DDL takes umbrage at Stabroek Business errors
Kaieteur News
June 11, 2004
The Demerara Distillers Limited, which obtained an injunction against the Guyana Securities Council on Wednesday, which now paves the way for its Annual General Meeting to be held this afternoon at its Diamond Head Office, has issued a response to the analysis of the company by the Stabroek News Business Page. Because of the length of the presentation and the importance of the argument contained therein, Kaieteur News reproduces the company’s position in full.
THE TEXT
It is not the policy of the Demerara Distillers Limited to engage in public debates in the media, however, in this particular instance, DDL is compelled to respond to the writer of the Business Page in the Stabroek News for the purposes of protection of its interest as well as its duty to expose any statement which mislead the public.
Business Page interrupted its series on GT&T to launch an attack on what seems to be one of its favourite targets, DDL, in a column with issues not related to the 2003 Annual Report, and once again riddled with inaccuracies. For brevity, we have listen ten (10) below :-
1. The subsidiaries did in fact contribute 37.5% of revenue and not 23.4% as stated by the analyst.
2. The analyst has INCORRECTLY included the return from the associated company when calculating the return from the subsidiaries.
3. The ratios quoted in relation to the subsidiaries are incorrect.
4. The ratio for the debt to equity of the subsidiaries is incorrect.
5. The capital expenditure budget for the years 2001 to 2003 was not US$15 million.
6. The analyst has once again made incorrect conclusions with regard to the transactions with Hamilton Bank.
7. The 2000 Annual Report did not state that the company owned trademarks in 40 countries.
8. Nizam Ali & Co. does not provide audit services for the company nor any of its subsidiaries.
9. The financial statements are in compliance with the International Accounting Standards and the Companies Act 1991.
10.The Chairman’s statements in relation to subsidiaries turnover and profit before tax are consistent with the financials.
The company’s response below is in light of these and other inaccuracies in the analysis.
DIVERSIFICATION STRATEGY
The analyst has attempted to trivialise the DDL group’s strategy of diversification, ignoring the fact that diversification has led to the creation of the EL Dorado Brand- recognised by the analyst as one of the finest rums in the world- and 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.
The analyst goes on to make reference to Johnnie Walker & Sons implying that this company has no other interests. The Johnnie Walker label is however, owned by Diageo plc. Diageo plc owned numerous subsidiaries including the Pillsbury Company which is involved in the manufacturing, marketing and distribution of refrigerated dough products, frozen pizza, frozen and canned vegetables, Mexican foods, canned soups and food service, baking mixes, as well as the Burger King Corporation- one of the largest Quick Service Restaurant franchises in the world.
In the Caribbean, two of the most prominent groups, the Ansa McAl group of Trinidad and Tobago and the Goddards Group of Barbados are highly diversified. The Ansa McAl group is involved in the manufacturing, brewing, finance, insurance, real estate, automotive, media, trading and services sectors. The Goddards group is involved in Airline catering, industrial and restaurant catering, General Trading, Meat processing, Printing, Baking, Automotive, Real Estate, Shipping, detergents, rum distilling, water purification, Tiles and waste disposal, Laundry services, Financing, fish and shrimp processing, property rentals and General Insurance.
The DDL Group operates in a highly complex international environment, which is apparently beyond the comprehension of the analyst.
PERFORMANCE
Subsidiaries contribution to turnover
- Any competent accountant would understand the basic principles in preparing group accounts require adjustments for inter- company transactions and elimination of unrealized profits on consolidation.
The analyst in his haste to accuse the company’s Chairman of making inaccurate statements in his report seems to have forgotten that in a group where sales are made between group companies, simple addition of the turnover of the holding company and the total subsidiaries will not equate to group turnover, which must be adjusted for inter-group transactions.
Subsidiaries contribution to Profit before Tax
- Once again the analyst has made an incorrect calculation, including the share of associated company profits in the profits attributed to subsidiaries. The analyst needs to adjust for the share of associated profit that amounted to $83M in 2001.
- These elementary errors made by the analyst have fundamentally affected his analysis since all of his ratios have been incorrectly calculated with reference to turnover, profitability, return on assets and taxation of the subsidiaries.
Capital Programme and Financing
The analyst, in the haphazard manner of his presentation, refers to the Group’s capital programme for a period varying from three to five years and the way in which it was financed.
The analyst, however, in his simplistic and superficial approach, fails to highlight that cash generated from operations for this five-year period, totaled $5.7B compared to an increase in net borrowing of $1.8B. The total funds available in this period for investing and financing activities was therefore, $7.5B of which self-generated funds contributed 76% of this total. By any standard, this must be considered healthy.
The analyst likewise incorrectly states that capital expenditure of the company for the years 2001 to 2003 exceeded budget by close to US$7M referring to US$15M stated as the requirement for the company’s expansion programme in the 2000 Annual Report. The company invested approximately US$17M during this period. The ten items referred to by the chairman in the 2000 report was not the entire Capital Budget, the Chairman highlighted the major items planned.
These investments were made with the strategic objective of reducing the Group’s dependence on bulk commodity products by diversifying into branded products and related activities. The fact that companies need to invest and that long-term investments do not yield immediate returns is conveniently ignored by the analyst. The expansion of the group was far from adventurous as categorically stated by the analyst. It was carefully planned and has the full support of our local and international bankers.
The column goes on to refer to the evils of subsidiaries borrowing in their home currency to finance their projects. Would the analyst prefer that all borrowings be made by the holding company in local currency to finance projects overseas? The group enjoys the confidence of its international bankers, such as ABN AMRO.
The group has accessed long term financing (25 years) at extremely competitive interest rates currently 3.25%. This is a tremendous achievement for a local group: the analyst once again attempts to belittle this significant achievement. Notwithstanding the attempts by the analyst to distort the facts, the company will continue to seek attractive sources of finance to fund its capital programme.
The analyst reports on the ratios of eight to ten years ago without appreciating that the global conditions have changed – as has been continuously reported during the 1990s – the end of preferential access to the European market, the reduced return from products sold on the bulk alcohol market and the continuing threat faced by bulk commodity rum as a result of the agreement on zero for zero by the EU and US needs to be considered when comparing the results of 1994 to those of 2003.
Had the company not pursued its diversification strategy, operating profits would have declined from the amount of $811M in 1994 because of the removal of the preferential access on bulk commodity alcohol on which the Group was overly dependent at that time.
During this ten-year period, operating profits, however, increased by more than 88% to $1,522M as a result of the contribution of the activities diversified into.
Increase in amounts attributable to Shareholders
The analyst goes on to misrepresent the amount attributable to shareholders by inaccurately focusing on dividends paid instead of retained profits available for distribution to shareholders. The analyst commented on four years 2000-2003. In these four years, amounts available to distribute to shareholders increased by $3,135M. Of this amount, $889M was paid in dividends and $2,246M was retained in the business to ensure long-term growth and profitability of the group.
Trademark
The analyst refers to the ‘vast’ expenditure on trademarks. We are unsure as to the benchmark he is using to term the expenditure vast, since deferred expenditure on the balance sheet represents 5% of non-current assets. Diageo plc, the owner of the Johnnie Walker label that the analyst refers to has intangible assets on their balance sheet as at the 30th June, 2003 that represents 44% of non current assets.
Inventory
The Group has in fact invested an additional US$2M in its aging programme. The analyst incorrectly links the rums being aged with the work in progress balance. The branded alcoholic and non-alcoholic beverages represent the major components of Finished Products, Spares, containers, goods-in-transit, and miscellaneous stocks include raw materials such as concentrates, pre-forms, bottles and crates required for our bottling operations along with increased quantities of molasses held to guarantee the continuity of our operations during the GuySuCo out of crop period. Molasses along with barrels for maturing of rums form a significant part of this inventory category and are required specifically for the company’s aging programme. In addition, the company is required to maintain an inventory of spares for its highly specialised equipment that form an integral part of its operation.
The Audit
Spreading Audit work
- The directors have also not “spread” the audit work. Only three of the, at least, ten audit firms locally are engaged to perform audit services for the group.
The analyst’s comments are not consistent with the above fact and raises the question of the analyst’s motivation.
Compliance with international accounting standards
- The analyst refers to areas of alleged non-compliance indicating in his opinion that there was insufficient disclosure and questioning the treatment of exchange differences on consolidation. As required by IAS 21 the assets and liabilities of Foreign Entities are translated at closing exchange rates and exchange differences are classified as equity. The analyst has apparently once again for the umpteenth time made an incorrect assumption or does not understand the difference between a foreign entity and a foreign operation, which is covered in the standard.
‘Analysts’ are in a privileged position and they are entitled to their views. At minimum, however, their comments should be fair, balanced, unbiased and based on fact. The analysts’ comments can affect shareholder value and as such they have a responsibility to be professional ensuring that all their analysis is accurate and objective.
We at DDL have always strived to maintain high standards in all areas; we appreciate comments, suggestions and constructive criticisms so that they will help us to improve all areas of our operations.
In closing, we wish to declare that no company, whether public or private, would permit or tolerate such a savage attack on its integrity which has serious implications with respect to its credibility, both locally and internationally, without taking all necessary action to deal with it. .