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MR. AELIAN GUNAWARDENE

MANAGING DIRECTOR

I would like to start my review of the year by thanking God for the blessings we have received during the year. The knowledge that his blessings are with me, gives me the fortitude to overcome all challenges however daunting they may be and the intuition to achieve all the goals I have set for myself and for my team at JAT.


We are indeed blessed to be where we are today and I believe the 2017-18 financial year, was a turning point in the evolution of JAT Holdings. 

The Company has taken its first steps towards calibrating itself in keeping with its vision for the future; an operation that spans the South Asian region and beyond.


A key change made during the year was to invest in a new talent at the highest level to drive the Company into its new destiny. When I started this Company 25 years ago, it was operated as a small family run business and was built around my values and my vision. In 2014, we made a conscious decision to divert from this family-business model to a far more corporate style of management, to prepare the Company for a higher level of growth. Based on this thinking, in 2017, for the first time in our history, we brought on board a CEO to oversee the functional aspects of the Company on a fulltime
basis. Our new CEO Nishal Ferdinando has the quintessential credentials, proficiency and experience in running business operations. Moreover, the transfer of authority over the operational aspects of the Company will result in the allocation of invaluable time for me to devote to the more strategic aspects of chartering JAT to new vistas. In this regard, my focus over the short term will be on developing new business lines and new export markets.


BUSINESS PERFORMANCE
Our turnover in the local market fell by about 12% compared to the previous year, which caused a larger 30% drop in our bottom-line. However, our
business was cushioned against serious losses because of gains from export markets, with exports growing by about 15%. This also helped in hedging
against a portion of the loss incurred due to the appreciation of the Euro.
Locally our lower performance was due to an overall lower rate of demand growth for paints and furnishings, which are the primary revenue streams of the
Group, as the construction industry, which is the main demand driver for paints and furnishings, continued to slow down as the year advanced. In addition,
on top of a shrinking and already crowded paint market, we find that there are Companies still getting in to this market creating even more competition.
Given the already highly competitive nature of the domestic paint market, the addition of another brand will continue to exert downward pressure on
margins of all manufacturers. However, mitigating this congestion in the paint market, the brush market opened up an opportunity with a leading brush
brand facing serious financial difficulty, which subsequently created an opening for our Brush Master brand to expand.

 

Although domestic interest rates remained high throughout the year, our strong internal financial discipline enabled us to negotiate probably some of the
best interest rates in the market among local companies. In fact, we have also obtained extremely advantageous rates with some of our dollar funding,
which has assisted us in diminishing some of the losses caused by sharp exchange rate fluctuations. Since we are still dependent on approximately 60%
of turnover from the local market, the fact that both the US dollar and Euro continued to appreciate created a challenging financing landscape for the
Company. Again, nevertheless, we were able to counter the unfavourable foreign exchange environment by growing our export volumes substantially.
Our subsidiaries were also negatively impacted by prevailing market conditions, more so than JAT Holdings, which is more solidly anchored due to its
longer period of existence. Our Indian operation, JAT Global, recorded a loss of Rs 45 mn and the others made marginal profits, performing below
expectations. However, we are bullish about the New Year and anticipate a turnaround in our subsidiaries to add considerable value to the bottom-line.
The silver lining in the current situation is that the slow-moving market conditions have given us the space to re-evaluate our inventories and product
strategies. We have used this opportunity to clear our shelves of all slow-moving stocks and have addressed any overstocking situations. While this
clearing operation also contributed towards a dip in incomes, I believe it will facilitate more stable outcomes in the future, because the Company is now
stocked to meet current market demand trends. The entire business model has been structured from a previous supplier driven approach towards a
demand driven platform. This approach ensures more sustainable benefits on long term basis as opposed to short term profit growth.
Laying a stronger foundation to support future growth, we devised some serious product development and value engineering with some of our prime
suppliers from Italy and Germany. In a new development, we entered into an agreement with a leading German kitchen cabinet exporter, SEA Bauformat
and have commenced importing kitchens, wardrobes and vanities from Germany and Austria. This new product line has opened up a very large market in
Sri Lanka’s growing real estate sector. Within a few months of introducing this product range to the local market, we have already captured new projects to
the tune of Rs 8 million Euros.
We also tied up with Lifewood, an Australian timber flooring company with a patented design, which is also another extremely lucrative niche market. With
this partnership, it is my intention to position JAT Holdings as the premier timber flooring company in Sri Lanka.
The aluminium and steel ceiling factory, which was acquired by JAT Holdings from Access Projects in 2017, started commercial operations in June 2017.
We have now completed moving the entire operation to the JAT Factory premises in kahathuduwa by increasing our existing factory and warehousing
space by 8,000 sq. feet. We now have a manufacturing cluster within our own premises, which allows us a higher degree of flexibility in responding to
market needs, while generating cost efficiencies and better oversight facilities over cross-cutting operations.

SUSTAINABLE GROWTH MODEL
As we grow our business and expand into new sectors, I believe it is vital to ensure our growth will be environmentally and socially sustainable. This is
the business ethic that I, as the founder of this Company, desire for the JAT Group. It is my firm belief that by God, our moral obligation is to protect our
country and environment. Hence our business models and achievements must incorporate a social conscience.
In order to move forward with this sustainable growth model, we have already established a new division entrusted with inculcating sustainable business
concepts and practices into the functional aspects of the business. Please refer to the Sustainability Report for information regarding these achievements
during the year under review.
OUR FUTURE OUTLOOK
I believe the outlook for JAT Holdings is extremely favourable, both in Sri Lanka and in our export destinations and the current downturn will be reversed within the next financial year. In spite of the economic downturn in Sri Lanka during the 2017-18 financial year, many major real estate projects are being realised, although at a slower pace than originally anticipated. These projects provide many growth opportunities for the future, as JAT Holdings is now geared to win extremely competitive contracts.
While we will continue to expand our operations in Sri Lanka, a key growth focus will be outside the country. We are looking strategically to grow exports,
as this is the only way to overcome domestic market risks, while capitalising on opportunities in neighbouring countries. In fact, we are looking beyond the
SAARC region to countries such as Myanmar, particularly in respect to our finishing business lines.
With Bangladesh and Maldives growing steadily we have put renewed efforts into India and Pakistan and we can expect improvements in the new financial
year. The Indian market has always been difficult to penetrate but we are strategically addressing these challenges and I am confident we can gain some
ground in India in the new financial year.
In Sri Lanka, we will maintain growth momentum by introducing innovations and new products to the market. In fact, this has been the mark of JAT
Holdings from its inception. We have led the way in pioneering new concepts and have guided local customers to new, more efficient solutions. We have
moved the market from polyurethane to polyester finishes, given consumers access to superior interior décor from German Kitchens and the latest design
and quality options for flooring, as opposed to traditional flooring options.
I believe contemporary, western furniture is an unmet need in the local market. We will step in and address this gap in the new financial year, by opening
a mega mall featuring the latest in high quality international furniture designs for the retail sector that will be ideal for apartment living. Sri Lanka is
experiencing a rapid shift in lifestyles with apartments replacing traditional homes in urban centres across the country. These modern structure require high
quality, western furnishings. We also plan to expand our current furnishing portfolio from kitchens, to office spaces, to cater to the furnishing requirements
of all modern living spaces.

Factory capacity enhancements and upgrades will be a vital sector of resource allocation to accommodate growth plans both locally and in export
markets. During the current financial year, we increased our warehousing space by about 30%; a practice we will continue to do. In addition, we
effected numerous improvements to internal systems, from automation in filling and packing, to workflows, to a Sales Force Automation system to boost
efficiencies and quality. We will continually evaluate and introduce improvements to our systems and process. We are also looking at a leaner organisation,
driven by a smaller, but more professional team, backed by more productive systems, which would reduce our workforce by about 25% over the next 2
years.


With our backend operations aligning with our forward vision, I am upbeat about our returns for the new financial year. We have targeted a 40% increase
in turnover and profits for the financial year 2018-19, compared to 2017-18. The main area of growth as we anticipate, will be from our project portfolio,
as we had already locked-in over 50% of the targeted revenues from this sector within the first quarter of 2018. Some big-name clients include, the Ritz
Carlton, the J W Marriott and the third Commercial Tower under The One project. These landmark developments have selected JAT to be their preferred
supplier covering all JAT products, from paints to wardrobes to flooring, to aluminium foam work, self climbing frames and other components. These
orders will translate into revenues of around Rs 4 Billion within the next 2 to 3 years. Our shareholders and other stakeholders will benefit from these
growth opportunities in the new future.
I would like to conclude by thanking the senior team for their indefatigable efforts at gearing the Company for its next phase of growth, our suppliers for
being exceptional partners, our bankers for supporting us with economical funding assistance when needed, and as always our loyal customers for their
continued patronage. I look forward to another year of mutual cooperation and benefits in 2018-19.
Sincerely

Aelian Gunawardene
30th May 2018