‘Fierce’ competition not a worry, Caltex to give back $260m

Ross Greenwood speaks to Caltex CEO Julian Segal after the fuel giant released its full-year profit revealing a five per cent increase in share prices despite a 12 per cent profit loss from the previous year.

Ross Greenwood:  Great to have your company here on Money News going right around Australia. One of the companies that really has got great interest about right now is Caltex. Today, it released full-year earnings, and as a result, the share price today jumped by 5% on the stock market to $29. On top of that also, the company has said it will actually have a share buy-back for its shareholders, some $260 million.

The interesting part about this is that you’ve got to understand that you’ve got a situation now where Caltex and Woolworths are in a partnership where many of the stations that Caltex will own, where you’ll see a lot more of those Woolworth Metro stores coming out there. In return, there is a situation where the old Woolworths petrol stations, Caltex will be supplying the fuel going back to the other way.

Margins there are pretty tight. We’re going to try and figure out exactly what it is that’s going inside these earnings results of Caltex. Let’s get on the Managing Director and Chief Executive of Caltex, Julian Segal. He’s right with his time. Many thanks for your time, Julian.

Interview with: Julian Segal, CEO, Caltex

Julian Segal: My pleasure. Thank you very much.

Ross Greenwood:  Let’s start with the actual earnings results themselves. They have gone down during this past 12 months and you’ve decided a bit of a squeezing up of margins in the retail area. Just explain to me how that reconciles with the ACCC in August suggesting that fuel companies were at that stage enjoying record profit margins. It doesn’t seem to add up.

Julian Segal: From our perspective, it’s very clear. You may recall, Ross, that in the third quarter the price of crude oil skyrocketed. We don’t pass those increases immediately to consumers. That’s actually is putting the squeeze in our margins. In fact, not only we’ve seen margin declining, but we’ve seen volumes declining because consumers clearly are affected by the increasing prices.

That reversed to an extent in the fourth quarter, where crude prices were going down and that clearly was reflected in consumer prices going down and therefore volumes going up. I think the other issue we need to keep in mind is not just the crude prices that are impacting on the price to the consumer, but also the rate of exchange of the Australian dollar. It’s been pretty weak lately.

Ross Greenwood:  These things actually conspire to take a bit of that margin away. Tell me about the competition in the fuel space right now, at the retail level at least, anyway. It seems as though there’s been a number of larger players coming into the marketplace who are competing with you say, for example, Viva Energy would be one of those. As a result, even though a lot of the independence have also been taken up by some international trading house, it just seems to me as though the competition is fairly significant in that petrol space right now.

Julian Segal: Competition is significant. You are right, Ross. The thing we need to remember, it’s always been significant and coming from different players at different times. Clearly, as you mentioned, there’s a new player in the market, the merging with EG that has bought the Woolworth’s petrol side. We’ll see how they will compete in the market. Viva themselves, of course, they have taken over the pricing responsibility from Coles. It’s basically the same Shell or Shell network. It’s not an additional competitor but truly run by a different party.

I would say, I’ve been 10 years with Caltex. The competition has always been fierce. From my perspective, we’re not trying to lessen the competition. All that we’re doing is becoming better at offering to the customer more. For example, our new Foodary format which is offering fresh food, fresh coffee, barista coffee, food now, food for later. It’s all about offering more from a convenience point of view to the three million customers that come to our sites.

Ross Greenwood:  Why has it taking so long for a strategy to get to that point? I’ve been in the UK, I’ve been in other parts of Europe where they’ve had these types of stores for many, many years. It’s taken Australia quite a long time to get to that offering, hasn’t it?

Julian Segal: Ross, you are absolutely right. If you look at the UK, for example, as you mentioned, the convenience brand per capita is five to six times that of Australia. The reason is, the offering as you said, it’s much richer, but the difference is really the logistics. You’ve got some 60 million people in the UK in a relatively small area. Australia is huge. The whole continent is only 20 million people.

The logistic of providing this value-added fast services is much more difficult. This is where I think we’ve taken a view that we have the capability to build those logistics around our new Foodary offering. We rolled 57 in two years. From a concept on paper to having 57 on the ground, took us only two years. In fact, tomorrow we’ll be opening the 58th. It’s just remarkable. Clearly, the capability in logistics, not just in normal dry goods, but in fresh and frozen and chilled, it’s a key capability that the industry needs to develop.

Ross Greenwood:  Also as you talk about the transition of the stores and 58 coming tomorrow, you now have a total of 516 stores operated by the company compared with 316 at the beginning of the year. How many of those do you imagine will end up having these quasi supermarket capacities once you’ve completed all the roll outs?

Julian Segal: It’s a good question, Ross. As you mentioned, some of those sites will be converted to Metro and Caltex. The sites we’re very excited about this partnership with Woolies because, clearly, they are going to attract additional customer to our site. I think in terms of how many, it’s just a question of how innovative we are because, for example, all sites as you know today, they are one story, one level. There’s no reason besides some unique cases that we can’t have the mezzanine story and expand our offering to all of [unintelligible 00:05:31]. It’s about being innovative, which I believe we will be.

Ross Greenwood:  Just tell me one thing because a lot of attention was paid a few years back in 2014 when there was a closure of the Kurnell refinery in Sydney. You’ve obviously still got the Lytton refinery in Brisbane. The earnings before interest and tax, $161 million was down $167 million compared with the previous year. You talk about refiner margins there, but strategically, how important is that Lytton refinery in your fuel mix today in Australia?

Julian Segal: Good question, Ross. Look, Caltex is extremely strong because we control and manage the fuel value chain all the way from procurement of crude product all the way through to the end user and along the way to our ships, terminals, depots, sites and so on. Lytton is clearly playing a significant role in the integrity of that supply chain and the reliability of the supply chain giving us options in terms of the crude that we can buy and process, the decision to make more or buy more product and clearly also ensuring the reliability of supply because having your own source of manufacturing is important in your ability to negotiate deals with other partners.

Ross Greenwood:  In other words, you can make decisions as to whether you manufacture a bit more yourself or whether at the right time if the dollar is at the right place, or if the prices are at the right place, that you can actually bring more supplies in from overseas. You have that flexibility which other traders coming in here. Some of those that actually run the independence side, for example, that don’t necessarily have that same level of flexibility.

Julian Segal: Correct. We’ve got flexibility and, in fact, because we invested in the Kurnell terminal, in fact, it’s the biggest one in the southern hemisphere, but also the very flexible one. That really gives us opportunities and options in terms of what we bring, what we blend. It’s not really even so much in terms of us not running Lytton to full capacity because normally we do. Then we can change the state of the product to take advantage of particular conditions in the market.

Ross Greenwood:  Julian Segal, the Chief Executive and Managing Director at Caltex on those full-year profits. I appreciate your time in the program this evening.

Julian Segal: Thank you very much, Ross.

Image source: 2GB

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