Ceylon Tea Services PLC (CTC), owners of Sri Lanka’s best known Dilmah brand of 100% Pure Ceylon Tea, had taken a hard blow from the steep fall in value of the Australian dollar between August 2008 and March 2009 having a serious impact on profitability.

While the group marginally increased turnover by 1.8% to Rs.4.4 billion, its profit after-tax was down 54.7% to Rs.487.1 million from nearly 1.1 billion the previous year.

"But for this reversal, profits would have matched the previous year’s level," Mr. Merrill J. Fernando, the company’s chairman said.

"During the second half of the year, the slowdown in the economy impacted on sales turnover, reversing the growth trend of past years."

Fernando said that the Australian dollar dropped from 0.98 cents to the USD to 0.64 cents between Aug. 2008 and Mar. 2009.

In January this year CTS paid its highest ever annual dividend of Rs.25 per share as an interim payment. But given the second half downturn, Fernando said that the company’s directors were not recommending a final dividend.

Despite the challenges which the company faced during the second half, CTS sustained investment in advertising and promotion to maintain their brand image and awareness at previous high levels and prevent loyal consumers from drifting to cheaper brands during the economic downturn.

"As the only glo3al brand name marketing 100% Pure Ceylon Tea, in a flood of mass market commodity tea brands, DILMAH is now, subject to numerous hardships," Fernando reported.

He noted that today auction prices of Ceylon tea are at highest levels ever known in the history of the industry. This trend is not shared by most other tea growing nations making it almost impossible to raise prices to retailers.

"In fact, some major brands exploit this situation by discounting their prices heavily, seeking to make things difficult for us by widening the price gap between their brands and Dilmah," Fernando said.

"You can gauge the challenge we face from the single factor that at present prices of Ceylon tea are more than a dollar per kilo higher than those of our nearest competitor."

He made the point that he had over the years repeatedly urged when the CIS countries such as Russia and Ukraine became major buyers of Ceylon Tea, that exporters should develop their own brands and refrain from assisting importers to build their brands ``which eventually become our biggest competitors.’’

"This is exactly what has happened now. Very large blending and packing facilities have been opened in Russia over the past few years by the very same importers whose brand names were supported by our exporters," he complained.

"Their `Pure Ceylon’ tea packs are anything but that, with only an ever diminishing proportion of Ceylon tea included!"

Fernando warned that if auction prices remain at current levels, CIS nations will go exactly the same way as others did and Ceylon tea prices may begin to tumble.

Ironically, some Lankan exporters have also set up branding and packaging facilities in Russia to take advantage of current market opportunities in a move that could well compromise the quality image and price levels of Ceylon Tea supplied by exporters from Sri Lanka, Fernando said.

He warned that this development may encourage other Lankan tea traders to walk the same road "perhaps making direct value added exports impossible."

"We need a strategy supported by incentives for developing value addition to tea that will benefit Sri Lankan owned brands, as opposed to developing and supporting competitor brands," he stressed.

Discussing the country’s tea plantations, Fernando said they were a fully sustainable industry but it was urgent to take meaningful and practical steps towards directing and guiding this industry before its enormous potential benefits disappear.

He advocated that a government assisted policy, working in step with proven achievers, is evolved, targeting rehabilitating and redirecting the entire plantation industry.

"The tea industry has survived in a culture of self protection, assuming no collective responsibility for itself. Different segments of the industry pursue their own agenda, rather than a common agenda for the development of the industry as a whole," Fernando said.

"Regional Plantation Companies, smallholders, brokers, exporters and transporters are all equal partners in the industry and must be made to understand their responsibilities for working together for the common good."

Fernando concluded his review in the CTS annual report saying that the company had given its original shareholders a remarkable return on investment. Since the company was launched 20 years ago, an initial investment of Rs.10,000 on 1,000 shares had delivered over Rs.1.9 million in dividends alone up to March 31, 2009. The current market value of that relatively small investment today stood at an impressive Rs.5.4 million.

CTS has a stated capital of Rs.200 million, reserves of Rs.1.9 billion and retained earnings of slightly over Rs.2 billion in its books with only very modest borrowings of Rs.2.3 million.

The company, through the MJF Charitable Foundation, does extensive work in a Small Entrepreneur Program helping to set up individual businesses that have helped their owners to sustain themselves and their families with dignity in a sense of optimism for the future.

The Foundation’s activities, concentrated in the rural hinterland, range from an ice flake plant in Kalametiya and Welipatanwila to help fishermen preserve their catch, supporting the Deaf & Blind School at Moneragala, tsunami housing and even funding an estate worker’s son through the Medical College.

MJF Teas (Pvt) Ltd. with 65.38% and MJF Exports (Pvt) Ltd. with 21.28% are the major shareholders of the company in which a foreign fund, BBH Genesis Smaller Companies, owns 7.25%. All other shareholders individually own less than one percent of the company.