Management Discussion and Analysis Industry Group Review Harnessing innovation, dynamism and talent 115 INDUSTRY GROUP REVIEW Transportation The “MT LM Mahaweli”, Sri Lanka’s first double hulled, double bottomed bunker barge commissioned by LMS Vision and Scope Ports and Transportation Shipping The vision of the Transportation industry group is to be recognised as a leading provider of Transportation solutions and related services through a diversifed portfolio of businesses in selected markets. These operations comprise of a container terminal in the Port of Colombo, a marine bunkering business, joint venture/associations with leading shipping, logistics and air transportation multinationals, as well as travel and airline services in Sri Lanka and the CARBON FOOTPRINT Maldives. Contribution to JKH Group 12,714 MT (2016/17: 11,309 MT) 19% Revenue 12% EBIT EBIT 8% Capital employed Rs.3.33 bn 13% Carbon footprint (2016/17: Rs.3.12 bn) 116 John Keells Holdings PLC . Annual Report 2017/18 Management Discussion and Analysis Industry Group Structure Transshipment trafc in the region recorded an increase facilitated by global and regional Transportation trade growth and the advent of major shipping lines through acquisitions and alliances with expansive vessel-sharing Ports and Shipping Transportation agreements. The Port of Colombo handled 6.2 Operation of a container terminal Logistics services include the operation of : million twenty-foot equivalent units (TEUs) in the Port of Colombo as a • DHL air express in Sri Lanka during the calendar year 2017, a growth of 8 public-private partnership on a • A joint venture with Deutsche Post per cent [CY2016: 5.7 million TEUs]. Sri Lanka’s build, operate and transfer (BOT) • Third party logistics (3PL) positioning as a ports and shipping hub in basis through South Asia Gateway • Warehousing, trucking and freight forwarding solutions the South Asian region was further reinforced Terminals (SAGT) under John Keells Logistics Limited when the Port of Colombo was placed 23rd • Freight forwarding business, Mack International Freight (MIF) Associate stake in Maersk Lanka, amongst the “World’s 30 Best Ports” as per agents in Sri Lanka and the Marine bunkering and related services under Lanka Marine 2017 Alphaliner Rankings and placed 13th Maldives for Maersk Line and Services (LMS) as well as airline, aviation, travel and related with regard to “Best Connectivity in the World” Safmarine services through Safron Aviation (owners and operators of Cinnamon Air), Mack Air and Mackinnons Travels Limited according to the Drewry Port Connectivity Index. Key Indicators Considering this strategic opportunity Inputs (Rs.mn) 2017/18 2016/17 % Change 2015/16 and the overall requirement of enhancing productivity and efciency of the Colombo Total assets 21,349 18,065 18 17,163 Port, the Sri Lanka Ports Authority (SLPA), Total equity 16,154 14,841 9 15,028 South Asia Gateway Terminals (SAGT) and Total debt 3,267 1,754 86 878 Colombo International Container Terminal Capital employed1 19,421 16,595 17 15,905 (CICT) entered into a memorandum of understanding (MoU) to collectively promote Employees (number)2 486 385 26 349 the Port of Colombo. The MoU is expected to encourage joint initiatives between the three Outputs (Rs.mn) 2017/18 2016/17 % Change 2015/16 terminal operators and contribute towards Turnover3 25,619 18,438 39 16,829 the development of the Colombo Port as EBIT 3,326 3,124 6 2,517 the main transshipment hub in the region. PBT 3,269 3,098 6 2,495 Investments are underway to extend the physical facilities within the Port of Colombo, PAT 3,084 2,979 4 2,454 given the envisaged increase in volumes in the 4 EBIT per employee 6.8 8.1 (16) 7.2 near term. Carbon footprint (MT)2 12,714 11,309 12 2,091 1. For equity accounted investees, capital employed is representative of the Group’s equity investment in these companies 2. Excludes SAGT, DHL, Maersk Lanka, MIF (formerly known as NDO) SRI LANKA’S POSITIONING 3. Turnover is inclusive of the Group’s share of equity accounted investees AS A PORTS AND SHIPPING 4. As per the sustainability reporting bound HUB IN THE SOUTH ASIAN External Environment and Operational Review REGION WAS FURTHER Global trade witnessed a recovery in the calendar year 2017, driven by a resurgence of Asian REINFORCED WHEN THE trade fows arising from an increase in intra-regional shipments and demand from North America. For the frst time since 2014, during the calendar year 2017, world trade growth at 3.6 PORT OF COLOMBO WAS per cent outpaced GDP growth of 3.1 per cent. The South Asian region, albeit from a lower base, PLACED 23RD AMONGST demonstrated the fastest progress with a 7.0 per cent growth in trade. Sri Lanka and the Group THE “WORLD’S 30 BEST continue to be uniquely positioned to capitalise on this opportunity as elaborated in the ensuing discussion. PORTS” AS PER 2017 ALPHALINER RANKINGS Sri Lanka’s strategic position on the main East-West trade route, linking the Far East with Africa, AND PLACED 13TH Europe, and the East Coast of the United States, coupled with its proximity to India and the Bay of Bengal region, provides ideal trade connections and presents a unique geographical advantage. WITH REGARD TO “BEST This has enabled Sri Lanka, to transform itself into a leading global shipping and transportation CONNECTIVITY IN THE hub particularly by leveraging the Ports of Colombo and Hambantota. This strategic positioning, WORLD” ACCORDING coupled with aggressive public and private investments catered towards improving domestic handling, transportation services and connectivity within the country, has resulted in Sri Lanka TO THE DREWRY PORT being considered with greater interest as a transport and logistics hub in the region. CONNECTIVITY INDEX. 117 INDUSTRY GROUP REVIEW Transportation During the year under review, the Group’s LANKA MARINE SERVICES, THE BUNKERING BUSINESS Ports and Shipping business, SAGT, recorded an encouraging growth of 10 per cent, OF THE GROUP, STRENGTHENED ITS MARKET handling 1.9 million twenty-foot equivalent LEADERSHIP POSITION DURING THE YEAR UNDER units (TEUs) [2016/17: 1.70 million TEUs], REVIEW. LMS WITNESSED A SIGNIFICANT VOLUME with transshipment volumes contributing to approximately 80 per cent of total volume. GROWTH OF 24 PER CENT IN THE YEAR ON THE BACK The increased activity within the Port of OF INCREASED PORT ACTIVITY AND REGIONAL Colombo, as discussed above, was a key factor SHIPPING MOVEMENTS. that contributed towards the higher volume growth at SAGT. SAGT continued to focus on efciency and The Logistics business, John Keells Logistics supermarkets, is underway and is expected to terminal productivity during the year under Limited (JKLL), recorded a double digit be operational in the second half of 2018/19. review, through initiatives aimed at improving increase in throughput managed driven In view of creating better engagement with its berth occupancies, increasing the efcacy of by a number of new client engagements client base and enhancing transparency into yard and gate operations and enhancing vessel secured by the business. JKLL increased its the logistics operations, a business intelligence productivity. Such eforts proved fruitful, with total footprint of managed warehousing (BI) platform was introduced in the year under SAGT being recognised as the “Best Terminal space by 25 per cent during the year review. in the Indian Sub-Continent Region” for the under review, onboarding a 57,000 sq. ft. second consecutive year by the Singapore- new facility in Enderamulla. JKLL secured More information on the digital initiatives based Global Ports Forum. leasehold rights to a 9-acre plot of land in undertaken by the business is elaborated Kerawalapitiya, Muthurajawela, to construct under the Intellectual Capital section of Lanka Marine Services (LMS), the Bunkering and operate a large-scale logistics facility. this industry group review. business of the Group, strengthened its market The land is particularly strategic to the leadership position during the year under business given its proximity to the port and During the year, JKH purchased the remaining review. LMS witnessed a signifcant volume airport. It is encouraging to note that facilities 40 per cent stake of NDO Lanka (Private) growth of 24 per cent in the year on the back at Peliyagoda, Sedawatte and Seeduwa Limited, a freight forwarding business, which of increased port activity, regional shipping continued to operate at full capacity. was previously a joint venture between XPO movements and the 18 per cent goods and Logistics Inc. and JKH. Post-acquisition, NDO services tax (GST) implemented in India in July During the year under review, JKLL’s was renamed Mack International Freight 2017, which was subsequently revised to 5 per focus on operational enhancements was (Private) Limited (MIF), a fully owned subsidiary cent in November 2017. Despite this reduction complemented with investments towards of JKH. MIF recorded an improvement in of GST in India, Sri Lanka continued to witness expanding its vehicle feet and capabilities of performance during the year on the back of increased demand for bunker fuel on the back handling temperature controlled transport increased business generated through the of increased delivery efciencies and overall solutions, which were identifed as a part project cargo vertical and rationalisation of growth in ship trafc. The increase in volumes of a larger supply chain solution ofered to operating costs. was supported by a sustained increase of the the Retail sector of the Group. The state-of- base price of bunker fuel in the year under the-art retail distribution centre developed DHL Keells (Private) Limited achieved double- review which assisted the company to achieve in collaboration with JayKay Marketing digit volume growth in the year under review, signifcant topline growth. Services Limited - the operators of “Keells” driven by both inbound and outbound Volume growth of LMS was further enhanced by the commissioning of the frst double- hulled double-bottomed bunker barge to operate in Sri Lanka in 2017/18, “MT LM Mahaweli” with a capacity of 2,400 MT, enabling the business to better cater to the demand.