Vector Limited (VETTF) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to Vector Limited's Conference Call and Webcast to discuss the company's financial and operational results for the full year ended 30 June, 2025. [Operator Instructions] I must advise you this conference call is being recorded today. I would now like to hand you over to Vector's Chair, Doug McKay, who will take you through the call. Please go ahead, Doug.

Tena koutou katoa. Good morning, everyone. I'm Doug McKay, Vector's Chair. Today, we'll be going through Vector's financial and operational results for the full year ending 30 June, 2025. Joining me on the call is Group Chief Executive, Simon Mackenzie; and Chief Financial Officer, Jason Hollingworth. Here is the agenda for today's presentation. Simon will start with some highlights from our year and an overview of our key numbers. Jason will then present a more detailed look at our financial performance and our segment performance. Then Simon will give a short update on our outlook and market commentary. After that, I'll talk about the dividend. That will be the end of the presentation, and then we'll be available to take your questions. I will now hand over to Simon to start the presentation.

Thanks, Doug, and hi, everyone. I'm pleased to share some highlights of our year. I'll begin with some of the wider context and how we've responded to it. A lot has happened in the energy sector over the past year. And through it, we've stayed true to our Symphony strategy, which puts the customer at the center of our decision-making as we strive to deliver safe, reliable and affordable energy. On 1 April this year, we entered into the start of the next 5-yearly regulatory cycle for electricity networks, known as default price path 4 or DPP4. Under DPP4, we've seen the Commerce Commission increase revenue for transmission and distribution charges, largely as a consequence of higher interest rates and inflation experienced within the prior DPP3 period. We're well placed to continue our investment approach in the DPP4 period, which is to avoid committing to high levels of capital investment in areas where there is significant uncertainty or to cover short demand peaks where there are other less capital-intensive ways to use available capacity and build network resilience. We're very conscious that the cost-of-living pressures for consumers remain high and off the back of a challenging winter last year for the wider energy sector, we've seen a number of reviews into its performance. We await with great interest the release of the Frontier report, which the government has commissioned to help with its review into the electricity market. Vector has taken an active interest in the process and will continue to provide input into important issues such as security of supply and an efficient market for customers. The DPP4 regulatory cycle for electricity distribution networks, which I spoke about earlier, has seen electricity network assets being repriced by the commission to reflect higher interest rates and the COVID-19 inflation impacts. This has resulted in price increases, which we recognize is hard on all consumers. However, in real terms, our electricity charges remain very similar to what they were more than 10 years ago. I'd also note that these price increases are smoothed over the 5-year period from '25 to 2030. Another important issue for us is the reform to electricity distribution connections as announced in July by the Electricity Authority. The key issue we were concerned about was the funding of connections and the potential of having to move away from our policy of the people causing the growth, paying 100% of the growth costs, with the growth costs subsequently being shared across Auckland consumers. The EA is continuing to engage on this, but at this stage, we don't need the Commerce Commission to reopen the DPP pathway to enable additional capital funding. There were a number of technical changes announced, which will add complexity, what is already a highly complex process, especially noting that we deliver around 15,000 new connections each year more than any other EDB. We'll need to make changes to our internal processes and we'll do so within the time frames that have been given with the customer mindset. The EA has also expressed that it's expecting some of these changes to be done in a nationally aligned way. We're already participating in those processes through our member association of the E&A, Electricity Networks Association, and we continue to engaging with the Electricity Authority as well. Looking to gas, there is unprecedented uncertainty around the future of natural gas in New Zealand. This is driven in the near term by significant market uncertainty, scarcity of gas and rising costs and in the long term by lack of clarity over how gas distribution networks will be impacted by New Zealand's 2050 net zero emissions targets. The current regulatory settings were designed in a more stable environment where demand for gas was growing, and we are urging the Commerce Commission to update them to recognize this uncertainty and ensure any shift away from gas protects the interest of consumers and other stakeholders. A new draft gas defined price path is expected to be announced by the commission later this year, and we're participating fully in the process so the commission understands our perspective, both for investors and customers. Key issues for us are that the commission recognizing the context the reset is occurring in, and this leads them to implementing steps to mitigate volume risk and stranded asset risk whilst also holding true to the financial capital maintenance principle that the regulation is founded on. I'll touch on a couple of important events that have happened in the year for Vector. An example of our strategy to embrace strategic partnerships to help us innovate faster is the launch of GridAware. GridAware is a new AI tool that is reinventing the way we inspect and maintain the electricity network. This tool was developed as part of our partnership with X, Google's innovation lab and Tapestry. It's energy moonshot, and it's the first tool to be deployed on our network from this collaboration. GridAware helps us improve our network inspection processes by using aerial imaging and data captured by drones and helicopters to give us highly detailed views of the condition of our overhead assets. This helps us prioritize maintenance investment, but GridAware can also go further because as we've used -- we're training AI to help us complete condition assessments automatically. The commission has recognized the customer benefit of this project, awarding us an innovation project allowance in the final year of the prior DPP3. Another event this year was Cyclone Tam in April, which was quickly followed by damaging thunder and lightning. This saw all our teams dealing with 2 events, not 1, which impacted many customers. We responded with a huge amount of work from our field service providers and our own staff to get the network restored as quickly and safely as we could. We always look to learn and then improve customer outcomes in these events. And shortly after Cyclone Tam, we began trialing a new digital tool that combines various data sets to help us analyze and identify storm impacts at a higher granular level, giving us valuable insights into what is often a highly dynamic environment. Our business portfolio has continued to evolve. The completion of the sales of the Natural Gas Trading, Vector Ongas and our shareholding in Liquigas are examples of successful transactions that align with the risk and future operating environment of each business. The completed transactions enable us to concentrate on the core strengths and demands of our regulated electricity and gas networks and explore growth opportunities such as through Vector Technology Solutions or our investment in metering business, Bluecurrent. On 1 August, after balance date for these results, Vector announced to the NZX, the sale of HRV. Our commitment to Auckland's growth and electrification remains strong, and the region continues to grow despite the broader economic slowdown. We're working closely with customers to ensure we understand, prepare and ultimately, enable their evolving needs. In 2020, we set a target to reduce Scope 1 and 2 emissions, excluding electrical line losses by 53.7% by 2030. This year, we recorded a reduction of 55%, which is calculated against the businesses we now have, meaning it reflects our actual emissions reductions, not from those businesses we've sold. This result was driven by innovation in technology and processes, with successful initiatives now embedded into our operations. We'll continue to focus on emissions targets, and we recognize there could be some volatility in maintaining and improving our overall emissions. Now, I'll move to financial results. Our financial performance for the year has been solid. For continuing operations, revenue is up 9% and adjusted EBITDA has increased by 16%. I'd just like to note that with regards to revenue, we report financial accounts of $1.104 billion, but our continuing operations after capital adjustments, our revenue is $894 million. This is the result of a higher revenue with regards to EBITDA, particularly in the last quarter where the DPP4 has come into effect. We've also maintained prudent financial management across the group. Net group -- sorry, group net profit after tax for continuing operations was $154.7 million, which includes a $37 million impairment of the gas distribution business. Underlying profit, excluding the impairment, was $191.7 million. The impairment recognizes our latest forecast for gas network connections, where we see a decline in net connections from financial year '26, as a result of significant market uncertainty, scarcity of gas and rising costs, as mentioned earlier. Following the impairment, the carrying value of the gas distribution business is consistent with the value of the regulated asset base. Gross capital expenditure is down 6%, reflecting a number of factors, including the timing of large projects. Growth-related capital investment was marginally up, reflecting Auckland's continued growth, although the pace has softened due to the broader economic environment. Operating cash flow was up 16%. Jason will now talk you through these details further.

Thanks, Simon. This slide shows the segment contributions to the top line adjusted EBITDA result. We're now reporting under a new segment structure, which we announced at our half year. This follows the sale of the businesses within our previous Gas Trading segment. The new structure is electricity, gas distribution and other. Other is a non-reportable segment and includes Vector Technology Solutions, HRV, Vector Fiber, Equalise and our group eliminations. Our corporate costs are now allocated out to the revenue-generating business units, in line with the regulatory allocation methodology. Next slide. Next, we have our group net profit after-tax result. You can see the year-on-year increase is driven primarily by the increase in adjusted EBITDA. Net interest costs reduced $20 million due to the lower interest income -- due to lower interest income as FY '24 included the interest we had received on the cash balance we held post the sale of metering. This year, as Simon mentioned, we recognized a $37 million impairment of the gas distribution business. But noting in the prior year, we had a $60 million impairment for the same business. Gross capital expenditure and net capital expenditure, where we net off capital contributions received from customers were both down on the prior year. Capital contributions were up, largely attributable to big relocation projects such as safety improvements to State Highway 16 and system growth contributions driven by higher incremental capacity. Year-on-year, electricity replacement CapEx has decreased by $33 million, primarily driven by the timing of large projects. Let's look at our group debt. Vector's net debt is relatively flat year-on-year at $2.15 billion, and our credit rating is BBB+ with a stable outlook. I'll now move on to the segment performance. Let me start with electricity. Revenue was higher due to pricing adjustments, including the new DPP period, which began on 1 April, 2025. There were higher pass-through costs such as transmission costs and also higher rates and levies, partly offset by prior period wash-up adjustments. The higher OpEx is mostly due to the higher pass-through costs, which are recovered through revenue. Underlying OpEx, which excludes pass-throughs, was flat. Total net connections continue to grow, but at a slower rate than the prior year, again, reflecting a broader economic slowdown. Gas distribution. Gas revenue was higher due to price increases and the prior period wash-ups, partially offset by lower volume. Volumes are up 8.5% lower compared to FY '24 due to lower demand from residential, industrial and commercial sectors. OpEx costs are consistent with the prior year. Total connections increased 0.2%, but the rate of connection growth was down on the prior year. Simon has already spoken about the wider context around gas, and this has led us to taking prudent steps to optimize our asset management strategies to maintain network safety and reliability while reducing asset stranding risk. One of the ways we're doing this is by reducing asset replacements and increasing maintenance, which sees a reduction in CapEx and a corresponding increase in OpEx. Bluecurrent. Our investment in the Bluecurrent metering business continues to perform in line with expectations. We've received $51.8 million of distributions from Bluecurrent in FY '25. I'll now hand back to Simon.

Thanks, Jason. As with the half year, we will be providing guidance on adjusted EBITDA, gross CapEx and capital contributions. For financial year '26, the range is shown on the slide. But in terms of adjusted EBITDA, the range is $470 million to $490 million, gross CapEx of $520 million to $590 million and capital contributions of $180 million to $230 million. For adjusted EBITDA, the forecast increase on financial year '25 is driven primarily because financial year '26 is the first full year of the new electricity price path, DPP4. The forecast increase in capital expenditure is linked to expected customer-driven growth and our continued investment in the network. Just before I hand back to Doug, as this is my last call, I'd like to especially thank all our staff, field service providers, advisers, call center staff and a host of other people for all their hard work, not only through this year, but also through the ups and downs of the 17 years I've been CEO. So, I really appreciate that. And I'd like to now hand back to Doug.

Thank you, Simon. I'll remind you that at our half year results announcement, we published an updated dividend policy, which is available on our website. The Board has determined an unimputed final dividend of $0.13 per share, taking the full-year dividend to $0.25 per share. This represents an 85% payout of free cash flow in the midpoint of the 70% to 100% range as stated in our policy. Shareholders should not interpret this year's payout as being an indication that future dividends will be in the midpoint of the range. The dividend will be paid to shareholders who are on the register at 5th of September with payment made on 17 September. That brings us to the end of our presentation. But before we get to questions, this is Simon's last results call for Vector. On behalf of the Board, I'd like to acknowledge Simon's departure from Vector at the end of calendar 2025 and thank him for his extraordinary service. He's an outstanding Chief Executive and highly respected Vector and industry leader. The Board wishes him well for his future and is grateful for his ongoing support while the recruitment process continues for a new CEO. Simon, Jason and I are now happy to take any questions.

[Operator Instructions] Your first question comes from Andrew Harvey-Green with Forsyth Barr.

Yes, I'd just like to acknowledge your stint as CEO as well, Simon. I think it's really impressive. And I think it must be pretty much the longest-serving Chief Executive in the NZX 50 at the moment, and all the best for the future. First question I had was just around the dividend and the sort of the comments around, we shouldn't expect 85% payout ratio to sort of be sort of a guide going forward. I just want to clarify, are you sort of talking about -- we should be thinking about the dividend going forward as a more progressive policy? Or put another way, what would be driving Vector to go towards the top or the bottom of the range? Is it really around sort of CapEx expectations and maybe where the EA lands on capital contributions going forward?

You've hit on the right issues there, exactly. Plus I'd add another one, which is every 5 years, we get a DPP reset and we have no visibility of that going forward into future periods. So, there will be a number of moving parts. CapEx, regulation around EA on connection charges, for example, is a very material change should that change. It's not going to until they review again possibly in 2030, I think they said and the ongoing cycle of the DPP process every 5 years. So yes, we just wanted to make sure that our policy says a range of between 70% and 100% of cash flow. And it just so happened that where we landed this year was right in the middle of that, and we're just making sure people don't start to assume that would be our target going forward.

Great. Next question is just around the HRV and the EBITDA contribution this year. And I guess, thinking about going forward, I guess it's currently in our numbers, but my understanding is it has been a little bit of a drag on earnings. Are you able to give us an indication of what it was this financial year?

I can't, Andrew, but it has been a drag and it has been negative. It's sort of under $10 million, but it's been negative, just to put it in ballpark.

Yes. And you provided the metering cash contribution at the half year in terms of guidance. Are you able to give us any indication around FY '26? We're looking at kind of similar numbers to FY '25, maybe a touch bigger?

I think it will increase slightly, Andrew, as it has this year. So, I expect that trajectory to continue to lift as they continue to deploy meters in Australia.

Okay. And last question is just around -- you announced that strategic review of the fiber business back in May. Are you able to give us, I guess, a bit more color on that and sort of time frames around when you expect that review to be complete?

Yes, Andrew. Yes. Absolutely, we're still working through that. One of the big considerations for us is that the fiber network was firstly built primarily for connectivity to all our electricity asset substations, monitoring for very sophisticated kind of digital platforms to coordinate the network. So as part of that overall review, that's something that we're working through, but we are still conducting that and we expect to be moving to the next stage of the process probably within a month or so. We don't expect there to be any announcement before the end of the year. But definitely, we're still on track to go through that review. As we said, it's not any definitive decision. And obviously, when we get into a position to know where that sits, we'll advise the market. But yes, as it stands, we're not doing anything other than continuing with the process.

[Operator Instructions] Your next question comes from Stephen Hudson with Macquarie Securities.

Just to add my voice to Andrew's as well. Congratulations on the 17 years, Simon. Thanks for all your insights and help, and good luck with the next stage of the adventure. A few questions. Just on the metering business, Bluecurrent. The $52 million distribution this year, is that a reasonable base for FY '26, Jason? Is there anything unusual going on in that level of distribution? Or is that repeatable?

Yes, I think it's repeatable. As I mentioned to Andrew as well, that if they continue to deploy meters, that should start to lift again as it has in '25.

Got you. And just imputation -- sorry, sort of reasonably boring questions, but just remind us when you're expecting to be able to, I suppose, fully impute the dividend would be a useful flag?

Yes. Look, I think FY '28, potentially, there's a few moving parts here. We had these tax rules change recently, but that's based on what we currently understand, we expect around FY '28.

Excellent. And the electricity EBITDA step-up, I think it was $57 million. Can you give us a broad split of the annualized DPP4 benefit versus CPI wash-ups from prior years?

Not off the top of my head, Andrew. There's obviously a quarter only of the DPP in there. So yes, happy to look at that and perhaps chat to you about that. But we've got -- only got 1/4 of that DPP benefit in this year's result. And from memory, we did disclose the whole year benefit.

Sorry, what was that?

We did disclose the whole year impact of the DPP reset back when it was announced. So, we've got 1/4 of that in this year's result. I can't recall the exact number we disclosed.

Okay. I can follow up with you. And then, Doug, just maybe one for you. Just can you give us an update on the CEO sort of process as well?

Yes, we're getting very close, and I would expect an outcome in the next few weeks, not able to say anything further at this point, but a process very thorough, internal, external, and we're getting very close now. So, I'm very optimistic that we will announce a new incumbent, and there will be the opportunity for a small amount of overlap with Simon, which I think will be valuable.

There are no further questions at this time. I'll now hand back to Mr. McKay for closing remarks.

Okay. No further questions. We'll end the teleconference and webcast. If analysts and investors have further questions, please feel free to contact Jason. On the media -- for the media, please contact Matt Britton or call our usual media phone number. Thank you, everyone, for your interest and for joining us.