The Demerara Distillers Limited Group says that 2008 was one of its most difficult in recent times and after tax profit of $789.2M was 11% less than 2007’s $885.2M in a year in which there was also heavy borrowing.
The company is nevertheless proposing to maintain its dividend rate at last year’s 40 cents per share and this is to be finalized at its AGM on June 19. The company is also in the middle of continuing litigation with the Guyana Revenue Authority (GRA) which presented it in January this year with a new 5.3b tax claim.
In its annual report distributed to shareholders, Chair-man Yesu Persaud underscored the difficulties the group experienced in the context of the global economic crisis.
He said “The Group experienced one of its most difficult and challenging years in recent times. Profits before interest and taxation were $1.971 billion compared to $2.024 billion in the preceding year, a 2.62% reduction”.
Persaud cited fuel prices and exchange rate movements among factors for the decline in profitability. He said that in 2008 the Group spent in excess of $1.7b on fuel-related expenses compared to $1.2b in the previous year – a 37% increase on top of the 26% for the preceding year.
The net exchange loss for 2008 amounted to $198M compared to the gain for 2007. “Our Group operates in many different countries and deals in most of the major currencies hence the movements in the exchange rates between currencies and particularly against the US dollar impacts the results directly”, Persaud said. He also pointed out that in the last quarter of 2008 there was a sharp drop from the peak in July 2008 between the Euro and the Pound Sterling against the US dollar.
Another factor in the smaller profit was the $225M in excess of the 2007 provision for impairment of assets. The report said included in these amounts were provisions for items that would become obsolete when the new bottling plant and distillation still became operational.
DDL said the $903M hit from these three factors was cushioned by the performance of overseas subsidiaries and local subsidiaries Demerara Shipping Company Limited (DSCL) and Distribution Services Limited (DSL) – the latter playing a growing role.
Current assets of DDL at the end of the year totalled 9.3b compared to $7.5b in 2007 while current liabilities of the company were 6.69b at the end of 2008 compared to $3.6b at the end of 2007 – representing a significant hike.
On the performance of DDL in the Guyana market, Persaud said that the local economy experienced a significant decline in disposable income. He added that the economy as well as consumers continued to be “impacted and burdened by the Value Added Tax”. The DDL Chairman said these factors resulted in a reduction of the beverages market but that the company was able to maintain and grow market share in some areas.
Turnover for the year was $8.8b compared to $9.3b in 2007 however this drop in part reflects the contracting out of the company’s retail distribution to DSL. Persaud said that the restructuring of distribution resulted in the selling and distribution expenses of the company being slashed to $428m from $1.16b in 2007.
“The economies of scale and improved efficiency in reaching our customers resulted in the Group’s selling and distribution expenses remaining fairly constant despite the significant increases in fuel and related expenses as regards to fleet costs. The Group’s selling and distribution expenses increased marginally from $1.44b to $1.46b.
International sales, the DDL Chairman said, accounted for 43% of the company’s turnover – excluding excise taxes on local sales – compared to 38% in the preceding year. Bulk rum sales dropped by 6% but there was a 61% increase in sales globally of branded bottled products over the previous year.
Persaud said that European revenues almost doubled and there was a 59% increase in Canadian sales which outpaced sales in the US for the first time. He said El Dorado was being sold in eight of 10 Canadian provinces and there was also a 23% rise in sales in the Caribbean.
Subsidiaries
Persaud said that DSL now played an integral role in the distribution arm of the group and its pre-tax profits rocketed to $284m compared to $118m in 2007 – a jump of 141%. “This strong performance was as a result of the steady growth in retail sales through the cash and carry outlets as well as the restructuring of its distribution base with the addition of the DDL line of products”. DDL plans to rebuild the outlet at Diamond and open a new one on the West Demerara in 2010.
The shipping company DSCL registered pre-tax profits of $147m compared to $120m in the previous year.
DDL’s juice subsidiary TOPCO however continued to experience problems. Performance, according to Persaud, was affected by the unavailability of fresh fruit for most of the year except the last quarter. Fuel costs also had an impact and as a result TOPCO experienced a loss after tax of $50.4m compared to $6.2m in the previous year.
DDL’s entire interest in Solutions 2000 Inc was sold at the end of 2008 resulting in a small gain on disposal of $1.3m. Persaud explained that the decision to dispose of it was based on the continuing high cost of internet bandwidth, the entry of the monopoly bandwidth provider into the internet market, the amount of funds that would have been needed to change the existing technology to stay current and priority to other capital programmes in the group. The loss after tax from Solutions 2000 was reduced to $14.9m from the previous year when the loss was $23.5m.
Focusing on international operations, the Chairman’s report disclosed that its Europe and North America operator, Breitenstein Holdings BV racked up a pre-tax profit of $108m compared to $54m.
Demerara Distillers (US) Inc. registered a pre-tax profit of $13.4m compared to $3.8m in 2007 while its St Kitts operation registered a profit after tax of $9m compared to a loss of $17.2m in 207. Persaud that in 2008 he and Vice President, international marketing, Komal Samaroo met with the Prime Minister of St Kitts to discuss an extension to the tax holiday that DDL had benefited from.
Its India joint venture, Demerara Distillers (Hyderabad) registered an after-tax loss of $13.8m compared to a loss of $10.5m.
Its associate, BEV Processors Inc had a good year and DDL’s 30% share of the profit translated into $50.1m compared to $14.5m in 2007. “The performance in 2008 resulted from better catches as well as higher prices in the US market where most of the product is sold. Competitively priced fuel which was sourced from Trinidad and Tobago helped to alleviate the massive increases in fuel prices experienced on the world market”.
Investment
In 2008, capital expenditure amounted to $1.88b and this included part payment for the new bottling plant which is now in place, the bio-methanization plant and the new column still. The new Multi Column Still is on track to be completed in the first quarter of next year. “This Still is anticipated to improve our competitiveness through improved efficiencies for raw material usage and fuel consumption”.
According to the chairman’s report, the bio-methanization plant is expected to come on stream during February next year within the projected cost of US$5m. The methane gas flowing from this plant will be utilized to power boilers at the distillery operations cutting dependence on heavy fuel oil. Persaud said “at the current prices of fuel the payback for this project is less than three years”.
Persaud said that these major projects and other works for 2008-10 were being funded by a combination of long-term bank borrowings, self-generated funds and European Union grant aid. In the first quarter of this year, a US$12m long term loan facility was clinched with RBTT at an interest rate of LIBOR plus 3%. DDL exercised the option of setting the rate over the duration of the loan at 6.2%. “This rate is extremely favourable given the prevailing business conditions worldwide”, Persaud’s report said. He added that the loan was to fully repay a US$8.5 million short term bridging facility negotiated with RBTT during 2008.
In relation to human resources, DDL said that during 2008 it spent in excess of $45M on training.
Under pending litigation, DDL pointed out that it had legally challenged the GRA on the basis for the determination of certain taxes. In February 2005, the courts found in the favour of DDL but the GRA appealed. On July 31, 2008 the Guyana Court of Appeal dismissed the GRA’s appeal. Following the dismissal of the appeal the GRA began a new assessment in August 2008 and on January 16, 2009 issued a new claim in the amount of $5.3b. On an application by DDL the High Court has issued an order nisi pending the hearing of the matter.
