Speech by the KTDA Board Chairman, Mr. Peter Kanyago, EBS.
OVERVIEW OF THE ECONOMY
The economy has been undergoing challenges characterised by reduced exports, reduced foreign direct investment and lower earnings from traditional top sectors such as tourism and horticulture.
Security threats against Kenya by external terror groups also negatively impacted on foreign investment inflows.
As a result of these, the Kenyan shilling weakened in 2014/15 compared to 2013/14, which was further attributed to pressure on government spending, low tourism inflows and reduced horticulture exports. Political challenges in our key markets such as Egypt, Syria and Iran also continued to negatively impact not just the tea sector, but our economy at large.
The small scale tea sub sector continues to play a crucial role in supporting our economy. During the last financial year ended 30th June, 2015, KTDA-affiliated tea farmers contributed approximately 58% of total tea production in the country.
During this period, tea injected more than Sh 100 billion to the economy, maintaining its position as the number one foreign exchange earner for the country.
GROUP FINANCIAL PERFORMANCE
During the year, the Group performed fairly well amidst a challenging business environment, characterized by erratic weather patterns, high cost of credit, energy and labour, as well as a general increase in the cost of doing business.
Despite this, I am happy to report that all the companies in the Group were able to return some profits, which in turn contributed to the overall dividend payout to the shareholders.
Dividends earned during the financial year stood at KShs 514.5million, compared to KShs 531.7 million paid out last year. The slight decline was caused by reduced profitability due to exchange losses registered on foreign currency loan obligations and reduced profit margins on the trading subsidiaries.
I wish to thank KTDA directors and staff for working hard to achieve these results and urge them to maintain this kind of work ethic.
KTDA MANAGED TEA FACTORY COMPANIES
During the year, tea production decreased by 8%, caused by erratic weather patterns and a drought in the second half of the year. As a result of lower production, made tea prices in USD increased marginally compared to the previous year.
The Kenya shilling depreciated against the US Dollar to an average rate of Kshs 98 to the Dollar from Kshs 87 in the previous year, which boosted farmers’ earnings.
Cost of production has continued to escalate due to high fuel, electricity, labour, administrative, financing and transport costs. To mitigate the rising cost of energy, we are investing in a number of small hydro electricity plants across the tea growing region, as well as exploring entry into biomass and solar energy.
In doing so, our farmers will earn more as a result of cost savings, and we shall reduce the negative impact on the environment caused by over reliance on fossil fuels.
Key costs of labour and energy will significantly reduce as we continue to explore more automation and mechanization. In particular, efforts such as the installation of continuous fermentation units, continuous withering units lower these costs without compromising on quality.
Total payment to farmers increased from Kshs 35.54 billion last year to Kshs 43.25 billion with the average payout per kilo increasing from Kshs 31.61 per Kg green leaf to Kshs 41.61 per Kg.
The proportionate payment to our farmers increased to 71% of the gross revenues earned on average, up from 69% in the previous year. This increase is as a result of improved operational efficiencies at the factories.
To address the challenge of an ageing farmer population and an emergence of ‘telephone farmers’, we have introduced farm management services to manage farms on their behalf.
I wish to applaud all directors and KTDA management for ensuring factories are run optimally, as well as encourage them to adopt new technologies that improve such efficiencies.
CLIMATE CHANGE
Climate change continues to negatively impact our production, making forecasting unpredictable. To reduce the impact of climate change, and as a demonstration of KTDA’s commitment to environmental conservation, KTDA factories have established a tree nursery in every zone, with 3 more being funded by Taylors of Harrogate – a key buyer of our teas. The 15 tree nurseries have a total capacity of 100,000 seedlings, which will be used as sources of wood fuel for factories’ own use as well as to be distributed to farmers to plant on their farms.
This year, our factories have planted more than 500,000 trees as a way of mitigating the effects of climate change. We continue to encourage our farmers to adopt sustainable farming that will improve tea yields as well as to conserve the environment.
To demonstrate how serious the world takes climate change, right now, the eyes of the world are on Paris, as the international community gathers for the United Nations Climate Change Conference (COP21), to set a global framework to address the threat of climate change.
I encourage factories to take bold steps in mitigating the effects of climate change for a more sustainable tea industry.
BUSINESS DIVERSIFICATION
Key to our business growth is diversification. Last year, I reported that KTDA was in the process of establishing a subsidiary that will fabricate tea factory machinery and to undertake maintenance of existing machinery. I am happy to report that this business – TEMEC – has now taken off and is making good quality machinery.
A number of factories have already purchased and are using TEMEC-fabricated machinery, which are cheaper to manufacture as opposed to importing already fabricated machinery. I wish to encourage factories to buy from TEMEC, because they are assured of good quality products that have been manufactured by well trained engineers. The money saved will ensure our farmers earn more from their investment.
Arising from the continued increase in energy costs, the shareholders have previously approved investments in small hydropower projects. Such an investment will not only reduce the electricity cost but will also provide an additional revenue stream for the shareholders. A number of small hydros are already being built across the country, with more being considered.
In August 2015, we broke ground for 4 SHPs – Gura, Iraru, Lower Nyamindi and North Mathioya. These sites are at different stages of construction, with Gura expected to be operational in the first quarter of 2016.
Recently, KTDA Power, in partnership with Regional Power Companies (RPCs), negotiated for a USD 55 million low-interest loan deal with the International Finance Corporation (IFC) and Proparco of France to finance a number of small hydro projects. These SHPs will significantly lower the cost of energy at our factories, as well as create an additional revenue stream for farmers.
Signing of this agreement will be done tomorrow, 3rd December at this venue.
Our other subsidiaries: Greenland Fedha Microfinance, KETEPA, Majani Insurance and Chai Trading continue to serve farmers’ and factories’ needs. This kind of vertical integration ensures all our needs are met in-house, leading to greater efficiencies and synergies across the Group.
Our new 300,000-square feet warehouses in Mombasa will increase Chai Trading Company’s storage capacity while reducing reliance on hired space. Optimization of the warehouses through racking is also being undertaken.
Our investment in Family Bank Limited remains worthwhile and the Board will continue to work with Family Bank Board in order to create synergy and unlock more value for the shareholders.
In terms of product and market diversification, we have ventured into orthodox in two new factories (Michimikuru and Itumbe), and expect to have more factories manufacturing orthodox to meet the growing demand.
We are also opening up new markets for our teas selling our teas, a testimony that our aggressive marketing efforts are beginning to bear fruit.
All these diversification initiatives are an endeavour to enhance shareholders value and will be sustained. The diversification initiatives are meant to establish more revenue opportunities for shareholders through dividend payments over and above tea sales earnings. My Board will spend more time in 2015/16 in getting the initiatives more anchored for enhanced value creation and risk mitigation.
CORPORATE SOCIAL RESPONSIBILITY
On CSR, KTDA Foundation has sponsored a total 240 bright but needy students from tea zones to advance their education in secondary school. In August 2015, these students attended the Annual Mentorship Programme where they were counseled on matters of academics, drugs and substance abuse, goal setting, stress management, self-esteem and sexuality. The first batch of these students will sit for KCSE in 2016.
DEVOLUTION
New challenges continue to emerge as a result of devolution. We shall continue engaging the County Governments to ensure cooperation for enhanced value creation to our shareholders.
GOVERNANCE
Last year, I promised that the Group will undertake a corporate governance training programme for directors. This has been fulfilled and the level of corporate governance is noticeable. I want to congratulate you for upholding good governance standards, for which we recently won a prize at the Champions of Governance Awards.
OUTLOOK
KTDA remains a farmers-organization that is committed to farmers’ needs. Lessons learned from the challenges of 2013/14 will remain useful as we endeavour to do the best for the benefit of the shareholders.
I appreciate the support given by our Board of Directors, management and staff. Factory boards and factory staff remain valuable to our performance and as KTDA’s interface with our farmers. I would like to express my sincere appreciation to all for the support and request for the same into the future.
I would like to express my sincere appreciation to all our stakeholders for their support and request for the same into the future. I wish you a merry Christmas, a prosperous 2016 and travel mercies for those travelling back to your homes.
PETER T. KANYAGO, MBS, EBS – CHAIRMAN.