The evolution of Caltex is a classic business case study

Tony Boyd
August 29, 2017
AFR

Commerce students searching for an ASX listed case study that shows the ability of a company to respond quickly to set backs while evolving a new operating model have the ideal candidate in Caltex.

The fuel supplier and convenience retailer showed on Tuesday with the release of its half year results that it was unfazed by the loss of its convenience store and petrol retailing partnership with Woolworths. The co-branded alliance had 531 service station sites.

Woolworths dumped Caltex in favour of BP which is paying about $1 billion to replace Caltex. But the deal has been held up by an investigation by the Australian Competition and Consumer Commission.

Caltex on Tuesday said the loss of the 3.5 billion fuel supply agreement with Woolies would trigger annualised losses of $150 million.

Chief executive Julian Segal, however, has replaced almost all these lost earnings with a combination of acquisitions in Australia and New Zealand and a new $60 million cost cutting program called Quantum Leap.

The acquisitions, the Milemaker petrol station chain and Gull New Zealand, are forecast to have annualised earnings before interest and tax of $55 million to $60 million. 

Caltex took advantage of low interest rates and refinanced its subordinated notes. This has annual interest cost savings of $15 million to $20 million.

During his tenure as CEO Segal has consistently focused on delivering top quartile total shareholder returns through earnings growth and lifting returns on invested capital. 

Unlike some CEOs who are wedded to outdated business operating models and unwilling to consider the disposal of assets to maximise returns, Segal is disciplined and pragmatic.

Over the past eight months Segal and chief financial officer Simon Hepworth has overseen the development of a new operating model with the help of consulting firm Bain & Co.

The company says it has “established two inter-dependent, but different businesses which require separate cultures, processes and systems, both with significant growth options”.

“The company has merged supply, business to business, refining and infrastructure into one business unit (Fuels & Infrastructure) to better optimise our value chain. Retail will focus on the company’s petrol and convenience (P&C) business.”

The first phase of this change in the operating model includes the $60 million in cost cuts including shedding 120 jobs.

The operating model review is continuing and there will be further updates.

As the company evolves its performance is being underpinned by stronger results from its refining business. Caltex reported record supply and marketing earnings in the six months to June. 

Caltex’s Lytton refinery in Brisbane is performing better than ever thanks to the optimisation of its output to meet the growing demand for premium diesel and unleaded petrol fuels. These fuels have higher profit margins. 

The Caltex retail strategy is being rolled out in a measured way. Segal said he would not repeat the mistakes of other companies which had rolled out a national network of new stores without testing it first in small bites. 

Caltex has only rolled out 10 new Foodary sites. These sites have shown sales growth of 20 to 50 per cent. Fresh food and barista coffee sales have been strong.