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Chevron Lubricants Lanka PLC Managing Director/CEO Kishu Gomes believes that the re-structuring done during late last year and early this year has started to realize its targeted savings, export volume growth, more global synergies being accrued, product mix changes leading to higher gross margin and a sizable saving out of corporate tax reduction were the key factors in the best ever nine months performance to date for 2012.
He also said that the company which paid Rs. 3 billion annually in taxes was hopeful that the government would act in the best interest of the industry and for its own sake where it is losing revenue in terms of 5% of the 55 million- litre lubricants market.
Here, he is in conversation with The Island Financial Review:
Q: How would you outline the backdrop of the local lubricants industry when it was under aegis the Ceylon Petroleum Corporation and the backdrop of the company at the time it was privatised ?
A: Prior to the privatisation, the lubricants business was under the purview of the Ceylon Petroleum Corporation, but it did not have the technology. The then manufacturing plant also did not have the requisite technology being outdated. It neither had the technology or the industrial capability or the product portfolio to meet the then market demand. It was a government monopoly, then, but there was special permission given to industry- specific and customized companies to import lubricants for their specific needs. That was for industrial and automotive applications. That was also a time where there was a crying need for a technically advanced global company to provide the right products for evolving local application so that was when the government of the day decided to liberalise the lubricants industry and the next step was to privatised the state owned Lanka Lubricants Ltd
The Government adopted an open bidding process from both global and regional players. Most of the top oil processing corporates responded to the bidding process including Caltex. Having gone through the tedious process based on the merits of each applicant’s documents based on investment and technological ability and related aspects of the business, the then government decided to sell the business to Caltex, where 51% of the equity was divested to Caltex , 39% was retained by the government with the remaining 10% apportioned to the employees who crossed over from the CPC. The government decided to divest the remaining 39% on the floor of the Colombo Stock Exchange to the public.
Q:But the industry has seen further liberalisation since then?
The Government decided to further liberalise the industry by inviting players to the market which also saw global giants such as Mobil. Shell, BP (British Petroleum), Castrol and Valvolene and Indian giant Servo. In 2009, there were eight more players who entered the market and now the market has 14 players which includes Sinopec of China, India’s Bharat Petroleum, Total of France, Elf and Gulf and the two local players Ceypetco and Laughs.
Q:In a most recent interview with The Island Financial Review, you complained bitterly that the regulator- the Ministry of Petroleum Resources and the Public Utilities Commission were not paying heed to your frequent outcries that the industry was not regulated in terms of adulterated products, low quality imports and no export rebates being paid. Any updates?
A: The status quo is still the same. We are hopeful that the government would act in the best interest of the industry and for its own sake where it is losing revenue in terms of 5% of the 55 million litre lubricants market.
Q:Can you assign a financial/ numerical value for the government loss ?
A: No. This is because there are the varying products which are marketed where there are over 150 and where the prices of the products range from Rs. 70 and Rs. 1000. That is the reason why it is difficult to assign a value for the estimated annual government loss.
Q:Chevron recorded a best ever quarterly performance in the September quarter. What made the difference in the light of the operating profit of Rs: 819million versus Rs:625.3 million for the corresponding period a year ago ?
A: It’s the best ever nine months results due to many contributory factors. Restructuring done during late last year and early this year has started to realize its targeted savings, export volume growth, more global synergies been accrued, product mix changes leading to higher gross margin and a sizable saving out of corporate tax reduction were the key factors.
We could have brought in more foreign revenue into country if not for the undue delay in getting the TIEP scheme approved by the relevant ministry which affected our export volume up to Aug.
Q:As far as I could remember, Chevron increased prices during the year twice. Is it fair to say that it was the main reason to show good profits? There was a sharp increase in your net profit margin of almost 40% ?
A: Following the crude oil price increase in the global market, the core raw material used for the production of Lubricants namely Base Oil went up in price by over 50%. Packaging cost too followed the same trend Local transport and distribution costs too went up. However, we managed to keep the price increase to the bare minimum. All 13 licensed players followed our price increase by similar margins including the government owned CEYPETCO. This goes to show that no player could escape or fully absorb the raw material cost increases.
Q:How are the sales in the North and East ? I think it has significantly increased your revenue. What have you to say?
No. The North and the East has not met our expectations. While there has been a slight growth in the industry in North, East has been flat due to bad floods during early this year.
North and East has the potential to grow but not in the short to medium term in my view. For real growth to take place, more economic activities have to happen on a consistent basis. The construction and limited agriculture and fisheries can only grow the market by a small percentage on a very low base. It doesn’t really help large organizations.
In my view, for the real growth to happen, the population in North and East should grow to benefit from the natural resources for double digit consumption increase. For industries like petroleum to benefit, the floating population or migrant workers are not enough. Petroleum sector growth is largely driven by the quality of life of people in the automobile segment which is close to 70% of the total lubricant industry in Sri-Lanka.
My estimation is that North and East will take another 5 years to go back to 15% contribution to national consumption which was the norm prior to 1983.
Q:You seem to have managed the distribution cost quite well compared to many other manufacturing outfits. How?
The per unit distribution cost has gone up with related cost increases. However, the strategic moves we make from time to time have kept the distribution cost under control.
We have a very strong distribution covering the entire country including the newly liberated areas in the North. We serve the customers in every nook and corner of the country with a consistent approach in terms of quality and efficiency.
Our offer to every single consumer is the same across the country – products portfolio, brands, distribution, pricing and discounts, channel partnership benefits, consumer offers, quality of distribution and after sales service etc are identical in every part of the country though the margins may remain the same.
We have a highly qualified and experienced team of engineers to take care of the industrial segment and a marketing qualified versatile sales team for the retail segment of the market.
Q:With all the stiff competition with a multitude of 13 players, how did you manage to keep the brand loyalty?
A: There are 13 licensed players operating in the market today for a mere 55 million litre market. It’s the total value proposition we offer to the customer that keeps our brands so strong in the market. We bring in the best technology to the country and support the local application needs with laboratory services and technical education etc. We do the same in the two export markets as well.
The two- pronged brand strategy with the Lanka brand that is trusted by the generations and the Caltex and Chevron brands which are world renowned offer the consumer the best choice through a product portfolio that is difficult to match.
Q:Chevron had the advantage of marketing its products via the Ceylon Petroleum Corporation dealer network. Are you still having that advantage?
A: Not at all. The CPC channel was opened for competition in 2004 and since then all licensed players have been selling their products in that channel. With CPC re-entering the lubricant business we exited the CPC channel completely 3 years ago. However, through a channel shift strategy we gave the consumers a list of reasons to follow us in our channel strategy and we have succeeded. The year 2010 end result of Rs. 1.5 billion and 9 months results this year themselves, speak for its success.
The CPC as a government entity imports finished goods from Malaysia which is against the government’s vision of promoting local production. I doubt if this creates any value for the country. On one hand government issues licenses to new players at a fee and then competes with them too via a government entity.
CEYPECTO should be focussing on their core business and not loose more money by trying to play in these businesses just for the sake of being in all areas. If it wants then it should be on a business model that helps the country but not to drain foreign revenue out by importing finish goods. CPC has so far failed to achieve the intended purpose in my view.
Q:The company hasn’t invested much in Sri Lanka apart from the initial investment. What are your plans for the future?
A: We have been injecting capital for expansion and technology capability enhancements on an annual basis. The plant posses the world’s best technology capabilities and is very efficient. As a result, we have been very successful in the two export markets too. The plant is also certified by the British Standard Institute which does regular quality audits to ensure the standards are updated and maintained too.
Q:What is your overall market share and for the individual product categories?
A: The best for you is to ask the other 13 players and then see how much is left for CALTEX! We would not be surprised that the 13 players claim more than 100%. So we have O market share ??? We don’t go behind market shares anymore. What matters is the margin share. The results we have shown speak for it. We are doing the same thing in Bangladesh and the Maldives too.
Q:What is your competitive advantage?
A: It is very a straightforward and simple answer - Satisfied customers. The others are technology behind the product, brand portfolio, our people and the distribution network, channel brands, after sales service, global synergies etc support the above premise
Q:Is the lube market really recession resistant?
No. In Sri Lanka It has been declining over the past 5 years prior to 2008. We are experiencing positive growth only now. The lubricant industry is not insulated from any macro and micro shocks or such developments.
Q: Are you in the bunkering business? If so what is your market share ?
A: We are not into the bunkering business. We looked at it when it was up for sale and gave up the idea due to many factors.
Q:Chevron’s Global President of the Lubricants Division Danny Roden was here recently. He was quoted in news reports as having said that Sri Lanka was a strategic location. Going by those sentiments, aren’t you diversifying into any other businesses in Sri Lanka such as refining and gas etc, given that Chevron has refineries in Singapore, Thailand and Korea?
A: He did not say Sri Lanka was a strategic location. Instead he said that Sri Lanka is a good country with business potential and the operation exceeded his expectations. Chevron being one of the largest energy companies in the world would review any viable business opportunity anywhere in the world for potential investment. Same goes for Sri Lanka.
Q:Being a lubricant manufacturing company, how do you handle/ manage the discharge of effluents and how do you respond to your stakeholders in that regard?
A: Our manufacturing facility is for both the local and export markets and our Sri Lankan operation is certified by Chevron global technology and as well as British standards.
Q:How do you see the growth of your export markets and your forays into the South Asian/ Asian markets ?
A: We will be concentrating on the existing markets where we will be hoping to consolidate. We have over 150 products which are non traditional product exports. Our Bangladesh market is threefold the size of the local market in volumes. The Maldives market, is in the backdrop of a stronger economy and the margins are much greater through the volumes are around 10% of the local market.
Q:Being a multinational blue chip, what are your commitments to Corporate Social Responsibility ?
A: We have taken up issues in terms of national importance for the last three years. One is about road safety and that program has been conducted with the Police Department. We are trying to minimise the death rates in this country which accounts for between 6 and 7 on a daily average basis.
In addition to that, we have also have awareness programs about the uses of water and that is projected as a valuable commodity. We have water conservation projects in Jaffna, Batticaloa, Trincomalee and other areas such as the south where the target audience is teachers, schoolchildren, famers, fishery sector folks, and those who deal with water altering them on the need for understanding that this was a fast depleting resource. We have been presenting books to libraries as well to enlighten society in this regard.
Q:One of the greatest and most acclaimed endeavours of Chevron as far as CSR is considered, is the sponsorship of the Caltex Premier League Club Rugby Tournament and also the knockout tournaments. How would you share your sentiments and those of the company in this regard ?
A: We have sponsored this tournament for the last twelve years and we have signed the sponsorship for the next two years. This makes us the corporate entity which has sponsored the longest uninterrupted sports sponsorship in Sri Lanka. We have spent over Rs. 450 million in the last 12 years.
Q:Your sponsorship is greatly appreciated, but why sports and rugby?
A: If we consider positive economic development, we need to change the attitudes of people and in that regard, sports is a great leveller. Sports creates attitudes in people which makes people healthier and stronger. For us at Chevron, sports goes a lot beyond mere entertainment. Rugby is also the fastest growing sports in Sri Lanka which has extended to Jaffna, Anuradhapura, Embilipitiya, Galle and Matara as well.
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