Assets Land and Buildings Other Property, Plant and Equipment Biological Assets Deferred Tax Asset Inventories Receivables and Prepayments Bank Balances and Cash SAR ‘000
Fair Value Recognized on Acquisition Dec 2011 (Final) Fair Value Recognized on Acquisition Dec 2011 (Provisional)

352,592 1,405 916 9,940 11,554 10,182 5,913 392,502

352,518 1,405 916 8,630 11,341 13,270 5,913 393,993

Liabilities Payables and Accruals Short Term Loans Deferred Tax Liability

(8,057) (432) (97,983) (106,472)

(7,193) (432) (97,983) (105,608) 288,385 33,108 321,493

Total Identifiable Net Assets at Fair Value Goodwill Arising on Acquisition Purchase Consideration Transferred Total Acquisition Cost: Cash Consideration Costs Associated with the Acquisition Total Cash Outflow on Acquisition: Net Cash Acquired with the Subsidiaries Cash Paid Net Cash Outflow

286,030 27,795 313,825

313,825 313,825

312,080 9,413 321,493

5,913 (313,825) (307,912)

5,913 (321,493) (315,580)

70 | Annual Report 2012

Step Acquisition of International Dairy and Juice Limited (“IDJ”)
On 5 Jumad Awal 1433 A.H. (28 March 2012) the Company, through its subsidiary Almarai Investment Holding Company W.L.L., increased its shareholding in IDJ from 48% to 52% through an equity contribution of USD 22.4 million (SAR 83.8 million). These consolidated financial statements include the results of IDJ from 1 March 2012, as the Company effectively obtained control of IDJ from that date. If the combination had taken place at the beginning of the period, the net operating income would have been lower by SAR 6.4 million and the net income of the Group would have been lower by SAR 0.3 million. The fair value of identifiable assets and liabilities of IDJ as at the date of acquisition were as follows:

SAR ‘000

Fair Value Recognized on Acquisition Mar 2012 (Final)

Fair Value Recognized on Acquisition Mar 2012 (Provisional)

Assets Property, Plant and Equipment Biological Assets Intangible Assets - Goodwill Deferred Tax Asset Inventories Receivables and Prepayments Bank Balances and Cash

640,468 22,838 443,212 115,557 76,799 108,718 1,407,592

659,757 22,941 517,355 3,457 109,288 136,306 100,821 1,549,925

Liabilities Short Term Loans Payables and Accruals Derivative Financial Instruments Deferred Tax Liability

(248,473) (66,976) (3,829) (28,861) (348,139)

(225,527) (98,033) (3,829) (47,811) (375,200) (129,522) 1,045,203 (522,990) 44,360 566,573

Non Controlling Interest of Teeba Total Identifiable Net Assets at Fair Value Non Controlling Interest of IDJ Goodwill Arising on Acquisition Purchase Consideration Transferred

(40,870) 1,018,583 (522,990) 70,980 566,573

Total Acquisition Cost: Cash Consideration Fair Value of Previously Held Equity Interest Total Cash Inflow on Acquisition: Net Cash Acquired with the Subsidiaries Cash Paid Net Cash Inflow

83,813 482,760 566,573

83,813 482,760 566,573

108,718 (83,813) 24,905

100,821 (83,813) 17,008

Annual Report 2012 | 71

5 - Cash and Cash Equivalents

SAR ‘000

2012

2011

SAR ‘000

2012

2011

Cash at Bank Cash in Hand Total

308,831 108,473 417,304

178,607 93,372 271,979

Provision for Impairment of Trade Accounts Receivables

Balance at 1 January Provisions released during the year On acquisition of subsidiary Balance at 31 December

23,786 (3,953) 19,106 38,939

38,135 (14,433) 84 23,786

6 - Receivables and Repayments
SAR ‘000 Trade Accounts Receivable - Third Parties - Related Parties (Refer note 27) 2012 2011 Restated

591,649 72,736 664,385

499,912 37,781 537,693
Trade Accounts Receivable Up to 3 months More than 3 months Total SAR ‘000 2012 2011

Less: Provision for impairment of trade receivables Less: Provision for sales returns Net Accounts Receivable

(38,939) (26,570) 598,876

(23,786) (24,315) 489,592

620,556 38,939 659,495

513,907 23,786 537,693

Prepayments Total

192,812 791,688

134,164 623,756

(a) The Group’s policy is to provide 100% impairment provision for all trade receivables due over three months. As at 31 December 2012, trade receivables more than three months due and impaired were SAR 38.9 million (2011: SAR 23.8 million). Movement in the group provision for impairment of trade receivables was as follows:

(b) Unimpaired receivables are expected on the basis of past experience, to be fully recoverable. It is not the practice of the Group to obtain collateral over receivables. (c) Provision for sales returns is calculated based on the forecasted return of expired products in line with the Group’s product return policy.

72 | Annual Report 2012

7 - Inventories

8 - Investments and Financial Assets

The Investments in associated companies, joint ventures and securities comprise of the following:

SAR ‘000

2012

2011 Restated

SAR ‘000

2012

2011

Raw Materials Finished Goods Spares Work in Progress Total

1,783,060 254,375 166,771 112,891 2,317,097

1,312,655 194,421 114,175 75,747 1,696,998

Investments in Associates and Joint Ventures International Dairy and Juice Limited Pure Breed Company International Pediatric Nutrition Company Almarai Company W.L.L.

2012 52.0 % 21.5 % 50.0 % 50.0 %

2011 48.0 % 21.5 % 50.0 % 50.0 % 36,886 11,679 204 48,769 489,500 34,723 10,318 204 534,745

Investments in Securities Zain Equity Investment Zain Subordinated Founding Shareholders’ Loan Jannat for Agricultural Investment Company National Company for Tourism National Seeds and Agricultural Services Company United Dairy Farms Company

2012 2.1 % 10.0 % 1.1 % 7.0 % 8.3 %

2011 2.5 % 10.9 % 1.1 % 7.0 % 8.3 %

181,394 7,000 4,500 2,064 600 195,558

194,250 109,587 7,000 4,500 2,064 600 318,001 852,746

Total

244,327

Annual Report 2012 | 73

8 - Investments and Financial Assets - continued
(a) The investment in associated companies and joint ventures comprises the following: (b) On 5 Jumad Awal 1433 A.H. (28 March 2012) the Company increased its shareholding in IDJ from 48% to 52% through an equity contribution of USD 22.4 million (SAR 83.8 million). This step acquisition results in the Group fully consolidating IDJ’s financial statements as a subsidiary instead of equity accounting its investment in an associate. The carrying value of the associate must be revalued to fair value with any variance being recognised in the consolidated statement of income. Accordingly, the Group has recognised a revaluation gain of SAR 27.2 million which has been included in Share of Results of Associates and Joint Ventures. (c) The Zain equity investment of 23.0 million shares at a par value of SAR 10 per share is measured at fair value based on a quoted market price for the shares on the Saudi Arabian (Tadawul) stock exchange at 31 December 2012 of SAR 7.90. This has resulted in an unrealised loss of SAR 122.4 million which is shown within other reserves in Shareholders’ Equity. On 14 Shabaan 1433 A.H. (4 July 2012), the Board of Directors’ of Zain agreed to decrease the share capital from SAR 14.0 billion to SAR 4.8 billion and accordingly to decrease the number of shares from 1.4 billion to 480.1 million to offset the Company’s accumulated deficit up to 30 September 2011. As a result the Company’s shares in Zain decreased from 35.0 million shares to 12.0 million shares. Further, the founding shareholders of Zain agreed to convert their respective founding Shareholders’ loans from debt into equity by way of a rights issue from Zain. The increased share capital has also been pledged for and on behalf of the preferred creditors. This resulted in the number of shares increasing from 12.0 million shares to 23.0 million shares. (d) All other investments in securities are stated at cost less impairment.

SAR ‘000

2012

2011

International Dairy & Juice Limited Opening Balance Less : Share of Results for the year Less : Transfer to consolidated subsidiary (Refer note 4) Closing Balance Pure Breed Company Opening Balance Add : Share of Results for the year Less : Distributions Closing Balance International Pediatric Nutrition Company Opening Balance Add : Capital Introduced Less : Share of Results for the year Closing Balance Almarai Company W.L.L. Opening Balance Closing Balance

489,500 (6,740) (482,760) -

513,485 (23,985) 489,500

34,723 4,297 (2,134) 36,886

32,764 5,098 (3,139) 34,723

10,318 23,501 (22,140) 11,679

16,229 17,500 (23,411) 10,318

204 204

204 204

74 | Annual Report 2012

9 - Property, Plant and Equipment

SAR ‘000

Land and Buildings (a)

Plant, Machinery Equipment &

Motor Vehicles

Capital Work-inProgress (b)

Total 2012

Restated Total 2011

Cost At the beginning of the year (Restated) On acquisition of subsidiaries Additions during the year Transfers during the year Disposals during the year Reclassification At the end of the year

4,429,812 353,724 696,945 (10,755) 5,469,726

5,540,974 428,763 1,163,733 (137,862) 6,995,608

1,237,147 51,124 387,475 (110,676) 1,565,070

3,188,844 38,889 3,213,069 (2,248,153) 4,192,649

14,396,777 872,500 3,213,069 (259,293) 18,223,053

11,141,206 363,504 3,035,332 (202,739) 59,474 14,396,777

Accumulated Depreciation At the beginning of the year On acquisition of subsidiaries Depreciation for the year Disposals during the year Reclassification At the end of the year

769,879 34,574 170,438

2,478,544 173,521 569,394

640,173 23,936 185,029 (102,329)

-

3,888,596 232,031 924,861 (238,271) 4,807,217

3,274,567 9,507 732,730 (187,682) 59,474 3,888,596

(5,055) (130,887) 969,836 3,090,572

746,809

Net Book Value At 31 December 2012 At 31 December 2011 (Restated)

4,499,890 3,659,933

3,905,036 3,062,430

818,261 596,974

4,192,649 3,188,844

13,415,836 10,508,181

(a) Land & Buildings include land granted to a subsidiary of the company at a historic fair value of SAR 61.0 million. (b) Capital Work-in-Progress includes SAR 75.1 million of borrowing costs capitalised during the year (2011: SAR 56.7 million).

Annual Report 2012 | 75

10 - Biological Assets

SAR ‘000 Cost At the beginning of the year On acquisition of subsidiaries Additions during the year Appreciation Transfers during the year Disposals during the year Reclassification At the end of the year Accumulated Depreciation At the beginning of the year On acquisition of subsidiaries Depreciation for the year Disposals during the year Reclassification At the end of the year Net Book Value At 31 December 2012 At 31 December 2011

Mature Dairy

Immature Dairy

Mature Poultry

Immature Poultry

Mature Plantations

Immature Plantations

Total 2012

Total 2011

716,131 25,475 188 76 258,800 (205,213) 795,457

313,861 351,468 (258,800) (81,302) 325,227

10,330 27,237 (25,964) 11,603

3,959 42,654 (27,237) 19,376

35,577 2,134 37,711

9,704 1,380 (2,134) 8,950

1,089,562 25,475 44,222 351,544 (312,479) 1,198,324

1,033,156 916 19,358 337,047 (303,265) 2,350 1,089,562

262,749 2,637 119,826 (97,094) 288,118

-

4,140 20,276 (21,028) 3,388

-

5,055 734 5,789

-

271,944 2,637 140,836 (118,122) 297,295

263,651 123,411 (117,468) 2,350 271,944

507,339 453,382

325,227 313,861

8,215 6,190

19,376 3,959

31,922 30,522

8,950 9,704

901,029 817,618

76 | Annual Report 2012

11 - Intangible Assets - Goodwill

Key Assumptions Used in Value in Use Calculations Management determined forecast sales growth and gross margin based on past performance and its expectations of market development. The discount rates reflect management’s estimate of the specific risks relating to the segment. Estimates for raw material price inflation have been made based on the publicly available information in Saudi Arabia and past actual raw material price movements, which have been used as an indicator of future price movements. Growth rates are based on the industry averages.

SAR ‘000
Western Bakeries and International Baking Services (WB & IBS)

2012

Restated Note 4 2011 548,636 244,832 27,795 821,263

548,636 244,832 27,795 514,192 1,335,455

The calculation of value in use is most sensitive to the assumptions on sales growth rate and cost of sales inflation used to extrapolate cash flows beyond the budget period as well as the earnings multiple applied to the net income for the final year of the forecast period. Sensitivity to Changes in Assumptions – Western Bakeries and International Baking Services With regard to the assessment of the value in use, management believes that no reasonably possible change in any of the key assumptions above would cause the carrying value of the unit to materially exceed its recoverable amount. The implications of the key assumptions are discussed below. (a) Sales Growth Assumption The current sales growth in 2012 is 20% and in the forecast period has been estimated to be a compound annual growth of 16%. All other assumptions kept the same; a reduction of this growth rate to 12% would give a value in use equal to the current carrying amount. (b) Cost of Sales Inflation The current cost of sales in 2012 is 55% and in the forecast period has been estimated at an average of 55%. All other assumptions kept the same; an increase in the rate to an average of 68% would give a value in use equal to the current carrying amount. (c) Terminal Value Multiple The multiple applied to net income for the final year of the forecast period to determine the terminal value is 14.7. All other assumptions kept the same; a reduction of this multiple to 0.8 would give a value in use equal to the current carrying amount. Sensitivity to Changes in Assumptions – HADCO With regard to the assessment of the value in use, management believes that no reasonably possible change in any of the key assumptions above would cause the carrying value of the unit to materially exceed its recoverable amount. The implications of the key assumptions are discussed below. (a) Sales Growth Assumption The current sales growth in 2012 is 58% and in the forecast period has been estimated to be acompound annual growth of 43%. All other assumptions kept the same; a reduction of this growth rate to 38% would give a value in use equal to the current carrying amount.

HADCO Fondomonte IDJ Total

The goodwill noted above arises from the acquisition of Western Bakeries Limited and International Baking Services Limited in 2007, HADCO in 2009, Fondomonte in 2011 and IDJ in 2012 (“the Subsidiaries”). Goodwill is subject to annual impairment testing. Western Bakeries and International Baking Services Limited form part of the Bakery Products reporting segment, HADCO represents part of both the Arable and Horticulture reporting segment and the Poultry reporting segment while Fondomonte forms part of the Arable and Horticulture reporting segment. IDJ falls under the dairy and juice reporting segment. Assets are tested for impairment by comparing the residual carrying amount of each cashgenerating unit (CGU) to the recoverable amount which has been determined based on a value in use calculation using cash flow projections based on financial forecasts approved by senior management covering a five-year period. The discount rate applied to cash flow projections varies between 8.9% and 15.1% for each CGU and the residual value at the end of the forecast period has been calculated by applying an earnings multiple to the net income for the final year in the forecast period. The recoverable amount for Fondomonte has been determined based on a fair value less costs to sell calculation.

Annual Report 2012 | 77

(b) Cost of Sales Inflation The current cost of sales in 2012 is 48% and in the forecast period has been estimated at anaverage of 48%. All other assumptions kept the same; an increase in the rate to an average of 63% would give a value in use equal to the current carrying amount. (c) Terminal Value Multiple The multiple applied to net income for the final year of the forecast period to determine the terminal value is 20.8. All other assumptions kept the same; a reduction of this multiple to 6.4 would give a value in use equal to the current carrying amount. Sensitivity to Changes in Assumptions – IDJ With regard to the assessment of the value in use, management believes that no reasonably possible change in any of the key assumptions above would cause the carrying value of the unit to materially exceed its recoverable amount. The implications of the key assumptions are discussed below. (a) Sales Growth Assumption The current sales growth in 2012 is 27% and in the forecast period has been estimated to be a compound annual growth of 26%. All other assumptions kept the same; a reduction of this growth rate to 25% would give a value in use equal to the current carrying amount. (b) Cost of Sales Inflation The current cost of sales in 2012 is 73% and in the forecast period has been estimated at an average of 72%. All other assumptions kept the same; an increase in the rate to an average of 78% would give a value in use equal to the current carrying amount. (c) Terminal Value Multiple The multiple applied to net income for the final year of the forecast period to determine the terminal value is 16.5. All other assumptions kept the same; a reduction of this multiple to 7.9 would give a value in use equal to the current carrying amount. Key Assumptions Used in Fair Value Calculations The recoverable amount for Fondomonte is measured on the basis of fair value less costs to sell. Fair value less costs to sell is defined as “the amount obtainable from the sale of an asset or cash generating unit in an arms length transaction between knowledgeable, willing parties, less the costs of disposal”. Management has reviewed the carrying value of Fondomonte and its underlying assets internally. Based on the current price of cereal grains the market value of these assets is determined to be at least equal to their carrying value.

12 - Terms Loans

SAR ‘000

2012 6,402,409 974,219 275,807 2,126 7,654,561

2011 5,980,116 941,048 4,000 6,925,164 6,925,164

Islamic Banking Facilities (Murabaha) Saudi Industrial Development Fund Other Banking Facilities Agricultural Development Fund

Sukuk Total

1,000,000 8,654,561

A. The borrowings from Islamic banking facilities (Murabaha) are secured by promissory notes given by the Group. B. The borrowings of the Group from the Saudi Industrial Development Fund are secured by a mortgage on specific assets amounting to SAR 974.2 million as at 31 December 2012 (2011: SAR 941.0 million). C. The other banking facilities represent borrowings of foreign subsidiaries from foreign banking institutions. D. On 14 Rabi Thani 1433 A.H. (7 March 2012), the Company issued its first Sukuk amounting to SAR 1 billion at a par value of SAR 1,000,000 each without discount or premium. The Sukuk issuance bears a return based on SIBOR plus a pre-determined margin payable semi-annually in arrears. The Sukuk is due for maturity at par on its expiry date of 30 Jumad Thani 1440 (7 March 2019). As per the terms of the arrangement, the Company is entitled to commingle its own assets with the Sukuk Assets. Sukuk Assets comprise the sukukholders share in the Mudaraba Assets and the sukukholders interest in the Murabaha Transactions, together with any amounts standing to the credit of the Sukuk Account and the Reserve retained by the Company from the Sukuk Account.

78 | Annual Report 2012

13 - Payables and Accruals

E. Maturity of Financial Liabilities:

SAR ‘000

Facilities available at 31 December 2012

Outstanding 2012

Term Loans 2011

SAR ‘000

2012

Restated 2011

Less than one year One to two years Two to five years Greater than five years

1,414,319 5,027,068 3,776,569 2,067,240

1,399,818 2,683,756 3,383,747 1,187,240

1,208,501 2,844,583 2,838,080 34,000

Trade Accounts Payable - Third Parties - Related Parties (Refer note 27) Other Payables Zakat and Income Tax Provision (Refer note 20) Total

1,429,075 38,465 636,797 72,238 2,176,575

851,390 13,971 584,519 65,892 1,515,772

Total

12,285,196

8,654,561

6,925,164

The Islamic banking facilities (Murabaha) with a maturity period of less than two years are predominantly of a revolving nature. During 2012 the group secured an additional SAR 1,800.0 million of Islamic Banking Facilities (Murabaha) with maturities greater than five years (2011: SAR 1,800.0 million with maturities between three to five years). As at 31 December 2012 SAR 2,658.3 million Islamic Banking Facilities (Murabaha) were unutilized and available for drawdown (2011: SAR 2,435.5 million). As at 31 December 2012 the Group had SAR 972.3 million of unutilized SIDF facilities available for draw down with maturities predominantly greater than five years (2011: SAR 398.4 million).

14 - Share Capital
The Company’s share capital at 31 December 2012 amounted to SAR 4,000.0 million (2011: SAR 2,300.0), consisting of 400 million (2011: 230 million) fully paid and issued shares of SAR 10 each. On 10 Jumad Awal 1433 A.H. (2 April 2012) the Extraordinary General Assembly Meeting approved an increase in the share capital from SAR 2,300.0 million to SAR 4,000.0 million through the distribution of 1 bonus share for each 1.353 outstanding shares for existing shareholders at the end of the trading on the same day. All legal formalities to effect this increase have been completed.

Annual Report 2012 | 79

15 - Segmental Reporting
The Group’s principal business activities involve manufacturing and trading of dairy and juice products under the Almarai, Beyti and Teeba brands, bakery products under the brands L’usine and 7 Days, poultry products under the Alyoum brand, arable and horticultural products as well as other activities. Other activities include the investments in Zain and infant nutrition. Selected financial information as of 31 December 2012 and 2011 and for the years then ended categorized by these business segments, are as follows:

SAR ‘000

Dairy and Juice

Bakery

Poultry

Arable and Horticulture

Other Activities

Total

31 December 2012 Sales Third Party Sales Depreciation Share of Results of Associates and Joint Ventures Income before Minority

7,988,406 7,972,686 (481,331) (6,740) 1,371,771

1,290,645 1,290,645 (114,150) 171,820

504,350 504,350 (50,340) 4,297 (96,800)

386,032 115,315 (68,332) 30,880

(22,140) (37,761)

10,169,433 9,882,996 (714,153) (24,583) 1,439,910

Share of Net Assets in Associates and Joint Ventures

204 2,594,310 8,184,108 11,046,963 (10,050,022)

180,457 1,786,704 2,002,505 (233,468)

36,886 1,833,192 3,559,923 3,728,592 (287,503)

21,568 1,433,157 1,736,202 (243,693)

11,679 109,327 993,733 1,004,386 (532,972)

48,769 4,738,854 15,957,625 19,518,648 (11,347,658)

Additions to Non-Current Assets Non-Current Assets Total Assets Total Liabilities

80 | Annual Report 2012

15 - Segmental Reporting - continued

SAR ‘000

Dairy and Juice

Bakery

Poultry

Arable and Horticulture

Other Activities

Total

31 December 2011 (Restated) Sales Third Party Sales Depreciation Share of Results of Associates and Joint Ventures Impairment Loss Income before Minority

6,606,206 6,592,805 (331,114) (23,985) 1,204,680

1,037,019 966,374 (90,278) 118,032

319,210 319,210 (39,006) 5,098 (33,478)

321,531 72,600 (58,696) 52,658

(23,411) (160,237) (194,955)

8,283,966 7,950,989 (519,094) (42,298) (160,237) 1,146,937

Share of Net Assets in Associates and Joint Ventures

489,704 1,561,970 7,046,843 9,064,765 (7,676,394)

242,548 1,745,506 1,920,117 (281,452)

34,723 1,184,266 1,769,980 1,937,961 (187,144)

502,171 1,471,062 1,699,573 (205,317)

10,318 313,661 1,030,193 1,034,010 (528,467)

534,745 3,804,616 13,063,584 15,656,426 (8,878,774)

Additions to Non-Current Assets Non-Current Assets Total Assets Total Liabilities

Annual Report 2012 | 81

The business activities and operating assets of the Group are mainly concentrated in GCC countries, and selected financial information as at 31 December 2012 and 2011 and for the years then ended, categorized by these geographic segments are as follows:

Analysis of sales is given by product group as shown below.

SAR ‘000 2012 Saudi Arabia Other GCC Countries Other Countries Total

Sales

Non-Current Assets

SAR ‘000 Fresh Dairy

2012

2011

4,062,057 1,016,232 1,243,222 1,601,811 1,290,645 504,350 115,315 49,364 9,882,996

3,475,719 761,135 888,110 1,446,635 966,374 319,210 72,600 21,206 7,950,989

6,650,596 2,575,357 657,043 9,882,996

14,053,017 300,535 1,604,073 15,957,625

Long Life Dairy Fruit Juice Cheese & Butter Bakery Poultry

2011 (Restated) Saudi Arabia Other GCC Countries Other Countries Total

Arable and Horticulture

5,656,415 2,198,470 96,104 7,950,989

12,003,293 169,940 890,351 13,063,584

Other Dairy Total

82 | Annual Report 2012

16 - Cost of Sales

17 - Selling and Distribution Expenses

SAR ‘000

2012

2011 Employee Costs

SAR ‘000

2012

2011

Direct Material Costs Government Grants Employee Costs Share Based Payment Transaction Expense Depreciation of Property, Plant and Equipment Depreciation of Biological Assets Biological Asset Appreciation Loss on Sale of Biological Assets Other Expenses Total

4,403,588 (124,388) 725,392 3,024 728,881 140,836 (351,544) 46,758 799,372 6,371,919

3,515,647 (82,212) 557,932 504 572,413 123,411 (337,047) 62,151 541,670 4,954,469

756,460 1,902 487,159 164,362 206,866 1,616,749

583,209 306 397,345 137,747 94,625 1,213,232

Share Based Payment Transaction Expense Marketing Expenses Depreciation of Property, Plant and Equipment Other Expenses Total

Annual Report 2012 | 83

18 - General and Administration Expenses

SAR ‘000

2012

2011

Employee Costs Share Based Payment Transaction Expense Insurance Depreciation of Property, Plant and Equipment Profit on Sale of Property, Plant and Equipment Other Expenses Total

287,979 1,300 23,710 31,618 (77,122) (46,083) 221,402

211,089 217 22,566 22,570 (8,471) 17,707 265,678

The vesting of the Option is dependent on meeting or exceeding the requisite annual performance targets set by the Company in accordance with its five year plan. The exercise of the Option is contingent upon the shares of the Company continuing to be listed on the Saudi Stock Exchange. In the event of a capital increase, share split or dividend distribution (in the form of shares), the number of Restricted Shares and the exercise price subject to the Option will be adjusted accordingly. The number of share options and the exercise price has been retrospectively adjusted for the prior period to reflect the effect of the bonus share issue. The fair value of the Option is estimated at the grant date using the Black Scholes Merton pricing model, taking into account the terms and conditions upon which the share options were granted. The following table illustrates the number of, and movements in, share options during the year:

19 - Employee Stock Participation Program
The Company will offer certain employees (the “Eligible Employees”) the option (the “Option”) for equity ownership (“Restricted Shares”) opportunities and performance based incentives which will result in more alignment between the interest of both shareholders and these employees. The number of Restricted Shares shall not exceed 1,913,043 shares. If Restricted Shares have not been granted to Eligible Employees in the reporting period for which it was earmarked, it shall carry over to the next reporting period. The program is effective after adoption by the Board of Directors (the “Effective Date”), on 4 Thul Quada 1432 A.H. (1 October 2011). The program shall continue for a period of three years from the date of its adoption by a resolution of the Board and shall automatically renew in successive three year periods unless otherwise terminated by a resolution of the Board. As the Eligible Employees have the option to purchase the Restricted Shares on their respective award dates in exchange for cash at a predetermined price, provided vesting conditions are met, this is regarded as an equity settled share based payment transaction.
2012 Outstanding at 1 January Granted during the year Forfeited during the year Outstanding at 31 December 2011

1,845,217 (17,391) 1,827,826

1,845,217 1,845,217

Exercise price is SAR 50.74 in the program.

84 | Annual Report 2012

20 - Zakat and Income Tax
The weighted average remaining contractual life for the options outstanding at 31 December 2012 is 1.2 years (2011: 2.2 years). The weighted average fair value of options granted during the year was SAR nil (2011: SAR 12.5 million). The following table list the inputs to the model used for the determination of the fair value of the Options for the year ended 31 December 2012:
Zakat Charge Income Tax Expense for Foreign Subsidiaries Charged to Consolidated Statement of Income

A. Zakat is charged at the higher of net adjusted income or Zakat base as required by the Department of Zakat and Income Tax (DZIT). In the current year, the Zakat charge is based on the net adjusted income method.

SAR ‘000

2012

2011

44,067 6,879 50,946

28,993 4,180 33,173

2012
Dividend yield (%) Expected volatility (%) Risk free interest rate (%) Expected life of share options (years) Weighted average share price (SAR) Model used

2011

2.5 % 20.9 % 5.0 % 1.2 50.74

2.5 % 20.9 % 5.0% 2.2 50.74

B. Zakat and Income Tax Provisions

SAR ‘000

2012

2011

Balance at 1 January Charged to Consolidated Statement of Income Payments On acquisition of subsidiarires Balance at 31 December

65,892 50,946 (44,613) 13 72,238

65,236 33,173 (32,517) 65,892

Black Scholes Merton

The expected life of the share options is based on historical data and current expectations and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the Options is indicative of future trends, which may also not necessarily be the actual outcome.

C. The Company has filed its Zakat returns for all the years up to 2011 and settled its Zakat liabilities accordingly. The Zakat assessments have been agreed with the DZIT for all the years up to 2006 while the 2007 to 2011 Zakat returns are still under review by the DZIT. HADCO has filed its Zakat returns for all years up to 31 December 2008 and has settled its Zakat liabilities accordingly. The Zakat assessments have been agreed with the DZIT for all years up to 31 December 2002 while the 2003 to 2008 Zakat returns are still under review by the DZIT. From 2009 onwards HADCO is not required to file a return as results are consolidated in to the Group’s return.

Annual Report 2012 | 85

21 - Earnings Per Share
Earnings per Share are calculated on the weighted average number of issued shares at 31 December 2012 and 31 December 2011 amounting to 400 million shares. The weighted average number of shares of issued shares has been retrospectively adjusted for the prior period to reflect the effect of the bonus share issue.

23 - Financial Risk Management Objectives and Policies
Financial instruments carried on the consolidated balance sheet include cash and cash equivalents, trade and other accounts receivable, derivative financial instruments, investments in securities, loan, short term bank borrowings, accounts payable, accrued expenses and other liabilities and long term debt. Commission Rate Risk is the exposure associated with the effect of fluctuations in the prevailing commission rates on the Group’s financial position and cash flows. Islamic banking facilities (Murabaha) amounting to SAR 6,402.4 million at 31 December 2012 (2011: SAR 5,980.1 million) bear financing commission charges at the prevailing market rates. The Group’s policy is to manage its financing charges using a mix of fixed and variable commission rate debts. The policy is to keep between 50% to 60% of its borrowings at fixed commission. The following table demonstrates the sensitivity of the income to reasonably possible changes in commission rates, with all other variables held constant. There is no impact on the Company’s equity.

22 - Depreciation and Disposal of Assets

SAR ‘000

2012

2011

A. Depreciation Property, Plant and Equipment Depreciation Biological Assets Depreciation of Biological Assets Biological Assets Appreciation Net Biological Assets Appreciation Total

924,861

732,730

140,836 (351,544) (210,708) 714,153

123,411 (337,047) (213,636) 519,094
2012
Increase / decrease in basis points of commission rates Effect on income for the year SAR’000

B. (Profit)/Loss on the Sale of Assets Property, Plant & Equipment Proceeds from the Sale of Property, Plant and Equipment
Net Book Value of Property, Plant and Equipment Sold

30+ 30(98,144) 21,022 (77,122) (23,528) 15,057 (8,471)
2011

(20,035) 20,035

Profit on Sale of Property, Plant and Equipment

30+ 30-

(17,910) 17,910

Biological Assets Proceeds from Sale of Biological Assets Net Book Value of Biological Assets Sold Loss on Sale of Biological Assets Total

(147,599) 194,357 46,758 (30,364)

(123,646) 185,797 62,151 53,680

Foreign Currency Risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group has transactional currency exposure principally in United States Dollars, Euros and Great British Pounds. Other transactions in foreign currencies are not material.

86 | Annual Report 2012

The outstanding foreign currency forward purchase agreements were as follows: Credit Risk is the risk that one party will fail to discharge an obligation and will cause the other party to incur a financial loss. The Group limits its credit risk by trading only with recognized, creditworthy third parties. The Group’s policy is that all customers who wish to trade on credit terms are subject to credit verification procedures. Trade and other accounts receivable are mainly due from local customers and related parties and are stated at their estimated realizable values. The Group seeks to limit its credit risk with respect to customers by setting credit limits for individual customers and by monitoring outstanding receivables on an ongoing basis. The receivable balances are monitored with the result that the Group’s exposure to bad debts is not significant. The five largest customers account approximately for 27% of outstanding accounts receivable at 31 December 2012 (2011: 25%). With respect to credit risk arising from other financial assets of the Group comprising of cash and cash equivalents, investments in securities and loan, the Group’s exposure to credit risk arises from default of the counterparty, with maximum exposure equal to the carrying amount of these instruments. Cash and bank balances are placed with national and international banks with sound credit ratings. Liquidity Risk is the risk that an enterprise will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from the inability to sell a financial asset quickly at an amount close to its fair value. Liquidity risk is managed by monitoring on a regular basis that sufficient funds and bank facilities are available to meet the Group’s future commitments. The Group’s terms of sales require amounts to be paid either on a cash on delivery or on a terms basis. The average days of sales outstanding for 2012 were 22 days (2011: 24 days). Trade payables are typically settled on a terms basis, the average payables outstanding for 2012 were 67 days (2011: 57 days).

SAR ‘000

2012

2011

Euro United States Dollar Great British Pound Other Total

1,002,025 734,699 115,640 49,058 1,901,422

993,670 1,320,478 61,437 46,249 2,421,834

The Group uses forward currency contracts to eliminate significant currency exposures. Management believe that the currency risk for inventory and capital expenditure purchases is adequately managed primarily through entering into foreign currency forward purchase agreements. It is the Group’s policy to enter into forward contracts based on the underlying exposure available from the Group’s business plan/commitment with the suppliers. The forward purchase agreements are secured by promissory notes given by the Group. As the Saudi Riyal is pegged to the United States Dollar any exposure to fluctuations in the exchange rate are deemed to be insignificant. The following analysis calculates the sensitivity of income to reasonably possible movements of the SAR currency rate against the Euro, with all other variables held constant, on the fair value of currency sensitive monetary assets and liabilities as at the reporting date.
Increase/decrease in Euro rate to SAR Effect on income for the year SAR’000

24. Financial Instruments
Fair Value Fair value is the amount for which an asset could be exchanged, or a liability settled between knowledgeable willing parties in an arm’s length transaction. As the Group’s consolidated financial statements are prepared under the historical cost method, differences can arise between the carrying values and the fair value. The fair values of financial instruments are not materially different from their carrying values. Hedging Activities At 31 December 2012 the Group had 19 commission rate swap agreements in place covering total notional amounts of SAR 1,450.0 million and US$ 210.0 million. At 31 December 2011 the Group had 15 commission rate swap agreements in place covering total notional amounts of SAR 800.0 million and US$ 210.0 million. Four new commission rate swaps were taken in 2012

2012

10%+ 10%-

(15,753) 15,753

2011

10%+ 10%-

(14,369) 14,369

Annual Report 2012 | 87

for notional amount of SAR 600.0 million. The swaps result in the Group receiving floating SIBOR / US$ LIBOR rates while paying fixed rates of commission or floating US$ LIBOR rates under certain conditions. One had a deferred start of 12 month and another one had a deferred start of 15 months from trade date with total exposure of SAR 200.0 million. The swaps are being used to hedge the exposure to commission rate changes of the Group’s Islamic borrowings. One of the contracts had an option of increasing the notional amount by SAR 50.0 million on the start date, which was exercised. At 31 December 2012 and 2011 the Group had various forward foreign exchange contracts that were designated as hedges to cover purchases and other expenditures in a variety of foreign currencies. All derivative financial instruments are being used as cash flow hedges and are carried in the consolidated balance sheet at fair value. All cash flow hedges are either against transactions with either firm commitments, or forecast transactions that are highly probable. The hedged highly probable forecast transactions denominated in foreign currency are expected to occur at various dates during the next 15 months. All 2012 hedges were considered highly effective and the net gain on cash flow hedges during the year recognised in Other Reserves within equity was SAR 28.2 million (2011: net loss of SAR 23.7 million).

D. Commitments under operating leases expire as follows:

SAR ‘000 Within one year Two to five years After five years Total

2012

2011

91,635 67,217 22,821 181,673

72,581 78,137 45,183 195,901

26 - Directors’ Remuneration
The Directors' remuneration paid to the Board of Directors for year ended 31 December 2012 amounted to SAR 6.6 million (2011: SAR 6.6 million).

27 - Related Party Transactions and Balances
During the normal course of its operations, the Group had the following significant transactions with related parties during the year ended 31 December 2012 and 31 December 2011 along with their balances:

25. Commitments and Contingencies
A. The contingent liabilities against letters of credit are SAR 233.2 million at 31 December 2012 (2011: SAR 342.2 million). B. The contingent liabilities against letters of guarantee are SAR 381.1 million at 31 December 2012 (2011: SAR 183.0 million).

SAR ‘000

Amount

Balance at 31 December

2012

C. The Company had capital commitments amounting to SAR 1,699.1 million at 31 December 2012 in respect of ongoing projects (2011: SAR 1,930.6 million). The majority of the capital commitments are for new production facilities, sales depot development, distribution fleet, fridges and information technology.

Sales Purchases

(406,691) 344,568

72,736 (38,465)

2011
Sales Purchases

(444,510) 276,022

37,781 (55,917)

88 | Annual Report 2012

Pricing and terms for these transactions are at arm’s length. The related parties noted above include the following:

Entity Savola Group Arabian Shield Cooperative Insurance Company Managed Arable Farms Pure Breed Company International Pediatric Nutrition Company

Relationship Major Shareholder Common Ownership Common Ownership Investment in Associate Investment in Joint Venture

28 - Dividends Approved and Paid
On 10 Jumad Awal 1433 A.H. (2 April 2012) the General Assembly Meeting approved a dividend of SAR 517.5 million (SAR 2.25 per share based on 230 million shares) for the year ended 31 December 2011, which was paid on 19 Jumad Awal 1433 A.H. (11 April 2012).

Contact Details
Almarai welcomes your feedback, suggestions and queries. For investor relations matters, please contact: Khalid M. Al Nasser +966 (1) 470 0005 Ext. 1280 investor.relations@almarai.com For product related matters, please contact: 800 124 6688 (KSA) +966 (1) 453 6688 (International) info@almarai.com www.almarai.com

29 - Dividends Proposed
The Board of Directors proposes for approval at the General Assembly Meeting a dividend for the year ended 31 December 2012 of SAR 500.0 million (SAR 1.25 per share based on 400 million shares).

30 - Subsequent Events
In the opinion of the Management, there have been no significant subsequent events since the year end that would have a material impact on the financial position of the Group as reflected in these consolidated financial statements.

31 - Approval Of Consolidated Financial Statements
The consolidated financial statements were approved by the Board of Directors on 5 Rabi Awal 1434 A.H. (17 January 2013).

Annual Report 2012 | 89

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