Tarek Sultan talks about first quarter earnings, impact of legal dispute, and company strategy

Historical Context: 2003 to 2009

Since 2003, Agility has developed a world-class commercial logistics business to complement its government contracting portfolio. That development has expanded Agility’s geographic footprint around the world, established our leading position in emerging markets, and added specialized capabilities to help us meet the needs of niche market segments.

Today, Agility’s commercial logistics arm, Global Integrated Logistics (GIL) operates in 120 countries and serves over 50,000 customers. Our operational platform is distinguished by its strength in high-growth emerging markets: China, India, and the rest of Asia; the GCC and the rest of the Middle East; Russia and Eastern Europe; and Latin America. And we offer specialized logistics solutions around Chemicals, Fuels, Fairs & Events, and Project Logistics. 

We also have diversified our Defense & Government (DGS) business. Our focus has been on expanding our business with the US government in geographies outside of Kuwait and Iraq, as well as attracting other governments, international organizations, and non-governmental organizations as customers. Finally, we acquired a group of non-Agility branded companies working in the areas of industrial real estate management, aviation and ground handling, and customs modernization and e-government solutions, which are grouped together under Agility Infrastructure.

From modest roots in Kuwait, Agility became an acknowledged global top ten global logistics player. We bring global scope, flexibility, and specialization of services to complex logistics challenges. We take pride in our commitment to personal service. Our customers consistently acknowledge that Agility goes above and beyond.

2009: Mastering a Challenging Year

The global financial crisis of late 2008 and the subsequent great recession of early 2009 tested the resilience of Agility and the logistics industry. Commercial freight volumes declined across the industry as international trade volumes contracted on a sustained basis for the first time since the 1930’s. Profit levels for nearly every logistics service provider were down substantially versus 2008 levels.

Agility navigated this challenging year better than most logistics service providers. Net profit for 2009 was KD 156.4 million, up 10.6% over 2008 levels. This slight increase against such market conditions was due to several factors:

• Early adjustment of resource levels in the commercial logistics business, beginning in late 2008, as we saw the slow peak season as an early warning sign for a broader economic slowdown

• Continued strong volumes through existing government contracts in Kuwait and Iraq, driven by sustained high troop levels

• New revenue and profits from network expansion into Brazil, Mexico, as well as new government contracts outside the Middle East

2010: A Pivotal Year

We are aware that 2010 is a pivotal year for Agility because of the US troop drawdown in Iraq and subsequent phasing-out of some of our large government contracts. This year is the final option year for US government contracts that have historically contributed 25%-35% of Agility’s annual revenue.

Although Agility anticipated and planned for the inevitable troop drawdown in Iraq, there are two additional, unplanned challenges that the company has also had to contend with in the last year.

• The first is the global recession that jolted the world at the end of 2008, along with the slower-than-expected recovery from that recession. The global slowdown has an ongoing impact on our Global Integrated Logistics (GIL) business.

• The second is the legal proceedings by the US government which led to the suspension on winning new government business.  This has had a deep impact on our Defense & Government Services (DGS) business.

Together, these three challenges have created a changed financial landscape for Agility in the near-term. I want to explain our financial position today and, more importantly, our plans going forward.   

First Quarter Results

Year-over-year comparison of profit levels going forward would be misleading, since Agility’s profits were up in 2009, in stark contrast to the dramatic declines in profitable for the rest of the industry. Going forward, Agility will measure current quarterly performance versus the previous quarter. This approach more accurately reflects the nature of business, in which large contracts ramp up over time and then decline as they reach the end of their contractual term.

Management focuses on net income and free cash flow. While we expect net income to decline in the near term, driven by the three challenges above, we plan to mitigate their impact through aggressive management of cash, and we expect free cash flow to be less severely impacted. 

Our first quarter results are as follows:

• Revenues have declined by KD 67.7 million or 14.4% compared to Q4 2009. Our revenue in Q1 2010 is KD 403 million. To break these numbers down further:

o DGS’s revenues declined 28.8% in Q1 of 2010 to KD 131.7 million compared to Q4 2009, mainly due to falling volumes in US government contracts as the troops withdraw from Iraq. As a result of the US government suspension on new business, the company was unable to supplement this anticipated revenue decline with new revenue growth in Afghanistan and other parts of the world.

o GIL revenue decreased by 5.8% or KD 17.4 million in Q1 of 2010 when compared to Q4 of 2009.  GIL revenues now stand at KD 279.4 million.  This is primarily due to typical seasonality witnessed in commercial logistics when comparing fourth quarter revenues to the current quarter.  Nevertheless, underlying business in GIL has grown compared to Q1 2009. Revenues compared to Q1 2009 are 14% higher.

o Agility Infrastructure companies contributed KD 20.8 million to total revenue, an increase of 22.7 % over Q4 of 2009. Agility Infrastructure has consistently shown healthy growth in the base business over the course of the last several years. 

o However, net revenues for GIL have declined by 17.8% for Q1 of 2010 compared to Q4 of 2009. This is because carrier prices, which fell in the early days of the global financial crisis, have been steadily rising. This has put pressure on freight forwarding margins industry-wide.

• In combination, these factors have the following impact:

o Operating profits are KD 18.9 million in Q1 of 2010, a 55.3% decline since Q4 of 2009. This decline is driven by the reduction in volumes in the defense and government services business, and the pressure on GIL’s net revenue margins, as discussed above. 

o Cash from operations stands at KD 62 million in Q1 2010, a 33% increase over Q4 2009. Free cash flow for the quarter stands at KD 47 million, an increase of 404% over Q4 2009.

o Net income is KD 17.6 million in Q1 2010, as compared to KD 40.8 million for Q4 2009. This results in Earnings Per Share of 17.5 fils for this quarter, compared to an EPS of 40.6 fils in Q4 2009.

What this Means in the Near Term

Our investors, customers, employees, suppliers, and partners will want to know what these numbers mean and what they can expect from us in the near-term.

• Agility’s overall vision and strategy have not changed in the face of these challenges. However, we must adjust timelines and tactics. Realistically, 2010 will be a year of transition for the company. Agility is likely to face declining profitability over the course of the next four quarters, as a result of major US government contracts winding down in Iraq, recovery from the global recession, and the financial impact of the legal dispute with the US government.

• In order to reverse the decline in profitability, we will aim to grow revenue organically, accelerate realization of return on investment, reduce costs prudently, and maximize yields on core operating assets

• While Net income may decline over this period, we will focus on cash management throughout the business. We expect that free cash flow will be the key metric to guide us on the health of the business.

To give you additional information at the business-group level:

• The Defense & Government (DGS) business has been set back by the combination of the troop drawdown and the legal case with the US government. If the company is able to settle the dispute, then DGS will focus on aggressively rebuilding its business, reinvigorating business development and customer outreach. If we cannot reach a mutually-agreeable settlement, then we would need to assess all strategic options for the DGS business. For now, the situation is fluid and no decision has been made, but we have contingency plans in place.

• The relative importance of the Global Integrated Logistics (GIL) business has grown in the face of uncertainty around DGS. GIL’s strategy remains the same, but timelines will be accelerated. GIL will continue to focus on growth, performance, and innovation. Growth strategies are centered around a tradelane development program and on growing business with global accounts. Performance strategies are focused on controlling overhead costs, maximizing returns on assets, and managing cash. Innovation strategies are centered on transforming our operations platform and investing in technological modernization which will lead to productivity improvements.
                         

In financial terms, there are some things you should know:

• Above all, we are committed to greater discipline. Already in the first quarter of 2010, operating expenses were KD 9 million lower than operating expenses in the fourth quarter of 2009. This is a result of our cost-containment efforts and initiatives to reduce overhead expenses.  We will continue to reduce our costs prudently.      

• Global Integrated Logistics (GIL) will strengthen its focus on managing working capital – we have already made significant investments in building a global platform in the past, and we now seek to achieve “superior” returns on that investment.

Although we are facing challenges, I see them as a catalyst for change. I believe that with a commitment to discipline, Agility will emerge stronger, more flexible, and more competitive.

Contacts:

Henadi Al-Saleh
Director – Investor Relations
Agility
E-mail: haalsaleh@agilitylogistics.com