07/05/2015 - General News
A year of two halves (following a half of two quarters)
Result and final dividend
Z Energy Limited (Z) announced it had delivered a solid result for the year ended March 2015 by actively managing volatility in both the domestic and global fuel markets.
This equated to a Historical Cost Net Profit After Tax (HC NPAT) of $7 million.
Z posted Replacement Cost Operating EBITDAF of $241 million, up from $219 million for the prior corresponding period. The Z Board has declared a fully imputed final dividend of 16.5 cents per share, which will be paid on 3 June 2015. This brings total dividends to 24.2 cents per share for FY15 and compares to 22 cents per share for the prior corresponding period.
Integration the key to managing volatility
Z Chief Executive Mike Bennetts said Z had focused on operating as an integrated company to deliver the result at the top of the guided range.
Mike Bennetts said this had been a year of volatility in which local refining had experienced the most variable operating environment in 20 years. Also, during the second half of the period, crude oil prices halved between October and January.
“Our view is that despite these swings, through disciplined margin management, firming volumes by matching competitor price discounting and running the entire business in an integrated fashion, that this performance is largely the result of focussed, effective management,” said Mike.
The improvement in refining margins in the second half of the financial year, saw all of Z’s fee floor payments to the refinery paid back in full before the end of the 2014 calendar year. The refining contribution to full year earnings was $31 million, up from $24 million in the prior corresponding period.
Additionally, the joint crude oil procurement and refining programme between Z and another refinery customer delivered the projected benefits over the course of the financial year.
Competition, margins, reinvestment
At Z’s half year result announcement in November 2014, the company said the competitive environment was the strongest in the company’s history.
That dynamic has not changed in the second half of the year with strong local price discounting continuing to occur – at times up to 35 cents per litre off the national main port price.
“While Z’s commitment to match up and compete on discounted prices has meant that up to 40% of its retail fuel volume has been discounted, this reduces margins on total retail volumes, however tactical pricing has firmed the company’s fuel volumes over the second half of the year,” said Mike.
Mike Bennetts acknowledged that over the second half of the financial year there had been a public conversation around fuel margins and industry profitability in the context of a rapidly falling oil price. Reporting its results today ensured facts are available for all stakeholders.
“We can understand why there were questions being asked because the only publicly available data outside of Z’s own disclosures is increasingly inaccurate and ignores most of the elements of a highly competitive market.
“Z’s full year results were in line with what we forecast in May 2014. They show a moderate gross margin expansion over the period, an increase in operating costs and a higher replacement cost net profit after tax – including the growing contribution from Z’s convenience store sales. This is equivalent to 5.2 cents per litre, up from 4.4 cents per litre in the previous corresponding period.”
Mike Bennetts noted that improved margins were supported by investing $70 million into a variety of growth and maintenance projects as well as organic growth from selling higher margin products in its stores and its decisions not to sell large volumes of fuel to commercial customers on uneconomic terms.
“Z wholeheartedly supports the right of our customers to know how much money we make, and how,” said Mike Bennetts. “What today’s results show is that Z’s returns are reasonable and consumers continue to receive fair value from a highly competitive market.”
Z’s Return on Average Capital Employed (ROACE) for the full year was 15%, comparable with returns generated from other listed retailer companies.
Strategy and growth
Z is now a full year into its ‘strengthening the core’ strategy, which will deliver an incremental $40 - $50 million of RC Operating EBITDAF over its duration, on top of the company’s underlying performance.
The strategy is focused on delivering customer value through:
• Building new-to-industry retail service stations
• Continuing to develop the tier one retail store offer and customer speed initiatives
• Upgrading the retail tier two store offer
• Delivering benefits through the company’s crude oil and refined fuel supply chains
• Continually optimising the Commercial customer portfolio.
Within the year’s $241 million of earnings, $8 million relates specifically to this strategy which is expected to be at a run rate of $14 million in FY16.
“A year into this strategy and we are making solid progress to grow the business. Over FY15 we have completed four new-to-industry retail service stations, rebuilt seven service stations from the ground up, grown store sales by 11% and now have pay-at-pump options at 120 retail sites,” Mike said.
Z anticipates network growth and a full development pipeline for FY16 with five new-to-industry sites planned to be built. Three of these will open by the end of July with the remainder over the rest of the financial year. Z has also taken opportunities to close low volume sites as investment decisions arose over the year.
“We have renegotiated further price improvements in our refined fuel supply agreements with a Korean refiner and continue to look within the global market for further supply opportunities.
“Additionally, Z backed the decision to spend $365 million on the Te Mahi Hou upgrade programme at Refining New Zealand and we look forward to the benefits from this investment which will be complete in November this year.”
Mike Bennetts said he still held concerns around the lack of resilience in the fuel supply chain and was committed to leading the response to it.
“One metric we think matters in New Zealand is that since acquiring this company five years ago, Z has more than doubled the rate of investment in the industry, having spent $316 million of capex over the last five years,” said Mike.
“Despite the investment that is occurring, more is required – particularly in the context of the forced closure of some South Island storage tanks. In this context, Z is currently reviewing the resource consents it holds to build bulk storage terminals at the ports of Lyttelton and Mount Maunganui, with a particular focus on the Lyttelton development in terms of the security of South Island supply.”
Outlook and guidance
Mike Bennetts said the FY16 financial year would be tightly focused on executing the company’s growth strategy. Guidance for the 2016 financial year is for RC Operating EBITDAF between $245 million and $265 million supported by capital investment between $70 million and $90 million.