Vivo Energy PLC

LSE:VVO

Earnings Call Transcript

[Operator]

Hello. And welcome to the Q1 Trading Update Call for Vivo Energy plc. [Operator Instructions] I would now like to turn the call over to your host for today's call, Giles Blackham, Head of Investor Relations. Please go ahead.

[Giles Blackham, Head of Investor Relations]

Thank you, Maureen. And good morning, everybody. And thank you for joining us for our call this morning, and thank you for your patience as we've worked through the technical issues to get everyone on the line. I think there's been a glut of calls this morning at 9 AM, which has led to a big backlog. So hopefully, everyone is now on the line, and apologies again for that. As you know, we put our results out this morning. We have also added some slides to our website to provide a little bit of extra context to the situation in our markets. But the plan for the call this morning is just to run through some short comments from Christian and Johan before opening up the lines for questions.And given the current circumstances, Christian, Johan and I are all in different locations, so please do bear with us over the course of the call, in case of any kind of logistical issues, and we will do our best to make it work as smoothly as possible. With that, I'm going to hand over now to Christian. Christian?

[Christian G. Chammas, CEO & Director]

Thank you, Giles. Good morning, everyone. I want to say and to start by saying how proud I am of what our teams are doing and how they have reacted to the new circumstances brought by coronavirus. Our first priority will always be our people, their families and our customers, and we have taken quick and decisive action across the business to protect these stakeholders. From the end of January, before the virus started to spread, we imposed the restriction on travel across our business, and at all times, we have been actively monitoring the situation and following the advice and direction of both the World Health Organization as well as government and public health authorities across our markets. We quickly activated a range of business continuity plans across our business and have provided the required PPE equipment to those that need it. As a decentralized organization with virtual central teams, we are all set up very well in this function to work remotely. And where possible, we have staff working from home or on shifts to minimize the risks to them. From the beginning, we started holding weekly executive meetings so that we can address issue and challenges in a timely manner and try to anticipate what might happen. We have also seen an immediate return on our investment into the ERP system and technology platform as we have been able to create daily reporting dashboards to have real-time reporting of the trends across the business, including from our automated sites. This wouldn't have been possible a year ago. Before we go into the details of our performance, it is worth providing some context. Governments in Africa acted at around same time as those in Europe to restrict movements even though the virus arrived in Africa considerably later. This has meant to date that there is less than 15,000 confirmed cases in our 23 operating countries. There is clearly less testing taking place than in Europe, but there has been just 376 deaths reported to date according to Johns Hopkins, across countries, with a combined population similar to the EU, which has had over 100,000 deaths. Looking at Vivo specifically, we have had just 6 confirmed cases amongst our 4,500 employees and dealers. This doesn't mean there hasn't been an impact on our countries. And given where we operate, we have had an even bigger responsibility to our communities. Each of our teams in our operating countries have played their part in supporting the response, whether it is by helping health workers, governments, local NGOs or individuals. We have committed 100% of this year's community budgets to provide support in our host countries. We have made significant donations to health organizations as well as initiatives having ranged from the provision of food, sanitizers, medical supplies as well as fuel for key workers. We've also provided support for e-learning in some countries where schools are closed. We have blended hand sanitizers for the Kenyan government. And amongst a range of initiatives in Morocco, we are funding the production of 400 ventilators in the country. As we continue to strive to become Africa's most respected energy company, we have made sure that we are doing the right thing and bring our help to the countries in which we live. Moving to our first quarter performance. We delivered $179 million of gross cash profit, which was 6% higher than last year. These figures don't tell the full story. But we saw gross cash profit grow by over 20% in the first 2 months of the year with strong volumes due to the benefit from additional months in the Engen countries compared to last year and improved retail volumes in share markets as well as strong margins. We saw very little impact from the coronavirus in the first 2 months, but it was only in the last 2 weeks of March that volumes fell as countries implemented measures to stop the virus from spreading. We also had lower margins in March due to the fall in demand and the valuations of stock held and not spent.It was a good start. But we have now adapted to the different operating environment with the imposition of restrictions on movement in our operating countries, meaning that fuel volumes, in appropriate, are running at about half of expected levels. The restrictions vary by country, but there are 3 broad groups. The smallest group of countries, including Tanzania, Zambia and Mozambique have imposed a range of social distancing measures with schools shut and mass gatherings banned. The second group of 10 countries, including Kenya, Senegal and Côte d'Ivoire, have social distancing in place, that have also imposed either overnight curfew or partial lockdowns, including restrictions on travel in and out of major cities. Both of these groups have seen volumes fall by around 1/3 with significant variability in each country. The final 9 countries, including Morocco, Tunisia, Uganda and Mauritius have had full lockdowns in place for all of April. In these countries, we have seen volumes fall by more than 50% on average. And because the group contains countries that are large-volume contributors to the group, this has brought the group average down. The lockdowns currently run until at least early May with Morocco running until 20th of May, but they may well be extended depending on the circumstances. We do not expect volumes to stay at this level, and it will depend on the restrictions remaining in place in the coming weeks and months. Ghana, for example, imposed restrictions on movements in its major cities through the first 3 weeks of April but relaxed those 10 days ago, and we have seen a pickup in volume since, but the overall situations continues to evolve. One important step we are taking is to support our forecourt dealers and transporters to help them while they feel the impact of the lower volumes. We want to ensure that the front line employees, park attendants and truck drivers are kept safe, supported and are still employed when we come out the other side of this. We've also worked with dealers to quickly adapt the size by adding handwashing stations, distance markets and limiting the number of people in shops at any one time as well as adapting the ranges we sell in our shops. We don't know what the future holds and what impact the virus will have, but we are an agile and innovate business and have already adapted to the new reality. We will be ready when the restrictions are relaxed. And when demand increases, we'll be there to supply it. I will now hand over to Johan to talk you through some of the financial elements. Thank you. Johan?

[Johan S. E. Depraetere, CFO & Director]

Thank you, Christian, and good morning, everyone. I want to start by reminding people that we run a very lean business. Maybe just, Christian, if you can put yourself on mute? Hello? Yes.

[Christian G. Chammas, CEO & Director]

Yes, sorry. Sorry, sorry. Sorry for that.

[Johan S. E. Depraetere, CFO & Director]

Okay. Thank you. We have only 2,700 employees for a business that sold over 10 billion liters of fuel last year. And our EBITDA margin, calculated against gross profit, which is effectively our revenue line was around 58% in 2019. We keep costs tight so that we benefit from the operating leverage as we grow volumes. Unfortunately, in times like this, this works against us as the majority of our costs below the gross cash profits line on the P&L are fixed. However, there are areas we've been able to manage expenditure. We have paused all spending on uncommitted marketing and CapEx. We are not committing to cuts in these areas, but we'll reduce spend through quarter 2, and it's clearly too early to quantify the impact on the full year. Where we have been able to take significant action has been on the supply of fuels. As fuel is not on demand in Africa, we normally run around 20 days of inventories to ensure supply for our customers. This varies by country, but supply chain can be anything up to 2 months long for countries like Uganda. When demand then drops dramatically, we cannot reduce inventory levels overnight and have to work with our suppliers to bring them back into balance. We've been successfully -- well, we've been successful in canceling or deferring around 75% of shipments for quarter 2 and expect inventory levels to normalize in May and June. The higher inventory levels have had a couple of side effects. One is on working capital, and the other one, as Christian mentioned, is the value of our stocks. We always say that we are agnostic to the oil price, and that remains true. Our underlying margin is unrelated to the oil price and is a fixed amount per liter in local currency in our 20 regulated markets. Just to remind you, it's not a percentage of the pump price. However, due to the simultaneous shock to both oil price and demand, there has been a bigger than normal impact on the revaluation of our stocks, which may create a short-term impact on reported margins at the end of the period. As you would expect, we're also monitoring our credit exposure carefully as this is managed on a daily basis. It's an area we've always placed great focus on because of the value of the products we sell, and we'll continue to do so. During the last 4 weeks, we have seen an increase in overdues, but we have not seen any impact on defaults. Moving on to our balance sheet. We continue to have access to significant liquidity and are well capitalized. We had available short-term resources amounting to a total of $1.6 billion at the end of March. Due to the operating locations and our decentralized model, each of the countries are normally self-funding and have their own local facilities designed to support their working capital needs. At the end of March, these local undrawn facilities amounted to $1 billion in aggregate, with around 30% of our total facilities utilized. We've seen an increase in utilization during April, but due to the reduced orders we are placing for supply, we would expect this to improve in May, and we remain comfortable with the headroom we have in all our countries. In terms of commitments for long-term debt of $369 million, which matures at the end of 2022, and which all sits at the HoldCo, we have principal repayments of $82 million due this year. These will be covered from cash on hand already at the HoldCo, and we have over $235 million of capacity in our corporate revolving credit facility to provide additional flexibility for the group if required in due course. Also know the market is focused on covenants. Ours are tested twice a year on a trailing 12-month basis, and we see no issues for us -- current trading levels for the midyear test. Finally, given the current impact on fuel volumes and uncertainty as to how long this will continue, we have taken a decision to no longer recommend the payment of the final year dividend. We do recognize the importance of dividends to shareholders and will consider paying additional dividends when there is more clarity around the outlook. I will now hand it back to Christian who will provide a quick summary before we move to Q&A. Thank you.

[Christian G. Chammas, CEO & Director]

Thank you, Johan. In conclusion, as you all well know by now, Vivo is a fast and agile business, and we have taken rapid action to adapt our business to the current reality. We have operated through difficult times before in Africa. It is a resilient continent that will bounce back with fuel being an essential part of that recovery. Today, we are doing what we need to protect our people, our business and our longer-term strategy remains unchanged. We believe in the potential from our new Engen countries. We believe the expansion of our nonfuel offerings at our site would bear fruit. We believe that we have a premium brand on the continent that will enable us to drive growth over time. And finally, we believe that our investment in technology will set us apart from competition. We have been careful to maintain a strong balance sheet and access to liquidity over time, which will enable us to manage through this crisis, and we will be ready when our markets reopen. Thank you very much. I will hand over now to Giles for the Q&A.

[Giles Blackham, Head of Investor Relations]

Thanks, Christian. Thanks, Johan. Operator, please do we see if there are any questions on the line?

[Operator]

[Operator Instructions] We will now take our first question. Please, go ahead Alexander Mees from JPMorgan.

[Alexander Mees, Head of UK Small and Mid Cap Research]

3 questions, please. Just firstly, on your retail sites, are they all open at the moment? Or if they are closed, can you say who makes the decision to close? Is it the country manager or the site manager themselves? Secondly, I believe 20 of your 23 markets are all imported. So I wonder if you think the low price of crude now will actually lead to additional demand for fuel into the future? And thirdly, obviously, a very good start to the year in January and February. Can you just confirm that Shell-branded volumes have performed strongly as well as Engen, please?

[Christian G. Chammas, CEO & Director]

Okay. Your first question on our sites being open, yes, our sites are open. Obviously, there's a curfew that they're impacted. But when the government or the local authorities do not put any constraints, they are open to sell fuel. The shops have restrictions. I'm talking here of food or otherwise, because of people moving within the shops. But they are open as well. The decision is for all the CoCos and the CoDos is ours. In the case of the DoDos they also have to comply with the opening hours because that is part of the contract. The second point was about supply, no, if I'm not mistaken? Johan?

[Johan S. E. Depraetere, CFO & Director]

Yes, the demand. So I think the lower oil price has an impact on demand.

[Christian G. Chammas, CEO & Director]

Yes, I mean, don't forget that the prices are regulated in 20 out of 23 countries. So depending on when the government decides to drop the price in order to adjust it to the new procurement cost of, vis-a-vis, the barrel, there could be an impact. And of course, you see it all over the world, there could be an impact. For the time being, a few governments have dropped the prices, but not all of them. There are no subsidies in the majority of the countries, bar one, if I'm not mistaken. So the prices are the reality bar tax on the other. So we should see a return to demand. But the continent is so reliant on energy for movement, for transport for energy production that -- and consumption that, that is the driver. And if it's cheaper, well, it'll probably drive it even better. And finally, Johan, I think it was for you?

[Johan S. E. Depraetere, CFO & Director]

What actually was -- so yes, Alex, the simple answer is yes. We've seen a recovery in the Shell, especially Shell-retail volumes to previous levels. So that's why we were very excited about the first 2 months.

[Operator]

Ladies and gentlemen, we will now take our next question from James Hubbard.

[James Richard Hubbard, Analyst]

Just 2 questions. I think, Johan, it would be useful if you could just take us through at a high level to the P&L impact and the cash flow impact from inventories having been bought at a -- maybe at a higher oil price and then essentially being sold at a lower one. I get a lot of questions on that and it would be quite useful to get it from the horse's mouth. And then secondly, Christian, you mentioned that Ghana came out of restrictions 10 days ago. Maybe too early to say, but I'm just wondering what scale of demand recovery have you seen over the ensuing 10 days, in Ghana, that is?

[Christian G. Chammas, CEO & Director]

Okay. Johan?

[Johan S. E. Depraetere, CFO & Director]

Yes. So actually, the last comment Christian made is probably the best place to start. As he said, some governments actually, based on oil price, have reduced the pump price. So basically -- and have changed the pricing formula where the input costs of product will have come down. Now normally, in our case, it's not an issue. Having said that, with the drop in demand, we actually have, call it, some extra inventory that is sitting there, and that is part of the previous pricing formula. So that's where we would see a hit on margins. Now it's very difficult to quantify, given that it's a really kind of a moving target and we look to do our NRV, net realizable value, at one at closing to see what that could be. But it's -- let's say, it is expected that once these inventories are sold down that, that impact will then be removed. And especially now with oil price coming up, again, we don't -- in other words, we don't expect it to be material is really where we see it. So that's just kind of the high-level answer to that question. And it also impacts clearly the regulated markets where you have competitive pressures. And depending on what competition does, you might have to follow faster than you would normally do.

[Christian G. Chammas, CEO & Director]

On Ghana, they went out of lockdown on the 20th, which was early this week, this week or last week, I can't remember. Anyway, 10 days ago. Yes, we have seen a ramp-up of volume, but it is not a motory speed. It is a gradual ramp up. I guess, at the end of this week and beginning of next week, we'll have a better idea. But yes, it is going back to business. We don't expect everywhere to ramp up at 100 miles an hour, okay? It is going to be a gradual process, and we are using Ghana as a test case. And then we'll adapt the measures that we will put in place, the offering, be it through shops, through layouts and whatever to make sure that we capture as much as we can. But we are ready to go for it in any case.

[Operator]

We will now take our next question. Martin Boeris.

[Martin Boeris, Analyst of French Mid Caps]

Yes. I have 2 questions, please. First, group unit margins was down quarter-on-quarter. Could you detail the impact of lower volumes on your unit margins, notably regarding the absorption of fixed costs like storage? Second question, what payment conditions do you have with your suppliers? Is there a risk we could see a significant working cap outflow because of a reduction in your payables this year?

[Christian G. Chammas, CEO & Director]

Johan?

[Johan S. E. Depraetere, CFO & Director]

So I think, maybe starting with the second question, your second question, the answer is no. I mean I think, yes, we've seen a pickup recently in our working capital just because of the misalignment of stocks with supply and demand. So -- but as I said, we've been able to quickly adjust that and just 75% of supplies for quarter 2. So that should normalize the working capital going forward. So there's no issue there. And I think the actual -- the margin that you see quarter-on-quarter, the main impact actually has been the stock effects that we talked about, rather than the fixed cost element because volume, yes, was down, but not as much as the impact of the stocks. And that's going back to James' question, you can see that a bit of impact there already in our margin. And then so in other words, the impact, yes, is not material from the fixed cost for first quarter.

[Martin Boeris, Analyst of French Mid Caps]

Okay. And in terms -- just in terms of payables, so the suppliers are quite accommodant, I would say, you are able to pay it?

[Johan S. E. Depraetere, CFO & Director]

Right. Yes. We've not seen any change there.

[Operator]

[Operator Instructions] We will now take our next question from Nick Stefanou, Renaissance Capital.

[Nikolas Stefanou, Research Analyst]

I've got 3 questions to ask, please. I'm also under pressure, I note it's a hard question. But would you maybe give me like an idea what kind of like working capital movement you're going see this year? Is it going to be like $100 million like a buildup or something like $300 million? Just -- I know it's very difficult to predict, but what is it that you're thinking? There are several moving parts and you've got Kenya, you've got payables, the inventory movements. So I just -- just want to get like a rough idea for what you guys are thinking. Then my second question is more -- it's about volumes post this crisis. I presume that a lot of the dealers, some of the dealers, in some sites might go out of business, and what happens then? Is it like the contract is -- of the dealers with you, so what will happen to that site later on? Is it the case of you're going to maybe like have no volume for about a year until some are in the states or other sites? How should I be thinking about it and potential impact on volume? And then finally, on your strategy and liquidity, you're taking the prudent decision to remove the dividend. Obviously, you've got a very strong balance sheet, lots of liquidity, low leverage. How should I be thinking about potential opportunities that might arise towards the end of the year when we might have more clarity? Maybe in terms of like M&A or how you might prioritize it?

[Christian G. Chammas, CEO & Director]

Okay. Johan, you take the first and the last one, and I'll take the one on the dealers and volumes.

[Johan S. E. Depraetere, CFO & Director]

Yes, yes. Thanks, Nick. So I think just to remind everybody, we still have -- our model is based on structural negative working capital. So we don't see any change in that. And yes, we have a disruption right now, but that's a very temporary disruption in our view. Secondly, the lower oil price actually will help us. So the values we have in stocks will kind of reduce our stocks but also reduce our payables and inventories, but you will see that impact as well in terms of dollars values. And then as you said, we are structure negative, but we have these timing effects, and you could see them very clearly last year when in the first half and especially coming from Kenya, we had quite a buildup in working capital. And at the end of the year, we actually had a massive reduction in our working capital. So we, again, especially some of these bigger countries, will continue to show these movements. So we basically don't see any structural changes. And as you said, it's almost impossible because if we win tenders in Kenya going forward, that will help us, and we always have that in our plan as well. So that's the one on the working capital. Christian, you want to answer the one on the dealers?

[Christian G. Chammas, CEO & Director]

Yes. For -- as a reminder to all of you, 65% of our sites are either company-owned or company-owned dealer operated. So in the case of company-owned company operated, there's no issues there, we operate it ourselves. In the second case, where it's a company-owned site and dealer-operated, if there's any issue, and if it falls from the part of the dealer, we take over the site overnight. And the following morning, we have somebody in place, and we put in place necessary working capital to restart the operations. But in any case, we monitor all these sites on a daily basis. So we know exactly what is going on. We know the cash, we know the stocks, and therefore, it doesn't come as a surprise. We organize ourselves. So there is no discontinuity in, I would call, sales from us to the site or from the site to our clients. So these are the, what I would call, the 65%. The remaining ones, which are 35%, which are dealer-owned, dealer-operated, if there is a liquidity issue or a default issue or an uncomfortable situation, we will propose to take over, right? On a temporary basis. And that, again, could happen very fast. So we're quite confident that in this circumstance, it is more opportunistic than otherwise, right? Because we will -- we have the capacity to take over. We can see from our liquidity across different OUs. We will not hesitate to use that as an opportunity.

[Nikolas Stefanou, Research Analyst]

Sorry, just to clarify on that, then it would be a case where your CoCo and CoDo mix might increase as a sort of like a result of potential like-for-like basis?

[Christian G. Chammas, CEO & Director]

Yes. On a temporary basis, yes, on a temporary basis, on a temporary basis because you are -- in the case of the DoDo, you're a caretaker until such a time when we either take it over fully and it becomes a CoDo or the partner finds somebody else to bring finance or he finds finance with his banks and recovers. So it's a temporary measure when it comes to the DoDos. But yes, it could be, as I said, an opportunity for us to take over sites.

[Nikolas Stefanou, Research Analyst]

Okay. And the last question on strategy and other opportunities will be mostly related to this or maybe other M&A?

[Christian G. Chammas, CEO & Director]

No, no. This is -- yes, this is the retail side. Of course, we remain open to business when it comes to opportunities being in the existing countries and outside of the country. So -- and we are still on quite a few opportunities, and I'm not talking of big merger acquisition, I'm talking of local opportunities. And when the situation normalizes and we can see and have a bit more clarity, yes, we will go after these opportunities. And in my opinion, it is the right environment for us to go after opportunities because we have liquidity. There are -- there is some fragility with some operators. And of course, we will be ready to go after these opportunities.Johan?

[Johan S. E. Depraetere, CFO & Director]

No. No, I think just to add that right now, clearly, it's -- we're exploring, we're looking, but we're -- given the uncertainty, cash is king. And yes, once we're not doing anything. We're not spending, just to be very clear. We -- and that's also helps the dividend decision, but we are clearly strong, and hopefully, we'll have this soon behind us. Nobody knows.

[Operator]

Ladies and gentlemen, we will now take our next question from Simon Irwin, Crédit Suisse.

[Simon William George Irwin, Director]

Most of my questions have been answered. Just one quick one, which relates to this year's openings. Typically, how far out is the gap between you kind of committing to a new opening and actually achieving it? Will you be looking to push these out? Or is it more down to kind of presumably being a little bit more cautious about taking on new sites for opening later in the year?

[Christian G. Chammas, CEO & Director]

Before we went into the lockdown situation there for January, February and probably March, there was quite a few projects in progress. So we have not stopped this. Everything that was launched is in progress albeit at a smaller pace, because activity is not the same everywhere. We have quite a few projects in hand at licensing phase or preconstruction phase. And we will revert back to business when -- as we have been saying since this morning, when more clarity appears. It is obvious that if business starts ramping up in the next 5, 6 weeks, we will not miss on opportunities, be it grassroot, or by acquisition or by whatever other mode. As long as the return is there and the cash is there, we will go for it. And that is what I want to say. We will be able to hit the promise of, I don't know, how many sites -- how many sites have we promised? Although we have -- the guidance had been removed, it was about 80 to 100 sites, if I'm not mistaken. Of course, we will strive to do it. We would have lost maybe 2 months of work, but we will accelerate the moment we can.

[Operator]

Ladies and gentlemen, that will conclude today's Q&A session. I would now like to hand back to the speaker for any additional or closing remarks.

[Giles Blackham, Head of Investor Relations]

Thank you very much, everybody. Thank you, Christian, Johan and everyone for dialing in and the questions. Good luck, and we look forward to speaking to you all soon. Thank you.

[Christian G. Chammas, CEO & Director]

Thank you very much. Bye-bye.

[Johan S. E. Depraetere, CFO & Director]

Thank you. Bye-bye.

[Operator]

Ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may now disconnect.