Joel Consing, CFO of ICTSI, on tackling the coronavirus crisis
Now is not the ideal time to be a port operator. International Container Terminal Services has faced a tough year, as the Covid-19 pandemic and geopolitical turmoil take a toll on global trade. But the Philippine company, which develops and operates container ports and terminals, moved quickly in response to the crisis in early 2020, boosting its liquidity and freezing its capital expenditure. ICTSI followed with two successful dollar bond sales in June and July.
Rafael Consing, who goes by the name Joel, is the chief financial officer at ICTSI. In an interview with GlobalCapital Asia, Consing shared his company’s strategies for weathering the storm, the lessons he has learned — and offered a hint of optimism about a highly uncertain second half.
GlobalCapital: This year has been a challenge for everyone, on multiple levels. How has ICTSI dealt with the Covid-19 pandemic?
Joel Consing, ICTSI: It has been an exciting five to six months. We took [a page] from the exact same playbook that we played off of in 2009, 2016 and now in 2020. These were the periods of a synchronised downturn in global trade — just driven by different reasons. In 2009, it was the global financial crisis, and 2016-2017 was just an overall weakness in global trade. That was also the beginning of the word war that ended up in a trade war. And now in 2020, we have this pandemic. It’s a classic MBA textbook case study in what we did.
What were the lessons you learned in 2009 that you applied this year?
In managing a global portfolio such as ICTSI’s, one of the biggest challenges is managing foreign exchange risk. The overall strategy in managing foreign currency risk is we neutralise currency risk at the level of the subsidiary, where the cash is being generated, not at the level of the parent. The total revenue of the company is 47% denominated in dollars while our expenses are only 39% denominated in dollars. So we are long in many currencies.
Why did we do it this way? We report in dollars. If the dollar appreciates against emerging market currencies, then on the revenue side, 53% of our revenues will translate to a lower dollar equivalent, because they are weaker than the dollar. On the expense side, 61% of our costs also convert to a lower dollar equivalent and therefore widen our Ebitda margin. You’re not really losing if you are neutralising everything at the level of the subsidiary.
This was a learning experience from 2009. It was 10 years in the making.
How exactly do you brace a global business like yours for a pandemic?
If you think about ICTSI, we have 31 terminals across the globe and we operate in 18 countries in six continents. Therefore, you look at ICTSI’s trade volumes as the world’s microcosm of trade volumes and how containers and volumes have weakened over time since [the Covid outbreak].
In January and February, we started to see volumes drastically reducing in China and in our terminal near Manila, which is a China-centric terminal. We saw that something was really wrong. Then we saw the weakness again in March, coming to Manila, so that confirmed it. Upon seeing the magnitude of the drop in volume, we drew $470m from ICTSI’s working capital facilities to create a liquidity buffer.
During a weakness in global trade, the world will give you what it decides to give you and you don’t have a choice about whether to accept it. Even your market share will not help. The only levers you can pull are capex, costs and capital structure. You have no control over the rest.
In our operating expense, we already knew what our variable costs would be and what our fixed costs are. The battle therefore was: how do we bring down our fixed costs? That is where we focused. We aimed to save about $15m-$20m, so that when volumes come back, we can operate with more efficiency and at higher margins.
We announced at the beginning of the year that we would be spending about $270m on capital expenditures. Upon the announcement of the lockdown in Manila, we announced a freeze of 100% of capex, and we took a tactical as well as a strategic review of our five year plan. Given where the volumes are, did we still have the capacity to build what we wanted to build? That’s the strategic question. The tactical question was: if so, when? As a result of that decision-making, our capex for the year will be reduced by about $100m so instead of investing $270m, we’re going to be spending $160m to $170m maximum.
One of your responses to Covid was to tap the dollar bond market twice this summer. Why did you decide to sell bonds and how did you manage to do so amid lockdowns and wider fear about the global economy?
In the last five weeks, you saw us do two capital market deals. With the first one, we raised $400m and paid down about $500m of short-term loans. The second was to push out a perpetual non-call 2021, to make sure that when we get to 2021, if the pandemic is still creating financial delays then we know we have enough runway to handle it.
That is corporate resiliency. Apart from being able to do what we said we will do, it is about being able to execute in such a short period of time.
We are extremely active in meeting investors. Since the lockdown in Manila in March, we met with 331 investors, 170 funds and had 43 individual virtual meetings. By the time we got to needing to do a transaction, everybody knew what was going on. And that really helped us.
How has the geopolitical situation, particularly the trade war, affected your business?
Let me predicate my statement by borrowing this quote: “The rumours of the demise of global trade have been greatly exaggerated.” Yes, global trade has definitely weakened. But global trade has many components in it. And merchandise trade is only a part of it.
Anecdotally, we expect our volume reduction to be in single digits for 2020. The reason for that is because of the defensive nature of our gateway-focused portfolio. In a pandemic such as this, the terms ‘essential’ and ‘non-essential’ are so important. At most of our ports, importations predominantly consist of essential goods. The only thing that’s non-essential is your discretionary spending — brand new cars, brand new household goods. But if you take that out, the non-essential part of our cargo is about 25%-30%.
Because we operate in emerging market economies, one thing that people do not see is that many of these emerging market economies have offshore foreign worker flows into their economies, which is absent in developed economies.
In the Philippines, Ecuador, Madagascar, and most of where we operate, if the dollar appreciates, it actually adds to the spending power of the direct recipients of the foreign workers’ remittances, and therefore they can spend more. Because of that, many of these countries in which we operate are consumption-driven economies.