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Annual Report

Richard Pieris and Company PLC

08/09

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Contents3 4 5 6 8 14 35 40 42 47 49 53 54 58 61 62 64 65 66 67 68 70 71 Financial Highlights The Richard Pieris Story Corporate Information The Board of Directors Chairmans Review Sector Review Financial Review Corporate Social Responsibility Risk Management Our People Group Structure Financial Information Annual Report of the Board of Directors Corporate Governance Report of the Remuneration Committee Report of the Audit Committee Statement of Directors Responsibility Auditors Report Balance Sheet Income Statement Cash Flow Statement Statement of Changes in Equity Notes to the Financial Statements

113 Group Real Estate Portfolio 114 Ten Year Summary 116 Shareholder Information 118 Glossary of Financial Terms 120 Notice of Meeting 121 Notes 123 Form of Proxy

1Richard Pieris and Company PLC Annual Report 2008/2009

Recession, falling prices, lower sales, inflation, high interest rates - much negativity; the past year has been tough, but we need to look beyond and focus on whats important in order to grow for the future. At Richard Pieris, were doing just that. Were consolidating our business to improve efficiencies, rationalizing our portfolio and investing in profitable business sectors, even as we exit unprofitable ones. We have a clear strategy for growth and that will guide us into a more successful year ahead.

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Vision

To be a market driven, technologically oriented diverse group. We will organise and operate to continually focus on exceeding the expectations of our customers, whilst excelling in profitability and we will attract, develop and retain talented people to ensure the continued growth and viability of all our business ventures.

Mission

To continually exceed the expectations of our customers. To optimise the contribution from our employees by providing career and personal development opportunities, thereby creating an atmosphere that would motivate and internalise employee aspirations with corporate objectives. To provide a satisfactory return to shareholders whilst retaining sufficient funds for reinvestment, thereby enhancing corporate wealth.

Cut out thTo ensure continuous growth by the planned expansion and diversification of business activities. To continually strive for the upliftment of our community whilst adhering to high ethical standards in business.


Financial Highlights2008/2009 Rs. 000 Net Turnover Profit from operations Profit/(loss) before tax from continuing operations Income tax expense Profit /(loss)for the year from continuing operations Loss after tax from discontinued operations Profit/(loss) for the year Loss attributable to Equity holders of the Parent Total Assets Shareholder Funds Market capitalisation Total value addition Per Ordinary Share Earnings (Rs.)* Net Assets (Rs.)* Market value (Rs.)* Ratios (2.57) 25.06 25.00 (1.68) 27.54 39.00 20,818,036 1,350,476 (8,935) (180,411) (189,346) (115,682) (305,028) (329,083) 16,924,097 3,213,907 3,206,276 6,170,023 2007/2008 Rs. 000 20,142,591 2,045,930 324,270 (77,278) 246,992 (203,216) 43,776 (215,077) 17,807,329 3,532,218 5,001,790 6,292,421

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Return on equity (%) Interest cover (No. of times) Gearing ratio (%)

(10.24) 0.96 59.80

(6.09) 1.20 61.49


The Richard Pieris StorySearch any household in Sri Lanka, from the highest to the most humble and your chances of not finding at least one product manufactured or sold by Richard Pieris and Company PLC are slim indeed. From food products, medicines, general plastic and rubber household goods to foam mattresses and furniture, Sri Lankas consumers turn to us for an almost incredible variety of products. In the process, they have turned the name of our Company and the Arpico brand into household words across the country. The beginning of this national institution was modest. The founding partners set themselves up in business as commission agents, general import and export merchants and dealers in estate supplies, and by doing so they were actually creating new dimensions for a Ceylonese mercantile community to emerge. The Companys first business venture was a filling station. Turnover grew by more than 500 percent in the first seven years. In 1940 the business was converted into a limited-liability company with the founding partners as Directors. The issued share capital of Rs. 50,000 was substantial for its day, and the new company boasted 70 employees. Our financial results for the current year were dissapointing, but we succeeded in further consolidation of our businesses. We have gradually evolved into being the market leaders in almost every line of merchandise manufactured and distributed by us. Today, the Group is well established, stable, diversified and forward-looking. Today, Richard Pieris and Company PLC can justifiably claim a place in the front rank of the countrys diversified business conglomerates. Our diversified manufacturing operations in rubber and plastic products combined with our investments in Sri Lankas largest retail super centres and in management of the plantations, make our company shares a secure and dependable long-term investment. When the world went to war, rubber became a precious commodity to the Allies and tyres were reserved for military use. Seeing a business opportunity in the midst of those dark days, Richard Pieris and Company PLC launched a tyre-rebuilding business to meet the demand for these essential products. The Companys first manufacturing venture met with abiding success; today, our Arpico and Arpidag brands remain leaders in the domestic rebuild tyre market. We look forward to a bright future and enhanced shareholder returns by concentrating on our core business operations that we now dominate.


Corporate InformationName of the Company Richard Pieris and Company PLC Legal Form A quoted public Company with limited liability, incorporated in Sri Lanka under the Companies Ordinance No. 51 of 1938 on 11th May 1940. The Company registration number is PQ 138. Stock Exchange Listing The Ordinary shares of the Company are listed in the Colombo Stock Exchange of Sri Lanka. Board of Directors Dr. Sena Yaddehige - Chairman/ Managing Director/CEO Mr. Pravir D. Samarasinghe - Chief Operating Officer/Director Mr. Lalit N. de S. Wijeyeratne - Finance Director Resigned w. e. f. 30.06.2008 Mr. J. H. Paul Ratnayeke - Director Prof. Lakshman R. Watawala - Director Dr. Susantha D. Pathirana - Director Mr. M. M. Udeshi - Director Head/Registered Office No. 310, High Level Road Nawinna, Maharagama, Sri Lanka. Secretaries Richard Pieris Group Services (Private) Limited No. 310, High Level Road, Nawinna, Maharagama, Sri Lanka. Legal Advisors Paul Ratnayeke Associates International Legal Consultants, Solicitors and Attorney-at-Law, No. 59, Gregorys Road, Colombo 7, Sri Lanka. Bankers Bank of Ceylon Commercial Bank of Ceylon PLC Deutsche Bank A G DFCC Bank PLC Hatton National Bank PLC Hongkong & Shanghai Banking Corporation PLC National Development Bank PLC Peoples Bank Sampath Bank PLC Seylan Bank PLC Standard Chartered Bank Indian Bank PABC Bank PLC Nations Trust Bank PLC Auditors Ernst & Young Chartered Accountants No. 201, De Saram Place, Colombo 10, Sri Lanka. Executive Management Committee Mr. Pravir D. Samarasinghe (Chairman) Mr. Michael Andree Mr. Abeyananda Dias Mr. Mahinda Galagedara Mr. Pushpika Janadeera Mr. Sunil Jayakody Mr. V. K. Jayawardena Mr. Ravi Kumararatne Mr. Sunil Liyanage Mr. Franklyn Mendis Mr. Keith Perera Ms. Coralie Pietersz Mr. Sunil Poholiyadda Mr. Niranjan Vithanage Mr. Muditha Welihinda


The Board of Directors

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4.1. Dr. Sena Yaddehige Dr. Sena Yaddehige is a scientist/ engineer and a Swiss-based entrepreneur. He developed the largest automotive sensor business in the UK, based on technology developed by himself with a large number of world-wide patents, with manufacturing units in China and Brazil. He is also a high energy radiation specialist with various patents on radiation processing. He is Founder, Chairman and Director of numerous companies; his current positions in Sri Lanka include Chairman of Richard Pieris 2. Mr. P. D. Samarasinghe Mr. Pravir Samarasinghe is a PLC, Kegalle Plantations PLC, Namunukula Plantations PLC and Director of National Development Bank PLC. Dr. Yaddehige is presently a Director of a Swiss Phamaceutical Company. He is the Chairman, Managing Director and Chief Executive Officer of the Company.

1.Exports PLC, Maskeliya Plantations He is a Past President of the

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an MBA. He joined the Board of Richard Pieris & Company PLC in 2000. He is a Director of several quoted and unquoted companies. Chartered Institute of Management Accountants (Sri Lanka) and Council Member CIMA UK. He is the Vice Chairman of the Industrial Association of Sri Lanka, and Committee Member of The Sri Lanka Institute of Directors, The Ceylon Chamber of Commerce and the National Labour Advisory Council. He is the Chief Operating Officer of the Group.

Fellow of the Institute of Chartered Accountants of Sri Lanka and the Chartered Institute of Management Accountants in UK and holds


3. Mr. J. H. P. Ratnayeke - Deputy Chairman Mr. Paul Ratnayeke is a leading commercial lawyer and the Senior Partner and Founder of the firm Paul Ratnayeke Associates. He graduated with honors from the University of Ceylon (Colombo) and has also been awarded a LLM degree by the University of London. He is an Attorney-at-Law of the Supreme Court of Sri Lanka and a Solicitor of the Supreme Court of England and Wales. He is a Director of the Board of Directors of several listed, public and private companies including the Richard Pieris Group and Asia Capital Group. 4. Prof. Lakshman R. Watawala Prof. Lakshman R. Watawala, is a Fellow of the Institute of Chartered Accountants of Sri Lanka, Fellow of the Chartered Institute of Management Accountants and Fellow of the Society of Certified Management Accountants of Sri Lanka. He is the Former Chairman and Director General of the Board of Investment of Sri Lanka, former Chairman of Peoples Bank, Peoples Merchant Bank, State Mining and Mineral Development Corporation and the Ceylon Leather Products Corporation and a Committee Member of the Ceylon Chamber of Commerce. He is also President of the Society of Certified Management AccountantsSri Lanka. Past President of the Institute of Chartered Accountants of Sri Lanka and South Asian

Federation of Accountants, Founder President AAT Sri Lanka and Past President- Organisation of Professional Associations of Sri Lanka. He also serves on the Board of Directors of several public listed companies. 5. Prof. Susantha Pathirana Prof. Susantha Pathirana is a graduate in Production Engineering from the University of Peradeniya with a MSc in Automatic Control and a PhD in Mechanical Engineering. He is a Member of the Institute of Engineering & Technology - U.K, Fellow of the Institution of Engineers - Sri Lanka and a Member of the Institution of Electrical & Electronic Engineers U.S.A. He is the former Head of the Department of Production Engineering and former Dean of the Faculty of Engineering at the University of Peradeniya, Sri Lanka. He is currently a Professor in the Department of Production Engineering at the University of Peradeniya, Sri Lanka. 6. Mr. M. M. Udeshi Mr. Morarji Udeshi Joined C V Bhatt Group of Companies in 1947. He was appointed Chairman and Managing Director of the C V Bhatt Group in 1991, Asha Phillip Securities Ltd, and C T Land Development Ltd.


Chairmans Review

The Group completed a difficult year being affected adversely by the macro-economic environment. The increase in the price of raw materials and energy in the first half of the financial year affected our Manufacturing Sectors while the decrease in commodity prices and the global financial crisis in the second half of the year had a negative impact on the Plantation Sector and the Group as a whole.


The Group achieved a turnover of Rs. 20.8 bn, a marginal increase from last year. Operating profit before interest and tax amounted to Rs. 1.35 bn a decrease of 34% from last year. The Group incurred a loss of Rs. 189 mn from continuing operations. Despite a reduction in Group borrowing by nearly Rs. 1 bn, Group Finance Cost remained almost at the same level as last year due to high interest rates. The Group incurred an additional loss of Rs. 116 mn from discontinued operations, resulting in a net loss of Rs. 305 mn. The Group continued with its strategy of exiting from businesses Dr. Sena Yaddehige Chairman/CEO/MD I would like to present the Annual Report and Audited Accounts of the Company and its subsidiaries for the year ended 31st March 2009. The Group completed a difficult year being affected adversely by the macro-economic environment. The increase in the price of raw materials and energy in the first half of the financial year affected our Manufacturing Sectors while the decrease in commodity prices and the global financial crisis in the second half of the year had a negative impact on the Plantation Sector and the Group as a whole. High interest rates and inflation continued to have an adverse impact on profitability. As measured by the Colombo Consumers Price Index, the general price level showed an upward trend, leading to an annual average increase of 22.6% in the year 2008 compared with an Economy The countrys economic growth reduced to 6% in the year 2008 compared to last year; with the Agricultural Sector growing by 7.5%, the Industrial Sector by 5.9% and the Service Sector by 5.6%. The annual unemployment rate reduced to 5.2%, while the Per Capita Income rose to US$ 1969. with low profitability and concentrated on its core business. The Group closed down the travel business and the PVC pipe operation.


Chairmans Reviewincrease of 15.8% in the previous year. The Central Bank of Sri Lanka was compelled to continue its tight monetary stance, during the early part of the year, in order to control the inflationary pressure in the country. Due to the tight monetary policy that prevailed and credit controls implemented by all commercial banks, local interest rates remained at high levels for most part of the year. Sector Review Inflation came down sharply from almost 30% in early 2008 to 24.3% in September and reached 5.3% by the end of March 2009. As a result, the Central Bank of Sri Lanka started relaxing its monetary policy by the end of year 2008 by reducing policy rates which resulted in a gradual reduction in the interest rates in the market. The Balance of Payments recorded a deficit of US$ 1,225 mn, which was mainly due to the increase in the cumulative expenditure on imports during the year, which had grown by 24% due to the sharp increase in international commodity prices. The Central Bank of Sri Lanka continued to maintain a fixed value for the local currency against the US $ during the first half of the year but the Rupee showed a sudden depreciation of 6% against the US $ in the latter part of the year due to the settlement of extended oil bills, lower foreign Targeted marketing activities implemented during the year increased the awareness of the Arpico Brand. This and continuous The Sector continued its selective expansion plans. A new Super Store was opened in Boralasgamuwa and the expansion project at Battaramulla is nearly complete. The showrooms concept is being upgraded and the Kurunegala and Wattala showrooms were relaunched, as part of this initiative. The Retail Sector completed another successful year recording an impressive growth despite the economic downturn and drop in consumer spending during the second half of the year. Sales grew to Rs. 8,813 mn, an increase of 8% from last year, with the main contributor being FMCG, while the operating profits grew by 13% to Rs. 473 mn during the year. This sector now contributes 30% of the Groups profits. The arbitrary imposition of taxes including the Nation Building Tax and the Cess on imported raw material is adversely affecting local industries catering both to domestic and international markets. The Policy makers should address these anomalies that are impeding the profitable growth of the private sector. remittance and large withdrawals of foreign investors.


this year while the operating profit showed a decrease of 53% from Rs. 1,182 mn to Rs. 555 mn. The sharp decline in commodity prices witnessed in September 2008 had a serious impact on profitability with the surpluses made in the first two quarters being eroded by the poor performance during the latter part of the year. improvements in customer service and close monitoring of the supply chain, to ensure that a wide range of products are available at the right quality and price, enabled the Company to maintain its competitive advantage. The expansion of the customer relationship activities via the Arpico Privilege card, and the expansion of the Arpico Family and Super Saver range of products increased value offerings to customers. The Retail Sector successfully implemented sound working capital management practices during the year and significant steps were taken in the reduction of overheads. The Plantation Sector, with its diversified range of crops, achieved satisfactory results, even though the low global prices of commodities, rising fertilizer prices, cost of energy and high inflation impacted adversely on the Sector. The Sector reported a decrease in turnover from Rs. 6,834 mn last year to Rs. 5,939 mn The Tyre Sector had a successful As a result of the estates investing in machinery, several factories now have facilities for dual manufacture which enables the estates to make optimum use of price fluctuations in small and leafy teas, to increase profitability. This has already shown good results. Along with the prices of other commodities, Oil Palm prices too were affected in the latter half of the year. However, it still remained the largest contributor to the profits of Namunukula Plantations PLC, which continues to expand the area under Oil Palm cultivation. The rubber prices declined, due to the demand for natural rubber plummeting, as a result of the effects the global financial crisis heed on the automotive industry. Both high and low grown tea prices also saw a significant downturn during the second half of the year. In order to reduce the impact strict cost control measures and restrictions on the intake of bought leaf were implemented.

year with a significant growth in both turnover and profitability. Turnover increased by 13% from Rs. 2,748 mn last year to Rs. 3,096 mn this year while operating profitability increased by 50% from Rs. 157 mn to Rs. 235 mn. The first half of the year saw large increases in the price of raw materials which dropped in the second half. The Sector maintained its competitiveness by frequent price revisions in response to changes in raw material prices. The retreading business, which is the main contributor to this sector, recorded an increase of approximately 10%, in market share during the year. It increased its product range and introduced new tread designs. The Tyre Sectors entry into the new tyre market two years ago, leveraging on the fact that it has the largest tyre dealer network in the country, proved a success. It launched a passenger vehicle tyre Corsa during the year, which has shown promising results. The product range has been expanded with the introduction of a new range of tubes and flaps. The Plastic Sector faced a challenging year with high prices of petroleum based raw material in the first half of the year and the adverse economic conditions that prevailed in the second half of the year. Relocation and reconstruction costs of factories along with


Chairmans Reviewrelated interest expenses affected profitability. Turnover increased marginally from Rs. 4,169 mn last year to Rs. 4,568 mn this year while profitability decreased by 27% from from Rs. 235 mn last year to Rs. 172 mn this year. The Sectors new rigid Polystyrene plant, which replaced the plant gutted by fire in 2006, was commissioned in the 3rd quarter of 2008 with state-of-the-art machinery and increased capacity. Despite intense competition, the company maintained market share and achieved a satisfactory level of profitability. The sales of rotational moulded products were affected by the slowdown in the construction industry and increased competition. The Company maintained its market share with difficulty but profitability was affected by decreased margins and overcapacity in the industry. The increase in the cost of raw materials and increased competition resulted in a drop in demand for Polyurethane foam products, including mattresses, which affected the profitability during the year. The Company plans to introduce new products based on careful market research in order to regain market share. Despite the effects of the economic downturn, the Distribution The Company continues to have production inefficiencies in its Latex Foam factory that resulted in high wastage. The volumes especially in North America were also affected in the latter part of the year, which contributed towards poor profitability. The company continued its market penetrative initiatives in new and existing key markets during the year which should show results in the future. The outcome for the Retail Sector remains positive. The Company will continue its strategy of selective expansion and providing more value to customers, whilst focusing on overhead and working capital Production levels at Richard Pieris Exports returned to normal after the industrial dispute experienced in the previous year. The Company introduced a number of new products and plans to focus more on value added products with higher margins. The Plantation Sector, will invest in replanting and upgrading the manufacturing process. The increased use of solid fuel should result in lower energy costs. The high cost of fertilizer and the wage structure, which is not tied to productivity, pose major challenges in this sector. The Rubber Export Sector witnessed a steep increase in the prices of raw materials during the first half of the year, due to increases in the price of natural rubber and petroleum based raw materials. Sales orders remain low as markets, especially the U.S.A. were affected by the global economic crisis. The Outlook for 2009/2010 The Group will continue to focus on its core businesses consolidating its operations whilst exiting from poorly performing businesses. The Construction Company continued to make losses and options to attract expertise / or exit are being pursued. Division in the Plastic Sector achieved a turnover which was only marginally less than last year. The Arpitech Water Pump which was launched in 2006 is now the market leader. Sales of Arpilight CFL bulbs also made steady progress during the year. Timberline, a subsidiary of the Company entered into a joint venture with Papoose International (Pvt.) Ltd, a company with synergies to infuse expertise into the Company. The sale to Europe of Arpitalian Compact Soles, a manufacturer of synthetic shoe soling sheets, declined whilst sales growth in the Asia Pacific region was recorded by sourcing several new customers.


management, in order to improve profitability. In both Tyre and Plastic Sectors the Group will strengthen its operations in the Countrys North and East. The envisaged increased construction and economic activities will provide opportunities for the Group which already has an established network of Tyre, Hardware and Furniture dealers islandwide. The Group is confident the Tyre Sector will continue to grow whilst the Plastic Sector will recover from the difficulties faced and improve performance in the ensuring year. The export oriented Rubber Sector will continue to face challenges due to the slow down in the global economy. Increased focus on international marketing and improving production process efficiencies augur well for the long term growth of the export sector. The Groups high borrowing position is still a concern and options to reduce gearing to an acceptable level are being looked at. Conclusion I thank all our stakeholders including the employees, our suppliers, our customers, our business partners and my codirectors of Richard Pieris and Company PLC for their support and guidance given in the last

challenging year. I also thank all the shareholders for the confidence placed in the Company.

Dr. Sena Yaddehige Chairman/CEO/MD 16th June 2009


Sector ReviewRetailThe Retail Sector had another successful year recording an operating profit growth of 13% despite the economic downturn. Management of overheads and working capital contributed to profitability.

Plantation

The sharp decline in commodity prices and rising costs had a serious impact on operating profitability which reduced by 53%. Despite these challenges the sector achieved an operating profit of Rs. 555 mn.

Tyre

The Tyre sector had a successful year with a 50% growth in operating profitability. Increase in the sales of new tyres and expansion in market share of retreads contributed towards increased profitability.

35%

24% 12%

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Plastics

18% 12% 9% 01 2 40%

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This was a challenging year for this sector with high raw material prices in the first half of year, adverse economic conditions and intense competition, which resulted in operating profits declining by 27%. This sector continued to focus on enhancing competitiveness and profitability.

Rubber

The high prices of natural rubber and petroleum based raw material and depressed overseas markets during the second half of the year had an adverse impact on the profitability of this sector. The Sector will continue to focus on international marketing and improving process efficiencies in manufacture.

Services

This sector performed poorly due to the impact of the global financial crisis. Travel operations were discontinued.


BuildingThe Retail Sector continued to be one of the Groups main growth oriented arms during the year under review. Its operations include the Arpico Supercentres/ Stores and its islandwide showroom network. The Sector also provides interior decoration solutions for institutions. The Sector is represented by Richard Pieris Distributors Limited, Arpimalls Development Company (Pvt.) Limited, RPC Retail Development (Pvt.) Limited, RPC Real Estate Development (Pvt.) Limited and Arpico Interiors (Pvt.) Limited. The year 2008/2009 proved to be a challenging year for the Retail Sector due to the adverse economic conditions in the country and the effects of the global financial crisis. The sector did remarkably well in its all-round performance up Richard Pieris Distributors Ltd. Richard Pieris Distributors operates the well-known Arpico chain of Supercentres, Super Stores and Showrooms islandwide. The Company retails a wide However, the Sector recorded an increase of operating profit by 13% when compared to the previous financial year. The growth in turnover and Net Asset Base clearly demonstrates the growth potential of this sector. However, it should be noted that these positive results were achieved primarily due to the significant growth experienced in the first half of the financial year 2008/09, which was followed by a downturn in consumer spending. to the end of August 2008, after which it witnessed a sharp drop in consumer spending as adverse macro events affected sentiment and reduced disposable income.

Sector Review - Retail

a strong retail brandarray of fast moving consumer goods (FMCG), household goods including furniture & electronics, apparel and a host of value added services through its 10 super centres/stores and 28 showrooms. Positive results were shown due to increased turnover, at all existing locations and effective management of overheads and stocks. The Company recorded a significantly higher growth in FMCG sales when compared to the previous year. However, the countrys economic downturn resulted in slower growth in other categories such as household goods including furniture and electronics. A significant negative change was observed in spending patterns among some segments of consumers following the crash of finance companies which occurred in the latter part of 2008.

General Merchandise, Apparel, Furniture & Electronics

The Product Portfolio: Fast Moving Consumer Goods, Food,


An initiative was taken to upgrade the companys showroom concept by re-launching the showrooms in Kurunegala and Wattala. A new Super Store was opened during the year at Boralasgamuwa. An outsourced food court was also launched at the companys flagship Supercentre at Hyde Park Corner. An expansion project at the Battaramulla Supercentre is presently nearing completion. Awareness of the Arpico brand was increased amongst existing and potential customers, through carefully targeted marketing and sales strategies. The company focused on growth in its customer numbers by providing greater value added products and services. The Arpico Privilege Card customer base achieved a milestone by increasing its membership to over 100,000 from 70,000 in the previous year. The increasing popularity of the Privilege Card is mainly due to tempting rewards provided to members. The Company continued to enhance its levels of customer convenience, which have added to its competitive edge. This included ample parking space available at all supercentres and super stores, wider aisle space for easy shopping, and state-ofthe-art cool rooms to provide fresh products. Special events were also organised throughout the year, including childrens activities, to create an added level of excitement and provide customers with a

more comfortable environment to shop in. The Companys Super Saver concept was well received by increasingly cost conscious consumers. The Company entered into strategic partnerships with two major mobile service providers on bill payment operations in order to provide customers even more value added services. Successful cost reduction programmes are being continuously introduced and implemented in order to keep the expenses of the retail operation well within budgeted and acceptable proportions in the face of high inflation. The supply chain operation of the company is consistently monitored and improved to give the company the capability of selling a wider product range at the right quality and price. Working capital management was improved to provide a higher cash flow. Inventory control was greatly enhanced and succeeded in reducing inventory significantly. Product offerings were adapted to better suit todays market and the range of Arpico Family branded products was expanded. The Company launched a training school in Nawinna for staff and believes in continuous training and development for its employees. The Company intends to continue its growth in profitability in the


Sector Review - Retailcoming year through selective expansion of its chain of Supercentres in targeted areas. The Company will further enhance its focus on overhead management and working capital control and take on the challenge of sluggish consumer spending brought on by the economic slowdown. The higher Nation Building Tax is expected to result in a negative impact on consumer spending. However, the Company is using the economic downturn as an opportunity to revisit its value chain and rationalise returns in all areas of operation. The Company is monitoring opportunities in the countrys North East, but has not committed to any plans for this region. Arpimalls Development Company (Pvt.) Ltd. Arpimalls Development Company owns the two large Arpico Supercentres in Battaramulla and Dehiwela that are operated by Richard Pieris Distributors Ltd. During the year under review, the Company continued its profitable record. RPC Retail Development (Pvt.) Ltd. RPC Retail Development owns the 45,000 square foot Arpico Supercentre in Negombo which is now in its second year of operation. Arpico Interiors completed another profitable year, despite the challenges posed by the countrys economic slowdown, especially that in the construction trade. This was compounded by the global recession, the increasing cost of sales and higher import duties and taxes. The Company provides institutional customers in both the public and private sectors with comprehensive solutions for interior decorating and furniture. Its activities are focused on projects for hotels, apartments, health sector and office sector, mainly in the areas of designing, flooring, ceilings and furnishing. Arpico Interiors provides high quality products mainly imported from the U.S.A., Belgium, Dubai, China and Malaysia. Its products are on display at the Interior Dcor Showroom at Hyde Park Corner. Arpico Interiors (Pvt.) Ltd. Arpico Interiors has built up a strong reputation in the interior decoration industry as a provider of turnkey solutions and supplier of furniture and related products. RPC Real Estate Development (Pvt.) Ltd. RPC Real Estate Development owns the Arpico Supercentre in Kandy. The Company continued its profit making record in the year under review. Arpico Interiors plans to adopt a cautious approach during the coming year, but it is confident of maintaining its profitability. The company has drawn up plans to meet the continuing challenges posed by the economic slowdown in the coming year, by further reducing costs through increased control of stocks and debtors, providing enhanced training for staff and identifying sources of more innovative and branded products. The Company once again deferred its plans to introduce more high end products to its portfolio, until market conditions are more favourable.


Consolidatingfor growthRubber, Oil Palm & Coconut PlantationsThe Plantation Sector of the Group is reputed for its diversified range of crops amongst all the regional plantation companies in Sri Lanka. Kegalle Plantations, Maskeliya Plantations and Namunukula Plantations constitute the Plantation Sector. Its portfolio consists of 39% Tea, 37% Rubber, 7% Oil Palm, 2% Coconut and 10% Timber reserves. It has 5% of other subsidiary crops. The results achieved during the period under review could be considered acceptable. The group was on course to achieve record profits for the year, until the dramatic downturn caused by the global financial crisis which affected the commodity markets during the latter part of 2008. The substantial devaluation of currencies among major markets further weakened commodity prices. Continuing challenges for this sector include the low global prices for commodities, rising price of fertilizer, high cost of energy and the threat posed by an escalating wage structure which is yet not tied to productivity. The existing collective agreement expired and a new agreement is under negotiation. The anticipated wage increase will increase costs further at a challenging time for the industry. The Sector further plans to strengthen its activities by divesting its idle assets and make The Sector continues to invest in replanting and upgrading the manufacturing process of all of its major crops, in order to take advantage of improved commodity prices, when the global economy begins to experience a healthy level of growth once again.

Sector Review - Plantations

The Product Portfolio: Leasehold Ownership & Management of Tea,

Considering these circumstances, the sector achieved satisfactory results at operating level during the year under review, with an operating profit of Rs. 555 mn, compared to Rs. 1,182 mn during the previous year. The product mix contributed to the good results which were supplemented by sound strategic planning over the years.

The Government has intervened to assist the industry by providing relief funding for estate operations at a concessionary rate of interest, which is in the final stages of approval. However, the overall profitability of the industry can be adversely affected by the ad hoc introduction of taxes, which are wholly unexpected and therefore cannot be planned for in advance.


Sector Review - Plantationsfull use of existing resources to supplement its cash flow during the period of recession. All three companies in the sector are undergoing a computerization process for payroll, accounting and inventory control, which will especially enhance management information systems to allow better operational and strategic decisionmaking. The Sector continued its programme to upgrade estate roads, utilizing Government Grants through the Plantations Development Programme (PDP). KEGALLE PLANTATIONS PLC Kegalle Plantations continued to be the largest producer of natural rubber in the country but due to the economic crisis, production dropped by 6% compared to the previous year. Kegalle Plantations accounts for 64% of its revenue in rubber, 34% of tea and the balance 2% in coconut. It also has the advantage of having its six tea estates located in three different agro-climatic areas. The Company recorded its finest ever performance up to the end of August 2008, but this was dampened by the economic downturn. Rubber and tea prices declined by 41% and 24% respectively within a period of just one month. Along with the decline in rubber prices, the demand for timber also decreased. Kegalle Plantations continued to maintain its ISO 9001-2000 standards in all its rubber manufacturing facilities, and also emphasized the need to have effluent treatment facilities in all factories to meet the standards of the Central Environmental The Company also continues its long term policy of replanting and a total of 659 hectares has been replanted since 2004. However, the superior quality products of the Company resulted in continued patronage of all of our local and overseas customers, despite the crisis. The company maintained its reputation as a producer of high quality natural rubber and continued its direct export of sole crepe to globally reputed manufacturers of shoes. The company is increasing its production of crepe to capitalize on a growing market. The global economic crisis has led to a disastrous situation in the automotive industry, which in turn has led to a considerable downturn in the rubber tyre industry. Consequently, demand for natural rubber has plummeted, which has alarming short term and long term effects since 70% of rubber production is for the tyre industry. However, with strict controls on all outgoings, Kegalle Plantations performed satisfactorily by the end of the financial year.


Authority. The Company is also investing further to upgrade its Udapola Centrifuged Latex Plant. The company continues to maintain the Forestry Stewardship Certification for timber processed from its rubber estates. A significant initiative in the year under review was the commencement of underplanting in rubber estates to optimize land usage. Specifically, these estates are now producing pineapple for the local market, which is a low investment, high yielding crop. The Companys tea operation continues to perform satisfactorily in all three agro-climatic elevations. Gampaha Estate in Udapussellawa was picked as the runner-up in the Ceylon Specialty Estate Tea of the Year Competition held in North America in June 2008. The decision to invest in dual manufacture at two factories in the Udapussellawa region was vindicated during the crisis, as the company obtained the maximum benefit from market conditions which assisted it in this difficult period. The Company continues to benefit from the high price for leafy teas due to this advantage. The Company continued to invest in its human resources through greater training and development of skills. In addition, the company invested in worker housing, crches and other welfare activities,

also providing scholarships to assist the university education of children of all employees. MASKELIYA PLANTATIONS PLC Maskeliya Plantations performance was severely affected by the downturn in tea prices from September 2008 and the Company is going through a challenging period. This was despite a satisfactory level in demand for the companys teas, with several individual estate records being achieved in the Maskeliya Upcot area and teas selling at their best price levels. However, the Company is taking steps to weather the present global crisis, which will place it on a sound footing for a much improved performance in the future. Four of the companys factories now have dual manufacturing capability, which optimizes opportunities from price fluctuations in leafy and small leaf teas. The Company is increasing its purchases of bought leaf, which is made possible by the dual manufacturing capability. The Company continued its programme of replanting its tea estates and a land extent of approximately 2% was replanted during the year under review. Meanwhile, the Company continued its strong commitment to quality and sustainability. All of the

companys manufacturing factories are working towards certification for ISO 22000 by the year 2010. Thus far, five factories have been certified to this standard. The Company continues to adopt best manufacturing practices, and four of its teas were rated in the top ten list. In addition, Craig Estate in Bandarawela received the award for Best Estate Co-operative during the year under review. All of the companys factories will also operate on solid fuel that is homegrown, which will contribute not only towards an improved bottom line, but would also meet the companys goal of clean production. The company is also taking an integrated approach to control fertilizer costs by expanding its composte production. Despite the effects of the global crisis, the Company continued to plan for the future, and focused on its training and development activities to enhance the skills of its employees. There was also a continuation in a full range of worker welfare activities, to enhance the quality of life of the workforce. NAMUNUKULA PLANTATIONS PLC Namunukula Plantations recorded an operating profit of Rs. 204 mn before provisions compared to, Rs. 314 mn achieved in the previous year. The sharp decline in the sale


Sector Review - Plantationsprices of its main three crops tea, rubber and oil palm - caused a severe setback and directly affected the performance of the company in the second half of the year. With tea prices falling below the cost of production, the Company was obliged to restrict the intake of leaf to large massive trading losses in the third quarter. The situation was further aggravated by a prolonged drought in the southern region which commenced in January 2009. Rubber prices - both crepe and smoke sheet - were badly affected by the economic crisis, resulting in a drop of more than 50% in prices when compared to the first half of the year. Oil palm prices were also adversely affected reaching rock-bottom in the world market. However the company succeeded in achieving a reasonable margin of profit for the season. Oil Palm cultivation continued to be expanded, as it is the largest contributor to its profits. A 10% expansion is planned annually for the next five years. Despite the poor trading results of all major commodities, the company also continued to invest in replanting of rubber. The total investment on field development of rubber and oil palm was over Rs. 84 Mn. The current structure of Customs Duty has also created a significant local demand for the product. The The Company began the amalgamation of several estates which had been fragmented due to acquisition of land for a highway development project. This will allow for better management and cost control. At the end of 2008, the Company was compelled to manage six estates in the Uva range that the Company had subleased in 2006, since the subleasee had abandoned the properties. The Company has since then been paying the workers wages which is to an extent being recovered from the proceeds of the sale of tea. The subleasees bankers had moved to court and a liquidation award was made for the subleasee company. A challenge for the next financial year will be to commence tea manufacturing in all nine low country factories, some of which were closed during the year, whilst establishing standards to maintain the prices above averages for respective elevations. In order to increase additional avenues of income, the Company has made plans to hand over the operation of metal quarries to third parties. Company is staying abreast of the latest trends in the oil palm industry by introducing external experts to continuously enhance its knowledge base and implement best practices. Walpita Estate won the award for Best Worker Housing Scheme in the Galle-Matara-Kalutara region, awarded by the Plantations Human Development Trust.


Maintaininga competitive edgeThe Tyre Sector comprises three companies that each represents a different segment of the tyre rebuilding chain, that serves the transportation industry and other vehicle related industries. These are Richard Pieris Tyre Co. Ltd., Arpidag International (Pvt.) Ltd., and Richard Pieris Rubber Compounds Ltd. Richard Pieris Tyre Company maintains an islandwide distribution network which has an established position as the market leader. Arpidag International (Pvt.) Ltd. and Richard Pieris Rubber Compounds Ltd. are supportive companies and supply pre-cured tread and custom mixing facilities respectively. Arpidag International also supply tread and consumables to mini plants in the industry. The year under review was a successful one for the tyre sector, The two halves of the year were a study in contrasts. The first half brought many challenges including the need to make continuous price increases in order to meet the increasing cost of energy and raw materials. The second half brought a higher level of success, as energy costs and raw material prices fell Richard Pieris Tyre Company Richard Pieris Tyre Company cemented its position as the number one marketer of retreaded tyres in Asia by handling 2,000 tyres in a single day. The Company with significant growth in both turnover and profitability. A significant level of growth was maintained at a time when the tyre industry and the entire country experienced a downturn due to both global and local economic conditions, which adversely affected the transport sector in particular. The Sector is optimistic about continued success next year, with further growth expected in volumes, market share and profitability. In comparison, the Sectors main competitor is presently undergoing severe difficulties and has been obliged to shut down several plants. The Sector enhanced its factory in Weligama to better cater to the Southern and South-Eastern regions. Plans are being finalised to establish a strong network in the Northern Province as soon as conditions permit. The Sector already has operations in Jaffna.

Sector Review - Tyre

Commercial Vehicles, Re-Manufactured Radial Tyres, Tubes and Flapssignificantly to bring about more competitive conditions. The Sector was able to reduce its prices and maintained its competitiveness.

The Product Portfolio: Re-Treaded Tyres for Light and Heavy


Sector Review - Tyrehas a 55% share in the local market. Its retreading operation contributes 70% of its turnover. Richard Pieris Tyre Co. added further products to its retreading and trading product lines, aiming to become a total tyre solution provider. It became the largest truck tyre importer in the country and entered the passenger radial tyre market in the year under review. Retreading turnover increased by 21% without any investment being required by the Company. Trading turnover increased by 12%, acquiring a considerable share in the truck and light truck tyre markets in the country. The retreading product line was expanded by adding the Arpiradial brand, which is especially designed for radial truck and light truck tyres, yet another pioneering product by the Company in Sri Lanka. The Company started the rebuilding of Off Road Tyres and also enhanced its design collection by marketing the Saviya brand. The Company further strengthened its market share by adding two more sizes. The Company entered the passenger vehicle tyre market by launching the brand CORSA, a well known Indonesian brand from Multistrada. Results up to now have been satisfactory and this brand is expected to gain a Plans are also being made to import The Company plans to increase the production capacity of rebuild tyres by 20% in the coming year. Sharp increases in energy and raw materials proved to be considerable challenges during the year under review. Factories handling hot process were amalgamated to gain energy efficiencies and energy efficiency was improved by modifying processes. Labour costs were also high due to the sharp increase in inflation, but the Company utilised existing human resources in a more efficient manner to reduce the impact on its bottom line. The Company has the largest dealer network around the country in the tyre industry. This was leveraged to offer customers delivery of imported tyres anywhere in the country within two days. This has now been further enhanced to a one day service. The Company strengthened its operation in the countrys North and East with a full range of products, especially Indian products. significant market share in the next financial year. The number of tyre tubes being marketed was increased to three by adding two imported Indian tubes - Rubber King and Birla. The Company also added the Super Flaps product to make inroads into the high end market.


a Radial Truck tyre to bridge the gap in its high end new tyre range early next year, which will introduce the Birla brand OffThe-Road tyre to the market. Arpidag International (Pvt.) Ltd Arpidag International supplies precured tread to the Richard Pieris Tyre Company and 8% of its volume is supplied to external customers through the ATM brand.

Richard Pieris Rubber Compounds Ltd. Richard Pieris Rubber Compounds provides mixing services to Richard Pieris Tyre Company, several other companies in the Group, and various external customers. The company has state-of-the-art machinery in its production facility which provides a high level of quality. The Company was affected by the

The Company increased its market share by selling treads to local mini plants in the industry and increased the design collection of Arpidag and Arpiradial. The Company was greatly affected by the high price of raw material and increases in energy costs in the first half of the year. Overheads were maintained at the previous years levels and no significant increases recorded. In the second half of the year, the quality of compounds was further increased, while prices were reduced to pass on cost reduction benefits to customers. The company also acquired the process quality certification of ISO: 9001 during the year under review. Arpidag International is now exploring the international market for treads in Europe and Asia. Negotiations with an European buyer are now in the final stages.

economic downturn in export based companies. However, the Richard Pieris Tyre Company continued to purchase constant volumes during the year. The Company utilizes 50% of its capacity to cater to the Richard Pieris Tyre Company. Energy cost was reduced in the second half of the year and the company was able to maintain the previous years levels in overheads. Whenever possible, the company implemented a policy of running at 100% capacity for a full month to maximise labour and energy efficiencies and build up a stock of tyre compound and then shutting the plant during the next month. The Company is continuing its marketing efforts to find potential customers for milling services and help the other two companies in the sector to achieve a higher market share.


PromotingThe Product Portfolio: Water Tanks, Polyurethene FoamThe Plastics Sector manufactures and markets a wide range of products, which include mattresses, cushions, sheets - all of polyurethane foam - water tanks, rigifoam products, PVC pipes and fittings, water pumps, CFL bulbs, imported furniture and plastic chairs. The Sector comprises six strategic business units - Arpico Plastics, Arpico Flexifoam, Plastishells, Arpitech, Re-Distribution Division and Rubber Products Ltd. The Sector faced a range of challenges during the year under review, which included high prices of petroleum based raw materials, adverse economic and market conditions, a sharp slowdown in the construction industry and high interest rates. The Sectors products do not constitute a purchase priority in daily life and The Company maintained its market share, despite intensified competition and achieved a reasonable level of profitability during the year under review. Expanded rigid Polystyrene Arpico Plastics is involved in the manufacture of expanded polystyrene products commonly known as Rigifoam which includes containers, sheets and products related to the fishing industry. However, each of the Sectors six SBUs continued to search for market opportunities for the future, while focusing on reducing overheads to enhance their competitiveness and profitability. this proved to be a drawback in the face of the sluggish economy and the reduced spending power of consumers. grounds.

Sector Review - Plastics

efficient manufacturingMattresses, Water Pumps, CFL Bulbs, Moulded Plastic & Expandable Rigid Polystyrene ProductsThe superior quality of its products were further enhanced, mainly due to the installation of stateof-the-art machinery at its new factory complex in Horana which was relocated during the year under review. This also resulted in its installed capacity being increased by 40%, together with the extension of its product range. The Rigifoam market which mainly serves the countrys fisheries industry, continued to perform strongly despite the economic downturn. The Company anticipates a boom in the islands fisheries industry once normalcy is returned to the Northern Province, with its rich coastal fishing

Polyurethane Foam Arpico Flexifoam suffered from a drop in demand for its range of polyurethane foam mattresses,


cushions, sheets and other specialized products, due to a sharp increase in the price of raw materials. This was exacerbated by intense competition. The Companys profitability declined during the year under review. The Company continued to market its existing product range and refrained from introducing new products due to the prevailing depressed market conditions. The Company introduced backward integration by its quilting process for mattress covers, which was previously outsourced, which served to reduce costs and also focused on reducing all other overheads.

cost of materials led to a decline in profit margins. The Company also had a large cost of finance to service and recorded a loss for the year under review. The Companys main production facility is in Horana, with satellite plants in Koggala, Pallekelle and Dambulla to cater to regional markets. The Companys performance during the year under review was also hampered by low net margins due to the cost of financing of its new factory complex in Horana. There is now a greater focus on reducing of overheads, especially in the area of inventory control. An enhanced range of purpose built

Arpico Flexifoam - which is an ISO 9001:2000 standard company also possesses the SLS 893 standard, introduced quilting to its Super Star range of mattresses, which is targeted at the middle income market. The company plans to introduce a new range of mattresses targeted at the low end mass market in the next year. Rotational mouldings Plastishells maintained its market share in the water tank, bins and septic tank markets, despite intense competition and overcapacity in the market. However, the general slowdown in the countrys construction industry greatly affected sales volumes of its product categories and the high

septic tanks was introduced to the market and showed much promise for the future. The Company is closely monitoring demand for its products from the Northern Province and a significant increase has been noted in inquiries for water tanks to cater to the large civilian population now under the care of the Government. The factory in Dambulla is fully geared to cater to the Northern and Eastern markets. PVC Pipes and Fittings Arpitech was involved in the manufacture of a range of pipes and fittings under the brand name of Arpico PVC and providing total water solutions to customers.


Sector Review - PlasticsThe company had received the Sri Lanka Standards (SLS) certification for its range of pipes and had begun test production on gutters. This was Arpitechs second full year of operations and the company performed poorly due to a combination of intense competition and a drastic downturn in the countrys construction industry. The Group has taken a policy decision to exit this industry and is examining options to dispose of the companys assets. Re-Distribution Division The Division operates as the distribution arm of the Plastic Sector. Products are distributed throughout the island through a network of Distributors and over 5,000 Dealer outlets that specialise in hardware and furniture. The Division was affected by the countrys economic downturn, especially in the second half of the year. However, the reduction in Turnover was limited to 5% less than that achieved in the previous year. The Arpitech Water Pump, which was launched in 2006, increased rapidly in popularity among consumers, and is now the market leader in the domestic water pump segment with a market share of 28%. Its sales contributed significantly towards turnover and gross margin. The high level of after-sales service, in which The Division will face the challenge of the trickledown effect of the global economic downturn during the year ahead. However, the reopening of the economy of the Northern Province is expected to bring about a resuscitation of economic activity that will be beneficial to the division as most of its products are necessities for construction and development. The Division has a distinct advantage over competitors through its already established network of dealers in the North and East. Stocks began moving overland along the main A9 road to Jaffna Sales of the Arpilight CFL bulb, which was launched in December 2007, made steady progress during the year and this product is expected to become a household name in the near future. The product is available in both Daylight and Warm Light colours in a full range of wattage for domestic use and is competitively priced. The company plans to expand this range to cater to industrial consumers during the coming year. Special emphasis will be placed on promotional efforts, to create topof-the-mind brand awareness and ensure that Arpico products will sustain their market leadership despite the challenges of a shrinking market. customers are provided doorstep service within 48 hours that is unique in the industry and an islandwide network of service centres, contributed greatly to its success. This product is now certified to international quality standards. Plans are being made to build on this success by entering the industrial water pump market with a new product. The Division focused on reducing overheads and optimising management of working capital to mitigate the impact of the economic downturn. and Kilinochchi at the end of the year under review. Operations in the Eastern Province were encouraging due to the increased level of development there by the Government and NonGovernmental Organisations.


Expandinginto new marketsThe Rubber Sector experienced a year filled with challenges as it adapted to meet rapidly changing market conditions. The Sector produces a diverse range of rubber products for the local and export markets. It consists of Richard Pieris Exports, Richard Pieris Natural Foams, Arpitalian Compact Soles and Micro Minerals. The Sector witnessed a steep increase in the prices of raw materials during the first and second quarters, due to a doubling of rubber prices and an increase in oil prices which affected imported raw materials. The cost of energy also increased significantly due to a hike in electricity tariffs. However the cost of production reduced in the third and fourth quarters as the prices of rubber and energy decreased. A new Chief Executive Officer with overseas business exposure was Each company in the Sector focused on enhancing the quality of its products in order to obtain a competitive edge among perceptive customer markets. The eco-friendly nature of the sectors latex and jar sealing ring products proved to be a significant positive marketing advantage. In the current year, the Company increased its turnover by 26%. Ring sales volumes increased by more than 100% and the Company intends to invest in this aspect of its business for the future. The Sector is at present receiving low sales orders from markets affected by the global economic crisis, especially the U.S.A., and is limiting its financial exposure by careful screening and monitoring of both new and existing customers. However, the Sector entered new markets in Europe and Asia with aggressive marketing strategies that succeeded in securing business for the future from a significant number of new customers. Richard Pieris Exports PLC Richard Pieris Exports produces and exports rubber mats to the U.S.A., Europe and Asia Pacific from its production facility in Ekala. In addition it also produces jar sealing rings and crutch tips for European markets. The Companys range in mats includes specialised products for industrial use, agriculture, playgrounds, gymnasiums and specialty items such as fire retardant, electricity resistant and anti static mats.

Sector Review - Rubber

The Product Portfolio: Natural Latex Foam Mattresses, Pillows, Rubber Mats for Industrial and Domestic Use, Jar Sealing Rings, Small Mould Products and other Specialised Industrial Rubber Productsappointed to lead the rubber sector and its senior management team was also re-structured.


Sector Review - RubberHowever, the overvalued nature of the Sri Lanka rupee adversely affected the competitiveness of the companys operations. The global financial crisis also caused a significant reduction in activity in the overall market. With intense competition being experienced in the low end product market, the Company is now focusing more on value added products such as flooring. The Companys production returned to normal levels during the year under review following the induction of an almost completely new workforce, after an industrial dispute during the previous financial year which hampered its operations. The Company introduced a number of new products for the agricultural and industrial markets and continuously explored possibilities to introduce new products through innovations. It is developing several international certifications in order to differentiate its products from those of competitors. Arpitalian Compact Soles (Pvt.) LTD. Arpitalian Compact Soles is a joint venture with Davos SPA, an Italian manufacturer of shoe soles. The Company produces resin rubber soles for many of the worlds best known brands of shoes. Its main markets are in Europe and the Asia Pacific region. The Company was adversely affected by high interest rates and depreciation. Despite keeping other overheads under control through various cost reduction measures, the many challenges resulted in an operating loss of Rs. 20 mn for the year under review. However the Company achieved significant sales growth in the Asia Pacific area, and sourced a significant number of new customers during the year under review. With the focus on new product developments, the company is forecasting a growth of 15% in this market for the next financial year. Arpitalian was severely affected by the steep rise in the price of raw materials, of which 70% are imported. This led to the company being obliged to raise its prices several times, which resulted in a decline in demand for its products. In addition, the global recession caused a considerable drop in demand for all types of clothing and accessories, including shoes. The companys main buyer in Europe reported a 50% drop in shoe sales. Arpitalian focused on enhancing the quality of its product range during the year under review especially for high end markets, and also succeeded in building relationships with new clients in the Asia Pacific region which augurs well for the future.


Richard Pieris Natural Foams Ltd. Richard Pieris Natural Foams produces natural latex foam products such as latex cores and sheets for export markets, at its factory located in Biyagama. The high prices of latex adversely affected the companys performance during the first half of the year and greatly affected margins. The company continues to work on inefficiencies in its production process which has yet not been satisfactorily addressed, in order to reduce levels of wastage.

consumption where natural latex is preferred for premium quality bedding products in all top brand names. The European market was particularly receptive to the Companys products due to European customers preference for the eco-friendly nature and medicinal properties of 100% natural latex. This market is a significantly lucrative one for products of high quality and consistency, and the company was successful with its range of pillows. The Company is also well-

The Group is planning to financially restructure the company during the next year, in order to make its operations more competitive.

positioned in the diverse and growing markets of the Asia Pacific, with its competitive pricing and quality products. Micro Minerals (Pvt.) Ltd.

The Companys emphasis on research and development resulted in the introduction of new brands of quality mattresses and pillows. The new Arpico latex pillow in particular enhanced the Companys image as one which is in the forefront of the latest trends and innovations in the bedding industry. The Company carried out a wellfocused marketing campaign in key markets in the Asia Pacific, European and U.S. regions. It secured a share of the lost U.S.A. market during the early part of the year - one of the largest single markets in terms of mattress

Micro Minerals is a small company that plays a supportive role to Arpitalian Compact Soles by manufacturing mineral products that are essential as fillers for rubber compounds. Its production plant is located in Bandaragama.


SupportingBusiness GrowthInsuranceThis sector includes the Groups holding company, Richard Pieris and Company PLC, together with subsidiary companies in various industries outside of the Groups main sectors of Plantations, Rubber, Tyre, Retail and Plastics. These include companies which are involved in Logistics, Insurance, Furniture and Branded Tea. RPCs various Divisions also provide support services to all group companies. The IT Division provides IT support services and maintains the internal communication network of the Group. With its experienced staff Richard Pieris and Company PLC Richard Pieris and Company PLC is the holding company of the Group and is responsible for the overall corporate policy and direction of the Group. Richard Pieris and Company PLC (RPC) generates a proportion of its income by way of dividends from its subsidiaries. It also owns and rents real estate to group companies. The Group Human Resource Division is responsible for the overall HR policy of the Group. More details on its activities are to of professionals who specialise in both software development and hardware maintenance, the IT Division has taken continuous steps to upgrade the Groups technology, to stay abreast of modern trends and maintain its competitiveness. The Group Corporate Planning Unit co-ordinates the development of the Groups overall strategic planning process and provides expertise to all SBUs to develop and monitor The Group Treasury supports all businesses in their funding requirements and banking facilities and manages the Groups foreign exchange exposure and interest rate risks. During the year under review, RPC recorded a capital gain of Rs. 213 mn from the sale of a land at Batakattara in Piliyandala. The Central Purchasing Division handles all procurement of raw material and consumables, both domestic and international. It has been successful in passing on the low costs to our SBUs by maintaining sound supplier relations and maximising economies of scale.

Sector Review - Services and Other

The Portfolio: Freight Forwarding, Furniture, Branded Tea and

be found in the report Our People on page 47.


Key Performance Indicators. This unit also analyses all new business ventures and develops business plans. R P C Logistics Ltd. R P C Logistics is the key SBU of the Transportation Sector of the Group, and is primarily engaged in international freight forwarding and customs brokering. It has now completed its fourth year of operations. At present, two thirds of the Companys revenue is generated from its freight forwarding activities. The Companys extensive portfolio of services includes airfreight, sea freight, sea freight consolidation, customs brokerage and transhipment. The Company has been successful in providing total logistics support to several infrastructure projects in Sri Lanka. Door-to-door services were provided for project cargo with the support of the Companys overseas agents, including export processing and handling at origin, sea freight from port of origin to Colombo port, import customs clearance at Colombo port and delivery to sites in various parts of Sri Lanka.

and exports in the country had a direct impact on both volumes and revenue. In addition, escalating fuel costs and ever increasing competition severely eroded margins. However, the Company continued strongly marketing its services to import and export industries, despite all these challenges. The Company is planning a conservative strategy for the coming year to tide over the present global crisis with an eye on the future, especially by managing costs, effectively and efficiently and maintaining its current customer base. RPC Logistics is the exclusive member of the prestigious Logistics International Network (LINK). As the sole member for Sri Lanka, the Company has the exclusive rights to business in Sri Lanka from the LINK global network that spans over 60 countries. However, RPC Logistics continued to expand its own independent international network of agents in order to build relationships with strong and reliable partners and further expand and improve its activities. The operations of RPC Global

The general economic slowdown in the Country had an unfavourable effect on the companys operations, especially during the second half of the year under review. A sharp reduction in both imports

Travels Ltd., the sectors travel arm, were discontinued on account of depressed conditions in the global and local travel and tourism industry. The Group will monitor the industry and continuously


Sector Review - Services & Otherevaluate opportunities to recommence activities. Asian Alliance Insurance PLC Asian Alliance Insurance is a comprehensive insurer that is rapidly gaining a sound reputation for its superior products and excellent service. The Company offers both life and general insurance services to corporate clients as well as individuals. Its client portfolio includes many of the largest trade and industrial conglomerates in Sri Lanka. The Company completed yet another successful year with a turnover growth of 15% over the previous year. The dynamic approach adopted by its management over the last four years succeeded in erasing the companys accumulated losses and increased its shareholder equity to Rs. 404 mn. The global crisis made it RPC Timberline (Pvt.) Ltd. Timberline is a Board of Investment (BOI) approved company that is capitalising on opportunities for contemporary hardwood furniture, by manufacturing a wide range of items for both the local and international markets. During the year under review, Timberline attracted a joint venture partner with synergies. This strategic alliance is expected to infuse enhanced management and marketing expertise into the Company. In addition, it Despite the challenges, Maskeliya Tea Gardens achieved some growth in turnover, recording Rs. 96 mn considerably difficult to enter new markets in search of other customers. The Company, which has now completed its third year of operations, continued its brand building process. Its strategy of appointing major distributors on a regional basis was slowed somewhat by caution on the part of prospective distributors towards investing in brand building during this time. The Company was greatly challenged by the negative effects of the global financial crisis in key markets, in common with the entire global tea industry. The depreciation of the Rouble by 50% posed an extreme challenge in the companys largest market Russia. The tightening of credit facilities by banks to major buyers was of particular concern. Maskeliya Tea Gardens Ceylon Ltd. Maskeliya Tea Gardens markets the superior quality products of Maskeliya Plantations, both internationally and locally, under the brand name St. Clairs Tea. The Companys popular St. Clairs Tea Centre in Maskeliya successfully overcame a significant increase in competition during the year under review. The superior service, excellent product range, sterling reputation and homely ambience of St. Clairs Tea Centre combined to maintain its popularity among both foreign and local tourists in the Nuwara Eliya region. has increased efficiencies and reduced wastage by improving the production processes. The alliance has also served to significantly broaden the product range on offer. in comparison to the previous years Rs. 82 mn. Total local and export market turnover increased to 130,000 kg from last years 80,000 kg.


Financial ReviewGroup Performance The overall performance of the Group during the year under review was affected by the global economic melt down resulting in a sharp fall in domestic demand for non-essential consumer goods, fall in tea and rubber prices and high interest rates. The first half of the year saw the manufacturing sectors affected by the high prices of raw materials particularly of petroleum based products. The Groups turnover increased marginally by 3% to Rs. 20.8 bn whilst the Groups operating profits declined by 34% to Rs. 1.35 bn when compared to the previous year. Finance cost of Rs. 1.4 bn in the year under review, resulted in an operational loss of Rs. 189 mn from continuing operations, compared to the profit of Rs. 247 mn achieved in the previous year. Losses of Rs. 116 mn, from discontinued operations, further increased the Groups losses to Rs. 305 mn. Consequently, losses attributable to Equity holders of the parent stood at Rs. 329 mn compared to the loss of Rs. 215 mn reported in the previous year. Group assets declined by 5% to Rs. 16.9 bn whilst total liabilities declined by 4% to Rs. 12.3 bn. Turnover The Groups turnover increased marginally from Rs. 20.1 bn in 2007/2008 to 20.8 bn in 2008/2009. The Tyre sector recorded a steady growth of 13% in turnover reaching Rs. 3.1 bn, when Turnover in the Plastic Sector amounted to Rs. 4.5 bn, an increase of 10% compared to the previous year. The Groups export turnover amounted to Rs. 1.78 bn, (approx. US$ 16.2 mn) a decrease of 2% compared to the previous year. The Groups main export markets in Europe and Asian Pacific amounted to 49% and 34% of the total export revenue respectively. The Retail Sector recorded a turnover growth of 8% to reach Rs. 8.8 bn for the year, despite the economic down turn that resulted in slower turnover growth in some non-essential categories, such as household goods including furniture and electronics. The Rubber Sector was affected by the global economic crisis, especially the U.S.A. and Europe which resulted in reduced orders from the U.S. and European markets. Consequently turnover remained at the same level as last year. A sharp decline in commodity prices in the second half of the year resulted in the Plantation Sectors turnover decreasing by 13% to Rs. 5.9 bn when compared to the previous year. compared to 2.7 bn last year. This was mainly a result of increased market share in the retreading business, the increase in the sale of new tyres and periodic price revisions.


Financial ReviewProfit from Operations The Group recorded a profit from operations of Rs. 1.35 bn in the year 2008/2009, which is a decline of 34% when compared to the previous financial year. This was a result of three of our key sectors namely Plantations, Plastic and Rubber performing below expectations, overshadowing the satisfactory performance of the Retail and Tyre Sectors. The Plantation Sector recorded a 53% decline in operating profit. This was mainly due to the setback in commodity prices in the second half of 2008/2009, rising prices of fertilizer and high cost of energy. Cost of Sales and Operating Expenses In the year 2008/2009 the cost of sales was 81% of revenue, which is 3% higher than in the year 2007/2008. The total operating expenses, inclusive of cost of sales, increased to 93.5% of revenue in the year 2008/2009 as compared to 89.9% of revenue in the year of 2007/2008. Steep increases in the prices of raw materials caused the cost of sales of the Manufacturing and Rubber Sectors to increase in the first part of the year under review. However, the nature of the demand for rubber and plastic products made it very difficult for both sectors to pass the full impact of price increases to their customers. This accounts for a higher increase in cost of sales compared to growth in turnover. The Plastic Sector recorded an operational profit of Rs. 171.9 mn, which is 27% lower than last year. The sharp increase in raw material prices particularly of petroleum based products, during the first two quarters and intense competition especially for the foam products and water tanks resulted in a drop in performance. Satisfactory revenue growth, due to the increased sales at Super Centres saw the Retail Sector increasing its operational profit by 13% to Rs. 472 mn, The Sector was successful in improving its net margin through stringent cost reduction measures adopted to control fixed overheads and improved stock management. The Plantation Sectors contribution to Group operating profit is 35%. Finance Cost Interest rates increased continuously during the period under review compared to the previous financial year and reached its peak in the middle of the current financial year. Hence, the Groups finance cost does not reflect the real impact of the 13% reduction in the Group debt amounting to Rs. 1 bn which occurred in the year under review. Group finance cost decreased marginally from Rs. 1.47 bn to Rs. 1.40 bn, a decrease of only 5%. Interest cover ratio decreased from 1.20 to 0.96 during the financial year. However, as the market interest rates reducing gradually with the relaxation of the monetary policy in the latter part of the year, the Group finance A significant growth was seen in the Tyre Sector, with operational profit increasing to Rs. 235 mn from 156.9 mn in the previous year. The Company increased its competitive advantage through the frequent revision of product prices. The fall in raw material prices during the second half of the year also contributed to the significant growth in profitability in this sector. The Rubber Sector recorded a negative contribution of Rs. 5.5 mn to the Group operational profit. This Sector was badly affected by the global economic crisis leading to a drop in sales volumes and profits.


Minority Interest Minority Interest of the RPC Group mainly comprises minority shareholdings of the Groups Plantation Sector. The recent downward trend in commodity prices in the global market lead to significant deterioration in the profitability of plantations. As a result, the Plantations Sector recorded an operational profit of Rs. 555mn during the current financial year, compared to Rs. 1,182 mn in the previous period. Consequently, minority interest of the Group reduced significantly by 91% to Rs. 24 mn in the current year. cost is expected to be lower in the ensuing year. Profit/(loss) for the Year from Continuing Operations The decrease in gross margin and the high finance cost resulted in a loss from continuing operations of 49.9 mn, compared to a profit of Rs. 296.3 mn achieved in the previous year. Profit/ Loss on Discontinued Operations As part of its continued strategy of divesting from businesses with low potential, the Group terminated its operations at Arpitech, the PVC pipe plant, Arpico Homes, the real estate development Company and RPC Global Travels during the year. The losses incurred by these discontinued operations amounted to Rs. 115.6 mn. Investment / Acquisition and Disposals The Group invested Rs. 1.0 bn in acquiring new plant, machinery, buildings and the replanting and development of agricultural crops during the year. The biggest investment by the Group during the year under review was the construction of a factory plant in Horana for the relocation of the manufacturing facilities of Rotational Molding products and Rigifoam. The Company disposed of land in Piliyandala during the year, resulting in a profit of Rs. 213 mn.

Equipment amounted to Rs. 9.51 bn as at 31st March 2009.The value of the Groups Real Estate portfolio is significantly higher than its book value, details of which are given in the Group Real Estate Portfolio statement on page 113. Working Capital During the current financial year, Group current assets decreased by Rs. 951 mn to Rs. 6.13 bn while total current liabilities decreased by Rs. 332 mn to 7.72 bn. This was mainly due to the reduction of Rs. 859 mn in inventories, Rs. 532 mn in Trade and Receivables and Rs. 131 mn in Trade and other payables. Though the reduction in current assets resulted in improving the Groups operational cash flow, the Group Balance Sheet continued to reflect a negative working capital position as at the financial year end. The negative working capital increased from Rs. 976 mn to Rs. 1.6 bn during the year while the current ratio decreased marginally from 0.88 to 0.79. Cash Flow Cash and Cash Equivalents increased by Rs. 396 mn to negative cash of Rs. 3.44 bn as of 31st March 2009. The Group recorded a growth of 300% in operational cash flow amounting to Rs. 1.31bn as compared to Rs. 430 mn in the last financial year. The Retail, Plantation and Tyre Sectors were the main contributors to the positive operational cash. Despite

Group Financial Position and LiquidityNon Current Assets The total non current assets of the Group increased from Rs. 10.73 bn in 2007/2008 to Rs. 10.80 bn in 2008/2009. Property Plant and


Financial Reviewthe positive cash flow of Rs 215mn from the disposal of land, the net cash flows from investing activities generated a deficit of Rs. 265 mn, due to investments made in new plant and equipment, building and replanting of agricultural crops. The repayment of loans amounted to Rs. 1,140 mn exceeding the proceeds from new loans to Rs. 551 mn resulting a net cash deficit of Rs. 653 mn from its financing activities. Capital Structure The total assets of the Group as of 31st March 2009 were Rs. 16.92 bn as against Rs. 17.81 bn in the previous year. Assets were funded by Shareholders funds (19%), Minority Interest (8%), Long Term funds (27%) and short term fund (46%). Equity The Companys Stated Capital amounted to Rs. 1.57 bn consisting of 128,251,023 Ordinary shares. Total Shareholders Fund decreased to Rs. 3.21 bn from Rs. 3.53 bn in the previous year due to losses reported in the current year. Debt Group debt stood at Rs. 6.8 bn as of 31st March 2009 as against Rs. 7.8 bn as of 31st March 2008 a decrease of Rs. 1 bn during the year under review. The most significant feature of this reduction is that, apart from Service Sector, all Sectors of the Group showed a significant reduction in the debt. Both the Tyre and Retail Sectors showed a 20% improvement in debt mainly due to operational profitability and significant improvement in working capital management. The Gearing ratio improved from 61% to 60%. Even though the group debt decreased by 13%, the Gearing Ratio shows only slight improvement due to the current year losses. Approximately 50% of total debt has been secured on a long term basis while 50% of the total debt is secured on a short term basis. The repayment profile and security offered on the long term debt is listed out in Note 13 in financial accounts on page 95 - 97 Information pertaining to the short term borrowings is given in Note 19 to the financial statements on page 101.

Shareholders Return /Return on Equity (ROE) / Earnings Per Share (EPS) The Groups Return on Equity continued to be negative in the year under review. The Groups Return on Equity deteriorated further to negative 10% in the current financial year, compared to negative 6 % in the previous year. Non recurring losses on discontinued operations and non recurring provisions contributed significantly to negative return. The Earnings Per Share in the period under review was negative


Rs. 2.57 as against negative Rs. 1.68 in the previous year. The Groups Earnings yield for the year stood at negative 10% as against negative 4% in the previous year. The Companys share price at the year end was Rs. 25 against Rs. 39 in the previous year. Market Capitalisation The Companys market capitalization as at 31st March 2009 stands at Rs. 3.2 bn as against Rs. 5 bn as of 31st March 2008. During the year under review the share of Richard Pieris and Company PLC traded in the range of Rs. 21.75 to Rs. 50.50. The share market continued to show a downward trend during the period under review. This was mainly due to the shifting interest of local investors to higher yielding Government Securities and continuous liquidation of stock positions by foreign investors due to the global financial crisis. Financial Risks Financial risk associated with the operations of the Group is discussed in detail under the Risk Management Section of this report in page 42 - 46.


Corporate Social ResponsibilityThe Richard Pieris Group, through its activities, has economic, social and environmental responsibilities to its stakeholders. We aim to engage positively with all stakeholders, responding to them swiftly and efficiently while we continue to welcome their views and maintain a dialogue with them. The Group has structured its CSR activities to protect the interests of its stakeholders. The Group has instituted a po

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