notes to the financial statements for the year ... - Investing In Africa

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CHAIRMAN’S STATEMENTEast African Portland Cement Co. Ltd Annual Report and Financial Statements FY 2008/20096Mark K ole KarboloCHAIRMANDear ShareholderIt is my great pleasure to welcome you to the 77th AnnualGeneral Meeting of the East African Portland CementCompany Limited.I wish to thank you all for your continued interest and alsoexpress my gratitude to the many new shareholders whodecided to invest in our Company during the past year.It was a momentous period that saw the Company improveits performance while continuing to invest in our staff,technology as well as contributing to the numerous activitiesin the communities we operate in.Cement Sector ReviewAs government gears towards achieving Vision 2030,the country will see further growth in cement demand.The planned public sector infrastructure spend, whichincludes long-term investments in electricity generation anddistribution capacity, airports, ports and rail infrastructures,water schemes, roads and telecommunications projectsbodes well for the construction industry over the next threeto fi ve years.The excess cement demand in the East African region hastriggered capacity expansion projects and entry of newplayers. As a result of improved governance, internationalorganizations are also funding many new projects. Howevernew entrants are setting up grinding capacity rather thanclinker capacity. Regional demand from neighbouringcountries, e.g. Sudan, DRC and Uganda, is expected tocontinue. Hence new capacity installation in Kenya willresult in pricing pressures while higher exports to otherregional markets are expected to provide a safety margin tomitigate this.The Kenyan market profi le is expected to realign followingentry of other companies with investments in capacity andcost effi ciency, making it more competitive. Our Companyis currently the second largest producer of cement in theKenyan market and with the expansion programme nowunder way, we will maintain this position in the coming years.However, we face greater challenges in an adverse tradingenvironment of maintaining competitiveness in the face ofincreasing costs of production. To this end, EAPCC will focuson technology, value adding business models, alternative fuelsand research to boost competitiveness.Commitment to Growth and TransformationEAPCC remains committed to creating value for itsshareholders and employees, at the same time creating moreemployment opportunities, caring for the environment andsupporting community upliftment projects as a priority.Growth Through ExpansionThe Company commissioned a new state of the art closedcircuit mill in June this year. The increased grinding annualcapacity of 1.3 million metric tons of cement has enabledEAPCC to double its current production capacity and meetboth local and export demand as it capitalizes on the boom inthe construction industry. We believe the expanded capacitywill help the Company address the problem of cementshortage while strongly positioning us in the increasinglycompetitive regional market.Growth ProspectsThe past year has seen strong growth in the constructionsector with cement volumes growing ahead of expectations.Going forward, we are relentlessly and continually searchingfor better ways to improve in order to grow more effi cientlyand profi tably. Our growth strategy will involve growingexisting markets, expanding and deepening cement shareof the construction industry and taking advantage ofopportunities across the value chain.Financial Performance 2008/09The year under review saw operating profi t increase by18% over the previous period. Internally, we focused ourenergies on minimizing our production costs, maximizing ouroperation effi ciency, streamlining our procurement processesand initiating a wide range of cost saving measures. Thesecoupled with a stringent fi nancial discipline saw us registerimpressive results during the year with a profi t beforeforeign currency exchange and taxation of the Kshs. 2.8bcompared to Kshs. 1.13b the previous year. This was wellwithin our performance target signed with the Governmentand in excess of the Company’s fi nancial estimates. Pleasetherefore join me in congratulating the management for thisachievement.Our effort and desire is to invest in all areas of our business,our people, our plant and our product. Therefore, in thisperiod substantial investments were undertaken and othersinitiated toward building a sustainable basis for futureoperations for the Company. I am confi dent that we willcontinue to translate these efforts into sustainable value foryou. Revaluation of Company assets was carried out duringthe year and certain leasehold properties were reclassifi edas Investment Properties, commissioned cement Mill 5 wascommissioned and work on the coal grinding plant installationis ongoing thereby increasing assets by Kshs. 2.5b (39%)compared with prior year.
DividendsOur overall cash position at the end of June 2009 increasedto KSh1.5b from Ksh988.6m in prior year mainly due tobetter performance in operations and effective workingcapital management. Despite the contracted and plannedheavy capital commitments to enable the company retain itsmarket share and competitive edge, the Board is pleased torecommend a fi rst and fi nal dividend of KSh1.30 per share.TaxationAs a good corporate citizen, EAPCC is committed to payingtaxes promptly as required by law. During the year underreview, the Company paid in excess of KSh1.4 billion in bothdirect and indirect taxes to the exchequer.Safety Health and EnvironmentA safe and healthy workplace for all our employees and otherpersons interacting with our business will continue to be ahigh priority.EAPCC has been in the forefront of improving its environmentefforts and compliance with conservation policy and legislation.We will not relax our conservation efforts and will continue toseek increased collaboration with NEMA to strengthen ourparticipation in conserving the environment. During the yearthe Company signed an agreement for Carbon Credits. TheAccident and ill-Health Prevention Strategy (OHSAS 18001)is ongoing towards certifi cation in April 2010.The Company has embarked on a more proactive approachin addressing safety throughout its operations with theaim of managing projects to ensure compliance with theEnvironmental Management Coordination Act of 1999.Regular safety and health audits and training are carried out.HIV/AidsLike the larger society, we have not been insulated againstHIV/Aids. The Voluntary Counselling and Testing (VCT)Centre is fully operational and are committed to undertakeprogrammes and activities that shall create awareness amongststaff and community, to embrace positive behaviour changeso as to reduce the negative impact of the HIV pandemic onour society.Corporate Social ResponsibilityEAPCC recognizes the fact that good corporate citizenshipis not only putting in place sound business strategies, makingimpressive profi ts, paying good salaries and making taxreturns. It is about creating partnership with the communityand ensuring both parties benefi t from the co-operation.We therefore have put in place a comprehensive CorporateSocial Responsibility programme, through which we shareour gains with communities that make operations possibleby being good neighbours and customers. By devoting moreresources annually to CSR, we powerfully demonstrate ourcommitment to building a strong partnership with localcommunities.Our social agenda is evident in our involvement inprojects, such as education, sports, water, famine relief andenvironmental conservation.Corporate GovernanceAs a Company, we continue to be committed to the tenetsof good corporate governance and sound business ethics.The Board has in place a charter and a code of ethics thatwill align our corporate behaviour with the expectations ofour shareholders and other stakeholders. We will continueto identity with and share best practice across the entirecompany structure.Future OutlookWith the sustained economic growth and a vibrant buildingand construction sector, cement demand is going to bemaintained at higher levels and the Company expects a strongperformance in the coming year.However, volatile foreign currency fl uctuations, the prospectof power rationing and fuel costs pose the biggest threat tomargins. The company will continue to implement variouscost optimization initiatives.EnergyBesides the additional cement milling capacity from the newCement Mill 5, installation of a coal milling facility (a coalgrinding and dosing facility) is ongoing to meet the energyneeds of an expanded capacity. The plan is to cut back on oiluse and electricity as our main sources of energy. Currently,the energy bill constitutes about 45% of our total productioncosts. By switching to coal we expect to reduce the energycost by at least 30%, which will enable the Company toachieve more sustained profi table path.Yen–denominated loanThis poses perpetual foreign exchange risks to the Company ifthe exchange rate shifts unfavourably. The Board has decidedto hedge this loan in the coming year.The BoardThe Board remained largely unchanged, with the exceptionof Mr. Sankale ole Kantai and Mrs. Rachel Lumbasyo whoretired from the Board. I extend our appreciation and thanksfor their contribution and at the same time welcome onthe Board their replacements, Mr. David Koros and Mr. A.Kazongo respectively.AppreciationI wish to most sincerely thank the Board of Directors for theirvision, dedication to the Company and unity of purpose.I also congratulate the entire management and staff of EastAfrican Portland Cement Company Ltd for their commitmentand hard work that has successfully positioned us for thechallenges and opportunities that lie ahead.Lastly, I would like to extend my gratitude to all our businesspartners and customers for their loyalty and unwaveringsupport.Mark K ole KarboloChairmanSeptember 29, 2009East African Portland Cement Co. Ltd Annual Report and Financial Statements FY 2008/20097
Page 3: ContentsBusiness ReviewFive Year Fi
Page 6 and 7: FINANCIAL HIGHLIGHTSKshs million100
Page 10 and 11: MANAGING DIRECTOR’S BUSINESS REVI
Page 12 and 13: CORPORATE SOCIAL RESPONSIBILITY (CS
Page 14 and 15: SportsEvery year the Company sponso
Page 16 and 17: BOARD OF DIRECTORSEast African Port
Page 18 and 19: THE BOARD AND STATUTORY INFORMATION
Page 20 and 21: STATEMENT ON CORPORATE GOVERNANCEEa
Page 22 and 23: East African Portland Cement Co. Lt
Page 24 and 25: STATEMENT OF DIRECTORS’ RESPONSIB
Page 30 and 31: INCOME STATEMENTFOR THE YEAR ENDED
Page 32 and 33: STATEMENT OF CHANGES IN EQUITYFOR T
Page 34 and 35: NOTES TO THE FINANCIAL STATEMENTSFO
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NOTES TO THE FINANCIAL STATEMENTSFO
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NOTICE OF ANNUAL GENERAL MEETINGNot
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NOTESEast African Portland Cement C
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