Dear Shareholder,

It is in difficult times that the benefits of diversification are most appreciated. 2012/13 was certainly a difficult year, both for the world economy and, to a lesser extent, Sri Lanka’s. Yet despite far-from-ideal business conditions, Hayleys, the only diversified Sri Lankan conglomerate to enjoy significant presence in agriculture, manufacturing and services, earned pre-tax profits of over a billion rupees in each of three key fields of activity: Hand Protection, Purification and Transportation & Logistics. The results in these sectors contributed significantly towards the year’s very satisfactory Group revenue and profit before tax figures; revenue grew by 13% to reach Rs. 74 bn, whilst profit before tax soared 96% to Rs. 5 bn.

These remarkable results were achieved against a background of respectable growth in the Sri Lankan economy. Monetary policy was tight, resulting in higher interest rates and lower access to capital, and in parallel, the free float of the Sri Lanka rupee resulted in significant depreciation. Such measures were undoubtedly necessary to stabilise an economy at risk from overheating, but they resulted in higher finance costs for the Group. However, the float of the rupee has helped our export businesses adjust to domestic cost changes and thereby remain competitive in the global market. Meanwhile, we have been actively exploring alternative sources of finance such as off-shore capital and corporate-debt instruments.

Another factor affecting business performance was rising energy costs, which had a particular impact on manufacturing. In agriculture we faced a different set of challenges arising from unseasonable droughts and floods in various parts of the country.

Overseas, the macroeconomic picture was even cloudier, with sluggish growth in our best markets, Europe and the US. Growth also slowed in emerging economies and new economic powers. Since much of the Group business is export driven, such developments had clear strategic as well as tactical implications for us.

Billion-rupee businesses

It was against this not-very-encouraging background that three of our business sectors posted the record breaking results referred to above. In the Hand-Protection sector, a combination of leaner operations, product innovation and the energetic pursuit of new markets earned the sector pre-tax profits of Rs. 1.3 bn despite significant downturns in key European markets. Dipped Products also took steps to streamline its supply chain, while latex price movements were closely monitored in order to optimise pricing.

The Purification sector earned PBT of Rs. 1.2 bn, as demand for quality activated carbon products manufactured by Haycarb remained solid, particularly in emerging markets. To meet it, Haycarb has been investing in added production capacity in Sri Lanka, Thailand and Indonesia. The Company has also been working to secure access to competitively-priced raw material supplies along with increased focus on high value carbons in order to enhance its margins. Haycarb products are used around the world in a variety of applications such as air and water purification, gold mining and energy storage, and they are likely to remain in strong demand for the foreseeable future.

The Transportation & Logistics Sector was our third star performer this year, with profit before tax of Rs. 1.06 bn, the highest ever. This sector, too, did exceptionally well under trying conditions: Sri Lanka’s trade contracted during the year under review, with imports declining in response to tighter monetary policy measures and exports depressed due to continued economic weakness in key international markets. Slowing economic growth in India also had its effect on the sector, resulting in lower transhipment volumes at Colombo. Under the circumstances, Hayleys Advantis focused on relationship-building with principals and other stakeholders, and successfully developed new agencies as well as developing its energy logistics operations. Our 3PL business and other inland logistics activities performed well.

Profitability in diversity

Hayleys is a major player in the plantation sector, accounting for 4.5% of Sri Lanka’s tea and 2.2% of its rubber production. This sector, too, recorded its highest-ever profits since privatisation: profit before tax for the year stood at Rs. 966 mn, a year-on-year increase of 131%. Though business costs rose, innovative practices helped our plantation companies remain competitive and profitable. We continued to lead the industry’s drive for sustainability, reflecting both Group ethics and the changing attitudes of consumers. Attention to manufacturing best practices and sustainability thus pays consistent dividends in the form of higher auction prices for our tea and rubber.

Despite the adverse climatic conditions referred to earlier, the Agriculture Sector returned pre-tax profit of Rs. 700 mn. Its performance is all the more commendable given that tight credit conditions prevailed during the year, increasing the cost of financing for agricultural machinery and other inputs. Already present at every point along the agricultural value chain, from farming inputs to advanced R&D and biotechnology, Hayleys further expanded its range of agricultural inputs, streamlined its supply chains and developed new value added products for the market.

Our domestic distribution operations had a mixed year. Higher interest rates and a weaker rupee temporarily depressed consumer spending, though long-term prospects for the sector are good, as rising incomes are expected to drive demand for world-renowned brands in the Sri Lankan market. Accordingly, the Consumer Products sector launched a number of new products during the year, leveraging existing distribution channels and brands.

Recent investments in leisure, construction materials and renewable energy are making strong and growing contributions to our bottom line. Construction is presently enjoying a boom in Sri Lanka and our Construction Materials sector contributed a profit before tax of Rs. 375 mn to the Group results, an increase of 232%. We embarked on a number of new sectoral ventures during the year including exploring the export market, licensed contract manufacturing and a number of new value-added products.

Our 10 MW wind power project in Kalpitiya was fully connected to the national grid, and results have been very positive. We remain bullish on renewable energy and are currently in the process of expanding our renewable energy portfolio.

A major development during the year was the reopening of the Ceylon Continental Hotel under its new name, The Kingsbury. The performance of this 229-room investment since its expansion has been encouraging. The Amaya Group, the resorts arm of our Leisure & Aviation sector, also continued to perform well, and we have increased capacity there. In the Leisure & Aviation sector, Hayleys represents British Airways, which became the first European carrier to recommence online operations to Sri Lanka after the end of the conflict. The holistic approach we have taken towards this sector, combining hotels, a travel agency, destination management and airline GSAs, creates strong synergies that help us take advantage of a booming industry.

An encouraging turnaround was seen in the Fibre Sector, which contributed a profit compared to an operating loss the previous year. This was achieved through leaner manufacturing operations, factory consolidations and mergers within the sector, combined with active product development and marketing. There remains a lot to be done to realise the full potential of this sector, and we are moving in the right direction.

The Textile Sector, though, still remained in the red, reduced its losses and a turnaround is expected. A number of changes have been implemented and a new ERP system, SAP, is now operational, while changes in key management will bring experience and dynamism to this sector. A number of cost-reduction strategies were also successfully implemented without undermining the quality of the end product.

Delivering and deriving value

Our businesses embrace appropriate sustainability practices, ranging from energy-efficient operations and pollution control to supply-chain management and equitable labour policies. Along with their positive impact on stakeholders, these practices contribute directly to our bottom line. In addition, some core businesses, such as renewable energy, are of intrinsic benefit to the environment. Maintaining this balance is part of our wider commitment to the nation, which also sees the Hayleys Group provide direct employment for more than 33,000 individuals.

It is pleasing to note the recognitions for our commitment to sustainability and good governance practices. In the year under review, the Group was ranked amongst the three ‘Most Respected Business Entities in Sri Lanka’ in a survey conducted by Lanka Monthly Digest, which also placed the Group first for ‘Nation-Mindedness’.

A future rich with opportunity

Diversity, along with effective risk management, has left us well positioned to take advantage of the many and various business opportunities that arise in a global economy. In the coming years, the focus of that economy will shift increasingly towards Asia as millions of citizens in emerging economies make the transition to middle-class lifestyles and values. This will create enormous new markets for our products; however, it will also lead to further depletion of natural resources and put greater pressure on the environment. I am confident that, in this exciting yet challenging future, Hayleys is well-positioned for continued growth and success, creating value for all our stakeholders.

In the Hand Protection sector, long-term potential remains positive. Health and safety concerns are bringing increased regulation to emerging economies, driving demand for industrial and medical gloves, while greater wealth coupled with changes in lifestyle preferences in these economies also increases demand for household gloves. The challenges here will come from balancing costs with quality as the supply of cheap products with questionable quality becomes more abundant.

Haycarb’s activated carbon products are used around the world in a wide variety of applications. Demand for them will only increase as growing populations put greater pressure on natural resources and the environment, placing pure air and water at an increasing premium; meanwhile, the use of activated carbon for energy storage, a maturing technology, shows enormous future potential. Our purification systems arm, Puritas, will continue to invest in R&D and expand its product portfolio and market footprint.

Transportation & Logistics is another sector in which Hayleys is well positioned for the long term. As global economic activity shifts towards Asia over the next decade, Sri Lanka’s potential as a trading hub and transhipment centre serving two of the world’s largest economies - India and China - will increase. Hayleys will be in a strong position to provide the transportation and logistical services that will be in demand. The realisation of this is greatly dependent on the Sri Lankan Government following the policies required to attract the necessary investment to make the regional-hub status a reality.

In agriculture too, we see tremendous opportunity in greater mechanisation, value addition and technological input where Hayleys could contribute. As the global demand for agricultural commodities grows with rising population and expectations, Sri Lanka, which is expected to enjoy abundant water resources for decades to come, will become formidable producer.

A different approach to reporting

We regard sustainability as an integrated process, just as much as business is an integral part of society and its environment. We are a signatory to the United Nations Global Compact, which underlines our respect for and commitment to international standards. We continue to be guided by these principles. Our reporting for FY 2012/13 too reflects this philosophy. We are reporting on sustainability using the same GRI G3.1 guidelines as in the previous year, but instead of a separate chapter, we have addressed the principles and disclosures in relevant sections throughout the report. Our annual report as a whole is a self declared GRI G3.1 Application Level B. We will consider having the GRI aspects also assured as per the new format as we further refine our approach to integrated reporting.

Although we label this as our ‘first’ integrated annual report, it may interest some to refer the innovative approach we adopted way back when reporting for FY 2002/03 - our 125th anniversary, particularly in showcasing the interplay between our tangible and intangible capitals, proof that sustainablility and responsible stewardship have been ingrained in the Hayleys culture virtually from the inception of the Group 135 years ago. The seeds of our integrated reporting were sown then, as we now witness the concept taking root globally. What was then out of the box thinking and style of reporting - although some may have called it pure fiction - is now a solid fact.

The Group also complied with the new Sri Lankan Accounting Standards (SLFRS and/LKAS) effective from 1st January, 2012 and this report has been produced in accordance with the first time adoption requirement of these standards.

In conclusion

It has been, overall, a very positive year for the Hayleys Group, but - considering the global potential of most of our businesses - we retain tremendous capacity for growth. While the Board and I focus on the strategic development of this potential, I have ensured that each of our sectors is led by professionals with the appropriate expertise and experience. Having the right people in the right places has ensured that your Company has
delivered strong results and will continue to do so in the ensuing years.

In light of the results achieved this year, the Board of Directors have proposed a dividend of Rs. 4.50 per share to be paid on 8th July, 2013.

I would like to conclude by expressing my gratitude and appreciation to our customers, suppliers, principals and all the other stakeholders who have continued to co-operate closely with us over the years. I thank the staff of Hayleys, who have worked hard to deliver this year’s record-breaking performance.

Mr. J.A.G. Anandarajah, who has served on the Board of Hayleys since 2007, retired this year, completing a 33-year career within the Hayleys Group. Mr. Anandarajah made a tremendous contribution, particularly in the development of DPL, which he joined in 1980. Please join me in thanking him for his service to Hayleys and wishing him well in his retirement. Mr. Ruwan Waidyaratne has been appointed to the Board of Hayleys as of April 2013 as an Executive Director. Mr. Waidyaratne is at present the Managing Director of Hayleys Advantis, bringing with him 28 years of industry experience. We wish him a successful career on the Board.

Finally, I should like to place on record my special appreciation of the support and guidance provided by the Deputy Chairman and the Board of Directors of Hayleys.

Mohan Pandithage
Chairman & Chief Executive

20th May, 2013