Caltex profit hit by weak economy
Caltex will cut costs, sell servos and abandon a convenience store earnings target after a sharp drop in half-year profit.
Fuel supplier Caltex abandoned a long-term target for an earnings jump from its convenience retail stores and plans to sell sites and introduce a new cost cutting drive to steady its flagging performance.
After announcing his intention earlier this month to step down from the chief executive’s role, Julian Segal said while Caltex still remains confident in its convenience retail strategy it now concedes a previously forecast earnings uplift target of $120 million to $150m by 2024 will not be met, based on “learnings” from the past two years and the results of an ongoing review.
While describing yesterday’s interim results as disappointing, the Caltex chief said he backed the company’s ability to turn around its subdued retail performance.
“The board is a strong supporter of our strategy in its completeness,” Mr Segal told The Australian. “We want an additional platform for strategy growth and I have no doubt the board is on the same page and is confident about the progression of our business strategy and certainly I’m confident retail will deliver meaningful growth.”
Caltex is in the midst of a major overhaul of its retail strategy, which includes bringing its franchise sites into the company’s control and a boosted retail offering for consumers. A new partnership between rival BP and department store David Jones announced yesterday vindicated it was on the right path ahead of its competitors, Mr Segal said.
“If you look at what we were saying two years ago, it’s about transforming retail convenience in Australia. It’s really good from our perspective to have a worthwhile competitor following us.”
However, Caltex’s retail vision has so far proved a messy rejig, with earnings continuing to disappoint the market and leading some analysts to question the company’s strategy.
Caltex said it would sell 50 metropolitan freehold sites in the second half of 2019 and keep a further 500 in its network. Additional work would be conducted on assessing the remaining 240 sites in its portfolio.
The Sydney-based company will also embark on a major cost-cutting drive, with plans to slash $100m annually in operating costs from the overall business.
Its central Sydney headquarters would be relocated and it hopes to “leverage learnings” from optimising its Lytton refinery across the business.
The move is being led by chief financial officer Matt Halliday, a former Rio executive, who said it was the right time to make cuts at Caltex despite a tepid trading environment.
“I think the overall economy is reasonably tough but I think that’s actually conducive to being able to take cost out of the system,” Mr Halliday said. “We have quite a significant opportunity in front of us. As we look at how we spend money corporately and across the convenience retail business I think there’s a lot of replication opportunity that we’re intending to leverage.”
Citi said Caltex’s new finance chief is already making an impact on productivity, which will partly soften the company ditching its 2024 EBIT target for retail.
“We doubt the market had much convenience benefit anyway, so with $100m in cost out, this may be a net benefit for expectations,” Citi analyst James Byrne said.
The company also sharply lowered its capital expenditure guidance for 2019 to $300m from a $320m to $385m range and in comparison with $355m in 2018.
Caltex saw its first-half net profit more than halve amid oil refining volatility and a weak economy.
Profit on a replacement cost basis fell 54 per cent to $135m, from $296m for the same period last year and within the $120m to $140m guidance issued to the market on June 20.
Earnings before interest and tax in the company’s convenience retail business fell 47 per cent to $85m from $161m, at the top end of its previously forecast $75m to $85m range.
However, its Lytton refinery saw EBIT slump to just $1m from $105m, just scraping in at the lower end of a zero to $10m guidance range as it continues to feel the pain of margin pressure.
An interim dividend of 32 cents per share will be paid, down from 57c last year.
Caltex shares fell 4.6 per cent to $24.66.