Dear Editor,
With reference to the Sunday Stabroek Business Page of Sunday 15th June 2008.
We have in the past stated that it is not the policy of Demerara Distillers Limited to engage in public debates in the media, we are however once again compelled to respond to the writer of the Business Page to correct a number of elementary errors he has made. These errors although being so basic are however potentially detrimental to the interests of the DDL Group since they have resulted in a fundamentally flawed analysis and are misleading to the public.
Performance of the Subsidiaries
A substantial portion of the article was dedicated to the performance of the subsidiaries; unfortunately the basis on which the writer determined the performance of the subsidiaries and associates was seriously flawed.
The analyst made the rudimentary mistake of apparently simply subtracting the Company results from the Group results and assuming that the difference represents the performance of the subsidiaries and associates. It is a basic principle in preparing group accounts that adjustments for inter-company transactions and the elimination of un-realized profits on consolidation are necessary.
This has not been the first time that this type of error has been made in his analysis, the fact that this mistake continues to be made calls into question the care that is being exercised in the preparation of these articles.
The secondary assertions made are therefore inaccurate and unsound since these are based on a flawed premise (as mentioned above). A section of the Article is titled ‘vision’; the writer fails to recognize that visionary thinking is not set in a time period of one or two years but over a longer time horizon.
The Group’s diversification strategy has led to the creation of the EL Dorado Brand, DSCL and DSL all of which have been recognized by the writer as being successes. The El Dorado 15 year old Rum has become one of the recognized brands globally; this has improved the image not only of DDL but also the country as a whole. In the past the analyst questioned the investments made in DSL and DSCL; these same companies that he now admits are successes.
The writer fails to recognize that the subsidiaries are related to (e.g. manufacture of fruit juices) and provide support for (e.g. shipping, distribution, information technology) the business of the parent company.
Turnover and Profitability of
the Company and the Group
In what has now become a norm the analyst ‘cherry picks’ data as he sees fit to serve his purposes at the time, in this his latest article he has selectively put together a hodge-podge five year review of some of the subsidiaries.
For this reason we have sought to set out in summary, having regard for the limitation in space that this newspaper affords, the growth in turnover and profitability of the company and the group over the last five years; using two key indicators Turnover, and Profit before Taxation (PBT).
Company Group
2007 2002 2007 2002
G$ M G$ M % Inc G$ M G$ M % Inc
Turnover 9,843 7,345 34 11,789 9,055 30
Profit before Taxation 1,358 865 57 1,572 1,001 57
Turnover
At the beginning of 2007 Value added Tax (VAT) was introduced, this replaced amongst other taxes the Consumption Tax (C/tax) regime. The turnover reported in 2007, excluded VAT, in previous years Turnover included C/Tax. Even with this fact, as the above table indicates in the last five years Turnover has grown by 34% in the case of the company and 30% in the case of the Group.
Profit before Taxation
The PBT increased by 57% for both the company and group in these five years, this represents a year on year growth of 9.5%.
By any standard this is steady sustained growth, despite the challenges that exist in the local and international markets.
Assets, Liabilities and Return on Shareholders’ Funds
The writer has made mention of the increase in the Group’s liabilities without making any reference to the corresponding increase in the assets, the growth in Shareholders’ funds or the steady performance of the return on shareholders’ funds.
The writer we suspect knows better and should live up to his commitments of providing fair and unbiased analysis of the financial performance of the reports he reviews.
Below is a summary of the pertinent information over the last five years.
Group
2007 2006 2005 2004 2003
G$ M G$ M G$ M G$ M G$ M
Total Assets 17,575 15,385 14,390 13,719 12,924
Total Liabilities 7,694 6,549 6,169 6,019 5,850
Shareholders’ Funds 9,878 8,829 8,214 7,691 7,066
As the above table indicates the writer failed to make any mention of the fact that over the past five years total assets increased by $4.6 billion while Total Liabilities increased by only $1.8 billion. The increase in Total Assets was therefore more than two and a half times that of the increase in Total Liabilities!
In addition Shareholders’ funds increased by $2.8 billion or 40%, to almost $10 billion dollars. The analyst made no mention of this.
The analyst also failed to make mention that over this five year period return on shareholders funds has been at a steady average of 16%!
Cash-flows
The writer states, and I quote: “Over the past two years alone, the group has had negative cash flows of more than $1.25 billion dollars. . .” This statement is absolutely false, and seems to be a figment of the imagination of the writer. We are extremely disappointed by this type of negligence.
For the benefit of your readership we have included a table showing the actual cash-flows of the group over the last five years.
Group
2007 2006 2005 2004 2003 Five Year Total
G$ M G$ M G$ M G$ M G$ M G$ M
Cash Generated 2,236 1,585 1,852 1,855 1,165 8,693
from Operations
Net Financing 458 -10 -361 374 373 834
Short term funds -154 301 297 -222 505 727
(increase)/decrease
2,540 1,876 1,788 2,007 2,043 10,254
Used as follows
– Investing Activities 907 684 553 859 1,187 4,190
– Taxes Paid 808 409 494 494 304 2,509
– Interest Paid 525 503 459 414 330 2,231
– Dividends Paid 300 280 282 240 222 1,324
2,540 1,876 1,788 2,007 2,043 10,254
As the above table indicates the Group generated from operations in the last five years in excess of $8.7 billion. Over this period $4.2 billion was used in investing activities (purchase of fixed assets etc). In addition over $1.3 billion was paid in dividends and $2.5 billion in corporation and property taxes.
All of this was done with only a minimal movement in long term loans, long term financing increased by only $834 million. In 2007, cash and cash equivalents improved by $154 million.
Other Matters
Diamond Fire and General Insurance Incorporated
The guidelines are quite clear on the requirement for consolidation of companies. We are confident that we have correctly followed these rules.
Distribution Services Limited
The rationalization of the Group’s distribution through Distribution Services Ltd will have a negligible effect on taxation. As was stated, substantial benefits are derived from rationalization of distribution and larger economies of scale.
Share Price
The analyst admits that the price earnings ratio of close to eight is “quite attractive”. Meaning that it is a worthy investment, the ‘analyst’ the next time around may want to contemplate that this is the reason that only a minimal amount of shares (less than 1%) have been traded in the last year. Existing Shareholders seem quite content in holding on to their investment.
In closing, it is clear that the writer, apparently in the haste to prepare the article, has made a number of elementary mistakes and errors. These must be a cause for concern and a source of embarrassment to the analyst and to this newspaper.
As always we appreciate constructive and fair criticisms as well as suggestions in our quest to becoming the premier public company in the region. As is demonstrated by the multiplicity of errors, this article by any stretch cannot be viewed as fitting the criteria of being fair, balanced or impartial.
We are confident that the steady growth experienced in the past will be maintained and improved upon into the future. The Group is well positioned to take advantage of the opportunities that exist both locally and more so on the International Market. We look forward to continuing our contribution to the society as a whole and the building of a strong and robust economy.
Yours faithfully,
R. Vansluytman
Demerara Distillers Limited
Company Secretary/Legal Officer
