Business Page today turns its focus on the Annual Report of Demerara
Distillers Limited, a leading conglomerate and public company which holds
its Annual General Meeting on June 2 2006, over five months past the
financial year end. The notice by the Secretary is dated May 8, 2006 which
is beyond the date prescribed under section 58 of the Securities Industry
Act (SIA) for the submission of the Annual Report to the Securities Council
(SC). Following a court decision on a matter brought by the company against
the SC on its 2004 Annual Report the under-resourced SC appears unwilling or
unable to execute its mandate under the Act even on procedural issues such
as late filing, a recurring problem faced by this company.
Some of the issues facing the company and the group are of a recurrent or
continuing nature and cover the range of legal, regulatory, accounting,
transparency, policy and governance matters. For example the company
continues to ignore accounting requirements that its insurance arm Demerara
Fire and General is a subsidiary and should be accounted for as such; the
company has failed to honour an obligation given to the court with respect
to certain disclosures under the Companies Act 1991; has failed to account
for a gain of US$1.1 mn. on a Hamilton Bank loan buy-back and has
international ambitions that severely test its capabilities.
But this review is limited by constraints of space and will focus on the
operations of the company and its subsidiaries which this column has
questioned on 'business model grounds' (see Sunday Stabroek December 14,
2003). It is worth noting that despite the claimed internationalisation of
the company and the group, Guyana accounts for 85% of revenue and close to
100% of the profits of the group with all but one of the international
companies failing to justify their existence and investment
The company is one of Guyana's leading public companies and describes its
principal activities as Manufacturing, Trading and Services. Its flagship is
a stable of alcoholic products which despite the seven consecutive Gold
awards at the International Wine and Spirit Competition are marketed with
mixed success across a number of regional countries and continents. The
group has invested heavily over the past ten years with Capital Employed
having more than trebled while Profit after Tax has increased by a meagre 5
% from $729mn. to $763 mn. before any account for inflation. Indeed in real
terms and using key indicators such as return on assets and return on
shareholders funds, the group's performance ten years ago was almost twice
as good as it is now.
Profitability / efficiency indicators -Demerara
Source: 10 Year Review - DDL Annual Report 2005
The group's performance in the second half of 2005 was appreciably better
than the first half results announced in an undated interim report issued by
the company and received by this columnist on October 31, 2005, the deadline
for the publication of those results under the SIA. During the six months
January to June 2005, turnover was $5.1 bn. with a gross profit percentage
of 38% but in the second half of that year turnover increased to $5.7 bn.
and gross profit as a percentage of sales increased to 44% - a historical
high that warrants some explanation.
In a year described by the Chairman as a 'most difficult year in the
history of the company', profit before tax increased by just 3% on increased
sales of 11%. The increase in the pre-tax profit of $39mn., was swallowed up
by an $80 mn. increase in the tax charge with the result that profit after
tax fell from $803 mn. to $763 mn. and earnings per share from $1.04 to
$0.99. In a statement that seems to confuse cost (what is paid) with value
(what is received), the Chairman explained that but for increases in the
cost of molasses and fuel which according to him more than doubled in terms
of value during the year, profits would have been some $600 mn. more. Not
only is this statement not supported by available data on these commodities,
but it would suggest that the company would have earned a gross profit of
close to 48% which defies all historical experiences.
Over the years, this column as well as the columnist in his capacity as a
shareholder has raised a number of issues of concern in this company
including the strategic direction in which the management-controlled board
has taken the company with an expensive expansion programme that cannot be
justified by the consistently poor showing of a number of subsidiaries and
brings into question the quality of the company's Strategic Plan first
mentioned in 1993 and referred to again several years later. The group's
liabilities and debt servicing with interest and other finance costs
approach half a billion dollars on overdraft and loans of $3.4bn.
The performance of the company and its subsidiaries set out in the table
below shows that six of the subsidiaries and an associated company recorded
losses in 2005 with the company and five of its subsidiaries recording a
profit. This is how they performed.
Profitability record - DDL and its subsidiaries/ associated company
Source: Annual Reports - Demerara
Guyana based companies
DDL - The turnover of this company which is the parent of twelve
subsidiaries accounted for 79% of group turnover, 93 % of profit before tax
and 99% of profit after tax. Its gross profit percentage was 42% compared
with 44% in 2004 suggesting that the Chairman's estimate of the profit
effect of fuel and molasses price increase of $600mn. was unrealistic.
Demerara Shipping - This company reported profit of $94 mn., an increase
of 16% over the previous year and some $5mn. more than the company earned in
Distribution Services Limited - This trading company reported profit of
$44 mn., an increase of 47% over the previous year but just $1mn. more than
the company earned in 2001.
Topco - This company that had an injection of $500 mn. over the past
three years and which was expected to make a 'significant leap forward' in
2005 barely managed to maintain profits of $8.4 mn., just half of what it
earned in 2003. At this rate it would be decades before the company could
justify the investment when the benchmark is 5 years.
...... and the failures
Solutions 2000 - As it did in the previous year this company again
recorded a loss of $4.5 mn. This company was acquired from two directors in
what appeared to be a conflict of their fiduciary duty as directors with
their personal interest. In 2003, the Chairman was evasive when asked about
the basis on which the purchase price was determined or to identify the
directors involved. This matter prompted a complaint to the accounting
regulator the Institute of Chartered Accountants of Guyana, which has shown
a disgraceful lack of interest in pursuing the matter.
Demerara Contractors Limited - Another company with an interesting
history, DCL had a loss of $2.5 mn., making it four out of five years in
which the company has recorded losses and one can only wonder about the
justification for its continued existence.
Decipher International Inc. - The second of the IT companies in which the
group is involved, Decipher too has recorded losses, in this case $25 mn.,
following a loss of $21.7 mn. in 2004. The Chairman reported that this
project which is geared towards assembling qualified medical 'transcriptionists'
will continue into 2006 at a total cost of $120 mn. Does this mean that the
company will spend in 2006 some $75 mn. more on training? No doubt
shareholders would be asking themselves what kind of retention arrangements
are provided for in the contracts with the trainees and how soon the company
is expected to recover the $120 mn. investment.
Breitenstein Holdings BV - This European group with two subsidiaries in
Netherlands and four in the UK had sales of close to $1.5 bn. and profit of
$40 mn., a net profit percentage of 2.73 %.
Demerara Distillers US Inc - This company which is the beneficiary of
hundreds of millions of deferred expenditure could only make G$1.3 mn. or
US$6,500 for the entire year, about the same as in 2004. It is also of more
than passing interest that there is no indication that the company proposes
to enter the Canadian market where the company's former Managing Director
and now Vice President International Marketing now resides with his family.
Demerara Distillers (TT) Limited - For the third successive year that
subsidiary has reported losses, this time of $11 mn., just less than the
loss in 2004. The notes to the financial statements indicate that it carries
on trading operations in Trinidad but yet shows nil sales. What can possibly
be the logic of having a subsidiary in this twin island republic when a
distributorship through a national company would seem to be a win-win
Demerara Distillers (St Kitts-Nevis) Limited - Here again the company
which is described as manufacturing suffered losses for three consecutive
years, making it four out of five. Given the CSME, the practical closure of
the sugar industry in that country, the question of economies of scale and
what amounts to self-competition, the retention of this subsidiary seems
The directors' report juxtaposes Corporate Governance and the CARICOM
Single Market and Economy (CSME) and proudly boasts that the directors and
management recognised the challenges of the CSME 'many years ago'. Clearly
they did not translate that recognition into opportunities and profits.
Demerara Distillers Hyderbad Limited - The company reports its 50 % share
of the losses at $20 m. on sales of $5mn., down from $14 mn. in 2004. The
operation in India is conducted through a joint venture in which the company
appears to participate through its Chairman who has just been awarded a
national award from that country. The Indian experiment goes back to 1993
when the company announced that it was in a joint venture with an Indian
company to build and operate a distillery in Maharastra 'to serve the Indian
market, the Pacific Basin, the former Soviet Bloc and Africa'. It took the
company several years to admit that its initial investment could not go
through because it was a 'dry state' but that was all the information the
company was prepared to offer.
Once again the company is reporting difficulties in that country and one
has to wonder whether sentiment is not getting the better of judgment with
There is no mention of the experience in China to which the company had
made its first shipment in November 2004 and where the Vice President had
visited on several occasions. In 2004 the company had also announced more
than doubling of its branded El Dorado sales and the development of new
markets in Mexico, Russia and the Middle East.
The company appears to have failed to register the DDL trade mark in any
of those countries - inexplicable for a company with a vision of 'global
tentacles' by 2012.
The results show that the DDL group is over-extending itself and the
weaknesses are beginning to show. It will be paying $0.01 per share more in
dividends than it did last year but with its cash position in negative, it
will almost certainly be going further into overdraft.
The Chairman is one of Guyana's best ever businessmen but that does not
make his judgment infallible and it is unrealistic to expect him to carry
indefinitely the same workload he has been carrying for decades. To agree to
post in a non-DDL country its de facto number two is clearly a major mistake
which has had little compensating benefits with the domestic sales far
outstripping foreign sales both in dollar as well as growth terms.
If this company wishes to remain strong and competitive, it needs a major
realignment of its ambition with its capabilities. World class,
prize-winning products need equally excellent direction and execution.