Demerara Tobacco Company Limited, a subsidiary of British American
Tobacco, p.l.c., buys a branded product from a fellow subsidiary, pays more
than US$600,000 in 'royalties' to the parent company, has one single
distributor and no more than fourteen employees and pays another
US$1,000,000 for management services from fellow subsidiaries and technical
and advisory services from the ultimate parent company. The company also has
an average of in excess of another US$1,000,000 due from a related party on
which it receives no interest.
The company will be holding its 72nd Annual General Meeting this coming
Thursday to announce that despite the floods which 'hampered distribution',
the company has increased its profits before tax by some 6% on an increase
in sales of 2% (on a 3.5% increase in volume).
Last May, after the high-visibility Minister of Health returned from one
of his overseas trips he announced to the press that anti-tobacco
legislation, like Tarzan, would be 'coming soon'. One year later, there is
no legislation and the company that controls 97% of the market announces
that its sales of cigarettes have increased by 18,000,000 sticks!
One year after announcing that his ministry would be conducting a survey
biennially, the company can boast of the huge success with its after-work
lime and music competition promising original music or an iPod - hardly the
sort of thing that attracts non-youths.
Nation of Smokers:
Even as the country's population declines or flattens, cigarette sales
continue to rise, with every single Guyanese, from the cradle to the wheel
chair, on average smoking a total of thirty-six packs of twenty cigarettes
per year. With tobacco being the leading cause of preventable death in the
world today, and with administrators and public health officials emphasising
preventive rather than curative medicine it would have been good if the
Minister had been faithful to his public pronouncement and ministerial
mandate. This total neglect by the Minister makes the statement by the
Managing Director that the company has 'demonstrated over the years its
commitment to work with the Government to ensure that legislation developed
is reasonable to all parties involved' troubling. It is either pure rhetoric
with no substance or indicates that despite the commitment of the company,
the government is simply not interested in legislation - a case of Hobson's
For the third successive year, the company's AGM will be presided over by
a new Chairman. In 2004, it was Mr Michael Harris who held the triple title
of Country Manager, Managing Director and Chairman who was followed in 2005
by Mr Christian Preuss, Chairman and Managing Director. In 2006 the Chairman
is Patrick Smith a non-executive director while the position of CEO (ag) is
held by Guyanese accountant Mr Chandradat Chintamani. The company has not
disclosed the number of employees which at December 31, 2004 stood at 14
with average remuneration of $4.4M. per employee for that year.
Key management personnel earned $28.5Mn but unhelpfully the company
neither discloses the number of employees nor key management personnel to
allow for any meaningful comment.
The gross profit margin, which measures the relationship between the
sales value and the cost of the items sold, fell from 52% to 50%, prompting
a 14% price increase from December 2005. With three price increases between
2002 and 2005, there appears to be no price elasticity for the company's
product. This should be good news for the administrators considering any tax
increases to restore the relationship between duty and excise paid and sales
to what it was a few years ago when it was 33%. It is now 24%.
In dollar terms, gross profit fell by $37M. but because distribution
costs were reduced by $62M. and administrative expenses fell by $52mn.,
profit before tax increased by $70M. Edward B Beharry and Company Limited
with decades of experience in the business is now the sole distributor of
the company's product for the entire country, a move that has seen a decline
in distribution expenditure of 23%. There is no breakdown of the category of
administrative expenditure but the notes disclose that expenditure payments
to related parties alone amounted to $334 M. raising the question whether
some of these are charged to cost of sales.
The company remains a major taxpayer and its effective rate of tax on
profits declared is 49%. Earnings per share increased by $1.38 while
dividends declared and paid totalled $521M, representing 91% of after tax
profits compared with 94% in 2004.
Inclusive of royalties, management charges and dividends, payments to
group companies amounted to $720 M, representing an extremely attractive
return to the group. The attempt by the company to justify a royalty payment
of G$130M, by stating that the product is manufactured to 'predetermined
specifications' is hardly convincing even to a non-smoker who can buy the
same product almost anywhere outside of Guyana. And while every company can
and should determine its business model, paying US$1M, for management
services when all the company does is bring in a product and sell it
immediately to a sole distributor seems to defy business logic. That
Business Page has been sharply attacked by the company for raising some of
these very issues in the past ought not to make them less worthy of
repetition particularly in the absence of reasonable justification. Surely
even Guyanese shareholders must be willing to put aside their appreciation
of good dividends in the broader fiscal and national interest.
And is it a measure of bigness that the group can simply decide to
discontinue the payment of interest at the paltry rate of 2% per annum or
that it will lend an additional G$235M. to a fellow subsidiary? Is Guyana
the gem in the BAT jewel and is this because the GRA - busy preparing for
the introduction of VAT, dealing with smuggled weapons and more recently
money laundering - has taken its eye off the ball?
Under the tax laws, even where management charges are in fact allowable,
this is limited to 1% of turnover which would mean that such charges would
be limited to $34M. and that $170M. of management services and technical and
advisory services would otherwise be disallowed. In fact the financial
statements which are audited by Jack A Alli, Sons and Co. show a total
amount of disallowable expenses of $81M (which includes all forms of
disallowable expenses including group charges).
Just by way of comparison, NBIC which is owned 51% by Republic Bank of
Trinidad & Tobago and which has 11 branches and 558 employees in Guyana
charges $48M by way of management fees which include directors fees and
After the public spat which the company had with Business Page last year
over the issue of corporate governance, it is heartening to note that the
Annual Report which bears on the face 2006 instead of 2005 has included a
new section on Business Principles including the principle of good corporate
conduct. It seems clear that for the company however that 70% of
shareholding means 100% control. Could they not make a concession to the
local minority shareholders or does the company consider that former CEO
Charles Quintin represents the interest of those shareholders?