DDL Annual Report 2014

The Stabroek News article on the performance of DDL for the year 2014 (S/N 03-24-15 DDL’s after-tax profit up 38.4%) comes three days before the annual general meeting (AGM) of the company. DDL has three institutional investors holding more than 5% of its issued shares – Trust Company (Guyana) Limited (20.58%), with which it shares some common directors, Secure International Finance Co Ltd (18.32%), a Beharry Group company, and the NIS (8%).

In most western countries the directors of public companies respect, if not fear, their institutional investors. Those directors are mindful of the consequences on share value of the disposal of a significant block of shares by any dis-satisfied institutional investor. To avoid that, it is very common for them to meet with their institutional investors before any major decision or action.

In those countries too, annual reports are expected to comply not only with laws but also with regulations and best practices. By contrast, Guyana companies seem less interested and are willing to take more risks with disclosure while institutional investors are perhaps the most silent group of shareholders, never asking a single question of the directors, or ever trying to influence company decisions. The casual observer can be forgiven for believing that there is some unwritten, unholy understanding by institutional investors not to interfere in the company’s business.

Consequently, the responsibility to carry out the searching analysis of the annual reports of public companies falls on the press since the small shareholder seldom has the expertise to do so for herself. The task is even greater when the company fails to meet the disclosure requirements of the law and regulations, or where its reporting is contradictory, or sometimes clouded in strange language.

For these reasons shareholders and the public would have appreciated reading beyond all the positives disclosed in the DDL Chairman’s report. I have always faulted this company for the ambiguity and confusion caused by its deliberate or inadvertent choice of words in reporting on its performance. For example, readers are often left wondering whether references to performance are to volumes or value, and are confused by the unexplained relationship between the Chairman’s statement that in Caribbean markets the brands experienced growth of 28% while the financial statements disclose a decline in revenue of 24%.

Shareholders would also like to know, and have a right to adequate explanation for growth of 25% in the US market but a fall in profits from $36 million to $2 million, and why the already statutorily inadequate information given for the US subsidiary is not given for the Canadian subsidiary for which all the reader is told is that DDL’s brands increased by 35%.

The Companies Act requires the directors of holding companies to give a report on the affairs of their subsidiaries – not just the after-tax profits of a select few. It says a lot about DDL’s disclosure policies that NICIL, hardly ever considered a model of accounting and reporting, has better disclosures on its subsidiaries than DDL does.

On the Line: Annual Report 2012 – Demerara Distillers Limited

The conglomerate, Demerara Distillers Limited, which has as its flagship the world famous El Dorado rum, will be holding its annual general meeting next Friday April 26 when the directors will report on the performance and state of affairs of the parent company and its ten subsidiaries and one joint venture. One of those subsidiaries, Breitenstein Holdings BV, a Netherlands company has two distribution companies in the Netherlands and four in the United Kingdom. The joint venture is listed as a Manufacturing and Distribution company in Hyderabad, India. At least two of the subsidiaries – Distillers Gas Company (sic) and Demerara Contractors and Engineers Limited – seem to have disappeared from the radar, the first mentioned as dormant in a note to the financial statements and the second receiving no mention in any of the documents making up the Annual Report. Included in the financial statements of the group as Associate Companies are Diamond Fire and General Insurance Inc. and National Rums of Jamaica Limited, 19.5% and 33.33% of whose shareholding respectively is owned by the group.

The Guyana Stock Exchange, itself stunted by conflicts of interest and a tolerance of a culture of weak governance among the handful of public companies, has been far from impressed with the group, attributing to it one of the lowest Price Earnings (P/E) Ratio. The consolidated financial statements show that turnover of the company has risen by 11.5% but that there were declines in profit before interest and taxes (5.2%), profit after taxes (17.6%) and total comprehensive income by nearly 25%. The combined performance of the subsidiaries was flat. Turnover (sales) increased from $5,065 million to $5,173 million, or by 2.1%, less than the rate of inflation. Profit before tax of the subsidiaries remained the same but after tax profits fell from $352.4 million to $350.2 million, a decline of 2.1%.


A significant contributor to the change was explained in the Chairman’s Report as due to a “deferred tax charge of $230 million as against $65 million in 2011.” No explanation was given for this increase, nor do the financial statements give any hint, particularly since there was no significant acquisition in fixed assets, a major factor in making a provision for deferred taxes, as the tax allowance is very often significantly higher than accounting depreciation in the first year.

The important stock market consideration, Earnings Per Share (EPS) of the company fell from $1.55 per share to $1.28 per share dragging down that of the group’s EPS from $2.01 to $1.74 per share. However, with the way Guyana’s media overacts to absolute numbers, the market price for the shares has not been adversely affected. Or perhaps the market is responding to an increase in the dividends per share from $0.48 per share to $0.52 per share. Incidentally, someone in the company should tell the Company Secretary that Guyana abolished cents as a unit of currency in 1998!

Continue reading On the Line: Annual Report 2012 – Demerara Distillers Limited

On the Line – Demerara Distillers Limited Annual Report 2011

Demerara Distillers Limited, a conglomerate group comprising several local and overseas companies with manufacturing, trading, banking and trust relationships in Guyana, the region, North America and Europe as well as a joint venture in India and associated companies in Guyana and Jamaica, will be holding its annual general meeting this coming Friday, April 27. When the shareholders meet at the company’s Diamond Complex on the East Bank of Demerara, they will consider, among other routine items, an impressive if not entirely informative annual report containing the financial statements of the parent as well as its subsidiaries.

Measured by growth in turnover, it was not such a good year either for the parent (2.2% compared with 11.3% in 2010), or for the group as a whole (a more respectable 6.7% but less than 10.6% in 2010). Sales to subsidiaries represented 75% of total turnover of the company compared to 77% in the prior year.

In terms of after-tax profits, on the face of it the company and the group have done very well; the profits of the company increased by 68.7% while those of the group increased by a still substantial but smaller 35.7%.

Performance over the past nine years is illustrated by the following graph:

Source: Annual reports

No doubt encouraged by these results, the directors of the company are recommending an increase in the dividend per share from $0.45 to $0.48 – it would be good if the company could appreciate, like everyone else, that “cents” are no longer part of the currency of this country –which will cost the company some $23 million more than the $346 million paid out in 2010. Yet, for all of these, the Chairman in his report was less optimistic than usual, for reasons that only became apparent as the reader perused the financial statements and in particular their accompanying notes. Let us turn to some of those numbers.

According to the Chairman, there was an unspecified shortfall in bulk sales which carry a significantly lesser margin for which the higher value, higher margin-branded products should have more than compensated. An outsider looking in would think the company should welcome any situation whereby the higher margin products grow at a faster rate than the lower margin products. The emphasis on the sale of bulk products over branded products evident in year 2010 during which bulk sales increased by 45% while total sales increased by 10% seems quite counter-intuitive, if not illogical.

Domestic operations
While two of the four domestic operations made losses, those that were profitable produced some good results on a considerably smaller asset base. The standout failure is TOPCO, the juice company in which, despite the injection of hundreds of millions of dollars in capital expenditure, has managed to make losses in more years than it has operated profitably. One cannot help but notice too for TOPCO the almost identical language in 2010 being repeated in 2011, suggesting an inadequate level of attention in a competitive business environment. On the other hand, Distribution Services Limited, with a much smaller asset base, is reported to have enjoyed a10% growth in income and a 43% growth in after-tax profits.

Revenue from Guyana customers represents 65.4% of total group turnover compared to 62.5%, possibly reflecting the pressures faced in the international markets.

International operations
Not unlike the domestic operations, the inconsistently presented information for the overseas operations indicates that the international members of the group also had mixed fortunes. Total overseas sales fell by 1.6% despite growth in branded products of 10% reported by the Chairman.

In problem plagued Europe, turnover was down 6% and after-tax profits by 32%. In that region, a single customer generated 44.6% of total turnover from Europe compared to 50.0% in the prior year.

In DDL USA, no sales information is offered but after tax profit is reported to have grown from G$21 million in 2010 to $31.5 million in 2011. The shareholders of the parent company will recall that Demerara Rum Company of Canada was bought two years ago for $76.9 million. The company’s shareholders would certainly have liked to have had some particulars of that transaction as well as the parties behind the acquired company which handled bulk sales in Canada and must have had the confidence of the directors back home.

Interestingly enough, while the Canadian company was able to record an after-tax profit of $23.4 million in ten months, in 2010 it made only $8.9 million in 2011. It would certainly be interesting to learn how this was possible in the home of the company’s VP for International marketing, Mr Komal Samaroo. The company’s joint venture in Jamaica saw profits halved in 2011, but it was the Indian joint venture which ought to have caused the most concern among the company’s directors.

It seems certain that the existing joint venture in Demerara Distillers (Hyderabad) is heading the way of a number of other subsidiaries which the parent acquired and subsequently found unprofitable. Anyone following this column in the early nineties would remember the adventures of the first Indian operation which suddenly and without any explanation or information disappeared in 1993. Well, the directors having promised shareholders in the 2010 annual report that management would “make appropriate decisions to ensure an adequate return on [India] investments in 2011” now say, after another year of losses, that a “decision will be made in 2012 on the way forward.”

BEV Processors Inc
What does all of this mean? Except for an interesting transaction in which the company divested its BEV Processors Inc, the results of the company and the group would have been unimpressive. The profits reported include a non-recurring $288 million in dividends received prior to the sale of the investment, a reminder of a missed and costly lesson for Guyana’s taxpayers on whose behalf privatisation czar Winston Brassington sold the government’s 20% holding in GT&T without getting any of the year’s dividends, let alone accumulated profits.

The BEV transaction was particularly interesting in that the sale took place in early March 2011, but the dividend was not recorded in DDL’s books until the second half of 2011. Moreover, the 2010 annual report referred to the BEV shares sale in March 2011 without any mention of the substantial dividends the company received.

The June 2011 half year report published under the Securities Industry Act was used to help explain the revenue flow over the year. Turnover in the second half of the year represented 53% of the turnover for the entire year but produced exactly 50% of the gross profit and 60% of the profit before tax as a result of other income earned, representing 79% of the year‘s total. For the second half of 2011, finance cost was 52% and profit before and after tax 63% and 66% respectively, of the full year amounts.

But the income statements are interesting for other reasons too. Note 26 Related Parties discloses several transactions with group companies, only some of which I have been able to follow in the financial statements. Here are the major ones:

One might expect these to show up somewhere in the Income Statement; it is unclear where some of these items have been accounted for. In the interest of transparency, the company and its auditors TSD Lal & Co should be asked by some shareholder to explain these substantial transactions, before the GRA does. They should also be asked to provide information on which of the subsidiaries are audited and by whom, and which are not. It does not help shareholders and market confidence to have such uncertainties flowing from the financial statements of a public company, particularly one that is totally controlled by executive management.

Balance Sheet
Ever since this column began reviewing the company’s annual reports about two decades ago, two areas have stood out: inventories and loans. Because of the stable of products offered by the company, it is expected that inventories in the maturing process will be fairly significant while bearing in mind that inventories for accounting purposes must always be valued at the lower cost and market value, regardless of the accretion of the market value. The company had sales of $9.5 billion in 2011, the cost of which was $5.9 billion. In other words, the company has some 327 days of finished inventory on hand compared with 234 days in 2007.

Included in inventories as well is an amount of $1.165 billion of “spares, containers, goods-in-transit and miscellaneous stocks,” a category that always seemed to have been overstocked and out of balance with the finished stocks. It is good to see that that category seems to be falling significantly, both in absolute and relative terms. In 2007 the value of the inventories in that category was $1.8B or approximately 30% of total inventories.

The debt/equity ratio is a healthy 0.87:1 but the share of income before interest and taxes which goes to interest is around 25% and lenders to the company consistently receive a bigger share of the company’s earnings than its shareholders. In 2011 interest paid was $618 million ($371 million after tax assuming the lender is subject to a 40% tax rate) compared with dividends paid of $346 million with lenders investing less than half of shareholders’ equity.

Human resources
DDL has always prided itself as a good corporate citizen and is a major donor to the community through sports and education. In fact, two years ago the company established the DDL Foundation to “make a difference in the lives of deserving young people.” Internally too, the company has supported its employees with training, including the degree programmes at the University of Guyana. As the Chairman said, however, employee retention is a problem, a fact borne out by the turnover at management level in the company.

Of the nine members of the management team identified in the 2006 annual report, only two are still with the company, one of whom has moved up to the main board. Indeed, even at the board level there have been changes – some unavoidable – with only four of the nine directors in 2006 still on the company’s board of directors. Of the eight current directors, four are accountants including three serving in a non-independent executive capacity. The remaining one is a recent addition to the Board and serves as the Chairman of the Audit Committee.

This column has for years commented on the quality of the information provided in the Annual Report including an indication of those subsidiaries which have been audited and by whom. It is also not in keeping with modern trends to have only a Chairman’s report and not a CEO’s report, or a Management Discussion and Analysis which does not depend on the existence of the CEO.

Despite the improved earnings and earnings per share, the company’s share price is trading lower now ($10.7) than it did at the end of the half year ($11.0).

Half-yearly reports show increased turnover

Caribbean Containers Inc, a public company in the paper recycling business has reported turnover for the first half of 2011 increasing by 9.3% over the same period last year. This follows a 10.3% reported turnover increase by the DDL Group of Companies and a 13.8% increase in the Banks DIH Group, the only one of the three with a September 30 year-end while CCI and DDL have a December 31 year end. The increases in turnover are of course considerably higher than the rates of inflation in the economy. Banks DIH in explaining its improved performance cited higher dollar sales, a term usually used in contradistinction from volume sales.

Caribbean Containers Inc.

CCI reported a gross profit increase over 2010 of 14.3% but its losses before tax increased from $21.8 million to $23.8 million. The report shows Earnings before depreciation as having declined in the first half of the year by 31.3% and that margins were severely affected by the rapid escalation in global fuel prices which resulted in the company’s fuel bill going up by some 40%.

The company’s performance in the third quarter ended September 30, 2011 improved strongly with an 18.3% growth in Earnings before depreciation compared with third quarter 2010. The result was a modest profit before tax of $2.7 million compared with a loss of $10.2 million for the third quarter of 2010. The overall result was a sharp decline in loss before tax for the nine months from $32 million in 2010 to $21million in 2011. The report explained that over the last four years, sales in the second half of the year averaged 13% more than in the first half.

CCI has had its fair share of financial problems over the years with a number of ownership changes and substantial debt restructuring. As at June 30, the company had liabilities of $365 million including trade and other payables of $116 million and loans repayable within a year amounting to $69 million. Cash resources amounted to $37 million but this had gone down to $25 million three months later.

In what can be described as Guyana’s principal LCDS private sector company, survival is still the challenge as the company’s aging technology has high running and maintenance cost, placing cash management at the centre of management focus.

Yet the company deserved commendation for being the only private sector company other than Republic Bank (Guyana) Limited to publish quarterly financial reports. The Bank of Guyana had published and recently withdrew Guideline # 10 requiring all banks to publish quarterly statements.

Banks DIH Limited

The half-yearly report is a consolidated report of the food and beverage giant and its subsidiary Citizens Bank Guyana Inc. Given the disparate nature of the operations and business of the two entities such a consolidated report does not allow any easy informed analysis of the two businesses.

The company had unaudited profit after tax in the half-year of $689.5 million compared to $594.1 million in 2010, an increase of $95.4 million or 16%. Chairman and Chief Executive of the group explained in the report that the improved results came mainly from increased dollar sales, efficiencies derived from Plant and Machinery upgrades and the benefits obtained from the installation of Capital Equipment.

The subsidiary Citizens Bank achieved an unaudited profit after taxation of $364.6 million compared to $261.0 million in 2010.

Total group profit after taxation for the half year was $1,025 million compared with $836 million, an increase of some 22% and a resulting increase in Earnings per Share from $0.71 per share to $0.85 per share.

A meaningful cash flow commentary is not possible as the cash and bank resources of the company cannot be distinguished from those of the banking subsidiary. Inventories, the bulk of which would be for the company stood at $4,367 million, increasing from $4,069 million one year earlier. For the type and nature of the operations this seems reasonable, particularly when compared with DDL to which we now turn attention.

Demerara Distillers Limited

This group comprises several local and overseas companies in the region, North America and Europe as well as a joint venture in India and associated companies in Guyana and Jamaica. In his Chairman’s Statement Dr. Yesu Persaud reported that the group’s pre-tax profit for the half-year of $769 million had increased by 6.4% over 2011, attributed to the performances of the European subsidiary, Demerara Shipping Company Limited and Distribution Services Limited.

When account is taken of increases in the fair value of investments and exchange differences on consolidation, the total comprehensive income for the year – a measure of the sum total of all operating and financial events that have changed the value of an owner’s interest in a business – is $627 million compared with $437 million in 2010. The group may have a challenge however in exceeding the full year reported profits for 2010 of $1,139 million. The profits for that year were augmented by a $151 million “share of profit of associated company.” In the first six months of 2011 this profit was only $8.4 million compared with $3.4 million in 2010 half-year, suggesting some major development in the second half of that year.

Earnings per share (EPS) have increased from $0.65 in half-year 2010 to $0.69 in 2011.

The balance sheet continues to be fair with current assets exceeding current liabilities by a ratio of nearly 2:1. The problem lies however in the composition of the two balance sheet components. Trade payables have climbed to $4 billion, bank overdraft is $2.8 billion and loans repayable in the next twelve months is close to half a billion dollars.

Share prices
None of the reports bother to speak of one of the most important issues for shareholders and that is the performance of the companies’ shares on the Stock Exchange. A comparison of recent prices is shown below:

Annual General Meetings generate interest

As the season for general meetings moves into high gear, members, or as some companies call them shareholders, have been showing some interest in these meetings, although not always for what might be considered the right reasons. One complainant in a letter appearing in the press this week went so far as to make the charge of meanness against the directors and management of one of those companies. For good measure the writer reported that there was a “deep groundswell of resentment against the directors and management.” One individual who takes a healthy interest in such meetings and is one of the younger breed of investors wrote me on a number of issues all of which he suggested indicate that the directors and management are generally insensitive to the convenience of their members, including the calling of meetings when most persons would be at work, the meetings of more than one company being held on the same day, and no facilities for the aged and infirm. The shareholder was so incensed that he suggested that despite the expense of putting out glossy annual reports, company management really do not want shareholders to attend, speculating that there must be “something to hide”.

That speculation seems both harsh and unjustified. Experience suggests that our shareholding public is not sufficiently informed to detect any “hidden truths” and questions at an AGM almost without exception come from a handful of persons and are less than pointed. Some people it seems go to meetings as a social event, for many the only time they are invited to a hotel. Others go for that peculiarly Guyanese phenomenon at which gifts are distributed to those in attendance. While the motive for this may be good, this is an unfortunate practice to which members have become so accustomed that I do not think any company would wish to discontinue.

Serious business
A shareholders’ meeting is a serious event at which searching questions should be asked of the directors particularly given the weakness of our financial press and the fact that none of the companies meets the press and gives them the opportunity to ask questions. Such meetings are not really the forum for long-service awards but for directors to allow questions about their stewardship.

The practice of gifts apparently developed as a goodwill gesture and is now used to encourage attendance at meetings. It is important to note shareholders’ entitlement is to dividends – not gifts – and that all holders of the same class of shares are to be treated equally. In other words if one shareholder gets a gift or a dividend, then all shareholders of the same class are equally entitled. It would be interesting to see how any of the companies would respond to a challenge to a charge of discrimination against shareholders who do not attend and are therefore told that they are not entitled to a gift.

On this note it is useful to note that the Institute of Chartered Secretaries of India – a country that has lots of experience with improper influences – says categorically that “No gifts, gift coupons, or cash in lieu of gifts should be distributed to Members at or in connection with the Meeting”.

Clash of meetings
In terms of timing of meetings, part of the problem is that several of our public companies have a calendar year-end and have four months within which to hold their annual general meetings. But to do so they need to have the company’s financial statements finalised and audited for inclusion in their annual reports which must be circulated three weeks before the annual general meeting. It is hardly any surprise then that most meetings are held in the fourth month following the year end. While the Securities Council cannot dictate the date and time when companies which they regulate can hold their AGMs, it may wish to consider discussing with them a schedule so that there is no clash and persons who hold shares in more than one company are thereby free to attend each of these meetings.

This coming weekend there are three meetings of public entities – the Demerara Distillers Limited and Sterling Products Limited (April 29) and the New Building Society Limited (April 28). All the reports offer useful opportunities for serious questions on policies, performance, shareholder relations, etc. which could be raised by some shareholder group with collective knowledge and some institutional memory. Before making some specific points about the companies here are some general questions which shareholders can raise.

Board of Directors
With each of the three companies having only one woman director, the questions should be asked about the steps the company is taking to attract qualified women and minority shareholders for board membership. They may also wish to enquire about any mandatory retirement age for directors; whether there is an ethics committee; the perquisites paid to executives, the basis on which these are valued, whether executives reimburse the company for the fair value of personal benefits received and whether executive perquisites are checked by internal auditors and reported to the audit committee.

Audit and controls
The number of internal auditors the company has; whether they report to a sufficiently high level of management and have ready access to the audit committee; the regularity with which they visit each operating location, including foreign operations; the standards and performance of the internal audit department and whether these have been evaluated by an external review; whether internal auditors have full, unrestricted access to all company functions, records, property and personnel; and the actions taken on any material weakness in internal control reported by the independent accountants.

In the case of a company with several subsidiaries, if the annual report does not provide the information, shareholders should enquire whether all of the subsidiary companies are independently audited and the names of the audit firms. Too many auditors are not necessarily a good sign, while no auditor for any of the subsidiaries casts doubts on the financial integrity of their financial statements.

Political and Economic Environment and Taxes
Shareholders should be asking whether the company has maintained its competitiveness in terms of sales and earnings in the markets in which it operates; the cost to the company of compliance with governmental directives and regulations and the risks of operating in some markets and industries; the conditions for investment and expansion; taxation and efforts to lobby government on various issues.

In an election year, shareholders may wish to enquire whether the company plans to make any contributions, loans or other support to any political candidate or organisation including lobbies and if so to ask for details.

Financial and Liquidity and Capital resources
Against the background of their own personal liquidity and to formulate their savings and investments, shareholders would need to hear from their company of its plans to pay cash dividends and issue cash or bonus stock. With financial statements and annual reports growing in size and complexity, the shareholder should be enquiring why financial statements and footnotes in the annual reports are not more intelligibly written so that the average shareholder can understand them.

This list is by no means exhaustive and would have to be tailored to the specific circumstances of the particular company. Serious shareholders should keep a file containing past annual reports and the questions asked since even directors sometimes need to be reminded of earlier commitments.

Let us now turn to some specific issues which could be raised at this weekend’s AGMs.

This company operates in several countries, the economies of all of which did not perform as well as Guyana’s. Yet of the group companies, those in Guyana performed less well than those abroad. Indeed the parent company (DDL) reported a 12% decline in after tax profit, while the other local subsidiaries including its trading company Distribution Services Limited, TOPCO, Demerara Shipping and Demerara Contractors all came in with disappointing results. The company’s financing strategy has been questioned in these columns before and one wonders at the logic of financing costs over the past five years nearly double the returns to shareholders. If it has not already done so the company needs to consider why with all the investment TOPCO is still making losses. The company’s investment in India continues to cost the company significant sums while St. Kitts and North America remain marginal after several years of efforts and expenditure. On the other hand the investment in National Rums of Jamaica Limited is producing good returns.

Overall the return on assets and shareholders’ funds, has dipped slightly.

Sterling Products Limited
While turnover has increased, profit after tax has declined and therefore so have measures such as return on assets and return on shareholders’ funds. Chairman Dr Leslie Chin attributed this to higher deferred tax which was not completely compensated for by a decline in the corporation tax charge. In order to maintain the same level of dividends paid in 2009 the company will be paying out 53% of its after-tax profits.

New Building Society
The notice convening the meeting excludes from the right to attend the meeting, mortgage account holders, who under rule 21 of the Society’s Rules are described as advance members. While a similar exclusionary note was included in the 2009 annual report, such persons have always been allowed into the meetings and the basis of the decision to exclude them is questionable.

The other three major issues of note are: 1. the Society has been finally brought under the Financial Institutions Act although it has a four-year transitional window; 2. it is still in breach of section 7 of the Act, an issue I have pointed out before; and 3. the Society actually lent one billion dollars less in 2010 than in 2009.

Indeed, despite the housing programme in which it should be playing a major role, the number of loans at the end of 2010 was a mere seventeen more than in 2009, a clear indication that the Society lost significant market share during the year.

While the report acknowledges the mutual nature of the Society’s ownership it not only repeats the word “profit” ad nauseam but the directors appear not to understand the meaning of the concept. No wonder then that they have ignored rule 23 relating to rebates, an issue which the directors agreed at the last meeting to review following a question from the floor.

For those attending the meetings, enjoy your gifts.