Channel Infrastructure NZ Limited (CHI) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'd like to now introduce Mr. Greg McNeill to open the meeting.

Welcome, ladies and gentlemen to the 59th annual meeting of the shareholders of the New Zealand Refining Company Limited. My name is Greg McNeill, Communications and External Affairs Manager. Today's meeting is being held online by the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting which will be by audio-only to ensure a smoother transmission. In addition, shareholders and proxies have the ability to ask questions and vote on resolutions. Questions can be submitted at any time. To ask a question press on the speech bubble icon. This will open a new screen. At the bottom of that screen, there is a section for you to type your question. Once you have finished typing, please hit the arrow symbol to send. Please note that while you can submit questions from now on, we will not address them until the relevant time in the meeting. Please also note that your questions may be moderated or if we receive multiple questions on one topic, these will be amalgamated. If, however, you do not feel your question has been addressed, please resubmit it. Finally, due to time constraints and to ensure all shareholders have a chance to ask a question, I ask that you limit yourself to asking 2 questions. We may run out of time to answer all your questions and if this happens, we will endeavor to answer them in due course via email or by posting responses on our website. Also on this webcast today are Chairman, Simon Allen; Chief Executive Officer, Naomi James; and Refining NZ's Directors: Ms. Debi Boffa, Mr. Riccardo Cavallo, Mr. Lindis Jones, Mr. James Miller, Ms. Vanessa Stoddart, Mr. Paul Zealand. Also on the call with us today are representatives from our external auditors, Ernst & Young, Simon O'Connor and Neil Calder; legal advisers, MinterEllisonRuddWatts, Silvana Schenone and Igor Drinkovic; and share registrar, Computershare Investor Services Limited. I now hand over to Simon to formally open the meeting.

Thank you, Greg. Ladies and gentlemen, fellow shareholders, good afternoon. I am Simon Allen, Chairman of the New Zealand Refining Company Limited. It gives me great pleasure to welcome you all to the 59th annual meeting of shareholders. Normally, we would be meeting face-to-face, but these are not normal times for anyone. Even so, we've done all we can to enable shareholders to participate and thank you for taking the time to join this webcast today. Please note that my address and the annual meeting presentation have been posted on the New Zealand Stock Exchange. Both will also be available on the company's website later today. We have the necessary quorum of shareholders and I therefore declare the meeting officially open. Ahead of the formal business of the meeting, Naomi and I will review the 2019 financial year and provide an update on the company's plans going forward. You will notice that our focus this year is much more on the future than reviewing the year currently -- or recently concluded. This is because we now find ourselves in a radically different environment and one that is changing all the time. We are all in a new world, and I'm sure your focus, like ours, is on how we adapt and change as a company under these new conditions. Please take note of the disclaimer, I would highlight the words that you should not place undue reliance on any forward-looking statements we may give. Let me now quickly review the 2019 year and how quickly things have changed. I will also give you a Board perspective of our strategic review before our chief executive sets this out in more detail. I'm not going to go into too much detail about last year. Our annual report and our recent presentation of our 2019 financial results are available to shareholders, and we are happy to take any questions on these when it comes to question time. The key point I'd like to make is that last year's results confirm a trend and put into stark relief why we're undertaking our strategic review. In 2019, we achieved a very good operating performance with 99.7% plant availability, up from 90.7% the previous year and reflecting this and plant optimization. Our employees and contractors helped to deliver an outstanding personal and process safety performance for the business with only 1 lost time injury during the year and no Tier 1 or Tier 2 process safety incidents. Our safety case was approved in January by the regulator, Worksafe. And yet, this operational performance did not deliver commensurate financial results. Net profit after tax, or NPAT, was $4.2 million compared to $30 million the year before. EBITDA was $118 million. Our uplift over the Singapore Complex Margin significantly increased to USD 4.32 per barrel. To put that in context, first 10 months of our GRM averaged USD 5.85 per barrel before margins fell to USD 2.62 in the last 2 months of the year. This weakness continued into early 2020, and has been further compounded by the impact of COVID-19 on fuel demand. Our 2019 result was in line with the profit matrix that we shared with shareholders at the 2019 Annual Shareholders meeting. It is clear that in a lower margin environment and with our current cost base and operating model, we do not earn our cost of capital and, in some cases, do not cover our costs. Before explaining the governance arrangements for the strategic review, I want to pause to thank all our team for their incredible response to COVID-19, to both safeguard the company in the short term and to ensure New Zealand's fuel supply lines remain flexible and available in these extraordinary times. Refining New Zealand responded very quickly to the reduction in fuel demand brought on by the COVID-19 travel and transport restrictions. In late March, the company moved to a robust operating model, agreed with customers, and this mode has been extended until August 2020. This enables us to plan to run cash-neutral through this time. Given the challenging operating environment and the uncertainty associated with COVID-19, we chose to increase and extend our bank facilities in March. This brings Refining New Zealand's total available debt funding facilities to $400 million with no significant maturities until March 2022. We were very pleased with the support of our banks, which reflects their confidence in our business. Taking these actions has meant that we are in as good a position as we can be to withstand an extended period of low demand. In such uncertain times, the directors have resolved that it is prudent to not pay a final dividend. Our interim dividend of $0.02 paid in September becomes our total dividend payment for the year. I would like now to highlight 3 important areas of recent change for the business. We've had some important team changes. Naomi James was appointed Chief Executive Officer, effective April 2020. We are pleased to have someone with Naomi's extensive experience of change management during what is a time of fundamental change for this business. We have put in place a long-term incentive package for Naomi that focuses on retention and aligns with shareholders' interests, as was recently announced. Secondly, I would like to thank Paul Zealand on behalf of your Board for his service as Managing Director during our CEO transition. Paul's ability to step into an executive role from the Board was very much appreciated. Paul's ability to work with Naomi and the Board has enabled our new CEO to hit the ground running. So thank you, Paul, and we're delighted you've been able to resume your role as an independent director. Thirdly, Andrew Brewer was appointed to the new role of Chief Operating Officer, effective March 2020. Andrew brings a wealth of experience in the refining sector, having spent the previous 18 years with Caltex in Australia and Chevron in Canada, in refinery and supply leadership roles. In December, the Refining New Zealand Board aligned its audit policy and its external audit services with recent market guidance from the Financial Markets Authority. This led to our reissuing the company's auditor independence policy statement and carrying out a market assessment of external audit services. As a result, the Board appointed Ernst &Young to provide external audit services to the company, and reached a mutual agreement that PwC resign from their auditor role. The Refining New Zealand Board acknowledges the quality and professionalism of the audit services provided by PwC over the last 20 years. Meanwhile, EY is standing for reappointment by shareholders at this meeting. The final area of change relates to the Emissions Trade Scheme. The government has approved bringing Refining New Zealand into the New Zealand Emissions Trading Scheme, or NZETS, as an emissions-intensive trade-exposed business. As we had negotiated with the government, we believe that this decision by policymakers is firm but fair, consistent with a just transition environment. So while 2019 had its highlights, overall it underscored the serious underlying challenges facing the business. And then COVID-19 arrived, reinforcing why we cannot go on as we have. We are tackling these challenges in our strategic review, which is designed to set the company up for its next phase, leveraging its significant assets to maximize returns to shareholders through the cycle. Critical to ensuring we get the best outcome for the company and for you, our shareholders, will be how your Board governs this important process. Our independent directors will play a central role in representing the interests of our noncustomer shareholders through the review. We will draw on the skills of all of our directors, but our independent directors committee will separately oversee and take decisions on matters relating to our customer shareholders. You can have confidence that the outcomes from the strategic review will be in the best interests of all shareholders. We will obviously carefully consider the views and interests of all our stakeholders while having a clear focus on our shareholders and delivering an outcome that ensures we have a sustainable and valuable long-term business. Our strategic review will be led by CEO, Naomi James, who is very well qualified for this role, supported by the management team as well as external advisers. Following a rigorous international search, Naomi joins the company from Santos Limited, one of Australia's largest independent oil and gas producers, where she was responsible for midstream infrastructure assets, including oil and gas processing facilities. At Santos, Naomi led the creation of a separate business division for Santos' infrastructure assets with the aim of realizing additional value from these assets. We've put in place a long-term remuneration package that incentivizes Naomi, and we look forward to her leadership of the strategic review and of the company as it transitions to its optimal structure and operating mode based on the best option arising from the review. I'd now like to invite your new CEO, Naomi James, to give you more detail on the strategic review. Naomi?

Thank you, Simon. Let me start by adding my welcome to Simon. Thank you for joining us today. While it's regrettable I can't be meeting you face to face, I hope that we can do that in the not-too-distant future. Many of you I know have been a part of the life of this company for a long time. Your perspectives are something I value, and your interests are at the heart of why I'm here and excited by this opportunity. I was attracted to this role, both by the quality of this company and by the scale of the challenge. And while I didn't anticipate starting the role in this sort of operating environment, it hasn't changed my view on the opportunity to create shareholder value at RNZ with what we have. So to start with, what are we seeking to achieve with this strategic review? We are seeking 2 things from the process: to determine the optimal business model, which needs to be one that delivers acceptable returns through the cycle; and to determine the best capital structure for that business model, which maximizes the value of those assets to our shareholders. We have a unique mix of skill, capabilities and expertise as well as our physical assets. And our role at the very heart of New Zealand's transport fuel supply chain is something we can leverage more effectively than we have been doing. While I'm very focused in bringing a shareholder value lens to the process, I am also bringing an open mind to the options. What is up for review is the way the company operates and the ownership and capital structure of its assets. Through this initial stage of the process, we will be engaging with a range of stakeholders to develop and assess those options. Returns haven't been acceptable, as shown on this slide. Although we've invested significantly over the last decade, the returns on invested capital have only once in the last 10 years exceeded the cost of capital, which was in a year of high margins. Why are returns too low? Firstly, substantial new supply from low-cost producers in places like the Middle East, China, India and South Korea, is depressing global and regional margins. These changes are taking place in the context of extraordinary volatility in the global oil market due to COVID-19, which have seen the biggest fall in oil prices since 1991 on the back of the collapse in demand for oil products globally. Notably, dated Brent crude, being one of the crudes we benchmark off, recently dropped to a 21-year low of around USD 13 per barrel. While the logical response for the excess supply we are seeing in oil and refining capacity should be supply coming out of the market, we don't see this occurring. As global competition has expanded, we have moved from companies competing to countries competing. And in many cases, these competitors are effectively national enterprises who don't operate under the same economic constraints that we do. Secondly, Refining NZ has operated under the same processing agreements with its 3 customers since 1995. These 25-year-old agreements are now outdated and do not reflect the current environment. Thirdly, our own cost structure isn't helped by rising electricity and natural gas costs in New Zealand, which means that the fee floor in our processing agreements no longer covers our cash costs. So we face major structural challenges, both in terms of how we organize our business as well as how the global market is changing. But we have a lot to play with and for. We have significant and strategic infrastructure assets with which to realize further value for shareholders. Our assets play a crucial role in the supply of transport fuel, with 70% of the nation's fuel processed through our assets. Our assets are deeply integrated into the fuel supply chain, including the Refinery to Auckland pipeline, or RAP, which connects with the Wiri terminal in Auckland and gives us a strong competitive advantage in that market. This is one of the most valuable and strategic assets in the New Zealand fuel supply chain. The land at Marsden Point is adjacent to Northport, which is strategically important for importing generally and is likely to grow in importance. And we have a high level of technical skills, including the inherent flexibility to adapt or repurpose parts of the refinery, including opportunities to produce lower-carbon fuel. A key part of the strategic review is to look at whether we can make a fundamental change to the competitiveness of refining operations and the economics of our business model in order to improve the financial performance of the refinery. We have achieved progress in several of these areas, but there is clear potential to do more. On the right side of the graphic, we talk about the opportunities that exist for our refining assets and capabilities to make a very significant contribution to New Zealand's transition to a lower-carbon transport fuels environment. Part of this assessment will include how we unlock greater value from our infrastructure. We know that today the combination of assets in a single corporate structure with volatile earnings from our refinery assets effectively means that our infrastructure assets are undervalued. An important part of the review will be to assess what is the right capital structure for the business going forward. Here's a summary of options under consideration. These are illustrative and not exhaustive. The answer may involve a combination of the options listed, but there is no status quo option. Shareholder returns as things stand are not acceptable. Starting with the top box on the left, we will look at all options to make significant improvements in the financial performance of the refinery within the current business model. Secondly, we will look at options to change the business model for the refinery, whether that's the processing agreement or distribution arrangements. Thirdly, we will look at options to create separate capital structures for the refining and infrastructure assets. Fourthly, we will look at the alternative business model of converting to import operations. And we will look beyond our existing assets for opportunities to grow and diversify our asset portfolio, where Refining NZ could, as the independent operator of shared infrastructure, improve the resilience and performance of New Zealand's fuel supply chain. We expect to provide an update in June on the strategic review. Over the next couple of months, we will engage with all our stakeholders, particularly customers and government, to make sure we can identify and assess the best options available. Regardless of the outcome, we will remain a significant investor and player in New Zealand's transport fuel supply system. Our assets offer enormous opportunity if we can structure them to make the most of the market conditions we see now and into the future. Again, our priority is to unlock the value that the market is not currently ascribing to our valuable and strategic infrastructure assets. Thank you for your attention and for the opportunity to lead this exciting work, and to help this iconic New Zealand enterprise take its next major step into the future. Thank you, Simon, and I'll hand back to you to continue with the meeting agenda.

Thank you, Naomi. I draw your attention to the next slide, and would now like to invite you to ask any questions that you may have in relation to my address and Naomi's presentation.

Greg, have we received any questions at this stage?

Yes, Simon. First question around the strategic review. Is the strategic review being driven because of the impacts of COVID-19?

Thanks for that. We've covered that a little bit in our presentations, but no, it's not driven by COVID-19. COVID-19 has compounded the market effects of what has been going on in the market, including oversupply, and it does present us with a further increase in the uncertainty of outlook for an indefinite period. We have taken actions to respond to both events that have been happening that is the medium-term change to the market and the COVID-19 cycle or in position on top of the cycle that was going on. There's no doubt that we have a view that because of COVID-19, the normal recovery is not expected and -- as it has done in previous cycles. Naomi, if you want to add to that answer at all, feel free.

No. I think you've covered that well, Simon.

Greg, any other questions?

Yes. Thank you, Simon. We have a question from [ Susan Gibson ] regarding directors' fees in light of COVID-19. The current difficult environment for refining, the fact that no final dividend will be paid and the fact that the Board has chosen not to pay bonuses to staff for their performance in 2019, will the Board be reducing director fees as many other companies have done? And if not, why not?

Okay. Thank you. Well, actually, this matter has been given serious consideration by the Board. The Board has discussed the actions of other companies in relation to director and employee remuneration and considers that action is not required now, given that the company is currently operating at cash-neutral and plans to do so for the rest of the year. The demand will continue to be closely monitored by the Board and the management team and in light of the stakeholder review. By that context, over the last 5 weeks, the directors have been meeting frequently and working alongside management in support of the company's rapid operational response to COVID-19, and we do not see any letting up in the challenge facing the Board and the directors over the period coming before us with the review that is going on. We had done a director remuneration review in '19 and had recommended some alterations upwards. And we had already taken a decision to not put those into play, and those decisions stand. With regards to the employees, the nonunion employees that do not receive bonuses for the year ended 2019, that did save the company about 5% of wages and salaries expense across the full year, but with not the base salaries of anybody. Thanks, Greg.

Simon, thank you. There are no further questions at this stage.

Okay. Thank you, everyone. I'll hand back to Greg to explain the voting process before we move to the formal part of the meeting.

Thanks, Simon. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, Simon will shortly call for a poll on all resolutions. At that time, if you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit submit or enter button as the vote is automatically recorded. Up until the time the poll is declared closed, you have the ability to change your vote by simply selecting another option or you may cancel your vote by clicking Cancel. I will now hand it back to Simon to conduct formal part of the meeting.

Thanks, Greg. I now declare a poll for all items of business. The polling icon will soon appear. Please submit your votes at any time. Please note that the poll and voting will close after the third agenda item. We have received 231 valid proxies and postal votes, representing 71.63% of the votes able to be cast. The items of business before the meeting today are all ordinary resolutions and are required to be passed by a simple majority, more than 50% of the votes of shareholders who are entitled to vote on the resolutions and to exercise their right to vote. Reappointment of auditor. We now move to agenda Item 1, the reappointment of the auditor. The resolution is that Ernst & Young, EY, be appointed as auditor to the company for the financial year ended 31 December 2020. Have we received any questions on this agenda item, Greg?

Not on this agenda item, Simon.

As Chair, I now move as an ordinary resolution that Ernst & Young be reappointed as auditor to the company for the financial year ended 31 December 2020. If you've not already done so, I ask shareholders' vote on Item 1 using Lumi. [Voting]

Auditors fees and expenses. We'll now move to agenda item 2, the auditor's fees and expenses. The resolution is that directors be authorized to fix the fees and expenses of Ernst & Young as auditor to the company for the financial year ended 31 December 2020. Again, any questions on this item, Greg?

No questions on this item, Simon.

I now move as an ordinary resolution that directors be authorized to fix the fees and expenses of Ernst & Young as auditor to the company for the financial year ended -- ending 31 December 2020. If you've not already done so, I ask that shareholders vote on Item 2 using Lumi. We'll pause for a moment. [Voting]

As the next resolution relates to my reelection as an independent director of the company, I'll now hand over to fellow independent director, James Miller, to conduct this part of the meeting.

Thank you, Simon. Mr. S.C. Allen is required to retire by rotation and being eligible to do so, offers himself for reelection. A brief biography of -- for Mr. Allen was included in the notice of meeting. I will now ask Simon to make a brief statement.

Well, thanks, James. Well, I'll start by saying the company does face the most challenging environment it has had in its history. There are multiple -- with a strategic review, there are multiple scenarios facing the company. And in all of these scenarios, I am totally focused on the outcome for shareholders. I'm pleased to be working alongside a really strong Board. And in that role, I'm focused on the appropriate governance practices, including the role of the independent directors. I do believe I have the personal capacity to dedicate the significant time needed for this role and I do manage my time conflicts appropriately. Thank you for considering me for this further term.

Thank you, Simon. Have we received any questions for Simon or about the agenda Item 3, Greg?

Thank you, James. No, there are no questions on this item of the agenda.

Thank you. I will now move the ordinary resolution that Mr. S.C. Allen, who retires by rotation in accordance with clause 8.9 of the constitution, be reelected as a director of the company. If you have not already done so, I ask shareholders to vote on Item 3 using Lumi. [Voting]

I'll now hand over to Simon to conclude the formal part of the meeting.

Thank you, James. That does conclude our discussion on all the items of business. I now close the voting system and the poll can be concluded. Our auditors, Ernst & Young, are in attendance and will act as scrutineers. Once they have completed their review, the results of the poll will be posted on the New Zealand Stock Exchange and then our website. Moving on to general business. If there are any items of general business that shareholders wish to raise, please do so through the question function. While we're waiting for people to raise any items of general business, an e-mail address to your feedback is here on the screen. We would welcome more feedback at any stage. Greg, have we received any further questions?

Yes, Simon. Two questions here. First, from [ Gary Wiborg ]. His question is, is Refining NZ seeking grants for R&D on green or very low-carbon hydrogen?

As part of our work last year, we had identified being part of the future fuels scenario for New Zealand, and we had talked to and applied to the Provincial Growth Fund for funding in this area. And the solar plant was tied into that question. At the moment, due to our current cash situation and our strategic review, we have got to hold our activity in this area. Any other questions, Greg?

Yes. Thank you, Simon. One further question from [ Aaron Holwright ]. Why does the Caltex Australia Refinery at Lytton and Brisbane always outperform Refining NZ despite being older and smaller and less complex?

Okay. Well, it's quite difficult to answer in terms of performance. There's about -- there's many, many, many measures of performance. The operating processes in Australia and the company itself that you're referring to are quite different companies, different structures and different operating environments. And so it is not easy to do a direct comparison. In terms of comparing how refineries work, we do receive outside benchmarking help and that benchmarking help goes into how we operate. And on a lot of measures, our refinery operates extremely well. The operating performance last year in 2019 is a good case and example. Thanks, Greg.

Thank you, Simon. At this stage, there are no other further questions.

Okay. Well, as I said earlier, we're happy to field further questions from shareholders. If you send them into the address that was given on the screen, we'd be happy to reply to those as well. There being no other matters of business, I do thank you for attending today. It is an unusual scenario operating like this. This virtual meeting has been a first for the company, and I'd like to thank shareholders for making the time to connect with us today. I'd also like to acknowledge the team at our end who have worked very hard to make this possible. I now declare the meeting closed. Thank you.