THE ICEBERG PRINCIPLE HAYLEYS PLC ANNUAL REPORT 2011/12 ABOUT HAYLEYS Hayleys PLC is one of Sri Lanka’s largest multinational business conglomerates with a history spanning 134 years. The Company’s subsidiaries and equity accounted investees in Sri Lanka as well as overseas, drive a globally competitive business portfolio spanning 12 defined sectors of enterprise. These sectors fall under the broader ambit of 7 categories - Global Markets and Manufacturing, Agriculture and Plantations, Transportation and Logistics, Leisure and Aviation, Consumer Products, Power and Energy, Investments and Services. Commencing commercial operations in 1878 as Chas P. Hayley and Company, we were incorporated as Hayleys Ltd. 60 years ago. Hayleys today accounts for 2.51% of Sri Lanka's export income and 4.5% of tea and 2.5% of rubber production. VISION To be Sri Lanka’s corporate inspiration at all times. MISSION Delivering superior shareholder value by unleashing the full potential of our people and achieving leadership in all our domestic and global businesses. VALUES Integrity - ethical and transparent in all our dealings Enduring Customer Value - enhancing experiences for every customer, from the rural farmer to the global consumer A Will to Win - exhibiting the will to win that which is important to Hayleys and its shareholders Respect for People - treating everyone with respect and dignity, providing for the development of our people and rewarding them for good performance Good Citizenship - caring for the communities in which we work, actively supporting their growth and being environmentally responsible in all we do Teamwork - working with each other and with our partners across boundaries, to make things happen Accountability - holding ourselves responsible to deliver what we promise The Iceberg Principle ‘Above the waterline’ the Hayleys you see is substantial in size and scope. But this is just the ‘tip of the iceberg’ story all over again. The potential for growth that lies within our uniquely diverse portfolio of businesses as a premier multi-national conglomerate is tremendous... it profi les Hayleys in its truest light and gives insight into the substantial resources the Company possesses to leverage synergies and grow and expand its businesses well into the future. The report in your hands helps clarify the ‘iceberg principle’ through its revelatory disclosures for the year 2011/12. HAYLEYS PLC - ANNUAL REPORT 2011/12 002| 003 CONTENTS 04 _ Financial Highlights 06 _ Chairman and Chief Executive’s Message 10 _ Management Review and Preview 10 _ Our Portfolio of Businesses 12 _ Operating Environment 36 _ Goals & Strategies 37 _ Our Strategies in Action 41 _ Outlook 42 _ Financial Review 48 _ Board of Directors 52 _ Group Management Committee 56 _ Sustainability Report 113 _ Annual Report of the Board of Directors on the Affairs of the Company 119 _ Governance at Hayleys 143 _ Risk Management 151 _ Financial Reports 152 _ Statement of Directors’ Responsibilities 153 _ Chairman/Chief Executive’s and Group Chief Financial Offi cer’s Responsibility Statement 154 _ Audit Committee Report 155 _ Remuneration Committee Report 156 _ Independent Auditors’ Report 157 _ Income Statements 158 _ Balance Sheets 159 _ Statements of Changes in Equity 160 _ Cash Flow Statements 162 _ Notes to the Financial Statements 222 _ Ten Year Summary 224 _ Value of Real Estate 225 _ Country Report 227 _ Milestones 228 _ Glossary of Financial Terms 229 _ Notice of Meeting Enclosed _ Form of Proxy Inner Back Cover _ Corporate Information HAYLEYS PLC - ANNUAL REPORT 2011/12 004| 005 FINANCIAL HIGHLIGHTS 2011/12 2010/11 Change 2009/10 Rs. mn Rs. mn % Rs. mn Gross turnover* 62,465 54,370 15 38,103 Group turnover including associates* 63,054 55,724 13 38,169 Group profi t before tax* 4,806 2,041 136 3,293 Group profi t after tax* 3,845 1,137 238 2,609 Profi t for the period 3,845 1,128 241 2,581 Profi t attributable to equity holders of the Company 2,520 677 272 1,731 Dividends 300 300 0 300 Shareholders' funds 18,159 15,646 16 15,214 Company market capitalisation 27,000 28,658 (6) 16,875 Group market capitalisation 49,361 54,092 (9) 36,691 Group investments 5,039 2,899 74 918 Group value addition 18,744 13,825 36 11,090 Revenue to Government (including associates) 3,132 2,601 20 1,523 Group employment (persons) (including associates) 33,201 31,651 5 30,177 Per Share Earnings (basic) (Rs.) 33.60 9.03 272 23.67 Market value (year end) (Rs.) 360.00 382.10 (6) 225.00 Net assets (year end) (Rs.) 242.13 208.61 16 202.86 Dividend (Rs.) 4.00 4.00 0 4.00 Price earnings (year end) (times) 10.72 42.32 (75) 9.51 Ratio Gross profi t (%)* 21.3 20.8 24.7 Interest cover (times)* 3.1 2.5 5.6 Dividend yield (%) 1.1 1.0 1.8 Dividend payout (%) 11.9 44.3 17.3 Current ratio (times) 1.1 1.1 1.2 * Continuing Operations % % 15 Gross Turnover 241 Profi t for the Period Turnover Growth Rs. mn 72,000 60,000 48,000 36,000 24,000 12,000 0 07/08 08/09 09/10 10/11 11/12 % % 36 Group Value Addition 20 Revenue to Government HAYLEYS PLC - ANNUAL REPORT 2011/12 006| 007 CHAIRMAN AND CHIEF EXECUTIVE'S MESSAGE OUR BROAD STRATEGY IN RECENT YEARS HAS BEEN TO DRIVE INNOVATION AND VALUE ADDITION IN OUR CORE BUSINESSES AND STRATEGICALLY ENTER INTO NEW GROWTH AREAS THAT HAVE EMERGED IN POST WAR SRI LANKA. Hayleys PLC recorded the highest earnings during I welcome you to the 61st Annual General credit risks and political turmoil in the Middle the year under review. Meeting of Hayleys PLC and I am pleased to East leading to spiraling oil prices. Despite these present to you the Annual Report and Audited constraints, Hayleys was able to secure its A number of strategic actions have enabled the Financial Statements for the fi nancial year ended position as one of the top export companies in Group to achieve these outstanding results. 31st March, 2012. It is with great pleasure that I Sri Lanka with an export turnover of around am announcing that in the fi nancial year 2011/12 USD 360 mn (equivalent Rs. 40 bn). This is a The Group has laid the foundation for future your Company achieved its highest earnings. refl ection of our strategy to add value to our growth by aligning itself to the high growth sectors in the economy and is confi dent that this will add These results have been achieved despite a exports and to be aggressive in our marketing strength and stability to the Group challenging operating environment both locally efforts in both traditional and emerging markets, and internationally. Majority of the sectors made in order to be competitive with a better value positive contributions to the Group’s earnings proposition to our loyal customers. this year with particularly strong performance by the Hand Protection, Agriculture, Purifi cation Given this background, it is pleasing to note that and Transportation sectors. It is satisfying to turnover of your Company grew 15% to reach note that our performance is a refl ection of a Rs. 62.5 bn. Group profi t before tax for the year number of strategic actions taken in recent years, was a record Rs. 4.8 bn. Whilst this included which I will elaborate upon shortly. For the most capital gains of Rs. 2.3 bn refl ected mainly in the part of the year we enjoyed domestic economic earnings of DPL, Investments and Services and stability with low interest rates, low infl ation the Fibre sector, when capital gains are excluded, and a strong economic growth performance. profi t before tax has grown 30%in the current The measures taken by the Government to year compared to the previous year. Whilst address some constraints such as high credit the key sectors mentioned earlier contributed growth and a wider current account defi cit have signifi cantly to this higher profi tability, the pre-tax resulted in short-term challenges due to higher losses of the textile sector (Rs. 856.48 mn) interest rates, Rupee volatility and higher costs of signifi cantly eroded the overall Group energy, but we believe these policy reforms are performance. important to secure longer term macroeconomic stability. Having a substantial export portfolio, A number of strategic actions have enabled us developments beyond our shores have important to achieve the strong results that we see today. consequences on our performance. The global A fundamental change that was implemented economy had another volatile year with a number in 2009 was the policy that Hayleys will focus of issues ranging from the European debt on investments in which we have management crisis,weak growth in the USA, Euro Zone and and ownership control and exit passive stakes. Japan resulting in major challenges for some This was done to exercise more control over of our exports in terms of demand stability and our income streams, and this approach is now reaping rewards. In the last 3 years we secured controlling interest in the tea exporting company Mabroc, hybrid seed manufacturer Quality Seed, obtained 100% control of our fertilizer business and enhanced ownership in the Plantation Sector. We also exited passive minority stakes in Tropical Villas and Jetwing Hotels. Our broad strategy in recent years has been to requirements of a range of industries from air and drive innovation and value addition in our core water purifi cation to electrical energy storage.