The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

AML Foods 2013 annual profit would have been wiped out by the $1.5 million annual cost increase the company is projecting from Value-Added Tax (VAT), its chief executive yesterday pledging: “We’re not going to let that happen.”

Gavin Watchorn, speaking after the BISX-listed food retail and franchise group unveiled a 45 per cent profit increase for the quarter to end-January 2014, said the current VAT proposal was “very unfair” to the industry.

He disclosed to Tribune Business that with AML Foods’ Business Licence fees increasing by $200,000 a quarter, or $800,000 per year, as a result of the 2013-2014 Budget, the group’s margins were simply unable to absorb the predicted VAT impact.

And Mr Watchorn explained that the group’s strategy to focus on growing its franchise and high-end Solomon’s Fresh Market divisions was deliberately designed to reduce price-controlled goods as a percentage of overall sales volume.

Price controlled items have increased from 11 per cent of AML Foods’ sales two years ago to 15 per cent now, and reducing this is another part of the group’s plans to mitigate VAT’s impact.

“The current legislation, at a 15 per cent rate and with exemptions, will cost us approximately $1.5 million,” Mr Watchorn told Tribune Business of VAT’s likely impact.

“The reality is the food industry is not operating on the kind of margins that will allow us to absorb those kind of things, Business Licence increases and new taxes. Something has to give.”

Prime Minister Perry Christie has already confirmed that VAT will be introduced at a lower rate than the planned 15 per cent, indicating it will likely be either 10 per cent or 7.5 per cent.

The impact, though, is likely to be immaterial for goods importers/sellers such as AML Foods, as a lower VAT could mean that Customs duties are reduced by a smaller amount. Thus the net effect may be negligible.

A $1.5 million VAT expense would have effectively wiped out AML Foods’ $1.488 million net profit for the year to end-January 2014, and potentially eaten up almost 60 per cent of its $2.501 million net income from the previous financial year.

This shows the extent of VAT’s potential wide-ranging impact on the Bahamian food retail and wholesale sector, if the tax is introduced in its current form.

“We’re not going to let that happen,” Mr Watchorn told Tribune Business yesterday, when VAT’s potential impact to AML Foods’ bottom line was pointed out to him. “That’s the reality.

“Tying that into price control, it’s a very unfair position to take on the food industry. Both wholesalers and retailers are facing these issues.”

The industry’s main grievance to-date is that retailers will be unable to reclaim between 50-80 per cent of their VAT ‘input’ payments, due to a high proportion of their inventory being treated as ‘exempt’ for tax purposes.

This will also exacerbate the negative impacts from Price Controls and other tax increases, the industry having previously warned the Government that its present VAT policy will likely result in store closures and more job losses, plus increased food prices for Bahamian consumers.

“Our overall strategy is to reduce price controls as a percentage of overall sales,” Mr Watchorn told Tribune Business. “We are not going to give up that business altogether, but as a percentage of sales that needs to be reduced down. That’s the Carl’s Jnr strategy, that’s the Fresh Market strategy. That’s all part of that.”

The AML Foods chief executive said he was ‘encouraged” that the New Zealand consultants, in their visit to the Bahamas last week, had echoed the concerns and advice supplied to the Government by the Retail Grocers Association.

“It’s refreshing to hear the consultants from New Zealand talk about less exemptions and lower VAT rates,” Mr Watchorn said. “We gave that advice to government for free several weeks back.

“The Grocers Association has been adamant that should be the position. It’s revenue positive for the Government, and will help consumers if we are able to reclaim the VAT paid on inputs.”

AML Foods’ inventory is currently split 50/50 between items that would be taxed and treated as ‘exempt’ for VAT purposes, meaning it would be unable to reclaim roughly 50 per cent of its input costs.

Mr Watchorn described 2014 as “a transition year”, adding that AML Foods was ready to deal with VAT “from an administrative perspective” based on the existing legislation and regulations.

“We sat down as a team and looked at 2014,” he added. “We know it’s going to be a transition year, whether it’s through economic reasons or new taxes coming in.

“The goal is to end the year as healthy as you can. That’s why we’re repaying the debt early, focusing on controllables and getting our house in order.

“If we can come through this period in good health, with a strong balance sheet and cash available, there will be opportunities next year,” Mr Watchorn said.

“We’ve got a very focused team, and are working very hard to achieve our objectives, and as long as we keep doing that we’ll be OK for 2014, and for our shareholders, giving them the returns they expect.”