Business Page –  On the line: Demerara Tobacco Company Limited Annual  Report, 2004

Sunday, April 3rd, 2005

Introduction:

Demerara Tobacco Company Limited has joined those public companies which have sought to hold their Annual General Meeting earlier than in the past. The meeting will be held well within the time-frame prescribed by law. Business Page reminds the powers that be that there is a conflict between Section 58 of the Securities Industry Act, 1998 and the Securities Industry (Disclosure by Reporting Issuers) Regulations 2002. The act allows a period of four months for a public company to send to the Securities Council and the members its annual package while the regulations (which are subordinate to the act) allow six months. Instead of resolving this conflict, the Securities Council has been allowing some companies to utilise the longer period.

The 71st AGM of the company will be held at the Hotel Tower on Thursday April 11, 2005 at which shareholders would be considering the Annual Report and financial statements for the year ended December 31, 2004. The report will be presented by Mr Christian Preuss, Chairman and Managing Director who has replaced Mr Michael Harris, who readers might remember took great exception to the Business Page review of the 2003 report.

While volume sales have increased by some 18 million sticks and the value of sales increased by 6.95 per cent, profit before tax fell by $110M which the Chairman attributed to "the high cost of fuel and depreciation of local currency." Unlike the previous year when the rate of growth of the Guyana company outstripped the sales growth of the rest of the group's subsidiaries, this year it fell well short of the 31% achieved by the remainder of the group. This is perhaps a measure of the maturity of the Guyana market referred to in the Managing Director's 2002 report. Bristol continues to account for 98% of the company's volumes while "the Benson and Hedges variants recorded a growth of some 15% ...as a direct result of the implementation of strategic promotions."

Financial highlights

Commentary:

The gross profit margin which measures the relationship between the sales value and the cost of the items sold, fell marginally from 53% to 52 per cent. This makes the lamentation about the increased cost of fuel, the depreciation of the local currency and the import costs of the products seem a bit hollow. Distribution costs have increased by $100 million or 47 per cent, which appears excessive, while administrative expenses increased by $67M or 27 per cent.

For its fourteen employees, the company's wage bill has increased from $42M to $55M. What makes this even more striking is that the Chairman/Managing Director is based not in Guyana but in Trinidad. Small shareholders like me have no clue how this company operates and the Annual Report offers no help.

The company remains a major taxpayer and its effective rate of tax on profits declared is once again 48 per cent. Although the earnings per share decreased by $2.65, dividends of $510M will be paid out this year representing 49% of after-tax profits for the year compared with 40% in 2003.

Once again, the inter-company charges for royalties and management fees exceed $300M, and it is hard to understand that the simple device of signing a contract-manufacturing agreement can justify a royalty charge for a branded product bought from a sister company. And is it reasonable for anyone to accept that a straightforward commercial company which operates an "agency agreement with the company's main distributor" requires management services costing close to US$1M?

Bandits read financial statements?

Return on assets measured by profit before tax as a percentage of average total assets is 133 per cent, which is several times the group's average. It is not worth referring to Related Party Disclosures - IAS 24 - but perhaps it would help Guyanese to compare how some of the multinationals operating here compare with their home country. This is the table of Directors' remuneration in the financial statements of British American Tobacco:

Amongst the many objections I have heard for non-disclosure of this kind of information which is a requirement in Guyana is that it could compromise personal security. Does anyone really believe that bandits read financial statements in selecting kidnap targets?

Last year's exchange with the company's Chairman/CEO included comments on the governance practices of the company and the extent and quality of disclosure of governance arrangements in the company. The Chairman was very clear that the company would only comply with legally binding regulations. This I pointed out was the wrong way to treat governance arrangements, and I had sincerely hoped to see some improvements this year. I am disappointed - nothing has changed.

But a look at the parent company's report proudly states that the "Group recognises its responsibilities to the countries in which it operates and in this context notes the OECD Guidelines for Multinational Enterprises in their current form." I looked at those guidelines and found that they require enterprises to disclose, among other things, remuneration of members of the board and key executives, material issues regarding employees and other stakeholders, material foreseeable risk factors and governance structure and policies. Since a number of the company's directors are appointed by the parent, they should explain the reasons why this noble declaration does not apply to Guyana.

Just by way of a sample, here is how the parent presents the attendance of directors at meetings.

- Indicates not a member of that Committee.

- *Corporate Social Responsibility

The financial statements of the parent also disclose that the pricing policy which regulates intra-group sales is "based on normal commercial practices which would apply between independent businesses." DEMTOCO, however, states that "acquisition of products are made at prices agreed by the parties, which are reviewed on six monthly basis." Why is the language different if the policy is uniform?

Deja vu:

Both the content and quality of this report are extremely disappointing. It is like a copy of the previous year and even the error of the definition of substantial interest is repeated despite its being pointed out in this column last year. Another egregious example is the statement in the 2003 Report that "during the year a competitive brand was launched on the local market..." The paragraph is reproduced in its entirety! Was history repeating itself? This apparent error makes one wonder whether the number and holdings of shareholders remain absolutely identical as in 2003. The weekly trading statements of the Stock Exchange indicate that shares changed hands during the year but yet not only is the number of shareholders in the seven bands the same as last year, but so are the number of shares in each band.

About 30% of the company is held by institutional and small shareholders. They have no voice in the company. The company is clearly being run by British-American Tobacco for the benefit of its own shareholders. Clearly it has a product for which there is a real demand. It should not, however, exploit the weaknesses of the country for the benefit of its expatriate shareholders. In fact it has an opportunity to set an example and it would be refreshing if it could take that seriously.