Business Page – June 4, 2000

On the Line: Demerara Distillers Limited – Annual Report 1999

Introduction

 As part of its commitment to inform the public of financial issues in Guyana Business Page reviews the Annual Reports of public companies as they become available. As a matter of policy the review is done after the Report has been presented to the members at the Annual General Meeting and addresses only information made available to the public.

Today, Business Page reviews the Annual Report of Demerara Distillers Limited, one of the country’s leading public companies with its shareholding fairly widespread. This is unlike Demtoco, NBIC and GBTI whose shares are publicly tradable but which each has a significant shareholder with a controlling interest. The Report was presented to the members of the company on May 31, 2000 at the National Cultural Centre.

The Company

  DDL is both an operating as well as a group parent company i.e. it has a controlling interest in other companies. There are eight wholly owned subsidiaries, one that is 95% owned and one in which it has a 40% stake. Four of these companies are overseas based,    two in the Caribbean and two in Europe. The company also has interlocking directorships with the hugely successful Demerara Bank Limited and GA 2000 of which the indefatigable Mr. Yesu Persaud is also Chairman.

The activities of the companies include rum manufacturing, shipping, construction, food processing and distribution. Unfortunately the Report does not present information on these companies in a comprehensive or consistent manner to allow for a proper evaluation of their performance. By way of example the Chairman’s Report in discussing the performance of the subsidiaries included such comments as:

  • Topco:    Sales grew by 76%. No comment on profit or profitability

  • Demerara Shipping: Pre-tax profit was $82.9M, a decline of 19.6% with no comment on sales.

  • Distribution Services Limited: “DSL had a satisfactory year and improved its profit before tax by 19.6% on the previous year.” No indication of the dollar value of the pre-tax profit or sales.

  • CSR (St. Kitts) Limited: “The company made a marginal profit.” What this means is patently unclear.

  • Superior Distribution Limited (Trinidad): ‘The company is expected to make a profit at the end of 2000” Does this mean for the year or that it will move into profitability by the end of the year?  Accounting language must be more precise so as not to lead to different interpretation.

  • European Subsidiaries: “The pre-tax profit for the year was $46.2M compared with $115.2M” Again no mention of sales volume or value.

This imprecise presentation may have been deliberate to avoid apparent repetition but its consequences with regard to information content seem to be much worse. The company is not only a business leader but has three of the country’s top accountants as Executive Directors. The contents of the Annual Report can and indeed should be improved.

Financial Highlights

In this review we focus on the Company rather than the Group since we do not consider that the Report provides sufficient information to allow any intelligent review of the Group.

The Chairman Mr. Yesu Persaud in his Report indicated that the performance of the company was affected by the 8 week strike by public service workers including customs officers which effectively prevented shipments from entering and leaving Guyana.  He also referred to the negative impact of low commodity prices and the weakness of the Euro on European exports. In order to achieve significant savings on overhead costs it was decided to combine Distilleries operations in one location at Diamond. Below are some of the financial highlights of the company:

Financial Statement Snapshot

1999 1998 % Change

Total Assets

5,532,467 5,058,430 +9
Total Liabilities 1,287,440 1,269,770 +14
Deferred Tax 118,287 112,729 +5
Shareholders’ Funds  4,126,740 3,675,931 +12
Net Income before Taxation 887,356 862,505 +3
Net Income after Tax 624,059 513,669 +21
Earnings per Share (in Dollars) 1.62 1.33 +22
After tax return on shareholders’ fund 15.12% 11.25% +34
Return on Gross Assets after 11.28% 10.15% +11

Profitability

Total revenues increased by 16%, from G$4.93Bn in 1998 to G$5.0Bn. or 1.6%. Given the difficult circumstances in the Chairman’s report the results are understandable even though if inflation is taken into account there is a real decline in the turnover.

Income before taxation and interest increased from 18.4% of turnover in 1998 to 19.3% in 1999 but net interest cost increased from $45M to $80M with the result that net profit before tax increased only marginally from 17.5% to 17.7%. The tax charge declined from $349M. to $262M. or from an effective rate of 40.5% to 29.7%. As Note 5 indicates the major change is in relation to Deferred Taxation, a form of tax equalisation, which had a charge of only $5.6M. in 1999 compared with $112M. in 1998.

After-tax profit reflected a 21% increase over 1998.  The after-tax return on shareholders funds, which reflects the efficient use of the shareholders’ funds in the production of income, was 15.12%, an increase of 34% over 1998.  The after-tax return on assets was 11.28% as compared with 10.15% in 1998. The Company’s Annual Report uses the acceptable method of pre-tax return on profits and assets but since any return to shareholders would be after payment of taxes, the usefulness of such a measure is questionable.

Balance Sheet

There has only been a 3.5% change in the book value of the company’s net assets but this is due largely to a depreciation charge of $162M which masks investments of $232M. during the year. The directors have approved a further $500M.capital expenditure but which has not been contracted for. There is no indication in the financial statements or in the reports of the Chairman or the Managing Director how the expenditure will be financed.

There were no further investments in subsidiary or associated companies during the year and investments therein remain at $125M. The directors should be becoming increasingly concerned at the rising level of indebtedness of the subsidiaries to the parent company. In 1997 this figure was $647M. increasing to $754m. in 1998 and in 1999 the figure is $1.001B. It appears that some of the subsidiaries are undercapitalised and that they may not be able to respond positively to any demand from DDL for a liquidation of the amount owed by them. It is probable that classifying these balances as current meaning that they are likely to be turned into cash within twelve months is not a conservative position. Any concerned shareholder should be asking why this level of support and how those funds are actually used by the subsidiaries.

As mentioned earlier the Chairman in his report indicated that the European markets are experiencing problems. The Company’s experience in India and the lackluster performance of the St. Kitts operation evidence the high risks involved in some areas of international operations. This in turn suggests that while the growth hinges on expansion into other markets more exhaustive investigations need to be carried out in the regulatory and marketing aspects of those countries.

Management

While this company has achieved remarkable success over a relatively short period of time – the Annual Report speaks of a “legendary level of creativity” shown by the management of the company- the Annual Report does not discuss the issue of governance in any way. Stock Exchanges and shareholders increasingly expect disclosure over and above the bare minimum required by the law. It is now mandatory in several countries to have rules which aim to prevent abuse by the management including executive directors. Some of these mechanisms include audit committees and compensation committees on which independent directors should form a majority. The Report does not indicate whether there exist such committees in the company.

Conclusion

Given the difficulties experienced by the country in 1999, the results have to be considered satisfactory. There is a good balance between executive and non-executive directors although there is only one woman among the ten directors. Alcoholism is a serious social problem in Guyana and it would have been useful for the report to disclose how the Company promotes the responsible use of its principal product. Chairman Persaud continues his campaign for responsible conduct by our politicians. He could have said that unless this is demonstrated fairly urgently, the future of both the country and that of the Company will be in doubt.