Michael Smith
February 21, 2017
AFR
Caltex is at a crucial juncture in its transformation from refiner to retailer but chief executive Julian Segal’s long-term strategy has hit some speed bumps.
Investors want a better explanation about how the company is going to plug the earnings gap from losing its long-term fuel alliance with Woolworths. They also want assurances that bad behaviour by some of its franchisees is not evidence of a systemic problem with a model that has landed 7-Eleven and Domino’s Pizza in hot water.
The 17 per cent decline in Caltex’s first-half earnings was well flagged and slightly above consensus forecasts. It was a clean result but there are question marks about how exactly Segal is going to achieve his long-term vision to grow non-fuel income.
This involves building a world-class convenience network which will sell everything from coffee, fresh food, parcel delivery services and dry cleaning. Buying the Woolworths’ network of 527 fuel sites would have put it firmly on that path but in the end it could not compete with the $1.8 billion BP put on the table.
Caltex finance chief Simon Hepworth says investors should not be asking how Caltex will replace lost earnings from Woolworths but whether the company made the right decision not to overpay for the business. Caltex wants recognition for being financially disciplined.
Segal did provide some clarity when questioned by analysts. He says the company’s acquisition of petroleum maker Milemaker and New Zealand petrol retailer will generate around $50 million in earnings.
Analyst estimates of the impact on earnings from the loss of the Woolworths business range from $52 million to $142 million. It hopes to make up the rest with improved productivity and additional growth and mergers and acquisitions. Caltex shares fell around 20 per cent last year on expectations of BP securing the deal.
Caltex is also standing by its franchise model following allegations some operators were underpaying or mistreating workers. Investors have become increasingly worried about the franchise model and for good reason.
While Caltex has not completed its audit, Segal says a “significant” number have been through the process. An independent review also found its franchisees can still draw a wage, make a profit and afford to pay workers within the law.
He says about 5 to 10 per cent of franchisees are sometimes unprofitable but Caltex consistently offers assistance. He says a “small number” have not acted within the law and those franchises were terminated. Both Segal and Hepworth told investors they had “nothing to worry about”.
Segal has long had a vision of a national network of a new type of convenience store offering everything from fresh food, coffee and dry-cleaning that will rival anything on offer in Europe, the United States or Japan. Technology will play a central role in this vision, with customers using a Caltex app to pre-order something for dinner or have a parcel waiting for them as they drive into the site. The idea is to leverage off its existing network of 800 sites.
Caltex is taking a conservative approach to its convenience strategy though which means nothing will happen in a hurry. It will roll out pilot sites over the next 12 months before a wider roll-out. It has signed pilot partnerships with Boost Juice, Sumo Salad and Guzman Y Gomez. The low-risk approach involves a modest capital commitment of $30 million.
Net operating profit before the impact of oil prices fell 17 per cent to $524 million. This was slightly ahead of its $500 million to $520 million guidance. The main reason for the drop was a decline in refining margins compared to 2015 when they were abnormally high.
Chevron, the US-based energy giant that held a 50 per cent stake in Caltex for 40 years, sold its stake in the company in 2015 for $4.6 billion. This finally gave Segal – who has been chief executive since 2009 – the autonomy he needed when planning acquisitions or capital management.
Subscribe to our free mailing list and always be the first to receive the latest news and updates.