John Keells : Interim Financial Statements as @ 30th September 2022

• Group EBITDA recorded a notable improvement to Rs.9.29 billion during the quarter under review, which is an increase of 45 per cent against the comparative period of last year [2021/22 Q2: Rs.6.41 billion], demonstrating the strong underlying cash operational performance of the Group.
• While the second quarter of the previous year was partially disrupted on account of the lockdowns due to the pandemic, the overall operating indicators in most businesses demonstrated activity at pre-pandemic levels.
• With the exception of the Property industry group, the Group's businesses recorded strong growth in EBITDA, compared to the second quarter of the previous year, on the back of a continued recovery momentum.
• Group PBT recorded a decline of 10 per cent to Rs.2.56 billion in the quarter under review, mainly on account of the second quarter of the previous year including revenue and profit recognition from the handover of the residential apartment units at 'Cinnamon Life', and the higher finance expenses due to the significant increase
  in interest rates on working capital facilities, particularly in the Leisure and Retail industry groups. Further, the PBT of the Holding Company was impacted by the translation impact of the IFC loan interest payment and the notional non-cash interest charged on the convertible debentures issued to HWIC Asia Fund (HWIC) in August 2022, in line with the accounting treatment, due to significant difference between the market interest rates and the three per cent interest accrued on the instrument.
• In August 2022, the Government gazetted regulations under the Casino Business (Regulation) Act of 2010 to formalise the process of issuing of licences and monitoring of operations for casinos in Sri Lanka. With the regularising of Gaming, the Group will proceed with finalising arrangements with prospective gaming operators to operate at 'Cinnamon Life'. Similar to the experience with Integrated Resorts in other Asian countries, 'Cinnamon Life' has the potential to transform Colombo as a destination for leisure and entertainment and lead to significant foreign exchange earnings for the country.
• The profitability of the Transportation industry group recorded an increase driven by the Group's Bunkering business, which recorded higher margins, and the Group's Ports and Shipping business, where both businesses benefitted from the translation impact due to the depreciation of the Rupee against the previous year.

• The Leisure industry group recorded a continued turnaround in performance primarily driven by the Maldivian Resorts segment, supported by higher occupancy.
• The Consumer Foods industry group continued its recovery momentum with the Beverages and Frozen Confectionery businesses recording growth in volumes.
• The performance of the Supermarket business was driven by a growth in same store sales through a combination of higher basket values on account of inflation and an increase in customer footfall.
• The Property industry group recorded a decline in profitability as the second quarter of the previous year included revenue and profit recognition from the handover of the residential apartment units at 'Cinnamon Life'. The recognition of revenue of all units sold at 'Cinnamon Life' up to 31 March 2022 was recorded across 2021/22.
• The Insurance business recorded a growth in gross written premiums whilst Nations Trust Bank PLC recorded an increase in net interest margins and a reduction in costs.
• As announced to the Colombo Stock Exchange, the Company concluded the issuance of an unlisted, unsecured, LKR denominated convertible debentures amounting to Rs.27.06 billion, through a private placement to HWIC, a subsidiary of Fairfax, Canada. The coupon interest payable on the debenture is at three per cent per annum.
• In a significant step towards strengthening Diversity, Equity, and Inclusion (DE&I), the Group introduced an equal one hundred days of maternity and paternity days as parental leave at the birth or adoption of a child.
• In light of the current socio-economic crisis in Sri Lanka and hardships faced by people in the country, the Group initiated a multi-pronged crisis response programme in selected communities to address the areas of food security and the education of children and youth.
• The Group's carbon footprint per million rupees of revenue decreased by 29 per cent to 0.37 MT while the water withdrawal per million rupees of revenue decreased by 36 per cent to 7.10 cubic meters.

The Group reported a strong performance during the quarter, notwithstanding the challenging operating environment, with all businesses, except for the Property industry group, recording an increase in profitability, particularly the Transportation businesses and the continued significant turnaround in the Leisure businesses driven by the Maldivian Resorts segment.

It should be noted that the comparative performance with the corresponding quarter in the previous year is impacted by business disruptions on account of the imposition of island-wide travel restrictions from mid-August till end September 2021 due to the spread of highly transmissible Delta variant of the COVID-19 pandemic.

It was encouraging to witness a quarter of operations with day-to-day consumer and business activity reverting to levels of normalcy from late July 2022 onwards, supported by political and social stability and less disruptions on account of the macro-economic challenges.

The appointment of a new President in July 2022 and the subsequent appointment of a Prime Minister and Cabinet has resulted in a degree of political stability while many of the shortages of essential commodity items have been largely resolved enabling a resumption of normal activities. The Government has announced several significant policy actions and reforms, aimed towards achieving a path of fiscal consolidation and reaching sustainable debt levels, with some initiatives already implemented during the quarter under review. In September 2022, Sri Lanka reached a staff level agreement on an Extended Fund Facility arrangement of USD

2.90 billion with the International Monetary Fund (IMF), with expectations of a final IMF board approval by end 2022 or early 2023. Further, significant increases in both direct and indirect tax rates were announced with the intention of increasing Government

tax revenue to approximately 15 per cent from 8.5 per cent of gross domestic product. Similar to the market reflective pricing mechanism for fuel and cooking gas which has been in place for a few months, the Government also announced upward revisions to electricity tariffs which will reduce the cost of subsidies to the Government.

The fuel rationing scheme implemented in July 2022, where a national fuel pass was introduced to provide a guaranteed allocation of a fuel quota on a weekly basis has been successful in ensuring an equitable and consistent distribution across the country. This has resulted in confidence surrounding the supplies, thereby ensuring the ability for people to plan and carry out their normal activities. The reduction in consumption of fuel due to these actions, together with the drop in global fuel and commodity prices has created some space in terms of the import requirements of the country. As a result, the foreign exchange liquidity position in the country witnessed an improvement from the peak stresses witnessed in the first quarter. The significant supply chain disruptions and acute shortages of essential items which were witnessed in the first quarter have improved to a large extent with business operations witnessing less disruptions as a result.

The severe pressures on the domestic macro-economy as a result of these external pressures have now eased somewhat and will be a positive heading into the ensuing quarter. While many fiscal tax consolidation measures have been announced and partly implemented, the impact of these measures on consumer disposable incomes and spend is yet to be fully seen.

Whilst we note the positive progress made thus far in implementing the reforms and initiatives, and understand these are much required in terms of fiscal consolidation to help overcome this financial crisis, we urge

the authorities to give due consideration to ensuring tax measures are implemented with a view to striking a balance between economic stability and growth, which can, in turn, affect revenue targets if the base levels of activity are impacted significantly. While revenue enhancing measures are required, Government expenditure should also be optimised to drive economic recovery in a sustained manner.

We are optimistic that Sri Lanka is on a path to recovery, and appreciate the authorities undertaking difficult, yet necessary, corrective measures to revive the economy to overcome the worst economic crisis faced by the country. We urge the authorities to expedite the implementation of much needed public sector reforms,

as done by countries when faced with similar challenges in the past, to address the structural and governance issues of the economy to achieve long-term sustainable growth and emerge from this crisis stronger.

Issue of Unlisted Convertible

Debentures

As announced to the Colombo Stock Exchange in August 2022, the Company received the funds and concluded the issuance of convertible debentures amounting to Rs.27.06 billion, by way of a private placement of LKR denominated securities to HWIC Asia Fund (HWIC), a subsidiary of Fairfax Financial Holdings Limited, Canada. 208,125,000 Sri Lankan Rupee denominated unrated, unlisted, unsecured convertible debentures were issued to HWIC at an issue price of Rs.130 per debenture. The debentures have a maturity period of three years and will accrue interest at a rate of three per cent per annum. The date of maturity of the debentures is 12 August 2025 with HWIC having the option to convert each debenture to one new ordinary share of the Company during the conversion period from 12 February 2024 to 12 August 2025.

Group Performance - Q2 2022/23

Group revenue at Rs.69.06 billion for the quarter under review is an increase of 40 per cent against the comparative period of last year [2021/22 Q2: Rs.49.27 billion].

Cumulative Group revenue for the first half of the year under review at Rs.140.58 billion is an increase of 60 per cent against the revenue of Rs.88.07 billion recorded in the corresponding period of the financial year 2021/22.

Group earnings before interest expense, tax, depreciation and amortisation (EBITDA) at Rs.9.29 billion in the second quarter of the financial year 2022/23 is a 45 per cent increase against Group EBITDA of Rs.6.41 billion recorded in the previous financial year. Cumulative Group EBITDA for the first half of the financial year 2022/23 at Rs.22.63 billion is an increase of 103 per cent against the EBITDA of Rs.11.17 billion recorded in the same period of financial year 2021/22.

Group profit before tax (PBT) at Rs.2.56 billion in the quarter under review is a

10 per cent decrease against the Rs. 2.83 billion recorded in the second quarter of 2021/22. The decline in PBT is mainly on account of the second quarter of the previous year including revenue and profit recognition from the handover of the residential apartment units at 'Cinnamon Life' and the higher finance expenses due to the significant increase in interest rates on working capital facilities, particularly in the Leisure and Retail industry groups. The increase in working capital in Retail is largely temporary on account of the investments to ensure continuation of supplies and minimise disruptions. The improvement of supply chains will now enable the businesses to gradually revert to more normalised levels of working capital. Further, the PBT of the Holding Company was impacted by the translation impact of the IFC loan interest payment and the notional non-cash interest charged on the

convertible debentures issued to HWIC in August 2022, in line with the accounting treatment, due to significant difference between the market interest rates and the three per cent interest accrued on the instrument. Cumulative PBT for the first half of the financial year 2022/23 at Rs.17.37 billion is an increase against the PBT of Rs.4.14 billion recorded in the comparative period of the previous financial year.

Profit attributable to equity holders of the parent at Rs.1.60 billion in the quarter under review is a decrease of 44 per cent against the comparative quarter [2021/22 Q2: Rs.2.86 billion]. On a cumulative basis, profit attributable to equity holders of the parent is Rs.12.88 billion compared to Rs.4.40 billion in the comparative period.

Company PBT for the second quarter of 2022/23 at Rs.3.62 billion is a 248 per cent increase against the Rs.1.04 billion recorded in the corresponding period of 2021/22, mainly as a result of an increase in dividend inflows to the Holding Company due to the timing of dividend receipts. Company PBT for the first half of the financial year 2022/23 at Rs.14.92 billion is a 410 per cent increase against the corresponding period of 2021/22.

Transportation

The Transportation industry group EBITDA at Rs.3.03 billion in the second quarter

of 2022/23 is an increase of 153 per cent against the EBITDA of the comparative period [2021/22 Q2: Rs.1.20 billion]. The significant increase in profitability is mainly attributable to the strong performance of the Group's Ports and Shipping business, South Asia Gateway Terminals (SAGT), and the Group's Bunkering business, Lanka Marine Services (LMS). The profitability at SAGT recorded an increase supported by higher revenue from ancillary operations and the benefit of the depreciation of the Rupee against the previous year. Despite

a decline in market volumes and global fuel oil prices, LMS recorded an increase in profitability driven by higher margins and the translation impact due to the depreciation of the Rupee.

The groundwork on the West Container Terminal (WCT-1) at the Port of Colombo is progressing well, where the contracts for the dredging and reclamation works for the project and the construction of the quay walls were awarded during the quarter. The dredging work has commenced while overall timelines for the project remain as originally envisaged.

Consumer Foods

The Consumer Foods industry group EBITDA at Rs.1.01 billion in the second quarter of 2022/23 is an increase of 68 per cent against the corresponding quarter of the previous year [2021/22 Q2: Rs.600 million]. The increase in EBITDA is mainly attributable to the performance of the Beverages and Frozen Confectionery businesses which witnessed growth in volumes during the quarter despite the disruptions to distribution in the first few weeks of July 2022. The volumes in Frozen Confectionery were driven by a significant increase in the Impulse segment.

Similar to the previous quarter, the margins of the businesses continued to be under pressure due to the significant raw material and input cost increases. The profitability during the quarter was supported, to an extent, by the recouping of eroding margins through price increases, together with the benefit of operating leverage on account of the growth in volumes and forward buying of raw materials.

With many global raw material prices coming off its peak together with declining freight costs, the gradual easing of the country's foreign exchange liquidity position and the improved raw material availability, the pressure on margins is