Business Page August 5th, 2001


On The Line - Demerara Distillers Limited

Introduction

Today, Business Page reviews the 2000 Annual Report of Demerara Distillers Limited (DDL), presented to the shareholders on June 29, 2001.

DDL is both an operating as well as a holding company. 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 Demerara Bank Limited and GA 2000, which recently went into receivership.

The Group

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. The Chairman's Report in discussing the performance of the subsidiaries included such comments as: "Sales grew by 36% to $71.4M while operating profits increased by 80% to $9.0M" (Topco); "pre-tax profit was $88.1M, an increase of 6% with no comment on sales" (Demerara Shipping); "DSL had a remarkable year increasing its turnover by 22%. Net Profit before tax was $20.1M, an increase of 33%" (Distribution Services Limited); Solutions 2000 Inc. (acquired in 2000) recorded "a turnover of $72M in 2000 and $12.1M in surplus cash after operating expenses and tax payments".

For the overseas subsidiaries (CSR Limited in St. Kitts and Superior Distribution Ltd. in Trinidad) there was no comment on their financial performance except that "they continued to show improved performance". Last year's Annual Report had predicted the Trinidad company "to make a profit at the end of 2000". For the European subsidiaries no reference to sales volume to value was made.

The vague and varied descriptions of the performance of the subsidiaries have the unintentional effect of confusing readers and making comparisons impossible. This imprecision appears throughout the Report as in the case of the acquisition of the old Guysuco Sugar Factory "at a cost in excess of US$1M."

Under several jurisdictions the subsidiary of a public company must itself be a public company. This is not so in Guyana and DDL has taken full advantage of this situation. Business Page has previously commented on the unexplained acquisitions and disposals by DDL. Some years ago in an Offer for Shares document the company had listed Distillers Gas Co. Ltd. and Demerara Contractors and Engineers Limited as wholly owned subsidiaries. Have they just disappeared? In 1994, DDL announced a joint venture with an Indian company to build and operate a distillery in India. Again, this appears to have been long since aborted although in its expansion programme included in the 2000 report, the company predicts establishing a distribution network in India to serve the Asian market.

The company has also gone into the insurance business and has taken up a 19% interest in Demerara Fire and General Insurance Company while it has acquired 70% of the shares in Solutions 2000 Inc. Unfortunately, there is never an indication of who the minority players are or from whom the interest is acquired.

Financial Highlights of the Company (DDL)

This brief analysis which follows draws entirely from information contained in the financial statements which are included in the Annual Report. In this review we focus on the results of the Company partly because we do not consider that the Report provides information to allow a sufficiently meaningful review of the Group's financial statements. It should be noted however, that the Company's turnover accounted for 68% of the Group's turnover for 2000 compared with 73% in the previous year while profit before tax accounted for 81% compared with 86% in the previous year.

Profit and Loss Account
				2000		  1999                  % Change
                                                              (G$'M)		(G$'M)
Net Sales ($M)			4,887		  5,013		  (2.5)	
Profit Before Tax ($M)		858		    887		  (3.3)
Taxation ($M)			327		    263		  24.3
Profit After Tax  ($M)		531		    624		  (14.9)
Dividends ($M)			173		    173		    - 
Earnings per Share			1.38  		   1.62		  (14.8)

Because of a 24% increase in taxation due to an increased provision for deferred tax, profit after tax recorded a decrease of 15%. The Company's Chairman attributed this fall in profits to an increase in the cost of production due particularly to the rise in prices of molasses and fuel. In addition, there was a 20% decline in the Euro resulting in a $100M exchange loss. The financial statements themselves do not show an exchange loss and it is possible that the Chairman meant lost revenue instead. The Company's Earnings per Share fell from $1.62 to $1.38.

The Chairman further stated that the Company's decision to diversify its operations was the Group's 'saving grace'. He feels that "the Guyanese economy's dependence on commodities is too overwhelming and that there is absolute need to encourage investments in the value-added export-oriented products". This foresight was the motivation for investments in such initiatives as shipping and information technology.

The times interest earned ratio (the number of times that interest is covered by Pre-tax Profits) has increased from 12.01 times in 1999 to 15.82 times in 2000.

Profitability 
				2000		1999		1998
Net Profit Margin (%)		10.86		12.45		10.41   
Operating return on assets (%)		0.16		0.17		 0.18
Return on equity (%)			0.20		0.23		 0.25

The Net Profit Margin is the relationship between net income to sales and the decline is a result of the weakening in the gross profit margin due to high production costs and depreciation in the value of the Euro. As a consequence of these circumstances the return on assets and shareholders' funds have both decreased.

Despite the fall in after tax profits the directors have declared a dividend of $173M, the same as in the previous year. Dividend cover (the number of times that dividends are covered by After Tax Profits) has decreased from 3.6 times in 1999 to 3.1 times in 2000.

Taxes paid to the government by the group increased from G$1,341M to G$1,438M, an increase of 7.2%.

Balance Sheet
				  2000		  1999		% Change
				(G$'M)		(G$'M)
Current Assets	 		  3,383		  3,327		1.7
Current Liabilities 			     951		  1,123		(15.3)
Working Capital 			  2,432		  2,203		10.4
Fixed Assets 			  2,186		  2,071		5.6
Equity				  4,484		  4,127		8.7

By any measure, the balance sheet is sound. The company has loans outstanding of $328M of which $196M is repayable in 2001 while bank and cash balances amount to $146M. There is no indication of how much of the cash and bank balances are held in Guyana (to indicate risk exposure) and whether these are held in the Bank with which there is significant interlocking directorship.

Significantly, the financial statements show no information on related party transactions as required by International Accounting Standards which are mandatory in Guyana.

Expansion Programme

The Company has announced a planned US$15M three-year expansion plan beginning in 2001. This includes the purchase and erection of new storage facilities and bottling lines, investment into the information technology and cellular telephony sectors, and the establishment of a distribution network in India. This expansion will be financed by way of a share issue of 230 million shares, a bond issue and bank loans.

Conclusion

In the context of such a large and leading company, one would have expected some attention in the report on governance. While the Company has a number of non-executive directors, there is no indication of the role they play in its governance. The concept of an Executive Chairman has been heavily criticised since it concentrates too much power in the hands of one individual. One notes that the alleged abuses in Globe Trust were facilitated by the combined role of Chairman of the Board and Chief Executive Officer.

Non-executive directors are there to prevent excesses and both law and good corporate practice requires that they direct the management of the business and affairs of the company and play key roles in the major committees of the Board including the Audit Committee, Nominations Committee and the Compensation or Remuneration Committee. There is no indication whether these committees even exist in the company reinforcing the culture of excessive dominance by one or two individuals over the affairs and resources of the company. Shareholders continue to look to the non-executive directors to introduce to the company a different, enlightened culture of governance.