Following is an interview of Ceylon Tobacco Company PLC (CTC) Chief Executive Felicio Ferraz appeared in the FY13 annual report of the company that was released to the Colombo Stock Exchange yesterday.

Q: How would you rate CTC’s performance in the year under review and has Sri Lanka proven to be a challenging experience?
Firstly, it gives me immense pleasure to address our valued shareholders through my first review of operations. As the only legal manufacturer of cigarettes in Sri Lanka, when I first arrived I wondered what my challenges would be; but we have had plenty of topics for discussion since then, from the proposed graphic health warnings on cigarette packets, to a decline in volume and unfair enforcement. These challenges have kept us motivated and in turn helped us to deliver some extraordinary results.

CTC had a great year in terms of business performance. We have successfully delivered to our consumers’ expectations in terms of quality, innovation and product reach. We have strengthened the solid foundation built over a century of excellence and CTC has a sustainable business model in place that will drive the company forward despite the challenges it may face.

These are the results of not only a sound business model but also the strong set of values we have built and inculcated in our people and having integrated CTC into the many communities that we operate in. I believe we have delivered an exceptional performance this year and I carry a great deal of confidence and optimism into 2014.



Q: Have we delivered adequate value to our stakeholders through our business operations?
I believe we are the best at creating value to all our stakeholders. The CTC share has delivered great value for our shareholders during the year under review. In 2013, CTC became the Most Valuable Company on the Colombo Stock Exchange for a period of time, achieving an exponential growth of 2,260 percent over the past five years, including the dividends paid out by the company. Our financial strength and value of our corporate brand is also signified in the prestigious Business Today Top 20 as we rose from the seventh position to the fourth during 2013. This is truly a remarkable performance.

We take great pride in our partnerships with our distributors and trade and retail universe of over 76,000 members by whom we are recognised for some of the best trade loyalty and value addition programmes initiated by an organisation. CTC has made a name for itself as one of the top employers of the nation, which was reaffirmed by the top award for ‘Best Employee Relations’ awarded by the Ceylon Chamber of Commerce for Best Corporate Citizens.

Our flagship corporate social responsibility programme, the Sustainable Agricultural Development Programme (SADP) has empowered the lives of over 16,364 low income families all across the island and has been acclaimed as one of the best agricultural and economic empowerment programmes in the country. Our products are 100 percent locally manufactured; the leaf that we use for our blends grown almost entirely in Sri Lanka by 12,000 farmers who work tirelessly to produce top quality leaf that goes into our product. These are but a few examples of the impact and enrichment delivered by CTC and indeed we are one of the Best Corporate Citizens of this country adding value at every instance.



Q: What is the status with regard to the proposed 80 percent graphic health warnings on cigarette packaging? How does this impact CTC?
CTC is not in principle against graphic health warnings. We are in favour of informing consumers of the health risks involved with smoking and this is done via a health warning to which we are already compliant under existing regulations. There is also room for better education and communication on its harmful effects as with many other products. What we are not in favour of is excessive regulation such as the proposed 80 percent warning on the front and back of the pack face. We strongly feel that it infringes upon our intellectual property and brand communication rights – and that it is excessive, which are some of our contentions before court.
As a responsible and reputed multinational, governance is of utmost importance to us. We are always compliant with the existing laws of the land and have often moved towards self-regulation exceeding expectations by law. Our efforts with the islandwide Youth Smoking Prevention campaign to dissuade underage smoking are an example of one such initiative.



Q: How has CTC’s volumes performed over the year under review?
The volume decline we experienced during the year under review can be attributed to a mix of factors such as pressure on consumers’ disposable income, pricing and down trading to ‘beedi’ which went up in 2013, despite the decline seen over the past 10 years. We also saw unfair enforcement by certain sections of the law enforcement authorities, restricting and imposing penalties on our trade partners selling our legitimate product. In some areas of the country, our trade partners were forced to stop selling this legal product. There is a huge lack of understanding and awareness on this matter.

In addition, consumers are uncomfortable to exercise their right to smoke as permitted under the law because they may be unaware of and victimised for smoking in areas where they are permitted to do so. These factors collectively contributed immensely to our sales performance this year and we have engaged with law enforcement authorities and our trade partners to educate them on the situation. To compensate for the volume decline we took steps to increase the value of our offering while maintaining a stringent focus on quality.

CTC looked at innovative offers in our premium segment which has worked very well in the market, such as Dunhill Switch, which was the first of its kind in the South Asia Area. With Dunhill Switch we transformed smokers’ experience and the product is delivering significant value to the premium range. In the latter half of the year we introduced John Player Gold Leaf Special to meet consumer requirements for a smoother and premium product, following which we reintroduced Bristol. In doing so we created a better mix of our brands where with lower volume we can still deliver revenue to the government and the company.

To sustain our volumes, we need to be proactive and take corrective measures to prevent the growth of a massive illicit (smuggled cigarettes) market. We believe that with the expected growth in the economy and improvement in income levels, pricing will become a less significant factor.




Q: What did the CTC team do differently during this year?
During 2013, the British American Tobacco (BAT) group rolled out its new global strategy, ‘The BAT Way’. This new strategy places the consumer at the centre of everything we do. An extensive internal campaign was rolled out to align the company to The BAT Way, infusing new life to how we approach the market, our production and supply chain and even aspects such as employee safety and quality.

In order to overcome the challenges before us during the year, we chose an innovative approach under the theme ‘Bring It On’. Having divided the entire organisation into four teams, we presented a number of challenges under our strategic pillars to provide opportunity for the teams to develop innovative solutions on their own. These included aspects such as volume drive, social responsibility, sustainability and team building initiatives and the CTC team performed admirably, demonstrating the unique values which make our team a world-class unit. This is part of our people vision; to empower and to allow them to develop their own solutions and build their leadership skills, which in turn has made our people a much sought-after talent in the BAT world.

CTC has continued to export its talent to the BAT group and we are delighted to see Sri Lankan talent performing well in other parts of the world. We currently have 15 staff serving in regional markets around the globe.




Q: What are the future prospects for CTC and the local tobacco industry?
No doubt the future will not be an easy one but we are not afraid of challenges. The global anti-tobacco lobby will keep pushing their agenda, however I would like to stress that a world without a legal tobacco industry will not be what they envisage it to be.  If we look at the business, in terms of product, we now have the advent of the e-cigarette. BAT is taking the lead and investing boldly in Next-Generation Products, which include e-cigarettes, vapour products, less harmful cigarettes and more.
To pursue future innovations in tobacco products, BAT acquired CN Creative Limited, a company with e-cigarette technologies already selling products in 22 countries and set up Nicoventures Limited to commercialise licenced inhaled nicotine products. These products are already in markets like the United Kingdom and from 2014 the group will start to cascade its seeding strategy over key markets. We will bid to be one of those markets given the context of pricing and the constraints that we face here.

For the economy and industry, I tend to be very positive. Sri Lanka is growing at 7 percent, if you look at most other countries it is difficult to find that level of growth. I am therefore confident of the economic prospects of the country and the company. The strategy now is to stabilise our volumes and grow them again by 2016 with the expected growth in the tourism sector. In January 2014 we launched TaO, a programme of new process efficiencies which will make us more agile and efficient.

We have a strong portfolio of products driven by a team of dynamic and motivated professionals. Our products are world-class, encompassing the best blends and technology. Sri Lanka is doing great with the SWITCH technology which is still not found in some developed markets. When you consider all these factors I reiterate the medium-term prospects for the company are strong and that the next two years will open new doors for innovation and expansion. I look forward eagerly to this new chapter of our development.