An Interview with the MD/CEO Elvis C. Okonji
What have been the effects of COVID-19 on the energy and logistics industry?
On the heavy-duty truck haulage industry, COVID-19 had a direct impact on revenue projections and consequently liquidity, and profitability projections industry wide. For example, we achieved about 73% our turnover projection for FYE 2020 as a fallout of COVID-19 and other economic inefficiencies such as port congestion.
However, crisis in the industry was averted due to the essential nature of services it renders. Palliatives and essential commodities needed to reach the vulnerable and trucking facilitated this flow at the peak of the crisis.
It is important to note that the industry fared better than a lot of other industries. Most suffered irreparable damages that have led to bankruptcy. We can therefore imply that the industry is recession proof.
The decline in revenues was directly related to the decline in manufacturers’ volumes arising from movement restrictions in the country. Majorly hit were the alcoholic beverages and construction materials segments.
Post COVID-19, the industry continues to recover, and it is projected to expand at 4% CAGR till 2024. The strong cashflows have also enabled industry players navigate the headwinds posed by the pandemic on debt service and operations.
On the energy side, the fortunes were mixed. Energy demand and oil prices slumped on the back of Covid-19 to about $19pb and OPEC+ countries had to agree on massive production cuts to stabilize prices. You will recall that crude futures traded at -$37pb during the lockdown. While investments in oil and gas fell steeply, investments in renewable energy soared supported by a rise in green bonds.
The misfortunes in the energy market transferred cost advantages through low energy prices to the heavy-duty truck haulage industry. For example, diesel, a major input in the industry sold at about N180.00. Post COVID-19, the price of the commodity has risen steadily and settled at N250.00 per liter.
In 2021, and on the back of foreseeable global recovery, the industry must brace up for high energy prices and other business inputs stemming from inflationary pressures and possible devaluation of the local currency.
What are the measures put in place by the industry to cushion the COVID-19 effects on businesses?
Post Covid-19, we expect industry players to deepen their core competence, build strategic reserves, review their finance strategy, diversify, enshrine situation analysis, and risk management to guarantee sustainability. We also envisage modifications to contractual clauses relating to endemics and pandemics.
The industry is highly leveraged, labor and capital intensive. Covid-19 brought to the fore the risk of pandemics and nature forcing immediate shutdown of businesses. Given the huge obligations associated with heavy duty truck haulage, strategic cash reserves to cover a minimum of 6months – 12months operations is ideal to sustain operations well into an unforeseen occurrence. The operability of these reserves will be player specific bearing in mind the negative impact of double-digit inflation rates on future value.
The pandemic also brought to the fore the need to position logistics companies for more sophisticated sources of financing. We envisage a gradual switch in the industry’s heavy reliance on bank financing to the capital market. Bonds and equity issues will become more desirable to hedge long term interest rate and foreign exchange risks while commercials papers may be sought to bridge short term financing needs. Equity raising will improve leverage within the industry and position it for increased participation.
Recently, TSL successfully listed its N12billion series-1 bond on the FMDQ exchange. the bond was guaranteed by Infra Credit. We at GPC, are in discussions to list a N50billion bond program to facilitate our rapidly expanding business. Tenors of 7+years suited for long term financing and depreciation of assets are more realistic in this market.
The critical resource for the industry is trucks which are predominantly imported from Europe and China. Thus, the industry is heavily reliant on foreign exchange. Dwindling reserves and instability in oil prices thereby pose a major risk within the industry. Diversification into potential foreign exchange earners such as agriculture and cross boarder logistics to mitigate foreign exchange risks are medium term industry trends.
Industry players acknowledge the need to stay alert to threats and trends within their internal and external environment. Increased collaboration is expected amongst industry players as a tool for business analysis and decision making.
HAULMACE (Haulage and logistics Magazine) has been in the forefront of industry collaboration through its annual conference and exhibition and magazines. However, the industry must do more in terms of collaboration between truck manufacturers and buyers, IT solution providers, and other input suppliers.
There is also a gap for accurate industry data and a database for drivers and qualified technicians.
In what ways is govt intervening or contributing to the growth of logistics industry?
Unfortunately, this is one sector that has not received adequate attention from the government despite its strategic significance to the economy and critical economic metrics. Logistics/transportation costs feed directly into distribution expenses of manufacturers which are subsequently transferred to consumers via price adjustments. This is reflected in the persistent rise in food inflation to 20.57% and transportation CPI to 319.4%
With spiraling inflation, rising energy costs, double digit interest rates, local currency devaluation, paucity of foreign exchange for raw material imports, congested ports, high incidence of touting, double taxation, there might be no end in sight to escalating food and commodity prices. For example, transport cost for a 40ft container within Lagos has risen from N120,000.00 to N1.3million due to the increased journey time associated with port congestion, high cost of diesel (N250 per liter), and other inefficiencies. Transporters are left no option than to transfer these economic inefficiencies through price increases to manufacturers and penultimately, consumers.
Government must realize that transportation is the linkage between imported, manufactured, and cultivated goods to final consumers. Thus, without the sector, trade is impossible. It must therefore declare a sectoral emergency and implement sector wide reforms, concessions, and subsidies to limit the impact of these economic inefficiencies on transporters, manufacturers, and its citizenry. We recommend the creation of a transport bank to support the sector with tailored financing solutions at single digit interest rates.
On a positive note, the recent idea of the infrastructure company of Nigeria (InfraCo.) with a capital base touted at N15trillion is a welcome and innovative initiative. This will boost infrastructure investments and spur economic growth. One of the bottlenecks bedeviling the sector is bad roads. We envisage that with proper funding and concession of transport infrastructure, the current state of Nigerian roads will improve. InfraCo may also invest in a transport bank.
Already, a lot of attention is being given to road reconstruction and rehabilitation countrywide utilizing proceeds from FGN SUKUK bonds. These improvements will help reduce losses and wastages arising from accidents, and increased journey time.
The reduction in import tariff to 5% is also laudable. This will reduce the overall cost of acquiring and replacing these assets with antecedent impact on financing activities and performance of transporters. While the argument against the tariff reduction exists in favor of local vehicle manufacturers, the prices of the locally assembled vehicles may not materially differ from fully built units. We envisage that trade opportunities form the commencement of AFCTA will spur demand for trucks and guarantee a market for locally assembled brands.
Whilst applauding these initiatives and improvements, they must be backed by an unambiguous legal and institutional framework for sustainability to avoid an erosion of gains accruable from them.
We also implore the government through the National Bureau of Statistics (NBS) and the Central Bank (CBN) to make available accurate statistics and industry data to support planning within the industry with its increasing level of sophistication.
Recently, NBS released reports that shows Nigeria is out of recession, what do you think is led to this development?
The development is a welcome one.
Oil production has dipped continuously to 1.56mbpd thus, we reason that the recovery emanated from expansion in agriculture and telecommunications output.
This also points to the growing importance of the non-crude oil sector and consistent investments in it.
For telecommunications, WFH, video conferencing, interviews, online schooling, webinars, seminars, etcetera are heavily dependent on data. These trends which have gained acceptance increased revenues due to the sector considerably. Post COVID-19, we envisage these trends will persist due to anxiety over more resistant strains of the virus.
For us at GPC, how does the perceived economic growth translate to gains for the ordinary Nigerian? GDP growth may amount to nothing given the prevalence of various economic inefficiencies. Unemployment at 27%, Inflation at 16.47%, reduces savings propensity and disposable incomes. High energy and borrowing costs for transporters implies higher food prices and additional pressure on individual wages and incomes. Lesser patronage of manufactured goods by consumers implies lesser production volumes, capacity underutilization, and consequent job cuts.
We must look beyond statistics as a nation and attack the fundamentals that have led our people deeper into poverty.
How do you see GPC Energy and logistics in the next 5 years, I mean what is your plan for this company in the nearest future?
In 2020, we reviewed our corporate strategy as the fulcrum for organizational success. Since then, we have made deliberate attempts at continuous improvement along people, financing and financing options, risk management, reserves, portfolio analysis, and service capabilities.
We are positioning GPC Energy and Logistics Limited as conglomerate with a valuation of $1billion by 2030. However, our medium-term goal is to become the market leader in heavy duty truck haulage services in Nigeria targeting annual revenues of N30+billion. This we will drive through service excellence, superior financial performance, intelligent brand positioning, and opportunities presented by the liberalization of African trade through AFCTA.
It is important to clarify that GPC was set up as an Energy and Logistics company. However, since inception, our focus has been on logistics with a specialty in enterprise transport solutions within the heavy-duty truck haulage industry. Thus, our growth in the last 10years has been derived from only one line of activity which we were legally incorporated to play.
From this analogy, you will agree that the growth prospect before GPC is enormous. However, we aim to expand organically leveraging our captive market to mitigate shocks associated with expansion into segments or sectors which we will decide to venture into.
Transportation is input dependent with diesel, spare parts and accessories, Lubricants and labor accounting for up to 45% of revenues. We consider these linkages as viable expansion options whose integration will sustain our growth trajectory, enhance planning, and transfer long term cost advantages.
We have also commissioned feasibility studies to explore the viability of introducing electric powered trucks into our fleet. Our existing manufacturers such as Mercedes Benz and MAN Diesel have already made giant strides into the research, design, and development of these vehicles. We envisage that the replacement of batteries will rank relatively cheaper in comparison to instability in prices of fossil fuels and engine parts. This is also consistent with our CSR of improving our environment by reducing CO2 emissions and noise.
A critical part of our growth plan will be the introduction of petrol stations with EV charging capabilities along our strategic transit corridors to power a possible switch to EV trucks. These stations will double as rest points, charging and fueling dumps, data gathering centers, maintenance, and emergency response centers to enhance service delivery.
