Lube pact incomplete - Paramount, Allegheny still to finalise joint venture partnership after two years
Paramount Trading's auditors have raised concerns in two areas, but the newer element relates to the absence of a clear partnership arrangement between Paramount and American oil blending firm Allegheny Petroleum.
The other concern - the credit risk implied by the growing levels of trade receivables, which now stands at $275 million - was being raised for a second consecutive year.
The 50:50 lubricants partnership has seen Allegheny building and equipping a blending plant and Paramount providing the real estate and housing for the manufacturing facility at its complex in Kingston.
Paramount's auditors, McKenley & Associates, noted that notwithstanding that the blending of lubricants started in January of this year, there was no clear agreement in place up to May, which is the closing period for Paramount's fiscal year.
However, Paramount's Managing Director & CEO Hugh Graham is shrugging it off as a non-issue, saying the auditors would not have seen evidence of a partnership because up to that time, the plant was not fully commissioned.
"It is really a matter of working out the best way to run the plant," Graham said in an interview on Monday, while noting that there were clear roles and legal considerations surrounding the partnership.
"The focus was on them building the plant, training the staff, getting the plant to start producing; and then we would work out the best way to run the plant, based on US and Jamaican laws," Graham told the Financial Gleaner.
He said the plant is not yet fully operational, since the new staff is still in training and it is only producing some of the items it plans to manufacture.
In the meantime, the partners are giving consideration as to whether to operate the plant under a management contract or some other arrangement.
NO REP ON PARAMOUNT'S BOARD
In other developments, post the company's year end, the president of Allegheny Corporation, Barbara Kudis, resigned as a director of the Paramount board, effective August 29, and was replaced this week by Anna-Maria Graham. Allegheny now has no representative on Paramount's board, but Graham is downplaying any significance, saying Kudis had to make a hard choice on her involvement brought on by a taxing schedule.
"Barbara Kudis left because she felt she could not manage the dual roles of board member at Paramount and being President of the American Private Oil-Blenders Association," he said.
Paramount and Allegheny launched construction of their lubricants plant more than two years ago, but delays for what should have been a five-month project to be commissioned at the end of calendar year 2016 led to the initial timeline for its development being extended into this year.
The deal for Paramount meant it would move from just being a distributor of imported lubricants to becoming a manufacturer.
Over the period, Paramount's profits have been shrinking - from $173 million in 2016 to $101 million in 2017 and now to $58 million. The shrinkage this year amounts to 42 per cent, but eight points or $8.4 million of that relates to Paramount's return to the income tax rolls.
As a junior market company that listed in December 2012, Paramount qualified for a 100 per cent waiver on its corporate income tax for the first five years after listing, and a 50 per cent waiver in the next five years.
On October 1, Paramount advised of the appointment of Tania Waldron-Gooden, senior executive at Mayberry Investments Limited, as an adviser to the company's board of directors, which Graham said was meant to ready Paramount for the time when it will no longer benefit from tax concessions.
"We're a junior market company that is looking at coming off waivers in the next four years. We have to look for those persons who are available that can add value to what we do," he said.
By moving solely from distribution to a business model that includes manufacturing, Graham rationalised, Paramount is laying the predicate for future growth.
"Like every investment, we are looking for a return ... . It is all about putting in the investment and making those moves that cause us to make good profit," Graham said.
The company's revenue has been increasingly yearly - hitting $1.15 billion in the year just ended - even as its bottom line shrinks. Additional income is expected to flow to the company from the bleach operation that it acquired in April from Seprod Limited.
The bleach business became operational in September, but Graham declined to provide revenue projections for the new unit, citing market disclosure rules. He said the projections and revenue performance would show up in the second-quarter numbers set for release later this year.
As for the auditor's concern over the outstanding payments for goods sold on credit, Paramount said the increased sales has translated to higher receivables and that some of its larger customers have been granted 90-day credit facilities in some instances.