Nov 2009 Financial News

GraceKennedy hires risk consultant to strengthen financial division - Adds new Caribbean markets for food

Nov 18, 2009

GraceKennedy Limited has retained a risk assessment and audit firm called Protiviti Inc to assess its internal systems and make recommendations for their recalibration to avoid a repeat of the US$19.9 million (J$1.8 billion) loss on trading activities within banking subsidiary First Global.

At the same time, the conglomerate has been building out new markets for its food products, saying revenue for GK Foods, which generates four-fifths of the conglomerate's sales income, was down in the third quarter.

Together, First Global Bank and falling sales in the food segment made for one of the worst performing periods for the group.

In the three-month period July to September 2009, GraceKennedy's cost of doing business outpaced the $13.9 billion of revenue earned by $61 million.

But a half-billion dollar gain in 'other income' positioned the group to return a profit of $278 million (3Q 2009: $556 million) in the period.

Chairman and chief executive officer Douglas Orane said in a teleconference Monday that a team from Protiviti, a global operation that had its start in 2002, is already in Jamaica and at work, but that the risk review would take several months.

GraceKennedy on Tuesday studiously avoided a query on what it was paying for the review, but said the assessment "will not be confined to GK Investments" - the division that encapsulates the conglomerate's financial assets.

Protiviti began its assessment November 9, starting at the trigger point - the bank - and is expected to finalise the consultation in six months, that is, early in May 2010.

First Global's trading loss wiped out nearly all gains made by the conglomerate's banking and investment segment - from a nine-month contribution to group operations of $586 million to an operating loss of $82 million in the comparative period ending September 30, 2009.

GraceKennedy said it spread the trading loss over two years - booking $926 million in financial year 2008 and $842 million this period.

Avoiding recurrence

"The bank has taken action to ensure that risks surrounding possible similar losses have been eliminated and has implemented additional measures necessary to ensure that there is no recurrence," said Orane in a statement appended to the conglomerate's nine-month earnings report.

The hiring of Protiviti - a firm created by Robert Half International Inc when the firm hired hundreds of risk and audit professionals formerly of Arthur Anderson LLP - is the most recent of the corrective actions that started with the departure of the trader involved in the transactions and senior officers who failed to detect the trades, including bank president WayneWray, and a $900-million cash injection to boost the bank's capital base.

Division head of GK Investments, Courtney Campbell, is the bank's interim boss until a candidate emerges.

GraceKennedy in the nine-month period, even with the problems associated with First Global and indications of falling sales for manufactured products, continued to report good financial results.

Profit rose from $1.8 billion to $2 billion, and a slightly weightier balance sheet, including a gain in book value from $21 billion to $24 billion, and a near $3 billion increase in assets to $96.5 billion.

Orane said via teleconference Monday that the group was focused on running a cash-rich operation, explaining the timing of the divestment of its holdings in Versair and Felicity Motors - two non-core businesses - to Barbados partner Goddard Enterprises in a $350-million deal.

At September 30, however, its cash had fallen to $8.5 billion from $10.7 billion in the previous quarter, but was no worse off than a year ago when the group reported cash of more than $7.1 billion.

All business segments, excluding retail, grew revenue, but nine-month profitability was mixed.

Retail reported a $980-million decline in revenue to $5 billion, and contributed $41 billion in pre-tax loss to the group.

Banking and investment eked out a tiny pre-tax gain of $2.3 billion, a deep descent from last year's $647 million.

The star was money services, which added $1 billion to profit, up from $761 million in 2008.

Food remained the most lucrative, but grew revenue by only seven per cent, from $24.2 billion to $26 billion, but was efficient in its use of funds - ending the period $672 million in the black, up from $500 million in 2008.

The group made $43 billion, up eight per cent from last year's $40 billion.

GraceKennedy in the September quarter began shipping juices and pepper sauces to French Guiana; and its milk-based drink, Nurishment, to new markets in Barbados, Trinidad and Tobago and Guyana.

"We intend to make further shipments to other Caribbean territories through our bonded warehouse in Jamaica," Orane said.

GraceKennedy is also finalising construction of a $2-billion distribution hub at Bernard Lodge, St Catherine, but said the facility would not be put into full-scale operation until early in the second quarter of 2010.

business@gleanerjm.com

Protiviti's terms of reference in summary:

a) Conduct an assessment of effectiveness of the internal control structure and make value added best practice recommendations for improvement to the existing internal control framework throughout the Group.

b) Review Enterprise Risk Management and Corporate Governance programmes throughout the group.


Source:
Jamaica Gleaner
Wednesday November 18, 2009

http://www.jamaica-gleaner.com/gleaner/20091118/business/business3.html