Annual Report 2009/2010 - Colombo Stock Exchange

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OPERATIONS REVIEW The single most important change in the operating environment was the return to stability at the end of the armed conflict. The North & East opened up for business after many years & security conditions eased helping people move about without hesitation. The return of general optimism & business confidence helped drive the economy forward. A significant increase in tourist arrivals also contributed to the economy. The beer market benefitted from the return to normalcy & peace. The reduction in oil prices & tightened monetary policy helped reduce inflation during the year under review. As a result interest rates that rose well beyond 20% in the previous year declined to single digits. The currency too stabilized during the year under review on the back of a narrower current account deficit. Since the Company has significant exposure to foreign exchange transactions, the stability in the currency was helpful. Whilst commodity prices stabilized during the latter half of 2009, this was not the case at the time your Company confirmed its requirement for malt – its principal raw material – for the year under review during late 2008. As a result, the input cost of malt was significantly higher than in the previous year. However, this cost increase was partly off-set by prudent sourcing of other materials. A plethora of taxes – both direct & indirect – continue to burden the private sector. Not only are a number of taxes levied on revenue but there are retrograde levies such as cesses at the point of import as well. These are commonly called “nuisance taxes” & for good reason. Whilst the need for greater revenue at a time when combating terrorism cannot be argued with, the opportunity is now available to reform & re-structure the tax system. The appointment of a Presidential Commission on Taxation was a welcome move & its outcome is widely awaited. Alcohol Policy The best that can be said of the alcohol policy governing your Company's business is that it did not change significantly during the year under review. There were a few exceptions of which the new restriction imposed on the transfer of a license is the most significant. Under this new “administrative” rule, a licensee cannot transfer a license to a new location. Thus licenses operated out of rented premises will be subject to the whims & fancies of the landlords. Critically, if the landlord were to refuse an extension of the lease, the license would be of no value. Such ad-hoc “rules” lend themselves to malpractices at multiple levels. The policy of “Mathata Thitha” continued to be in force during the year. If the practical application of this policy intends to reduce per capita consumption of pure alcohol & prevent alcohol related harm, then your Company extends its fullest & wholehearted support to it. Indeed in a country where consumption of hard liquor – be it legal or illegal - is the norm, there is a pressing need to prevent alcohol related harm, both to the consumer & to those in his vicinity. There is sufficient evidence to suggest that soft alcohols such as beer are viable means by which alcohol consumption & related harm can be reduced in environments where hard liquor is heavily consumed. The Russian experience over the recent past is such an example. During the year under review, excise taxes applicable on soft alcohol remained stable, a positive move much appreciated by the industry & your Company. During the year under review, there were signs that the effort to curb the manufacture & distribution of illicit alcohol was intensified. There is little doubt that policy makers and implementing agencies have the best of intentions. Yet the risk to reward ratio in the illicit alcohol business is so skewed towards the latter that law enforcement alone cannot succeed in curbing this menace. Illicit alcohol will be curbed only if the associated rewards are reduced to a level that makes the activity unattractive. Towards this end, legal alcohols particularly soft alcohols bearing in mind the health related issues, need to be more affordable & less difficult to access. Results will not be evident overnight. Yet the quicker the start, the earlier the results will be seen. An alternative approach to curb the consumption of illicit alcohol is consumer education. Yet, with economic conditions being what they are in most parts of Sri Lanka, a strategy that ignores affordability & availability of legal alcohols is unlikely to succeed. During the year under review the Company paid Rs 2,918.92 million as Excise Duty, up 22.71% from Rs 2,378.79 million paid in the previous year. In terms of total taxes, the Company paid Rs 4,795.26 million as against Rs 3,673.49 million in the previous year, an increase of 30.54%. Operating Results & Financial Position On a turnover of Rs 7.92 billion, the Company returned a profit of Rs 640.50 million, an overall margin of 8.09%. At the point of gross profit, the margin was 32.76%. The near 1% increase in gross margins was a result of a focused effort to reduce input costs. That it was achieved in the face of increased raw material prices – particularly malt – is an indication that the Company's efforts have been successful. Both critical indicators i.e volumes & margins were above those of the previous year. R e v i e w o f O p e r a t i o n s 5
R e v i e w o f O p e r a t i o n s OPERATIONS REVIEW The level of margin returned by the beer business is a reflection of the high taxation imposed on it - both in terms of excise & revenue related levies –and the complex manufacturing process that takes basic raw materials & converts them into a liquid in a pack. On year end Equity – including reserves – the return was an acceptable 16%. Once again this is a significant improvement over the previous year. Overall operational costs increased by 17% driven mainly by high inflation during the first half of the year, higher than normal bottle breakages & greater distribution costs arising from the increased access to the markets of the North. During the year under review, the Company placed greater emphasis on the management of working capital. As a result all key working capital indicators – raw material & finished goods inventories, receivables & payables – improved significantly. In September 2009 the Company successfully concluded a 3 for 5 Rights Issue. The issue was oversubscribed. Your Company's ultimate parent the Carson Cumberbatch Group & its JV partner, Carlsberg Breweries of Denmark subscribed for their respective allotments in full. The proceeds of the Rights were used to reduce borrowings on which the Company had depended heavily to fund the investment in India. Post the Rights, the Company's gearing improved and at years' end stood at a healthy 16%, a significant improvement over the previous periods' 53% . Marketing & Sales It was a busy year in Marketing & Sales. It was the first time in three decades that Sri Lankans celebrated the festive periods of December & April without the clouds of conflict and celebrate they did & rightly so. Along with the festivities, the elections in January & April helped increase demand as did tourist arrivals during the “winter” season. Your Company's distribution system coped remarkably well with the sudden shift in demand confirming its agility & flexibility in the face of rapid change. The change in operating environment meant that the Company had to re-position itself to aggressively seek growth rather than merely consolidating its operations. A number of very successful initiatives were carried out during the year targeting our business partners. The results are clearly evident in the volume growth achieved by your Company. During the year under review, the Company launched a new SKU, the 500 ml can to complement the existing 300 ml pack & this was an instant success. Driven by consumer convenience, cans now account for a significant share of the Company's business. An added benefit of this SKU is that it will help reduce the dependence on glass bottles and their associated costs in the years ahead. The Company continued to consolidate its sales & distribution system during the year under review. New distributors were appointed to strengthen operations in two vital parts of the Country with immediate success. The Company is currently in the process of further streamlining its distribution processes & it expects significant improvements in effectiveness & efficiency in an already excellent system. The Company's brand, Strong, received a Gold Medal at the coveted Monde Selection. This adds to a long list of awards received by the Company's brands over the years and re-confirms their world class quality. Supply Chain The Company's state of the art brewery in Biyagama was stretched to the full to meet demand during the last quarter of the financial year. During the festive months of December, March & April – a period in which two elections added to demand – the brewery operated to full capacity. The logistics operations during these months were also stretched to the limit. Yet, the Company did manage to meet demand for the most part although there were instances of brand & SKU shortages in the market. In anticipation of higher volumes in the coming year, the Company has embarked on an immediate expansion program, the first stage of which will be completed in July & the second by October 2010. During the year under review, the Company set up a professional procurement division to both consolidate its excellent raw material inventory management & to seek significant reductions in costs of inputs. Initial results have been extremely encouraging. Support Services The focus of the Finance division during the year rested on strengthening the balance sheet. The result was a successfully concluded Rights Issue which helped restore a healthy gearing for the Company. 6
Page 2 and 3: Operations Review
Page 4 and 5: CHAIRMAN'S STATEMENT Your Company w
Page 8 and 9: OPERATIONS REVIEW The stronger bala
Page 10 and 11: OPERATIONS REVIEW Conclusion From m
Page 12 and 13: PROFILE OF DIRECTORS Profiles of Di
Page 14 and 15: ANNUAL REPORT OF THE BOARD OF DIREC
Page 20 and 21: AUDIT COMMITTEE REPORT The Audit Co
Page 22 and 23: STATEMENT OF DIRECTOR'S RESPONSIBIL
Page 24 and 25: FINANCIAL STATEMENTS Financial High
Page 26 and 27: INCOME STATEMENT For the year ended
Page 28 and 29: STATEMENT OF CHANGES IN EQUITY In R
Page 30 and 31: NOTES TO THE FINANCIAL STATEMENTS 1
Page 32 and 33: NOTES TO THE FINANCIAL STATEMENTS (
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Page 48 and 49: VALUE ADDED STATEMENT For the year
Page 50 and 51: FIVE YEAR SUMMARY Year ended 31st M
Page 52 and 53: INCOME STATEMENT For the year ended
Page 54 and 55: FINANCIAL HIGHLIGHTS Year ended 31s
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INFORMATION TO SHAREHOLDERS & INVES
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GLOSSARY OF FINANCIAL TERMS Appropr
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LION BREWERY (CEYLON) PLC FORM OF P
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Annual Report 2009/2010 - Colombo Stock Exchange

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