line: Demerara Tobacco Company Limited Annual Report 2003
turtles could talk
Company Limited, which ceased manufacturing in Guyana in 1997, and is now
entirely in the importation and sale of cigarettes will hold its 70th AGM at
Hotel Tower on Thursday, May 14, 2004. Business Page today reviews the
Annual Report for the year ended December 31, 2003, including the report of
the directors and the financial statements for the year ended on that date.
Financially, the company has again done extremely well with a return on
assets and earnings per share being the stuff of which financial dreams are
made. Indeed, while the company is reporting continuous growth, British
American Tobacco, its ultimate parent company reported a decline of 25% in
profits for 2003 from 2,113M pounds sterling to 1,567M pounds sterling.
Even as he lamented
"the continuation and escalation of the difficult conditions in the country
which started in 2002, the Executive Chairman of the Company, Mr Michael B.
Harris, expressed pleasure in reporting another successful year. The
Chairman reported an increase in total volume of sales of 1.4% but a decline
of 14% in the sale of Benson & Hedges, the company's premium brand. With a
reported fall in the population it seems that Guyanese are actually smoking
more not less cigarettes. One colleague has suggested that the company
benefits from the depressed economic and social conditions as Guyanese turn
to cigarettes - and that other vice, alcohol - for temporary relief. In the
process, Guyanese are clearly ignoring the fatal dangers medically
established as associated with cigarette use. Interestingly, the cover of
the company's 2003 Annual Report, with an eye on marketing, depicts images
of Shell Beach and includes four turtles. Is it not fascinating to ponder
what turtles might think of cigarettes?
but obviously very defensive about what he refers to euphemistically as "the
on- going controversy surrounding our industry" internationally, the
Chairman spent a large part of his report defending the industry by
highlighting steps such as anti-smuggling(?) and the unlawful trade in the
company's products, and speaking extensively about smoking being a lifestyle
choice. What he has failed to note, however, is that it is not a choice
which he and many of his fellow directors would make, and clearly the
company is shifting responsibility to the victims of smoking who in Third
World countries are not sufficiently informed about the life-threatening
dangers of smoking.
While the Annual
Report will come as a joy to the members of the company, it does raise a
number of issues, including the country's tax policies, one specific tax
matter and by omission, questions of governance. Demtoco shares with some of
our other public companies the dominant influence of the controlling
shareholder who operates the winner-take-all style common to governments.
Minority shareholders are at best passive investors with practically no say
in how the entity is managed.
Sales for the year
were $3,121M, an increase of 7% over last year. Last September, this column
questioned the price increase in July 2003, describing it as "a case of
exploitation of a market in which the company boasts a market share of 98%
in the company's key brand." The exploitation is borne out with the reported
gross profit percentage of 113% compared with a more measly 97% last year!
Net profit for the year has topped the billion dollar mark ($1.16B) for the
first time in the company's history and represents an increase of 16.7% over
After taxes of
$556M, the company is left with $601M out of which it has paid some $228M in
interim dividends, and is proposing to pay a final dividend of another
$228M, costing the company a total of $456M or 75% of the year's profits
available for distribution. While such a payout may seem high by local
standards, it should be noted that the company's needs for investment are
negligible as its business is now entirely trading. By contrast, the group
(BAT) is paying out 799M pounds sterling out of the year's profit of 631M
pounds sterling, making the payout ratio 127 per cent! What is particularly
significant is that after the dividend, the group has a negative accumulated
The company is
clearly not following the group's practice when it comes to dividends - but
then it does not need to. When dividends are declared, every shareholder
receives his/her proportional share leaving less money in the company. What
the company does, no doubt under instructions from its parent, is forgo the
dividend that it might otherwise be able to pay, retain that money in the
company and then lend it interest-free to its related parties. As a result
of this strategy, group companies now owe the Guyana company $395M, a level
that keeps rising annually.
One of the charges
in the accounts is an amount of $120M for royalty charged by the ultimate
parent company. This is difficult to understand and hard to justify. This is
a trading company that buys a branded product and it must therefore be
assumed that ownership passes at the time of sale. The company does not
trade under any other name, and sells only group products which it buys.
What then is it paying a royalty for? Could it that this is a legacy from
the days when Demtoco was manufacturing under licence? If this charge is not
commercially justifiable, what then would be the basis for the payment that
has amounted to $500M over the past five years?
Earnings per Share
has increased by $4.03 to $25.72, which is likely to be reflected in an
increase in the share price, that is, assuming that holders would want to
part with their shares, the price of which skyrocketed last year shortly
after Business Page had opined that the market was grossly undervaluing the
Return on assets
measured by profit before tax as a percentage of total assets is a
staggering 139 per cent, compared with 8.3% for the group companies. But
annual earnings to full-time employees (now down to 13 from 16), is also
quite impressive averaging $3.5M per employee, up from $2.7M in 2002. With
no disclosure of remuneration to key management personnel as required by IAS
24, no further analysis is available for shareholders. Does BAT support this
As they did when
they published the company's half-yearly report as required by the
Securities Industry Act, the directors did not even acknowledge the
existence of the Securities Council or the draft Guidelines on Corporate
Governance published by the council with which it is more non-compliant than
not. This is truly regrettable behaviour by an international company which
would not dare to behave so cavalierly in its home country, as is obvious
from BAT's Annual Report available on the web. Unfortunately, Demtoco is not
the only Guyana company to reflect such a dismissive attitude in relation to
the Securities Council, and unless that body begins to show that it means
business, it will soon earn the type of reputation which the Office of the
Registrar of Companies has.
Is it this type of
carelessness that allows the company to describe a "substantial shareholder"
as one with 10% rather than 5 per cent, or permit it to ignore the
requirement for disclosure of summary particulars of any contracts of
significance between the company and related companies?
Once again, the
increasing profitability earned by the company and the 98% market share
raise questions about the competition from smuggling. Duty and excise tax
paid by the company averages less than 50% of cost of sales, and there is
clearly a matter for tax policy-makers here. This column noted last year
that cigarettes are as susceptible if not more, to smuggling as say fuel,
refrigerators, stoves, etc, yet we appear unable to control the smuggling of
those commodities while doing so successfully with cigarettes.
Demtoco is now
indisputably the most successful company in Guyana. The group must feel
vindicated about its decision to move from manufacturing to trading. The
industry does contribute a substantial sum to the national coffers, but
there are serious health costs to be borne by the country, citizens and
consumers. The bulk of the company's profits are not compensating the nation
which has to bear the cost of smoking's consequences. The company is managed
in some ways like the Bookers of old, one standard for the colonizers and
another for the colony.
Can and how does
Guyana resolve such a dilemma?
we will look at GT&T.
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