Tony Boyd, 22 March 2016

When Caltex chief executive Julian Segal set out to refresh the company’s vision and strategy he drew inspiration from his first experience riding a motor bike in Romania.

A wealthy neighbour took Segal for a ride when he was a teenager. From that moment onward he has associated freedom with the magic sensation of wind through the hair.

About 45 years later, Segal has a lot less hair on top but he has managed to capture the motorbike riding experience in his catchphrase for the company’s new vision.

It’s called “Freedom of Convenience” and it is summarised in the following sentence: To be the market leader in complex supply chain and the evolving convenience marketplace by delivering the fuel and other everyday needs of our diverse customers through our networks.

The new description of the company’s purpose is significant because it potentially marks a new phase of growth following a five year period when total shareholder returns were 24 per cent per annum.

That impressive performance, which ranks Caltex among the top 10 companies in the S&P ASX 200 over the five-year period, is a tribute to Segal and his chief financial officer Simon Hepworth.

They have cemented a strong reputation among fund managers for delivering what they have promised.

In 2010, Segal established a vision for Caltex of being the “Transport Fuels Leader”. At the time the company was basically a fuel refining and marketing business with volatile earnings and a controlling shareholder with narrow interests.

There were four legs to the Caltex strategy for unlocking one of the most valuable and fastest growing retail networks in Australia.

The company developed its own integrated supply chain for its convenience stores. This distinguishes the company from its competitors. For example, BP uses Metcash to supply its convenience stores.

The second leg of the strategy was to convert the Kurnell refinery in Sydney into an import terminal for a range of fuel products. In tandem with this conversion Caltex established Ampol Singapore to create a more efficient supply chain.

A company-wide cost-efficiency program called Tabula Rasa was begun in 2014 and to continues today. Another ongoing program is optimisation of the entire value chain, including the development of new-look convenience stores.

The final leg of the strategy was capital management which went arm in arm with the exit of Chevron from the Caltex register. That happened last year with a record $4.6 billion block trade.

Switching from a distant controlling shareholder to a range of local institutions was liberating for management.

Segal and Hepworth have been searching the world for inspirational business models so that they can disrupt the Caltex model.

They have used external consultants to assist them and visited leading convenience store companies overseas including Couche-Tard in Canada. They have also visited companies with strong retail operations attached to petrol stations including Buckee’s in the United States.

The use of the word “freedom” in the catchphrase for the new vision is no accident.

Segal regards convenience stores attached to petrol stations as being ideally placed to provide busy Australians with the place to go for e-commerce delivers, meals and groceries.

The traditional concept of a petrol station convenience store which sells soft drinks, meat pies and confectionary is being turned upside down during the brainstorming inside Caltex.

Every aspect of the Caltex convenience stores could change as a result of review being undertaken by Segal and Hepworth and the Caltex management team.

It is even possible that the Caltex name will disappear from the retail network. That is possible given that surveys have shown that Australians associate the name with an American petrol company.

The retail network is extensive and growing each year. According to Caltex’s last annual it had 496 Star convenience stores and 795 service stations owned or leased. There are about 2000 stations in total under the Caltex banner, including about 500 owned by Woolworths.

As part of the company’s review of its strategy and preparations to become something different to what it is now, it has invested about $2.5 million for a 20 per cent stake in car sharing company called Car Next Door.

Car sharing could become one of the fastest growing shared services in the world according to a recent study by Boston Consulting Group.

The BCG report said that in Europe, about 14 million people will be registered with a car-sharing service by 2021, along with 6 million North Americans and roughly 15 million residents of Asia-Pacific.

It said that these patrons of car-sharing services will generate global revenues of €4.7 billion in 2021, with the bulk of revenues, €3.2 billion, coming from light users who need a car only for occasional trips.

Caltex has beefed up the digital capabilities in its management ranks as part of the move toward serving the digital economy.

In October last year it employed Has Fakira as head of digital. He was previously head of technology, multi-option retail at Woolworths.

Hepworth says Caltex now has two streams of IT. There is the traditional IT infrastructure upon which the company runs its day to day operations and then there is its digital stream.

Fakira’s responsibility is to look at customer-facing IT initiatives and make sure that Caltex is agile as an organisation in the digital space.

One aspect of the Caltex strategy that will not change is the commitment to the distribution of excess capital to shareholders. This has involved buybacks utilising franking credits.

FOREIGN BRIBERY

The sudden resignation of Elmer Funke Kupper as chief executive of the ASX has highlighted the reputational risks arising from allegations of questionable transactions offshore.

Ted Williams, a construction and mining sector partner at Piper Alderman, says Funke Kupper’s move has come at a time when the federal government is showing an appetite for significant reform in the area of foreign bribery.

His perspective on this is backed up by Anthony Whealy, a barrister who is chairman of the Australian arm of Transparency International. He says two recent events showed Australia was started to take the issue of foreign bribery and corruption seriously.

These events were the passing of legislation last week relating to false accounting and a speech in Paris by the Justice Minister Michael Keenan flagging Australia’s commitment to adopting deferred prosecution agreements (DPAs).

DPAs, which are common in the United States, are similar to plea bargaining.

Williams from Piper Alderman says DPAs have changed the landscape in the US in relation to Foreign Corrupt Practices Act prosecutions.

Fines imposed on companies have skyrocketed with the average fine exceeding $US150 million. Analysis of these fines shows that eight out of 10 of the biggest fines paid were from companies outside the US.

Williams says the US Assistant Attorney-General Leslie Caldwell in 2014 described the DPA system as “a more powerful tool than actually going to trial”.

Someone with a company that has had to deal with the Department of Justice in the US over foreign bribery told Chanticleer that DPAs have become a profit centre.

The person said that once the DoJ or Securities and Exchange Commission get involved in a bribery investigation there is no telling where the investigation will go.

The unusual aspect of these cases is that the company accused of bribery must employ a law firm to not only represent them but also conduct the investigation. The SEC will turn up for meetings but they rely on the law firm to do the hard work.

There is a further peculiar aspect to this process. Most of the lawyers who work in the firm’s representing companies accused of bribery have previously worked at either the SEC or the Department of Justice. That apparently qualifies them to understand deeply the issues involved.

Williams says that DPAs will “lower the bar” in foreign bribery cases. “We will potentially see an increase in investigations leading to successful prosecutions,” he says.

“Australian businesses will need to ensure that they have adequate compliance systems that meet international benchmarks (as with the BHP Billiton).

“Now is the time for corporate Australia to carefully review and revise their compliance policies and not rely on inadequate Australian standards.”

Tony Boyd

Twitter: @TonyBoydAFR

tony.boyd@afr.com.au

Extracted in full from the Australian Financial Review.

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