Despite challenges, CTC expects to sustain strong PERFORMANCE

Despite the many challenges faced, Ceylon Tobacco Company PLC (CTC) has continued to reinforce its position on the Colombo Stock Exchange (CSE) by adopting forward thinking and sustainable processes that have contributed towards creating wealth and value across all spheres of the Sri Lankan economy. CTC Chief Executive Officer and Managing Director Michael Koest provided a candid overview of the current market conditions and corresponding opportunities and challenges faced by the industry within which the company operates today. 
Following are the excerpts of the interview:

What are the key milestones achieved during the first six months of 2016? 
I am very proud of the long list of achievements, but let me highlight a few. Firstly, it is CTC’s outstanding contribution to the Sri Lankan economy. Secondly, the implementation of the regulatory changes that took place during the past 18 months. Last but not least, the international recognition received by our top-notch corporate social responsibility (CSR) programme, the Sustainable Agriculture Development Programme (SADP), for rural development over a period of 10 years. These achievements didn’t come easily; on the contrary, we accomplished them in the face of mounting challenges. 2016 is the continuation of the success story and prevailing despite ever increasing challenges.

Let me first briefly summarise our contribution to the Sri Lankan economy. During the six months ending June 30, 2016, CTC has contributed Rs.49 billion in the form of excise tax, corporate tax and other levies, to the exchequer. This is an increase of 12 percent over the same period last year. Incidentally, we have been able to sustain revenue growth for the government in the past 10 years with double-digit growth rates. In addition, our achievements are not restricted to financial contribution alone; they span across having widely recognized business best practices, 4,200 happy shareholders and a constant effort to keep injecting value to our wider stakeholders.
Relating to the community and the wider stakeholders, I am proud to note that CTC’s operations in Sri Lanka support over 180,000 livelihoods. The company has injected over Rs.8 billion to the local economy in 2015, namely to farmers, retailers, distributors, partners and suppliers. Furthermore, more than 20,000 farmers, islandwide, are reliant on CTC to enhance their lives and economic threshold. With a guaranteed per kilo price of Rs.400 and the purchase of the entire production, a tobacco farmer is guaranteed a good income for his efforts. 

The second achievement was the implementation of regulatory changes. We have transitioned our packaging to ensure compliance with the graphic health warning (GHW) requirement with no disruption to our operations, no material waste, 100 percent islandwide market compliance in a record time and no impact to our volume. Our industry welcomes balanced, fair and evidence-based regulations and we fully recognize the need to inform the smokers about the health risks associated with smoking. 

When it comes to excessive regulation though, the expected benefits rarely become reality. For example, in Australia, three years after implementing plain packaging, we have seen no deviation from historic smoking rate trends. There has, however, been a significant increase in the size of the illegal tobacco market – the criminals behind this illegal trade are now profiting at the expense of Australian taxpayers, with the government losing around AUS $ 1.42 billion in tax revenue annually.

The Australian initiative is neither helping public health, nor state revenue. We believe that strict enforcement of the existing laws like the prohibition to sell tobacco to people below the age of 21 and running youth anti-smoking campaigns are more effective measures to enhance public health. 

CTC’s success in implementing GHW with no disruption shows our resilience as a business, resonating our inimitable spirit and penchant for excellence, values that have been the backbone of our success for over a century. 
The final achievement I would like to highlight is SADP, our flagship CSR project, which allows over 18,000 participating beneficiary families to rise above poverty. By the way, this initiative has been recognized on global award platforms such as at the recently held Asia Responsible Entrepreneurship Award (AREA) from Enterprise Asia. We consider this to be a productive contribution towards national development and we proudly play a considerable role in the development of social infrastructure. 

What is your view/outlook on the tobacco industry in Sri Lanka?
Let’s start by defining the tobacco industry in Sri Lanka, which consists of cigarettes (55 percent), beedi (43 percent) and illegal or smuggled cigarettes (2 percent). The market dynamic is very simple. Over the last decade, total smoking has increased with declining cigarette volumes and growing beedi, while smuggled products have remained stable. I must compliment the Customs and Excise Departments, as well as other law enforcement agencies for their fight against smugglers, which has helped keep the illegal cigarette market in check. 

The legal cigarette industry, while being highly regulated and heavily taxed, is also the only contributor to government revenue. This means that as cigarettes get more expensive, people switch to cheaper alternatives such as beedi or smuggled products, which in turn results in no health benefits and no revenue to the government.

Our outlook is that CTC will continue to be hit with regulations like nobody else. As a legal industry selling a legal product, we feel we are treated in an unfair manner and therefore, we will continue to call for the creation of a level playing field, driving for parity in regulation and taxation for beedi. This is much required because CTC’s mission is to continue driving sustainable value injection into the Sri Lankan economy.

Could you elaborate on a few growth prospects for CTC?
One area we are looking at is to invest in exporting cigarettes that are 100 percent made in Sri Lanka, as well as tobacco leaf to operating companies within the British American Tobacco (BAT) group.
Secondly, given that the beedi market accounts for 43 percent of the tobacco industry, there is a great business opportunity for CTC to play in this market. We have all the necessary facilities and technology in place to launch a better version of beedi, which will be machine-made and sold at a very competitive price. 

We will also continue to focus on product innovations and value generation as we have successfully done in the past. 

How do you intend to capitalize on these growth opportunities? 
With BAT operating for over a century in 180 countries, CTC as part of the group has every expertise to operate with incredible agility and capitalise on any opportunity. The employee dynamism we find in CTC is fairly unique. We have a new top team as well as young and driven employees with world-class skills. With our expertise and our people, we have all ingredients to continue to be one of the most valuable enterprises in Sri Lanka. 

What is the company’s view on the regulatory changes and their impact on the overall operations? 
No doubt the tobacco industry is the most regulated in the world. The global anti-tobacco lobby will keep pushing their agenda to keep increasing regulations. However, we must be mindful that a world without a legal tobacco industry is not what they envisage it to be.

CTC has never been against regulations. What we are not in favour of is excessive or unfair regulations targeting solely the legal tobacco industry. As a responsible and reputed multinational, with strict governance and compliance standards, we will always comply with the existing laws of the land, quite often going beyond the requirements imposed by law through strict, self-imposed codes of conduct.
For the local law enforcers, I would like to point out that the only way to see results from regulations imposed is if they are applicable across the industry, providing a level playing field for all its players.

In your opinion, what challenges do you anticipate in the industry you operate in? 
The biggest obstacles are the ad hoc regulations imposed, as highlighted previously. Other factors are linked to the external environment, such as crop failures due to natural disasters, which would operationally affect the company and its business. Regulations though remain the most prominent obstacle. Since we source all raw materials locally, we can only inject more value to the economy provided we secure our right to grow tobacco and manufacture and sell cigarettes. 

What is your assessment on the readiness of your organisation to meet these challenges?
In over 100 years of successful operations in Sri Lanka, our commitment to the national economy has become progressively prominent over the years. 

The company considers corporate governance as an uncompromising quest for both internal and external stakeholders alike. Accordingly, we have demonstrated our responsibility and sincerity of purpose by advocating our own voluntary code of conduct and other ethical standards in addition to complying with regulations in the midst of immense challenges. 

A very disheartening aspect is that despite operating in a legal industry as a legal company, in most instances, the company is deprived of due recognition because of the industry we operate in. 
Thankfully, we are a company that succeeds in the face of challenges and are therefore not afraid to embrace whatever the future may hold with utmost passion in true CTC spirit. This is the cornerstone of our success.

What efforts and initiatives are you taking to drive shareholder value? 
CTC will continue to deliver strong shareholder returns. Our commitment is to strategically deploy sustainable investments throughout the entire value chain from ‘seed to smoke’. 
Moreover, we will continue to strengthen our portfolio propelled by innovations. We will continue to lead in governance, transparency, risk management and business ethics. Finally we will continue to fight for our right to operate by enhancing our mutually-beneficial and economically sustainable long-term relationships with all stakeholders. 

How has listing on the CSE been beneficial to your company? 
It is indeed an honour to consistently deliver strong results and play in the top of the league in Sri Lanka feting us amongst the top companies on the CSE. Our relationship with the CSE is long-standing and has been growing for over 60 years. 

Our main benefit is access to a broad variety of shareholders. We are excited to continue our journey in the years to come.