About Z

Z delivers growth in current cost operating earnings as strategy hits straps

03/05/2013 - General News

Jonathan Hill

Z Energy is pleased to announce that it has delivered sustained growth in current cost operating earnings for the 12 months to 31 March 2013 as the company realised gains from year two of its current three year strategy programme and begins developing the next multi-year strategy for the company.

On a historic cost (NZ IFRS) basis, Z’s statutory reported Net Surplus for the 12 months ended 31 March was $35.0 million, down from $77.0 million for the previous corresponding period.(1) 

On a current cost basis, Z posted Operating Earnings Before Interest, Depreciation, Amortisation and Financial Instruments (CC Operating EBITDAF) of $195 million, which is in the middle of its guidance range of $185 - $200 million, and up from $172 million for the previous full year period.(2)

Z Chief Executive Mike Bennetts said the company’s strong focus on customers and executing its strategy had delivered a solid CC Operating EBITDAF improvement in a highly competitive market and positioned the company well for future growth.

“For the third year in a row, Z has delivered double digit CC Operating EBITDAF growth through making disciplined strategic choices and executing well against those choices. Z has delivered consistently strong cash flow and is now in the process of developing its next multi-year strategy programme which targets further growth through internal efficiency, competing where the company is advantaged and sensibly developing into new markets such as new service offerings around fuel efficiency.”

Mike Bennetts said he was particularly pleased with the integrated operations of the company and with the success of the Z brand.

“Our research shows that Z is now the country’s most preferred and trusted supplier in the transport fuels market and that more people rate Z as their first preference for transport fuel than any other company. We believe the Z brand has significant growth potential and the opportunity for us now is to make choosing Z as easy as possible, which means continued strategic investment in our retail network.”

Mike Bennetts said in an industry which for a number of years has lacked adequate investment, Z was bucking the trend by consistently investing in new retail outlets as well as assets in its commercial markets and supply chain.

“Z retail sites pump substantially more volume than the industry average. We have a comprehensive national retail network and the flexibility to grow our reach by investing further in new sites as they become available.

“On the strength of this we expect to open four or five strategically located flagship sites every year for the next few years. Our experience to date is that these new-to-industry sites exceed business planning expectations and quickly deliver free cash flow.”

In addition, Mike Bennetts said early indications were that Z’s investment in customer service, staff training and an overhauled retail convenience offer was paying off.

“The last quarter of the financial year saw growth in convenience retail sales, and in March the company sold its one millionth cup of Z Espress coffee. A strong convenience retail offer combined with 60 million transactions per year – which is second only to supermarkets – provides confidence in the growth potential of Z’s convenience retailing.”

Mike Bennetts said the company was continuing to lead the industry in much-needed reform.

“We expect new international procurement contracts for refined fuel and crude oil negotiated by Z over the last 12 months to deliver substantial savings for the company. Additionally, strategic supply decisions in the commercial fuel business are delivering a much better return on discretionary sales and help to ensure prudent commercial use of working capital,” he said.

“Z is continuing to make good progress on the consenting and design of an additional 40 million litres of bulk fuel storage at Lyttelton and Mount Maunganui, with consent granted for an additional 25 million litres at Lyttelton in early April.

“With moves by Port of Tauranga to dredge to enable larger vessels, Z is positioning itself to use larger and more cost-effective import vessels to deliver Z’s finished fuel products, which should also represent significant cost savings.”

 

Mike Bennetts said the company remained very active in moving the industry onto a robust commercial footing.

“Ensuring the capital cost of terminal operations is captured in commercial contracts is already sending important investment signals and enabling much needed reinvestment in the country’s fuel infrastructure.”

Mike Bennetts said Z was also interested in developing fuel related services and in the next generation of liquid transport fuels, while ensuring these are developed in a fully commercial way.

“We are very conscious of the impact of higher fuel prices on consumers,” he said. “While there has been an improvement in profitability to the point where there now exists confidence to make required infrastructure investment, this remains a high fixed cost, low margin business.

“Z has a number of advantages and opportunities which have delivered strong growth. With further development of our strategy, an integrated operation, and disciplined execution through a committed group of employees, we believe Z is well placed to deliver future strong performance,” he said. 

 

(1) Z’s statutory earnings are prepared on a historic cost basis (as required by IFRS). Earnings prepared on this basis are subject to fluctuations in the value and volume of stock held over the period, due to changes in oil prices, exchange rates and deliveries. For the FY13 this approach to valuing stock has resulted in a decrease in value of stock of $31.5 million which is reflected in Z’s statutory earnings.

(2) Z’s management, and the company’s capital providers, focus on (and Z provides guidance on) current cost earnings which better reflect the underlying trading performance of the business. More information about current cost accounting and the difference between current cost and historic cost earnings is provided at the end of this announcement.

 

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The Z Energy Group provides information on its earnings based on both a Historic Cost and Current Cost basis. The difference between the two is the cost of sales adjustment (COSA) of $32 million. The COSA is the difference between earnings calculated on an historic cost basis and earnings calculated on a current cost basis. It reflects the differing valuations of the period’s opening and closing fuel (or inventory).
Historic cost (as required by NZ IFRS and disclosed in the statutory financial statements) calculates the cost of inventory on a “first in, first out” basis. Current cost revalues all stock to its replacement cost. Current cost is a non-NZ IFRS number but is used by management and capital providers as it better reflects the underlying business model – which is not to trade in stock (i.e. “buy low, sell high”), but to seek to generate sustainable margin on stock (whatever its acquisition price).
Fluctuations in the value of stock due to changes in oil prices and exchange rates, and the timing of deliveries, inevitably occur and are reflected in Z’s historic cost (NZ IFRS) earnings. Separately identifying the effect of such fluctuations (via the COSA) means that the underlying operating performance of the Z Energy Group’s business model is also separately shown.
Historic and current cost earnings will differ in any one period, but should deliver similar results over time.

The Z Energy Group provides information on its earnings based on both a Historic Cost and Current Cost basis. The difference between the two is the cost of sales adjustment (COSA) of $32 million. The COSA is the difference between earnings calculated on an historic cost basis and earnings calculated on a current cost basis. It reflects the differing valuations of the period’s opening and closing fuel (or inventory).

Historic cost (as required by NZ IFRS and disclosed in the statutory financial statements) calculates the cost of inventory on a “first in, first out” basis. Current cost revalues all stock to its replacement cost. Current cost is a non-NZ IFRS number but is used by management and capital providers as it better reflects the underlying business model – which is not to trade in stock (i.e. “buy low, sell high”), but to seek to generate sustainable margin on stock (whatever its acquisition price).

Fluctuations in the value of stock due to changes in oil prices and exchange rates, and the timing of deliveries, inevitably occur and are reflected in Z’s historic cost (NZ IFRS) earnings. Separately identifying the effect of such fluctuations (via the COSA) means that the underlying operating performance of the Z Energy Group’s business model is also separately shown.

Historic and current cost earnings will differ in any one period, but should deliver similar results over time.