Z Energy’s strengthening local brand and progress with its strategy implementation saw the company deliver solid underlying performance for the first six months of the 2013 financial year, despite vigorous competition and a stubbornly slow domestic economy.
Z’s statutory reported Net Surplus for the six months ended 30 September was $2.3 million, down 90 per cent from $22.9 million for the previous corresponding period. Z’s statutory reported numbers are calculated on an historic cost basis as required by International Financial Reporting Standards (IFRS). Historic cost calculates the cost of fuel sold on a first in, first out basis. Therefore historic cost earnings take into account changes in the value of inventory, which may be volatile depending on how much the price of oil fluctuates. Dubai crude started the period at $NZ147 per barrel and finished at $NZ133.
Z’s management (and capital providers) focus on current cost earnings as this reflects the underlying business model, with Z constantly selling fuel and buying product to replenish its inventory. Z uses various risk management tools including currency and commodity hedging to protect margin in a business which is high volume and low margin.
Current cost is calculated by revaluing the cost of fuel to its current value. The difference between historic cost earnings and current cost earnings reflects the differing valuations of the period’s opening and closing fuel (or inventory). Over time the two measurements should be similar, but there will be differences in any one accounting period and generally historic cost earnings will be more volatile.
Z’s recorded Current Cost Operating EBITDAF for the six months was $96.8 million, up 17 per cent from $82.8 million for the previous corresponding period.
Z Chief Executive Mike Bennetts said he was particularly pleased with how Z’s ongoing strategy implementation and the evolving Z brand was helping deliver consistent earnings despite continued volatility in both global and domestic fuel markets.
Volumes across the industry declined over the six months, reflecting petrol prices above $2 per litre and subdued economic activity. Within the industry, strong competition in the retail market in particular has seen shifts in market share, with Z’s petrol sales down seven per cent compared to the same period last year. This has been impacted by the closure of many Z sites over the period for rebranding and refitting.
“It’s now one year since the commitment was made to the Z brand, resulting in one of the country’s most visible rebranding projects. It’s now three months since the rebrand of 300 sites was completed, on time and on budget, with Z now a wholly independent, locally owned company trading under a distinct local brand,” said Mike Bennetts.
“Given the investment in building and owning the Z brand rather than leasing a global brand, we have been encouraged with the way the new Z brand is resonating with customers.
“Independent brand tracking now shows Z as New Zealand’s most preferred and recommended brand in this category, with increasing customer loyalty.”
Additionally, Z’s new convenience offer is landing well, with shop sales in reformatted Z stores delivering a 5.5 per cent growth in sales year on year. All 100 tier one sites will be refitted by the end of the financial year.
Mike Bennetts said progress continued to be made against strategy.
“We’ve completed our $12 million investment in a new retail state-of-the-art point of sale system for a faster, more reliable customer experience and we now in the resource consenting process for significant investments in boosting the country’s tight fuel supply chain.
“We’ve decided Mount Maunganui and Lyttelton represent the most strategically important locations for additional bulk fuel storage and we’re now in the preliminary engineering and consent phases for a $40 million investment in 35 million litres of new bulk fuel storage at these ports.
“On top of the 30 million litres we commissioned at Lyttelton last year, this additional tankage will start to address some of the serious infrastructure deficit that has developed over the last 20 - 30 years and enable a more secure and reliable supply of fuel to New Zealand. It will also enable Z to procure larger shipments of imported products that will lower freight costs.”
Mike Bennetts said Z remained committed to transparency around prices, margins and profitability.
“In a $2 per litre plus market, the New Zealand public expect to be told how much money a local company like Z makes. Over the six month period there was volatility in fuel margins but, at the end of the period, Z’s current cost net profit after tax equates to a margin of 2.6 cents per litre compared to 2.4 cents per litre for the previous corresponding period.
“While there has been a much-needed, short-term improvement in gross margins, this was mostly offset by growing operating and financing costs, meaning we are still a high volume, low margin industry with real need for major capital investment. Commentators like the AA repeat that fuel margins are higher than historical averages but they miss the point that the post tax profits are largely the same. It is also Z’s view that the history of this industry has not served New Zealand or the motorist well and that the current state of the industry and its infrastructure is something to be fixed rather than be proud of.”
Mike Bennetts said Z remained committed to building a more efficient and effective company that delivered the best value to customers.
“We’ve taken real gains over the last six months which enable us to grow our shop and carwash income, generate efficiencies, refocus attention on profitable commercial customers and enable us to focus on reinvestment in our business and in meeting our customers’ needs.
“Z’s recent contract to buy petrol and diesel from a Korean refinery will cut $5 million of annual costs out of the business and in March 2013 Z will settle an unconditional contract to sell and lease back 44 retail service station properties across New Zealand.
“This contract follows eight properties already sold and leased back and will free up a further $84 million of capital for reinvestment back into the growth of the core business.”
Mike Bennetts said he expects conditions to remain challenging over the remainder of the financial year, with the volatility that has characterised the first half, but reaffirmed the company’s full year current cost EBITDAF guidance at $185 - $200 million.
Reconciliation from Operating EBITDAF (Current Cost) to Net Surplus (per statutory accounts)
|Operating EBITDAF (Current Cost)
|Cost of sales adjustment
|EBITDAF (Historic Cost)
|Depreciation and Amortisation
|Net Surplus (per statutory accounts)
The Z Energy Group provides information on its earnings based on both a Historic Cost and Current Cost basis. The cost of sales adjustment (COSA) is the difference between earnings calculated on an historic cost basis and a current cost basis and reflects the differing valuations of the period’s opening and closing fuel (or inventory). Historic cost (as required by IFRS and disclosed on the statutory financial statements) calculates the cost of inventory on a first in, first out basis. Current cost revalues all stock to its current value. Current cost is a non-IFRS number but is used by management and capital providers as it reflects the underlying business model.
Historic cost earnings are subject to fluctuations in the value of the stock held on the balance sheet due to changes in the price of oil and exchange rates. Over time historic cost and current cost measures should deliver similar results but there will be differences in any one accounting period.