KOTAGALA PLANTATIONS PLC ANNUAL REPORT 2011/2012. Driving Growth

Transcription

1 KOTAGALA PLANTATIONS PLC ANNUAL REPORT 2011/2012 Driving Growth

2 Content Financial Highlights 01 Chairman s Review 02 CEO s Review 04 Board of Directors 07 Risk Management 08 Enterprise Governance 10 Our Plantations 15 Production and Yield 16 Management Discussion & Analysis 17 Ten Year Summary 22 Shareholder & Investor Information 23 Sustainability Reporting 24 Financial Reporting Annual Report of the Board of Directors 30 Statement of Directors' Responsibilities 33 Report of the Auditors 34 Income Statement 35 Balance Sheet 36 Statement of Changes in Equity 37 Cash flow Statement 38 Notes to the Financial Statements 39 Glossary of Financial and Non Financial Terms 65 Notice of Meeting 66 Form of Proxy 67 Corporate Information Inner Back Cover Vision To be the foremost producer of High Quality Tea & Rubber Mission To maximise land and labour productivity and achieve excellence in the profitable management of the Company in an acceptable and socially responsible manner. Core Values Integrity Courage Commitment Objectives To lead the way in the technical and innovative development of the Tea & Rubber agri-industries. To provide a satisfying work experience to our employees and ensure a rewarding investment to our shareholders. To be a trail-blazer in the shift away from producing visually graded rubber as an agricultural commodity to the production of a fully technically specified industrial polymer

3 FINANCIAL HIGHLIGHTS Year ended 31st March Change % Turnover Rs.000 3,610,320 3,683,366 (2) Profit before interest and tax Rs , ,904 (30) Profit before tax Rs , ,251 (31) Profit after tax Rs , ,773 (34) Dividends Rs , ,000 (80) Earnings per share Rs (34) Interest cover No. of times (11) Return on equity % (70) Return on capital employed % (12) Balance sheet highlights Total assets Rs.000 6,503,688 5,772, Total debt Rs.000 1,129,205 1,412, Total shareholders funds Rs.000 2,471,241 2,352,633 5 Net assets per share Rs Debt/equity % Debt/total assets % Market/shareholder information Market price (Year end) Rs (58) Market capitalisation Rs.000 2,240,000 5,376,000 (58) Dividend per share Rs (80) 1

4 CHAIRMAN S REVIEW I take great pleasure in presenting on behalf of the Board of Directors the Annual Report and Audited Financial Statements of Kotagala Plantations PLC for the year 1st April 2011 to 31st March The single most significant factor that impacted on the performance of the Plantation Industry in the year under review was the Collective Agreement between the major Plantation Trade Unions representing the workers and the Employers Federation of Ceylon representing Regional Plantation Companies. This Agreement which came into effect from the 1st of April 2011 is for a period of two years ending 31st March The Collective Agreement provided for an unprecedented increase of 33.3% in the basic wage and the final daily wage of a worker inclusive of attendance and other incentives is now Rs.515 per day. The total cash outflow resulting from this wage increase for the year was Rs.400 Million excluding topping up of the gratuity provision, which amounted to a further Rs.88 Million. It is not often realized that, in the Plantation Industry, due to the irregular attendance of the workforce, the estates employ an extra 20 to 25% of the workforce to make up for the drop in attendance. Although workers are paid only for the days they report for work, the estate has to find housing and provide all other benefits in terms of health services, paid holidays, etc. and also make a full provision for gratuity at the end of each year. This matter has, over the years, been discussed with the relevant authorities, but unfortunately very little progress has been made towards solving this vexed question. COMPANY PERFORMANCE Tea Kotagala Plantations PLC has 2,451 ha of tea in bearing and 3,345 ha of rubber in bearing. The bulk of the Company s tea is in the Western High Grown Dimbulla District and a much smaller extent is in the Low Grown Kalutara District. Although the island s tea crop at Million kilos was a little behind the previous years, the Company s crop harvested in both the High Grown and Low Grown tea areas performed better than budget. The total crop harvested on the estates was 5,466,960 kg. The overall yield achieved by the Company for the year was a very satisfactory 2,230 kg per hectare. In addition to the Company s own tea crop, an extra 1.5 Million kilos of tea was manufactured as smallholder bought leaf. An above budget performance in crop is generally accompanied by a reduction in the Cost of Production, but this year, due to the wage increase referred to above, the final Cost of Production of the tea was Rs at estate level. During the year under review, due to instability and uncertainties in the Middle Eastern Region and a major economic downturn in the Euro Zone, tea prices were depressed. During the first quarter of the year 2012, the Rupee was devalued against the US Dollar and there was a slight improvement in the local Rupee prices. However, it is significant that the producer is not getting the full benefit of the Rupee devaluation. The US Dollar equivalent of the Colombo Auction price is today significantly lower than the year 2010 for both the High Grown and Low Grown teas, although the Rupee price since devaluation has shown a small increase. As a result of the increased wages and the depressed prices, the Kotagala tea recorded a loss of Rs.105 Million for the year at estate level. Reference has been made in earlier reviews to the inadequacy of factory capacity to manufacture the Company s crop and this was corrected to a very significant extent last year. We are now able to handle most of our heavy crops. Nevertheless, cropping patterns particularly in the high elevation teas are not very regular and during the high cropping months, there are sudden peaks which last a few days, which cannot be catered for by improving manufacturing capacity. Very often, these peaks are due to inability to harvest leaf at optimum levels due to labour shortages arising from prolonged absences due to Pongal and the New Year and localized Temple Festivals. We have therefore focused on endeavouring to maintain regular plucking rounds by the introduction of plucking shears as required. This has been done quite successfully on two of our properties and will be extended to other properties as necessary. The total spent on Capital Expenditure during the year, other than on mature and immature plantations, was Rs.63 million. Rubber Kotagala has a significant extent of rubber which is in prime condition, and due to regular replanting with newer clones, has now started recording improved yields on most properties. Some of the larger rubber properties still contain significant extents of older low yielding clones and it will be sometime before these extents are also fully replanted. During the year under review, unusual rains interfered with tapping and against a budget of 307 days tapping for the year, only 231 days tapping were achieved. This reduced number of tapping days resulted in a decrease in the crop harvested when compared with budget. Nevertheless, Kotagala produced 3 Million kilos of rubber which was nearly 2% of the island s total production of 157 Million kilos of rubber. Four of the rubber properties recorded yields in excess of 1,000 kg per hectare for the year, which is a very satisfactory yield by national standards. Nevertheless, the final Cost of Production at Rs per kilo was exceptionally high. In spite of the economic downturn in the Euro Zone and the US economy yet to return to normal, international rubber prices ended up stronger and for the year 2 Kotagala Plantations PLC Annual Report 2011/12

5 2011/12, mainly due to heavy buying by China and India. The price of Sri Lanka crepe rubber for the year 2011/12 was Rs as against Rs in the previous year. The Company s rubber price was Rs per kilo and the total rubber profit for the year was Rs.600 Million at estate level. We improved on our export operations and exported a total quantity of latex crepe and sole crepe amounting to 300,000 kg at an average price of US$ 5 per kg. In the new year, we expect to expand this further and venture in to export of value added rubber as well. The rubber tree has a 30 year life span and it is therefore necessary that 3% of the rubber hectarage is uprooted and replanted in new rubber each year. On average, at any given time, 18% of the total rubber extent is immature and this extent is maintained under Capital Expenditure. The total spent on replanting during the year under review on rubber and a relatively small extent of tea was Rs.306 Million. PERFORMANCE After Colombo charges, lease rental and the extra provision for the gratuity top up, the tea operated at a net loss of Rs.158 Million whilst rubber recorded a profit of Rs.565 Million. The final Company profit before tax was Rs.531 Million, which includes provision for an exchange gain of Rs.129 Million on rubber export earnings. Given the extremely difficult conditions under which the Company performed during the year, this final result is commendable. FUTURE DEVELOPMENT We made reference in the last report to the Company s diversification into a third crop; Oil Palm. The first 117 ha was planted in the year under review and is expected to come into bearing in We are scheduled to plant another 247 ha in the year 2012/13 and the plants are already available in the second stage nurseries. We expect to have a 5 Ton capacity mill in operation by 2014 and this will be sufficient for our requirements upto the time the planting of the full 1,000 ha is completed. Thereafter, as the crop matures and yields increase, the capacity of the mill will need to be increased by the addition of another 5 Ton crushing capacity. A major project which we worked on during the year was the investment of US$70 Million in Cambodia on the lease of 20,000 ha of secondary jungle for clearing and planting in rubber. These negotiations have progressed very satisfactorily and we expect to sign final agreements early in the new year. We expect to commence the initial land clearing and establishment of nurseries in the year 2013/2014 and hopefully commence the first planting in the following year. When fully completed, we expect Kotagala to be one of the major producers of natural rubber in the world. The development of our factories to conform to modern environmental and social responsibility standards continues. Six of our eight factories are fully certified for ISO environmental standards. Mayfield Factory is scheduled to complete certification in the coming year. Two of our properties have been accepted by the Fair Trade Labelling Organisation and some of our teas are bought by Fair Trade Members and sold under Fair Trade Labels. All the Kotagala Factories also conform to the Ethical Tea Partnership requirements. Our social welfare activities continue as usual. We continue to assist deserving children of employees who gain admission to Universities and other institutions of tertiary education. The Manager of Mayfield was selected as the Runner Up for implementation of social welfare activities in an all island evaluation of Plantation RPCs. Hedigalla Estate won an award for the Best Managed and Equipped Crèche in the district. Unacceptably high labour wages will continue to have its effect on the performance of the Company in the year 2012/13. A significant improvement in national tea prices is not forecast. Colombo is still the highest selling Auction Center in the world. In recent months, there has been talk about permitting larger volumes of tea imports to boost the total exports of the country. What effect such a move will have on the unique image of Ceylon Tea has not been considered. As far as the producing companies and the tea smallholders are concerned, such a move which is designed to counteract high auction prices of Ceylon Tea compared to other Centers is bound to adversely affect the producer who sells all his produce at the auctions. CONCLUSION The year 2011/12 was a difficult year for the Industry. Significant improvements are not expected for the year 2012/13. I would like to take this opportunity to thank all staff on plantations and the Head Office for their continued commitment and support during a difficult year. I also wish to express my appreciation to my colleagues on the Board for their unfailing support and advice. A Rajaratnam Chairman 18th May

6 CEO S REVIEW I am privileged to present this report at the 19th Annual General Meeting for the year ended 31st March The commodity markets internationally for Tea declined progressively during the course of the completed season. Rubber prices that reached peak levels of Rs.685/-per kilo in April 2011 declined to Rs. 475/- per kilo levels by the fourth quarter. The degree of the decline in tea prices could be assessed by the fact that, the Western High Grown average declined by Rs per kilo to Rs per kilo whilst the CTC High Grown sale average of Rs recorded a sizeable decrease of Rs per kilo when compared to the previous season. The 33.3% wage increase that came into effect with the payment of arrears from the month of April, that is at the commencement of the season, coupled with the decline in prices referred to severely affected the viability of all tea plantations and reduced the profitability of Rubber as well. This resulted in a sharp decline in profit due to the COP exceeding the NSA. Tea Crop Kotagala Up-country The average rainfall recorded for the region was 2,257 mm with 160 wet days which is a considerable decrease of 1,814 mm and also the decrease of 36 wet days when compared to the previous season, could well affect the vegetative growth in the forthcoming season. The Region did extremely well to harvest the highest ever crop of 5.1 Mn. kilos made tea, and thereby achieved the highest yield for the region of 2,268 kilos per hectare. From the ten estates, nine estates recorded yields of over 2,000 kilos per ha. Outstanding performances were recorded once again by Mt. Vernon with a yield of 2,624 KPH, Mayfield 2,551 KPH, Chrystler s Farm 2,501 KPH Craigie Lea 2,339 KPH, Drayton 2,262 KPH, Kelliewatte 2,229 KPH, Stonycliff 2,102 KPH, Bogahawatte 2,088 KPH and Derryclare 2,083 KPH. Yuillefield estate is the only estate which yielded below 2,000 KPH but improved on its previous highest yield of 1,807, to obtain a yield of 1,868 KPH. Innovative management strategies such as shear plucking were adopted, in order to control plucking rounds, and thereby improve the quality of the green leaf, sent for manufacture. Despite the increase in cost of basic wages of 33.3% and the fuel, chemicals, packing material price increases, the COP was maintained at a reasonable level of Rs per kilo. As stated earlier the steep decline in the high grown sale average severely eroded into our overall profits. We wish to acknowledge the dedication and hard work of all our employees who strived under very trying conditions to obtain the co-operation and assistance of the workforce in order to reap the benefits of the full agricultural programme carried out. The Region did extremely well to harvest the highest ever crop of 5.1Mn. kilos made tea, and thereby achieved the highest yield for the region of 2,268 kilos per hectare. From the ten estates, nine estates recorded yields of over 2,000 kilos per hectare Kotagala Low country Tea Kotagala Low country Tea consists of 200 ha of 100% VP tea, the yield for the season was 1,804 Kgs per ha. improving on the previous yield of 1,777 Kgs per ha. The Low grown estate crop harvested was 360,705 Kgs the bought crop from small holders was 1.1Mn Kgs making a total of 1.5Mn. Kgs. Rayigam estate achieved the best yield of 1,910 Kgs per ha with Vogan and Gikiyanakande achieving 1,887 Kgs and 1,649 Kgs per ha respectively. The depressed low grown sale average coupled with enhanced wage increase of 33% resulted with the Low Grown Tea sector operating at a marginal profit of Rs.7.5Mn. The final combined COP was Rs with a NSA of Rs resulting in a combined profit of Rs.6.92 per Kg. In spite of the restricted profit recorded, the replanting of 10 ha. in tea was undertaken during the season in the Low country. Rubber The Rubber market in global terms progressively declined during the course of the season and its impact was reflected in the Colombo auctions as well. The peak prices that reached Rs.635/- levels per Kg for TPC 1X declined to Rs. 475/- levels by the 3rd quarter. RSS prices also had a similar trend but improved in demand over 1X for short period, when RSS attracted better prices than 4 Kotagala Plantations PLC Annual Report 2011/12

7 Crepe. However, this trend did not continue and Crepe once again had improved demand. The annual production of Kotagala Rubber was 3.0Mn.Kgs. against the budgeted crop of 3.9 Mn. Kgs. recording a shortfall of 23% against the annual budget. The COP appreciably increased as a result of the wage hike during the period under review, which had an impact of 18%. The overall COP increased further due to high petroleum, energy and packing materials cost. Despite the decline in profits, Rubber replanting continued with an extent of 89 ha. undertaken. Kotagala enhanced its reputation of manufacturing top quality Crepe Rubber as well as Sole Crepe and was rewarded with 18 top prices, with all our estates contributing to this achievement and especially Dalkeith, Arapolakande, Rayigam, Padukka, Paiyagala and Millewa. The Padukka ISO certified factory specializes in Sole Crepe manufacture including Honey/colour Sole Crepe and Sole Crepe sticks, which are exported to end users. The revenue earned by the export of rubber increased during the season due to remunerative prices obtained for the Sole Crepe at US$ 9 per Kg. and Thick 1X Crepe at an average price of US$ 5. A total quantity of 866,000 kgs was direct exported. If the present economies of China and India, and the Euro Zone financial crisis also improves, more favourable market condition could be expected in the new season. The COP at the end of the season was Rs with a NSA of Rs giving a profit margin of Rs per Kg. The decline in crop was due to the reduced number of tapping days. The rainfall recorded during the season was 4,115 mm with 165 wet days. The rain guarding of tapping panels was undertaken in the virgin bark fields. Even though in these areas there was an increase in the actual number of days of tapping and consequently increased crop the quantity was inadequate to make a significant contribution to the overall harvest. The Rubber market in global terms progressively declined during the course of the season and its impact was reflected in the Colombo auctions as well. The peak prices that reached Rs.635/- levels per Kg for TPC 1X declined to Rs. 475/- levels by the 3rd quarter. Due to the attention given to the manufacture of top quality Rubber and also paying attention to the percentage of premium grades manufactured, the Company was able to secure a profit of Rs Mn, inclusive of all charges such as lease rental, MA fees, gratuity top up etc., The profit for the season on Rubber can be considered very satisfactory despite the increased expenditure on wages and all other inputs. Kotagala enhanced its reputation of manufacturing top quality Crepe Rubber as well as Sole Crepe and was rewarded with 18 top prices, with all our estates contributing to this achievement and especially Dalkeith, Arapolakande, Rayigam, Padukka, Paiyagala and Millewa. Oil Palm Our target of planting an extent of 1,000 hectares of Oil Palm is progressing satisfactorily. 117 ha has been completed to-date. It is our intention to extend our planting programme in the current season to 217 ha. This project is expected to be completed by The seed material for the nurseries continues to be imported from PNG New Britain Palm Oil Limited. Restriction enforced on us regarding the purchase of seed material from PNG New Britain Palm Ltd has resulted in a steady increase in cost. With a steady increase in demand for Vegetable Oil for the World Markets, the Oil Palm Industry will be a profitable venture. Financial Review The Company s turnover of Rs.3,610.3Mn. indicates a marginal decline over the previous year turnover of Rs.3,683.3Mn. The Company recorded a profit before tax of Rs.531.9Mn. and the cash flow stood at Rs.321.9Mn. in the year under review. Capital expenditure To maintain the Company asset value of the following capital expenditure was incurred during the season under review. Machinery Tea Machinery Rubber Repalnting Tea Replanting Rubber Equipments Rs.7.6Mn. Rs.5.1Mn. Rs.15.1Mn. Rs.30.8Mn. Rs.5.5Mn. 5

8 CEO S REVIEW Fairtrade Certification The demand for Fairtrade teas continues to increase with all 3 marks of Kelliewatte, Bogahawatte and Chrystler s Farm being patronised. These marks have been accepted by Fairtrade USA as well. Kelliewatte with its connected Certificates on Environmental worker health and safety standards, Ethical Tea Partnership and ISO 22000:2005 & ISO 9001:2008 continued to have Fairtrade sales on a weekly basis. ISO Certification/Ethical Tea Partnership All nine plantations have received ETP certifications. Seven plantations, that is excluding Mayfield and Bogahawatte, have received ISO 22000: 2005 & ISO 9001:2008 certifications. These certified factories had regular audits undertaken in order to ensure that ETP and ISO requirements are continuously maintained. Mayfield estate will be ready for ISO certification by June The demand for Fairtrade teas continues to increase with all 3 marks of Kelliewatte, Bogahawatte and Chrystler s Farm being patronised. These marks have been accepted by Fairtrade USA as well. Social Welfare The Company achieved recognition from the PHDT for the various Worker Welfare activities carried out such as - building of new units of houses, new Toilets, reproofing of Worker dwellings, constructing new play grounds, upgrading and building child development centers. The infant mortality rate and maternal mortality rate on our Plantations, are registered at zero levels. This is a great achievement and is a tribute to our medical and welfare staff. We give below the details of the awards received by 3 plantations in respect of the Social Welfare activities; 1. Mayfield Estate - Best Manager -1st runner-up 2. Stonycliff Estate - Best Health Care service - 2nd runner-up 3. Hedigalla Estate - Best Estate Worker Housing Co-operative Society - 2nd runner-up We wish to extend our thanks and appreciation to the PHDT for their co-operation and support given in this regard. Human Resources The Company invested in training all categories of Management, Staff and Workers with the assistance of NIPM, TRI, RRISL as well as EFC with resource personnel from reputed Agencies. The worker welfare activities highlighted in the report were undertaken with the assistance of the PHDT and the contributions made by the CARE International and the training programme of the WUSC. As done in the past, the Company has given financial assistance to Staff and Workers children for higher education. Disabled persons on the estates have been assisted through the Sunera Foundation. Eye clinics and health clinics continue to be held with the free distribution of spectacles. The season under review was very trying with many difficulties faced with increased labour wages combined with poor prices especially in tea and decline in prices for Rubber as well. Our Plantation Executives and Staff, continue to show dedication and loyalty to the Company to introduce innovative strategies, with the assistance of all executives at the Head office as well and an endeavour to meet the many constraints faced during the season under review. I wish to thank the Chairman, Board of Directors, Management Team, Executives in the Plantations, Head office and Estate Staff and our Workers for their co-operation and dedication during a very difficult season. We acknowledge with appreciation the contribution made by all. R C Peries Chief Executive Officer Lankem Tea & Rubber Plantations (Pvt) Ltd. Managing Agents 18th May Kotagala Plantations PLC Annual Report 2011/12

9 BOARD OF DIRECTORS A Rajaratnam - Chairman Non-Executive He joined the Board of Kotagala Plantations PLC in 1996 and was appointed Chairman in the year He serves as Chairman of The Colombo Fort Land & Building Company PLC (CFLB) and several listed and unlisted companies within the CFLB Group in addition to holding other Directorships within the Group. Mr. A. Rajaratnam is a Fellow of the Institute of Chartered Accountants of Sri Lanka. S D R Arudpragasam Non- Executive Director He was appointed to the Board in He holds the position of Deputy Chairman on the Boards of The Colombo Fort Land and Building Company PLC (CFLB) and Lankem Ceylon PLC. Mr. Arudpragasam also functions as Managing Director of E.B. Creasy & Company PLC in addition to serving on the Boards of other Companies within the CFLB Group. Mr. S.D.R. Arudpragasam is a Fellow of the Chartered Institute of Management Accountants (U.K.) R C Peries Executive Director Having started his career with Carson Cumberbatch & Co. he then moved to George Steuarts, one of the premier Agency Houses. He has served as Manager of some of most prestigious rubber properties in the Low Country and also held senior appointments in the industry and served on the Rubber Research Board Advisory Panel. In 1983, he was appointed the Regional Director of the JEDB Hatton Board and in 1988 he was made Director General of the Kegalle - Avissawella Zone of the JEDB. In 1992 after the Privatisation of the management of plantations, he joined George Steuart Management Services as the General Manager of Low Country rubber & tea estates of Kotagala Plantations PLC. He continued to serve in this position even after the take over of the Management of Lankem Tea & Rubber Plantations (Pvt) Ltd(LT&RP), Managing Agent in He was appointed to the Directorate of LT&RP in 2002 and to the Board of KPPLC in 2005 and is presently the Chief Executive Officer of LT&RP. He also serves as a Director in other companies of the Colombo Fort Land & Building Group. He is also a member of the Rubber Research Board and the Chairman of Lankaprene Marketing Company Ltd. He is presently a committee member of the Colombo Rubber Traders Association, and is also a member of the Rubber Wages Board. Mr. R C Peries is a Member of The Ceylon Institute of Planting. C P R Perera Independent Non-Executive Director Appointed to the Board in Mr. C.P.R. Perera serves as a Director in several Companies in the Colombo Fort Land & Building Group and also holds directorships in other private and public companies. He is a past Chairman of the Sri Lanka Tea Board, Sri Lanka Insurance Corporation, PERC and Bank of Ceylon. He retired as Chairman of Forbes & Walker Ltd and its subsidiary companies in June 2005 after almost 44 years of service. He presently functions as Chairman of Ceylon Tea Brokers PLC and Capital Alliance Finance PLC. He is a Director of the Sri Lanka Business Development Center (SLBDC) and a Board Member of the Outward Bound Trust of Sri Lanka. Mr. Perera has served as a Committee Member of the Ceylon Chamber of Commerce, The Planters Association of Ceylon and on the Committee of Management of the Ceylon Planters Provident Society. D A Ratwatte Executive Director Having commenced his career with Messers Whittall Boustead Ltd prior to nationalisation he has contributed many years of his life to planting. After the nationalization of estates he continued to be manager of two of the most prestigious plantations in up country after which he was invited to serve on the board of the JEDB as a Regional Director in Kandy. After the privatization of management of the Regional Plantation Companies in 1992, Mr. Ratwatte took charge of the operations of Maturata Plantations Ltd. In 1999 he joined Lankem Tea & Rubber Plantations (Pvt) Ltd.(LT&RP),Managing Agents, as a Regional Director in charge of the Western High Grown properties. He was appointed to the Board of LT&RP in 2002 and joined the Board of KPPLC in He also serves as a Director in other Companies of the Colombo Fort Land and Building Group. Mr. D A Ratwatte is a Fellow of the National Institute of Plantation Management. G D V Perera Executive Director He commenced his career in planting with Mackwoods Estates & Agencies Limited in With the nationalization of Estates, he worked as an Estate Manager and Visiting Agent and was subsequently promoted as a Director of JEDB in the Nuwara Eliya Region. He has provided his services to the prestigious Commonwealth Development Corporation (CDC) of UK on Tea Projects in Tanzania and was resident there. After the privatization of the management of Regional Plantation Companies, he returned to Sri Lanka and joined Forbes Plantation Management Services Ltd., as a Plantation Director of Balangoda Plantations Limited in He joined Lankem Tea & Rubber Plantations (Pvt.) Limited (LT&RP), Managing Agents in 1996 and was appointed to the Directorate of LT&RP in 2002, and KPPLC in He also serves as a Director in other companies of the Colombo Fort Land and Building Group. He is a past Chairman of the Planters Association of Ceylon and is a Trustee of the Colombo Tea Traders Charity Trust. He is a Director of the Plantation Human Development Trust Mr. G.D.V. Perera is a Member of the Ceylon Institute of Planting and a Fellow of the National Institute of Plantation Management. He is a member of the consultative committee on Tea Research. 7

10 RISK MANAGEMENT The Risk Management process At Kotagala, we emphasise the importance of having a strong working culture within the organization that strengthens the internal processes. Risk Management is no longer an additional set of processes but embedded in the business process itself.the risks could influence the achievement of the strategy of business, operational and financial objectives therefore the Directors have taken the initiative to identify the organisations major risks and introduced several measures to mitigate the risks faced by the Company. The following are some of the major risk factors that the company is exposed to while carrying out its business and the actions implemented to reduce or eliminate risk. Operational risk The company carries out continuous planning, quality control and disaster recovery management strategies in order to ensure the continuous operation of business. Tangible assets are insured against identifiable risks and the associated insurance policies are reviewed and evaluated annually. Provision is also made for asset defects and malfunctions and for obsolescence due to advances in technology. We go to the best suppliers to ensure that defect free products are purchased. The factories in the estates and other infrastructure are continuously upgraded when required. Exposure to reputation risk is minimized through product quality controls and a comprehensive quality management process which includes upgrading our factories to adhere to HACCP standards Weather The Company s product portfolio being Tea and Rubber, helps to minimize the impact as tea requires wet and rubber requires drier weather conditions. The location of our tea estates in the High grown and Low grown elevation categories also helps in this regard. The Company has the option of increasing or decreasing quantities of bought crop according to weather patterns. Prudent agricultural practices such as rain guards for rubber trees and planting of TRI recommended clones and other agricultural practices to minimise drought effects and proactive planning has helped the company to minimise the risk of adverse weather conditions. Business Risk Prices are cyclical and have an impact on earnings. Tea Auctions in Colombo are influenced by global demand and supply, and foreign currency exchange rates. The company mitigates this impact by producing high quality tea and rubber. The direct export of rubber facilitates price stability and entering into forward contracts with rubber buyers helps reduce market risk. Kotagala Plantations process a full range of teas (low grown, high grown and CTC) and different types of rubber which helps reduce market instability. Initiatives have been taken for diversification into other crops like cinnamon and oil palm which will reduce over dependence on tea and rubber. The Company possesses synergistic benefits from being in a group which includes a chemical supplier and another company in the plantation business. Healthy relationships are maintained with our suppliers. Fluctuations in the exchange rates are closely monitored and hedging techniques applied when required. In order to minimize the dependence on a single distribution channel (brokers) the company has continued to establish its export operations. Further the company has leased out a portion of land to Mlesna (Ceylon) Ltd in Kotagala for the purpose of the sub lessee to carry out sales and operate a tea centre for their products. This facility also has provision to market KPPLC garden mark packs. Legal and regulatory The Company addresses this area with great concern in order to protect its corporate image. Quality assurance standards in factories have been established over a period of time (ISO, HACCP) and continuous reviews are conducted to ensure they are maintained. The Company s legal division ensures full compliance with all regulatory requirements including labour regulations, adherence to laws and instructions of governing authorities such as Provisions of the Companies Act, Securities & Exchange Commission and Colombo Stock Exchange requirements. The Company also obtains expert advice from its Auditors, Tax consultants, Actuaries, TRI, RRI as and when required. As a public listed company we also strive for a high standard of corporate governance in the conduct of our business. Human resources Kotagala Plantations has entered into Collective Agreements with trade unions as a member of the employers federation. This helps to ensure industrial peace and a well negotiated and affordable wage. Human Resource Management is given priority, 8 Kotagala Plantations PLC Annual Report 2011/12

11 where continuous training and development programmes and workshops are held in order to motivate and develop our human resources. Governance Risk These risks are dealt with preventively through the actions of the company s legal department and through frequent internal & external audits to monitor compliance. The company s management culture stresses ethical performance in this area, following best practices at all times. Liquidity We ensure sufficient liquidity is available to meet our debt commitments and provide for our operational capital requirements. Loans and overdraft facilities are arranged with banks to meet planned cash flow commitments. For our long term investments, we obtain loans from Asian Development Bank at low interest rates, and we make use of the grants from the Plantation Human Development Trust and the Plantation Development Support Programme. Borrowings are suitably structured to ensure their maturity profiles match those of the investments they finance. Employee related risks Risks such as omissions, fraud, judgmental errors, negligence, are examples of employee related risks. The company has a set up a competent internal audit department which carries out exhaustive checks on a routine basis in order to eliminate the above mentioned risks. The Internal audit department functions independently and reports directly to the Executive Directors. They ensure all receipts have been banked, lodging of funds have been deployed for the intended activity. Suitable delegated authority levels have been set up and succession plans are formulated. We maintain a conducive working environment for all staff Information Proper internal controls have been established in order to secure the information system. Routine and surprise audit checks are carried out to detect any deficiencies and improvements are suggested. The company has implemented sound backup systems and procedures, and has also entered into maintenance contracts with established agents and uses licensed software. Further the company has entered into insurance agreements in order to hedge financial losses arising from uncertainties. 9

12 ENTERPRISE GOVERNANCE Enterprise Governance is the combination of Business Governance and Corporate Governance, it is the set of responsibilities and practices exercised by the Board and executive management with the goal of providing strategic direction, ensuring that objectives are achieved, ascertaining that risks are managed appropriately and verifying that the organization s resources are used responsibly. Enterprise Governance is such an important framework. It encapsulates Corporate Governance, Performance Management, Internal Control and Risk Management, and it strives to achieve a balance between conformance and performance. The Company has a management committee that acts as a Board sub-committee and assists the Board of Directors on various matters. This process helps the Board to review its strategic position continually. The strategic options, implementation and risk control strategies are closely monitored in order to deliver better results. The Company is in compliance with the majority of the good corporate governance practices recommended by The Institute of Chartered Accountants of Sri Lanka and the listing rules of the Colombo Stock Exchange. Given below is a demonstration as to how we adhere to good Corporate Governance practices. At Kotagala Plantations PLC we are firmly committed to the highest standards of governance. The Company s performances are managed to the best interest of its shareholders whilst maintaining high ethical standards. The Board is committed to adhere to various business practices in order to further establish our Company as a good corporate citizen that values responsibility. Corporate Governance Principle Composition of the Board Company s adherence Directors The Board consists of three Executive Directors and three Non Executive Directors of whom one is independent. The Directors possess a strong balanced blend of skills, experience to offer guidance in core areas important to KPPLC. These Directors are named below and profiled on page 7. A Rajaratnam S D R Arudpragasam R C Peries C P R Perera D A Ratwatte G D V Perera - Chairman - Non Executive - Non Executive - Executive - Independent Non Executive - Executive - Executive The Non-Executive Directors have submitted declarations of their independence or non-independence to the Board of Directors Mr. C.P.R. Perera was determined to be an Independent Non- Executive Director with effect from 10th January, He has served on the Board for more than nine years and is a Director on the Boards of other Companies in which a majority of the Directors of the Company are Directors and is also a Director on certain subsidiaries of The Colombo Fort Land and Building Company PLC (Ultimate Parent Company) However the Board after taking into consideration all other circumstances listed in the Rules pertaining to the Criteria for Defining Independence is of the opinion that Mr. C.P.R. Perera is nevertheless Independent. 10 Kotagala Plantations PLC Annual Report 2011/12

13 Corporate Governance Principle Decision Making of the Board Company Secretaries Independent Judgement Obtaining independent professional advice Managing Agents Finance Acumen Company s adherence Directors In addition to attending Board Meetings, matters are referred to the Board and decided by Resolutions in writing. The Board is responsible for :- Ensuring the conduct of the Company s affairs in the best interest of its stakeholders. Identifying Strategic options,implementation and monitoring their success. Appointment of the Directors, ensuring comprehensive staff succession and determining remuneration of senior executives and staff. Ensuring an effective internal control system. Ensuring a proactive risk management system. Ensuring compliance with highest ethical standards and legal standards. Approval of major capital investments acquisition expansions and Budgets Approval of interim and annual financial statements for publication. The Company and all Directors may seek advice from Corporate Managers & Secretaries (Pvt) Ltd who are qualified to act as Secretaries as per the provisions of the Companies Act No. 7 of The Board of Directors at all times exhibit high standards of integrity, commitment & independence of judgement. Advice is sought from independent experts whenever board deems it necessary. The Directors are updated on the changes in the plantation industry as well as on the general aspects which may affect the Company s operations. The Board of Directors has delegated the management of Plantation and the task of achieving the strategic objectives set out by the Board to the managing agents Lankem Tea & Rubber Plantations (Pvt) Ltd (LT &RP). The Board of LT&RP meets every month and review the progress towards achieving the budgets and discuss the operational issues. The successful implementation of the Capital Expenditure programmes and focussing on the development strategies are also key priorities. The Board comprises of two finance professionals who together with the Director Finance - LT&RP possess the knowledge and the competence to offer the Board the necessary guidance on matters relating to finance. 11

14 ENTERPRISE GOVERNANCE Corporate Governance Principle Supply of Information on a timely manner Company s adherence Directors Prior to each meeting all Directors are given a file of Board Papers which includes Summarized Financial Statements, operational statistics, performance reviews, sales reports, Schedules of Capital Expenditure and a Progress Report, covering all significant issues with the comparatives of prior year and budget. This information is provided at least 7 days prior to the meeting which gives Directors adequate time for qualitative deliberation and analysis. Appointments to the Board New Directors are proposed for appointment in consultation with the Chairman of the Company. The Board as a whole decides on the appointments of Directors in accordance with the Articles of Association of the Company and in compliance with rules on Governance. All appointments are approved by the Board of The Colombo Fort Land and Building Co. PLC. Disclosure of appointments of New Directors to the Shareholders. The new appointments are made available to shareholders by making announcements at the Colombo Stock Exchange. Re-Election of Directors In terms of the Articles of Association of the company a Director appointed to the Board holds office until the next Annual General Meeting, at which he seeks re-election by the shareholders. The Articles require one-third of the Directors in office (excluding the Managing Director and the Appointed Directors) to retire by rotation at each Annual General Meeting. The Directors who retire are those who have been longest in office since their last election. Retiring Directors are eligible for re-election by the shareholders. Relations with Shareholders Annual General Meeting The Company always welcomes the active participation of the shareholders at the Annual General Meeting. Questions put up by the shareholders are answered thus promoting a healthy dialogue. The required number of days notice has been given to the shareholders in terms of the Companies Act No.7 of 2007 and the Articles of Association of the Company. Communication with Stakeholders The Company publishes the Annual Report together with the interim reports in order to communicate information to the shareholders in a timely manner. Major Transactions There have been no transactions during the year under review which fall within the definition of Major Transactions as set out in the companies Act. Price Sensitive Information Due care is exercised with respect to share price sensitive information. 12 Kotagala Plantations PLC Annual Report 2011/12

15 Corporate Governance Principle Others Company s adherence Relations with Shareholders The Company also maintains a website under the name of its managing agents which offers any individual or body, information on the Company and its affairs. The Company s principal communicator with all its stakeholders are its Annual Report and Quarterly Financial Statements. The shareholders are free to communicate with the Company. When ever possible, the Company implements their suggestions. Accountability and Audit Financial Reporting Disclosures Going Concern Internal Control Internal & External Audits The Board attaches high priority to timely publication of quarterly and annual results with comprehensive details (both financial & non financial) going beyond statutory requirements. This enables both existing and prospective shareholders to make fair assessments on the company s performance and future prospects. The financial statements are prepared in accordance with Sri Lanka accounting standards. The Company s accounting formats and procedures are in compliance with the procedures laid down by the regulatory authorities. The Annual Report of the Board of Directors is on pages 30 to 32 of this report. The Statement of Directors responsibilities for the financial reporting is on page 33 and the auditors report on the financial statements is on the page 34 of this annual report. The Board of Directors after reviewing the financial position and the cash flow of the Company are of the opinion that the Company has adequate resources to continue operations well in the foreseeable future. Therefore the Board adopts the going concern basis in preparing Financial Statements. The Directors are responsible for maintaining an effective internal control system and proactive risk management strategy. Internal controls cover both financial and operational matters and risk management to safe guard the assets of the Company. The risk management strategy of the Company is on pages 8 and 9 of this report. The Company also ensures that effective internal and external audit procedures are followed and the Board reviews the reports in order to maintain the progress of the systems & results. The Internal Audit division comprises of the Internal Audit Manager and Assistants who report directly to the Executive Directors. They are empowered to examine and review the financial reporting systems, internal control procedures, accounting policies and compliance with accounting standards. It also reviews the adequacy of systems for compliance with legal, regulatory and ethical requirement and company policies. The Company maintains a professional relationship with the external auditors, M/S KPMG. This ensures their objectivity, independence and compliance with regulatory and ethical requirements. The Board of Directors retains authority in determining their remuneration. 13

16 ENTERPRISE GOVERNANCE Corporate Governance Principle Audit Committee Company s adherence Accountability and Audit The Audit Committee of the Company s Ultimate Parent Company, The Colombo Fort Land and Building Company PLC is chaired by a qualified Chartered Accountant, Mr. R. Seevaratnam an Independent Non- Executive Director and also constitutes of one other Independent Director, Mr. A.M. de S. Jayaratne and a Non-Executive Director, Mr. S. D. R. Arudpragasam. The Committee has scrutinized the quarterly accounts and the accounts for the year ended 31st March, 2012 of Kotagala Plantations PLC. Steps are being taken to set up the Company s own Audit Committee. Directors Remuneration Remuneration Committee Disclosure of Remuneration The Remuneration Committee of the Ultimate Parent Company, The Colombo Fort Land and Building Company PLC functions as the Company s Remuneration Committee. Aggregate remuneration paid to Directors is disclosed in Note 5 to the Financial Statements. Other Management Committees Compliance with Legal Requirements Social & Environmental Matters Rights of Employees /Other Stakeholders The Management committee comprises of Directors, Consultants, General Managers and Deputy General Mangers. Meetings are held once a month where a review in detail is carried out on the performance of each individual estate based on both financial and relevant non financial indicators. The Board of Directors through the company s Legal & Finance divisions makes every endeavour to ensure that the business complies with all laws and regulations. The Company has for many years recognized the benefits that accrue from responsible employment, environmental and community policies which are dealt with in detail in the Sustainability Reporting in Pages 24 to 28. The Company identifies the rights of employees. Several employee performance enhancing mechanisms such as performance appraisals and training initiatives are in place for the career building of our employees. A series of best practices and techniques are now embedded in the business and applied intelligently within the organization. Constant responsiveness to all stakeholder interests and an effective risk management process are critical success factors to ensure that the governance process will continue to add value in the future. The Extent to which the good Corporate Governance practices are adopted in the Company is given as above in this report. 14 Kotagala Plantations PLC Annual Report 2011/12

17 OUR PLANTATION Estate Crop Planting District Kotagala Region Area in Tea (Ha.) Area in Rubber (Ha.) Other Total Mature Immature Mature Immature Mature Immature (Ha) (Ha.) (Ha.) Buildings, roads. etc Total Extent Type of Factory Factory Capacity Bogahawatte Tea Nuwara Eliya Leafy 11, Chrystler s Farm Tea Nuwara Eliya Leafy 7, Craigie Lea Tea Nuwara Eliya Orthodox 15, Drayton Tea Nuwara Eliya Orthodox 19, Kelliewatte Tea Nuwara Eliya Leafy 8, Mayfield Tea Nuwara Eliya Orthodox 17, Mount Vernon Tea Nuwara Eliya CTC 29, Stonycliff Tea Nuwara Eliya Orthodox 21, Yulliefield Tea Nuwara Eliya Orthodox 16, Derryclare Tea Nuwara Eliya No Factory Regional Total 2, , , , ,143 No. of Workers Horana/Kalutara Region Eduragala Tea/Rubber Kalutara Hedigalla Tea/Rubber Kalutara Gikiyanakanda Tea/Rubber Kalutara Orthodox 1, Rayigam Tea/Rubber Kalutara Orthodox/Crepe 2800/ Vogan Tea/Rubber Kalutara Orthodox 1, Arapolakanda Rubber Kalutara Crepe 1, Dalkeith Rubber Kalutara , Crepe 4, Millewa Rubber Kalutara Crepe/Sole crepe 1, Padukka Rubber Kalutara Sole Crepe 4, Paiyagalla Rubber Kalutara Crepe 2, Sorana Rubber Kalutara Crepe 3, Usk Valley Rubber Kalutara Regional Total , , , , , ,191 Company Total 2, , , , , , , ,334 15

18 PRODUCTION AND YIELD Tea Production (KG 000) Yield per Hectare (KG) 2011/ / / / / / / / / /08 Western High Grown Bogahawatte ,088 2,113 2,190 1,986 1,985 Chrystler s Farm ,501 2,357 2,428 2,299 2,542 Craigie Lea ,339 2,281 2,386 2,293 2,228 Drayton ,262 2,082 2,005 1,977 2,048 Kelliewatte ,229 2,174 2,211 2,037 2,246 Mayfield ,551 2,380 2,324 2,074 1,810 Mount Vernon ,624 2,505 2,518 2,421 2,505 Stonycliff ,102 2,067 1,965 1,824 1,938 Yulliefield ,868 1,807 1,492 1,409 1,636 Derryclare , Sub Total 5,475 5,310 5,147 4,903 5,020 2,268 2,182 2,111 1,996 2,061 Low Grown Eduragala ,574 1,420 1,687 1,321 1,499 Hedigalla ,955 2,070 1,693 1,777 2,312 Gikiyanakanda ,649 1,660 1,737 1,803 1,897 Rayigam ,910 1,918 1,914 1,591 1,956 Vogan ,887 1,799 1,725 1,574 1,956 Sub Total 1,494 1,451 1,538 1,298 1,675 1,804 1,779 1,800 1,620 1,916 Total Crop - Tea 6,969 6,761 6,685 6,201 6,695 2,230 2,151 2,088 1,969 2,052 Rubber Arapolakanda ,182 1,216 1,229 1,227 1,285 Dalkeith Eduragala Gikiyanakanda Hedigalla Millewa ,057 1,153 1,211 Padukka , ,019 1,134 1,230 Paiyagalla ,398 1,403 1,513 1,401 1,394 Rayigam ,011 1,034 Sorana , ,017 1,000 Usk Valley Vogan Total Crop - Rubber 3,006 2,996 3,307 3,552 3, Kotagala Plantations PLC Annual Report 2011/12

19 MANAGEMENT DISCUSSION & ANALYSIS RUBBER Global Rubber Industry Asia has the virtual monopoly Asia is now home to around 92% of the world supply of Natural Rubber. Thailand and Indonesia are in the forefront of Natural Rubber production and the global supply of Natural Rubber continues to be centered on these two nations. This trend is likely to continue in the next decade. WORLD RUBBER CONSUMPTION (%) 1% Rs Sri Lankan Rubber Averages (LCR 1X) 18% 6% 47% 300 April May June Jul Augusty September October November December January February March 2010/ / % Asia Europe North America Latin America Africa Industrial development gathered momentum and the Asian Natural Rubber consumption increased. About 48% of the global demand for Natural Rubber comes from China, India and Malaysia which are three major rubber consuming countries within the Association of Natural Rubber Producing Countries. (ANRPC). Global rubber demand is forecast to reach 27.2Mn. metric tonnes in The global Natural Rubber production is forecast to rise by 5.1% in 2012, driven by high growth in normal production according to a study by International Rubber Study group. Global rubber consumption is forecast to rise 4.3% on a year on year basis till 2015 to 30.5Mn. metric tonnes. Tyres represent by far the largest market for rubber.development in the automobile industry throughout the globe will significantly boost the amount of rubber consumed. Sri Lanka performed creditably well in respect of production by reaching a historically high crop figure of 157,000 metric tonnes in Sri Lanka performed creditably well in respect of production by reaching a historically high crop figure of 157,000 metric tonnes in Company Performance Crop During the year under review the company produced a crop of 3.0Mn.kgs recording a marginal increase compared to the previous year. Due to adverse weather conditions in the rubber growing areas, budgeted crop could not be achieved. Kg '000 4,000 3,500 3,000 2,500 2,000 1,500 1, CROP- RUBBER Net Sales Average (NSA) Sri Lankan rubber prices remained at attractive levels though they were not as remunerative as in the previous year. The highest price per 01kg of Ribbed Smoked Sheets No.01 (RSS 01) at Rs was recorded in June The prices came down subsequently owing to the slow growth of the global economy which impacted on the demand for rubber.the average NSA recorded for rubber was Rs which fell short marginally compared to the previous year s figure of Rs Recent increases in the crude oil price, which has reached nearly $110 a barrel, has driven international rubber prices upward. The demand for naturally produced rubber always strengthens when the crude oil price rises because its utilisation becomes more economical. 17

20 MANAGEMENT DISCUSSION & ANALYSIS The highest price per 01kg of Ribbed Smoked Sheets No.01 (RSS 01) at Rs was recorded in June 2011 Kg MAJOR TEA PRODUCING COUNTRIES Cost of Production (COP) The COP for rubber increased from Rs to Rs as a result of the high wage increases granted to the plantation workers. Rs./Kg COP NSA VS COP - RUBBER NSA TEA Tea Industry Sri Lanka s tea crop of Mn. kgs in 2011 fell short of 2010 s all time record harvest of Mn. kgs, by only 3.06 Mn. kgs. Having commenced with a record crop harvest in the first quarter of 2011, production slowed down as the year progressed North India South India Bangaladesh Sri Lanka Indonesia Indonesia Kenya Malawi Tanzania Uganda Zimbabwe Favourable weather conditions experienced this year, caused tea production to rise by 4% to 7.0Mn kgs compared to 6.8 Mn. kgs produced in the previous year. Our own estate crop exceeded budget by 3%for both high grown and low grown regions whereas the budgeted crop target could not be achieved for bought crop and it fell short by 19%. 8 of the 9 estates in the high grown region reported yields in excess of 2,000 Kgs per ha, as in the past. The significant contributors are Mount Vernon, Mayfield and Chrystlers Farm. Kg.000 6,000 5,000 4,000 CROP- TEA (Combined) World tea crop too was lower by approximately 17 Mn. kgs. China continues to dominate World tea production, with India the 2nd largest producer followed by Kenya and Sri Lanka. However, it is the latter two origins that have the larger exportable surpluses, Kenya being the largest exporter of Black Tea in the World, followed by Sri Lanka. 3,000 2,000 1, High Grown Low Grown Volatile Tea market conditions prevailed in all quarters of Season 2011/2012. Unrest in the Arab world & North Africa, together with the earth quake in Japan which resulted in a Tsunami, affected the Colombo Tea Auction prices. Hence the anticipated advantage of lower production in major tea producing countries such as Kenya and India did not materialize. Company Sri Performance Lanka s tea production hit by bad Crop weather and low prices Net Sales Averages (NSA) The sale prices dropped below the corresponding periods in the previous year, and the decline was further aggravated by currency fluctuations. The Dimbula quality season during the year was a disappointment due to erratic weather patterns. 18 Kotagala Plantations PLC Annual Report 2011/12

21 The policy of attaining an NSA above the COP in order to maintain a profit margin, was not conducive for our Up-Country estates to achieve the High grown Elevation Average. In the face of intensive competition for good quality Bought leaf, with the exception of Rayigam, company s other two Low Grown factories did not fare well Cost of Production (COP) The COP stood at Rs resulting in an increase of 6.34% Among the many setbacks suffered by the tea industry, the wage increase caused the most damage as tea is a more labour intensive crop than rubber. Wage increase and related gratuity adjustment wiped out profits. The increases in fuel and electricity costs further eroded margins. Kotagala Plantations PLC has planted 120 ha in the year 2011 and is programmed to plant 220 ha in the year The scheduled extent of 1000 ha is expected to be completed by the year The first Oil Palm crop is expected in early This will enable the reduction of the country s annual import quantity of MT at a cost of Rs.14 billion as out-flow. The areas already planted in Kotagala Low-country are Dalkeith, Usk Valley and Arapolakande. Bulk of the extents will be confined to Dalkeith, Usk Valley and Hedigalla since the available land there is not best suited for rubber with the present weather changes envisaged in this area. With diversification to this crop coming in, Kotagala Low-country will have three major agricultural crops that could sustain it even during adverse marketing trends for Tea and Rubber. Rs. /Kg NSA VS COP - TEA Kotagala Plantations PLC has planted 120 ha of oil palm in the year 2011 and is programmed to plant 220 ha in the year Field and Factory Development Investments in replanting and other factory modernization activities were given priority.productivity has to increase to sustain the tea industry. Re-planting and infilling is given priority with a view to evade this problem NSA - High grown COP - High grown NSA - Low grown COP - Low grown Diversification Oil Palm Oil Palm, (botanical name- Elaeis guineensis ) is native to West & South Africa and tropics of central America. Most believe this crop migrated to South-East Asia as an ornamental plant and later developed as an agricultural crop. Commercial cultivation is undertaken in many South-Asian countries and Indonesia, Malaysia and Papua New Guinea account for the bulk of Palm Oil production in the world. In the year under review ha of tea and ha of rubber was maintained under immature extents, expending Rs.306.0Mn.in total. The company spent Rs.46.7Mn. on plant and machinery,infra structure development, social work, vehicles, IT development and to meet HACCP standards. Rs./Mn. 600 CAPITAL EXPENDITURE The commercial planting material consists of Tenera Palms or DxP Hybrids which are obtained by crossing thick-shelled dura with shell-less pisifera. These hybrid seeds are imported by Kotagala Plantations PLC from New Britania Palm Oil Nurseries of Papua New Guinea under strict quarantine controls. These plants are planted in two stage Nurseries prior to planting in the field

22 MANAGEMENT DISCUSSION & ANALYSIS IT Developments The Company has embarked on implementing a new Enterprise Resource Planning (ERP) system in the year under reveiw. ERP system integrates internal management information accross the Company. The main advantages is improved efficiency information integration for better decision-making. The Company has embarked on implementing a new Enterprise Resource Planning (ERP) system in the year under reveiw. Challenges Despite the impressive progress of the Sri Lankan rubber industry, it is still faced with stiff challenges such as the incapability of the aged tappers which affects productivity, labour shortage, high cost of production, inadequate resources etc. Our Vision for future Our vision is to stabilize long term sustainability. This includes enhancing productivity and look for new markets. In today s dynamic and turbulent business environment, it is vital that the industry re-examines its strategies, taking into consideration the changing scenario and developments. There is an urgent need for some level of automation at the tea picking stage to overcome the problem of a shrinking workforce. New Venture We have recently embarked on a venture in collaboration with an associate Company within our group, M/s C W Mackie PLC, who have launched the Kotagala Kahata brand through their extensive distributor network. We are committed to supply a consistent quality of tea for this purpose, while C W Mackie PLC is adding value to it, for the benefit of the group. Investment Abroad The Company is evaluating possibilities of expanding its land bank as a strategy to increase revenue generating capacity and shareholders wealth. Due to the limited land resources available in our country (to facilitate large scale planting in a contiguous block), low labour productivity due to highly unionized labour force and scarcity of labour who would prefer not to work in the plantation sector, the company has explored the possibility of securing land from other rubber growing countries in this region. Approvals required for the investment have been obtained from the relevant authorities in Sri Lanka and the project is expected to commence during the year FINANCIAL REVIEW The Company results were commendable given the very difficult conditions that prevailed Net profit after tax was Rs.438.6Mn. which is a decrease of 34% when compared to the previous year. The profit recorded for the rubber sector was Rs.565.9Mn. contributing 139% of the total profit. Tea sector did not perform well in the year under review. The year s results were adversely affected by the decline in tea prices throughout the year. Substantial contribution from other income of Rs.247.1Mn. strengthen the Company s bottom line. This includes Rs.129.1Mn. of exchange gain. Rs. Mn PROFIT BEFORE TAX Turnover The Company s turnover of Rs.3,610.3Mn. indicates a marginal decline over the previous year turnover. (2010/11-Rs.3,683.4Mn.) Tea was the highest contributor generating a 60% of the company s topline. Rubber sector revenue increased to Rs.1,437.5Mn. from Rs.1,434.2Mn. of the previous year. Increase in export turnover and the effect of exchange gain were the factors responsible for the increase in turnover. 20 Kotagala Plantations PLC Annual Report 2011/12

23 Rs.Mn. 4,000 3,500 3,000 2,500 2,000 1,500 1, TURNOVER Performance Measurement Dividend The Directors recommended a first and final dividend Rs.2.00 per share which will be declared at the Annual General Meeting. Rs. /Share Dividends Per Share SEGMENTAL TURNOVER (Rs.Mn) ,437 2,173 Share Price The share price of a Kotagala share was Rs,70.00 as at 31st March In keeping with market sentiments, share prices reached a peak of Rs And dropped to a low of Rs The year end market capitalization for the Company was Rs. 2.2 Bn. Tea Rubber Gross Profit The company recorded a gross profit Rs.646.2Mn.when compared with previous year figure of Rs.1,042.8Mn.this was mainly due to the wage increase in and downturn trend in the prices. Balance Sheet The Balance Sheet of the Company has been further strengthened during the year under review. Total assets stood at Rs.6,603.7Mn., non current assets and current assets increased by Rs.631.3Mn. and Rs.99.8Mn. respectively. The Company invested in Lankem Development PLC and Agarapatana Plantations Ltd expending Rs.350.0Mn. in the year under review. The Company spent Rs.352.7Mn. in total on capital expenditure. Cash Flow The Company s cash flow at the end of the year stood at Rs.321.8Mn. including the exchange gain of Rs.122.3Mn. Repayment of long term borrowings and dividend payment amounted to Rs.277.2Mn. and Rs.318.5Mn. respectively. Rs.Mn. 2011/ /11 Cumulative 1st 2nd 3rd 4th Up to Qtr Qtr Qtr Qtr Revenue 889 1,770 2,749 3,610 3,683 Gross Profit ,043 Profit after Tax Shareholders Fund 2,219 2,128 2,267 2,471 2,353 Total Assets 5,960 6,040 6,306 6,504 5,773 Earnings per share -Rs Net Asset per Share- Rs Market price per Share - Rs

24 TEN YEAR SUMMARY 2011/ / / / / / / / / /2003 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 TRADING RESULTS Revenue 3,610,320 3,683,366 3,173,728 2,331,370 2,749,132 2,175,599 1,751,122 1,537,574 1,222,295 1,249,009 Gross Profit 646,227 1,042, , , , , , , , ,568 Other Operating Income 247, ,318 93, ,827 97, ,743 60,276 56,776 44,279 46,937 Operating Profit/(Loss) before Management Fee & Interest 743,321 1,070, , , , , , , , ,199 Profit/(Loss) before Income Tax 531, , , , , , , ,049 (36,767) (38,567) Profit/(Loss) after Tax 438, , , , , , , ,203 (36,767) (38,567) BALANCE SHEET Non-Current Assets 4,376,530 3,865,241 3,497,052 2,805,320 2,325,609 2,081,004 1,921,439 1,836,411 1,960,643 1,911,799 Current Assets 2,127,158 1,907,348 1,070, , , , , , , ,277 6,503,688 5,772,589 4,568,043 3,658,869 3,276,994 2,707,093 2,450,610 2,407,778 2,232,125 2,240,076 Issued Capital 320, , , , , , , , , ,000 General Reserves 240, , , , , , , , , ,000 Retained Profit/(Loss) 1,911,241 1,792,633 1,220, , , , ,083 25,578 (98,625) (61,858) Shareholders Funds 2,471,241 2,352,633 1,780,860 1,489,670 1,382, , , , , ,142 Deferred Income 309, , , , , , , , , ,836 Interest Bearing Borrowings 739,584 1,163, , , , , , , , ,380 Retirement Benefit Obligations 568, , , , , , , , , ,379 Net Liability To Lessor 397, , , , , , , , , ,358 Deferred Tax 276, , ,756 89,332 63,851 39,039 JEDB/SLSPC Lease Arrears Payable - - 7,878 19,878 25,286 Long Term Related Party Balance - 74, , ,630 - Current Liabilities 1,739, , , , , , , , , ,695 6,503,688 5,772,589 4,568,043 3,658,869 3,276,994 2,707,093 2,450,610 2,407,778 2,232,125 2,240,076 Net Cash Flow From/(Used in) Operating Activities 811, , , , , , , ,090 75,943 98,153 From/(Used in) Investing Activities (449,035) (477,774) (640,094) (600,339) (404,025) (215,013) (142,469) (104,951) (81,329) (68,074) From/(Used in) Financing Activities (689,291) 187, ,585 38,362 (183,971) (16,031) (18,689) (74,046) (683) (19,001) Increase/(Decrease) in Cash & Cash Equivalents (326,540) 324, ,405 (269,279) 44, , ,860 7,093 (6,069) 11,078 Per Share - Rs. Earnings/(Loss) (1.15) (1.21) Dividends Net Assets (Year End) Market Value (Year End) Kotagala Plantations PLC Annual Report 2011/12

25 SHAREHOLDER & INVESTOR INFORMATION 1 STOCK EXCHANGE LISTING The issued ordinary shares of the Company are listed with the Colombo Stock Exchange 2 DISTRIBUTION OF ORDINARY SHARES 31st March st March 2011 No. of Total Percentage of No. of Total Percentage Shareholders Holding Total Shares Shareholders Holding ,325 1,751, ,877 2,008, , , , , ,871, ,953, ,001-1,000, ,048, ,698, Over - 1,000, ,502, ,502, ,642 32,000, ,173 32,000, No. of Total Percentage of No. of Total Percentage Shareholders Holding Total Shares Shareholders Holding Categories of Shareholders Individuals 12,524 4,434, ,061 4,285, Institutions ,565, ,714, ,642 32,000, ,173 32,000, PUBLIC HOLDING The percentage of shares held by the public as at 31st March 2012 was 19.97%. (31st March %) 4 Market Value The market value of the Company s ordinary shares was 2012 (Rs.) 2011 (Rs.) Highest Lowest Close Major ShareHolders 31st March st March 2011 No. of Shares % No. of Shares % 1 LANKEM PLANTATION HOLDINGS LIMITED 12,100, ,100, LANKEM TEA & RUBBER PLANTATIONS (PVT) LIMITED 9,602, ,602, SECRETARY TO THE TREASURY 3,800, ,800, PERSHING LLC S/A AVERBACH GRAUSON & CO. 388, , PAN ASIA BANKING CORPORTION PLC/MR.M.MATHEWS 278, MR. TALIB TAWFIQ TALIB AL-NAKIB 276, , MR. LOAY MAHMOUD SAYED HAMED ALNAQIB 275, , MR. MUSHTAQ MOHAMED FUAD 199, , MACKSONS HOLDINGS (PVT) LTD 167, , WALDOCK MACKENZIE LTD/HI-LINE TRADING (PVT) LTD 161, , MR. MOHAMED MAKEEN MOHAMED MIZVER 152, , MR. MOHAMED ZAREEN RASHEED 120, , MR. MOHAMED MILFER MOHAMED MAKEEN 101, , SEYLAN BANK PLC/THIRUGNANASAMBANDAR SENTHILVERL 100, MR. DAVID KOTTHOFF 98, , MISS. ASHA MORARJI UDESHI 97, , MR. KANGASU CHELVADURAI VIGNARAJAH 74, , SEYLAN BANK PLC/RISING SUN GARMENTS (PVT) LTD 71, , LUNUGANGA TRUST 67, BANK OF CEYLON NO. 1 ACCOUNT 64, , TOTAL 28,197, ,238,

26 SUSTAINABILITY REPORTING We are conscious of the importance of sustainable practices and continue to balance our social, economic and environmental responsibilities with our business strategy. Economic Our Customer Environmental Contribution People Centric Impact Economic Contribution Kotagala is committed to sustainable growth and performance. Our strategies are geared to deliver sustainable economic growth to all stakeholders. The Company is committed to enhance shareholders value through steady growth in earnings, maintaining effective cash positions and distributing dividends over the long term. The Statement of Value Added given below explains the value created by business activities and how it was distributed among the stakeholders. Statement of Value Added 2011/ /11 Rs.000 Rs.000 Economic Value Generated Revenue 3,610,320 3,683,366 Other Income 247, ,318 Share of results of associates 1,474 (509) 3,858,852 3,821,175 Defined Contribution Plan Obligations Employees are eligible for Employees Provident Fund and Employees Trust Fund contributions and the applicable percentages are contributed to the EPF and ETF. Retirement Benefit Obligations Every employee with more than 5 years of continuous service will receive half month s salary for every year of service on retirement or termination of service. An Actuarial Valuation was carried out by M/s Actuarial Management Consultants (Pvt) Ltd. According to the valuation, the gratuity liability as at 31st March 2012 was Rs.568.9Mn. in the year under review, gratuity payments amounted to Rs.69.5Mn. Our People Kotagala is an equal opportunity employer having a workforce of 11,085 and considers its employees as its greatest asset. Economic Value Distributed Operating Costs 1,298,757 1,432,797 Employee wages and benefits 1,902,789 1,456,983 To- Providers of capital (interest) 77,415 67,261 To- Government as lease rental 46,556 89,392 To- Shareholders as dividends 320,000 96,000 Economic Value Retained Provision for Depreciation 165, ,185 Profit after dividends 118, , , ,958 Kotagala maintains a centralized procurement system and purchases at fair and reasonable prices complying with trade terms and conditions. Kotagala is committed to ensure that all dues as per statutory requirements are paid within the specified time periods. 24 Kotagala Plantations PLC Annual Report 2011/12

27 Strength of Kotagala Family The total workforce is spread around different locations and functional levels as shown below. Workers Clerical, Technical & Executives Total Other Staff 2011/ / / / / / / /11 Total Employees 10,334 11, ,085 11,811 Region Wise Kotagala 6,244 6, ,566 6,917 Horana 4,090 4, ,464 4,826 Head Office ,334 11, ,085 11,811 Gender Wise Male 4,632 4, ,202 5,433 Female 5,702 6, ,883 6,378 10,334 11, ,085 11,811 Age Distribution Below 30 years 2,260 2, ,378 2, years 4,585 4, ,843 4,922 Over 45 years 3,489 4, ,864 4,498 10,334 11, ,085 11,811 Service Below 5 years 3,578 2, ,718 3,035 Distribution 6-15 years 3,150 4, ,457 4,464 Over 15 years 3,606 4, ,910 4,312 10,334 11, ,085 11,811 Good employee relations are a necessity in today s corporate world. It enhances productivity, motivates and also builds up loyalty towards the company. We at Kotagala invest in our people and their communities to improve their livelihoods. 25

28 SUSTAINABILITY REPORTING Housing and Infrastructure Welfare of our estate workers is given priority under our corporate responsibility programme. We are working with Government bodies to provide better facilities for the estate workers. Kotagala has introduced various welfare projects to improve worker welfare. Kotagala, with the assistance of Ministry of Livestock & Rural Community Development and the Plantation Human Development Trust (PHDT), expended Rs.29.6Mn. on improving living standards of workers as shown below. Re-roofing Sanitation/ Upgrading New Life Housing Playground Water Scheme Child Development Centres 98 Units 150 Units 25 Units 2 Units 2 Units 1 Unit We have made a significant breakthrough in the health status of plantation workers. A dengue prevention programme was held to create awareness among the workers and a shramadana was conducted to destroy the breeding grounds of dengue mosquitos. Estate management took time and effort to organize a health camp for women over 35 years of age. This was mainly an educational programme. Investments made so far has led to significant improvements in living standards resulting in evidently better social indicators. Health care, child care, skill development, sports and recreational activities It is our high priority to ensure a safe and conducive environment for our employees. Many activities related to welfare, such as health care, child care, skill development, sports and recreation activities, were conducted during the year. Three of our plantations received awards in respect of the social welfare activities at a ceramony conducted by PHDT. A free dental clinic was conducted for the needy on Vogan estate. Infant Mortality Rate (IMR) and Maternal Mortality Rate (MMR) are registered as zero on our estates. Mayfield Estate Stonycliff Estate Hedigalle Estate - Best Manager - 1st runner up - Best Health Care Service- 2nd runner up - Best estate worker Housing Cooperative society - 2nd runner up In addition, the Company also promotes sports activities, cultural and religious programmes. As done in the past, children s day was celebrated with passion in the year under review in our plantations. Many activities, traditional and novel, were organized in honour of children. Three of our plantations received awards in respect of the social welfare activities at a ceremony conducted by PHDT. A workshop was organized by the Department of Labour on Protection of Labour Rights and Protection of Child Rights on Eduragala estate. A Singithi Pola was organized by the Child Development Centre of Eduragala estate. Good quality home grown vegetables were sold at reasonable prices for everyone s satisfaction. Vogan and Padukka estates organized avurudu celebrations specially for the amusement of children. Estate management donated gifts to those who excelled in traditional Avurudu games. 26 Kotagala Plantations PLC Annual Report 2011/12

29 CUSTOMER CENTRIC Our customers are important to us. Endeavour for Greater Standards Food Safety Management System The Global tea trade has called upon the Tea Industry to implement new national standards of ISO which is a food safety management system. This is to comply with the growing demand to ensure higher standards of quality and safety of food produced and exported from the country. Many of our tea factories have met this requirement with additional participation in Fair Trade, Ethical Tea Partnership etc. Forest Stewardship Coucil (FSC) FSC certification provides a credible link between responsible production and consumption of our forest products, enabling consumers and business to make purchasing decisions that benefit people and the environment,as well as providing business value. In order to achieve the certification, FSC requires compliance with a comprehensive set of universally applicable standards of forest management. The aim is to ensure that forest resources are managed to meet social, economic and ecological needs of present and future generations. The FSC label on wood or any paper product guarantees the consumer that the source is reliable and can be trusted. We take pride in announcing that Kotagala has effectively fulfilled the requirements of the FSC and was awarded certification with effect from 1st July 2011 to 30th June 2016, subject to annual surveillance audits. We are among the very few plantation companies to successfully establish that we manage our rubber properties and the forest areas in tea estates on par with the international standards specified by FSC. During the year under review our plantations in Kotagala continue to strengthen the work done while completing the surveillance audits carried out by Messrs. SGS Lanka Pvt Ltd.This surveillance measures are meant to ensure the ISO standards for which certification has been given are maintained/ improved upon. Vogan, Chrystlers Farm and Kelliewatte continue its membership in the fairtrade organization patronage for Kelliewatte (Nadoototam) teas continued. 27

30 SUSTAINABILITY REPORTING ENVIRONMENTAL IMPACT Kotagala is committed to promoting sound environmental practices within our business through policies and practices that enable us to operate in a sustainable and environmentally sound manner. As a plantation Company we understand the importance of being green. We proudly state that the 8, Ha of tea and rubber plantations we have are themselves a forest cover which improves the air quality,environment and enriches the eco system. We have adopted many environment friendly agricultural practices such as using leguminous cover crops, live and stone terraces, draining on an annual basis, planting shade and green manure belts. Usage of properly dried firewood is another option to save energy. A modest saving of 30% is not beyond reach. Future energy management activities Continuing to improve on the current energy management practices. Carryout continuous periodic energy audits to identify further improvements. Continue to evaluate the use of renewable energy as a primary source. It is suggested to split firewood prior to storage thereby increasing the surface area exposed to the atmosphere, which in turn will lead to faster and more efficient drying of the firewood. We give priority to cultivation of our own fuelwood trees ensuring the continuous supply of firewood. A sustainable forest management programme has been already implemented and is monitored by a dedicated Forestry Officer. Use of various types of briquettes made of Paddy Husk, Coconut Husk, Saw Dust, Refuse Tea etc is also an option for thermal energy but is costly and the technology is still in the elementary stages. The company emphasises the importance of protecting water resources and ensuring that they are not contaminated. We make sure that our agricultural practices do not pollute the water resources on our properties. Energy Saving Energy is a critical input for tea manufacture and the tea industry is one of the biggest consumers of energy in Sri Lanka. Whilst electrical energy is required at almost all stages of manufacture,thermal energy is required to remove moisture from the green leaf as well as from the fermented tea. We mostly depend on firewood for thermal energy.we have started installing modern thermal Heaters and state of the art Boilers/Hot Water Generators. As a result our thermal efficiency has improved to over 75%. Almost all our large factories are now equipped with Hot Water Generators. We have installed seven units of wood fired Hot Water Generators. 28 Kotagala Plantations PLC Annual Report 2011/12