Union Chemicals Lanka : Annual Report 2023

UNION CHEMICALS LANKA PLC

Notice of Meeting

NOTICE IS HEREBY GIVEN THAT the thirty sixth (36th) Annual General Meeting of Union Chemicals Lanka PLC will be held at Ceylon Chamber of Commerce, Ground Floor, West Wing Conference room, No 50, Nawam Mawatha, Colombo 02., on Monday, 10th June, 2024 at 10.30 a.m for the following purposes:

1. To receive and consider the Audited Financial Statements for the year ended 25th December, 2023 together with the Reports of the Auditors' thereon and the Annual Report for the said year.
2. To declare a Final Dividend of Rs.27 per Share for the Year Ended 25th December 2023, as recommended by Directors
3. Directors
4. 1. To re-elect, Mr. Ukwatte Liyanage Pushpakumara, Director, who retires by rotation in terms of Article 84 of the Articles of Association of the Company.
   2. To re-appoint as a Director, Mr. Soma Russel Noel De Zilwa who was 77 years on 28th January, 2024 and who vacates his office in terms of Section 210 of the Companies Act No. 7 of 2007 (the Companies Act).
      Notice is hereby given to propose the undernoted Ordinary Resolution in compliance with Section 211 of the Companies Act, in relation to his re-appointment.
      "RESOLVED THAT Mr. Soma Russel Noel De Zilwa who is 77 years of age be and is hereby re-appointed a Director of the Company and it is hereby declared that the age limit of 70 years referred to in Section 210 of the Companies Act No. 7 of 2007 shall not apply to the said Mr. Soma Russel Noel De Zilwa".
   3. To re-appoint as a Director, Mr. Henadira Appuhamilage Don Upananda Gamini Gunasekera who was 71 years on 16th February, 2024 and who vacates his office in terms of Section 210 of the Companies Act No. 7 of 2007 (the Companies Act).
      Notice is hereby given to propose the undernoted Ordinary Resolution in compliance with Section 211 of the Companies Act, in relation to his re-appointment.
      "RESOLVED THAT Mr. Henadira Appuhamilage Don Upananda Gamini Gunasekera who is 71 years of age be and is hereby re-appointed a Director of the Company and it is hereby declared that the age limit of 70 years referred to in Section 210 of the Companies Act No. 7 of 2007 shall not apply to the said Mr. Henadira Appuhamilage Don Upananda Gamini Gunasekera".
   4. To re-appoint as a Director, Dr Azeez Mohamed Mubarak who was 72 years on 04th July, 2023 and who vacates his office in terms of Section 210 of the Companies Act No. 7 of 2007 (the Companies Act).
      Notice is hereby given to propose the undernoted Ordinary Resolution in compliance with Section 211 of the Companies Act, in relation to his re-appointment.

Annual Report 2023

1

UNION CHEMICALS LANKA PLC

Notice of Meeting

"RESOLVED THAT the age limit of seventy (70) years stipulated in Section 210 of the Companies Act No.07 of 2007 (the "Companies Act") shall not be applicable to Dr Azeez Mohamed Mubarak, Director, who was at the date of this resolution 72 years of age (having reached 70 years of age on 04th July, 2021), and accordingly that the re-appointment of Dr Azeez Mohamed Mubarak as a Director of Union Chemicals Lanka PLC which had been effected by a duly passed resolution of its Board of Directors on 10th May 2024, on the basis that such re-appointment will be effective from 04th July, 2021, (subject to the approval of the Shareholders being obtained therefor), be and is hereby approved and ratified in pursuance of Sections 211 and 238 of the Companies Act effective from the said date of 04th July, 2021 being the date on which he attained 70 years of age up to the date of the Annual General Meeting; and

THAT Dr Azeez Mohamed Mubarak who is 72 years of age be and is hereby re-appointed a Director of the Company and it is hereby declared that the age limit of 70 years referred to in Section 210 of the Companies Act No. 7 of 2007 shall not apply to the said Dr Azeez Mohamed Mubarak".

1. To re-appoint the retiring Auditors Messrs. KPMG, Chartered Accountants, to hold office until the conclusion of the next Annual
   General Meeting and to authorise the Directors to determine their remuneration.
2. To authorise the Directors to determine and make donations.

(Sgd).

BY ORDER OF THE BOARD

JACEY & COMPANY

SECRETARIES

10th May 2024

Colombo

NOTE:

1. A MEMBER ENTITLED TO ATTEND AND VOTE AT THE MEETING IS ENTITLED TO APPOINT A PROXY TO ATTEND AND VOTE IN HIS/HER STEAD.
2. A PROXY NEED NOT BE A MEMBER OF THE COMPANY
3. THE COMPLETED FORM OF PROXY MUST BE DEPOSITED AT THE SECRETARIES OFFICE OF THE COMPANY AT NO.9/5, THAMBIAH AVENUE, COLOMBO 07 NOT LESS THAN 48 HOURS BEFORE THE TIME FIXED FOR THE MEETING.

2	Annual Report 2023

Chairman's Message

Dear Shareholder

I am pleased to welcome you to the 36th Annual General Meeting of the Company and present on behalf of my fellow directors the Annual Report and the Audited Financial Statements of the Company for the financial year ended 25th December 2023.

The year 2023 had a significant impact on our business as the markets and customer requirements fluctuated continuously. Geopolitical conflicts with weak economic growth, high energy costs and interest rates continue to hinder the competitiveness of local industries. Our company responded to these challenges and devised an effective business plan to ensure that our company will come out from these difficult times, as we have always done during our 36 years of existence.

Economy

Sri Lanka's economy decreased 2.3% in 2023, as the island nation struggled to overcome its worst economic crisis in decades. In March, the IMF approved Sri Lanka's request for a USD $2.9 billion bailout with a four-year program to restore the island's economic condition. While in June the Central Bank announced a domestic debt-restructuring plan, and an agreement was reached with the Paris Club.

In 2023 the agriculture sector grew 2.6% from a year earlier, but industry and services sectors decreased by 9.2% and 0.2%, respectively.

On the positive side, a stronger currency, higher remittances from the expatriates, and increased revenue from tourism during the second half of 2023 contributed to positive economic sentiment. However, implementing reforms such as higher taxes and hike in electricity tariffs reduced the disposable income of the people, affecting the local semi-luxury market, in which Union Chemicals deals.

Company Performance

Union Chemicals supplies products to approximately 600 customers in the coating industry sector in almost all the provinces of the country. In the year under review, our manufactured products aimed at the Adhesives and Coatings sector were unable to maintain the volumes of sales at the anticipated levels.

Similarly, trading business in chemicals and plastic ingredients was significantly below average. Record earnings from finance and other income partly offset the below par results from our business operations.

While modifying our production structures, among other measures, to reduce our expenses, we are also investing in low-hanging areas to sustain our business in the current economic situation.

The Company's performance is analyzed in detail in the Management Discussion and Analysis on page 4. The revenue of the Company decreased by 4% to Rs.1.61 billion compared to last year. The figures show that our cost base was managed effectively during the year to minimize the overheads. Our inventory levels and receivables were also maintained low, which enabled us to achieve a strong cash flow from operating activities.

UNION CHEMICALS LANKA PLC

Future Outlook

Sri Lanka's economy is expected to rebound in 2024, albeit below norm, following two consecutive years of contraction. With the Country's economy showing signs of stability in terms of macroeconomic and financial policies, a more favorable business environment is anticipated. While acknowledging that higher electricity tariff and income tax regime will have an impact on the consumer market, we are confident in our ability to overcome them through focused strategies and unwavering determination to emerge stronger in the coming years. In this regard, we are focusing on research and innovation to enhance our product portfolio with new and improved coating ingredients. We also plan to maintain a well- recognized management system to produce high quality products in an environmentally friendly manner.

Dividends

To demonstrate our commitment to our shareholders, we are proposing a final dividend of 27/- per share at the Annual General Meeting. This will be on top of Rs. 18/ per share that was paid as interim dividend in November 2023. The total dividend payment for the year under review will be Rs. 67.5 million.

Acknowledgement

I thank my fellow Directors on the Board for their excellent advice and support during the year. I wish to express my gratitude to the Managing Director for his visionary leadership and astute management skills that helped the company to remain afloat at a steady pace and the hardworking women and men of Union Chemicals Lanka PLC for their extraordinary efforts and commitment during a difficult and challenging year.

I would like to express my thanks to all our stakeholders, including our suppliers, particularly Dow Chemicals, our valued customers, state institutions and banks and most importantly our shareholders. Your continued support and trust in our capabilities have provided immense strength to us to overcome the challenges during the difficult period.

We are confident in our ability to cope with the challenges ahead and become a leading polymer manufacturing company for the coating industry in the country.

(Sdg).

Dr. Azeez M Mubarak

Chairman

10th May 2024

Annual Report 2023

3

UNION CHEMICALS LANKA PLC

Management Discussion and Analysis

Union Chemical Lanka PLC, is manufacturing and trading of waterborne polymer, adishive, coating and industrial chemicals to deliver excellent performance.

Majority of the key factors influencing our business are global and regional economic conditions, oil and gas exploration, shipping freights charges currency fluctuations. and international and local regulation on chemical manufacturing.

As the Company's operations involve providing a range of products a broad spectrum of customers in mainly western province, no one factor opinion, determines the Companies' financial condition or the profitability of the Company's operations.

Sri Lanka's economy displayed tentative signs of stabilisation in 2023 after the worst economic and political crisis since its independence in 1948. An severe balance of payments crisis caused lower- and middle-income Sri Lankans to pre-emptively default on foreign debt, which exceeded US$50 billion in April 2022. A crippling economic contraction, spiraling inflation, shortages of food and fuel and financial uncertainty followed. Government implemented stabilisation measures to overcome the situation.

Revenue

Rs. 1,612.8 Mn.

2022 - Rs. 1,667.7 Mn.

Company revenue includes the Company's core activity of manufacturing of latex products and trading of chemical & plastic. The major revenue contributor for the Company has become manufacturing of latex 80.7% from total revenue compared to 75.6% recorded last year.

Rs.(000)					Revenue per employee
45
40
35
30
25
20
15
10
5
-
2014	2015	2016	2017	2018	2019	2020		2021		2022	2023

Our employees make a significant contribution to Union Chemical's success. We want to attract and retain talented people for our Company and support them in their development. To do so, we cultivate a working environment that inspires and connects people. It is founded on inclusive leadership based on mutual trust, respect and dedication to excellent performance.

Rs. Mn.				Revenue
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
-					2019
2014	2015	2016	2017	2018	2020	2021	2022	2023

Goss Profit

Rs. 429.4 Mn.

2022 - Rs. 502.3 Mn.

The gross profit for the period is Rs. 429.4 Mn. against Rs. 502.3 Mn. in 2022. Gross margin of latex segment decreased marginally to 25% from 26 % comparative to last year. Marginal decrease in CIF prices in term of USD per Kg in key raw material of Butyl Acrylate and 2- Ethyl Hexyl Acrylate in Latex segment comparative to last year were reason to reduce the gross margin.

Other income

Rs. 13.0 Mn.

2022 - Rs. 5.2 Mn.

The revenue of the Company decreased by 4% to Rs. 1,612.8 Mn. from Rs. 1,667.7 Mn. The revenue from latex segment increases by 3% and chemicals & plastic segment decreased by 24% comparative to last year.

Revenue of coatings, paint and adhesive increase by 18%,2% and 3% respectively comparative to last year. Revenue of textiles, decreased by 77% respectively comparative to last year.

The performance of chemicals & plastic segment recorded a significant decrease in sales volumes comparative to last year

Other Income of the Company excluding interest income has increased to Rs. 13.0 Mn during the year from Rs. 5.2 Mn. recorded for last year. Increasing in scraps sales and rent income comparative to last year were reasons to increase the other income.

Finance Cost

Rs. 6.3 Mn.

2022 - Rs. 205.6 Mn.

Finance cost of the Company decreased by 97% to Rs. 6.3 Mn. from Rs. 205.6 Mn. recorded for last year. Significant decrease in borrowing levels of trade finance was the key factors to significant decrease in cost of finance during the year under review.

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UNION CHEMICALS LANKA PLC

Management Discussion and Analysis (Contd.)

Exchange rates (LKR Vs UDS)

Rs. 307.99

2021 - Rs. 371.78

During the year 2023, Sri Lankan rupee has appreciated against the US dollar by 17.16% during the year up to date reflecting a devaluation of LKR by the central bank by floating the exchange rate determine policy. Sri Lankan rupee has also depreciated against other major currencies during this period reflecting cross-currency movements. Appreciation of LKR resulted exchange gain of Rs 13.3 Mn. in the year under review.

The Company's total assets as at 25th December 2023 were Rs. 1,314.9 Mn and shows a marginal decrease of 2.29% from Rs. 1,345.2 Mn recoded for 2022 This is mainly due to decrease and current assets by 920.4 Mn. (5.47%) comparative to last year.

Current Assets

Rs. 920.4 Mn

2022 - Rs. 973.7

Current assets of the Company have decrease to Rs. 920.4 Mn. in 2023 compared to Rs. 973.7 Mn in 2022. Significant increase in inventories by 26.5% and trade and other receivables by 5.45% comparative to last year were the key factors.

Profit before tax

Rs. 356.9 Mn.

2022 - 222.0 Mn.

Rs.(000)								Profit
800
700
600
500
400
300
200
100
2014		2015	2016		2017	2018		2019	2020		2021	2022		2023
						Profit before taxation			Profit after taxation

The profit before tax increased to Rs. 356.9 Mn. from Rs. 222.0 Mn. it is 61% increased comparatively to the previous period. Decreasing in finance cost and increasing in finance income by 81% were the main key factors to increase profit before tax to the prior-year figure.

FINANCIAL POSITION

Total Assets

Rs. 1,314.9 Mn.

2022 - Rs. 1,345.2 Mn.

Rs. - Mn

Total Assets

1600
1400
1200
1000
800
600
400
200
2014	2015	2016	2017	2018	2019	2020	2021	2022	2023

Working capital

Rs. 754.1 Mn.

2022 - Rs. 567.8 Mn.

The net working capital of the Company shows an increase of 32.8% during the year to stand at Rs. 754.1 Mn. year under review as against previous year value of Rs. 567.8 Mn. Decreasing in loans & borrowings (100%) and trade and other payables (53.4%) significantly impacted in decreasing in working capital comparative to last year.

Net Cash flow from operating activities

Rs. 437.5 Mn.

2022 - Rs. 76.8 Mn.

Cash flows from operating activities amounted to Rs. 437.5 million, compared with Rs. 76.8 Mn. in the previous year. The increase in cash flows from operating activities was largely due to the cash received in receivables 16.0 Mn., especially in decreasing in inventory by Rs. 182.8 Mn. and payments in trade and other payable by Rs. - 120.0 Mn. decreasing in raw material cost impacted significant decreasing in inventory. Payment in advance for raw material and settlement of debts in foreign currency brought forward from previous year decrease the trade payable.

Further, the main causes of increasing in earnings significantly improve by 61% comparative to the last year resulted the cash flows from operating activities to Rs. 437.5 Mn. at adverse economic condition.

Cash flows from investing activities amounted to Rs. - 144.0Mn. in year under review, meaning that was mainly attributable to investing in treasury bills of Rs. - 125.1 Mn. and interest receive on deposits in 2023 was 24.8 Mn. It is 40.3% higher than in the previous year.

Cash flows from financing activities amounted to Rs. - 105.6 Mn., compared with Rs. - 57.7 Mn. in the previous year. particular to the net cash outflow from the change in financial and similar liabilities by Rs.-54.6 Mn. and dividend payments of Rs.- 50.9 Mn.

Free cash flow, financial resources remaining after investments increased to Rs. 326.6 Mn. compared with Rs. 23.3 Mn. in the previous year. Increase in interest income to Rs 24.8 Mn compared with Rs. 17.7 Mn. in the previous year and incasing in cash outflows from investing activities in property, plant and equipment. by Rs. - 43.8 Mn. offset such an increase in free cash during the reporting period.

Annual Report 2023

5

UNION CHEMICALS LANKA PLC

Management Discussion and Analysis (Contd.)

Net assets value per share

Rs. 740.38

2022 - Rs. 605.70

The net assets value per share of the Company increased to Rs.

740.38 as at the reporting date compared to Rs. 605.70 recorded for last year. Positive operational performance during the year under review increased the net asset value of the share by Rs. 134.64 per share.

Net Debt

Rs. 116.4 Mn.

2022 - Rs. 365.2 Mn.

Company's total net debt was Rs. 116.4 Mn as at balance sheet date, a 68.1% decreased against previous reporting period. This was primarily due to 59.0% decreasing in current liabilities during the year. The Company gearing level decreased to 10% from 40% level points in 2023.

Rs.					Net assets per share
800
700
600
500
400
300
200
100
-
										2019
2014	2015	2016	2017	2018	2020		2021	2022	2023

Capital structure

Rs. 1,110.6 Mn.

2022 - Rs.908.6 Mn.

Net assets of the Company stand at Rs. 1,110.6 Mn. as at the reporting date. No significant changes in value compared with in the previous year.

Total assets of the Company stand at Rs. 1,314.5 Mn. as at the reporting date. No significant changes in value compared with in the previous year. Assets were funded by shareholders by 84.5%, non- current liabilities by 2.8% and current liabilities by 12.6%.

We stand by our dividend policy to increase the dividend per share each year. In 2023, we again generated a strong free cash flow. We pay Rs. 67.5 Mn. as dividend year under review.

Operational Efficiency

We are pleased to report that our lost time accident rate and accident severity rate remained at zero year under review in consistent with the previous year.

Risk Management

Volatility in the global economies and challenging market conditions coupled with uncertainties in the domestic environment, we acknowledge the potential impact on our operations in the year ahead.

However, our strategic plans are designed to mitigate risks and address challenges effectively. Risk management remains integral to our processes, with thorough reviews conducted to identify and analyse potential risks to the business. Furthermore, we have aligned our systems and policies to comply with evolving regulatory requirements and have implemented effective mechanisms to ensure compliance.

Economic Environment in 2024

The year 2024 will also bring significant challenges. The high level of uncertainty will continue. The World Bank expects Sri Lanka's GDP to grow at 1.7 per cent in 2024 up from negative 3.8 per cent in 2023 and negative 7.8 per cent in 2022. But previous poverty reduction gains over past decades have been reversed, because of growth going backwards and job losses. The percentage of people living beneath the US$3.65 a day poverty line has doubled to 25% during the last two years was a significant challenge in upcoming periods.

6	Annual Report 2023

UNION CHEMICALS LANKA PLC

Board of Directors Profile

Dr. Azeez M Mubarak - Chairman

Mr. U. L. Pushpakumara

Appointed to the Board on 5th August 2013.Dr. Mubarak currently serves as a Director of the Office for Reparations (OR) and Council Member of the University of Sri Jayewardenepura and the Sri Lanka Standards Institute (SLSI). Dr. Mubarak, a Commonwealth Scholar, graduated from the University of Colombo and has a doctorate from the University of Cambridge, U.K.

Dr. Mubarak has held the posts of Director/CEO-Industrial Technology Institute (ITI), Chairman-National Science Foundation (NSF) and Chief of Research and Innovation-Sri Lanka Institute of Nanotechnology (SLINTEC). He also served on the Boards of the National Engineering Research & Development Centre (NERDC) and the Sri Lanka Accreditation Board (SLAB). Dr. Mubarak has had the distinction of functioning as the President of three apex scientific bodies in the country namely, the National Academy of Sciences, Sri Lanka (NASSL), the Sri Lanka Association for the Advancement of Science (SLAAS) and the Institute of Chemistry, Ceylon.

Dr. Mubarak also functions as a Non-Executive, Independent Director on the Boards of E. B. Creasy & Co PLC and Lankem Ceylon PLC.

Mr. H. A. D. U. G. Gunasekera - Managing Director

Appointed as the Managing Director on 01st April 2000. Holds a Master of Business Administration, Postgraduate Institute of Management, University of Sri Jayewardenepura. He is an Attorney- at-Law, LL.B (OUSL), LL.M(Col), a Fellow of Incorporated Engineers, Sri Lanka and a Fellow of Institute of Management Services (U.K). He serves as Chairman of National Cleaner Production Center, Member of the Board of Governors of Sri Lanka National Arbitration Centre, Past Chairman of Ceylon National Chamber of Industries and a Director of Lan Management Development Services (Pvt) Ltd.

Appointed to the Board on 10th July 2012. Holds a Master of Science in Operational Research from University of Moratuwa. He is a Fellow of the Institute of Chartered Accountants of Sri Lanka (FCA). He has held Financial and Management positions in Public Listed Companies in Sri Lanka and the Middle East. UL Pushpakumara has over 20 years working experience in Financial Management having worked in world largest international Companies. Presently, Mr. U. L. Pushpakumara is the investors relation officer of the Company.

Mr. K. M. Dissanayake

Appointed to the Board on 1st April 2016 Mr. Kosala M. Dissanayake is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka (FCA), Fellow Member of the Society of Certified Management Accountants of Sri Lanka (FCMA), a Fellow Member of Institute of Certified Professional Managers (FCPM), a Member of the Sri Lankan institute of Marketing (MSLIM) and also followed the General Management Program at the National University of Singapore (NUS) in 1997. Awarded for Excellence in Business Management by ICMA of SL in 2009.

Mr. Dissanayake was the Chairman/Managing Director GlaxoSmithKline Consumer Health Care.

Mr. Kosala M. Dissanayake was the Managing Director of Delmage Forsyth Company Ltd and Group Director Administration for Asiri Group of Hospitals.

Mr. R. De Zilwa

Appointed to the Board on 26th March 2008. He holds a Degree in Mechanical Engineering from the University of Ceylon, is a Fellow of the Institution of Engineers, Sri Lanka and a Fellow of the Institution of Mechanical Engineers, UK. He has been extensively involved in the research, design and development of Industrial processing equipment in Sri Lanka and overseas. He has played a major role in Sri Lanka getting international recognition for engineering academic programs and professional engineering qualifications.

Annual Report 2023

7

UNION CHEMICALS LANKA PLC

Statement of Directors' Responsibilities

Directors' Responsibilities for the Preparation of Financial Statements

This Statement of Directors' Responsibilities is to be read in conjunctions with the Auditors' Report and is made to distinguish the respective responsibilities of the Directors and of the Auditors in relation to the Financial Statements contained in this Annual Report.

The Directors of your Company are required by the Companies Act No.7 of 2007 to prepare Financial Statements which give a true and fair view of the state of affairs of the Company as at the end of the Financial Year, and of the Profit and Loss and of the Cash flows of the Company for the Financial Year.

The Directors confirm that the Financial Statements of the Company for the Year ended 25th December, 2023 presented in the Report have been prepared in accordance with the Sri Lanka Accounting Standards, and the Companies Act No.7 of 2007 and the Listing Rules of the Colombo Stock Exchange. In preparing the Financial Statements, the Directors have selected the appropriate accounting policies and have applied them consistently. Reasonable and prudent judgments and estimates have been made and applicable accounting standards have been followed and the Financial Statements have been prepared on a going concern basis.

The Directors are of the view that adequate funds and other resources are available within the Company for the Company to continue in operation for the foreseeable future.

The Directors have taken all reasonable steps expected of them to safeguard the assets of the Company and to establish appropriate systems of internal controls in order to prevent, deter and detect any fraud, misappropriation or other irregularities. The Directors have also taken all reasonable steps to ensure that the Company maintain adequate and accurate accounting books of record which reflect the transparency of transactions and provide an accurate disclosure of the Company's financial position.

As required by Section 56 (2) of the Companies Act No.7 of 2007, the Board of Directors have confirmed that the Company, based on the information available, satisfied the Solvency Test, immediately after the distribution, in accordance with Section 57 of the Companies Act No.7 of 2007, and have obtained a certificate from the Auditors when declaring the Interim Dividend paid on 09th November, 2023 The prescribed provisions will be followed and a further Certificate will be obtained from the Auditors, prior to recommending the Final Dividend of Rs. 27/- per share for the Financial Year, which is to be declared by the Shareholders at the Annual General Meeting.

The Directors are required to provide the Auditors with every opportunity to take whatever steps and undertake whatever inspection they consider appropriate for the purpose of enabling them to give their Audit Report. The Directors are of the view that they have discharged their responsibilities in this regard.

Compliance Report

The Directors confirm that, to the best of their knowledge, all taxes and levies payable by the Company and all contributions, levies and taxes payable on behalf of the employees of the Company, and all other known statutory obligations as at the balance sheet date have been paid or provided for in the Financial Statements.

(Sgd).

By Order of the Board

JACEY & COMPANY

Secretaries

Colombo

10th May 2024

8	Annual Report 2023