Business Page

Introduction

This time of year could be said to be earnings season for Guyana: the deadline for interim results ending 30 June looms and those companies with September year-ends start publishing their full-year results. According to my records this is the first time Caribbbean Container Inc (CCI) has published interim financial reports. The company was handed a life-line by its creditors and the Managing Director’s report stated that “Sound Corporate Governance is essential to good business practices”. It is thus heartening to see that the company is now taking its disclosure obligations seriously.

The publication appears to comply with most of the requirements of the Securities Industry (Disclosure by Reporting Issuers) Regulations. The basis of taxation does not appear to be stated; though given that taxation charge was zero it may not be strictly necessary. In keeping with the practice of many reporting issuers the interims were published well after the deadline required by the regulations.

Failing to generate cash from operations

On first inspection CCI’s financial statements appear to show that the company is generating cash flow: cash at bank and in hand increased from G$7.8M at the year end to G$16.0M as at 30 June 2007. However closer examination reveals that the company has drawn down further loans to the tune of G$42.6M. Though no cash flow statement has been included with the interims, it is possible to construct one based on the items in the profit and loss account and balance sheet. This investigation reveals that in the six months to June 2007 cash generated from operations was negative: G$(19.6M).

The company thus appeared to be borrowing in order to meet its working capital requirements. Though the working capital position has improved tremendously since the write off of the debt to the Republic Bank Group (RBG), it appears that despite the restructuring the company is still having trouble generating cash flow.

In my review of 2006 financial statements I had indicated that I thought that cash from operations would now exceed finance costs, thus the company would have sufficient cash to meet the interest cost of servicing its debt. Instead, the reverse appears to be the case.

If the company cannot generate cash it will end up in a similar situation to the one that led it into discussion with RBG to reach a compromise settlement in the first place. In the management letter to shareholders the Managing Director, Mr Ronald Webster, indicates that fuel price increases adversely effected the margins in the last quarter of 2006 and the first half-of 2007.

Analysis of the gross profit margins (gross profit excluding depreciation over turnover), reveals that while margins for the trailing twelve month period are on a downwards trend, the margins for the six-month period for the second half of 2006 exceeded those in the first half. Given that fuel prices adversely effected margins in the last quarter of 2006 it would have been useful for the report to indicate what caused the margin to increase overall in the second half of 2006.

2006 Analysis

The profit margin for the six months to 30 June 2007 is almost identical to that for the six months to 30 June 2006. Given that revenue increased 10% this means that the loss before interest and taxation fell from G$81.5M to G$64.6M, with depreciation contributing G$86.1M and G$75.3M to these figures respectively. Thus it appears that the majority of the cash flow requirements stemmed from working capital changes, reflected by an increase in inventories, a decrease in trade creditors and increase in trade debtors. If this situation reverses in the second half of 2006 then we can expect further cash flow to be generated.

Nonetheless, operating profit before working capital changes (G$10.6M) was not sufficient to cover the finance charge for the six month period (G$14.6M). The company is very close to balancing its operating profit with its financing costs; however by borrowing an additional G$42.6M it is making it harder to make this equation balance.

Prospects

The greatest risk facing CCI at the moment is not the losses being charged to the profit and loss account: a substantial proportion of the loss is down to depreciation which is a non-cash item. Rather it is the requirement to be able to generate positive cash flow. Mr Webster has indicated that new corrugator knife drives and computer control systems were commissioned at an investment cost of G$45M in August. Assuming these items were not booked in the interim financial statements it seems unlikely the company will be able to finance them from internally generated cash flows, thus we can expect further loans to be drawn down to meet the cost before the year end. The company is right to focus on its margins: if it can bring its gross profit margin up to around 20%, it will be able to meet its financing requirements from operating cash flow. At that point a capital injection by way of a new share issue becomes much more feasible.

The problem is that until margins get there the company’s finances remain on a knife edge. Further financing by loans will not make balancing the books any easier.