2016 Results Presentation - For the year ended 31 March 2016 12 May 2016 - Z Energy
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2016 Results Presentation For the year ended 31 March 2016 12 May 2016 Mike Bennetts, Chief Executive Chris Day, Chief Financial Officer
Disclaimer
Please read this page before the rest of the presentation
Please do not read this presentation in isolation
This presentation supplements our full year results announcement dated 12 May 2016. It should be read subject to and in conjunction with the additional information
in that announcement and other material which we have released to NZX and ASX. This material is available on our website, www.z.co.nz. All references in $ are to
New Zealand dollars unless otherwise stated
Forward looking statements are inherently fallible
This presentation contains forward-looking statements and projections. These reflect our current expectations, based on what we think are reasonable assumptions.
But for any number of reasons the future could be different – potentially materially different. (For example, assumptions may be wrong, risks may crystallise,
unexpected things may happen). We give no warranty or representation as to our future financial performance or any future matter. Except as required by law or NZX
or ASX listing rules, we are not obliged to update this presentation after its release – even if things change materially
Understand our non-GAAP information
Some of the financial information in this presentation has not been prepared in accordance with generally accepted accounting practice (“GAAP”). In particular, we
show results calculated on the basis of “replacement cost accounting”. It is very important that you understand how this non-GAAP information relates to our GAAP
results. So please read the explanation in the appendices
There is no offer or investment advice in this presentation
This presentation is for information purposes only. It is not an offer of securities, or a proposal or invitation to make any such offer. It is not investment advice or a
securities recommendation, and does not take into account any person’s individual circumstances or objectives. Every investor should make an independent
assessment of Z Energy on the basis of expert financial advice
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Disclaimer
To the maximum extent permitted by law, we will not be liable (whether in tort (including negligence) or otherwise) to you or any other person in relation to this
presentation, including any error in it
Front cover: Jessica McCleary – Forecourt Concierge, Z Washdyke 2
Headline financials
Consistently good profit performance across the value chain
Key Financials FY16 FY15 Variance
Historical cost net profit after tax (HC NPAT) $64m $7m
Replacement cost operating EBITDAF
$238m $241m (1%)
(RC Operating EBITDAF)
Acquisition and transition related expenses (CNZ) ($25m) - -
RC Operating EBITDAF less CNZ expenses $263m $241m 9%
Final dividend declared 18.1 cents 16.5 cents 10%
• RC NPAT of $123m primarily reflecting the higher contribution from Z’s shareholding in Refining NZ
• Operating cash flow of $127m, evidence of underlying profitability
• Strong refining margin environment matched by similar performance by the marketing businesses
• CNZ acquisition and transition related opex of $25m and capex of $7m, a further $24m opex and $9m capex in 1H
FY17 to settle the transaction and complete cutover
• Settlement of historical liabilities with Customs of $18m - $5m in prior years and $13m this year
Note: HC NPAT has been calculated in accordance with NZ GAAP. RC NPAT and RC Operating EBITDAF has been calculated on the basis of “replacement cost accounting”. In this presentation
we show results calculated in accordance with NZ GAAP and results calculated on the basis of “replacement cost accounting”. It is very important that you understand how the “replacement costs”
results relates to our NZ GAAP results, so please read the explanation and consider the reconciliation information in the appendices. 3
Health, Safety, Security and Environment
On the way to a harm free workplace with a generative safety culture by 2020
Operational Metrics FY16 FY15 • Fully compliant with the new Health and
Safety at Work Act 2016
Total recordable case frequency (TRCF) 1.26 0.91 • Progressive implementation of Z’s
Organisational Risk Management system
Motor vehicle incident frequency rate (ZORM)
5.73 0.87
(MVIFR) • 2020 Strategy, Risk Profile and Assurance
Plan completed and will improve the
Lost time injuries (LTIs) 9 14
effectiveness of Board and Management
governance
Number of spills (loss of containment) 1 0 • Continued investment in security of sites
with external security experts engaged in
Security incidents (robberies only) 11 3 relation to material escalation in robberies in
4Q
Product quality incidents (high risk) 0 0
Process safety incidents (Tier 1 & 2) 0 0
Note 1: Current year LTIs, TRCs and MVIs (and consequently TRCFs and MVIFRs) only include Z employees, Retailers’ employees and Mini-tankers franchisees. Previous years’ data also
included trucking contractors and maintenance staff.
Note 2: Motor vehicle incident frequency rate is the number of motor vehicle incidents recorded per 1 million kilometres travelled. 4
Trading conditions
Market conditions remain consistent with 1H
Monthly Industry Volumes - kilo litres Monthly Market Share
350,000 32%
300,000 30%
250,000 28%
200,000 26%
150,000 24%
100,000 22%
50,000 20%
‐ 18%
Mar‐13
Jun‐13
Sep‐13
Mar‐14
Jun‐14
Sep‐14
Mar‐15
Jun‐15
Sep‐15
Mar‐16
Dec‐13
Dec‐14
Dec‐15
Mar‐13
Jun‐13
Sep‐13
Dec‐13
Mar‐14
Jun‐14
Sep‐14
Dec‐14
Mar‐15
Jun‐15
Sep‐15
Dec‐15
Mar‐16
Regular Premium Diesel Jet Total Petrol Total Diesel Total Other Product
• Industry petrol volumes for FY16 are +2% PCP, stronger • Graph does not include Supply sales and exports
growth compared to prior periods as a result of continued • Retail promotions in February and March activated to
lower prices address decline in petrol volumes
• Industry diesel volumes for FY16 are flat on PCP, compared • Customer wins in 2H are at an annual run rate of
to a 3% industry gain in the prior year 34ml demonstrating Z’s ongoing portfolio management
• Diesel volumes indicate a possible slowing of the economy and the momentum for sales growth in FY17
• 90ml of new Jet contracts signed up in 4Q
5
Note 1: Source is Industry Exchange data at March 2016
RC Operating EBITDAF variances to FY15
Margins and store performance offset one-off expenses
Refining +$20m Fuels and non fuel +$10m Operating expenses and one offs +$33m
• Gross refining margin +55% • Fuel margin +2% to PCP with • OPEX increased 3%
to PCP continued investment in network • Customs settlement $1m penalties and
• Average NZD/USD and pricing discipline $12m fuels margin
exchange rate of 0.68 to • Non fuel margin growth +5% to PCP • CNZ transition expenses $25m
PCP 0f 0.81 due to expansion in store offers
1
3
13
19
8
3
17 25
263
241 238
FY15 Refining margin Refinery Volume and Non-fuel income Gains and losses Customs Operating FY16 Pre Acquisition and FY16
optimisation margin expenses acquisition and transition
transition 6
Fuel margin +2% to PCP
Continued focus on portfolio optimisation
$m Fuel Gross Margins (Replacement Cost) cpl
Sales Volumes (ml) FY16 FY15 Var 500
Petrol 802 823 (3%) 400 20
261 254
Diesel 820 861 (5%) 300 202 216
Other 626 625 - 200 10
Total marketing volume 2,248 2,309 (3%) 100 199 209 225
195
Supply sales and exports 112 172 (35%) - 0
FY13 FY14 FY15 FY16
Total Volume 2,360 2,481 (5%) 1H 2H Z Fuels (RHS)
• Focus in 4Q on SME customer contracts, promotional • Unit margin of 20.0cpl compares to prior year
activity and campaigns drove growth in both petrol and 19.3cpl
diesel volumes. • Increased discounting activity in 4Q, both on
• Other volume includes increase from marine (6ml), prime sign as well as other forms of discounts
decrease in bitumen (8ml) and increase in jet (2ml) due to • Price lead in commercial of $6m equates to 0.23cpl
new contracts with international airlines in 4Q
• Supply sales include sales of products (diesel and marine
fuel) both locally and overseas
7Retail discounting continues
Up to 60% of Z’s network discounted from main port price by up to 35cpl
Discounting - Volume and Cpl
VOLUME DISCOUNTED CPL DISCOUNT
Discounted Volume % Average CPL Discount Weighted CPL Average
80.00% 0.14
70.00% 0.12
60.00%
0.10
50.00%
0.08
40.00%
0.06
30.00%
0.04
20.00%
10.00% 0.02
0.00% 0.00
1/04/2015
15/04/2015
29/04/2015
13/05/2015
27/05/2015
10/06/2015
24/06/2015
8/07/2015
22/07/2015
5/08/2015
19/08/2015
2/09/2015
16/09/2015
30/09/2015
14/10/2015
28/10/2015
11/11/2015
25/11/2015
9/12/2015
23/12/2015
6/01/2016
20/01/2016
3/02/2016
17/02/2016
2/03/2016
16/03/2016
30/03/2016
13/04/2016
27/04/2016
• Increased activity in response to competitor discounting in 2H including tactical response to one-offs; all competitors more
active in this space including regional distributors
• Z continued with its tactical pricing, including through store promotions and discount days in 4Q (e.g. March madness
deals)
• Launched the Z App in 4Q to support targeted discounting with sign-ups steadily growing
8Non Fuel Margins +5% to PCP
Continued growth in coffee and leisure categories
Non Fuel Gross Margin ($m)
Operational Metrics Tier 1 Tier 2 Tier 3
70 0.1
1.2
2.1
60
2.5
Number of stores 89 61 58
50
33
32
FY15 85 49 70 40
28
29
30
Average weekly shop sales $44k $27k $18k
20
29 31
24 26
Sales growth 10% 11% (3%) 10
-
Total transaction count YoY 2% 2% (11%) FY13 FY14 FY15 FY16
Store transaction count YoY 7% 8% (6%) 1H 2H Insurance proceeds
• Continually improving execution on site underpins sales • Coffee sales +31% to PCP
growth which is greater than convenience industry average • Food +24% to PCP, driven by growth in pie sales
of 4.9% and expanded food offer
• Continued rollout of new offers like ChillZone and Lotto trial • Leisure +29% to PCP
• Development of new POS software during 4Q with rollout • Strong promotional activity drives underlying
planned in 2Q FY17. growth, e.g. vegan pies, large cup coffees
Note 1: The number of stores shown excludes independents
Note 2: Industry average percentage derived from Industry Exchange data sourced from Aztec Petrol overview 9Refining margin +55% to PCP
Record-breaking refining environment
Regional markets and Refining NZ Total
Gross Refining Margin Per barrel
• Margin hit cap in 2H, exaggerated by lower ($m) ($)
50 14
NZD/USD exchange rate and record
processing volumes which reduced 12
40
imported products 24 10
• Te Mahi Hou commissioned in November 30
8
2015 with expected uplift in RNZ refining
margin of USD $0.90/bbl 20
15
7 23 6
4
24
10
15 16 2
9
- 0
FY13 FY14 FY15 FY16
1H 2H $/bbl GRM
Z Performance
• 2H processing volumes increased to 6.4m barrels from 6.1m barrels PCP
• 2H refining margins are 4.1% of total gross margin against 5.6% PCP
• Optimisation programme involving BP, Refining NZ and Z realised an $8m benefit (reported in fuel margin), +$3m to PCP
10Cash and capital
Balance sheet strength and capacity retained
$m Sources and Uses of Cash
Metrics Mar 16 Sep 15 Mar 15
400
14 29
Gearing – book 350
33% 40% 31% 77
value 300
155
250
Gearing – market 105
9% 12% 10% 200
capitalisation 10
150
Market 100 206
79
$2.7b $2.7b $2.1b 155
capitalisation 50
76
Debt coverage 0
(Total debt/12 months RC 1.7x 1.8x 1.9x
EBITDAF)
• Net debt of $354m, made up of $430m domestic retail bonds less $76m of cash on hand
• Average net debt of $354m (excluding Chevron acquisition deposit) compared to $342m PCP
• New capex spend of $70m (incl $7m transition-related), stable compared to PCP plus $13m of incomplete projects carried
forward into FY17
• Land and buildings revaluation resulted in uplift of $110m
• Closing cash and average net debt levels impacted by $79m CNZ acquisition refundable deposit, $18m one-off Customs
payment, $32m transition and acquisition costs and $25m tax prepaid.
Note 1: In calculating gearing ratios, acquisition deposit has been treated as cash
Note 2: Total Debt being defined as the sum of bonds plus mark-to-market derivatives and excludes working capital funding 11Equity and distributions
10% increase in total dividend
cps Dividends and Earnings per Share
• Directors have declared a fully imputed final 40
dividend of 18.1 cents per share ($72m)
- Record date: 27 May 2016 30
12.5
- Payment date: 8 June 2016
20
• Total FY16 dividend 26.6 cps ($106m) compared 18.1
16.5
to FY15 at 24.2 cps ($97m) 14.3
7.3
10
• Total FY16 dividend represents a dividend payout
ratio of 87% of RC NPAT (FY15 80%) 8.1 7.7 7.7 8.5
-
FY13 FY14 FY15 FY16
Interim Final Special EPS
• Dividends paid over the FY13-FY14 period also include
interest paid (pre IPO) relating to the reset preference
shares and shareholder loans
• Dividends per share and EPS calculation assumes issued
shares of 400 million in FY13 and FY14
12Strategy projects deliver momentum
“Strengthening the Core” run rate now $25m
FY16 FY15
Strategic initiative Progress in FY16
Actual Actual
New sites and rebuilds • Four new sites and two rebuilds complete, bringing
Invest to strengthen the network the total to eight new sites and nine rebuilds during
the strategy period. $8.5m $0.7m
• Three new sites and two rebuilds to open in 1H
FY17
Evolution of Tier 1 store offer • Chill Zone rolled out to 14 sites
Develop food on the go offer and • Exploring partnerships with Lotto and NZ Post to $2.5m $0.3m
further “hero” categories expand frequency driven offers to customers
Extend Tier 2 store offer • Rollout complete at 32 sites in September 2015
Push current food and coffee offer • Called a halt in 2Q to further capex given Chevron $0.6m $0.3m
further into the network
Inland diesel portfolio management • 42 mlpa secured with existing customers
Refocus diesel volume by region, • 60 mlpa declined as margins insufficient $1.7m $0.5m
channel and then customer segment • 53 mlpa currently under offer
Competing supply chains • Refinery optimisation and refined product benefits
Leverage improved refined product continue as expected $10m $6.3m
pricing across manufactured volume • Product contract for 2016 finalised
TOTAL $23.3m $8.1m 13Te Kora Hou: Z’s biodiesel plant
Leading New Zealand on alternative transport fuels
• $26m investment in 20ml B100 biodiesel plant which has
safely completed construction and nearing completion of
the commissioning phase
• Produces high-quality tallow-based biodiesel, meeting Euro
5 specs, and fully supported by leading OEM’s
• Fully compliant to ZORM and relevant external standards
• Product will be progressively distributed across upper
North Island retail and commercial markets from June 2016
• Support from foundation customers like Fonterra, Fulton
Hogan, NZ Post and Downers
• Plant fully staffed with expertise from a diverse range of
processing industries
• FY17 economics adversely affected by lower crude prices
and price premiums required to ensure long term
profitability
14Acquisition of Chevron New Zealand (CNZ)
Opportunity for dual brand strategy, network optimisation and differentiated offers
• 12m bbl of crude • 28% of RNZ refining • Seven terminals • 92 truck stops • 213 sites (208 agents,
• 3m bbl of refined capacity owned • 1,209ml five independent)
product • 25% COLL • Four JV terminals • 32,000 Z card • Convenience store
ownership • 146ml terminal customer accounts and car washes
capacity • Supermarket dockets
• Flybuys
• 7m bbl of crude • 21% of RNZ refining • Seven terminals • 73 truck stops • 146 sites (136 RORO,
• 4m bbl of refined capacity owned • 1,089ml 10 CORO)
product • 25% COLL • Three JV terminals • 11,000 StarCard • Caltex and Challenge
ownership • 98ml terminal customer accounts brands
capacity • Lubricants • AA Smartfuel
• No store participation
15Financing the transaction
Based on a purchase price of $785m
Acquisition metrics $m Agreed financing approach
• Additional bank debt of $705m provided by existing
CY14 Estimated RC Operating EBITDAF 132
banking syndicate
CY15 Estimated RC Operating EBITDAF 156 • Post acquisition leverage debt/FY16 RC Operating
EV/average CY14 and CY15 RC earnings 5.5x EBITDAF peaks at 2.6x after adjusting for impact on
earnings from divestments
• Working capital adjustment to be made
Sources $m • Leverage expected to reduce to 2.0x within 36 months (by
end FY19)
Cash 115
• Assumes dividend growth of 10% per annum
Additional debt 705
• Modelling has been completed on downside scenarios and
Divestment proceeds TBC further mitigating actions have been developed
• Divestment programme to satisfy Deed with Commerce
Commission in progress
Uses $m
• Bond issue to reduce bank debt and replace maturing
Acquisition of CNZ 785 October bond to be undertaken
Remaining transition costs 33
16Integrating the businesses
Immediately into action following Commerce Commission clearance
• Targeted for midnight on 31 May, requiring complete changeover for all IT systems
• 5,000 line Cutover Plan involving over 200 employees, 23 vendors and six countries
Cutover • Thorough change management program for both Chevron’s employees and customers
• Focus is on operating safely, delivering fuel, collecting cash and employees knowing what to do
• At best will be a 14 day period, at worst up to a 60 day period
Stabilisation
• Crisis management like structures and processes tested and in place
• Only begins once Stabilisation is complete and target metrics satisfied
• Focus is on fully integrating the business activities of Z and Chevron into one operation
Integration
• Forecasting a period of six to nine months to complete all of the necessary changes
• Benchmarking operational processes and refreshing synergy targets
Value • Focus is on the strategy for a combined portfolio, aka Strengthen the Core
Realisation • Key deliverable is an implementation plan through to end FY18 by December 2016
• Will also identify and complete preliminary analysis of options for growth beyond FY18
17Resilience tested and proven, for now…
Momentum and capability building for a big FY17
Summarising FY16
• Strengthening the Core on track resulting in the sixth consecutive year
of growth in underlying earnings and profits
• Final dividend +10% to PCP from strong operating cash flow
• Significant capability built in project, risk and change management, and
broader knowledge of IT systems
• The quality and commitment of Z’s employees has been a material
factor in delivery of the financial results
Looking forward to FY17
• Expectation for another year of largely similar macro economic
conditions
• Z’s contract with Progressive Enterprises Limited will cease at 31 July
2016
• Z stand alone guidance - RC Operating EBITDAF of $260m to $290m,
with capex of $60m
• Committed to monthly operating updates on progress and risk
management of Chevron cutover and integration
18Appendix
1. Financial results
2. Profit and loss
5Financial results
Basis of presentation
Non-GAAP Accounting Measure - Replacement cost (RC) earnings:
• Is a non-GAAP measure used by the downstream fuel industry to measure and report earnings on a replacement cost
basis
• RC earnings adjusts purchases of crude and product as if the product sold in a month had been purchased in that
month, rather than the Historical Cost (HC) which reflects the prices actually paid
• RC earnings exclude the impact of changes in crude oil and refined product prices on the value of inventory held by Z,
thus it is a better measure of underlying performance
• The difference between HC earnings and RC earnings is the Cost of Sales Adjustment (COSA). Refer to the
reconciliation between HC NPAT and RC NPAT in these appendices
• From FY17 onwards the impact of foreign exchange and commodity gains and losses will be removed from RC results
20Profit and loss
$m FY16 FY15 Variance
Revenue 2,521 3,064 (18%)
RC gross margin 591 562 5%
Operating expenses (excluding primary distribution expenses) (327) (294) (11%)
Foreign exchange and commodity (losses) (26) (27) 4%
RC Operating EBITDAF 238 241 (1%)
Share of earnings in associates 23 10
RC EBITDAF 261 251 4%
Depreciation and amortisation (41) (43) 5%
Impairment (5) - -
Net financing expense (32) (34) 6%
Other (14) (10) (40%)
Taxation (46) (43) (7%)
RC NPAT 123 121 2%
Reconciliation from RC NPAT to statutory NPAT
Tax on COSA 24 44 45%
Replacement cost of sales adjustment (Difference between RC & HC Gross Margin &
(83) (158) 47%
EBITDAF)
Net profit per the statutory accounts 64 7
HC gross margin 508 404 26%
HC Operating EBITDAF 155 83 87%
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