Post-crisis Performance

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In our last post we discussed how the leaders in the industry are changing the way they invest and manage their investments.

In this post we explore how the metrics to measure success is changing and how it is going to impact the way port executives are appraised and maybe one day how they are remunerated.

For more information please go to: port-investor.com or write us on info@industreams.com.

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Post-crisis Performance

  1. 1. contact@industreams.com InduStreams.com & Port-Investor.com POST-­‐CRISIS:     HOW  EXECUTIVES  WILL  BE  MEASURED      
  2. 2. contact@industreams.com InduStreams.com & Port-Investor.com Introduc=on   In  our  last  presenta-on  we  discussed  how  the  leaders  in  the   industry  are  changing  the  way  they  invest  and  manage  their   investments:       www.port-­‐investor.com/post-­‐crisis-­‐inves-ng       In  this  presenta-on  we  explore  how  the  metrics  to  measure   success  is  changing  and  how  it  is  going  to  impact  the  way  port   execu-ves  are  appraised  and  maybe  one  day  how  they  are   remunerated.  
  3. 3. contact@industreams.com InduStreams.com & Port-Investor.com How  your  goal  is  changing   The  crisis  brought  with  it  clear  evidence  of  substan-ally  more  vola-lity  than  was   previously  conceived  possible.  With  that  we  are  seeing  how  some  of  the  best  in  the  market   are  changing  the  goal  metrics.     The  main  focus  point  has  previously  been,  and  for  many  s-ll  is,  one  figure  or  a  base  case   around  which  decisions  were  made  and  expecta-ons  to  management  performance  were   formed.  But  with  the,  in  many  cases,  nega-ve  and,  in  some  cases,  posi-ve  surprises   investors  have  had  we  expect,  and  already  see,  a  change.     Specifically  we  start  seeing  much  more  focus  on  poten-al  downside  and  upside.     That  changes  the  game.  It  is  increasingly  becoming  about  altering  the  en2re  return   profile  by  limi2ng  downside  and  increasing  upside  (and  very  much  the  rela-on  between   the  two).     As  example  an  investment  yielding  a  total  expected  NPV  of  $125mn  may  be  entrusted  to   you  or  a  management  team  of  which  you  are  part  to  deliver  on  for  a  given  number  of   years  (see  next  slide).    
  4. 4. contact@industreams.com InduStreams.com & Port-Investor.com How  your  goal  is  changing  (2)   If  the  investment  changes   from  Scenario  0  to  Scenario  1   during  your  tenure  you  have   failed.  This  is  oPen  seen  in   incremental  investments   where  a  set  of  assump-ons   make  decision-­‐makers  blind   to  the  dispropor-on  between   incremental  downside  and   upside  (as  example  when   automa-ng  a  yard   opera-on).     But  if  you  have  changed   payoff  exposure  from   Scenario  0  to  Scenario  2,   then,  despite  not  having   added  addi-onal  upside,  you   have  performed  much  beRer.     Another  way  to  look  at  it  would  be  that  rather  than  focusing  on  the   average  or  the  “expected”  payoff  point,  the  return  range  is  used  to  drive   the  average  upwards  (as  illustrated  above  from  e.g.  Scenario  0  to  Scenario   where  the  average  has  changed  by  $100mn).  
  5. 5. contact@industreams.com InduStreams.com & Port-Investor.com Breaking  it  down  in  models   We  see  three  key  focus  areas   or  models  that  performance  is   being  assessed  on  (explicitly   or  implicitly).  See  below   diagram  and  associated   descrip-on  for  explana-on.       Investment   Opera=ng   Ownership   Concerning  everything  that  relates  to   the  scope,  footprint,  design,   investment,  obligaFons  and  enFtlement   that  create  the  frame  for  the  terminal  to   operate  in  the  market.  Consequently   the  investment  model  also  concerns   itself  with  the  enFre  investment  period   (e.g.  the  full  concession  period)  and   project  return  is  oIen  used  to  assess   performance.     With  the  given  frame  of  the  investment   model  the  operaFng  model  concerns   the  actual  usage  and  deployment  of   shorter  term  resources  to  operate  and   provide  services.  The  horizon  is  a  single   Fme  period  or  a  few  at  most  and   performance  measure  used  oIen   annual  margins  or  profit.     Pertains  to  the  individual  shareholders   and  how  they  each  derive  their  returns   from  the  shareholding  in  the  project  or   terminal  company  through  the   combinaFon  of  the  investment  and   operaFng  models.  Long  term  the   performance  metrics  used  is  of  course   the  returns  to  the  shareholder  for  the   enFre  investment  period  and  short  term   annual  proceeds  (e.g.  dividends).    
  6. 6. contact@industreams.com InduStreams.com & Port-Investor.com Breaking  it  down  in  models  (2)   How  much  emphasis  the  different  investors  and  operators  put  on  each  varies  much.  As   example  APM  Terminals  seem  to  obsess  about  the  opera-ng  model,  whereas  an  operator   like  Hutchison  seems  more  concerned  with  the  investment  model  and  ownership  model   and  private  equity  funds  all  obsess  about  the  ownership  model.     However  the  trend  we  see  is  that  it  is  becoming  increasingly  difficult  for  shareholders  to   ignore  the  one  or  the  other  because  of  the  vola-lity  they  have  experienced  during  the   crisis.  All  levers  than  can  be  should  be  used  to  shape  shareholder  return.     Consequently  you  should  expect  a  much  more  comprehensive  approach  in  the  future  if   you  are  an  execu-ve  or  team  of  execu-ves  responsible  for  terminal  asset/s.     Likewise  we  expect  the  goal  metrics  to  change  in  a  similar  manner  for  all  these  various   models  as  explained  above  (focusing  on  elimina-ng  downside  and  crea-ng  upside).       As  example  most  terminal  MD’s  and  execu-ves  are  today  measured  in  some  form  on   actual  annual  profits  (and  associated  drivers).  But  in  vola2le  market  condi2ons  a  great   terminal  MD  is  one  who  can  limit  downside  when  volumes  slump  and  capture  upside   when  markets  are  good,  not  someone  who  sub-­‐op-mizes  around  some  single  point   predic-on.    
  7. 7. contact@industreams.com InduStreams.com & Port-Investor.com Two  domains:  One  forgiving,  one  merciless!   In  the  previous  ar-cle  we   explored  how  returns   (whether  from  single  or   mul-ple  -me  periods)  can  be   considered  derived  from   market  drivers  and  the   models  you  employ.  Or  in   other  words  how  market   drivers  or  variables,  x,  are   turned  into  returns,  “y”,   through  the  models   employed,  “f(x)”.     We  also  discussed  how   market  drivers  of  course  at   best  can  be  impacted,  but   models  in  principle  in  full   control  of  the  investor  in   ques-on.     We  expect  this  trend  to  mean  that  model  mistakes  made   by  execu-ves  (as  example  big  downside  exposures  traded   off  for  small  upsides)  to  be  judged  more  harshly  than   when  market  drivers  do  not  shape  up  as  expected.     Market  drivers  (or  x)   Return  (or  y)   Models  (or f(x))  
  8. 8. contact@industreams.com InduStreams.com & Port-Investor.com Brace  yourselves  for  the  stress  test!   When  you  experience  a  period  of  seemingly  stable  condiFons  it  is   natural  to  get  lazy  and  stop  preparing  for  hard  Fmes.  Likewise  in  good   Fmes,  foregoing  addiFonal  upside  might  be  easier  to  get  away  with   than  when  volumes  are  down.     We  think  this  will  increasingly  become  a  thing  of  the  past.    And  whereas   you  cannot  predict  the  future  it  is  very  easy  to  test  your  up-­‐  and   downside  exposure  by  simulaFng  a  spectrum  of  volume  and  rate   scenarios.     Stress  tests  from  shareholders,  head  quarter  or  regional  offices  are   going  to  come  and  we  think  they  are  going  to  be  tough.       The  best  you  can  do  is  to  get  fit!  
  9. 9. contact@industreams.com InduStreams.com & Port-Investor.com What  comes  next?   We  will  conFnue  to  explore  aspects  of  our  “Real  Payoff”   iniFaFve,  which  you  can  read  more  about  on:     www.industreams.com/real-­‐payoff     We  encourage  anyone  who  wants  to  share  specific  views  or  cases   to  reach  out  and  explore  the  challenges  and  possibiliFes  of  this   topic  with  us.  You  can  reach  us  directly  on:     contact@industreams.com    
  10. 10. contact@industreams.com InduStreams.com & Port-Investor.com Disclaimer   This  presentaFon  is  issued  for  informaFon  purposes  only  and  does  not  consFtute  an   agreement,  offer,  obligaFon  or  invitaFon  to  enter  into  transacFons  or  investment   business.       With  this  presentaFon,  INDUSTREAMS  LIMITED  does  not  act  in  any  way  as  your  advisor.   This  presentaFon  is  not  intended  as,  nor  should  it  be,  a  subsFtute  for  consulFng  with   INDUSTREAMS  LIMITED.     Whilst  this  presentaFon  has  been  produced  from  sources  believed  to  be  reliable,  the   informaFon,  views  and  opinions  expressed  in  this  presentaFon  are  provided  as  of  the   date  of  this  presentaFon  and  remain  subject  to  verificaFon,  compleFon  and  change   without  noFce.  No  representaFon  or  warranty  whatsoever  (whether  express  or  implied)   is  or  will  be  made  as  to,  or  in  relaFon  to,  the  accuracy,  reliability  or  completeness  of  the   informaFon  contained  herein  or  in  the  appendices  to  this  presentaFon.     INDUSTREAMS  LIMITED  will  not  be  liable  towards  you  or  any  third  party  for  any  eventual   damage  you  may  incur,  caused  by  the  informaFon  contained  in  this  presentaFon  and  its   appendices.  

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