Fuels supplier Caltex Australia will sell 50 service station sites in Sydney and Melbourne and has walked away from its guidance of an uplift of as much as $150 million in retailing earnings by 2024 after a slump in first-half profits amid a tough climate in both retailing and refining.
Caltex will also shift its corporate headquarters from the Sydney CBD to Alexandria, four kilometres to the south, next year as part of a new $100 million a year cost-cutting drive, and has slashed its capex budget for this year.
The news has left some investors questioning how Caltex will deliver promised increased return for shareholders just when it is set to undergo a transition in leadership given chief executive Julian Segal flagged his intention to retire earlier this month.
Mr Segal described the 54 per cent drop in benchmark profit for the June half as disappointing but said Caltex is already responding by focusing on capital discipline and reducing costs. He said the strategy was fully supported by the board and he would be remaining as CEO “for quite a while” to carry it through.
“Caltex has a history of adapting to operating conditions to continue to succeed and we will remain agile to deliver for our shareholders,” he said.
The weak result was not unexpected after Caltex cut its earnings guidance in June but the shares still fell 4.6 per cent to $24.66.
The drop extended a 4 per cent slide in the stock on Monday after rival Viva Energy offered a weaker than expected outlook for the second half that revealed the extent of the weakness in retailing margins.
Citigroup analyst James Byrne said Caltex’s new chief financial officer Matt Halliday, previously of Rio Tinto, seemed to already be making an impact on the business, driving cost reductions, the divestment of under-performing retail stores and reducing capex to strengthen the balance sheet.
“This good news offsets the outlook that $120-150 million in EBIT [earnings before interest and tax] uplift from convenience will no longer be achieved,” Mr Byrne told clients.
“We doubt the market had much convenience benefit anyway, so with $100 million in cost out, this may be a net benefit for expectations.”
The market had been losing faith in Caltex’s retailing profit targets over the past 6-12 months as returns from the rollout of new and revamped stores proved slow to emerge.
But Mr Segal said he was still very confident the retail transformation would deliver “meaningful growth”, noting that while the increase in earnings would be smaller, it would be achieved with lower capital spending. He said that the retailing alliance announced on Tuesday between BP and David Jones Foodsreflected Caltex’s two-and-a-half-year-old strategy to upgrade its convenience retailing offer at its petrol stations.
The decision to close 50 stores and sell the sites is the result of an ongoing review by Caltex of all its convenience retail network. About 500 sites have been identified as delivering strong returns and growth, while another 240 are still under review but will remain part of the network.
Mr Halliday said the 240 sites were important as part of Caltex’s branded network but deeper analysis was required to find the best pathway to apply the retailing strategy.
Caltex now expects to spend about $300 million on capital investment this year, down from an original guidance range of $320 million-$385 million
Net profit leaving aside the value of inventories, the figure most closely watched by the market, sank to $135 million in the six months ended June 30, within Caltex’s June guidance of $120 million-$140 million.
Bottom line net earnings dropped to $155 million from $383 million a year earlier. on revenues that edged up 1 per cent to $10.3 billion.
Earnings before interest and tax from fuels & infrastructure fell 38.5 per cent to $193 million, while convenience retail EBIT almost halved to $85 million from $161 million in the first half of 2018.
Caltex’s sole remaining refinery, the Lytton plant in Brisbane, saw an average gross return on converting a barrel of crude oil into a barrel of petrol, diesel and other refined fuels of $US7.50 in the first half, down from $US10.06 a barrel in the year-earlier half.
The company reduced its guidance for full-year fuels sales from its own production to about 5.5 billion litres, from 5.8 billion litres, because of high oil purchasing costs.
Caltex declared an interim dividend of 32¢ per share, down from 57¢ a year earlier.
Extracted from AFR