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Edited Transcript of ZEL.NZ earnings conference call or presentation 3-Nov-20 9:00pm GMT

·47 min read

Half Year 2021 Z Energy Ltd Earnings Call Wellington, Nov 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Z Energy Ltd earnings conference call or presentation Tuesday, November 3, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Lindis Jones Z Energy Limited - CFO * Michael John Bennetts Z Energy Limited - CEO ================================================================================ Conference Call Participants ================================================================================ * Andrew Rupert Pelham Harvey-Green Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities * Grant Swanepoel Jarden Limited, Research Division - Research Analyst * Jeremy Kincaid UBS Investment Bank, Research Division - Associate Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Michael John Bennetts, Z Energy Limited - CEO [1] -------------------------------------------------------------------------------- Kia ora koutou, everybody. Welcome to Z's first half results announcement for the financial year 2021. I'm joined this morning by Lindis. And between the 2 of us, we'll share some thoughts on the first half of this financial year and we'll walk you through the pack. We'll obviously have time for questions, and we'll go to our moderator on the call, as we normally would do. We actually don't have anybody in the room with us today. So all of the questions will actually come through the moderator over the telephone. So I'm really pleased to be able to present these results to you. They're certainly very different to what I thought I would be doing when we set the original plan for Z in February of this year, we agreed that with the Board. And shortly after that, of course, there we were in the middle of a nationwide lockdown in late March. So actually came into this year, we've had to deal with, in some respects, 3 waves of change. We certainly recognize that our business had lost momentum in the last financial year, particularly the second half of the financial year. So we already came into this year with plans to address that, and I'll speak specifically to that shortly. And then, of course, we had the impacts of COVID, the national lockdown, the various levels that we worked our way through. And now, I guess, we're sort of into the continued risk of resurgence around COVID, and we're into a good old-fashioned recession. So there's been 3 impacts or waves of change that have come upon Z. One of which we were fully prepared for, the lack of momentum from last year. The other 2 we've had to make up and respond to, as we've gone all the way through the last 6 months. So we'll speak to each element of that as we go through the presentation. This is our standard disclosure, just a chance to pause and for everyone to just be reminded about all the advice that we provide within that. If I was then to move into the headline financial results. And this is the usual table that we would share with you. I think the first point to make here is clearly that COVID has had an impact on our results. And that as a result of that, we are posting a replacement cost EBITDAF of $95 million for the year. That's significantly down on where we were for the same period of last year, and that rolls through to an actual replacement cost net profit after-tax loss for the period of $19 million compared to a profit of $22 million a year ago. I think it's probably really important to emphasize or stress that for both the replacement cost NPAT and the historic cost impact, the primary impacts on those 2 numbers were actually occurred in the first quarter. So at the end of the first quarter, our historic cost net profit after tax was minus $50 million. And at the end of the half year, it's a minus $58 million. And for replacement cost, it was minus $15 million at the end of the first quarter, and it's minus $19 million at the end of the first half. So we've had a half of 2 very, very different quarters for very, very obvious reasons. As per with the update we provided you when we raised equity in May of this year, we had negotiated with our debt funders our covenant waivers to deal with the risks and complexity that was being thrown our way around COVID. And as a result of that, we're not able to pay a dividend for this first half performance and a reminder that we are not able to pay a dividend according to those debt waivers for the full year performance for FY '21. So no dividend payable in December of this year and no dividend in May of next year. Normal resumption around the distribution policy will apply from the first of October of next year, which is effectively the first half of the next financial year. So overall, not an unexpected result for the first half from a financial perspective, given what we were advising the market through weekly volume updates and the quarterly update we provided around our profit performance 90 days ago. And we acknowledge it's a significant difference to where we were in the first half of last year. We came into this year with the 4-point improvement plan, and you can see it there on the screen. And so when I say we came into the year, what I mean by that is we had already acknowledged that there was momentum lost within our business. We've been very upfront around that. We had a structural change in retail margins, particularly in the second half of the year. And certainly, the significant change in refining margins that began in November strongly crystallized in the month of December. And that's obviously going on for way longer than we thought, given COVID affected things. But we'd already lost operational momentum. So we had developed this 4-point improvement plan. We had agreed amongst the management team and presented it to the Board as part of our preparations for FY '21, and it's had to change over time to respond to COVID, and then as I said earlier, the eventual effects of the recession that we now find ourselves in. So first of all, we had to make sure we came into this year with a plan to reduce costs, and we did that. And we have expanded that plan in response to COVID. So what we've been able to achieve in the first half of the year is a $35 million year-on-year reduction in overall costs, and $22 million of those were actual structural cost savings. And we've got a table later in the presentation that Lindis will take you through that gets more specific about that. And we are on track for the commitment that we made to you at the time we raised equity of reducing our structural costs by $48 million. And we will actually exceed the run rate we advised you of that being $55 million. We've now been able to increase that to $60 million. So really good progress made in the first half around that aspect of our improvement. In terms of holiday market share, we've acknowledged that the volume margin trade-off that we have pursued for a period of time is no longer the right thing for us to be doing strategically. So we have a much stronger focus on volume, particularly in the retail sector of our business. So we are able to declare that we are holding market share. We changed our pricing tactics in September of last year, and that is now coming through. We have a year-on-year growth in terms of this week, this year versus this week last year. We've been able to post that across both Z and Caltex once we've been able to move back into alert level 1. So we don't yet have a good enough up-to-date understanding of where we are from a competitive perspective, but it indicates that we are actually, at the very least, holding market share and potentially gaining market share, in petrol anyway. We've already got evidence we're gaining market share in diesel and jet, albeit that's obviously have a very, very small base at this point in time. It's really important to us that we monetize the scale, and we're really pleased that the Fuel Industry Act has now been passed and that MBIE are developing the necessary regulations to put that into effect. That's really important to us because, although we've been able to make progress strategically in both retail and our commercial businesses since we did the Caltex acquisition in 2016, we have not been able to make the progress strategically around the ideas, the options that we have within our supply chain because of the uncertainty, both regulatory and politically, around the changes to our industry through the ComCom review and then subsequently, the Fuel Industry Act. That has now been passed, and we have got the way forward on how we go into action around that. We've already chosen to bring our Nelson terminal out of the national inventory agreement. We did that earlier this year. So we reached a bilateral agreement with one of our competitors for Nelson that came into effect at the beginning of this financial year, and with the other competitor it came into effect in July of this year. So we're really pleased that that's one step in a number of steps that we'll be making around the way in which we monetize the scale in our business beyond what we've been able to achieve so far in retail and commercial. And the last point to emphasize. And certainly, from an improvement perspective, this is the one that has changed the most as a result of COVID. We're very focused on making sure we manage capital, and that resulted in an equity raise, a very sensible one at the time. And of course, in hindsight now, things have been less worse than we actually forecasted when we raised that equity. However, that's given us an extremely strong balance sheet that should New Zealand go back up the alert levels with some other significant unforeseen event hit us or the recession becomes much worse than currently forecasted, we have a very, very strong balance sheet and a series of capital options that enable us to, once we get past the steep wave of period, get back to our normal distribution policy, get to the bottom end of our preferred target range for debt leverage and still make suitable investments in both integrity and growth CapEx within our business. So from an improvement perspective, we came into this year with a 4-point plan. It changed as a result of the COVID impact. It's modified somewhat because of the way in which we see the recession playing out, and we've been able to identify the progress that we've made. Moving on in terms of where we are from a safety and well-being perspective. This has been largely a story of success during the year. Some of it could be argued certainly in the first quarter that we had less incidence as a result of lower levels of activity. But what certainly happened in the second quarter once we got back to the normal level of activity in our business across all of our operational activities that actually that year-on-year performance in safety has largely been maintained. Two things I would call out here is we've had a particularly strong emphasis on mental health and well-being. We came into this year with an intention to do that anyway. And certainly, the impacts of COVID, both for people at a personal level and what it means for their role within the organization has meant that we've had to do more in that area. And we're really pleased to report the progress that we've made. We did really strong employee engagement feedback around the way in which people are feeling suitably, emotionally and mentally supported given these difficult COVID or recessionary times. I think the other thing that I would emphasize here also is that we've developed treatment plans. We know how to deal with COVID in terms of how we run our operations in a normal sense or a normal lockdown sense. We've also had one example where we had a COVID case visit one of our sites, and we're able to close the site and complete a fully deep clean within a 2-hour period. So from the time we were given notice to the time we -- and shut the doors to the time we reopened, we mentioned that, that was within 2 hours, simply because we'd already had a practice at that and we developed plans. So if that was to occur again in any one of our operating locations, the impact on our performance we would like to think would be very minimal. So overall, I'm generally happy with where we're going with the health and safety performance for the year. In terms of the big variances around what's happened year-on-year. As I said in my opening remarks, sort of the year-on-year EBITDA is down 48% compared to the prior comparable period. The big impacts here, as you can see from the waterfall chart, really do come in fuel margin and the refinery margin. The fuel margin, about 60% of that is related to retail. And it's predominantly volume related. Our unit margins in retail were fractionally down on what they were for all of last year as an average. So of the $72 million there, about $2 million of that is unit margins in retail. The risk of it comes from actual volumes caused by COVID. And so 60% of that number comes from retail and 40% comes from commercial. Our unit margins in commercial are consistent year-on-year. So this is solely about COVID-related volume impacts, primarily in jet, of course, where our sales are down about 80% year-on-year. The second block around refinery margins, very, very difficult times. We saw margins decline in December of last year. We thought we might have been free of the impacts of that by March or April, but clearly, COVID came along and has simply sustained and prolonged the refinery margins on a global basis. So instead of posting a normal sort of $30 million to $35 million of positive refinery margins during the half year, we actually are showing, as you can see there, it's actually a minus $14 million for the period, which is $47 million less than we had for the half year last year. And you can see here the impact of the reductions, the efforts that we've made around our operating expenses, which are down $29 million between the 2 periods. And we have been able to release some of our COVID-related provisions. So we provided for $24 million worth of OpEx and $9 million worth of COGS at the end of the last financial year, and we've been able to release some of those where the actual costs have turned up. So therefore, we've been able to expense those. And in some cases, the costs that we expected to turn up have not turned up. This has mostly been in the area of doubtful debts. However, we have had some other COVID-related expenses occur or are likely to occur during this period. So we have increased the provision. So we've gone down by $13 million, but we've added some additional provisions back. And you can see that on a net basis, there's $7 million of net benefit of provision. So the $95 million that we posted, you could argue that on an underlying basis or excluding those provisions, it really is an $88 million underlying performance. I'll now pass you across to Lindis to talk you through some of the more operational aspects of how we've been going. -------------------------------------------------------------------------------- Lindis Jones, Z Energy Limited - CFO [2] -------------------------------------------------------------------------------- Great. Thanks, Mike. I'll go through this relatively quickly because I think Mike's hit the headlines of what is a relatively more straightforward set of results. But most importantly, we'll start with a cost-out program. Mike shared the headline there that the commitment we made to take $48 million of structural cost savings out this year. We're on target of the 23 individual initiatives that we targeted. We've made the decisions. We've taken the actions such that, for 21 of them, the cash is actually flowing. So we've got a degree of confidence about that. And during that work, we are happy to confirm that rather the run rate for next year going to $55 million, so those same choices annualizing to $55 million next year, we expect that cost savings from those choices to be $60 million. Also on the act of pursuing that work, we've identified a further set of choices where we believe we can take an additional $10 million of structural cost savings out. So the $48 million this year becomes $60 million, and we believe there's another $10 million that we can commit to at this point in time to deliver the next calendar year. In terms of other cost management tools that we had available to us, the one-off OpEx choices that we made in the face of the COVID -- impact of the COVID pandemic, we're on track to deliver those choices and deliver the benefits from those choices. And to the extent that we've been able to capture the benefit from the volume decline, we've managed to do that. But it's important to note that our estimates of the volume decline that we made in March this year haven't transpired such that the actual savings are slightly less than anticipated. From an overall enterprise perspective, that's, of course, a good thing. Just in terms of key thing I want to point out in that table, we've included in the one-off OpEx the effective tailwind from the COVID provision that we've released. There's not to claim benefit from it, but just enables a reconciliation. So we're explicit about how that $35 million savings versus the PCP is actually captured. So if we move on to the next slide, just talk about trading conditions. And I think the headline here is that the market has recovered well and better than expected. And there's a degree of consistency with the overall economic recovery being to have achieved a level of recovery greater-than-expected by this point in time, when we consider how we were thinking about that, and I get the peak uncertainty in March this year. But how that's showing up in our industry is that having moved through those alert levels 4 and 3 more quickly, but also at alert level 1, the impact on volumes, in particular ground fuels, is much less than expected. So in March this year, we were expecting we put this forecast together that ground fuels volumes of petrol and diesel would be down 15%, and that hasn't been the case. And amongst that, Z's performed relatively strongly. So while we don't have the benefit of the same market share reporting that we've typically had where we would be able to capture our share on a monthly basis, we do get quarterly data. So we've got the Q1 data there. And what that does show is that there is a relatively strong performance in diesel. And we are holding -- appear to be holding our market share for petrol flat as of the end of Q1. The data for Q2 will be released in the next couple of weeks. Other important data points when we assess our relative performance, I'd like to point out there, probably most significant since we've been alert level 2 and 1. What we've seen is that both the Z and Caltex retail-branded volumes have been up week-on-week for the same week last year. So overall, the markets recovered relatively strongly versus expectations that were formed in March this year. And amongst that, Z has performed on a relative basis, I think, strongly. If we move on to talk about how this flow through to fuel margin, it's very much a volume story. So while we see that, in aggregate, the fuel unit margin for Z has grown from $0.163 to $0.176, that's entirely attributable to the decrease in sales of the lowest margin products. So if you look at the jet sales, we've experienced a 72% decrease in jet demand compared to the same period last year, whereas we see petrol and diesel decline being 23% and 4%, respectively. I think behind those numbers, we see the diesel volume reflects strong inorganic and organic growth in our commercial business, where we've had exposure to sectors that have grown strongly in the last quarter, such as forestry and construction, and also some good customer acquisition by our commercial colleagues. In terms of the petrol gross margin, that's very much a volume story as well, where we see versus the same period last year and full year margins are down $0.003 and $0.006, respectively. And we're seeing the volume performance reflects Z's pricing tactic to be focused more on preserving our market share and competing for volume. So overall, the impact on fuel margin, very much a volume -- sorry, fuel margin, a volume story as opposed to a margin story. So moving on to retail fuel pricing, what we're seeing in the market. This is a slide that we've shown for quite a few periods or years now. I think 2 points here. Normal service resumed as it relates to price competition, both on the price board, but also after price board discounts, as soon as we came out of alert levels 3 and 4. So the depth and extent of discounting and price competition is similar to the same period last year. And it's worth noting in terms of, for all stakeholders, how fuel margins are observed in the industry, what we note is that there's been a disconnect with the MBIE-assessed margin over the last 6 months. We do note that is somewhat unusual and that we've been traveling in a relatively narrow and lower band for the last 4 to 5 months, yet we seem to have a structural disconnect between our margins and the MBIE-assessed margins for that period of the last 5 or 6 months. Moving on to nonfuel margin. I think this is a particularly interesting story and reflects the resilience of the convenience food store business. So while the nonfuel margin is down $3 million on the prior period, what we observe is that convenience sales are actually up 7%. And what we see is store transaction count only down 7% despite total transactions down 13%. And that reflects a lot of the great work that the retail team and the way the business did just to ensure that we were the best place to provide what the customers needed in those lockdown periods. We can do it safely and we can do it efficiently. And there's a lot of rearrangement of how we manage stock in our supply chains during that period, and similar to the resilience that a lot of Kiwi businesses have shown that shown up in much stronger results than we might have otherwise expected going into what was a particularly unusual period. So the main drivers of the gap in the nonfuel margin versus in the prior period are somewhat unrelated to the impact directly on our business, and that arise from the drought in Auckland, meaning that our car wash turnover volumes are significantly down for this period, but also the impact on some of our lessees of COVID, such that our lease income is less than it was for the same period last year. So it's those 2 effects that really drive the decline in nonfuel margin, as opposed to the underlying resilient performance of our convenience food stores. -------------------------------------------------------------------------------- Michael John Bennetts, Z Energy Limited - CEO [3] -------------------------------------------------------------------------------- Fist thing to speak about refining margins, and sort of the graph shows at all that significant change between where we were this last half year compared to where we were 12 months ago. Probably the first point I want to make here is a shout-out and a thanks to Refining New Zealand. Clearly, this is an industry issue in terms of the impact of COVID, what that would mean for volumes, the impacts from a customer perspective, the consistently large drop in demand, particularly around jet, then obviously, the implications for that from a production perspective. So I deeply appreciate the relationship that we've had with Refining New Zealand. We've been able to work with them, and along with our -- the other customers of Refining New Zealand, to agree what's the right way, the right production levels of volume to run through the refinery during the last 6 months given significant drop-offs in demand. And that a refinery is very much like a butcher shop in the sense if you bring in so many lambs at the front end, you only end up with so many legs of lambs. So as much as we wanted to, say, have lower levels of volume for production for petrol and diesel, we wanted much less jet because we simply were selling proportionately way, way of this jet. So very much appreciate the work that we did with Refining New Zealand to rebalance the refinery production as an interim response to where we got to with COVID and then we've been very supportive of the work that they have been doing to understand what's the right way to size the refinery on an ongoing basis. So we continue to have discussions with Refining New Zealand around best way to do that. And I would like to note that we've had really good cooperation over the last 2 quarters that's enabled us to ensure that the amount of distressed cargoes we've had to export has been minimized, and that has required significant cooperation and lots of maneuvering between our respective parties, both commercially and while keeping our eye on the overall situation that we have a responsibility for, but just to make sure that we maintain supply security for New Zealand. I think the second point I'd make here, and it really is the first bullet point of the second section that production was down significantly. So essentially, we did 4.4 million barrels during the period versus 10.2 million last year. That really shows the impact of where demand showed up and the way in which the refinery responded. So the refinery proportionately responded to the reduction in demand across New Zealand. And in many respects, it was good that we did reduce that because, of course, unit margins, both globally and then regionally and then eventually what such -- how that's shown up here within New Zealand, refinery margins have been awful. And that's something that we don't see going away in the short term. As we forecasted refinery margins for the first half, we were pretty well bang on what we forecasted. However, there, I have to say the inter-month volatility, we got -- every month, we were wildly off our forecast. However, after a 6-month period, it managed to average out to us actually being within $3 million of what we forecast for the period. So a very tough time for refineries over the last 6 months. Significant impact on our year-on-year earnings as well as the absolute earnings within this half year period as well. And we don't see that changing significantly in the second half of the year. -------------------------------------------------------------------------------- Lindis Jones, Z Energy Limited - CFO [4] -------------------------------------------------------------------------------- And so turning the conversation towards capital management. I'll just confirm what Mike's already shared, that consistent with the arrangements with our debt providers, there will be no interim dividend paid for this period. Below that, I think there's a fairly rich capital management story, which we've chosen, I just want to pause and share that we've chosen to present the data on capital management and what I'd call new money or post-IFRS numbers. So the table that outlines our gross debt and our gross debt to RC EBITDAF are post-IFRS numbers. And what that reveals is with the decline in earnings, we've seen that gross debt to RC EBITDA on a post-IFRS basis increased by 1 turn from 2.7 to 3.7x. In providing the information, I guess, in the new language of the new currency, what it doesn't do is reveal the strength of the balance sheet. And that's revealed by if we look at the total cash on hand, the impact of the total cash on hand, meaning that in previous language, the net debt at balance date would have been -- it was $563 million. And from a pre-IFRS number, that means that from a gross debt EBITDAF basis, we're much closer to a 2x multiple. So while it has increased, we've definitely been able to -- I think the previous number gives us a good like-for-like assessment of the increased strength of our balance sheet and how we've been able to weather what the last 6 months has surrounded us. I think almost as importantly is we believe at Z that the capital intensity of our business is a very strong driver of not only competitive returns over the short and long-term and the sustainability of our business, but it's a key driver of shareholder value. So this is the fifth year in a row where we've been able to fund growth CapEx from divestments, with the majority of those divestments coming with a high degree of certainty in the second half. I think the other observation I'd make is it comes to the relative competitive intensity of our business. And one thing that we would observe is despite having a market share in excess of 40%, we estimate our capital -- our market share of capital expenditure over the last few years has been less than half of that. We think that's the right thing to do from both our capital intensity and shareholder returns, but also a relative competitive performance basis. So I think 2 stories there, strong balance sheet that we'll continue to drive through strict and disciplined management of our balance sheet. So moving on just to touch upon the equity raise. Already mentioned that, in effect, we're getting -- we will be close to the bottom of that debt leverage target range by the time that we've both paid off the bank debt and the retail bonds that we expect to pay off in November this year. So that's been funded by the equity raise, and that would get us right towards the bottom of the debt leverage target range of 2 to 2.5x that we have shared prior to the equity raise. That strength of balance sheet and being able to move towards the bottom of that target debt leverage range over the medium term will provide many choices for Z that will look to explore over the course of the next 12 to 18 months. One choice that we won't be looking to exercise in the near term is the reduction of debt ahead of any maturities. Just given the penalties that are associated with that, we can't find a way that that's in the best interest of our shareholders. So we won't be looking to do that in the near term. So I hand over to Mike. -------------------------------------------------------------------------------- Michael John Bennetts, Z Energy Limited - CEO [5] -------------------------------------------------------------------------------- Yes. Just a quick update on where we are with government relations. As I mentioned earlier, the Fuel Industry Act has come into effect, and we've made the first of a number of changes we'll be making within the supply chain. We have a productive relationship with MBIE in terms of being able to provide our view on the way in which regulations are subsequently developed. There's good consultation taking place. One of the reasons why we've shown on the graphic there a picture of the price board is we are, in our view, the first company that through both the Z network and the Caltex network that would have met the obligation that's yet to be actually regulated to post premium prices on the price board. So you have all 3 grades now up there, and we've chosen to feature the Pumped discount for -- or the Pumped price for 91 at the top of the price board to make sure that those consumers who are particularly price-sensitive capture that as the first thing when they start to compare whether they should shop at Z or any other competitor who has a Z-like offer or a Caltex-like offer or an unmanned competitor. So we think that is actually benefiting us already. We are seeing growth, more growth, in our premium fuel sales year-on-year than we are in our 91 fuel sales. We do think that, that particular action is paying dividends for us. And we are looking forward to these regulations being put in place. We do think that some aspects of those that we think should be accelerated, particularly the way in which the government through these regulations want to make sure that there is increased competition within the distributor part of the market that those wholesale contracts need to come up on a more regular basis and be of shorter duration over time through the Commerce Commission process and our engagement with government around the Fuel Industry Act. We've changed our mind on that. We are now strong advocates for ensuring that the tenure of those agreements is relatively short. So something like perhaps 2 or 3 years rather than what we originally advocated around 5 to 7 years. And that the time frame to transition away from those agreements being fully exclusive for extended periods of time, that, that has shortened as much as possible. So we're strong advocates that this should come into effect within 12 months' time, and that should be 2- or 3-year agreements. The reason we say that is because we now see the advantages of the investments we've made in, particularly, infrastructure over the last 5 to 6 years that we can monetize that scale by actually having a much more competitive wholesale market. So that's why we changed our view over time. In terms of how we look forward to the second half of the year. I think we've proven that we've been operationally and financially resilient during the first half. Clearly, the equity raised helped significantly around that. But going forward, I think we have a great deal of resilience to whether it be COVID or worst recession or something else that comes along. And I think the team, overall have done a very good job, both financial and operation to make sure that's possible for us. We are continuing to focus on that 4-point improvement plan in the second half of the year. So we will continue to make progress on costs, and we will take those steps around the ways in which we want to monetize the scale of our supply chain in the second half of the year. There is a material improvement that we are forecasting for the second half of the year, so we have committed to giving you guidance, and there it is, that we are now guiding for RC EBITDAF of $235 million to $265 million in the second half of the year. Material improvement on the first half. If you think -- if we did $95 million in the first half, there's a big step-up in the second half. The assumptions we want to bring to your attention around that is that we consider that that's very doable if New Zealand was to remain at alert level 1. And we have proven that, certainly, in the last lockdown that even at alert level 2, we're relatively resilient to any volume declines, particularly in the commercial markets. That we are expecting that refinery margins in the second half of the year may be slightly better than they were in the first half of the year, but they will still continue to be very, very low relative to historic perspectives. And that RNZ will run at a lower level of production volumes, as they have done for the last 2 quarters. We don't plan any more one-off cost reductions or there's no more demand-related cost reductions to flow on through, as per the table Lindis talked you through, but our focus is on making sure we deliver on those structural cost reductions. And we confirm that our integrity CapEx will be around about $50 million, and the growth CapEx is going to be funded by divestments. We don't expect to make any further debt reductions until we have the bond mature in November of next year. And again, to confirm that shareholder distributions will resume in the first half of FY '22. So a significant step-up in guidance for the second half of the year. We are confident about that, given the assumptions that I've shared with you. It's not to say that it's easy, but we have a really good understanding of the way in which we can manage the impacts of the recession and any other further increases in the alert levels. So at that point in time, I'm happy to pause, and we'll go to the operator for any calls or any questions that you may have. And between Lindis and I, we'll answer all of them. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Grant Swanepoel with Jarden. -------------------------------------------------------------------------------- Grant Swanepoel, Jarden Limited, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Mike, or Lindis, could you possibly give some commentary around what happened to the commercial margin, excluding the mix impact? So what we're really interested in is we saw the retail margin settle out quite nicely, but what's happened with diesel and petrol margin in commercial, and also what's happened to secondary distribution margin on that front? Has there been any impact from the new contracting on the commercial front that has seen some margin decline there? And then, can you comment on some of the competitive openings and closings that you normally do to indicate the health of the market and the competitiveness out there? And finally, just on your outlook, I know you said that refining is looking a little stable in the first half. Can we assume that the minus 14% we should just double that for the full year to get to mid-guidance? -------------------------------------------------------------------------------- Michael John Bennetts, Z Energy Limited - CEO [3] -------------------------------------------------------------------------------- Yes. So I'd say we wouldn't expect a minus 14% for the second half, Grant. We do see a slight improvement. The reason why it has a bigger impact now is because we were in a fee floor environment. Any improvement in margin means we get 100% of the benefit of that. Whereas when we're above the fee floor, of course, we only get 30% of that margin. So we're much more leveraged to the refinery margin at these very, very low levels. So sort of $0.50 a barrel makes a difference. Or to give you an easy number, $1 a barrel is $1 million a month. So if margins were to be $2 a barrel rather than the $3, that would be $1 million a month less we would get. And clearly, the reverse of that, if that was to be the case. In terms of the number of new sites, if I recall correctly, we've seen 5 new sites built, net 5 during the quarter. So yes, something of a slowdown to what we've seen previously. What I would say about that is there's a couple of things that -- worthwhile bringing to your attention around that. The first would be that there's a number of participants who had indicated they were going to be building some new sites, and they have paused or potentially completely stopped those. So it's one feature that, that 5 doesn't indicate. There are -- if you take someone like Waitomo, for example, they have expanded their network in the South Island, but they've done that by taking over mobile-branded sites, changing the offer and rebranded them to Waitomo. So a change in the way in which that is playing out. We are seeing a number of sites reduce their operating hours. This is typically the first response you see to life getting tougher from an economic perspective for a service station that you reduce from 24 to 18 hours or perhaps from 18 to 15 hours a day. Or indeed, things like the removal of the forecourt concierge, as we have done. That's another indication that people are reducing their on-site costs to remain economic. And the last thing I'd point to is we have a number of our competitors who are in the unmanned space who are frankly, knocking on the doors of our Caltex service stations saying, would they like to swap brands or would they like to exit their service stations. So across those different examples, there's a change in behavior within which these unmanned competitors are choosing to develop their networks. And I can give you a more specific color and context that's suitably shared privately rather than I make a statement in a public domain. In terms of commercial margins, the real impact there is just simply selling a whole lot less jet. The commercial margins themselves, they are mostly contracted for the anywhere between 2 and 5 years. So as things move up and down from a -- like a retail sense, that hardly ever impacts commercial because you're effectively locking the margin through escalator pricing for the duration of the contract. So it's surely a -- it's purely a sales mix issue. -------------------------------------------------------------------------------- Grant Swanepoel, Jarden Limited, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- And the new contracts that you signed that's boosted the commercial side on diesel, although just similar margins to what we have historically. -------------------------------------------------------------------------------- Michael John Bennetts, Z Energy Limited - CEO [5] -------------------------------------------------------------------------------- Yes. So just talking about the wholesale contracts that we're now -- where we supply 2 competitors out of Nelson. Again, it's not a material number. And I'm happy to speak to that privately, but it's not material, and I wouldn't want to bridge anything from a competition perspective by talking about that. So it's very modest to begin with. And we'll have more to say about that once -- as we gradually implement the rest of those supply chain options. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Your next question comes from Andrew Harvey-Green with Forsyth Barr. -------------------------------------------------------------------------------- Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [7] -------------------------------------------------------------------------------- Mike and Lindis, just a couple of questions from me. First of all, just following on from the refinery. In terms of volumes in the second half, are they going to be similar to what we've just seen in the first half? Or we did have a shutdown in the first half, so maybe a wee bit better? -------------------------------------------------------------------------------- Michael John Bennetts, Z Energy Limited - CEO [8] -------------------------------------------------------------------------------- Yes, there certainly was a shutdown in the first half, so August was -- during that period. So we see them being slightly higher than the second half. Refining New Zealand had already themselves quite rightly disclosed how they see their production volumes going, so you can back your way into what that means for Z. So slightly higher in the second half, solely as a result of the shutdown in August not being repeated. -------------------------------------------------------------------------------- Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [9] -------------------------------------------------------------------------------- Yes. And secondly, I noticed that you were completely silent on this point, but also on the refinery and the strategic review. Just from your side of things, your perspective, how is that progressing and timing on that potential, I guess, answer coming out? -------------------------------------------------------------------------------- Michael John Bennetts, Z Energy Limited - CEO [10] -------------------------------------------------------------------------------- Yes. We continue to engage with the refinery on 2 aspects. One is clearly their proposal to reduce production, if you like, contractually under the processing agreement for 2021 and the impacts of that, and they've been public around what they're doing there. We still remain in discussions with them about that, and I expect that to work its way through and be complete probably in the next 4 to 6 weeks, certainly before the end of the current calendar year because it comes into effect in the new calendar year. And as regards to the import terminal, we continue to have discussions around that. There is progress being made. There are differences that are being explored. And I can't put a time frame on that because for both Refining New Zealand and ourselves, our primary focus is on agreeing what's the right size and shape of the refinery in the short term and the fee floor implications of that for 2021. So when either of us have something to say, we will say it. We've certainly agreed that given we -- we are both public companies that we would need to coincide any disclosures that we make when a disclosure by RNZ has an application for the Z and vice versa. So we will be timed on that one when we have something to say. -------------------------------------------------------------------------------- Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [11] -------------------------------------------------------------------------------- Yes. Next question I have was just around the dividend. And is there any circumstance where you would look to reinstate the dividend daily? And if so, what would that circumstance be? -------------------------------------------------------------------------------- Lindis Jones, Z Energy Limited - CFO [12] -------------------------------------------------------------------------------- Yes. So the agreement that we came with our debt providers is quite clear. But also, if we were in a circumstance where the forecast that drove those negotiations proved to demonstrably not be the case, i.e., we would no longer needed those waivers, given our performance, I think it's fully expected and recognized by our providers of debt that we would seek to approach them to have those waivers removed. But that would be based upon a level of performance that is above the guided range. So it's possible, and it's driven -- the most likely circumstance would be driven by our outperformance versus the guidance we've provided. And we'd expect that, that request would be reasonably considered. -------------------------------------------------------------------------------- Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [13] -------------------------------------------------------------------------------- Yes. Okay. And I guess it's another dividend related question in terms of your target debt levels going forward. So I think you've talked about 2 to 2.5x ratio here. Is that going to be, I guess, reconsidered by the Board before you do reinstate the dividend? -------------------------------------------------------------------------------- Lindis Jones, Z Energy Limited - CFO [14] -------------------------------------------------------------------------------- I think the prompts for reconsidering that leverage would be a change in the circumstances of the firm in terms of earnings volatility, et cetera. So for instance, the outcome of discussions with Refining, what the shape of the industry would be, and Z would be a driver for assessing the inherent risk and -- of the business. And I think that's the catalyst for reconsidering that leverage target, as opposed to the fact that we've got the ability to pay dividend. So I think that's how we'd separate our thinking on that or how we do separate our thinking on that one, Andrew. -------------------------------------------------------------------------------- Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [15] -------------------------------------------------------------------------------- Okay. And last question for me, slightly detailed one. The tax expense for the first half, you're showing, I think, $13 million tax expense, even though pretax profit was negative. Can you just sort of talk through why that is? I presume there's some nondeductible expenses or something similar running through at a reasonable level? -------------------------------------------------------------------------------- Lindis Jones, Z Energy Limited - CFO [16] -------------------------------------------------------------------------------- Yes. So I think the 2 stories regards tax, Andrew, I can take you through more detail. But the 2 impacts on tax were the tax paid in a period, we pay tax several times a year, and so there was a hangover from last year. But also not included in that line, but the deferred tax. There's been a correction to that we've implemented this year to deferred tax based upon an interpretation of a new accounting -- a new standard that came into March this year. But I think the difference you're referring to is really just a timing difference based upon our tax payments don't coincide with our financial year. I can take you through that in detail. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Jeremy Kincaid with UBS. -------------------------------------------------------------------------------- Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [18] -------------------------------------------------------------------------------- Just 2 very quick questions from me. Your response to Grant's question around the competitive response was very helpful. I was just wondering if you could explain what the competitive response has been following the removal of the Nelson terminal. -------------------------------------------------------------------------------- Michael John Bennetts, Z Energy Limited - CEO [19] -------------------------------------------------------------------------------- Yes. So what I -- how I talk about that one from a competitive perspective. So what we've done is we have reached agreement with 2 competitors in that market who provide wholesale supply to other participants. At this point in time, we've agreed a price and a volume bandwidth in which they would draw down on those private stocks. And on a monthly basis, they're drawing down according to that. So we -- again, I can't get to any more specific than that, Jeremy. Other to say we have a 1-year contract in place with those 2 players. And yes, we priced it accordingly, and they are performing against the contract, as indeed we are. Very happy to pick up that in more detail if it would be helpful to you when we chat privately. -------------------------------------------------------------------------------- Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [20] -------------------------------------------------------------------------------- Right, sure. Understand. And then secondly, the airport is talking about the potential for borders to be closed through to 2024. And you're talking about, obviously, the refinery is to produce additional amount of avgas. Is there a risk that we produce too much avgas and we can't store it anywhere if the borders are still shut for that period of time? -------------------------------------------------------------------------------- Michael John Bennetts, Z Energy Limited - CEO [21] -------------------------------------------------------------------------------- Yes, so a really good point. So just kind of like, typically, that's not avgas. They actually produce jet. I know it's kind of splitting hairs, but there is a bit of a difference there for those who do know that difference. So yes, we may end up with more jet than we would otherwise be able to sell. That's why we've been really pleased with the way in which we've been able to engage with the refinery and their 2 other customers to rightsize the refinery for all of our mutual needs. So at this point in time, it doesn't look like we're at a production level where we would need to export jet. And as I said -- I might have said previously, sort of 15% of our jet sales are domestic, about 10% to 12% is Trans-Tasman, and the balance is international. So yes, we're seeing a little bit of Trans-Tasman, and there may be a chance for some growth there. New Zealand domestic has probably got about as high as it's going to get during a recession. So we think we now have a good understanding of what a reasonable level of in recession, no large amounts of international travel demand would be. And we think the refinery is able to size itself around that in a way that we're not going to be one of those distressed jet exporters. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back for closing remarks. -------------------------------------------------------------------------------- Michael John Bennetts, Z Energy Limited - CEO [23] -------------------------------------------------------------------------------- Final comments from me. As I said, we would like to thank everybody for their support during the equity raise. And we appreciate the feedback we've had during the period around how we could improve our disclosures to ensure that you were -- are suitably informed when we moved from weekly to monthly volume actuals that we reported. We are committed to the guidance that we've shared with you. We've heard that feedback. To reinforce Lidis' point, if we are in a very unique circumstance where our debt waivers were not going to be applying because we were having a level of performance above the guidance range, we are very keen to be able to return capital to you under reasonable circumstances. So we would use that as a prompt to do that. We recognize how important that is for our shareholders, whether they be institutions or particular retail investors. And last point I close on is, there are a number of initiatives or products that we are bringing to the market over the next quarter that also give us some confidence in that guidance range for the second half of the year or certainly the step-up. We are scaling up some of the things that we've had in test for some time. I won't share those here because that would be telling our competition what we're about to do. But we are looking to do that, and I think that would give further momentum to the year-on-year volume improvement that Z is seeing within retail, and we're certainly very happy with the performance we're getting out of the commercial portfolio because we have organic growth because the sectors that dragged us down last year around forestry and construction are much more positive at the moment. And we are seeing some really good signs of our customer acquisition. So with that said, thank you very much for your support, and we will look forward to sharing Z's results with you in May of next year. Kia ora koutou.