Jun 2016 Financial News

Massy talent can weather the storm

Jun 02, 2016

Sitting at the top of a $10.2 billion regional conglomerate, Gervase Warner, president and group chief executive officer of Massy Holdings Ltd, is charged with the task of steering the conglomerate through some particularly challenging economic times.

Facing chronic foreign exchange shortages in its home territory, a sliding share price, declining earnings in its energy-related businesses as a result of falling oil and gas prices and a regional economy that has survived on life-support for most of the last decade, Warner maintains a healthy optimism that his company has the talent, resources and experience to push ahead and sustain its growth path in these uncertain economic times.

In an exclusive interview with the Business Guardian, the Harvard graduate discussed how Massy has been managing through uncertainty, its focus on building out its presence regionally, and its efforts towards creating a more diversified group.

Speaking in the boardroom on the fifth floor of Massy’s Park Street, Port-of-Spain head office, Warner cuts the figure of a man energized by the state of local and regional economic affairs.

As a group, the company performed commendably in its last financial year, registering a 12 per cent increase in revenue (from $10.7 billion in 2014 to $11.9 billion) and a nine per cent increase in profit before tax (from $881 million in 2014 to $960 million).

However, its half-year report for 2016—from October 1, 2015 to March 30, 2016—shows both revenue and profit before tax down on a year-on-year basis by two and three per cent respectively with revenue declining from $6 billion to $5.8 billion and profit falling from $411 million to $398 million. Most of the group’s overall decline can be traced to a contraction in economic activity in T&T—the single largest contributor to the group’s overall revenue and profit.

Questioned on this decline in performance, Warner said: “There are a few things that have affected our performance. Firstly, we had a one-off maintenance charge for our oxygen plant in Point-Lisas, which is a joint venture with Air Products and that was for $29 million.

“We also incurred some losses in our energy companies. The production company had a loss and low oil prices and the continuing royalty and tax regime make it difficult to make money on land production at current oil prices. One of our energy services companies also ran a loss given the slowdown in the upstream providers doing projects and the fact that they’ve moved to doing more maintenance work in-house.

“So these taken together are really the main contributing factors to our decline in performance.”

In December last year, Massy Group appeared on a list of the largest consumers of foreign exchange in T&T. No doubt, given the nature and scope of its operations, timely access to foreign exchange plays a critical role in the operations of many of its subsidiary companies. Not much has changed since December with demand for “hard currency” still significantly outstripping the available supply.

Asked about how Massy deals with its foreign exchange challenges, Warner said:

“We do a rolling 90-day queue for US dollars in terms of what we need. Our queue was US$100 million. It’s now down to US$70 million. We’ve been taking several initiatives to access US dollars:

• We continue to work very closely with banks;

• We compete for some of the foreign exchange that’s changed by some of the petrochemical companies through Massy Finance GFC;

• We have a remittance business that was doing more sends then receives and we’ve adjusted so we could get a better balance to be a net foreign exchange earner;

• We’ve also started to remit dividends from our overseas subsidiaries so we get access to hard currency. We use the fact that we operate in multiple jurisdictions so that we can get access to Jamaican dollars, Guyanese dollars, EC dollars and get access to US dollars through those currencies.

“So we’ve become very creative and we manage foreign exchange on a daily basis.”

Going further, Warner said that in a strange way, the lack of access to foreign exchange has actually made some of the group’s operations more efficient.

“One of the things that has happened (as a result of inability to access foreign exchange) is that we’ve worked with suppliers and said ‘look, we can’t get US dollars to buy three months of inventory at a time, we can only buy six weeks at a time.’ This has actually resulted in efficiencies in some of our distribution operations since we’re carrying less inventory than we need to because we’re buying in smaller quantities.”

In spite of a solid 2015 performance, Massy’s share price has experienced a significant tumble in the last year. On a year-to-date basis, the stock is down over 20 per cent from $64.36 to $48.16; trading close to its 52-week low of $47.98. This decline has not gone unnoticed by Warner.

Commenting on the movement in the share price, Warner said: “Recently, we spent some time with brokers, institutional investors and bankers discussing this matter.

“Firstly, the overall T&T Stock Exchange is down in terms of volume and trading activity with Massy being down more than the average.

“From where we sit, and based on the feedback we’ve received, it appears that there is a basic temperament in the market where people are selling their shares.”

Warner suggested that there were three main reasons that could be proffered for the slump in Massy’s share price.

“Massy stock, being widely held and frequently traded, makes it a more liquid stock than some of the other shares listed on the stock exchange. So people who need money for whatever reason will put their shares up for sale.

“Secondly, there is a sense now that Massy might be more exposed to the economic downturn taking place because we are such a strong, consumer-oriented organisation. There is also a concern emanating about us having problems accessing foreign exchange and some expectation that we’re going to have some sort of major hiccup or problem in our organization as a result. This is just not so.”

Warner emphasised his belief that the group is well-capitalised and solidly positioned to maintain its growth path.

“While we may have had some losses and one-off charges recently, the group is fundamentally sound with many profitable companies in the fold. We are really well positioned in some major economies that are going to grow. In the medium-term, we certainly believe our strategies will yield positive results.”

One of Massy’s most recent major undertakings has been the joint venture operation with Mitsubishi Corporation and Mitsubishi Gas Corporation to establish a methanol to dimethyl ether (DME) plant at Union Estate in La Brea.

With the financial investment decision signed off on in September 2015, the plant is expected to be fully operational in 2019.

Questioned as to how much progress has been made on the plant thus far, Warner said: “Construction on the plant has proceeded at a pace. We’ve never interrupted the construction process. What happened was that the shareholders have been advancing equity into the project to keep the construction going since we were not able to draw down on the lenders’ financing.

“With the change of government, the new administration revisited the legal documents associated with the project and there were some things they wanted to have changed.”

But all issues have since been resolved and the project is pressing on.

“They (the new government) had some legitimate issues and concerns and we listened to them and said let’s work together since we believe this to be an important project for T&T. It took us about six months to come up with an alternative proposal which has now been bought into by all the shareholders in the project and which will us allow to draw down on the lenders’ contribution in the very near future.”

The trend in regional consolidation appears to be firmly afoot with industry giants in both telecommunications and finance either acquiring outright entire companies or taking up major positions in others. Within the last decade, Massy has made a number of acquisitions, all designed to strengthen its presence across the region.

Asked if organic growth is on the decline and if mergers and acquisitions will be the order of the day for large organisations seeking to grow their business, Warner said: “We believe that both organic growth and acquisitions will be part of our strategy moving forward. We continue to achieve organic growth in certain industries that have room for organic growth and where the cost of acquiring assets is more than we would be willing to pay for them.

“For example, our insurance business (Massy United Insurance) is now the fifth largest property and casualty insurance company in the Caribbean and moving up. This has been achieved basically through organic growth. We’ve been growing at roughly 25 to 40 per cent per annum in Trinidad.”

Turning his attention to acquisitions, Warner said that certain segments make acquisitions the more viable option.

“Car dealerships in Colombia, for example, have proven to be a segment where we’ve found acquisitions to be the most feasible option. Most of the dealerships tend to be family-owned and we’ve found that when we’ve bought these dealerships outright there were a lot of efficiencies that we’ve been able to bring to these businesses. We’ve been able to grow these businesses in a territory that’s fairly new to us.”

Moving Massy forward continues to be Warner’s main priority. Considering all the challenges in the local, regional and global economy Warner sees tremendous opportunities for solid future growth.

Asked what he envisioned to be the new growth poles for the conglomerate, the former McKinsey partner said: “We have quite a few. The first one would be our continued efforts in geographic diversification. Colombia and Guyana we believe to be economies that, in the medium term, will provide great growth platforms for us. Certainly in Colombia we’re getting wonderful deal flow in our automotive business.”

Beyond geographic diversification, Warner highlighted Massy’s initiatives in the energy sector and communications space.

“The methanol and DME plant introduces us to the downstream petrochemical industry which creates a number of other opportunities for us that are under consideration and look pretty good at this time.

“We’ve also launched Massy Internet and TV which is really a start-up business for us. The fact that we’re such a consumer-facing organisation we believe this to be a real strength for us in this space since we have a measure of built-in brand recognition and access to customers who are already part of the Massy ecosystem. So we’re building out a worldclass network and we think that this will be a great growth platform for us moving forward.”

 

Source:
ANDRE WORRELL
andre.worrell@guardian.co.tt
Business Guardian, BG6 and BG7
Thursday June 2, 2016