Fri | Nov 17, 2017

Derrimon refocuses on retail to curb credit exposure

Published:Wednesday | September 27, 2017 | 12:00 AMNeville Graham
In this August 2017 photo, customers wait in the line at the deli inside Select Grocers at Manor Park. Select is Derrimon’s newest retail investment.
In this photo released May 26, 2017, Chairman and Derrimon Trading CEO Derrick Cotterell (centre) shakes hands with Mayberry CEO Gary Peart after the successful placement of a $250m bond arranged for Derrimon by Mayberry. Derrimon CFO, Ian Kelly is at left.
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Derrimon Trading Company Limited once relied on distribution as its main source of income, but it also meant extending credit to customers, which left the company exposed.

Its retail operation, however, was a more consistent source of cash.

Then last year, Derrimon saw a 12 per cent fall in distribution revenue concomitant with a 22 per cent spike in retail sales. It was a deliberate outcome of the restructuring undertaken by the company to control its receivables, according to chief financial officer Ian Kelly.

Formerly, 60 per cent of the company's revenue was based on offering credit. But: "We're now at a stage where 70 per cent of our revenue is based on the retail side, which is cash, and 30 per cent based on credit," Kelly told Gleaner Business in an interview, having initially raised the issue at the company's annual general meeting last week.

"The objective is not to grow revenue by [double] digits that is to say, 30 or 40 or 50 per cent but rather to grow profitably at double digits, where the growth that comes from our margins should be ahead of the growth from increased revenues itself," he said.

Last year, revenue at Derrimon fell from $6.29 billion from $6.18 billion. But gross profit rose 12 per cent, from $833 million to $934 million.

Kelly says the company also adjusted its debt profile, with the assistance of financial adviser Mayberry Investments Limited, which cut an average of 300 basis points off its interest charges. The result is that Derrimon now pays an average of about 9.5 per cent to 10 per cent to service its debt, down from around 13 per cent, he told Gleaner Business.

The restructuring of the company's finances comes amid overall expansion, mainly focused on the grocery retail operations, and the acquisition of new debt to finance it.

Alongside new stores for Sampars supermarket, growing the chain to seven outlets, Derrimon also acquired assets and launched an upscale operation called Select Grocers, and took over Caribbean Flavours & Fragrances Limited.

"Our approach to debt is very strategic. We are not borrowing for operational expenses, but rather, we're borrowing to invest in capital and in doing that we insist that, it should give us positive return from day one," Kelly said when pressed on whether the company might be taking on too much debt.

Three years, Derrimon's borrowings amounted to $63 million, including $50 million owed to owners of the company. In 2015, its loans grew eightfold to $492 million, then to $615 million the following year.

Now, the company owes $904 million to bondholders, banks and other lenders.

The company's debt financing charges have been growing, but so has its margins leading, in turn, to expanded profits last year at 43 cents per share, compared to 32 cents the year before.

Although Manor Park-based Select Grocers was launched into business just five months ago, Kelly said the supermarket had already surpassed expectations in terms of sales and customer count, while at the newest Sampars that opened in Cross Roads around seven months ago, formerly Empire Supermarket, "the returns are great," he said.

Caribbean Flavours was a two-stage acquisition for Derrimon, which first bought 49 per cent of the company at $2.50 per share in 2014; followed by acquisition of the stake held by the company's founders in 2017 for $4.50 per share, which pushed its holdings to 75 per cent.

While Derrimon financed the acquisition with debt, Kelly said it can liquidate a portion of the holdings at some point, if it deems it necessary.

The company's chairman and CEO, Derrick Cotterell, previously signalled that Derrimon might take on an equity partner in Caribbean Flavours under a long-term plan to grow the company's exports.

Kelly also noted that the stock is now worth triple the takeover price.

"The stock is now trading at in excess of $13, so even at 75 or 65 per cent we could sell, say, 15 per cent, still be majority shareholders and cut our debt by 50 per cent," he said, "The growth in our gross profits, which is cash, and the ability to hold our expenses to show a positive return, means that over a short time we'll be able to pay off some of these debts," the CFO said.

Derrimon continues to see improvements in gross profit this year, which rose 27 per cent in the six-month period ending June. Its profits also improved to 32 cents per share, compared to 29 cents at HY2016.

"If you judge us by our six months, results and our first half is usually the flat period then you can see where it is headed come year end," he said.

neville.graham@gleanerjm.com