By Al Edwards, Business Co-ordinator GRACE, KENNEDY & Company has put in yet another stellar performance for the year ended 2002, heightening its profile as a world-class Jamaican company positioned as one of the dominant players in the region. The Group recorded sales for the year of $18.3 billion, an increase of 18.6 per cent on the previous year. Net profit attributable to stockholders increased by 40.5 per cent, moving from $1 billion to $1.4 billion. This represents earnings per stock unit of $4.39. Operating income has increased by $234.5 million. This growth represents a 300 percent increase on 1999's figure and was largely due to a turnaround in its loss making companies. If those companies cannot be turned around, Grace, Kennedy will divest itself of those entities or close them down. The Group has expanded its services division rapidly. Operating income as a percentage of revenue also increased. In 1999, it stood at 1.77 per cent and in 2002 it was 5.43 per cent. But just where is this operating income coming from? OUTSTANDING PERFORMANCES There were some outstanding performances from the Group's subsidiaries last year. The banking division of Grace, Kennedy has grown considerably over the last year, with First Global Bank reporting an increase in pre-tax profits of $102 million, and George & Branday by $73 million. Grace's wholly-owned factories, Tropical Rhythms and Canning plant showed growth in profits of $66 million. Five years ago, the Food and Services Division was actually losing $200 million a year. Last year, it made $200 million in profit. The retail supermarket stores, Hi-Lo, have not posted profits over the last few years but in 2002 Cameron Diaz and John Mahfood, who both head that division, turned a profit of $12 million. There are plans to launch four more supermarkets. Port Services, its stevedoring company, turned around and posted profits of $23.6 million. OPERATING ACTIVITIES CONVERTED INTO CASH In 2001, Grace generated $1.3 billion, in 2002 it grew to $2.5 billion. Cash therefore doubled in the Grace, Kennedy Group of Companies year over year. Why so? Through the $1.4 billion net profit attributable to shareholders and working capital management, the Group was able to focus on successfully managing its inventories and receivable, which has added about $639 million to its cash generation. CASH BONANZA Grace, Kennedy's cash pile now stands at $11.2 billion. On examining Grace's balance sheet it shows an increase of some $5 billion. But the growth in the banking division will show where that cash is held. First Global Bank holds $2.8 billion and George & Branday holds US$1.2 billion. Grace's chief financial officer, Don Wehby says that although this is the case, there is also a liability - its customer deposits. The Group's capital expenditure has increased with investments taking place in its factory operations, with it spending $2.5 billion over the last five years. With tongue firmly in check, Mr. Wehby said the company was awaiting a tax credit from the Minister of Finance. Some $424 million was spent in its factories with a new line put in place for its Tropical Rhythms drink products and its barbecue sauces which are also export products earning foreign exchange. Recently, Grace entered into a joint venture with Capri Sun, spending $53 million. Part of that agreement will see Grace Canning exporting to the Caribbean all the Capri Sun line. The Group has made notable investments in its retail division, expanding Rapid & Sheffield and making significant improvements to its Portmore store. The aim here is to grow that division. It's combined revenue of that division now stands at around $4 billion and the Group will be making efforts to improve on that figure next year. GKRS spent $288 million on technology this year, signalling its intent to utilise technology cost effectively in its operations. The Group also bought a crane in the hope that the Port of Kingston will be First World in terms of productivity. EXPENDITURE PROPOSAL FOR 2003 The Group intends to spend $578 million, with IT taking up $264 million of that amount. Upgrading of factories and equipment is expected to come in at $134 million and the expansion of its retail infrastructure at $99 million. What is the impact to Grace, Kennedy of the battle for control of Kingston Wharves? Grace Kennedy & Company owns 43 per cent of Kingston Wharves and it is an associated company of the Group. Kingston Wharves has consolidated profits of $60 million, which is four per cent of the entire Group's $1.4 billion profit. Grace receives an after tax management fee of $21 million. That management fee is determined by the performance of Grace, Kennedy as the managers of Kingston Wharves. In other words, if Kingston Wharves does not perform in terms of tonnage and profitability, the management fee is reduced. That said, the contribution of Kingston Wharves is $81 million or 5.7 per cent of the Group's profits. If Kingston Wharves had earned Grace, Kennedy nothing at all, the Group would have still registered an increase in profit of 33 per cent. GRACE'S STOCK PERFORMANCE Last year was a good year for the conglomerate with a 135 per cent increase in Jamaica. The Group sold more than five million units in Trinidad with a 110 per cent increase there. The Barbados market is perhaps a little thin and there Grace's increase came in at a modest 13 per cent. In Jamaica, Grace's stock sells for approximately $43, despite a high interest rate regime which sees rates of 35 per cent on long term instruments. INTERNATIONAL ACCOUNTING STANDARDS The Group is about 90 per cent ready for the implementation of International Accounting Standards, which it expects to be fully implemented in July. The Institute of Chartered Accountants of Jamaica (ICAJ) has asked that all listed companies be ready by June 2003 for the interim report but Grace expects to be ready well before that deadline. One of the biggest impacts in the implementation of IAS is IAS 19, which stipulates that the surplus of a pension fund will have to be brought onto the balance sheet. Therefore, there is a long term asset reflecting the pension fund surplus, and a credit, your statutory reserves. The Grace Kennedy pension fund has a very large surplus. ESTIMATED PROFITS FOR 2003 Grace Kennedy's chief executive officer, Douglas Orane, is forecasting a tougher business environment this year, with the present recessionary trends and the impact of the war in Iraq and is conservatively estimating an increase in profits of 12 per cent over 2002. Speaking in an exclusive interview with the Financial Gleaner, Mr. Orane said: "Our theme for this year is to satisfy the unmet needs of Jamaicans and other Caribbean people wherever we live in the world. What we have been learning to do and better with time is to listen very carefully to what are the hassles in people's lives and to work with those people to solve those hassles so that they keep coming back to us and are willing to pay us their money for goods and services. "We attribute that as the main reason why our sales have increased and we expect that to continue this year, despite many people have a doom and gloom view of Jamaica, with talk of recession and the inability to get ahead. No, we don't subscribe to that view, we are positive about the future here in Jamaica. In fact we believe that when there is more uncertainty, there are more hassles and therefore more possibilities. CONSCIOUS STRATEGY "To prepare for that we have been investing heavily in our people particularly over the last two years as a conscious strategy because the energy and motivation people bring to their work is a key competitive advantage. As a result of that we are seeing a blossoming of creativity within the Group. We have concentrated on customer service at every level. It is very encouraging when young people come up to me and want to be part of the Group. "We have four factories in Jamaica and they are doing a lot more business than they use to, exporting more and being a lot more competitive internationally, so much so that we are extending a hand of friendship to other manufacturers in Jamaica who may be interested in carrying out a similar increase in productivity."