Ernst & Young and Carib Cement at odds over financial report
KINGSTON, Jamaica, Thursday April 19, 2012 – Caribbean Cement Company Limited (CCCL) in its 2011 financial report has used future sales under the PetroCaribe agreement to reduce the impairment of its plant assets by over JAM $760 million.
However, auditors Ernst & Young have criticised the inclusion of these future sales in the April 12 report, noting that if these sales were excluded, it would place CCCL in a very different stated financial position as it would wipe out the company's shareholders' equity and worsen its loss position to JAM $3.3 billion.
CCCL, a subsidiary of Trinidad Cement Limited (TCL) is in a debt restructuring negotiation.
In their qualified audit report, Ernst & Young stated that during the year, the company recorded impairment losses pertaining to plant and machinery and deferred tax assets totalling $193.2 million and $618.39 million.
"These impairment losses were determined based on management's projections, which assumed that the group will generate significant revenue from exports to a certain market under a proposed agreement currently under active negotiation, for which the terms and conditions have not been agreed as at the date of this audit report," the auditors said.
"We have not obtained sufficient appropriate audit evidence to support the inclusion of the cash-flows from these exports," stated Ernst & Young.
It added that had management excluded those cash flows from its projections, the group would have recognised an additional impairment loss of $764.88 million in the statement of comprehensive income for the year ended 2011.
"Additionally, the group would have recorded a shareholders' deficiency amounting to $355.69 million and net loss after tax of $3.37 billion as at 31 December 2011," it stated.
However, CCCL General Manager Anthony Haynes has presented the argument in the media that the proposed contract encompasses the private sector trade benefits under the existing PetroCaribe oil agreement with Venezuela.
The benefit includes government forgoing payment of interest for goods supplied to Venezuela. In turn, the Jamaican government would pay CCL for the exports.
Haynes explained that the trade of cement requires signing by governments, but that was delayed due to recent elections in Jamaica and Venezuela, as well as Venezuelan President Hugo Chavez's cancer treatment.
However, Ernst & Young wants evidence of the agreement, which Haynes said CCL expects to sign within eight months.
Haynes projected that CCCL can increase sales of cement by up to 50 per cent with the Venezuelan contract, based on the demand in that country.
Annual sales hit some JAM$8 billion from production of 800,000 tons of cement for 2011. However, the production potential stands at 1.2 million tons.
Haynes said CCL continues to improve its performance, indicating that despite the worsening net loss, which is down 67 per cent, from JAM$1.5 billion to $2.6 billion, the operations have returned to a cash-positive position.
In 2011, total cement sales volumes grew by 6.0 per cent, with export sales rising by 11 per cent and the local market showing a 4.0 per cent gain.
While the domestic growth was rather modest, it represents a landmark and a reversal of the continuous decline in domestic sales over the past five years, stated Carib Cement's management in the financials.
The company said the improved local sales volumes were driven by a 45 per cent increase in bulk cement sales as the Government's infrastructural development programme got going.
However, the outlook remains dissappointing for the island's cement giant.
"At the time of writing, volumes in the domestic market are on par with the prior year period, which is disappointing based on the rebound that was seen in the latter part of last year," the company said.
It noted that in January a new government entered office and has placed moving the economy forward, and job creation high on their agenda.
The cement company said that provided real economic growth is realised, cement demand and therefore the fortunes of the company will improve. However, it also noted that "significant threats remain and the future remains uncertain and, as such, we will continue to remain focused on effective cost management and gaining entry to new markets", stated management.