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| Chairman’s message |
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“A key strategic priority
at the board level is to
build and scale up an
organisation with the
capability and the
capacity to deliver
our vision and objectives,
while preserving
the values of JKH” |
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Dear Stakeholder, |
I am pleased to report that your company, and group, performed commendably in revenue and profit growth even in the face of the challenging macro environment that confronted us during the financial year.
It is in response to these macro challenges, that we adopted a simple, but determined, approach of doing what we do, better than we already do. This has helped us in no small measure to pursue our long to medium term goals whilst realising our short term objectives. Having experienced the power of such an ethos, we believe it is also an appropriate theme for our Annual Report this year. As you will note, our report this year is in two parts a compact disc containing the full annual report and a hard copy of an abridged report that focuses on areas which traditionally have been of interest to our stakeholders. We were encouraged on this route by a very recent comprehensive review of our sustainable practices that revealed to us with alarming clarity the urgent need to conserve what nature has bestowed in a variety of forms such as energy creating primary materials, water, air and trees, just to name a few. The two pronged approach is JKH's first steps in a wider “greening” and environment friendly strategy.
In overall terms, the year under review could be termed as one of “ups” and “downs”.
As for the “downs”, which I will refer to first, we were unable to fully achieve the high goals we had set for ourselves in substantially increasing our local and regional investments. Operating assumptions and hurdle rates for local investments were difficult to establish because of the myriad of uncertainties surrounding the local operating environment. The prevailing interest rates, anticipated inflation and industry risk premiums made the determination of discount rates extremely challenging. In the case of the regional investments, we explored several opportunities but were reluctant to invest in what we perceived to be an overheated environment and in hindsight we were proved right with significant corrections taking place post the subprime crisis. Some of the opportunities which were available to us did not meet our requirement of scale while in many others the reward factor for operating in unfamiliar territories were not commensurate with the associated risks. |
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| As for the “ups” |
| - We focused on building better internal structures and processes and refined our compensation and benefit schemes to attract and retain the talent required for our future plans |
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| - A number of our businesses and functions achieved significant milestones in productivity enhancement and organic expansion under the defined strategy |
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| - We gained domain knowledge and insights in to identified regional countries and have created networks that would facilitate a smooth and successful entry into such countries |
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| -In the prevailing volatile global capital market conditions, we secured long term funding from the International Finance Corporation (IFC) on terms that recognised the strength and potential of the group |
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| -Dividends increased by 125 per cent from Rs. 1.41 to Rs. 3.18 billion on the back of a one-off special dividend of Rs. 2 per share |
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Our performance |
I am pleased to report the following key financial highlights for the year 2007/08.
- Group profit after tax attributable to equity holders increased by 45 per cent to Rs. 5.12 billion
- Group revenue increased by 27 per cent to Rs. 41.81 billion
- Group profit before tax grew by 37 per cent to Rs. 6.58 billion
- Earnings per share increased by 32 per cent to Rs. 8.00
- Dividend payout increased by 29 per cent from 62.8 per cent to 81.0 per cent
- Net cash flows from operating activities increased by 174 per cent to Rs. 6.91 billion
- Cash EPS increased by 27 per cent to Rs. 9.54
- Pre tax return on capital employed increased to 13.7 per cent from 13.6 per cent in the previous year |
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As stated earlier, the macro environment continued to pose a multitude of challenges during the year with the escalation of the NorthEast conflict and the increased frequency of incidents of violence across the country. Commodity and oil prices rose sharply on the back of increasing global prices. Interest rates continued to remain high against the backdrop of high inflationary trends. A revalued Sri Lankan Rupee, while helping to lower the cost of imports, resulted in export and other forex denominated revenues being lower in local terms. Despite these adverse factors, it is pleasing to note that the country's reported GDP growth for the calendar year 2007 at 6.8 per cent was not a significant slow down from the previous year's 7.7 per cent.
The above factors had varying impacts on the performance of our industry groups. While Transportation, Property, Financial Services, Plantation Services and the holding company recorded improvement in profits, Leisure, Information Technology and Consumer Foods and Retail achieved profits which were lower than that recorded during the previous year.
Transportation remained the main profit earner for the group contributing 53 per cent of the group's post tax profits. This would have been higher if not for the teething costs associated with the supply chain management company which was established last year and a difficult year in the freight forwarding businesses in Sri Lanka and India. Our ports business as well as our bunkering operations recorded a significant increase in volumes which, combined with cost effective and efficient management, translated into higher profits.
Leisure PAT decreased by 31 percent over the previous year. The sporadic incidents and consequent negative travel advisories in some of our major markets resulted in a fall in tourist arrivals to Sri Lanka. Furthermore, two of our new Maldivian resorts were only partially operational for a greater part of the year as they underwent extensive refurbishment, and a third, that was constructed and launched this year, had some startup issues. All the resorts in the Maldives are now fully operational under our Cinnamon and Chaaya brands and have performed very well during the peak winter season. The lease over Velidhu Island, our first resort in the Maldives expired at the end of the financial year and was not renewed as it was not financially viable to do so at the lease rentals expected by the owner.
Property recorded a decrease of 3 per cent in PAT compared to the previous year. The completion of “The Monarch” was behind schedule resulting in only a part of the final profits from the development being recognised in the fourth quarter. The balance will be recognised in the new financial year when all the apartments are handed over and the final instalments are received. Road closures, restrictions in the movement of materials and other impacts emanating from the high security demanded in the city of Colombo contributed greatly to the delay in the completion of the project. The construction of “The Emperor” is in progress, albeit slightly behind schedule, for the same reasons. However, I am pleased to state that almost 80 per cent of its 164 apartments have been sold.
Consumer Foods & Retail experienced a 21 per cent drop in PAT compared to the previous year as a result of negative impacts on production costs and sales volumes of carbonated soft drinks arising from the delay in the installation of our new bottling line, increasing commodity prices, lower disposable incomes and a higher than normal rainfall. This decline was partially offset by better than previous year performances from the Retail segment, which opened 11 new stores during the year, and the Convenience Foods segment.
Financial Services reported a PAT increase of 30 per cent due to an impressive performance from our banking associate, Nations Trust Bank, and an improved result from our insurance arm, Union Assurance.
Information Technology recorded a 23 per cent decline in PAT. This was mainly attributable to the high fixed costs associated with the start up capability building expenses of our still nascent business process outsourcing (BPO) business. The improving revenue prospects of the joint venture between our Software business and Air Arabia is also worthy of mention, as is the steady performance of our Office Automation business.
Plantation Services, which is shown under Others in our segment report, recorded a 103 per cent increase in PAT with impressive performances by both Tea Smallholder Factories and the Broking SBU.
A more detailed review of the performance of the industry groups is available in the management discussion and analysis section of the comprehensive annual report. |
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Progress on strategic initiatives/priorities |
In my message last year, I had outlined the strategic priorities of the group and our long term goals. I now wish to summarise below the progress made on each of these priorities.
Internationalisation and geographical diversification in identified core segments of our businesses
The long term funding (loan) of USD 75 million from the International Finance Corporation (IFC) was a landmark transaction for the group. The funding arrangement gives us the added strength to explore and finalise new cross border growth opportunities. Given the stringent criteria that have to be fulfilled in securing an IFC loan, I believe that the facility reflects the strength of our balance sheet and the efficacy of our operating model.
During the year, we evaluated a large number of hotel properties for investment in northern as well as southern India. However, prices of real estate in India, particularly in the key metros and the more established leisure destinations, have increased sharply in recent years and appear to be overpriced. Such high entry costs, coupled with the heavy investment costs of the capital intensive hotel sector, do not equate to commercially viable propositions. Whilst we recognise that exceptional rewards cannot be reaped in the absence of risk taking, we have had to exercise prudence and significant discipline in our project evaluation and investment decision processes, in avoiding investments that do not provide sustainable returns to our stakeholders. We will, however, continue to appraise and seek ideal entry opportunities for us in the Indian hospitality sector. Besides India, we are also evaluating several opportunities in the tourismlucrative Indo China region and this will be an increasing focus going forward.
In contrast, our Destination Management business established in Mumbai in 2006/07 is performing exceptionally well. Two new branches in Bangalore and Ahmadabad were opened during the year and a fourth branch will also be opened shortly in Delhi. The burgeoning tourism industry, both into and out of India, presents us with much potential for accelerated growth in this segment.
Our BPO operations, though only in its second full year of operations, has about 550 staff in India and Sri Lanka. During these two years, we have developed our capability, positioned a sales team, mainly in the USA and have generated exciting leads. Portraying Sri Lanka as a reliable BPO host is proving to be quite challenging in the face of the negative publicity that Sri Lanka is currently receiving about its security situation. However, recognising the potential of Sri Lanka in the BPO area, we acquired an equity stake of 44 per cent in Quatrro Finance & Accounting Solutions (Quatrro F&A) in April 2008. Quatrro F&A recently acquired the Chicago based Financial Process Outsourcing LLC (FPO) which is a niche player in the Finance and Accounting (F&A) outsourcing vertical, focusing on small and medium enterprises. FPO currently has facilities in the USA and Mumbai with approximately 500 staff. A key consideration of the FPO acquisition was the availability in Sri Lanka of high level F&A skills. During the year, Auxicogent, our BPO company, entered into a contract to provide medical transcription services to USA based customers. A 258 seat facility has already been established in Sri Lanka for this purpose.
Our Convenience Foods business under the Consumer Foods and Retail industry group will commence the manufacture and marketing of processed meats in the key metros of India. We are confident of success in the Indian market given the current wide acceptance of our products in these cities and the increasing disposable incomes of the expanding Indian middle class. Meanwhile, our Retail business is pursuing opportunities for expansion in the South Asian region.
Having established ourselves as a developer of super luxury condominium properties in Sri Lanka, we are now evaluating opportunities for property development in the South East Asian region in strategic partnership with established developers. Two large opportunities that came our way were thoroughly evaluated, but were not concluded because of regulatory issues in the case of one and a risk reward mismatch in the case of the other.
The Transportation industry group recently reorganised its logistics business in India with a view to better exploiting the available opportunities. We are currently evaluating potential strategic investments in ports, shipping and logistics in the region.
The stock broking arm of the group expanded its operations outside Sri Lanka by entering into a memorandum of understanding with Lanka Bangla Securities, the leading stock broking firm in Bangladesh. The positioning of our stock broking company in Bangladesh is just one of the many steps that we have taken, and are taking, in better understanding this large market for group investment. |
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Focus on selected large local industries
The port of Colombo has tremendous growth potential and the group is committed to its future development and expansion plans. During the year, the government called for proposals for private sector participation in the proposed South Container Terminal Expansion at the Colombo Port. This tender was subsequently cancelled. Encouraged by the unique success of our associate SAGT, which owns and operates the Queen Elizabeth quay at the port of Colombo, in running a world class operation, we will participate when the project is retendered.
The proposed “Port City” development for which the group received an inprinciple approval from the government of Sri Lanka is high on our list of priorities. The group is in an ongoing dialogue with the government on this project and we are working towards executing a formal Letter of Intent (LOI) during the financial year.
We have a strategy in place for developing our extensive land bank in prime areas of Colombo and will launch new developments subject to market conditions. The construction of “The Monarch” has provided valuable learnings for the business, particularly for the development of “The Emperor” project. I am delighted to also report to you that JKH recently entered into a Memorandum of Understanding with Associated Motorways, Sri Lanka and Finlays Colombo, Sri Lanka to develop a contiguous 6.6 acre block of land in the heart of Colombo under a “City within the City” theme.
During the year, the John Keells Hotels PLC announced conditional voluntary offers to acquire three listed hotel companies controlled by a local hotel group. However, the conditions of the offer were not met by the offer closure date and the offer was withdrawn.
Ceylon Cold Stores (CCS) invested in a new bottling plant to increase its beverage production capacity by over 50 per cent. The new bottling line is now fully installed and has attained functioning stability. Plans that focus on product rationalisation, an improved distribution model, production efficiencies and more focused marketing and advertising, among others, have been rolled out and are being monitored closely.
The Retail business has been on an aggressive expansion programme with 11 new outlets opened during the last year. The central distribution centre, established in 2006/07 under the logistics arm of the Transportation industry group, has overcome most of its teething problems and is now functioning in line with original expectations and generating significant efficiencies in back office processes including inventory and vendor management. The establishment of an inhouse academy for training and certifying associates at the outlets has also been a success and will add to the quality of our customer offering.
Our Financial Services associate, Nations Trust Bank (NTB), has continued its aggressive expansion through a growing branch network, innovative services and the development of multiple channels for customer reach. In the light of its impressive operating and financial performance, JKH invested in the issue of rights and warrants by NTB this year in order to maintain our stake.
Divest businesses that contribute disproportionately to management time
In line with our continuous evaluation of our portfolio of businesses, we divested a majority 74 per cent of our stake in the Systems Integration business, Keells Business Systems, as this business, although profitable, does not fit with the long term strategic priorities of the Information Technology industry group.
Building organisational capability
A key strategic priority at the board level is to build and scale up an organisation with the capability and the capacity to deliver our vision and objectives, while preserving the values of JKH.
This past year was a year of insight and introspection for the group. Each of our businesses delved deeply into their processes and embarked on an aggressive drive of generating cost efficiencies and increasing productivity and these initiatives were regularly monitored by the Group Executive Committee. We believe that if our businesses are to become regional leaders we must relentlessly pursue internal efficiencies and make continuous process improvements and this is an area where we left no stone unturned.
It has given me great pleasure to lead a young and energetic team at JKH and one of my most rewarding tasks has been
my personal involvement in the many structured processes that proactively identify, select and develop a strong second line in every business and function. Ours is a growth focused group and there is tremendous potential for accelerated growth in each of our industry groups and these, in turn, create many opportunities to recruit, train, develop and spawn high performers.
The implementation of our new “pay for performance” scheme aligning employee rewards to organisational performance was another important step towards enhancing performance. This proved to be a timely move, in an environment where, as I stated earlier, revenues are under pressure because of lower disposable incomes and an appreciated Sri Lankan Rupee in the case of forex denominated revenues and costs are increasing because of escalating commodity and energy prices, and significant increases in other inputs because of inflation. The need for an uncompromised focus on productivity has never been greater, not just for JKH, but for our nation as a whole. Though the new scheme may have initially caused some trepidation in the minds of our employees, there is now near full acceptance with employees having understood the long term sustainability and the upside of the scheme. I have no doubt that history will prove that it was the right move. |
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Corporate citizenship |
We are increasingly conscious of the impact of our businesses on a wider range of stakeholder groups and in particular on the environment. As a first step in understanding such impacts, we engaged the services of an internationally recognised consultancy group to conduct a gap assessment of the sustainable business practices of the group as well as our sustainability reporting process. This exercise was concluded recently and as of date, detailed action plans are being formulated to address the various issues that emerged out of the study in order of priority. It is our intention to make sustainability a key business priority in 2008/09 and thereafter until it is institutionalised as part of organisational DNA and towards this, a steering committee headed by an executive director and consisting of other very senior managers has been formed to ensure that all objectives pertaining to sustainable practices are achieved in the planned time frames.
The John Keells Social Responsibility Foundation continued making progress on its major projects, details of which could be found in the Sustainability Report of the comprehensive Annual Report. |
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The future |
The year ahead of us will be a tough and challenging one for the country, in general, as it attempts to solve the ethnic conflict, develop the eastern province and stabilise inflation and for businesses, in particular, as they try to sustain their operations in an environment of rising costs, restless employees and declining disposable incomes. In such an environment, both the government and the private sector have to take bold steps the government in creating opportunities that promote publicprivate partnerships and the corporate sector in exploiting such opportunities to create value. As a reliable partner in development, JKH is ready to play its part. As we consolidate and improve our position locally, we will intensify our efforts in the region and I am delighted to state that the prospects there are encouraging.
We will take whatever steps necessary to preserve our competitive advantage in the many businesses that we are involved in. We recognise, and acknowledge, that tough situations require bold steps and we will not hesitate to take them provided that they are imperative, and appropriate, in the circumstances.
We will focus on areas within our control and work in close partnership with the government and all our stakeholders in portraying our group as a reliable provider of goods and services, a preferred partner, a responsible corporate citizen in the communities that we operate in and ensuring that JKH is an organisation that our shareholders can continue to invest in with the assurance of attractive returns. To this end, we will do what we do, better than we already do. |
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Appreciation |
As you are aware Mr Rusi Captain resigned from the board in May 2008 because of increasing personal commitments. I wish to acknowledge on behalf of the board the valuable contribution made by Mr Captain to board deliberations.
I wish to thank all the women and men of JKH for recognising, and understanding, the importance of the steps we have taken, for being willing partners in many of our change initiatives, for supporting us wholeheartedly in pursuit of our medium term to long term objectives and for making 2007/08 the year it was for JKH.
I also take this opportunity to thank all my colleagues on the board for their support, guidance and stewardship in effective and exemplary corporate governance.
Finally, I thank all of you, our stakeholders, for your support and the confidence and trust that you have placed in us. |
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Susantha Ratnayake
Chairman
22 May 2008 |
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