Demerara Distillers Limited,
the country's most successful non-bank public company has reported a
dramatic decline in foreign sales during the last financial year. In 2002,
the company's Annual Report showed foreign revenue accounting for 42.7% of
the group's total revenue and in 2003 a slight reduction to 40%. In 2004
however, the company reports foreign sales down to 27.2% of total, or
$1,573M. According to the group's 2004 Annual Report, the decline in sales
is reflected in both the company ($308Mn.) and its subsidiaries ($476M.) and
follows on the heels of the re-assignment of the company's Managing Director
to the newly created post of Executive Vice President for International
Marketing. This Report comes up for consideration by shareholders at the
company's Annual General Meeting on Friday May 27, 2005 at the Diamond
Complex of the Company.
Despite the fall in revenues,
Chairman Yesu Persaud reports an increase in pre-tax profit of 14% for the
company but a decline of $79M. in pre-tax profits for the subsidiaries.
After-tax profit of the company increased by $84M. while that of the
subsidiaries declined by $57M. This severe set-back was explained by the
Chairman as the result of the 'extremely difficult year' faced by BEV
Processors, a company in which DDL acquired a 40% stake and which saw its
fortune reversed from group's share of profit of $11.4M. in 2003 turn into a
loss of $60Mn. in 2004. DDL is proposing a final dividend of $0.26 which
will bring total dividends for the year to $0.36, compared with $0.33, an
increase of 10% on the previous year.
The directors appear to have
responded to criticisms last year about the 'unacceptable and indefensible'
reduction of information on the performance of the companies in the group
and there is now more information even though too much is left to the reader
to figure out and there appear to be some inconsistencies. For example, the
Chairman reports that 'there were increased sales of El Dorado and other
brands developed for the international market', 'growth in branded export
sales' and that 'in 2004, internationally branded El Dorado sales more than
doubled and new markets were developed in Mexico, Russia and the Middle
East'. Since El Dorado has a higher added value than the sale of bulk rum
which is being de-emphasised, it is difficult to reconcile this with the
dramatic reduction in foreign sales referred to above.
Only two local subsidiaries
reported increased profits in 2004. These were Demerara Shipping ($6M.) and
Dem-erara Contractors ($14M.). Distribution Services, a trading company
reported a profit decline while Topco, on which hundreds of millions were
expended two years ago, saw profits halved in 2004. Solutions 2000 saw a
profit of $8.4M. in 2003 converted into a loss of $4.5M. in 2004 and
Decipher International reporting a loss of $21.7Mn. in 2004. This column
last year raised questions about the payback period of the Topco investment
and has made the acquisition of Solutions 2000 from two of its directors a
complaint to the accounting regulator, the Institute of Chartered
Accountants of Guyana.
Diversification has its
virtues but also has its limits and the best business strategy is still to
stick with what you are best at. The company in 1993 had referred to a
Strategic Plan of which precious little details were ever shared with its
owners but it is unlikely that the results are as intended.
Last year we commented that
'conveniently and perhaps not surprisingly all the five year charts on page
five of the Annual Report - Contribution to State, Operating Profits and
Turnover - are those that have shown growth in nominal G$ terms'. Turnover
which has fallen and Contribution to State which has increased by a mere
$6Mn.have been replaced by Profit before Tax and Shareholders' Equity which
have both increased! And even for the one constant, Operating Profits, the
figures shown in the 2003 and 2004 for the year 2003 differ by $47M. Such
inconsistency can lead to confusion, misunderstanding and uncertainty about
the accuracy and reliability of the figures.
The Chairman reports that the
Board's vision is that DDL will be an international company with 'global
tentacles by 2012' but it must be conscious of the domestic threat posed by
the possible loss of control of its very valuable access to Guysuco's
molasses. This is a matter that is currently being addressed by the Court
and seems to have attracted the attention of the President in a manner that
does not appear to be sympathetic to the company.
The company must also be very
concerned about the trend of key indicators over the past ten years. The
fall in revenue and profitability on overseas sales at a time when the
company should be benefiting from a very favourable exchange rate of the
Euro must add to those concerns.
One consistent concern which
this column has with the company is the performance of its subsidiaries.
Last year it drew attention to the fact that in 2001, the subsidiaries and
associated company with $864M. of total assets made $274M. profit before tax
of which the local subsidiaries contributed $138M. In 2003, with a greater
number of subsidiaries and three times as much in assets, the subsidiaries -
local and foreign - provided only $162M. in pre-tax profits'. That trend has
continued in 2004. It is time that the directors take stock of its portfolio
of subsidiaries across the world. How well is it positioned to take
advantage of the CSME and should it not get out of those businesses where
its returns have at best been erratic?
The total assets of the group
have increased by $794M. to $13.7Bn. of which the company accounted for
$648M. and the rest of the group for the balance of $146M. These are partly
financed by loans and overdraft which have increased by $88M. and $127M.
respectively. Major loans taken during the year were $500M. by the parent
and $215M. by Demerara Contractors Limited. Total finance cost for the year
increased by $84M. the bulk of which was in respect of the parent company.
In the 2001 Annual Report, the Chairman announced that the Company in 2002
would restructure the financing to minimise financing cost but just the
opposite has taken place. Net interest expenditure increased from $97M in
2000 to $202M in 2001, $239M in 2002 and is now a staggering $$412M in 2003.
In 1999, interest was covered
9.97 times and in 2000 11.2 times and is now less than four times. In 2000
dividends as a percentage of interest was 178%, in 2001 - 114%, 2002- 97%
and 2003 - 77% and in 2004 58%. Directors might of course argue that the
borrowings are necessary to maintain the level of profitability to allow for
the payment of dividend. In these circumstances however, would it not be
useful, given the liquidity in the system, for the company go to its
shareholders for additional funds?
These are major areas on
which we have commented adversely in the past as all the evidence suggests
that the costs for trade mark registration were in excess of the proper fees
payable. Another $14M. was spent on additions to the Trademark following the
$79 M. in 2003 and $200M. in 2002! Efforts to obtain explanations for these
have been ignored by the company.
For years, this column has
been concerned about the inventory figures revealed by the audited financial
statements and last year expressed surprise "that a company whose flagship
product is aged rum has more in 'spares, containers, goods-in-transit and
miscellaneous stocks than it has in finished stocks and work-in-progress."
Quietly and without any attention being drawn to the matter there is a major
re-statement of the composition of the inventory figures. Despite this
attempt to remedy a clear deficiency, it remains strange that the company
has only $4M. in work-in-progress while none of the subsidiaries has any!
There has been some attempt
to correct some of the more glaring defects identified in earlier annual
reports but there remains a number of significant issues and concerns. Last
year in my capacity as a shareholder I had asked the Chairman of the Audit
Committee to provide me with some basic information on the company's
subsidiaries, all of which are private companies and may not be all subject
to audit. At the AGM he denied receiving my letter but promised to respond
if I sent him another copy. I kept my part of the bargain - he did not. That
was not unusual. The company secretary has also failed to respond to letters
seeking information while the directors have failed to honour a commitment
to the Court with respect to mandatory disclosures. (See letter in the
Stabroek News of August 5, 2004).
Most egregiously, the company
has failed to give any explanation for its failure to account for a gain of
US$1.1M. on a loan buy-back a couple of years ago. Not all shareholders are
likely to forget.
There is no questioning the
value of DDL to this country or the national stature of the directors. That
does not however give them licence to ride rough shod over shareholders,
show disregard for the law or ignore the need to demonstrate the same
standard of governance, accountability and transparency which we demand from