Chairman, CEO and CFO's speech notes
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Vector Limited (VCT) | 11:10 am, Wednesday 27 August 2008 | VCT | 1.950 |
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(+1.04%) |
Embargoed until 11.30
[Slide 2]
Good morning and thank you all for coming to our annual results briefing.
At a time when local and international markets have tightened considerably,
Vector is pleased to announce a result that it believes is robust, with solid
growth on last year.
[Slide 3]
Vector's Net Profit after Tax now reported under IFRS for the year ended 30
June 2008 is $164.4 million.
In interpreting that figure, allowances need to be made for one offs and the
transition to IFRS, the detail of which Simon will outline shortly.
Vector will pay shareholders a fully imputed dividend for this year of 13.25
cents per share, contrasted with 13 cents last year.
In preceding weeks the board has also announced its intention to undertake an
on-market buy-back of up to 25 million ordinary shares, and this morning we
have announced the buy back will commence on 1 September 2008 and finish on
27 August 2009.
This morning's annual result is due to 12 months of focussed effort.
Vector has seen sound progress in our strategic journey to becoming a leading
integrated infrastructure company, with core interests in open access
electricity, gas and telecommunications networks.
Much of this progress has been made against a continually evolving background
across all of Vector's core lines of business.
Important areas of focus for us during this period have been the regulatory
environment, refinancing, security of supply, climate change and New
Zealand's infrastructure objectives.
The energy and telecommunications sectors remain dynamic and challenging
business environments.
Now I will hand over to Simon, who will take you through the headline numbers
and an overview of the key factors contributing to the performance of each
business segment.
[Simon - Slide 5]
Thank you Michael.
First I'll look at the results summary for the Group and following that, the
performance of the Electricity, Gas and Technology businesses, then recap on
what we have achieved this year.
Our Chief Financial Officer Alex Ball will speak to our financial
performance.
I'll look ahead, then we'll be happy to take your questions.
[Slide 6]
Our NPAT is at the upper end of the $150 million to $165 million range of
analyst's previously published forecasts.
The 2007 comparative figure is restated for IFRS, and is inflated by a one
off tax adjustment, also restated under IFRS that has been previously
disclosed to the market.
Given the inflation of the 2007 NPAT by one off tax adjustments, as further
inflated by IFRS, a better indication of profit increase is Net Profit before
Tax and, you will note a rise of 1.3% to $231.5 million over the last
financial year.
NPAT does not include the profit on the sale of the Wellington Electricity
Network, expected to be approximately $200 million subject to final
transaction costs, as this will be booked on date of sale which falls outside
FY08.
Group revenue has increased to $1,329 million, a 1.7 % increase on the
previous financial year, and EBITDA is up 5.7%
This is due to Vector's core businesses making increased contributions
against the last financial year, increased revenues and reduced costs, while
experiencing increased financing costs and other external inputs.
[Slide 7]
Now... to the past year's performance of each line of Vector's business; all
figures are revenues external to the group.
Total electricity revenue is up 4.3 %.
Overall connections and volumes increased over the last twelve months, driven
largely by growth in Auckland, albeit lower than previous years.
Low volume growth in Wellington was due to a milder winter compared to the
previous year and low connection growth.
As previously referred to, the divestment of the Wellington electricity
network was completed at the end of July this year.
The process to transition management of the network to CKI is progressing
smoothly.
[Slide 8]
Turning now to the gas business.
The total volume of gas piped through our transmission system increased by
15.5% to 109.3 petajoules over the last 12 months, primarily due to power
station and large industrial demand.
Natural gas sales volumes decreased due mainly to the absence of large
one-off sales to the petrochemical sector.
This year has also seen the roll off of our Maui legacy gas entitlements,
although we still have right of first refusal entitlements that we may
exercise.
Both of these issues have previously been disclosed to the market
Distribution network volumes were down 1.8% against the same period last year
due to warmer temperatures and the prior year including non recurring
industrial volumes.
Total gas liquid sales volumes have decreased over the last year by 11.1 % to
151,000 tonnes, due to reduced production from the Kapuni field, but have
been offset by the move to import price parity.
As a result, revenue for the gas business was down by 1.2%, but this was
offset by cost savings to give an improved EBITDA.
We continue to have a strong contract position in the Commercial and
Industrial market, although we are seeing increased competition, due to gas
supply conditions.
[Slide 9]
Let's move on to our technology business, which incorporates
telecommunications and energy metering.
Total technology revenue is up by 4.9 % or $3.1 million over the last twelve
months due mainly to increased telecommunications activity.
Although outside the period, it is also worth noting our announcement this
morning of a contract with Genesis for the roll out of advanced electricity
metering services to 500,000 homes and businesses over the next five years.
This is a significant development in being able to offer services to
consumers that will improve their ability to manage their energy consumption
more sustainably and effectively.
During the period, we announced an agreement with Vodafone that meant
expansion of our fibre-optic network.
Work is underway on that 300Km network extension, which will also connect 41
Telecom exchanges, enabling Service Providers to offer services over the
unbundled local copper loop and other customer options.
The network's length was extended by another 100 kilometres and now totals
640 kilometres in Auckland and Wellington combined. The Wellington fibre
optic network was not included in the sale to CKI.
[Slide 10]
Vector has achieved a lot over the last twelve months, and I'd now like to
run through the progress we have made.
This year has been dominated by turmoil in international and domestic
markets.
We said we would refinance, and we did.
Our medium term note issue was well subscribed by European tier one
investors, reflecting the market's view of Vector as solid investment grade
debt.
After unsolicited approaches and a strategic review, we divested the
Wellington network because its relatively static growth and lack of overlap
with our other networks did not fit our strategy.
Subsequent to that, Vector retained its Standard and Poor's BBB+ stable
investment grade rating and has had its Moody's Baa1 senior unsecured rating,
lifted from developing to stable.
Vector has consistently emphasised the importance of regulation striking the
right balance between consumer protection, and ensuring we can earn a
commercial return - so we and others can invest and future-proof our
infrastructure for the next generation of New Zealanders.
So, over the last 12 months we have had extensive input into the Commerce
Amendment Bill.
The result is that the Bill has been returned to the house with key
components such as the requirement for input methodologies to be specified
and options for merits review retained, while still protecting the rights of
consumers.
The passing of this will be a critical step forward in achieving the
foundations for an appropriate regulatory regime. If it isn't, I am of the
view that regulatory uncertainty will remain.
This has been our primary focus in the regulatory space over the last period.
We remain optimistic that the Bill will be passed prior to the election.
The passing of the Bill will see the electricity reset extended to 2010, or
beyond.
In May this year, we also achieved an acceptance by the Commerce Commission
of our proposed administrative settlement on electricity price control.
This was a good outcome for shareholders given the on-going uncertainty
surrounding the matter.
Our Auckland gas distribution network is another case where we have been
working with the Commission over the last year - the formal process is due to
be complete by October, and we are in ongoing constructive dialogue.
In summary, regulation remains a key area of focus for us - we believe we
currently pay an excessive premium on credit in markets because of regulatory
uncertainty here in New Zealand; it was the biggest concern of the financiers
we recently visited in the U.K.
The cost of regulation to Vector is at least $7 million per annum excluding
the undoubted premium embedded in our cost of funds from the markets due to
this uncertainty.
[Slide 11]
Efficiency in capital and operational expenditure is a key area of focus for
us.
So it's pleasing to note that contrasted to the previous period, total group
operating expenditure is down $12.6 million. This includes a gross cost
saving of $15 million, net of redundancy and restructuring costs.
As a result of our focus on cost efficiency, this equates to annualised
savings of
$20 million, before increases in uncontrollables.
Over the past twelve months we have had a major internal project underway to
standardise our field contracting model, which we intend to complete by
October.
As a result of this process, we believe we can generate further savings and
improve customer outcomes, by rationalising the number of field contractors
we have.
Streamlining our own processes and structures will continue to result in cost
efficiencies.
Over the last year our gas treatment operation at Kapuni has further
increased uptime from 99.5% last year to 99.87%.
This maintains Kapuni's world class ranking in uptime reliability.
In the electricity business, SAIDI measures the average duration of outages
experienced by customers during the year, and over this year we kept outages
under the target required by regulation.
The regulatory target is 85.5 minutes. Vector has beaten that target by
achieving 84.7 minutes of normal outages.
During the year a further 114.7 minutes were due to extreme events such as
storms, using the Commerce Commission extreme event assessment methodology.
We completed the regulatory year with supply interruptions arising from
normal operations, slightly below the 85.5 minutes SAIDI regulatory threshold
for supply quality.
We have also proven our research and development in new solutions to roll out
fibre optic networks quickly and cost effectively.
[Slide 12]
We have made some positive steps to improve our customer focus, and we will
continue to drive improvements.
Almost a year ago I was standing here talking to many of you about a storm
that had knocked out power to 150,000 customers.
Our response then was good but needed to be better.
Vector's network has recently been hit by two severe storms in a space of
just four days - with over 100,000 customers affected.
This time, we initiated an Auckland region wide response, involving more than
200 field crews, and close liaison with Civil Defence emergency centres at
local councils, as well as national Government and retail partners.
Thanks to the dedication of our contractor field crews and staff, improved
communication and reconnection processes, we have received some great
feedback from customers, Civil Defence officials and will continue to
improve.
We have also further increased the bench strength of our executive team, by
putting in place a new structure aligned with our strategic objectives, and
making four new appointments.
They are Allan Carvell - Group General Manager Regulation and Pricing, David
Worsnop - Group General Manager Service Delivery, David Tompkins - Group
General Manager Asset Investment, and our CFO Alex Ball who will now brief
you on the financials.
[Slide 13 - Alex]
Thank you Simon, and good morning ladies & gentlemen.
As the new incoming CFO it is always pleasing to be able to speak to what has
been, a solid year from a financial results perspective for Vector, despite a
highly challenging one in the credit markets throughout the year and the
emergence of a domestic slowdown during 2008
[Slide 14 - Positioning the financials]
To start with I would like to remind you of a couple of aspects of how our
results are presented this year.
Firstly, as this is the first year of financial reporting under IFRS, I draw
your attention to the fact that the 2007 comparatives in the results have
been adjusted for the transition to IFRS.
Secondly, the results presented today are for the total group as it existed
at 30 June. This includes the results from the Wellington electricity
network that was sold on 24 July.
In the IFRS accounts the Wellington network is classified as a discontinuing
operation held for sale and so the financial performance and position for
this component of the group is presented as a single number on the face of
the income statement and balance sheet. Note 1 to the accounts aggregates
the continuing and discontinuing financial result that is discussed today.
This year's result has been achieved with the backdrop of significant turmoil
in the wholesale credit markets that has seen a sharp decline in liquidity
levels and a resultantly sharp increase in pricing of credit by banks and in
the bond markets.
For Vector, while we have maintained our BBB+ rating and the banks' continue
to lend to strong NZ credits, we have seen a $24m increase in our financing
costs year on year.
In addition, this year as outlined at the half year we have driven a robust
operational excellence and cost containment programme.
While this has delivered gross cost savings of over $15m partially offset by
one off redundancy costs this year, the full annualised savings of $20
million have yet to be realised.
Finally depreciation and amortisation is up $8.3m having taken the decision
to accelerate depreciation on our 760,000 of meters, specifically increasing
depreciation by $5.4m with the remaining increase attributable to our
increased asset base.
The requirement to accelerate was due to the speed of transitioning from
legacy meters to smart meters.
[Slide 15 - Financial results summary - waterfall 1]
With this context, our Group EBITDA of $640m is $34.7m or 5.7% ahead of the
equivalent prior year period and our NPAT for 2008 is $164.4m.
The key underlying drivers of the EBITDA growth are in our core business
areas of electricity and gas with:
- Increased electricity EBITDA of $27m on the prior comparable period
and
- An increase in the EBITDA from the Gas business of $8.4m (or 3.4%) on
2007 level; and
[Slide 16 - Financial results (2)]
Turning to look at headline revenue and operating expenditure levels:
Total revenue is up $22.2m (or 1.7%) driven by:
- Electricity revenue is up $26.0m (4.3%) on 2007
- Gas revenue is down $7.3m (1.2%) on 2007
- Technology revenue is up $3.1m (4.9%) with increased
telecommunications sales the key contributor
- These translate into the increase in EBITDA outlined earlier of
$34.7m
- Simon has already commented on the change in EBIT and NPAT, and you
will note the increase in NPBT of 1.3% to $231.5 million over the last
financial year.
[Slide 17 - operating margins]
Turning to our key margin metrics, both EBITDA and EBIT margins have improved
year on year.
- EBITDA margin
The increase in EBITDA margin is driven by improvements in both core business
lines with electricity up from 61.5% to 63.5% driven by improved revenues and
flat costs and gas up from 38.9% to 40.7% with improved transportation
revenues, the cessation of several large lower margin natural gas contracts
and improved margin on the LPG businesses.
These improvements combined with the savings on overheads previously
indicated led to the overall 1.7% improvement on EBITDA margin.
- EBIT margin
The improvement in EBIT margin reflects the improved EBITDA margin offset to
an extent by the higher depreciation and amortisation charge referred to
earlier.
NPBT Margin
After allowing for increased financing costs during the year, this
has resulted in a flat NPBT to total revenue margin.
[Slide 18 - divisional results]
So to run through the divisional results in more detail, as you can see EBIT
increased for the two main business lines and our corporate cost base
decreased year on year. I'll touch on the result for the Technology business
in a moment.
Note that these figures include Intersegment revenue which is removed from
the total group figures on the slide.
With regard to the electricity business line the key points to note are:
- Electricity (including Wellington) continued to improve in
performance and contributed 63% of group EBITDA for this year. (56.7% on
continuing operations base)
- The increase in electricity revenue was driven predominantly by an
increase in consumption on the networks of 1.1%, albeit lower than expected
due to weather, together with the impact of the CPI related price increase.
- Due to strong cost containment initiatives overall electricity
related costs in fact decreased by $1m. To put this in context, our input
costs have increased significantly, especially in areas such as materials.
The gas business turned in a solid result.
- The downturn in gas wholesale revenues related to a reduced volume of
sales due to the loss of several petrochemical customer contracts, partially
offset by increased LPG revenues and more than offset by the improvement in
gas transportation revenues, as noted previously.
- The reduction in gas operating expenditure was driven by a
correspondingly lower volume of natural gas purchases offset by an increase
in LPG cost of sales due to import parity pricing.
- Our Technology business turned in a lower EBIT result despite an
increase in gross revenues of $3.4m from our telecommunication business.
- Much of this reduced result comes from the additional $5.4m of
depreciation of the legacy metering assets as well as incremental
transitional costs relating to our smart metering programme and write offs
from reducing our footprint in Wellington.
- The Corporate/Other component of our business predominantly contains
shared service and head office costs. Of the $15m gross cost savings in the
year, Corporate contributed $10m savings which was offset in part by one-off
redundancy and restructuring costs.
[Slide 19 - Impact of Wellington Sale]
- Let's move on to consider the contribution of the Wellington network
which was sold soon after the year end as is classified as a discontinued
operation in our group result.
- As you can see, the overall result as we identified at the time of
the announcement of the sale is that the group's EBITDA and NPAT is reduced
by under 15 %
- In addition, less than 15% of the group's asset base was sold and our
anticipated one off profit from the sale will be approximately $200 million.
We are in the process of finalising our related costs and completing the
settlement accounts for the new owner so there is still an element of
variability in the final gain figure.
- A rebalancing programme that we have previously signalled continued
in April for our electricity networks that reduced Wellington revenues and
EBITDA year on year by approximately $14m.
- We have commenced providing transitional services to the new owners
to ensure a smooth handover for new owner and customer alike.
[Slide 20 - Dividend]
- The final dividend for 2008 will be 6.75 cps; fully imputed at 30
percent.
- The dividends will be paid on 18 September to shareholders on the
register at 11 September 2008.
- This brings dividends for the year up to 13.25 cps, all fully imputed
- The increase in dividend is consistent with the underlying
improvement in the financial performance of Vector in 2008 yet is considered
prudent given the challenging ongoing nature of financial markets and the
deteriorating domestic economy.
[Slide 21 - Capital expenditure ]
- Capital expenditure discipline and efficiency has been a continued
focus during the year.
- Capital expenditure levels were lower than prior year across all
business lines with the annual figure $30m (or 11%) lower than prior year.
- The majority of capex spend is on the electricity networks and capex
was down $11.3m on prior year level.
- Gas capex was $5.4m lower than prior year.
- Technology capital expenditure was $7.4m lower due to a compliance
only level of spend on legacy metering prior to the rollout of smart meters,
as well as a lower level of net capital expenditure spend by the
telecommunications business. (2007 included an amount of $6m for the North
shore urban fibre network funded by MUSH), and
- Corporate IT spend has been reduced on the prior year by
approximately $5.8m.
[Slide 22 - Cash flow]
As you can see the key components of our operating cash flow for the year
are:
- An increase in EBITDA of $34.7m (or 5.7%)
- An increase in interest paid of $22.7m (or 10.2%)
- An increased level of cash tax payments of $8m (or 13.0%) ear on year
reflecting both an increased level of profitability and management of our tax
payments to enable us to fully impute our dividends
- The reduction in working capital for 2008 of $9m driven by a
reduction in creditors of $20m,
- An increase in dividends paid of $5m
- With regard to capital expenditure; the difference is between the
accrued and the actual capex.
- If we deduct replacement capital expenditure as well as the dividend
from operating cash flow we had approximately $95 million dollars of positive
cash generation from operations to fund growth capital expenditure
- After funding the growth capex programme we embarked on in 2008, our
overall debt level increased by $31.8 million
[Slide 23 - Asset backing and capital structure]
- At 30 June net debt had increased, funding an increased asset base
driven by reinforcement of existing networks as well as the volume of growth
assets built in the year. Our ratios were still comfortably towards the top
end of the BBB range to maintain our BBB+ rating.
- In April 2008 we successfully completed the placement of $285.6m of
sterling bonds (?115m).
- In June S & P reconfirmed our credit rating at BBB+; stable and
Moody's also recently upgraded Vector's senior unsecured rating from Baa1
developing to Baa1 stable.
- With sale of Wellington we have retired debt and as a result each of
these ratios have markedly improved with less debt and therefore less
interest incurred
- Our ratios will now be at the top end of the S & P range affirming
our status as a BBB+ although regulation remains an overhang on our rating.
- This translated into the following debt and equity metrics at the
year end.
[Slide 24 - Debt facilities and maturity profile - 30 June]
- This leads us onto our debt facility maturity profile.
- This slide outlines our profile at 30 June 2008.
- At that date we still owned the Wellington network, and as I have
previously mentioned the proceeds from the sale were predominantly used to
retire bank debt.
[Slide 25 - Debt facilities maturity profile (after Wn sale)]
- If we look at the impact of this debt retirement on the profile,
- today we announced the renegotiation of our Senior Credit Facility -
we have chosen only to renegotiate a 2 year $125m facility down from the
$700m facility it replaces.
- This reduced level of facility is due to the application of funds
from the Wellington sale as well as a reduced anticipated funding requirement
going forward in the medium term.
- The profile is now a more even spread of maturities and allows us to
take advantage of opportunities in the capital markets as our shorter term
debt matures or new growth opportunities emerge.
Thank you I'll now hand back to Simon who will outline more about the future
for Vector.
[Slide 26 - Looking Ahead - Simon Mackenzie]
Thanks Alex.
I'd like to talk now about our achievements in establishing some valuable
future options for disciplined growth.
[Slide 27 - Options for disciplined growth - telecommunications]
As I mentioned, over the last twelve months, we've continued to add to our
Auckland fibre-optic telecommunications network; it now encompasses most of
the Auckland Central Business District, a loop around West Auckland and parts
of the North Shore, and is still growing.
We have continued to prove our credentials in being able to work with both
local and central government in partnership to deliver high speed open access
fibre optic broadband, as has been evidenced by our North Shore project.
But we have the option to do more in future - namely to deploy high speed
fibre optic cable across the Auckland region.
As you will all be aware, both major political parties have announced
broadband infrastructure funds.
Clearly this is aimed at infrastructure investment, and as previously
advised, we believe we are strongly placed to deliver this much needed
infrastructure.
We have continued our focus on this option and will engage with whoever is
elected on how we may meet the objectives of their fund.
We remain committed to open access network environments and partnerships with
retailers, local and central government.
I believe our actions over the last year demonstrate this.
To provide a sense of scale, we estimate to build a significant fibre network
covering the wider Auckland region would cost over $1 billion.
This is clearly a significant investment and one which could take shape in a
number of different ways depending on the structure of a broadband investment
fund.
We would only proceed if our usual financial, commercial and risk criteria is
satisfied.
Importantly, we have the capability and scale to deliver this infrastructure
and accordingly, this option will remain a key initiative for us.
[Slide 28 - Options for disciplined growth - smart metering]
Over the last year, we have also focused on transitioning our metering
business.
By moving into the Advanced Metering Services joint venture with our major
international partner Siemens, we've future-proofed what was previously a
legacy asset.
This partnership and business structure also positions us for further growth
in other markets.
[Slide 29 - Options for disciplined growth - renewables]
Vector is continuing trials of thin film solar voltaic panels, micro wind
turbines and other forms of renewable generation, to ensure we fully
understand their economic viability.
In the last few months Vector has been completing the process of applying to
become an accredited solar hot water installer, following an agreement with
Hills Australia to be an exclusive wholesale distributor of their advanced
evacuated tube technology.
We anticipate increasing demand for renewable energy sources, and
accordingly, we will provide these solutions to customers. We also recognize
the capital options they present to our existing asset replacements.
[Slide 30 - Looking ahead - security of supply]
Looking to the future, in the short-term we are clearly seeing downturn in
housing development, downturns in building consents, decreases in consumer
spending and connections.
Implicit within preparations for the medium and long term future of the
energy sector and its growth is the issue of security of energy supply in
both electricity and gas.
During the last year, we have actively participated in the CEO forum with
regard to this winter's power shortages.
Vector spends upwards of $200 million per annum investing in and maintaining
its electricity and gas networks to accommodate population growth and
increases in demand and volumes of electricity, and to enhance network
performance and reliability.
But we cannot carry much needed power that simply isn't available or being
generated in the first place.
We remain concerned by the proposed moratorium on extra thermal electricity
generation - it is critical for peak load.
While renewables are part of the solution to increasing generation capacity,
they are not the whole solution - New Zealand needs a range of energy
generation solutions working together in a co-ordinated fashion to ensure
future demand is met.
[Slide 31 - looking ahead - gas]
Gas is one of those solutions - and it is being aggressively developed across
the globe as an effective solution to climate change issues.
New Zealand has a healthy supply of gas with new fields being developed.
New investment in national gas transmission pipelines is primarily dependent
on thermal power generation build, and at current rates of increase, base
case demand will outstrip capacity by 2011.
[Slide 32 - Summary - growth]
In summary, we are pleased with our results over the past 12 months.
Our strategic position remains as a multi utility infrastructure owner or
manager.
Our focus remains on the key elements of our strategy, being, for our
existing assets:
- Operational Excellence
- Capital and Operational Expenditure efficiency
- Regulatory and customer outcomes
- Disciplined growth
We will continue to grow all our existing assets, either organically or
through the development of options that leverage our positions, relationships
and expertise, such as those we have already discussed with fibre and
renewables.
[Slide 33 - Summary - Key value drivers]
Key value drivers for our assets remain organic growth characteristics with
options for future growth, overlap with our other networks, population
density, capital expenditure and network age, and regulation.
As you would expect, we will also carefully consider acquisitions if they
arise.
[Slide 34 - Summary]
However, we have had progress in Refinancing.
We continue our constructive efforts in the Regulatory area.
But it must be reiterated that regulation is still a major issue for us. The
Commerce Amendment Bill if passed will be an improvement, but inputs will be
a critical element of providing an appropriate framework.
We have achieved improvements in capital and operational expenditure
efficiency and operational excellence across our business lines.
We have improved our customer outcomes.
We have strengthened our executive team, and we have established some
valuable options for disciplined and prudent future growth.
We still have a lot of work to do especially in customer focus and
operational and capital efficiency. The regulatory regime remains a
significant challenge that we face, as do critical policy decisions around
energy and infrastructure. We remain focused on driving performance from our
existing core assets while progressing the growth options previously
identified.
But I am proud of the Vector team and the progress we have made to date.
We'll now take questions from those here in person first, and then from those
who've joined us via the conference call.
ENDS.
A copy of the presentation can be obtained by e-mailing lcr@nzx.com
