Sep 2006 Financial News

Carib Cement claims expected to exceed $160 million

Sep 26, 2006

The cost of claims against Caribbean Cement Company Limited (CCCL) for damages due to defective cement is expected to exceed the initial provision of $160 million. Alice Hyde, CCCL marketing manager, made this disclosure on Wednesday, at the Mayberry Investments Limited investor seminar held at the Knutsford Court Hotel.

"We will have to revise the provision for damages and publish the new amount accordingly" said Hyde. According to her, the actual amount that CCCL was exposed to is not fully known as the $160 million provision is "outside" CCCL's insurance coverage. Hyde would not disclose the amount CCCL's insurance provider has paid to claimants.

That said, Hyde told the audience that CCCL has paid out $100 million so far. She expects that the situation will soon be resolved. "We have about 1,000 complaints and have visited or addressed 80 per cent of those complaints. Some of these have moved into claims with dollar values attached; we have settled a significant quantity of these claims," Hyde stated. "By the end of the year, we will close off the claims in the system."

In February, Carib Cement, in error, released defective cement into the market, triggering a severe shortage and sending the construction sector into a tailspin.
"There was a quality issue earlier this year where we inadvertantly distributed bad cement," said Hyde in attempting to explain the problem. "We introduced a new material into the cement creation process. The problem is that when you introduce a new product, you must ensure that the equipment is calibrated properly. This was not done. At the same time we had grindability and milling efficiency problems."

According to Hyde, between January to June 2005, sales were 461,000 metric tonnes and between July and December that year this fell by 15 per cent to 401,000 metric tonnes. Operating profit for the same two periods declined by 252.3 per cent from $247.8 million to negative $4.5 million. By the six month period ended June 2006, the full extent of the cement debacle revealed itself. Profit after taxes was a negative $234.3 million.

However, Hyde sees CCCL's fortunes on the upswing. Firstly she noted that the company took corrective action to ensure quality output."We had self-initiated recalls. We shut down the plant in March for maintenance work and resume use of original raw material" said Hyde. "We sought guidance from experts in cement manufacturing and we developed a professional collaboration with the Bureau of Standards for more frequent testing."

In terms of recovering from losses and increased production inputs such as electricity, Hyde reminded the audience that, "We had two price increases since the start of the year. In February we increased prices by 12 per cent and in July we increased prices by 15 per cent." She stated, "We needed to correct operational cash flows and return the company to viability."

Interestingly, Hyde attempted to put CCCL's price increase in context. "Overall, the price of cement has increased by an aggregate of 12 per cent since 2003.
During that period, the following basic commodities and building inputs have also increased:
Paint - 36%
Steel - 95%
Lumber - 37%
Sugar - 43%
Counter Flour - 37%

That said, cement sales picked up for the January to June 2006 period to 461,200 metric tonnes and profit after tax was $293 million. Right now, Hyde stated, "Cement production is back to normal." Hyde went on to outline the competitive advantages that CCCL has.

"We are the only producer of cement and we have started an expansion and modernisation programme that will be finished by 2008," said Hyde. "We have a strong brand and we enjoy a good supply of local raw materials. We have an experienced management team and have expanded beyond our Rockfort headquarters to five distribution points across the island."

She acknowledged that there are indeed challenges that the company faces. "We are in a highly competitive market because of the removal of all duties and tariffs on imports. We anticipate this to be the case for at least two years," Hyde explained.

"We have high production costs in terms of fuel and we have challenges maximising efficiences. Our plant is aged and we are only able to produce at 80 per cent efficiency -the market demand for cement of one million tonnes per year exceeds our production capacity."

Even so, Hyde is very optimistic about the future."We expect the market growth to increase by a minimum of 10 per cent per annum over the next three years. Once our new production facility is on stream, we will be able to exceed the demand in Jamaica and export the excess," said Hyde. "In Jamaica, in every nook and cranny someone is building something, whether a new building or expanding their house. We are happy to be a part of that process."


Source:

Dennise Williams
The Jamaica Observer
Sunday 24th September, 2006

http://www.jamaicaobserver.com/magazines/Business/html/20060923T170000-0500_113231_OBS_CARIB_CEMENT_CLAIMS_EXPECTED_TO_EXCEED______MILLION.asp