46 AGM of Engro Corporation Limited

Overview of 2011

The consolidated revenue stood at Rs. 114.6 billion for the year ended December 31, 2011, as compared to Rs. 79.9 billion in 2010. The company announced earnings per share (EPS) of Rs 20.50 for 2011, as compared to an EPS of Rs 17.27 in 2010. A final cash dividend of 20% (Rs 2 per share) has been approved by the Board, making a total dividend of Rs 6 per share for 2011. The Board has also recommended the issuance of 30% bonus shares (3 shares for every 10 shares held).

Business Review

Fertilizer

In 2011, the urea demand declined to 5.9 m tons (from 6.1m in 2010) due to reduced supply on account of severe gas shortage. WithEngro expansion project (Enven’s) commissioning, the business produced 1,279 thousand tons of urea and sold 1,263 thousand tons, achieving a market share of 21%. The phosphates industry declined to 1.1m tons (from 1.4m tons in 2010) with the business selling 336kt of phosphates vs 328kt in 2010, achieving a market share of 29%. The Fertilizer manufacturing and trading businesses achieved a total profit of Rs 6,251 million during 2011, a 12% growth over the year 2010. The business through its operating leverage also retired Rs. 6 billion of debt throughout the calendar year 2011 and is well on its way to deleverage its balance sheet.

Foods

In 2011, the foods business achieved volume growth of 22% in the dairy segment securing a market share of 44% as opposed to 39% in 2010. During the first half of the year, in May 2011, the foods business raised Rs. 1.2 billion by issuing 48 million shares to the institutional investors – mainly the US & UK mutual funds – and local investors. The shares were issued at a price of Rs. 25 per share. Mirroring its success in the local market, the business made its foray in the international arena with acquisition of Al-Safa – a leading halal meat brand in North America – at a total cost of US $6.3 million in April 2011.

The foods business continued to expand its infrastructure and product portfolio to meet consumer needs and achieved a profit after tax of Rs. 891 million during 2011 as compared to Rs 177 million during 2010.

Petrochemicals

The petrochemical business’s production was lower than capacity due to limited availability of VCM and some operational constraints. However, by the end of the fourth quarter the plant had overcome significant teething problems and is in better shape with VCM capacity utilization up to 99%. During the year, the company produced 122KT of PVC as compared to 114KT in 2010. The business, however, incurred an after tax loss of Rs. 706 million due to unstable VCM operations in the first three quarters, and lower international PVC-Ethylene margins in the fourth quarter.

Energy & Power

During the year 2011, the energy business recorded its highest dispatch of total net power of 1,657 GWh to the national grid as compared to 1,201 GWh in 2010. The technical, environment, social and economic feasibility for the Thar Coal project has been completed as per the target deadline. The business declared a profit after tax of Rs 1,718 million as compared to 1, 111 million in the year 2010.

Chemical Storage & Terminal

The chemical terminal’s actual throughput for the year was 1,092 k tons vs. 1,104 k tons in 2010. The decrease in annual throughput is mainly attributable to lower import of Phos Acid due to lower production of DAP  as a result of gas load management by SSGCL. During the year company also handled first export parcel of VCM.  Continued efforts to position for the LNG import terminal at Port Qasim resulted in short-listing of the Company for the integrated LNG project and creation of a 100 percent owned subsidiary with the name Elengy Terminal Pakistan Limited.  Showing consistent growth in its main line of business, the chemical storage and handling business posted a profit after tax of Rs. 3484 million (inclusive of tax reversal of Rs 2018 million) in 2011 as opposed to Rs. 1109 million in 2010.

Others

The automation and control engineering business registered a loss after tax of Rs 169 million in 2011 due to reverberating impact of the recession where customers remained cautious with their capital expenditures. The second issue of ‘Engro Rupiya Certificates’ was completely subscribed raising Rs 2.75 Bn during 2011.

Near Term Outlook and Challenges

For our fertilizer business, the continuation of the gas curtailment is expected to result in decreased production. The implementation of the Gas Infrastructure Development Cess Tax decreased the feed gas subsidy from Rs. 345 per bag to Rs. 260 per bag also increasing the input price of the gas from Rs. 103 per mmbtu to Rs. 313 per mmbtu – an increase of over 200 percent. This increase in input costs coupled with the continuing gas curtailment is expected to build inflationary pressures on the supply price of urea in the local market.

The foods business will continue to increase market share in its dairy and ice cream segment offering strong value added benefits to the consumers.

Given the current energy situation in the country the energy business is expected to continue achieving high dispatch rates and demonstrate strong performance.

PVC domestic demand is expected to remain stable in 2012. Demand from agriculture sector and export of pipes to Afghanistan is expected to continue to generate PVC demand. However, gas and power shortages are expected to impact demand of both PVC and Caustic Soda.

The subject company for research this year was Engro Foods Limited, on which students from 8 leading business schools were required to prepare detailed equity research reports. The IRC is an annual competition organized by CFA Pakistan giving students from Pakistan’s top business schools the opportunity to learn from industry experts and compete with their peers. The challenge teaches participants best practices in equity research through hands-on mentoring and intensive training in company analysis and presentation skills.

This year’s panel of judges for the Pakistan Final comprised Mr. Farid Khan, CFA, Mr. Qasim Lakhani, CFA, Mr. Imtiaz Gadar, CFA , Mr. Muhammad Sajid, CFA and Dr. Amjad Waheed, CFA.

Congratulating the winning team at the finale, Mr. Afnan Ahsan, CEO, Engro Foods Limited said, “On behalf of Engro Foods Limited, I would like to congratulate all the winners for putting in so much thought and effort into their report. Apart from testing the research capacities of the youth, the competition aimed at instilling a sense of confidence and team work, giving them a glimpse into the functioning of the corporate world. I have no doubt in my mind that you will make Pakistan proud at the Final leg of this competition later this year.’

Engro Foods’ revenue for 2011 recorded an increase of 43% and stood at Rs. 30 billion as compared to Rs. 21 billion in the 2010. The Company also announced an EPS of Rs. 1.22 (basic & diluted) for the year 2011 as compared to EPS of Rs 0.31 in the year 2010.

Engro Foods continued to consolidate its growth through the year and during the first half of the year, in May 2011, the foodsbusiness raised Rs. 1.2 billion by issuing 48 million shares to the institutional investors – mainly the US & UK mutual funds – at a share price of Rs. 25 per share. The Company’s vision to enhance its footprint and pursue a focused growth strategy led to the first-ever public offering of 27 million shares of the business to the general public at a price of Rs. 25 per share – inclusive of a premium of Rs. 15 per share.

Summary of Results for the year ended December 31, 2011

Dairy and Juice  Segment:

Dairy

The Company continued its aggressive business strategy of growth and diversification and achieved volume growth of 22% in 2011. Building on its promise of elevating consumer delight, the business diversified into popularly priced, high quality product category with the launch of Dairy Omung – a nutritious and affordable dairy product for lower income consumers. Innovation remained at the core of the business’s product expansion strategies this year and we also introduced Olper’s variants of Badam Zafran and Rose flavors which were well received by the market.

Juices & Nectars

The year 2011 also marked the relaunch of the refreshing Olfrute brand which continues to reflect strong consistent growth in its volume base. With six invigorating flavors Olfrute registered a volume growth of 236% in 2011.

Ice cream and Frozen Desserts Segment:

Omore’s volume increased by 43% in 2011 and the company continued to investment in its brands, product development & diversification and cold chain infrastructure.

Dairy Farm Segment:

The Company’s Nara Dairy Farm continued to remain a rich and nutritious source of raw material for its dairy segment. The Nara Farm produced over 5.8 million liters of milk in 2011 with a total herd size of over 3,000 animals.

Engro Foods Canada:

Mirroring its success in the local market, Engro Corp – the parent company – made its foray within the international arena with acquisition of Al-Safa – a leading halal meat brand in North America – at a total cost of US $6.3 million in April 2011. The business is owned by Engro Corp, but managed by Engro Foods.  During the first 8 months of operations (since the acquisition) till December 31, 2011, Al-Safa brand sales were US $5.3 million and the operational loss was US $ 1.2 million including the pre-commencement cost of US $0.33 million. Since Engro Corporation currently owns the equity stake in Engro Foods Canada these losses are not included in the Company’s financial performance. Engro Foods will buy the equity shares from the holding Company at the actual cost post-approval of the Regulator.

The Board expressed confidence in the strategic vision and direction of the management and indicated a clear signal to pursue a long-term growth strategy by building an inherent cost-consciousness and  product positioning for the business.

Appreciating the efforts of Engro Fertilizers Limited on this initiative and successfully arranging the seminar for the fourth consecutive year, the chief guest Mr. Muhammad Shaharyar Khan Mahar, Minister of Environment & Alternate Energy, said: “It is initiatives such as Engro’s HSE Seminars which ensure that the necessary measures provided in the law such as enforcement, education & training and technical assistance to embrace safety as a value are implemented in spirit. Awareness and compliance to these set of rules ensures the safety and health of every worker. I urge the industries to come forward and join hands to strengthen compliance with HSE rules and regulations and guarantee development of an HSE compliant industrial framework.”

The industries of Pakistan have recognized the importance of achieving a very high level of performance, demonstrating well developed occupational safety, health and environment management systems. Statistics show outstanding control of risk and very low levels of error, harm and loss over a sustained period of time.

Ten papers were presented in the three sessions of the seminar through which participants gained insight into the expanding dynamics of health, safety & environment and learnt of trends in modern HSE management. The application of knowledge gained in the seminar will definitely assist in the development and implementation of a national risk management strategy.

Representatives from the private sector, legislative authorities of GOP, academia, civil society and media organizations from across Pakistan attended the 4th Annual Health, Safety and Environmental Seminar. Renowned spokespeople addressed various topics of importance including occupational health & industrial hygiene, safety management & risk assessment, environmental management systems, clean development mechanisms & climate change actions and energy conservation.

Mr. Khalid Siraj Subhani, President & CEO of Engro Fertilizers Limited said, “Engro, which works at the forefront of an industry that is highly prone to risk and injury, organises these annual seminars to create awareness in the corporate sector about the health, safety and welfare of the workforce with an emphasis on long term impact of industrial activity on the environment. Being a socially responsible company, Engro has a continuing focus on environmental aspects of its operations and has put risk mitigation plans in place. HSE compliance and awareness is deeply rooted in our company’s values and work culture and we continue to invest in sharing knowledge and upgrading standards to international benchmarks.” He also thanked all the attendees and looked forward to seeing at least 20 to 30 % of what was learnt at the seminar, applied in organizations.

The Pakistan Chemical & Energy Sector Skills Development Company (PCESSDC) has taken the lead in developing the TTC, with the support of several other corporations, in order to make the institution sustainable in the long run. TTC’s board members include, Pakistan Industrial Development Corporation (PIDC), Engro Foundation, Mari Gas Company Limited and SMEDA while donors include ENI, Saipe’m and Descon. STEVTA has also approved their funding to strengthen the institution with a vocational training Wing.

Daharki is a vital energy and industrial center but has lacked an institution which could cater for training the local community before they enter the industry. With a vision to enhance the skill asset of the locals the PCESSDC has set up Pakistan’s first TTC in Daharki which offers 3-year diplomas to young people in chemical and mechanical skills. This initiative is one of the best examples of public – private partnership in which the industry and government have come together to develop not just the industry but the potential and talents of the locals.

Speaking about the College Brigadier ® Raja Muhammad Ali SI (M), CEO, PCESSDC, said “The TTC will be beneficial to the local population at various levels. The greatest advantage is that it is a local institution with a dedicated and learned faculty, it is Industry driven and will also be affiliated with CITY & GUILD of UK. The institute has state of the art facilities which complement the syllabi of Sind Board of Technical Education thus allowing the students to develop their skill base accordingly. All of this in turn will increase prosperity in the region raising the living standard of the locals.”

The admission process began in August and was very transparent and similar to that of other reputable Professional educational institutions in the country. All students who had achieved minimum ‘B’ grade in the Matriculation exam were eligible to appear in the entrance test. In coming years Electrical, Instrumentation, Computers and Electronic technologies will be added.

1Q 2010 Overview

Engro Corp’s consolidated revenue recorded an increase of 47 % and stood at Rs 34 billion for the first half 2010, as compared to Rs 23 billion in the same period last year, while net profit (attributable to equity holders of the holding company,) increased from Rs 1,055 million in 1H 2009 to Rs 3,398 million in this half.

The increase in revenue is mainly due to increase in sales of fertilizers, foods and energy while increase in profit is attributable mainly to higher Urea production, better phosphate margins, dairy volumes and margin and the Qadirpur power plant startup.

Business Review

Fertilizers

Total urea market demand was 3.1 million tons, a 3% increase over the same period last year. Engro Urea sales were 492,000 tons in first half 2010, up by 17 % as compared to sales for the same period last year, due to increased availability of product on account of higher production. Our plant recorded the best ever first half production with 504,000 tons during the half year ended June 30, 2010, as against 436,000 tons produced during the same period last year. Our market share increased to 16 % vs 14 % last year. The sale of company manufactured blended fertilizers (Zarkhez and Engro NP) was 44,800 tons vs 43,500 tons during the same period last year. During the 2^nd quarter the Government   commenced gas curtailment to all fertilizer plants as part of overall measures to reduce power load shedding. We believe that urea provides the highest value addition for gas and the import of urea necessitated due to the curtailment is not in the best interest of the country nor the farmers of Pakistan.

The net profit for the half year ended June 30, 2010 was Rs. 2,012 million.

Energy & Power

Engro Energy Limited’s Qadirpur Plant generated 427 GWh following commencement on March 27, 2010 up till June 30, 2010 while plant availability was 492 GWh during the same period. Engro Energy Limited declared net profit of Rs. 379 million for the Half Year ended June 30, 2010.

Foods

Engro Foods continued its progress as per plan achieving its sales and bottom line targets. Sales grew by 45% during the half year ended June 30, 2010 to Rs. 9.5 billion as compared to Rs. 6.6 billion in the same period last year.

Dairy segment achieved a sales growth of 42 % against corresponding period last year, delivering a Profit after Tax of Rs. 149 million, vs. a loss of Rs. 10 million in same period last year. Olfrute juices were successfully launched in the market during the second quarter.

The company continued to make considerable investment in the marketing activities of its major brands in both dairy and ice Cream segments.

The net loss for the Half Year ended June 30, 2010 for all business segments was Rs. 180 million as compared to a loss of Rs. 292 million for the same period last year.

Petrochemicals

PVC domestic sales for the first half of 2010 were 46 KT as compared to 64 KT during the same period last year. Sales were constrained by low production and several customers had to import their requirement. International PVC prices declined from $1,020/ton in April to $900/ton in June.  Caustic soda production during the first half of the year was 44 KT. Domestic demand for caustic soda remained strong, and the company sold 38 KT. A total of 46 KT of EDC was produced in first half 2010 of which 23 KT were exported. VCM plant was started on April 24 and produced 12KT of VCM till June 9 after which a planned shutdown was taken. Engro Polymer incurred a loss after tax of Rs. 449 million during the half year as compared to a profit after tax of Rs. 13 million in first half 2009, mainly due to the delayed start of its VCM plant.

Others

In the industrial automation sector, Avanceon Limited posted a consolidated loss of Rs 94m in first half 2010 vs a loss of Rs 90m in the same period last year.

In the chemical storage and terminal business, Engro Vopak Terminal Limited, a 50% joint venture, posted net profit of Rs. 518 million (our share being Rs. 259 million) vs a profit of Rs. 390 million (our share being Rs. 195 million) in the same period last year.

Near Term Outlook

In Engro Corp’s fertilizers business, urea demand / supply will witness a major change with the commencement of production of its expansion project, which will abate the need for fertilizer imports in the near future.

In the foods business, Engro Corp expects continued growth in all business segments, although imposition of Value Added Tax on milk may temporarily slow the pace of growth.

Demand for PVC and Caustic Soda is expected to be strong during coming quarters. Engro Polymers’ VCM plant is being ramped up, with stable operations of the plant being key for improved margins.

All other subsidiaries are expected to perform as per expectations.

This funding support is provided through a sub-award by the USAID Pakistan Entrepreneurs project. Agnez Luz, Chief of Party, Entrepreneurs and Tahir Jawaid, Vice President of Public Affairs and Human Resources Engro Corporation and Trustee Engro Foundation, signed the sub-agreement on July 01, 2011. This agreement seeks to implement a value chain development project in the dairy subsector that will increase incomes of 15,000 milk producers, predominantly women, by 80% in various districts of northern Sindh and southern Punjab, namely Larkana, Shikarpur, Dadu, Khairpur, Naushero Feroze, Ghotki, Muzaffargarh and Layyah districts. The total estimated amount of this sub-grant for the period will be for a sum of more than 128 million rupees.

Pakistan stands as the fourth largest country in milk production globally. The project will seek to build capacity and strengthen institutions through the provision of product, marketing and income generating services to entrepreneurs. Presently, most of the milk collected reaches consumers with higher cost and inferior quality. The dodhie, middleman does not perform any quality test and does not have set standards of milk collection when collecting the milk from rural areas. This project, over a period of two and a half years from July 1, 2011 – Dec 31, 2013 will aim to build capacity and strengthen institutions so that milk costs can be lowered with milk collected of a higher quality.

The project team will train and develop a cadre of 300 Female Livestock Extension Workers (FLEW) & 300 Female Village Milk Collectors, who will provide services at door steps to livestock owners for better production and commercial milk marketing chnnel respectively. The project will provide a basic support to FLEWs in establishing small business at village base, which will fulfill the livestock requirements for maintaining health and nutritional support.

Engro Foods Limited will impart 60% chiller cost as private investor in this project. And will also facilitate the milk suppliers by offering competitive price and after project services in development of livestock.