25th November 2003

New Portland CEO faces a mean task

Making firm profitable will not be easy

Cement firm, East African Portland Cement, is now staring a staggering Sh532.5 million exchange loss.

Even more alarming is the fact that the hemorrhage only covers the first quarter of the 2003/2004 financial year.

Barring a sudden appreciation of the shilling, the firm is well set on a loss making streak. The weekend resumption of aid by the International Monetary Fund, and expected appreciation of the shilling, are Portland’s only cushions against heavy loss-making, given its escalating cost base.

Has such a loss occurred last year, even for all quarters, it would have left the firm deep in Sh448 million debt.

This reality can be gleaned from its audited annual report released at the weekend. The problem arises from a 13.85 per cent depreciation of the Japanese yen. The firm, guaranteed by government, borrowed a two-decade loan Sh6.5 billion at 2.5 per cent from Overseas Economic Co-operation Fund of Japan, which runs up to March 20, 2020.

It so far has a balance of Sh3.8 billion.
The red signals come at a time of management instability at Portland. Ministry of Trade and Industry last week appointed one of its bureaucrats, Ms Mary Ngari, to head the listed firm, after the managing director and chief executive Mr. Birya Charo retired under a cloud. Mr. Birya had been accused of misusing company finances.
“She has been deployed there to take charge as the government looks for a suitable candidate to replace Mr. Charo,” Trade Permanent Secretary Alex Keter told BusinessWeek.

Ms Ngari is a senior deputy secretary in the ministry. The government never even bothered to inform the bourse of the changes. The state owns only 25.33 per cent of Portland, with the National Social Security Fund and the Lafarge Group being the most important shareholders.

Her appointment, and the removal of Mr. Charo, elicited a predictable – if somewhat petty backlash from vested interests. The firm, like other parastatals, has long been a centre of patronage for ruling party politicians, resulting in a bloated bureaucracy.
Ms Ngari is expected to return the firm to profitability. In the year ending June, the company’s operating profit plunged 60 per cent from Sh436.5 million to Sh170.5 million. Its after-tax profit was up from Sh123.2 million to Sh226.1 million, a misnomer due to the strength of the shilling.

It made an exchange gain of Sh298.5 million, against Sh145.4 million loss in the previous year, included in its pre-tax profit of Sh382 million.

An important task for Ms Ngari will be to address the cost base of the firm. Last year, expenses escalated from Sh282 million to Sh405 million.

Staff costs, separate from the wage bill, surged from Sh167 million to Sh236 million, or 14.3 per cent, partly explained by a collective bargain agreement it entered into at the end of last year. Portland is one of the best paying manufacturing firms in Kenya, with its gross pay package averaging Sh52,000 a month. Selling expenses rose from Sh240 million to Sh427 million. Understandably, some of it was due to increase of sales from Sh3.2 billion to Sh3.8 billion – with foreign sales rising from Sh119.4 million to Sh440.1 million on aggressive entry into the Ugandan market. Notably transport costs were up by over Sh130 million to Sh268 million.

The increased cost overall contributed to a 61 per cent decline in operating profit, from Sh436 million to Sh170 million. Chairman Benson Ndeta alludes to the matter in his report: “We plan to concentrate on cost control measures, focus on supply chain management together with clearly defined goals, strategy and frameworks and operational discipline in the key areas of business so as to optimize shareholders’ value.”

In the same report, he notes the need for cultural change in the organization.
Directors in recommending the suspension of Mr. Charo are said to have considered the fact that he has been moulded in the firm as a negative.

During the general annual meeting set for December 9, further cost increases are expected with the seven directors’ fees doubling from Sh80,000.

That of the chairman will move in the same direction from Sh150,000. In the meantime, it remains to be seen whether the new chief will move to break up distribution monopoly which has to some extent claimed the jobs of her predecessors. Similarly lopsided contracts exist in cement sacks and furnace oil procurement. On all the fronts, she will be treading on extremely sensitive toes.
Whereas Mr. Charo may be remembered for the wrong reasons – which ostensibly led to his firing – it is clear that he made some headway on the domestic market where the firm increased market share by two per cent to 38 per cent, beside moving into Uganda.

In the latter country, where it is again in competition with Lafarge, it hopes to triple sales in the year.