Facing the future with

Transcription

1 LANKEM CEYLON PLC Annual Report 2013/14 Facing the future with

2 Lankem Ceylon has been a story of growth which spans over five decades and reaches out to people from all walks of life. As we enter our landmark 50th year, we are proud to record that we have established our footprint across eight major industries in the Country and extended our reach beyond the shores of Sri Lanka into international markets. This story of growth continues, as we continue to expand and diversify. Our strategy of consolidation has ensured a stable base for growth, together with a clear vision for long term sustainability for all our stakeholders.

3 Our Business Areas OUR BUSINESS AREAS ARE AGRI-INPUTS, PAINTS, BITUMINOUS PRODUCTS, CHEMICALS, CONSUMER PRODUCTS, PLANTATIONS, LEISURE, PEST CONTROL & CONSTRUCTION. Vision To be the front runner in the chemical industry in Sri Lanka. Mission Our mission as a manufacturer and formulator of chemical products is to expand our business through value addition and quality assurance with a commitment to society to continuously improve management and performance in the areas of health, safety and the environment. Favourable Rating Outlook Long and Short term Corporate Credit Ratings of BBB+ and P2 respectively affirmed by RAM Ratings (Lanka) Ltd. in March Contents Financial Highlights 2 Chairman s Review 3 Board of Directors 5 Management Reports 7 Financial Review 24 Sustainability Report 28 Annual Report of the Board of Directors 30 Corporate Governance 33 Risk Management 36 Remuneration Committee Report 38 Audit Committee Report 39 Financial Information Independent Auditors Report 41 Statement of Comprehensive Income 42 Statement of Financial Position 43 Statement of Changes in Equity 44 Cash Flow Statement 46 Notes to the Financial Statements 48 Ten Year Summary 106 Share Information 107 Notice of Meeting 109 Notes 110 Form of Proxy 111 Corporate Information Inner Back Cover

4 2 Lankem Ceylon PLC Annual Report 2013/14 Financial Highlights Rs. 29,363 Mn. Revenue Rs. 27,651 Mn. Total Assets Rs. 3,542 Mn. Shareholders Funds Rs Net Assets Per Share Revenue - Group Rs. Mn. 30,000 25,000 20,000 15,000 10,000 5,000 Operating Profit - Group Rs. Mn. 3,000 2,500 2,000 1,500 1, Total Assets - Group Rs. Mn. 30,000 25,000 20,000 15,000 10,000 5, / / / / / / / / / / / / / / /14 Net Assets Per Share - Group Rs / / / / /14 Total Equity - Group Rs. Mn. 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, / / / / /14 Dividend Per Share Rs / / / / /14

5 Annual Report 2013/14 Lankem Ceylon PLC 3 Chairman s Review On behalf of the Board of Directors I am pleased to welcome you to the Annual General Meeting of the Company and to present the Annual Report and the Audited Financial Statements of your Company for the financial year ended 31st March The activities of the group are severely dependent on local climatic conditions during the year. In this regard the floods experienced during the beginning of the financial year and the droughts experienced during the latter part of the financial year has had a serious impact on the operations of the Company. The Company s crop protection business has been seriously and adversely impacted by the weather patterns that were prevalent during the course of the year. The operations of the group s two regional plantation companies were also impacted with the tea and rubber crops at both Agarapathana Plantations Ltd and Kotagala Plantations PLC being severely affected. To a lesser extent, the drought has also had an impact on the natural rubber trading division of C.W Mackie PLC. What is extremely evident is that too large a portion of the group s business activities are dependent on the weather and the timely arrival of consistent monsoon rains. With the weather patterns being increasingly difficult to predict and with farmers unable to depend on timely rains and timely release of water from the tanks, the group too must look at diversifying into newer business areas that complement the group s existing businesses so that profitability is not severely impacted when Sri Lanka has a year where weather conditions are sub-optimal. The impact of the weather has been mitigated by the stable domestic economic climate that has been witnessed during the year. The Central Bank of Sri Lanka has moved to lower bank lending rates and keep a tight control over inflation. Businesses are able to plan better in the medium term as the Sri Lankan Rupee has been stable over the course of the year. The stable exchange rate and lower interest rates have helped the group reduce its finance costs quite considerably. While the prevalent drought has had a major impact on the agri-business of the Company, an even greater impediment has been the near continual change in the regulations that govern the industry. While there has not been one particular reason identified for the increase in cases of renal failure amongst people living in the North Central Province, crop protection chemicals have been targeted as perhaps being the reason for the increase. This has resulted in a host of changes to the regulatory environment which is designed to reduce the amount of chemicals used in agriculture. While your Company has complied with all the changes that have been made, we firmly believe that these changes will adversely affect agriculture as a whole and make it less likely that Sri Lanka can keep to its status as being self-sufficient in the production of rice. We will continue with our policy of introducing safer chemicals in order to assist the farmer community with their yield management. The Company s bituminous products division was hampered by the delay in road construction contractors receiving payments from the government. While there is a boom in road construction, the delay in funding of some of these projects has meant that the Company can only expand its operations with great caution. We will continue to work with our international partners to launch a more long lasting bitumen coating during the course of next financial year. The operations of our industrial chemicals group continue to grow strongly. The division has launched a series of products for the food and feed segment. We believe that chemicals required for the production of food will be a key area of growth for us in the years to come. Our solvents business has been resilient in the past year and we are hopeful that growth will continue in the next year. Our coatings business continues to thrive in the face of major changes in the local coatings industry. The Sri Lankan coatings industry is now on the radar of many multinational coatings companies. Several International Paint companies entered the market during the course of the year and we expect at least two other major multinational paint companies entering the market during the course of the year. We have done well to retain our market share in the face of this increased competition and we hope to see some growth in the year ahead as well. Given the difficult trading conditions, the group did well to increase turnover to Rs Billion. This increase was mainly due to the consolidation of the accounts of Union Commodities Limited which was acquired in December of The loss for the group was approximately Rs Million. The group has made many significant investments in the tourism and hospitality sector in the years past. These investments are now adding a significant level of profitability to the group s operations. The outlook for tourism remains strong with tourist arrivals into Sri Lanka continuing to show strong year on year increases. With the total number of arrivals into Sri Lanka just over one million; there is still a lot of room for the sector to grow. Our hotels are located on the Western coast of Sri Lanka and in the Cultural triangle. With excellent infrastructure links, we believe that these areas on the ones that will see the bulk of the new arrivals. Our hotels are also seeing a change in the demographics of the visitors patronizing our hotels. While Western Europe continues to be the single largest market for visitors, there have been significant increases in the number of visitors from China and the Middle East. These increases have been in line with the overall increase in numbers from these markets and we will be gearing to handle many more guests from these countries. While there are many positives for the sector, the one serious dampener for profitability is the very steep increases in the costs of operations. The cost of electricity and the cost of wages as mandated by the wages board continue to rise at a rate above the underlying rate of inflation. Hotels will need to take all steps to curtail these costs, if they are to be profitable in the future. Sigiriya Village Hotels PLC recorded a turnover of Rs. 284 Million and a profit of Rs Million with occupancy increasing from 49% to 51%. The occupancy of Beruwala Resorts PLC increased from

6 4 Lankem Ceylon PLC Annual Report 2013/14 Chairman s Review Contd. 41% to 54%, with the underlying profit of the company improving from Rs. 8.1 Million to Rs. 15 Million. At Marawilla Resorts PLC the profit was Rs Million. The operations of the group s boutique property in Galle continue to be strong. The group will continue to look at opportunities to further increase our presence in this sector. The profitability of the companies that fall under the umbrella of C.W Mackie PLC has rebounded strongly in the year under review. This strong growth has been underpinned by an excellent performance of the company s domestic trading activities. The company saw growth in the Scan products division which distributes popular brands such as Sunquick, Scan Water and Scan Jumbo peanuts. With the market reaching saturation in some of the business areas in which we distribute our products, we continue to look for areas in which we can leverage our strengths in distribution to distribute locally manufactured food products. With this strategy in mind, the company paid Rs Million to acquire a near 88% stake in Kelani Valley Canneries Ltd. We believe that this acquisition will further strengthen our domestic trading businesses. The company has also seen growth in our sugar trading business. As the level of industrialization increases in our country, the opportunities for the industrial products division also improves. This year has seen a robust increase in the level of business activity undertaken by the industrial products division and we are confident that this business too will be in the forefront of driving the profitability of C.W Mackie PLC in the future. The only area of concern in the business is the continued weakness in the natural rubber trading sector. Inclement weather has had an impact on the availability of latex for the production of certain grades of rubber. With the bulk of Sri Lankan natural rubber production being used for domestic consumption, the price of rubber available for export is higher than the world market price. The opportunities in this sector continue to be limited and the company will increasingly focus on Technically Specified Rubber (TSR), a grade widely used in the automotive tyre sector as a way of sustaining profits in the future. The demand for TSR in Sri Lanka is strong, with two of the largest solid tyre manufacturers in the world located in the country. The company has also developed excellent relationships with automotive tyre producers in India, who purchase TSR from the company. The reduction in the rubber trading sector had an impact on the turnover of the company. Turnover for the year 2013/2014 was Rs. 7,344 Million as compared to a figure of Rs. 7,647 Million for the comparable period in the previous year. Profit for the year jumped to Rs Million compared to a profit of Rs Million in the previous year. The improvement in profit is attributable to increased sales in the high margin domestic trading sector. As I have indicated earlier the operations in the group s two plantation subsidiaries were severely impacted by the weather. As a result of the weather, the number of days available for tapping rubber at Kotagala Plantations PLC fell by 77 days. The tea crop at Kotagala Plantations PLC fell by approximately 490,000Kgs. At Agarapatana Plantations Ltd the tea crop increased marginally by about 400,000Kgs. over the previous year but was 2.1 Million kilos behind budget. This marginal increase was on the results of a disastrous previous year and is far below the optimum harvestable crop of Agarapatana Plantations Ltd. Exacerbating the financial impact on both companies due to the drought, the start of the year also saw both companies hit with a near 20% increase in the cost of labor. The impact of the increase in wages to both companies is approximately Rs. 600 Million, excluding the increased provision to the Gratuity. The prices of tea at the Colombo Tea Auctions have continued to be strong and this has mitigated to a certain level the impact of the wage hike and the loss of crops. The international market price for rubber has weakened considerably during the year and this has negatively impacted the profitability of the rubber operations. With the global recovery gathering pace, the price of rubber should improve during the course of the year. Kotagala Plantations PLC has continued its process of replanting uneconomical rubber areas in Oil Palm and you can expect the first crops in approximately 3 years time. The financial year 2013/2014 was one of the most difficult years on record for both companies. Kotagala Plantations PLC reported a loss of Rs Million before other comprehensive income while Agarapatana Plantations Ltd reported a loss of Rs. 8.3 Million. We will look at every possible step to ensure the long term profitability of both companies. With this in mind the group has begun the process of setting up operations in the Kingdom of Cambodia with the aim to start rubber production there in the next few years. With the acquisition of Union Commodities in December of 2012, we are taking every possible step to add value to the tea that we produce. This financial year also saw the group complete its first mini-hydro project on Waverly Estate. The plant, with an installed capacity of 1.2MW will add to the profitability of Lankem Developments PLC, the holding company of Agarapatana Plantations Ltd. The group has witnessed arguably, one of the worst years in terms of performance. The inclement weather has severely impacted the operations of the group. We are hopeful that with improved weather patterns, the profitability of the group too will rebound. We look ahead to the next financial year with renewed hope. I would like to thank the many stakeholders of the firm who ensure the success of our Company. The confidence that these stakeholders place with the Company on a daily basis is the cornerstone to the success that the Company enjoys. I would also like to thank my fellow colleagues on the board for their continued counsel and guidance as we traverse through these difficult times. A. Rajaratnam Chairman 03rd June 2014

7 Annual Report 2013/14 Lankem Ceylon PLC 5 Board of Directors A. Rajaratnam [FCA] Chairman Mr. A. Rajaratnam joined the Board in 1990 and was appointed Chairman in the year He serves as Chairman of The Colombo Fort Land & Building PLC (CFLB) and several listed and unlisted companies within the CFLB Group in addition to holding other Directorships within the Group. S. D. R. Arudpragasam [FCMA (UK)] Deputy Chairman Mr. S. D. R. Arudpragasam joined the Board in 1989, and was appointed Deputy Chairman in He serves as Chairman of several subsidiaries of The Colombo Fort Land & Building PLC. He also holds the position of Deputy Chairman of The Colombo Fort Land & Building PLC and functions as the Managing Director of E. B. Creasy & Company PLC in addition to serving on the Boards of other Companies within the CFLB Group. Anushman Rajaratnam [B.Sc (Hons.), CPA, MBA] Managing Director Mr. Anushman Rajaratnam was appointed to the Board as Deputy Managing Director in the year 2005 and was appointed Managing Director in April He has spent several years working overseas as a Consultant for a leading Accountancy Firm. He also serves on the Board of The Colombo Fort Land & Building PLC in addition to serving on the Boards of several subsidiaries of the Lankem Group. D. L. Vitharana [MNI (Lond), MBA, M.Sc. (UK)] Chief Operating Officer Mr. D. L. Vitharana was appointed to the Board in He joined Lankem Ceylon PLC in 1997 and has headed the Lankem Agro Cluster since He is currently the Chief Operating Officer of Lankem Ceylon PLC and also serves on the Boards of several subsidiaries of the Lankem Group. R. N. Bopearatchy [B.Sc. (Cey), Dip. BM., MBA (Univ. of Col)] Director Mr. R. N. Bopearatchy was appointed to the Board in He has considerable expertise in product development, manufacturing and marketing of pesticides, pharmaceuticals and consumer products. Soon after graduation he was employed in research in the Plant Pathology Division of the Tea Research Institute and subsequently joined Chemical Industries Colombo Ltd., and was appointed to its Board. He also served on the Boards of Crop Management Services (Pvt) Ltd., the managing agents for Mathurata Plantations Ltd., CIC Fertilizers Ltd. and Cisco Specialty Packaging (Pvt) Ltd. He has held office as the Chairman of the Pesticide Association of Sri Lanka, the Toxicological Society of Sri Lanka and the International Mosquito Spiral Manufacturers Association (IMSMA). Mr. R. N. Bopearatchy currently holds several other directorships within The Colombo Fort Land & Building Group. N. H. B. S. Perera [B.Sc. (Cey)] Director Mr. N. H. B. S. Perera joined the Board in He is a former Chairman of Harrisons (Colombo) Ltd, and the Pesticides Association of Sri Lanka. He has held office as Deputy Chairman of the Planters Association of Sri Lanka and has functioned as Group Director of the Maharaja Organization Ltd. Mr. Perera has also served as Director on the Board of Harrison Lister (Colombo) Ltd, and several plantation company Boards such as Aislaby Estates Ltd, Attampettia Estates Ltd, Newburgh Estates Ltd, Kinross Estates Ltd, and Lunuwa Plantations Ltd, prior to nationalisation. He presently serves on the Boards of The Colombo Fort Land & Building PLC, Lankem Developments PLC and Lankem Tea & Rubber Plantations (Pvt) Ltd. Mr. Perera has considerable expertise in the field of developing and marketing Agri Chemicals, managing of plantation companies, manufacture and distribution, shipping and warehousing. K. P. David [FCMA (UK), FCMA, FIPFM, CGMA] Director Mr. K. P. David was appointed to the Board in Having commenced his career in the Banking sector, he joined the Parent Company E. B. Creasy & Company PLC as Group Accountant in He also serves on the Boards of several subsidiaries of the Lankem Group. A. R. Peiris [B.Sc. (Cey), FCMA (UK), CGMA] Director Mr. A. R. Peiris was appointed to the Board in the year He has served the Petroleum Corporation for 10 years in Technical, Planning & Finance Divisions and at the time he left the Corporation in 1979, he was the Head of the Refinery Finance Division. Thereafter, he joined National Development Bank PLC where he held several senior positions for 24 years. He has held Directorships in several reputed public listed and unlisted companies. Mr. Peiris also holds Directorships in several companies within the Lankem Group. He is also a member of the Board of Tess Agro PLC and functions as the Chairman of its Audit Committee. R. T. Weerasinghe [BBA USA] Director Mr. R. T. Weerasinghe was appointed to the Board in April He joined Darley Butler & Company Ltd, in the year 1994 as a Trainee Product Manager and was seconded to Lankem Ceylon PLC as the Marketing Manager of the Consumer Division in He was promoted as General Manager of the Consumer Division in 2005 and was also appointed as General Manager of the Paints Division. In addition he was appointed as the Head of the Industrial Chemicals Division in Mr. Weerasinghe possess expertise in the fields of Marketing and Management. Mr. Weerasinghe also serves on the Boards of certain subsidiaries of Lankem Ceylon PLC.

8 6 Lankem Ceylon PLC Annual Report 2013/14 Board of Directors Contd. A. Hettiarachchy [C.Eng, MIEE, MIProdE] Director Mr. A. Hettiarachchy was appointed to the Board as an Independent Non-Executive Director in April He is a Chartered Engineer and a Member of the Institution of Engineering and Technology, Member of the Institution of Chemical Engineers and is the Head of Process and Engineering Systems-Sri Lanka Institute of Nanotechnology. He serves on the Boards of Richard Pieris Arpico Finance Ltd. and as Chairman on the Board of ISL Services Ltd. He has served on the Board of Hayleys PLC and functioned as Managing Director on the Boards of Haycarb PLC, Recogen Ltd. and Puritas Ltd. and also served on several other subsidiaries of Haycarb PLC and Hayleys PLC both in Sri Lanka and Overseas. He was also a Board Member of the National Science Foundation and The Sri Lanka Institute of Nanotechnology. Member of the National Nano Committee and a member of several advisory Boards of the NSF. Mr. Hettiarachchy possess expertise in the fields of Process Design, Construction and Commissioning; Instrumentation and Control-Design, Installation and Commissioning; Mechanical Engineering, Thermal and Electrical Energy - Generation and Storage and Nano Technology. A. C. S. Jayaranjan [FCA, FCMA (UK), CGMA] Director Mr. A. C. S. Jayaranjan was appointed to the Board as an Independent Non-Executive Director in June He started his career as a professional at KPMG. Thereafter he has been working for thirty five years in the commercial and industrial sectors at senior managerial level. He was the Chief Accountant at James Finlay & Company PLC and Deputy Chief Executive Officer/Executive Director Shaw Wallace & Hedges PLC. Mr. Jayaranjan then joined as the Group Finance Director of Pership Group and later joined John KeeIls Holdings PLC, as Senior Vice President, Head of Learning & Development. His experience covers diverse areas in commerce and industry. Mr. Jayaranjan is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka, and a Fellow Member of the Chartered Institute of Management Accountants (UK). He is an external examiner/lecturer at the Faculty of Graduate Studies, University of Colombo. J. D. Gomes [FCMA (UK), FCCA (UK), FCPA (AUS), CGMA] Director Mr. Dian Gomes was appointed to the Board as an Independent Non-Executive Director in June Mr. Gomes is a Group Director of MAS Holdings and the Managing Director of MAS Intimates (Private) Ltd. He is a Fellow Member of the Chartered Institute of Management Accountants (UK), the Association of Chartered Certified Accountants (UK) and Certified Practicing Accountants (Australia). A Past President of the CIMA - Sri Lanka Division (2001/2002) and the Sri Lanka Amateur Boxing Association (2004 to 2009), Mr. Gomes is presently the Vice President of the National Olympic Committee of Sri Lanka. He is also a Member of the Commonwealth Advisory Body on Sport. R. Seevaratnam [B.Sc. (Lond.), FCA (Eng. and Wales) FCA (ICASL)] Director Mr. R. Seevaratnam was appointed to the Board as an Independent Non-Executive Director on 1st April He is a fellow member of The Institute of Chartered Accountants of England and Wales and of Sri Lanka and holder of a General Science Degree from the University of London. He was a former senior partner of KPMG. Mr. Seevaratnam is a Director of several listed and unlisted companies.

9 Management Reports Annual Report 2013/14 Lankem Ceylon PLC 7

10 Agri-Inputs

11 Annual Report 2013/14 Lankem Ceylon PLC 9 Lankem broke new ground through its tie-up with the world s number one research based crop protection company Bayer Crop Science- Germany. Keeping abreast with rapid changes in global trends, the Sri Lankan agriculture industry too is at a transitional stage with farmers shifting from more conventional agriculture to commercial agriculture. In the year under review Lankem broke new ground through its tie-up with the world s number one research based crop protection company Bayer Crop Science - Germany to offer a range of crop protection solutions to farmers, further strengthening its slogan as the Farmers Friend. The launch of Coragen, an innovative eco-friendly crop protection solution further strengthened our portfolio of chemicals with low toxicity. Being awarded the prestigious National Cleaner Production Award for our state-of-the-art factory in the Pannala industrial zone, affirms our commitment to environmental best practices. The recently established fertilizer arm which took initiatives to further enhance its distribution network, witnessed a successful year showing tremendous potential for growth in years to come. A modern seed processing facility in Pannala came into operation with the pledge of offering the best to the local farmer which manifests our position in this domain.

12 Paints

13 Annual Report 2013/14 Lankem Ceylon PLC 11 Lankem remains resilient in this sector whilst being pioneer in the coating manufacturing industry. During the fiscal year under review, Lankem Paints, has spread its wings in the realm of decorative paints by partnering with Italian paint giant, Candis, offering the Sri Lankan consumer a world class fashion experience for their walls combined with Italian sophistication. Their product portfolio was further strengthened with the introduction of a new range of decorative and protective wood care products and the introduction of a PU wood coating brought down in collaboration with Verinlegno of Italy. Strengthening the Auto Refinish sector, Lankem joined hands with 3M Lanka, as their sole distributor for collision repair products. All in all Lankem remains resilient in this sector whilst being the pioneer in the coating manufacturing industry in Sri Lanka. Our market share has increased with the introduction of new and innovative products into the portfolio of Decorative Coatings, Auto Refinish, Wood Coatings, Epoxy Coatings, NC-based Coatings and the Epoxy Adhesives segments.

14 Chemicals

15 Annual Report 2013/14 Lankem Ceylon PLC 13 Lankem Chemicals sustained market dominance in the Thinner and Solvent trading markets. Lankem Chemicals comprises of three sectors namely Industrial Chemical, Thinner and Food & Feed Ingredients. Lankem Chemicals sustained market dominance in the Thinner and Solvent trading markets whilst maintaining a considerable stake in the market. Despite market growth of each of these sectors being well below expectations during the year, Industrial Chemical and Thinner divisions maintained a sustainable growth. The Food and Feed Ingredients division recorded an impressive increase in turnover from the previous year resulting in higher profitability. Lankem Chemicals partnered with Ms. Solae Co Ltd a fully owned subsidiary of DuPont Inc., as its authorised distributor in Sri Lanka and with Asia s largest pigment manufacturer, Shenghua Group Deqing Huayuan Pigment Co Ltd, manufacturer of Hyrox Brand pigments as their authorised dealer in Sri Lanka. Lankem Chemicals has indeed set its standards in the industry for all three divisions it represents.

16 Bitumen

17 Annual Report 2013/14 Lankem Ceylon PLC 15 Lankem is the pioneer in the supply of Emulsion and Road surfacing Bitumen in Sri Lanka, and is the only Public Company engaged in this sector. Lankem is the pioneer in the supply of Emulsion and Road surfacing Bitumen in Sri Lanka, and is the only Public Company engaged in this sector. With the Government s current emphasis on infrastructure development, the rehabilitation and reconstruction of the existing road network and the construction of new roads, this industry is likely to show a rapid growth in the near future. In addition to the supply of road construction material, the Company is also involved in waterproofing through its three types of hardware products which are Shieldkote, DPC Tar and Roofing Tar. The Company has obtained ISO 9001:2000 Quality Management Systems for its manufacturing process in collaboration with the Sri Lanka Standards Institute.

18 16 Lankem Ceylon PLC Annual Report 2013/14 Plantations

19 Annual Report t2 2013/14 14 Lankem Ceylon PLC 17 During the year under review the Company made strategic investments in rubber plantation projects in Cambodia. With tea estates in the two main elevation categories of Western High Grown and Low Grown, Kotagala Plantations has the advantage of not being over dependent on the demand of any particular type of tea. In spite of adverse climatic conditions the company was able to harvest the budgeted crop. The rubber plantations too had similar effects due to climatic conditions effecting crops. During the year under review the company made strategic investments in rubber plantation projects in Cambodia. It also acquired Union Commodities (Pvt) Ltd., a long established tea export trading house with significant synergies in terms of operations. The year initiated the planting of Oil Palm in the low country due to the uneconomic nature of rubber lands with plans underway for future investments in this domain. Rain Forest Alliance certification which is a mandatory requirement, was obtained for the Dambetenne factory and associated fields. Additionally Food Factory Standard ISO certification was obtained for three factories.

20 18 Lankem Ceylon PLC Annual Report 2013/14 Consumer

21 Annual Report 2013/14 Lankem Ceylon PLC 19 C.W. Mackie PLC has been presented with the prestigious International Brand of the Year, a global award for brand excellence. Sunquick, a flagship brand of C. W. Mackie PLC clinched the title of International Brand of the Year gold award at the SLIM brand excellence awards 2012 and was presented with prestigious International Brand of the Year award at the World Brand Congress 2012 held in Mumbai. The company s continuous commitment to stringent world class standards was instrumental in enabling it achieve such a remarkable feat. An investment of Rs. 70 million was made by Lankem Consumer division in the commissioning of a state-of-theart laundry soap plant in Sapugaskanda. The launch of a new laundry soap into the market saw a noteworthy growth in sales during the year. The division has focused on the detergent industry given the tremendous potential and growth prospects. Investments in Nano technology are to be made to further strengthen our brand offerings.

22 Leisure

23 Annual Report 2013/14 Lankem Ceylon PLC 21 The hotels within the Group reflected the upsurge in the industry. The Government s efforts to promote Sri Lanka as one of the most sought after tourist destination was successful and resulted in increased tourist arrivals during the year. It also helped to improve the lucrativeness of the leisure sector and reiterated the Group s decision to make further investments in hotels across the country. The hotels within the Group reflected the upsurge in the industry. While The Palms - Beruwela undertook refurbishment during the year, Club Palm Bay - Marawila housed an expansion project to cater to the increase in numbers of guests while the Bay Beach Hotel - Weligama will embark on a full-scale upgrade shortly.

24 Construction & Pest Control

25 Annual Report 2013/14 Lankem Ceylon PLC 23 The Pest Control division recorded its first venture into Maldivian soil with their termite treatment methods. The Construction division has its main focuse on epoxy flooring, waterproofing, industrial flooring and sports court flooring. During the next fiscal year the focus is to be mainly on developing the water proofing industry and venturing into heat insulation. The Pest Control division recorded its first venture into Maldivian soil with their termite treatment methods. This led to the training of the Maldivian defense team on termite protection, and plans are underway to expand both the termite control and general pest control businesses. Another notable feat was the awarding of the termite control project of Shangri-La hotel in Hambantota.

26 24 Lankem Ceylon PLC Annual Report 2013/14 Financial Review Overview The financial year 2013/14 posed considerable challenges to the business environment of Lankem Ceylon PLC. The core business of the Group faced difficult trading conditions due to Government restrictions on key product segments, unpredictable and adverse weather conditions, competitor pressure, significant drop in retail sector and drop in disposable income of middle and lower income earners. In this challenging environment, the Lankem Group performed creditably to achieve growth in majority of the business sectors it operates whilst taking significant strides in several new business ventures to develop new opportunities. Due to these challenges the Group and the Company concluded the year with a loss of Rs Mn. and Rs Mn. respectively owing to the drop in margins and escalation of operating expenses. Revenue Analysis In the year under review, the consolidated revenue increased by 22.11% year-on-year and reflected an average growth rate of 24.66% over the last five years to Rs Bn. with primary contributions from Plantation Trading segment followed by Plantation segment and Industrial Products segment. Group Revenue The below graphs depict the composition of the Group revenue for the financial year 2013/2014 and financial year 2012/ % Company Revenue Rs. Bn / / / / /14 Segmental Revenue Composition (%) 2013/ /13 8% 14% 22% 26% 18% 10% 17% Rs. Bn % 3% 4% 25% / / / / /14 The Company managed to record a revenue of Rs Bn. during the year under review compared to Rs Bn. achieved during the previous year. The reduction in the Company turnover was predominantly due to the inadequate contribution generated by Agricultural Inputs segment as a result of adverse weather that affected the total market size for agri-inputs, regulatory changes and policy related issues that resulted in uncertainty, stock write offs that arose owing to low germination period and delays in settlement of fertilizer subsidies. Agricultural Inputs Consumer Products Industrial Products Leisure Plantations Plantation Trading The Group s business sectors have undertaken substantial expansion through acquisition of new ventures, thus strengthening the ability to establish itself as a successful and competitive business conglomerate in diversified areas. The recent acquisition of Kelani Valley Canneries Limited by Groups key subsidiary C. W. Mackie PLC strengthens the Group synergies in manufacturing a wide range of food & beverage products for the existing product portfolio of the Scan Product division. The Plantation Trading segment reported a revenue of Rs Bn. for the year under review compared to Rs Bn. in the previous year mainly due to significant positive contributions generated by Union Commodities (Pvt) Limited and Kotagala Plantations PLC. This segment revenue accounts for 31% of the Group revenue this year as opposed to 18% for the previous financial year. Leisure

27 Annual Report 2013/14 Lankem Ceylon PLC 25 The Plantations segment too concluded the current financial year on a positive note irrespective of the challenges that were faced in the form of increasing costs, fluctuating commodity prices and unpredictable weather conditions. The segment revenue grew by 0.52% which accounts for 22% of the Group revenue representing a value of Rs Bn. as compared to Rs Bn. during the previous year. Consumer Products segment which accounts for 13% of the Group revenue experienced a downturn of 5.52% in profitability compared to the previous year. Consumer Products segment revenue decreased to Rs Bn. from Rs Bn. mainly due to the severe competitor pressures witnessed by multinational companies in the FMCG market in Sri Lanka. However the Company has taken initiatives to enhance the performance of the segment by investing in a modern Soap manufacturing plant and a high-tech Detergent powder manufacturing plant in the year under review. The Industrial Products segment witnessed a growth of 2.70%, recording a turnover of Rs Bn. compared to previous year revenue of Rs Bn. The impressive growth reflected in the Company s Industrial cluster and C. W. Mackie PLC coupled with satisfactory growth in the Construction sector has positively attributed towards the favorable performance reflected in the Industrial Products segment. Segmental Revenue Performance Rs. Bn. 10 Profitability The Group achieved a post-tax loss of Rs Mn. for the financial year under review compared to a profit of Rs Mn. recorded in the previous year as all the business sectors in the Group showed a decrease in profitability during the year under review. The post-tax loss of the Company was Rs Mn. during the year compared to a loss of Rs Mn. during the previous year. This represents a negative year-on-year growth of 28.73%. Group & Company Profit After Tax Rs. Mn. 2,000 1,500 1, , / / / / /14 Group Company Finance Costs The Group s interest cover has dropped to 0.76 times from 1.86 times due to the fall in operating profits coupled with the significant increase in finance cost during the year under review. 8 6 Finance Cost and Interest Cover Ratio Agricultural Inputs Consumer Products Industrial Products 2012/13 Leisure Plantations 2013/14 Plantation Trading Other Rs. Mn. 1,500 1, Times The Agricultural Inputs segment experienced another extremely challenging year mainly due to the adverse macro-economic conditions discussed in detail in the above sections of the financial review / / / / /14 Finance Cost Interest Cover 0

28 26 Lankem Ceylon PLC Annual Report 2013/14 Financial and Liquidity Position Non-Current Assets Position The total non-current assets increased by 6.74% from Rs Bn. to Rs Bn. during the year under review mainly due to the investments in property, plant & equipment which has increased to Rs Bn. during the year from Rs Bn. in the previous year. Property, Plant and Equipment Rs. Mn. 10,000 8,000 6,000 4,000 Cash Flow The Group s net cash flows from operating activities increased to Rs. 1, Mn. from the previous year s figure of Rs Mn. representing a growth of % year-on-year. This was mainly attributable to significant increase in trade and other payables. Cash Flow & Profit After Tax Rs. Mn. 2,000 1,500 1, , / / / / /14-1, / / / / /14 Net Cash Flow - Operating Activities Profit after Tax Capital Structure The Group s debt as a percentage of the total capital is 59% whilst the equity component amounted to 41% during the year under review. During the financial year the Group obtained additional interest bearing long term and short term borrowings by way of term loans amounting to Rs Bn. while settling amounts worth of Rs Bn. Capital Structure 2013/14 59% 41% Share Performance The All Share Price Index (ASPI) of the Colombo Stock Exchange (CSE) for the financial year ended 31st March 2014 has increased by 5% to 5,968 points. The closing share price of Lankem Ceylon PLC (LCEY) was Rs representing a drop of 31% over the previous year. The total market capitalization of the Company stood at Rs Bn. as at 31st March Lankem Share Price & Volume Movement Rs. In Apr Apr Apr-13 8-May May-13 1-Jun Jun Jun-13 7-Jul Jul Jul Aug Aug-13 5-Sep Sep Sep Oct Oct-13 4-Nov Nov Nov Dec Dec-14 3-Jan Jan Jan-14 8-Feb-14 8-Feb Feb-14 4-Mar Mar Mar Debt Equity Share Price Volume

29 Annual Report 2013/14 Lankem Ceylon PLC 27 Relative Performance of ASPI and LCEY % Apr Apr-13 1-May May May Jun Jun Jul Jul Aug Aug Sep Sep Oct Oct Nov Dec Dec Jan Jan Feb Feb Mar Mar-14 LCEY-Based on 1/4/2013 Prices ASPI-Based on 1/4/2013 Index Value The Earnings Per Share (EPS) of Lankem Ceylon PLC Group decreased from Rs to negative Rs as a result of an increase in Group finance cost and operating expenses. The Net Asset Value Per Share (NAV) of the Group has declined marginally to Rs as at 31st March Earnings Per Share & Net Assets Per Share Rs / / / / /14 EPS NAV

30 28 Lankem Ceylon PLC Annual Report 2013/14 Sustainability Report Lankem does not have a separate sustainability initiative. It is simply part of who we are and what we do. For more than 50 years, Lankem, as a leader among corporations has engaged in sustainable actions and measures. We believe that we have a very real and sincere responsibility to society, in general, and especially to the communities in which we live and work. That is important from an environmental stewardship perspective, as well as a key competitive strategy. Our sustainability strategies are built upon three key principles: environmental stewardship, social responsibility, and economic success. Our focus on environmental stewardship dictates how we do what we do. It guides our design ethic, our manufacturing processes, and our means of distribution. Our focus on social responsibility means engaging in meaningful conversations with our key stakeholders, our customers, our shareholders, our employees, and our communities to ensure that we are acting as responsibly and as ethically as possible and that we are furthering our leadership position within our sustainability operations. Our focus on economic success enables us to create impactful, innovative sustainable solutions today and far into the future. We know that what we and our partners do today will have an impact far into the future. We act to meet the needs of society today, while respecting the needs of future generations. We have also found that, increasingly great people want to work for companies that are committed to environmental and social stewardship. Attracting great people who share similar beliefs is important for our future success, and new talent bring with them new ideas that help us to get better and better. Lankem participates and engages with numerous stakeholders regarding sustainability aspects and programs. The major categories of Lankem stakeholders and some of our key actions and engagements are identified in the table below. MAJOR STAKEHOLDER Employees Customers Investors Business Partners Academia/Scientific Organisations Media KEY ACTION AND ENGAGEMENTS Respecting human rights and diversity Supporting, optimising and promoting development and growth Ensuring a safe and healthy work environment Ensuring equal opportunity Providing diverse innovative product solutions and high valued customer service/support Offering a diversified portfolio of safe, reliable, dependable and sustainable products Delivering profitable returns on investments Disclosing timely, concise and relevant information Responsive to inquires Upholding corporate values Selecting credible suppliers that meet or exceed expectations Supporting collective efforts to deliver business results Engaging in technical and scientific research to develop innovative solutions to society Ensuring Lankem is represented accurately with current information Environmental Stewardship Economic Success Social Responsiblity

31 Annual Report 2013/14 Lankem Ceylon PLC 29 Economic Success An innovative company cannot be built just on inanimate lab or mathematics alone. It is built on a belief in the power of research and development, belief in our people and their work, and a deep conviction that the collective power of their imagination and creativity will generate future opportunity and financial betterment for the Company. Environmental Stewardship Environmental stewardship at Lankem is based on the principle of providing practical and effective solutions and products to address environmental challenges for both ourselves and for our customers. Setting and implementing global environmental policies, management systems, and tracking and maintaining key performance metrics enables Lankem to continually integrate and drive environmental stewardship throughout the organization. Social Responsbility Lankem is committed to continuously improving the quality of life of our workforce, their families, as well as the communities and society in which we operate and conduct business. Supporting a socially responsible workplace with a global diverse workforce creates a culture of collaboration essential to innovative economic growth and sustainable operations and society. Going forward, we will find creative solutions that reduce our environmental footprint and encourage our suppliers to embrace more sustainable practices. We will also focus on sourcing environmentally preferred alternative materials for our products and finding ways to enhance the benefits of our philanthropic activities. Our progress is predicted on the successful engagement of employees, suppliers, business partners, social and environmental non-governmental organisations, and customers.

32 30 Lankem Ceylon PLC Annual Report 2013/14 Annual Report of the Board of Directors The Board of Directors of Lankem Ceylon PLC present their Report on the affairs of the Company together with the Audited Financial Statements for the year ended 31st March The details set out herein provide the pertinent information required by the Companies Act No. 07 of 2007, and the Colombo Stock Exchange Listing Rules and are guided by recommended best practices. General The Company was re-registered on 18th March 2008 as required under the Companies Act No. 07 of Principal Activities, Business and Future Prospects The principal activities of the Company together with those of its subsidiary companies have been described along with the Corporate Information in this Annual Report. A review of the Company s business and its performance during the year with comments on financial results and future prospects is contained in the Chairman s Message, Business Review and Financial Review sections of this Annual Report. These reports together with the Financial Statements reflect the state of affairs of the Company. The Directors to the best of their knowledge and belief confirm that the Company has not engaged in any activities that contravene laws and regulations. Financial Statements The Financial Statements of the Group are given on pages 42 to 105. Auditors Report The Auditors Report on the Financial Statements is given on page 41. Accounting Policies The Accounting Policies adopted in the preparation of the Financial Statements are given on pages 48 to 59. Interest Register Directors Interest in Transactions The Directors have made general disclosures as provided for in Section 192 (2) of the Companies Act No. 07 of Arising from this, details of contracts in which they have an interest are disclosed in Note 29 to the Financial Statements on pages 93 to 97. Directors Remuneration Directors Remuneration in respect of the Group for the financial year 2013/14 is Rs Million (2012/13 - Rs Million) and in respect of the Company for the financial year 2013/14 is Rs Million (2012/13 - Rs Million). Directors Interest in Shares The Directors of the Company who have an interest in the shares of the Company have disclosed their shareholdings and any acquisitions/disposals to the Board in compliance with Section 200 of the Companies Act No. 07 of Details pertaining to Directors direct shareholdings are as follows: No. of Shares As at As at Mr. A. Rajaratnam - - Mr. S. D. R. Arudpragasam 5,100 5,100 Mr. Anushman Rajaratnam 37,156 37,156 Mr. D. L. Vitharana - - Mr. R. N. Bopearatchy - - Mr. N. H. B. S. Perera - - Mr. K. P. David 8,150 12,150 Mr. A. R. Peiris 2,935 2,935 Mr. R. T. Weerasinghe 7,000 7,000 Mr. A. Hettiarachchy - - Mr. A. C. S. Jayaranjan - - Mr. J. D. Gomes - - Mr. R. Seevaratnam - - (appointed w.e.f ) Corporate Donations Donations made by the Group amounted to Rs. 45,000/- during the year under review. (2012/13-Rs. 69,000/-) Directorate The names of the Directors who held office during the financial year and the subsequent appointment are given below. Brief profiles of these Directors appear on pages 5 and 6. Mr. A. Rajaratnam Mr. S. D. R. Arudpragasam Mr. Anushman Rajaratnam Mr. D. L. Vitharana Mr. R. N. Bopearatchy Mr. N. H. B. S. Perera Mr. K. P. David Mr. A. R. Peiris Mr. R. T. Weerasinghe Mr. A. Hettiarachchy Mr. A. C. S. Jayaranjan Mr. J. D. Gomes Mr. R. Seevaratnam (appointed w.e.f ) Chairman Deputy Chairman Managing Director Director/ Chief Operating Officer Director Director Director Director Director Director Director Director Director

33 Annual Report 2013/14 Lankem Ceylon PLC 31 In terms of Articles 85 and 86 of the Articles of Association, Mr. S. D. R. Arudpragasam retires by rotation and being eligible offers himself for re-election. Mr. N. H. B. S. Perera, Director, being over seventy years of age retires and offers himself for reappointment under and by virtue of the Special Notice received from a shareholder of the Company which is referred to in the Notice of Meeting. Mr. R. N. Bopearatchy, Director, being over seventy years of age retires and offers himself for reappointment under and by virtue of the Special Notice received from a shareholder of the Company which is referred to in the Notice of Meeting. Mr. A. Rajaratnam, who is over seventy years of age retires and offers himself for reappointment under and by virtue of the Special Notice received from a shareholder of the Company which is referred to in the Notice of Meeting. Mr. R. Seevaratnam who was appointed to the Board on 1st April 2014 and who is seventy years of age retires and offers himself for reappointment under and by virtue of the Special Notice received from a shareholder of the Company which is referred to in the Notice of Meeting. Auditors The Financial Statements of the Company for the year have been audited by Messrs KPMG Chartered Accountants, the retiring auditors who have expressed their willingness to continue as Auditors of the Company and are recommended for reappointment. A resolution to reappoint them and to authorise the Directors to determine their remuneration will be proposed at the Annual General Meeting. The Auditors, Messrs KPMG Chartered Accountants were paid Rs Million during the year under review (2012/13- Rs Million) as audit fees and fees for audit related services by the Group. In addition they were paid Rs Million (2012/13- Rs Million) by the Group for non-audit related work which consisted mainly of tax related work. In addition to the above, Group companies are engaged with other audit firms. Audit fees in respect of these firms amounted to Rs Million during the year under review (2012/13- Rs Million). Further, the fees for non-audit related services by these audit firms during the year 2013/14 was nil. (2012/13- nil). As far as the Directors are aware, the Auditors do not have any relationship (other than that of an Auditor) with the Company. The Auditors do not have any interest in the Company. Revenue The revenue of the Group for the year was Rs. 29,363 Million (2012/13 - Rs. 24,047 Million). Results The Group made a loss before Tax of Rs. 297 Million against a profit of Rs. 802 Million in the previous year. The detailed results are given in the Statement of Comprehensive Income on page 42. Investments Investments made by the Group are given in Note 18 to the Financial Statements on pages 75 to 78. Property, Plant & Equipment During 2013/14 the Group invested Rs Million in Property, Plant & Equipment (2012/13 - Rs. 1, Million). Further Directors are of the opinion that the net amounts at which Land and other Property, Plant & Equipment appear in the Statement of Financial Position are not greater than their market value as at 31st March Stated Capital The stated capital of the Company as at 31st March 2014 was Rs. 536,218,000/- and is represented by 24,000,000 issued and fully paid Ordinary Shares. Reserves The total Group Reserves as at 31st March 2014 comprised Other Capital Reserves of Rs.3.93 Million, General Reserves of Rs Million and Retained Earnings of Rs. 2, Million whereas the total Group Reserves as at 31st March 2013 comprised Other Capital Reserves of Rs Million, General Reserves of Rs Million and Retained Earnings of Rs. 2, Million. The movements are shown in the Statement of Changes in Equity in the Financial Statements. Taxation The Group s liability to taxation has been computed in accordance with the provisions of the Inland Revenue Act No. 10 of 2006, and subsequent amendments thereto. Income tax and other taxes paid and liable by the Group are disclosed in Note 10 to the Financial Statements on pages 62 to 64. Share Information Information relating to earnings, dividend, net assets, market value per share and share trading is given on pages 64, 65, 107 and 108. Events Occurring after the Reporting Period Events occurring after the Reporting Period that would require adjustments to or disclosures are disclosed in Note 34 on page 104.