Caltex Australia (CTX) chief executive Julian Segal has hit back at competition watchdog accusations of petrol price gouging, saying increased regulation has raised the cost of operating individual service stations, with compliance sometimes requiring an extra $1 million of investment not reflected in the margins.
If the industry was forced into lower margins and petrol stations were to remain open, safety standards would need to drop, he says.
The defence of the sector came as Caltex delivered underlying profit at the upper end of guidance and confirmed it was investigating a rebranding and company name change in the next 12 to 18 months to go with the rollout of radically different pilot convenience stores.
Mr Segal said the Australian retail fuel market remained “very, very competitive”.
“You are talking about sites that have to handle hazardous substances and the level of regulation, rightly so, is significantly higher as time goes by,” Mr Segal said.
“Compliance with these kinds of regulations costs up to $1m of investment in each site, so when you look at the money we invest, in order to build, maintain and operate this network, you find out the competition is intense.”
On Monday, the Australian Competition & Consumer Commission said petrol stations had this year been charging the largest premium for fuel for at least a decade, despite bowser prices being at 14-year lows because of low oil and refined petrol prices.
Caltex says the margins quoted by the ACCC do not take into account extra costs to meet regulation around things such as vapour control and electronic billboards and are not reflective of the actual cash flow. “If you are going to have a situation where there is no adequate return, you either do something we will never do, which is lower standards, or you stop providing (to) the community,” Mr Segal said.
Caltex yesterday reported first-half net profit of $318m, down from $375m a year ago. But the company’s more closely watched net replacement cost of sales operating profit, or RCOP, which strips out the impact of fuel and oil price moves on inventories, rose $3m to $254m, which was at the upper end of guidance of between $245m and $260m.
A weak refining performance was offset by a boost from supply and marketing, which had RCOP earnings before interest and tax of $349m, up 14 per cent thanks largely to a $46m increase in underlying transport fuel margins.
This margin increase was across the company’s supply chain, not just retail, and included benefits of a full year of Singapore fuel-sourcing operations.
The retail fuel performance was not disclosed.
Caltex will pay a fully franked, first-half dividend of 50c a share, up from 47c per share a year earlier. Shares fell 55c, or 1.6 per cent, to $33.69 yesterday.
Caltex expanded on a planned convenience strategy overhaul that the market is still trying to understand, saying it would roll out pilot convenience stores over the next 12 to 18 months.
“There is still significant scope for our core business, the transport fuel supply business, to grow through organic growth as well as mergers and acquisitions,” Mr Segal said.
“But what we are recognising is that for the long term for us to deliver on our top quartile total shareholder return ambitions, we do need to grow additional legs to the business,” he added, noting that a new convenience strategy was just one of a few legs the company was considering.
The new stores would have baristas, freshly prepared “grab’n’go” meals and fast-serve restaurants, as well as potentially offering things such as parcel pick-up and dry-cleaning.
Chief financial officer Simon Hepworth said a brand change was on the cards, as was a company rename to reflect Chevron’s sale of its 50 per cent stake last year.
“Our focus groups in Australia have said people are concerned about buying food and other products from a petrol company, so we are looking at the potential for another brand for the convenience rollout,” Mr Hepworth said.
“Caltex is a Chevron brand and we pay a brand fee to Chevron. So the company name is also one of the things on the agenda, it’s also a reflection we’re an Australian company servicing Australians.”
Credit Suisse analyst Mark Samter said Caltex continued to deliver substantial earnings growth from its supply and marketing business despite low volume growth.
But he said the convenience strategy was hard to gauge. “A lack of any great granularity into current performance makes us reticent to make any hero statements on why it will or won’t work, not to mention we don’t actually know what the strategy is,” Mr Samter said.
“This all said, the current CEO/CFO combination has reigned for eight years and despite persistent fears from the market on strategy and execution … we can’t actually remember them putting a foot wrong.”
Extracted in full from The Australian.