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Dipped Products Ltd. (DPL) recorded Rs. 2,954 million as group turnover during the financial year ending March 31, 2002, a 7.5 per cent growth over the Rs. 2,749 million turnover recorded during the corresponding period of the previous year, the company's annual report for the financial year ending March 31, 2002 said.

The Group performance could be deemed as satisfactory given the disappointing performance of the plantations. The main contributor to the rise in turnover was the Manufacturing sector while Plantations showed only a marginal increase due to the fall in rubber prices, DPL Chairman Sunil Mendis said in the annual report.

The profit before tax of Rs. 225 million is a decrease of 18 per cent on the previous year's earnings of Rs. 275 million. The results from glove manufacturing were satisfactory considering the weak trading conditions in major markets. They partly offset the adverse performance of the plantations. While the depressed rubber market was the main reason for the weak results from plantations, the strike early in the year and the unfavourable weather were not helpful.

The increase in finance cost for the year is attributed to higher levels of rupee borrowing by the glove manufacturing companies to meet enhanced working capital requirements.

The manufacturing companies in the Group were eligible for tax exemption under the 'thrust industry' status granted by the Board of Investment. The tax exemption will run for 10 years. The effective tax rate has dropped from 4.7 per cent to 0.5 per cent as Kelani Valley Plantations Ltd. (KVPL) too was able to set off its tax losses.

Neoprex has declared an interim dividend of 50 per cent from its current year's earnings. Interim dividends of 60 per cent and 40 per cent were declared by Grossart and Venigros respectively. KVPL paid a first and final dividend of 7.5 per cent.

The dividends exempt from tax received from the subsidiaries were redistributed as a 15 per cent interim dividend to shareholders in March. The directors have proposed a final dividend of 20 per cent, which represents a total dividend of 35 per cent. Since the dividend is entirely earned out of tax-exempt profits and dividends received by the company, they will be free of income tax in the hands of the shareholders, the Chairman said.

"The company is hopeful of a turnround in the rubber market during the year. The plantations will be affected as much by the outcome of negotiations with trade unions due later in the year as by any rise in demand for its products. We are hopeful that these negotiations will be conducted without the pressures that have attended wage bargaining in the past," he said.

DPL Managing Director N.G. Wickremeratne in his review said the Manufacturing Division performed well during the year to contain the fall in Group profits to 18 per cent as Plantation profits more than halved.

Manufacturing turnover grew 15 per cent to Rs. 1,781 million on volumes, which while only modestly up on the previous year, represented a higher proportion of value-added products. Profits grew by 18 per cent to Rs. 185 million in comparison to Rs. 157 million achieved last year.

All glove manufacturing companies recorded increases in export volume, value and profit. Neoprex, which produces high value nitrile gloves, generated the highest growth and continued to contribute significantly to group profits. Venigros too improved its performance, benefiting from the sharing of overhead costs with the new production line at Weliweriya. The performance of Dipped Products showed some improvement over the previous year. Grossart did not live up to the expectations from the additional capacity installed but this was mainly on account of a weak order-book.

In the backdrop of softer market conditions which emerged in the wake of the economic slowdown in the developed economies, regional competitors and new manufacturers from China exerted downward pressure on prices. The Group was called upon to cut prices especially in the low-priced segment of the market to retain business. However, some balance was afforded by the export of high valued gloves which offset the decline in prices elsewhere and helped maintain foreign currency revenues.

Exports to the USA declined sharply following the events in September as the recession in North America, feared for long, became a manifest reality. This was compensated by greater market penetration in South America, Africa, Middle East and Asia. DPL exported to 13 new countries and secured several new accounts during the year. Export volumes to the UK rose by 20 per cent largely due to BM Polyco, one of the long standing distributors.

DPL was able to contain cost increases in line with or below inflation. This was despite the impact of increases in fuel and electricity prices exacerbated by the need to rely on stand-by power for extended periods. The price of latex, which remained unchanged in rupee terms, was a significant contributor in restraining costs. Despite the imposition of war risk surcharges by insurers in August 2001, better freight rates were negotiated, leading to a fall in freight cost.

A surveillance audit was conducted by the Sri Lanka Standards Institution to validate the quality system. Meanwhile work has been initiated to ensure compliance to the ISO 9000:2000 standard by 2003. Several other measures were taken to maintain quality standards specified to customers and broaden the scope of DPL products to serve wider segments of the market, the Managing Director said.

During the year, further investment was made to augment the communication network between operational locations. The Mapics ERP system was upgraded to undertake a larger volume of transactions and improve its analytical functions.

DPL will look to maintain its share in the mature markets and continue building on what has already been achieved in the Asia Pacific and Africa during this year.

A three-pronged strategy focused on low cost, high product quality and service and innovation remains in place. Involvement of employees working as teams has been fundamental to the pursuit of the strategy.

The cost reduction initiative launched in the previous year was pursued with added vigour. The cost saving alone from team-based projects may impact overall costs by as much as five per cent.

DPL believes that a sustainable leading edge could be achieved by focusing on technology, product innovation and attention to satisfying the need of the end-user. Among the new products developed was a silvery metallic 'chrome' glove for the UK and a green fluorescent glove for Italy. A range of bead rolled gloves from the new plant at Weliweriya was added to the catalogue. The industrial glove range was augmented by nitrile gauntlets.

DPL exhibited at two trade fairs in Paris and Amsterdam while its sales and technical teams participated at fairs in Dusseldorf and Atlanta. These generated firm interest followed by sales. The DPL website was upgraded and has succeeded in attracting new customers. Customer reviews indicate perceived improvements in lead times, delivery and service. These measures will strengthen the market position of the Group.

Texnil Ltd. was incorporated during the year to produce fabric-lined nitrile and other synthetic gloves at the factory premises of Palma. DPL received approval to invest seven million US dollars to manufacture medical examination gloves in Thailand, under "Promotional Status" granted by the BOI Thailand. Part of the investment amounting to US$ 770,000 has already been remitted. The project is being reviewed and will be implemented if the Group is confident of the original goals being met.

The turnover of KVPL increased marginally to Rs. 1,294 million with tea registering a three per cent increase with rubber declining by 6.5 per cent over the previous year. The pre-tax profit of Rs. 42 million was less than half the profit of Rs. 117 million earned in the earlier year.

Tea production was able to grow only marginally over the previous year while rubber production improved by five per cent, largely on account of latex bought to manufacture centrifuged latex. KVPL continued to gain from supplying field and centrifuged latex to DPL.

Cost escalations driven by rise in fuel prices, electricity tariffs and surcharge thereon and increases in both labour and staff wages affected KVPL earnings. The plantation companies lost the advantage of the productivity-related component of the wage settlement due to political intervention. However, it was the depressed rubber market, which was the single largest factor for the overall decline in profits.

In conformity with Central Environment Authority standards, effluent treatment plants were commissioned at Dewalakande and Panawatte estates during the year. The company has now in place treatment systems in all its major rubber manufacturing locations, Wickremeratne's review said.

Large scale rehabilitation and in-filling of tea fields have continued in tandem with soil conditioning programmes. Block plucking is being introduced in selected estates to improve outputs. The adoption of more flexible worker deployment practices has strengthened operations. The strategies adopted to develop the crops have shown positive results since privatisation. During the last three years, tea and rubber yields have increased by 22 per cent and seven per cent respectively when compared to a similar period before privatisation.

Grater emphasis is being given to improve the viability of the rubber plantations in the low country region. New tapping techniques have been introduced to overcome labour shortage and enhance rubber production while uprooting old rubber has been mechanised. A similar process is being pursued for other field development work.

In the tea sector, mechanised pruning will be undertaken on a larger scale while machine harvesting extents will also be expanded. Nearly half the tea extent in the Avissawella region was mechanically pruned.

Production capacity of the centrifuged latex plant has been increased by a third and the expansion of storage facilities in the current year will improve output significantly. A better year is anticipated for the boron rubber wood unit which performed modestly due to weak demand in the last quarter.

The relaxation of regulations has made it conducive for the company to expand its forestry reserves. A programme developed to harvest forestry timber will contribute towards this year's earnings. Harvesting strategies adapted to market forces will be implemented to optimise earnings.

The mini hydropower plant at Glassaugh showed an improvement in earnings against the previous year. While work is about to commence on the Battalgala mini power plant, evaluations have been undertaken on two other sites with high energy generation potential, the annual report said.

Govt. help sought for estate, smallholder sectors

The rubber industry is facing a major crisis because of the continued slump in rubber prices since 1997. The rubber output during this period is estimated to have dropped by more than 20 per cent while the current prices for rubber are at 30-year lows.

Rubber production in Sri Lanka fell from a peak of 150,000 tonnes in 1980 to 87,000 tonnes in 2000, Managing Director of Dipped Products Ltd. N.G. Wickremeratne said in the company's annual report for the financial year ending March 31, 2002.

"The estate sector is probably in even greater crisis because its cost base is higher. Estates are compelled to provide employment to plantation labour with productivity levels, which are neither comparable to the small holders in Sri Lanka nor anywhere else in the region," he said.

Kelani Valley Plantations Ltd. has lost Rs. 30-40 million from its rubber plantation in 2001 and the entire estate sector may have lost close to Rs. 300-400 million. This can hardly be sustained for much longer.

Many plantation companies are considering alternate crops such as oil palm, which could remove nearly 30,000 tonnes of domestic production. This would take the bottom out of the local rubber industry, he said.

The plantations need to implement flexible work arrangements to drive up productivity and reduce their cost. Traditional estate labour structures are not used by any regional competitors in Thailand, Indonesia and Vietnam.

The plantation industry supports more than 200,000 people while the manufacturing industry is estimated to give employment to 30,000 people. Rubber plantations have nearly the same character of a natural forest and help to absorb green house gases from the atmosphere and retain ground water. It provides fuel wood and timber and helps save the natural forest cover.

Sixty per cent of the rubber produced in Sri Lanka is now consumed domestically, much of it for value addition. The rubber products industry is one of the largest export sub-sectors of the economy.

"Even though the Government is facing budgetary constraints, it needs to put out a lifeline to both the estate and smallholder sectors during this slump. This may be through enhanced replanting subsidies and a moratorium on lease rentals being charged on rubber plantations," he said. 

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