Edited Transcript of ZEL.NZ earnings conference call or presentation 10-May-20 10:00pm GMT

A couple of things that further suppress or push the replacement costs, net profit after tax down to $44 million compared to $178 million the prior period. At the half year, we had disclosed that we were — had written down $35 million of goodwill in the Flick transaction. And what we were required to do in the second half of the year as part of closing off the end of accounts was to take a further write-down of $61 million on Caltex customer contracts. These are specifically the retail supply agreements that we have with our retailers. Two parts to this. One was the volume loss that we sustained as a result of swapping out of Smartfuel to Pumped. That clearly was a step down that would flow through to future years and the significant change in the margin position as well had to be reflected in the valuation of those contracts required to do that on a regular basis, i.e. every half year and full year to look at all of those goodwill elements on our balance sheet. And from an accounting perspective, we — this was not a matter of choice. It was simply running the fair value model that we normally do, and we end up with the adjustments that we’ve made. So both of those items, of course, are noncash related, but they do push down the profit to an extraordinarily low level and certainly part of pushing the historic cost profit into the loss situation that we were. Just to confirm that we, as through our previous disclosure, we would not be paying a final dividend for FY ’20 as a result of the need to conserve cash for COVID.

If I was to move to the next slide, which is Slide 5. Quick — a couple of comments on safety and wellbeing. We finished the fourth year of our 4-year strategy around helping Z move up the culture ladder around health and safety to be a more generative culture. This was supported by again some expenditure and focus on digitizing aspect of the way in which we capture and record data so that we can be more prompt in how we identify incidents and put in place preemptive measures to stop those incidents from happening.

The one callout I’d make from this slide is the number of robberies. We actually had 14 last year, which is very similar to the prior period. But actually, 12 of those failed in a way that we call failing safely and that there was an attempt to — at robbery, but our — in 12 out of the 14 cases our site staff were able to make it to the safe room and activate something like a fold cannon or some other deterrent to have the intruders leave the premises pretty promptly. So that’s the result of a number of millions of dollars spent over 3 years to improve those controls and barriers such that we can’t control society’s problem, but if people are trying to rob one of our service stations, the priority is to make sure our people are safe as much as possible. So I’m really pleased that we had had a situation in 2 of those cases where our staff were exposed face-to-face with the robbers.

So move on to the next slide, being Slide 6 in the pack. This is the usual waterfall bridge between what we posted in FY ’19 and what we reported in FY ’20. You clearly see here that a significant deterioration in both fuel margin and refining margin. At the half year, those year-on-year, this bridge has actually had slight green bars there, but now they are clearly red. The $26 million downside in fuel margin really was the third quarter phenomena that I spoke about earlier on. And we did update the market in December that we saw the outlook for refining margins to be particularly poor, leading into the fourth quarter and potentially beyond and that’s certainly became apparent in the end.

The operating expenses were $11 million more, year-on-year, that was actually $13 million at the half year. We did start to pay attention to the way in which we could reduce our discretionary costs in the second part of the year and the Pumped program was an $8 million one-off spend last year. That explains most of that difference.

You can see that we have a $33 million provision for COVID. This is slightly up on the provision that we announced when we updated our guidance a couple of weeks ago. This is — $9 million of this relates to provisions and cost of goods sold, which is the way in which — where we record the impact of COVID on our supply chain. This is where we had to sell back cargoes that we bought at a loss relative to what we bought them for or another impacts on the supply chain, so $9 million of COGS-related expenditure there and $24 million spread between retail and commercial. In commercial, there are quite a lot of science behind that, but we’ve effectively taken a 5% provision on the entire commercial book in terms of the credit that we afford our customers each month. That was about $10 million. At about $14 million in retail that relates to a series of provisions across rents that we don’t expect to collect from some of our tenants, a provision for bad debt and some of the way in which our commissions arrangements worked with our retail as we guarantee floor level of earnings for them. So if things were to get severe as indeed they were under lot level floor, we will be required to top-up those retailers to that floor level. So slightly more provisions than what you saw previously, $9 million in cost of goods sold and $24 million of operating expenses.

Let’s move to the next slide, which is the one headed Fuel Margin. At the half year, we were up 3% period-on-period, and we finished the year 6% down. Again, that’s that third quarter phenomena around unit margins. The couple of points I’d emphasize here is that Z through its Caltex legacy had a particular — particularly large exposure or relatively large exposure to the forestry and construction sectors. These are typically heartland areas of business for Caltex. So both of those sectors were slowing down pre-COVID. And as a result, we were more exposed to that than, say, our competitors were on average. So therefore, we had some of that flow through to the end of the first half and certainly flow through in the second half in terms of our diesel sales. And the drop in petrol is solely related to the swipe over of Caltex from AA Smartfuel to Pumped with sales at 1 stage, if you wanted to compare week this year with weak last year, were down about 20% to 24%. That moderated to be about 10% to 12% down as we worked our way through the third quarter and came into the fourth quarter.

In terms of unit margins, it’s not particularly clear on the graph to the right on the page there, but actually, we recorded $0.0169 seats per liter unit margin in FY’19 and that fell slightly to $0.0168 in FY ’20, reflecting, as I said, the poor third quarter, somewhat moderated by an improvement in the fourth quarter.

As we move to the next slide, so just the one headed Retail Fuel Pricing. These are the standard slides that we post each time. So you can see what’s happening by way of discounts in the market and how our actual margins compare to what MB report on a regular basis. We can see this clearly, margins were different as evidenced there between the third and the fourth quarter. We have the graph on the right-hand side. And that is also evidenced in the graph on the left-hand side where you can see that the spread, so the difference between the notional main port price and the average feed price dropped down to almost $0 per liter. At the bottom trough of the graph on the left-hand side, that show that when margins gets particularly compressed that the spread across the country by way of pricing narrows up and when margins improve, that spread opens up again.

What we did see in the fourth quarter we saw some early indications of it in 3Q, but certainly in the fourth quarter, we started to see the impact of these lower margins in 2 forms. One was a number of service stations, what we would describe as marginally economic closing up. There are sort of a handful of those that were taking place, which is somewhat out of the ordinary compared to what had happened in the first half of the year where there were effectively no site closures. And we also became aware through our market intelligence of some of the distributors who have been building new-to-industry sites, actually canceling their construction contracts. So there was one particular competitor where we became aware that their plan of 6 sites to be built in the 2020 calendar year, the contract on that had been canceled well before COVID. So we were seeing a market response to those low margins in the third quarter.

So I move to the next slide, which is Slide 9 in the pack, the Non-Fuel Margins. You’ll see here, we’ve actually — the table we just broken out that we now have an automated site, often referred to as an unmanned site. We’ve spoken to about that at the half year. But as we start to think about how we may turn more Tier-3s into what we now call automated. We’ll make that distinction clear because obviously, we don’t generate nonfuel income from the site that has become automated. So good year-on-year growth here, although the overall nonfuel margin is flat year-on-year. That’s mostly because of the first half of the year, we no longer recorded lease income from some Caltex heritage sites because we took direct ownership of those sites ourselves and converted them to Z. And under IFRS 16, there were $2 million of rental payments that were moved to lease interest and depreciation and therefore, below the EBITDA line. So an underlying growth in income there. And we have partnered up with a company called Habitual Fix to implement a fresh food offer, and we’ve got 2 sites where that has been put in place. It’s going reasonably well, and we’re learning a heck of a lot. However, in the COVID world, we will not be expanding on that offer. It doesn’t make sense to do that at this point in time, but we are reasonably pleased with the experiences we had to begin with.

If we move to the next slide, the Refining Margin, clearly a season of 2 halves. We were required to top-up the fee floor in the fourth quarter, and we actually spent $15 million doing it. So almost a maximum fee for contribution throughout the fourth quarter. We were obliged to make a slight payment in December, but given that we’re effectively in credit, it actually wasn’t the cash out, but there was a fee for payment being calculated in December that didn’t result in cash out of $15 million in the fourth quarter. And you can see — really see that, that we only recorded $4 million of refining margin in the second half of the year. So guidance updated in the December we considered — we forecasted that refinery margins were going to be very, very low. And for an extended period of time has proven to be true, unfortunately.

I’ll now hand across to Lindis, and he can take you through aspects of capital management and the specific of the equities.

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Lindis Jones, Z Energy Limited – CFO [3]

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Good morning, everyone. We’re now looking at Slide 11, titled Capital Management. And clearly, there’s been — there’s been more information disclosed today about our capital management choices looking forward. But before I get into that, I’d like to briefly talk about the last 12 months and the information reflected in our FY ’20 annual accounts. In particular, I note that a payment of $23 million of core debt during the year reducing [clearly] over that period. Also, the leverage at the year-end on a pre IFRS basis of 2.7x gross debt to EBITDA. Important to say this was already impacted by the first impact of COVID $33 million of provisions included in the EBITDA and a result in the month of March that was significantly impacted by the Level-4 lockdown. Also led by higher Integrity CapEx spend than long run $45 million that we indicate, reflecting the tail-end of some significant IT and Integrity projects coming to completion and also closing out of some integrity projects and our terminal network. Also note that our net CapEx was slightly higher than planned as we held back some recycling of assets broader — in anticipation of a broader capital management strategy and activity that hasn’t been overtaken by the circumstances generated by COVID-19.

Before I get into the details of the equity raise we’ve announced today, I want to briefly summarize why we have made the choice to raise equity and some of the key considerations. The huge expenses caused by COVID-19 presented immediate challenges for the Z business. In addition to the operational challenges, there’s been a significant decline in sales and several one-off costs as we dealt with the immediate impact of COVID-19. Beyond these immediate challenges, we believe the impact of COVID-19 will continue to provide downside risks for the balance of FY ’21 and through FY ’22. Against this backdrop, management and Board have been through a process that first identifying what self-help measures can be pursued to maximize operating cash flow in terms of minimizing OpEx and CapEx spend. Having confirmed these arrangements materially reduce expenditure in the face of these challenges, we’ve engaged our debt providers encountering agreements on a set of arrangements that we believe provide significant flexibility and resilience to our business. At this point, I’d like to acknowledge all our providers of debt, but in particularly our syndicate banks that have worked with us and supported us over the last few weeks. And I’d like to actually take the time to name them given their outstanding support and leadership they’ve provided. So those institutions are BNZ, Westpac, Mitsubishi UFJ Bank, ANZ and HSBC. The support of these institutions is the key reason for management and Board to believe that Z is in a position to have real confidence about the resilience of our business and our ability to deal with the challenges ahead, but also maintain a market-leading position and ensure the delivery of quality returns, an industry that continues to roll over both the reporting periods, and we anticipate that we wish to be accelerated given the impacts of COVID-19.

I’ll now move to the actual details of the equity raise. So this is on slide — we turn to Slide 12. The key features of the CPP raise that I’d like to bring to a contention at this point. First of all, the size of the equity raise is up to $350 million, consisting of $290 million underwritten placement and up to $60 million from the share repurchase plan. The placement was fully underwritten at a price of $2.75 a share which is a 12.4% discount to the last closing price. The new shares issued under the share repurchase plan will be issued at the lower of the placement price and a 2.5% discount to the 5-day volume weighted average price for the period immediately prior to closing of the plan. And choosing the structure, we believe it enables us to provide the first outcome to all our shareholders.

Next, I’ll turn to the slide to outline how this raise, plus the other measures taken, provide resilience and flexibility in the face of unprecedented and challenging circumstances. I’m moving to Slide 13 now. Upon completion of the equity raise, Z will be paying down $180 million of term debt. Beyond that immediate reduction in debt facility, the way for key covenants and the ability to use excess proceeds to be netted off gross debt for the purpose of covenant calculation demonstrate clearly the impact of this recapitalization. And per circular, I point to the potential for debt on a pre-IFRS basis to be as low as 1.8x debt to EBITDA, reflecting a net debt of $594 million, if we elected to use all the excess proceeds to offset the gross debt amount.

It’s also important I draw your attention to a key condition of the agreement with our debt finances that we won’t be paying dividends for the period of the virus. Given the steps we have taken within the business and the resilience and the flexibility we now have, we fully expect to resume dividends consistent with the current policy, post 30 September ’21, so that would be our interim dividend for FY ’22. The other details of the equity raise and impacts that we expect to have on our balance sheet, these’s lot more details, of course, provided about the (inaudible) I turn back to Mike Bennetts.

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Michael John Bennetts, Z Energy Limited – CEO [4]

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Thanks, Lindis. I’ll now move to Slide 14. Just to update you on where we are in terms of government relations, given a number of things that have happened over the last 12 months. So as you know, the Commerce Commission delivered their final report in December of last year. That has now been taken up by government where all the recommendations were agreed to by government. They’re moving to put that into effect through a series of measures, some of which culminates in legislation that they had originally intended to be passing prior to the election. The original date they had disclosed was July 2020 for that legislation to be put into effect. We’re not sure right now exactly where that may stand given the government priorities are clearly different because of COVID-19, but we continue to engage productively and proactively with clearly MD as the focal point for receiving submissions on the field industry bill as well as any other stakeholders as and when required. So we expect to have this come through. And indeed, we’re not waiting for some of the recommendations to be legally brought into effect. The example I would draw your attention to is the — actually the (inaudible) where we do believe it is actually in the consumer’s interest to have all fuel grades posted on the price board. We have committed $6 million to actually do that, and that was one of the reasons why our Integrity CapEx was also up from its normal long-run average. And that slide there is what you could typically expect as Z slide to look like, where we will feature the Pumped price at the top of the board and then run through the 3 other grades that are available. This will be progressively rolled out across the Z and the Caltex network over the next few months. We’ve obviously already ordered the panels and have paid for the manufacturing of those and not just (inaudible). As I said, we support the conditions that came from the Commerce Commission’s study, and we’re working with MBIE to put them into effect on the relevant legislation.

I then move to Slide 15, which is normally the slide where we provide guidance for our earnings and in the more recent years dividend as well. And clearly, it is very, very difficult for us to provide any specific guidance — well, a specific enough forecast such that we could turn that into a guidance number. Lindis mentioned that we have a dividend stopper for FY ’21. So there’d be nothing to be worried about dividend in this year anyway. What we have thought we would do is, as outlined here in the slides provide you — with some of the insights about the way in which we think about our business going forward in the absence of being able to provide specific earnings guidance. The table to the right there shows you what impact we see on year-on-year volume as a result of the different alert levels. We produced this table a number of weeks ago now, if not — about 6 to 7 weeks ago. And we’ve been actually surprisingly accurate at Alert level 4 and 3. And obviously, we have no experience at all of Alert Level 1 or 2, but we thought it was important to share with you how we saw our volumes being impacted at this stage of these Alert levels that we’re yet to go into. So we’re reasonably confident around the percentages that are in that table based on the work that we’ve done about how New Zealand works and what we could learn from overseas markets. The big unknown for us is how long New Zealand will or will not spend in any one of those Alert levels. And we’ve obviously sized the equity raise on what we call the stress case, which is to assume that New Zealand would spend an extended period of time in Alert level 4 and 3 and rather than simply quickly progress down to Alert level 1, if not lower than that. That’s the really big uncertainty for us in terms of being able to forecast for the year.

Well, we can confirm though is that the confidence we have in forecasting the Caltex and Z price positioning. We do not see any reason to change that in an economy that’s either in discussion under a more severe strain because of COVID. And we do expect that there will be some form of market shakeout as a result of the impacts of COVID, particularly in the service station business. And our crystal ball on refinery margins is no better than anybody else’s. But we do expect the current conditions for refinery margins to extend themselves for the whole of FY ’21, and that we will need to continue to work with Refining New Zealand and agreeing what is the optimum production for them to operate as a company with their customers because we could be in a situation where if they were to operate at maximum production, we end up with product that we don’t have a use for ourselves, like jet, and have to export that into international markets at a loss, where the debt leads to one economic outcome versus working with the refinery, topping up the fee for them to run at a lower level of production, which may result in a less pessimistic economic outcome. But the key point here is we are not expecting any refinery margins in FY ’21, which has an impact in a typical year of taking out about $70 million to $80 million worth of EBITDA if you were to look back, say, to the FY ’18 year.

As Lindis mentioned, we are targeting a series of cost initiatives to take out at least $74 million and potentially up to $96 million worth of costs. There are $48 million of those that are absolutely structural and, therefore, recurring. That is after eating $9 million worth of inflationary costs. And therefore, that $48 million, we would expect debt to grow to be $55 million by way of run rate as we go into FY ’22 year. There are some one-off and, therefore, nonrecurring reductions we could make. And there are some costs that are also simply as a result of demand. And that’s why we’ve got such a relatively wide range of the $74 million to $96 million because some of it is outside of our control. And since that just depends on how many liters we sell, so there will actually be quite for the outcome not to achieve the upper end of this cost range because we actually did not have the volume decline that the table suggests we may have. And a confirmation that our Integrity CapEx is around about the level of $45 million, which is our long-run average and any growth CapEx that we have would be dependent upon underlying business performance.

There are a couple of contractual commitments we have for a small amount of money that I don’t want to get specific on for competitive reasons. So we think we should be able to manage that and that’s by single-digit CapEx to quantify that. So we will do our best to minimize, if not completely reduce that to 0 in the stress-case scenario. The things were to be something other than the stress-case scenario, it would make sense to go ahead, for example, with the building of a new service station at a strong location and would be one of our bigger pumpers. So it doesn’t make sense to pass up on that opportunity if we’re actually able to afford it.

And at that point, I would pause and then hand back to the operator for any questions. And what you — Lindis and I can’t be as coordinated on this as we normally would, so you could expect that anything to do with capital management and the balance sheet and the equity raise, Lindis will probably volunteer to answer those, and I will tend to deal with any other questions of a more general nature.

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Questions and Answers

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Operator [1]

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[Operator Instruction]. Your first question comes from Grant Swanepoel from Craigs.

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Grant Swanepoel, [2]

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Just a couple of quick questions. Can you just clarify the OpEx a little bit for us? IFRS-16 for FY ’20 you’ve got $24 million of provisions, knock those off, you had $8 million of Pumped, knock that off, knock $48 million of structural cost out, knock the $18 million of variable costs and then another $8 million of other according to your presentation, and you get to a number of about $310 million. Am I doing something wrong on that one?

Second question, your comment about 0 refining margin for FY ’21. Does that include fee floor payments? So actually, whatever margin you do pay, you get back to net off into (inaudible) payments. If not, can you give me an idea of what you expect for fee floor payments? And then my final question is, what was the cash flow effect from the ETS buildup?

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Michael John Bennetts, Z Energy Limited – CEO [3]

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Okay. So I’ll answer those ones, Grant. Your number of costs is about right. We get there in a slightly different way because there were some costs that were not incurred last year, like they were no staff bonuses paid that you typically expect to be paid in the given year, but we can pick that one up with you individually to make sure that your understanding of the bridge is the same as ours. We’re not expecting to be able to record any refining margin in FY ’21. So as to the third of the graphs that we show on that particular page, it would have nothing there at all. That may be a combination of we earned some refinery margin, but we didn’t need to moderate that with a fee floor top-up. So we recorded $39 million, I think it was this year. We’re not expecting to record anything. So that would be 0 for FY ’21.

In terms of ETS, what we did at year-end with our provider of ETS units, we did a typical repo on that, whereby we sold them the ETS units that we had bought from them, and we will bring those back on our books at a future date. The cost to do that was the same as our cost of debt. So it was not value destroying in any way. And that was about $110 million of units that were transferred off our books under the retail arrangement.

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Operator [4]

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Your next question comes from Andrew Harvey-Green from Forsyth Barr.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [5]

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Mike and Lindis, can you please just, in terms of the cost out, give us a little bit more color in terms of the line items that you’re looking at to reduce costs? And is there any impact on, I guess, the service offering that you have currently provided?

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Michael John Bennetts, Z Energy Limited – CEO [6]

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Yes. So I think a decent chunk here, Andrew, is we had the benefit of being at an elevated level of costs over the last few years as we’ve built out capability and capacity and data and so our marketing (inaudible) plan to reduce our cost by $35 million anyway. So the step-up to the $48 million that we declared after inflation represented a bunch of the work that was done in the fourth quarter. We do see that there are opportunities to think about the way in which we manage our site labor. It wouldn’t be sensible for me to talk about too much about what that might mean from an offer perspective. We would be very mindful about certainly for Z the way in which the brand is positioned. So you wouldn’t expect, at one level, see the entire hope of concierge disappear as an offer because that’s a fundamental to Z, but there would be some things around the edges that we would look to do to start with, and then we’ll learn from that, and we may choose to go further or simply pause at the first step that we would take some of the cost reduction that’s related to site labor. A good chunk of the cost reduction is as Z has reduced its headcount by about 20% from where we were at the end of December last year to where we are today. That’s been as a result of fixed-term contractors leading a reduction in the capability build that we were doing anyway. And we’re currently running with about 50 vacancies that we’re choosing not to replace given the situation around with COVID.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division – Director & Senior Analyst of New Zealand Equities [7]

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Okay. And my next question was just, I guess, in terms of giving — looking beyond FY ’21 to FY ’22. I guess, the previous dividend policy had sort of loosely talked about targeting a 1.5x net debt-to-EBITDA. Are you still going to be looking at that kind of gearing going forward? Or are you may be looking at a lower gearing in FY ’22 beyond?

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Michael John Bennetts, Z Energy Limited – CEO [8]

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At this stage, for FY ’22, nothing would change. So the same distribution policy, as Lindis indicated, and the same target gearing, where that 1.5x is a pre-IFRS number, which translates to 2.0x for a post-IFRS number. So we’d like to be around that level. And once we get there, we’d have to look at what are the circumstances that we see ahead of us in FY ’22, so for the next 2 to 3 years and reset that leverage level, if that was a sensible thing to do to either confirm it or reset it.

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Operator [9]

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[Operator Instruction] The next question comes from Jeremy Kincaid from UBS.

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Jeremy Kincaid, UBS Investment Bank, Research Division – Associate Analyst [10]

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First question for me just relates to your working capital facilities. My understanding is that the debt relating to working capital has sort of stood outside of your core debt, but just in your capital raising presentation, you just name it as a risk. I suppose, could you just give us some color around: a, whether or not that assumption is still the same, that’s sort of treated as a different leg of debt; and also b, whether or not the debt holders also view it that way or whether or not the thinking has changed?

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Lindis Jones, Z Energy Limited – CFO [11]

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Yes, Jeremy, Lindis here. I’ll answer that one. So in terms of the question, I think it specifically arose from some of the commentary and — for presentation around our equity raise. And so I’ll pick that up separately. But in terms of what I can answer generically is the — there is a risk potentially that if oil prices will just remain substantially depressed well into the future, then the working capital use requirement to facilitate that would be sustained. However, our forecast is even under the stress-case scenario that our working capital facility would resume to function as normal and can confirm that our debt facility arrangements still treated as working capital facility outside any covenant calculations.

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Jeremy Kincaid, UBS Investment Bank, Research Division – Associate Analyst [12]

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So how long does the crude prices have to remain low at suppressed levels before that your debt within the working capital facility is no longer deemed working capital and this is sort of the new norm? And does that debt gets transferred from the working capital facility into your core debt or anything like that?

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Lindis Jones, Z Energy Limited – CFO [13]

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No, it doesn’t. We can’t — it’s not as a risk, our forecast don’t identify toward to the scenarios where that debt would eventuate. And given our ability to manage our working capital facilities, such as obligations around ETS, we don’t anticipate and neither do our bankers and any arrangements or discussions that, that will be the case.

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Jeremy Kincaid, UBS Investment Bank, Research Division – Associate Analyst [14]

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Okay. And second question, the presentation also talks about potential avenues for growth once coronavirus has moved on. And Mike, you also talked about a market shakeout within the retail petrol station network. Are you able to provide some color on what your thinking of the future might look like or what potential opportunities might look like?

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Michael John Bennetts, Z Energy Limited – CEO [15]

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Yes. So when we use the term shakeout, it’s our way of talking about 2 things that the incentive to invest in new capacity would be diminished or potentially eliminated and that marginally economic sites would close. At our Investor Day materials at our last Investor Day, which — nearly a year ago now, we indicated the tail of the network that exists within New Zealand. If I recall correctly, something like 300 service stations pumping about 2 million liters. And we think that anything below 2 million liters is likely to be marginally economic. I think that’s likely to be accelerated in a COVID world where volumes were down significantly. And even when we come out of these Alert levels, we’re going to be in a good old fashion recession. So we would expect an acceleration of site closures perhaps back to the levels that we experienced in the 2000 to 2010 period, where there was about 50 sites closing a year, which contrast in more recent years with 50 sites being built a year. So that’s what we would consider to be the shakeout.

Within that, it may make sense for us to spend growth CapEx expanding any of our existing facilities to be able to cope with some of that demand that moves away from a closed service station. That might be a bigger store, maybe additional lanes or additional tankage within the site — an existing site or it may be a situation where there could be a much better performing at one level or more attractive assets, like say, a strongly located service station, where the financial situation of the individual operator is such that they are distressed rather than the business as a site, and that may provide us with an opportunity to buy that service station. So it would only be investments in the core business and clearly focused on the things that we know we do well. We can get a reasonable payback. And a good example of that we recently turned the Caltex (inaudible) site, which is the Caltex-owned site, which is run by an independent operator. We rebranded that to Z, and we upgraded the store and we had an uplift in volume of about 15% to 20%. So those are the sort of opportunities that we would — those are the sort of assets we would like to buy distressed asset should they pop up or invest in our existing facilities to create more on-site capacity to deal with closures that are happening in the trading area.

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Jeremy Kincaid, UBS Investment Bank, Research Division – Associate Analyst [16]

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Okay. That’s helpful. And then finally, for me, have any other capital management initiatives being taken to strengthen the balance sheet or under review? In particular, I’m thinking about any indication of selling your NZR stake or sale and leaseback or any other initiatives like that?

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Lindis Jones, Z Energy Limited – CFO [17]

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So Jeremy, Lindis here. So there’s no other initiatives that have been taken. There were options that we’ve spoken about as far back as Investor Day. We don’t think any of those options are the right thing to pursue at this point in time. So there remain options for us to exercise into the future. So no other options at this point in time, and they won’t be pursued in the near term. But they remain as options on our balance sheet and for the business for the years to come.

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Operator [18]

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Your next question comes from Nevill Gluyas from Jarden.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [19]

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Can you hear me.

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Michael John Bennetts, Z Energy Limited – CEO [20]

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We can hear you fine, Nevill.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [21]

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Great. So I’m going to reach in a little bit of ground, but I was hoping to get a little bit of clarity on the cost baseline that you’re talking about for the savings again. So this year, the $416 million of OpEx, $50 million of primary expense line, I’m assuming we should be deducting the $24 million and the $9 million COVID effects from those as a baseline. But is that it? Is that the new baseline against which we should then compare the $74 million to $96 million or the — and the $55 million in FY ’22?

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Lindis Jones, Z Energy Limited – CFO [22]

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Yes. To get specific, so you’d back out the provisions, that’s $24 million. You would allow for the $9 million worth of inflation. And without wishing to get too enthusiastic, we’d have to allow the possibility of paying a bonus in FY ’21 that was not paid in FY ’20. And that’s about $13 million. That’s about $13 million that sort of meets expectations level.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [23]

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Okay. So the $55 million for FY ’22 debt savings as against the (inaudible) adjustments you just talked about include those for the baseline for that comparison?

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Lindis Jones, Z Energy Limited – CFO [24]

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Yes. Yes, we would have said our underlying OpEx was $394 million for FY ’20. So we would bridge off that. And noting that the — some of the savings are accounted for in cost of goods sold. I will be transparent with you on this. We think it’s really important that we are. And so you can see us reporting this during our quarterly operating updates.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [25]

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And just to — so you give us that detail later and confirm it off-line, but the $55 million sounds like that’s almost entirely at the OpEx line rather than sort of shared with the supply chain?

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Lindis Jones, Z Energy Limited – CFO [26]

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Yes, correct. The structural cost reductions are all operating expenses, the demand driven ones are in the cost of goods.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [27]

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Great. Okay. And then some extra clarity on that. Do you anticipate any extra COVID-19 costs in FY ’21 or ’22 periods?

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Michael John Bennetts, Z Energy Limited – CEO [28]

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Okay. No, we think the provisions we’ve made were very sensible. And as you can see from the way in which we’ve done the stress case in site equity raise we are being as suitably black headed on this as we think is appropriate to be.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [29]

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Right. Okay. And you’ve given a sort of useful table of your sort of, in some cases, experienced but also estimates of the different Alert levels. I saw we had jet at 75% down under Alert level 1. Just raise the question, what period do you think that table is developed for? Are we talking FY ’21? Or are we talking beyond ’21?

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Michael John Bennetts, Z Energy Limited – CEO [30]

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Yes. I think it is the exception to the rule there in the sense that the company may come out at these Alert levels. But I think the downside on jet is likely to be at the 75% level for an extended period of time. About 25% of our jet sales are domestic, and it’s somewhat influenced by international travelers. So even if that came back to what it was, we would still be materially down and your view on international flights resuming at scale is no better or worse than our. So I’ll leave it to your own device on that. But we don’t — the 850 million liters of jet that we sold about 220, 230-odd is domestic. So the risk really is subject to the number of international travelers.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [31]

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Great. And would you want to hazard a guess as to how much would be Trans-Tasman?

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Michael John Bennetts, Z Energy Limited – CEO [32]

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Yes, I wouldn’t hazard a guess, but we can get that number for you.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [33]

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That will be useful. Okay. The ETS you talked about the repo arrangement, $110 million value, is that roughly what — surplus might be the wrong word, but is that roughly what the additional credits you’ve retained rather than relinquished are worth sort of above and beyond what you’ve obviously accrued between the start of this year and March, which you still have the option, you’re practically buying those for an obligation that will come? But up to the end of December last year, is that the value we should attach to the, if you like, the excess holding you have?

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Michael John Bennetts, Z Energy Limited – CEO [34]

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Yes. In terms of the excess holdings, so any repurchase arrangement just reflects kind of a temporal decision. And those units that are repoed were the units that we could use for settlement and — on the May date, which is when our obligation for calendar year comes in. So it’s — that’s not the size of any excess unit that we have.

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Nevill Gluyas, Jarden Limited, Research Division – Director of Equity Research [35]

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Okay. I think that’s helpful. And just the last question on the buildup of core debt. Obviously, you used $378 million from USPP. In the accounts, the fair value is $574 million. I’m just wondering, is there some lag of your various cross-currency interest rate swaps that is not hedge counted that explains why it’s $574 million in the books?

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Lindis Jones, Z Energy Limited – CFO [36]

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Yes. I can take you through that detail. But obvious stressed that the — it is the cross country interest rate swaps that there is an offset in the accounts, and I’ll take you through the May typically at.

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Operator [37]

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There are no further questions at this time. I’ll now hand back to Mike for closing remarks.

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Michael John Bennetts, Z Energy Limited – CEO [38]

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Certainly, thanks for your interest and your ongoing support. Today is obviously a big day for us as we go through the book build on the underwritten $119 billion placement that we’re looking to go through. And we are very committed to being transparent about the allocation process that we’re using, and we’ll report back on that to the market in a pretty timely way. And I also, on behalf of the management team are very committed to do 2 other things. One is to provide transparency around how we’re tracking against some of the commitments that we’re making. We recognize we’re in extraordinary times. So something like a cost-out becomes a much more important thing than perhaps it did in the past. That’s why we’ll provide a quarterly update on that. And we welcome any feedback that you may have around what we could be doing appropriately in some of the weekly updates that we’re providing. So given that we’re not giving guidance, we want to make sure that we — you are as well informed as we can possibly have you. And we are very, very committed to delivering on our promises and making sure that our business operates in a safe and reliable way, that we take full advantage of the capital that we are expecting to get in the next wee while. And we use that very wisely and sensibly that we’ve reset our balance sheet, and we pursue our strategic aims as strongly as we can. We do think that the impacts of COVID will create an environment in our industry that will enable us to accelerate some of the intentions that we had in a shorter period of time than perhaps what might have taken us 2 or 3 years to achieve. So we’re very much up for it as Z people are safe and well cared for at this point in time, and we’re going to make sure we keep it that way. So thank you very much for your support, and we’ll end call on that note.