Carreras Limited said its sales volumes slipped in the third quarter as smokers continue to retreat from its licit higher-priced Marlboro cigarettes while embracing black market offerings. Company revenue fell seven per cent to J$3.47 billion in the quarter ending December 2010, while net profit dropped 16 per cent, from J$849 million or J$1.75 per share to J$714 million or J$1.47 per share, reflecting both declining sales and a 38 per cent erasure of investment income as yields fell on paper securities.
The cigarette distributor has blamed the contraction in its business on both Finance Minister Audley Shaw’s heavy application of excise tax policy, as well as unchecked trading in smuggled and counterfeit brands, but went further in its latest earnings report to infer that one might be serving to facilitate the other.
“The company remains deeply concerned at the impetus and fillip that could be given to the illicit trade in cigarettes if the Government were to continue an excessively high and very frequent approach to the levying of taxes on the industry,” said Carreras chairman Christopher Burton.
“Our volumes will continue to be challenged going forward,” he said.
The company’s new boss, managing director Richard Pandohie, said Wednesday that Carreras is losing market share to illicit tobacco traders at a faster rate now, after two tax hikes since 2009. He said 40 per cent of Carreras’ business has been captured over three years, 26 per cent, in the last year alone.
“Tax policy, in isolation, is helping to drive illicit business,” he said. “We are asking Minister Shaw to relook his strategy.”
Meanwhile, in a touch of irony, while Carreras’ various obligations to the Treasury hit J$9 billion last year, it is yet to collect on the J$1.73 billion that the courts ordered returned to the company in February 2010, in reversal of a previous judgement handed down against its manufacturing subsidiary Cigarette Company of Jamaica, which is being wound up.
The company said it is yet to even receive an acknowledgement of its claims for refund.
The tax authorities are appealing the ruling.
Carreras, in the past two quarters, has stepped up its criticism of Government, saying it was concerned about the sustainability of its operation in the face of a mounting multibillion tax bill. Pandohie later said, when asked to clarify the company’s position, that Carreras was not considering and had no intentions of pulling from the Jamaican market.
Carreras said the two cigarettes tax hikes since May 2009 – aggregating 75 per cent – have resulted in price increases on cigarettes at the British American Tobacco-controlled operation. The tax rate shifted from J$6,000 per 1,000 sticks to J$8,500 per 1,000 sticks in May, and to J$10,500 in January 2010.
Consequently, the suggested price per pack of Craven A cigarettes has gone from about J$300 to J$580, Pandohie said, pushed higher because of a near 100 per cent pass through of the excise tax to smokers. Asked whether Carreras’ pricing policy could be blamed for its lost market, Pandohie said consumption patterns do not support that theory.
“Consumption is not declining,” he said, “it’s going elsewhere in the market.”
There are unconfirmed reports that another excise tax increase is being considered under the 2011-12 budget.
Burton said sales volumes could decline further if more taxes are levied on Carreras products, potentially, if inadvertently, creating a business opportunity for illegal traders to grab more market share.
“Indeed, the unfortunate reality is that an emboldened illicit trade, fuelled by an aggressive tax policy on the legal industry, would betotally outside of the tax net of the Government,” he said in a statement to shareholders of the J$3.5-billion company.
Pandohie said he has not been advised that another tax increase was on the cards, but said Carreras was not consulted on the last two increases either.
“In years gone by, there has been consultation,” he said, in reference to the practice of the former People’s National Party administration, when Dr Omar Davies was finance minister, “but in the past two years there have been none.”
The cigarette distributor has been working closely with the organised crime unit to fight smugglers, including providing equipment to facilitate policing. The police have had limited success on deterring smuggler, but Pandohie is sympathetic, saying they are woefully under-resourced.
Carreras has bought computer equipment for the unit, motor bikes for the police fleet and, more recently, new communication equipment for the police commissioner’s office. On Monday, Pandohie presented Police Commissioner Owen Ellington with J$2.7 million to assist with repairs to 430 units in the fleet.
The investment is not altogether altruistic, but designed to equip the police with tools to overpower black market traders. In that same vein, the company has reiterated that it does not want to pick fights with the Government over taxes, but work toward a policy that is revenue-efficient for the state and more friendly to its bottom line.
On a broader philosophical level, Pandohie believes that Jamaica is inefficiently taxed, under a system where PAYE earners bear the brunt of the burden.
“There is huge inequity in the tax system,” he said.
Still, Carreras may well end its current financial year with higher profit if its fourth quarter builds on nine-month gains. Revenues are up 17 per cent to J$9.55 billion in the April to December 2010 period – which is less than J$900m shy of the annual outrun reported for the full 2009-10 year – while net profit is up 10 per cent, from J$1.94 billion, or J$3.99 per share, to J$2.13 billion or J$4.40 per share.
Income and investment income have dropped to about one-third of last year’s returns, from J$225m to J$92m, and Burton has signalled that activity in this area is unlikely to rise to previous levels.
“As the company continues to distribute excess cash as dividends to shareholders,” the chairman said, “less cash will be available to invest and, consequently, interest income will likely continue to be adversely impacted.”