Vector Limited (VCT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Dame Alison Paterson, and I'm Chair of Vector. As we have a quorum and it's 3:00 p.m., I will now declare open the 2020 Annual Meeting of Vector Limited Shareholders. On behalf of my fellow Directors, a warm welcome to you all. Today's meeting is being held online for the first time. Like many listed companies, we had prepared for a number of scenarios, depending on Auckland's COVID-19 alert level status. It is, of course, different from our in-person meeting, so I have some instructions to ensure participation in the usual way, albeit virtually. We have shareholders, proxies and guests attending the meeting virtually. All attendees are able to watch the slide webcast of the meeting. In addition, shareholders and proxies have the ability to submit questions and their vote. [Operator Instructions] While we also welcome any members of the media to our meeting today, as this is a meeting for shareholders, please hold your questions and Vector's Group Chief Executive, Simon MacKenzie and I, will be happy to talk to you afterwards. Voting today will be conducted by way of a poll on the item of business. In order to provide you with enough time to vote, I will shortly open voting on the sole resolution. At that time, if you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up the resolution and present you with voting options. To cast your vote, simply select one of the options. There's no need to hit a submit or enter button as the vote is automatically accorded. You do, however, have the ability to change your vote up until the time I declare voting closed. I now declare voting open on the sole resolution. The polling icon will soon appear. Please submit your vote at any time. I will give you a warning before I move to close voting. In addition to those attending this webcast today, 598 shareholders, holding a total of more than 804,303,549 shares have appointed proxies. In my capacity as Chair of the meeting and in my own name, I hold proxies for 514 shareholders, representing 52,297,665 shares. Also included in proxies are 751 million shares held by Entrust, our majority shareholder. Entrust has represented at the meeting today by William Cairns. It's now my pleasure to introduce my fellow directors, starting from the right: Michael Buczkowski; Alastair Bell; Bruce Turner; and to my left, Jonathan Mason, Tony Carter; and Dame Paula Rebstock. Also joining us are our group Chief Executive, Simon MacKenzie; and John Rodger, our Chief Legal and Assurance Officer and Company Secretary. We also have our Chief Financial Officer, Jason Hollingworth; and Graeme Edwards, from our external auditors, KPMG, joining via by webcast. So to the structure of the meeting. We released our financial results on the 27th of August, and the details on this are extensively covered in our annual report, which is available on our website. Rather than repeat that detail, I will instead provide a strategic overview of Vector's future as we see it before handing over to Simon to review some of the highlights for the year and progress we are making against our strategy. After that, we will open the meeting for specific discussion on the annual report, including the financial statements and audit report as well as matters raised in our respective addresses. We will then move to the formal business of the meeting. I think we can all agree it has been a year of tremendous upheaval. Vector is a critical infrastructure provider and, as almost all our services are deemed essential, we have continued to support our customers throughout all COVID-19 alert levels. On behalf of the Board, I'm proud of the way our people responded to the global pandemic, whether it meant putting the needs of our customers and communities ahead of their own fears or working collaboratively to find new ways of working within the government guidelines. Our people showed great commitment to delivering to our customers and communities. Like the world around us, the pace of change at Vector is accelerating. Energy systems in New Zealand and globally are under pressure to respond to the uptake of new consumer energy technology, electrification of transport, demands for decarbonization, increased consumption of renewable energy and energy poverty. Vector has been an active leader in this change for many years. Our strategy, which we call symphony, is about designing energy solutions and systems that put our customers first, starting with demand, not supply. We are focused on enabling energy systems in the community, close to where the power is needed rather than at the end of costly and remote infrastructure. This approach increases resilience and system-wide efficiencies. Technology is at the heart of our strategy as we leverage smart energy solutions in data to unlock new products and solutions for our customers. All of this relies on coordination between customers and the energy systems, distributed energy resources and across energy supply chains. We are not doing this alone, and strategic partnerships are a critical part of our strategy. Our belief is that accessing expertise and sectors outside of energy will not only accelerate our progress, but allow us to work alongside the world's best and smartest companies and individuals. Our announcement of our strategic alliance with Amazon Web Services is our most recent example of this part of our strategy and action. You can expect to see other partnerships of a similar caliber in the future. This is how Vector is delivering on our vision to create a new energy future. For shareholders, the symphony strategy allows us to provide you with a diverse portfolio for sustainable returns, no longer simply a distribution company, but an innovative energy group with a growing local and international impact. Moving on to people highlights for the year. In August 2019, we were pleased to be awarded the Empowerment, Divisibility and overall Supreme Award at the Diversity Works Awards for our commitment to building an inclusive and supportive workplace culture. For the Supreme Award, Vector was chosen from 36 other entrants and 76 entries across 9 categories. This is the second time we've won the supreme award, the first being 2015. In sustainability, we were pleased to announce the launch of the battery industry group in November 2019. This cross-industry collaboration aims to propose a circular product stewardship scheme for end-of-use and end-of-life battery management to the Ministry for the Environment by the end of April next year. This would include recommendations on consistent safety guidance for the handling, storage and shipping of used large batteries. Given our goal of net zero carbon by 2030 and increasing demand from investors, shareholders and other stakeholders, it is imperative we remain focused on our carbon footprint. We're pleased this has substantially decreased by almost a quarter from full year '19. In the full year '20, we participated in the Carbon Disclosure Project for the second consecutive year and started working towards making the appropriate disclosures required by the task force on climate-related financial disclosures. We recognize the challenges of decarbonization and climate change, so we'll continually evolve our approach in order to ensure we are contributing ourselves, but also enabling others through our products, services and partnerships. Our view is that New Zealand needs to focus on creating a high-value economy that is built on innovation, moving from volume to value. This way of thinking is the embodiment of our symphony strategy and is a central theme in our ongoing discussions with our regulators as we continue to advocate for changes to reflect the environment we are in today and into the future. In November 2019, our Default Price Path 3, DPP3, regulatory settings were confirmed through to 2025, providing targets for electricity network quality and allowable revenues for the 5-year period, which commenced on the first of April 2020. A significant issue we are facing is the impact of the inflation assumptions selected by the Commerce Commission. Those assumptions used in setting our new price path have, for a decade, systematically over forecast inflation and, in turn, reduced our revenues below levels consistent with the fair return. This is an impact that will be further exacerbated through to 2025, given radically different inflation expectations since DPP3 was determined in late 2019. We do not believe this is a sustainable outcome or one that is consistent with the legislation intended to ensure regulated businesses can invest for the long-term interest of consumers and earn an appropriate return. This is not an issue that's exclusive to Victor, as other regulated entities in New Zealand face the same challenges and a review is underway in Australia with their regulator. We will actively engage with the Commerce Commission to seek a constructive solution. Vector considers this to be a critical matter that must be worked through collaboratively to ensure Auckland growth in government infrastructure investments are supported through aligned regulatory settings while ensuring fair returns to our shareholders. Despite this obvious cash flow challenge, Vector remains committed to upgrading and maintaining Auckland's electricity network to the best of our ability for the benefit of energy consumers. We recognize this is an obligation and, as such, our focus will be on the existing network as there is little incentive to invest more broadly. We will allocate capital to other parts of the Group that provide better returns. I would also like to point out that a future of the current regime is that any revenue under recovery can be recovered in subsequent years. Given the impact of COVID-19 on revenues, we're changing our previous policy and will use loss rental rebates, allocated by Transpower, to offset future customer price increases. It's important to note that consumers will not be disadvantaged by this as it will limit future price impacts and any excess loss rental rebates will be returned to consumers later. In closing, as previously announced, today, I will retire as Vector's Chair. Before I pass to Simon, I'd like to share some reflections about my time at Vector and the opportunities ahead for the company and the industry. When I started on the Board some 13 years ago, Vector was effectively just a lines company. I challenge anyone who thinks that is the case today to take another look and be prepared to see a diverse, innovative and progressive company that's leading the thinking and that I can believe can transform the energy industry. This week, the Board was fortunate to spend time with Laura Sandys, who's heading a U.K. think tank about the future of energy. Management has been working with Laura as she prepares a report for the U.K. government and regulator of the energy system of the future. What struck me is the alignment of thinking between Laura's group and Vector. We both believe that our centrally-planned model, focused on energy supply, is largely redundant, and that one, which considers the opportunities that exist across the customer, the demand side, decarbonization and a fully-costed system sector is fit for the challenges of today. I'm very proud that Vector is recognized at top tables globally for our views, our willingness to advance through action, not just words and expert opinions on the future of energy. Notably, our strategic alliance partner, Amazon Web Services, highlighted our cultural alignment to their way of thinking and ethos around innovation for customer benefit. There are certainly challenges, and none of this transformation is easy. But for these reasons, I'm confident in Victor's leadership, both at the Board and management level, and in the symphony strategy. I look forward to seeing the company take the opportunities before it and continue to evolve into a truly innovative and world-leading energy group. Finally, I thank my Board for their support, wish in-coming Chair, Jonathan Mason, all the best. And Simon and his team, I have very much enjoyed our working relationship and you have by respect. Simon?

Thank you, Dame Alison. Before I provide an overview of Vector's financial performance for the financial year 2020, I'd like to acknowledge Vector's staff, our key partners, particularly our field service providers, for their tremendous dedication to our customers throughout the year, but particularly since the start of the COVID-19 pandemic. Our business started preparing for COVID-19 in January, and moved quickly to activate our response team and initiatives such as banning travel, temperature checking and working from home trials, starting earlier than most organizations. All of our business units have changed their ways of working multiple times in the past 9 months, and I'm proud to say that our focus on our customers hasn't faltered. My thanks go to our Vector teams and our business partners. Our earnings to June 30 were steady, with adjusted EBITDA of $490 million, $4.2 million ahead of last year. Group net profit after tax was $397.3 million and includes a noncash impairment -- sorry, $97.3 million, includes a noncash impairment of $32 million in respect of E-Co Products Group. Despite improved performance from E-Co Products in the first half of FY '20, COVID-19 Alert Level 3 and 4 restrictions and the subsequent impact on the wider economy and consumer confidence have impacted E-Co Products Group trajectory. As a result, we have taken a conservative approach and impaired the carrying value of the business throughout the COVID-19 lockdowns, Vector observed significant changes in consumption trends across our electricity and gas networks. At the start of Level 4 on 25th of March 2020, volume across our electricity network dropped by approximately 15% compared with the average consumption over the previous 3 years. Across our gas network, that dropped by approximately 32%. And with more people working from home and studying from home, residential consumption during Level 4 increased by approximately 13%. We also noticed morning peaks started later in the day and a midday break forming for the first -- sorry, midday peak forming for the first time on record. When the country entered COVID-19 Level 1 and Alert Level 2 in August, residential trends largely returned to normal. However, commercial energy usage remains suppressed compared with historic averages. I'll briefly talk about some of the highlights that you can see on the slide deck. New electricity and gas volumes increased by 7.8% on the comparative period. To keep pace with Auckland's growth and enhance network integrity, this year, Vector invested in an all-time high of $317.1 million in our electricity and gas networks, 21.5% more than last year. Overall, electricity volumes were 1.1% lower at 8,315 gigawatt hours, with lower business volume, partially offset by higher residential volume and as mentioned, this was largely attributable to the COVID-19 lockdowns. The sale of the Kapuni Gas Treatment plant and associated assets to Todd Energy marked a key milestone for our Gas Trading business this year This means that in the future, Vector will no longer receive earnings from the Kapuni Gas Treatment Plant, but will recognize interest income below the line as part of its net interest costs. Bringing the ownership of the plant and field together clears the way for Todd to invest in developing the field. The deal includes long-term supply agreements, which means Vector can support our customers who value gas as a preferred energy choice. Vector's LPG business, Victor OnGas, continues to operate in an increasingly competitive retail market. The strong sustained performance from the Vector OnGas team is testament to their commitment to safety and customer service excellence as well as innovating to provide new customer solutions and optimize existing operations. Our new energy solutions business, Vector PowerSmart, has delivered several major projects in New Zealand and the Pacific this year, further enhancing our reputation as a leading provider of advanced energy solutions in the region. The floating solar array at Watercare's Rosedale Water Treatment Plant has now been commissioned. This-1 megawatt floating solar project is New Zealand's first floating array and first megawatt-scale solar system. You may have seen recent media coverage about Vector PowerSmart being selected as the technical partner in the next phase of the Hawke's Bay Airport solar project. It is encouraging to see organizations look to renewable energy option in their communities. Vector Fibre has continued to perform well this year, progressing plans to create new products and services to capitalize on changes in the telecommunications landscape. This business remains focused on seeing our fiber network support the rollout of 5G technology against the backdrop of regulation opportunities to increase industry competition. As such, we continue to advocate for a level playing field for all competitors in this market, which is in line with the original framework for the ultrafast broadband project. A key component of this strategy is investment in digital platforms to enhance the way our customers interact with us through the provisioning process. With respect to Vector Metering, it grew strongly with 1,000 -- sorry, 119,003 advanced meters installed in Australia and 36,350 in New Zealand during the year. In Australia, we are now averaging approximately 10,000 installations per month. Vector has continued to explore how next-generation connectivity platforms can further optimize our metering solutions and enable us to deliver even more value to our customers at scale. We have started multiple upgrade programs across key service platforms to ensure we continue to meet the evolving needs of our customers. In the past year, we have announced a significant upgrade program to replace all existing 2G modems for future-proof technology, which support both 4G and 5G technology as it becomes available. In March, we announced a partnership with Spark as we look to modernize the way energy consumption is measured in Kiwi homes and businesses. The deal will see a significant number of Vector's New Zealand-based advanced meters connected to Spark's 4G supported CAT M1 Internet of Things network with the ability to shift on to 5G connectivity as part of a multiyear rollout. This partnership works alongside existing agreements with Vodafone. Once complete, this investment will clear the way for continued meter connectivity and enable ongoing product innovation opportunities futures -- decades into the future. Earlier this year, we also announced a strategic alliance with Amazon Web Services, or AWS. As you may have seen, the purpose of this alliance is to jointly develop a new energy platform. Once complete, the platform will better meet customer and regulatory requirements. Initially, it will enable us to rapidly connect information on energy consumption and network performance from more than 1.6 million of our advanced meters across Australia and New Zealand. These insights will help us to enable energy and utility companies to develop tailored product and pricing solutions for their customers based on their consumption habits. This will drive forward more affordable, reliable and cleaner energy options to consumers through new market models that accelerate the uptake of renewables and electric vehicles, for example. This is a multiyear partnership, and our intention is that the multi-fuel platform will be introduced first in Australia and New Zealand, where there are around 70 energy retailers and more than 40 distribution networks, with the potential to be offered elsewhere around the world in time. The strategic alliance is the first of its kind for AWS and New Zealand and for AWS in the global energy sector. Together, we will be hiring more than 30 employees in highly skilled technology and engineering roles in New Zealand to help develop the platform and associated applications. As regulators in New Zealand and Australia request that data becomes more accessible and with the exponential increase in the volume of data available, we will continue to lead with these types of partnerships as part of our symphony strategy. An example of this is our ongoing partnership with mPrest, where we are developing a distributed energy resource management system that will connect traditional infrastructure like electricity lines and substations with new technology like solar, batteries or other distributed energy resources. We also continue our efforts in the electrification of transport, such as installing EV chargers on Waiheke Island, in partnership with EECA, to support its goal of becoming the world's first fully electrified island. Looking ahead to next year, we remain committed to growing, advancing and maintaining our networks so they can continue to deliver for our customers and evolve in line with their changing energy needs and preferences. Like all businesses, we will continue to experience the impact and uncertainties caused by a COVID-19 world, but have fared better than many, something we do not take for granted. We remain concerned about the regulatory settings and the impact on our ability to invest. We must balance these external pressures on Vector with our responsibility to deliver essential services at affordable prices for customers, and we'll continue to work constructively with the Commerce Commission on this matter. For the coming financial year, we are targeting adjusted EBITDA of between $480 million and $500 million. This takes into account all the factors just outlined. We firmly believe that our symphony strategy is the right one for us as we strive towards our vision of a new energy future. As a shareholder, in the next year, you can expect to see Vector continue to execute our symphony strategy, investing wisely and partnering smartly to benefit customers. We will embrace change and disruption and harness innovation with a relentless commitment to improving outcomes for our customers. With high-profile cybersecurity attacks recently, Vector assures our shareholders that we remain vigilant and never complacent. We have partnered with global experts to develop our own protection systems, which we now offer to other companies as part of Vector Technology services. In conclusion, I would like to take this opportunity to thank Dame Alison for the outstanding leadership and guidance she has provided to Vector over the past 13 years. She is an exemplary business leader and her extensive wisdom will be sorely missed. So on behalf of everyone at Vector, we wish you all the very best, Alison, and we look forward to hearing about your retirement, but obviously still keeping in touch.

Thank you. Thank you, Simon. The notice of meeting lists the item to be considered as an ordinary resolution. An ordinary resolution requires a simple majority of valid votes. For transparency, you will be shown the number of discretionary proxies held by me as Chair of the meeting or in my own name. I declare that it is my intention to vote the discretionary proxies in favor of the sole resolution. During discussion of the agenda items, I again ask that you confine your questions and any comments directly to matters before the meeting and Vector business. We are naturally happy to hear your views on how we operate our portfolio of businesses and to answer questions about operational policy and practice. If you have a personal matter relating to Vector's services, customer services representations can be contacted on 0508-VICTOR or info@vector.co.nz. As stated in the notice of meeting, any shareholders registered at 5:00 p.m. on Tuesday, the 22nd of September 2020, or their proxies or the representatives may vote. If you've become a shareholder since that date, you cannot vote at this meeting, but we do welcome your attendance. So the first agenda item is to invite questions on Vector's financial and operational results for the year ended 30th of June 2020. The annual report was available online on the 27th of August 2020. Hard copy reports were sent to all shareholders who requested one. Questions on this topic may be put directly to our external auditors, KPMG, but please keep those questions relevant to their auditing role.

Are there any questions in respect of the annual report, the financial statements and audit report for the year ended 30th of June 2020? As we want in an in-person meeting, I will provide ample time for questions.

The first question is from the New Zealand Shareholders Association. And the question is: I note that the Board has set a maximum on the amount that can be borrowed in any 1 year. What is the maximum gearing the Board and your banking covenants would accept?

I think the context we would actually look at is with regards to our banking covenants as well as our gearing is obviously a function of our revenues as well as our business mix profile. So we're very much committed to maintaining our credit rating metrics as well as our credit rating with Standard & Poor's. And as such, we have to also take into account the mix there between our regulated and unregulated business. I'd note that we regularly update Standard & Poor's and also Moody's. And as such, we have confidence that we have maintained our banking covenants as well. With regards to any maximum gearing, I think that's more a function of what's also going on with regards to our revenue profiles and also our underlying share price, which we continue to monitor.

Thanks, Simon. The second question is also from the Shareholders Association. And the question is: The E-Co Products Group has been a business that has despite efforts and improvement, failed to deliver. Is it time to offload it or put it out of its misery?

Yes, I'm happy to answer that. I mean we were pleased with the performance that we've made in the first half of the year. And as we noted earlier, that up until February, it was tracking in a much more positive direction. But basically, given the lockdown that occurred, Vector basically had to stop trading. We couldn't obviously send people into homes to install devices. And as such, it's really important that we continue to focus on the growth of that business. Since we've come out of that lockdown, business has returned to better performance. We're seeing continued demand for the services. And when we look across the industry, the demand for services, such as heating and ventilating and also home energy products that we certainly see more demand occurring there. There's a number of government policy initiatives, which are also likely to be relevant to the future for the E-Co Group, and so we remain committed to ensuring that it performs to the best of its ability at this stage.

There are no further questions in the session.