By Shane McGinley
Agility chairman Tarek Sultan discusses the logistics company's toughest ever year
There are still a few months left to 2011 but it’s probably safe to say it is unlikely to be a year on which Agility chairman Tarek Sultan will look back fondly. The logistics firm, which was set up in Kuwait in 1979 following a decree from the Emir, has had multiple issues to deal with on many fronts this year — legal battles with the US military, falling profit margins and the unexpected affects of the Arab Spring — and yet it is still striving forward with its expansion into emerging markets and new sectors.
The year started off with political unrest erupting in Tunisia and the toppling of president Zine El Abidine Ben Ali, who had been in power for more than three decades. This was the catalyst for unrest to spread across the region and next in line to fall was Egyptian president Hosni Mubarak. The wave on unrest spread to Yemen, Bahrain and Oman and violence has also spread to Libya and Syria.
While Agility’s logistics were affected in the short-term when conflicts erupted across the Gulf, Sultan claims the onset of what has now been christened the Arab Spring has not damaged its business opportunities. “Even during times of strife, people still need to eat, need to be treated with medicines,” he says, optimistically.
With hard-line regimes falling across North Africa, and more under threat, Sultan believes there may be some positive outcomes from the change of leadership as it “will offer more opportunities to the private sector.”
“One of the problems in the first place was we had governments that were big, governments that were crowding out private sector investment and were not able to create the level of opportunity and jobs that were needed to keep their constituents happy,” Sultan says.
“So the fact that they have changed, if anything, hopefully these new regimes will be more responsive to their citizens and private sector orientated, which is only good for business,” he adds.
The company is certainly in the mood for expanding its business scope as its first quarter results reported a 56 percent drop in profits to KD7.7m ($27.93m), compared with $64.54m in the first three months of 2010.
This was on top off an 84 percent drop in profits in for the whole of 2010, as the firm moved to reposition its business.
“After a year of adjustment in 2010, which included a transition away from government business, 2011 represents a new financial benchmark for Agility,” Sultan says of the results.
“Although our results this quarter reflect costs related to the restructuring of defence and government business, it is important to note that today; we are first and foremost a commercial logistics provider.”
“Our commercial business is steadily growing. We are acquiring new customers, expanding our business with existing customers, and transforming our operating platform to execute more efficiently,” he says.
Of course, the main reason why Agility has had to restructure its business and it is now fundamentally a commercially driven operation is because it has lost the majority of its government and defence business as a result of an ongoing legal battle in the US with the American military.
First indicted in the US in November 2009, Agility is accused of overcharging the American military on an $8.5bn contract to supply food for troops in Kuwait and Iraq. The case has led to a sharp contraction in revenue from the firm’s defence and government services (DGS) sector, which typically offers higher returns than the commercial logistics sector.
Figures show DGS revenues fell from 44 percent of total earnings in 2009 to around 25 percent last year. While company shares have slumped 65 percent since Agility was indicted, the logistics firm is in talks to resolve legal issues with the US Department of Justice and there’s no guarantee a settlement will be reached.
“[Agility is] still interested in resolving the dispute amicably… but if we can’t we are fully prepared to defend ourselves legally,” Sultan says.
“You don’t execute projects of that size and contracts of that complexity without working very closely with your customer and we clearly worked closely with our customer over a six or seven year period. Even General Petraeus [of the US Army] said our company did miracles in Iraq.
“The Defence Logistics Agency approved our business practices, the way we conducted our business and basically everything, our prices, our suppliers, everything,” he says with gusto.
Looking towards the end of the year, Sultan says he has “both a clear understanding of where we need to go as a company and deep determination to achieve our goals.”
However, he is still realistic that the ongoing US legal battle is likely to have an impact on the company’s full year financial results. “We have an EBITDA [earnings before interest, taxes, depreciation, and amortisation] target of $220m for this year and we feel confident we are going to meet that,” he says.
A look back at figures from 2010 shows Agility reported an EBITDA of KD80m ($292m) for 2010, which was itself a year-on-year decline of 63 percent. Sultan’s target of $220m therefore represents a further decrease of 24.6 percent for 2011.
In July, a US appeals court ruled against an attempt by Agility to avert prosecution over the fraud charges. The ruling, signed on 12 July by the US Court of Appeals for the 11th Circuit in Atlanta, should allow the case to proceed after more than a year of legal argument over whether the company was correctly served with an indictment by US prosecutors in 2009.
The company had asked the Atlanta appeals court to review a district court’s decision in March to deny its motion to quash “service of process” of the indictment. Agility had argued the lawsuit was invalid because prosecutors served the indictment only on the company’s US subsidiary and not on the Kuwait-based parent company, Public Warehousing Company KSC, also known as Agility. The appeals court dismissed this on procedural grounds.
“We lack jurisdiction over this appeal and appellee’s (government’s) motion to dismiss the appeal is granted,” the court order signed 12 July said. In the past, Agility has argued that the case involves a civil contract dispute rather than a criminal matter.
Despite this ruling, there is still no guarantee that Agility’s legal battles in the US are over. This summer, US prosecutors said they were investigating “potential new charges” which may be brought against Agility, a judge wrote US official federal court documents.
According a report by Bloomberg, Agility asked US District judge Thomas W Thrash in Atlanta to reject a federal grand jury subpoena demanding the appearance of retired US Army General Dan Mongeon, a member of Agility’s board.
“The principal purpose of questioning this witness is to investigate potential new charges,” Thrash wrote in court documents. “This is a proper use of the grand jury.”
The possibility of more charges was also highlighted by court filings from the US government, which had issued a subpoena to General Mongeon “not to build further evidence for trial on the existing charges but rather to investigate additional potential charges.”
In statements released to the press, Agility says it “remains committed to trying to resolve the dispute through dialogue with the Justice Department but is prepared to defend itself vigorously if those discussions are not fruitful.
With its government and defence work dried up, Agility will now focus on commercial logistics and emerging-market expansion to boost its income levels. “Clearly we’re in a transitional period,” Sultan says.
“In the short run it would be very difficult to replace the income or the profitability of some of the government contracts that we had,” he acknowledges.
“We can replace those revenues through our commercial logistics business, and with the focus on the emerging markets, and the underlying income or profitability, although lower in the commercial business, is more sustainable and has a higher value to our shareholders.”
Agility, which provides logistics services for the oil and gas industry in Iraq, made Singapore its Asia Pacific headquarters this year and expanded operations in South Korea, Malaysia and Vietnam.
The Middle East and North Africa “will be an interesting region,” while Brazil, China, India and Sub-Saharan Africa are key areas for growth, Sultan says.
Agility’s investments in emerging markets, and its focus on oil, gas and infrastructure industries, will help the company rebound from the loss of business with governments, he adds. One such commercial deal was Agility’s deal with Nando’s, the international restaurant chain. As part of the contract, Agility will source goods from multiple suppliers, consolidate shipments from the Netherlands and South Africa, freight forwarding and warehousing for Nando’s and will manage supply chain solutions in the UAE, Kuwait and Oman.
While the firm has previously sought to expand through acquisitions, but Sultan says it now prefers to go it alone and expand gradually into emerging markets.
“We are not looking to acquire any more companies,” he says, “We are looking to just grow our business organically.”
Having weathered the impact of the Arab Spring and managed the high-profile legal battle with the US military, the worst would appear to be over for Sultan. However, the real test of his leadership will be his ability to refocus the company’s efforts solely into the commercial sector and find a way to rebound the decline in profit levels.
With a three-decade pedigree, Agility has a solid past and Sultan is no doubt eager to secure it an equally robust future.