Vivo Energy plc

Good morning, everybody, and welcome to the first half 2023 update call for Vivo Energy. Appreciate the time you're taking to be with us here this morning. My colleague Isam and I will take you through a presentation that we've put together to share an update on both the operating and financial performance for Vivo in the first half of this year. And then, as the operator said, if you would like to ask any questions, I think there is some mechanics you need to do to dial into the conference line so uh hopefully we can we can sort that out um i think maybe just just at the outset uh the first comment i want to make is this is our first official uh results update call as a private company uh we we missed it uh for the full year results earlier this year. But just to be clear to everyone, it is our intention to continue to do these update calls on a half yearly basis going forward. So thanks again for taking the time today. So if we go to the first page of the presentation, I think there's five key points that we want to sort of touch on at the outset and we'll go on into more detail through the course of the presentation. I think the first half of the year has definitely been a challenging macroeconomic environment, not only for Africa, but for, you know, For all parts of the world, concerns around rising inflation, cost of living, the continued effect of higher commodity prices, and what that does to balance of payments has been something that has been weighing on our business just like many others. Nonetheless, I think we've been pleased with the resilience that our company has demonstrated through these months. And while our financial results aren't as robust as we would like them to be for the first half of the year, we're pleased with how we've performed from a volume perspective and how our run rate looks like as we've exited this first half and we look towards the balance of the year. we'll take you through some more of that resiliency in due course, but it's clearly been one of the key facets of Vivo Energy over a number of years and it continues to do so. As I just said, performance has started to normalize, particularly in the later part of the second quarter. And as we look forward, both from a margin perspective and from a volume perspective, things are returning to what we would call more normal levels. Just to hit on it right at the front, clearly the NGEN transaction will be a game changer for Vivo Energy. And so we will share an update on that in more detail. But I think the key message for now is that the transaction is progressing well and the target to close the transaction remains the fourth quarter of this year. In the meantime, and despite of the economic conditions that I was describing, Vivo Energy, and with the support of its shareholder, VTOL, continues to build for the future. We want to invest through the cycle. And we have been investing not only in the core retail fuels business, but also in some of our exciting other businesses such as LPG and renewable energy. And I think lastly, and again, we can touch on this in more detail, we do have clear, tangible priorities that we have identified for the second half of the year and are applying the customary rigor you would expect to really drive that performance. And hopefully we come out of this year ahead of the competition and on the front foot in a strong place. So if we go to the next page. One more. Yeah. So I think just to remind everybody, we published an update of our strategy in our full year end report last year. And we have grouped how we think about the business into three buckets. The first bucket, which is the largest bucket, is our retail fuels business. And the focus area here is really to identify how to maximize value from this business. This represents about 50 to 55% of our EBITDA and is a core part of our infrastructure and our portfolio. We continue to see growth in this business and it is our ambition to open around 125 or so net new sites every year for the coming period. In the first half of this year, we've continued pace with that, opening 61 net new sites in the first half. Our trajectory is to hit our target of around 125 every year. So that's an important area for us. I think the second bucket is what we describe as accelerating growth. And this is for our non-fuel retail offering. anchored off our retail sites, which when you compare our business and the maturity of the non-fuel business in a market like Africa, relative to what you would expect to see in other parts, North America or Europe, there is a lot of space here to grow. We've continued to invest in this space. We've continued to develop it. We believe that with the inclusion of Enjin in South Africa, that will be a step change for us in non-fuel, just given the maturity and sophistication of the South African market. And we have also started to hire some great new talents to help us lead this business, which we're quite excited about. I think the other thing I'd just flag on commercial fuels and lubricants is I think as the new owners or the the re-owners of the company, both VTOL and the leadership at Vivo have identified that, you know, our market share in commercial fuels doesn't always keep pace with our market share in retail. And that's a growth area that we've identified where given the scope and scale of our infrastructure, the strengths of our brand and our capability, we do believe that we have a structural place to increase that market share in these sectors up to be more aligned with where we are in retail, particularly in certain of our core countries and in certain countries where there are large infrastructure projects in mining and other forms of development where we think we are the right sort of partner and the right sort of supplier for those entities. There's been a lot of focus on that in this space. LPG is an exciting space for us, I think, from two lenses. Firstly, from an evolving lens and from a sustainability lens, we really see the need for LPG in Africa and the transition away from dirtier forms of fuel, such as charcoal and wood that people use to cook at home. We see that consumption per capita of LPG growing significantly over the coming years and decades in Africa, and we want to participate in that growth. To enable that, we have redoubled our focus on investing in infrastructure for LPG, both in terms of additional cylinders to put into the market to match that growth in demand, as well as critically infrastructure projects to enable a more efficient supply chain to supply that market. I think the third bucket that I do want to flag on, and we'll talk about it briefly today, but I would expect to describe this in more detail in subsequent updates to everybody, is what we say, how we're trying to evolve our business model. So on the supply side, we see solar as an exciting opportunity for Vivo Energy. And then the last one is new mobility and electric mobility. So on solar, our view is that there continues to be an excess of demand relative to supply for reliable, low-cost power. This is a challenge across the continent, and we believe that we are the right sort of platform to supply that energy to our customers. The ideal is to have a hybrid offer where we can supply customers with the full suite of our products, so fuel for their trucks and generators, lubricants for their equipment, and then ideally, develop a solar farm and a battery to help them manage the intermittency of the solar and the trade-off between when the sun is shining and the solar is available and when you need to run the generators for electricity. We have a couple of projects that are now, one in particular that's in operation and one or two more that are getting very close to being finalized. And we see this as key proof points for further customers and quite a lot of interest in this space. We made a commitment with our executive team to develop out this pipeline and we see a lot of growth here in the coming five years. I think the last one, and we'll touch on it briefly as we get into the presentation, is mobility. These are in the early days, but we do believe that just like in telecoms to a certain extent in Africa, parts of electric mobility will leapfrog the market and develop anchored off the capability that VTOL, our shareholder, has developed in Europe and in Latin America. We have an exciting new project in Rwanda for the introduction of electric buses into the city of Kigali. And we are piloting programs for two-wheel and three-wheel solutions in certain markets that we'll go on to in more space. So if I just quickly go to the next page. Further details of our CapEx can be found in our first half report. But I think the message that we want to sort of relay here is that we continue to invest for the long term. We believe in the growth of Africa. We believe in the power of the platform. And I think we're pleased with our performance in the first half of the year of continuing that growth investment and seeing the opportunities that present themselves to continue to find opportunities interesting projects that meet our return thresholds if I take you to the next page as I said you know the number one part of our strategy remains anchored around our core business, fuel retailing. The ambition is to maximize the value from the retail. And in order to do that, we believe we have to continue to open more sites. As new roads are developed, as new cities are coming up, and as there is an opportunity to acquire or partner with companies less mature existing networks and provide them with our brand, with our offerings and with our skills, again, we think that there's significant demand for our products out there. So we have continued to invest and you can see here the track record of building our portfolio of stations over the years. And we're quite pleased with the trajectory of growth. So if I go to the next page, As I said, commercial has been an area that's always been core to the business, but it's probably not received historically the same level of focus as retail has. And so I think our ambition is to maintain the same level of focus on retail, but redouble the efforts around commercial. And so in that space, in the first half of the year, we have really been focused in the amongst others, three pillars. So as I said earlier in the presentation, in the core B2B space, there are a number of exciting and large projects in the mining space that are being developed in our markets. With the increase in commodity prices over the last couple of years, there has been a significant investment into this area. And so we see a lot of demand from the space and we continue to focus on differentiating our offer to customers. And we do believe we have a competitive advantage here, given our brand, given our customer value proposition and some of the enhancements that we can bring to them through our offering. Two other businesses that I'll touch on briefly that again have faced some challenges over the last couple of years, but we are refocusing the efforts around is aviation and marine. Aviation is you know, still recovering from the pandemic, but we do believe that demand in Africa will grow significantly. And again, given our expertise around supply, given some of the relationships that we have with both international airlines and regional airlines, We are focusing on this to make sure that we have our fair share of the market and also enter into new markets. This year, in the first half, we have entered into Mozambique as a new market, which we're very excited about. Lastly, on marine, again, I think this is one where understanding the full capability of our infrastructure and identifying how we can optimize our assets across the value chain, we think we'll reposition this business. And as ports and trade routes shift over time with the changing landscape, we see more opportunity in this space going forward. Okay, if I go to the next page. Again, I won't try to take you through everything because I think I've already touched on this to a certain extent, but both the LPG business and the lubricants business remain areas of growth that we're quite focused on. In LPG, as I've already said, we are investing into infrastructure, both in terms of injecting cylinders into our market and building out our footprint with key infrastructure investments. We also have identified M&A as a tool here. So we have completed a transaction in one market and we are going through the regulatory approvals for, for a second transaction in an additional market. And we think that this will be a trend that we continue to see where there's more growth opportunities for us. And again, given our, given our scope and scale, our ambition is to build a leading LPG business across Africa. On lubricants, you know, the power of the, yeah, if you just stay on this page, the power of the Shell brand here is critical. Uh, we, we have, uh, really been focused on driving the consumer business, uh, investing into, uh, key points of consumption. So essentially these are lubricants, uh, bays where you can bring your car to change it. We've, we built them, uh, mostly at our retail sites, but we now have identified certain sites where there won't even be a fuel station, but there will be an oil changing station. And I think there's a picture of that later in this presentation, which I'll touch on. But again, I think we've, if you see our last year results, our lubricants volumes overall did not grow year on year, which we were disappointed about. And our expectation is that we can continue find that growth going forward in this core business. So if I quickly just touch on one more page, if I go to the next one, are evolving. And again, I've already sort of touched on this. So again, I won't go through the whole details here, but we're quite excited about the project in Rwanda. We think this differentiates us and our offering in our markets. We think it highlights the power of our portfolio, and the power of our platform to not only develop our core business, but with our scope, scale, and relationships in other markets, identifying new forms of demand and new sources of demand and new customer base. The picture here is clearly not in Rwanda, but that is a depot that our shareholder VTOL has developed and built in Bogota, Colombia. And it would be our ambition to provide something similar to the city of Kigali. And we're very excited about all the support and partnership we have with the local stakeholders there. I touched already on the two-wheel and three-wheel and the solar, so I don't want to repeat myself just in the interest of time. So if I go to the next page... And Jen, as I said, this will be a game changer for Vivo. We're very excited about what this will bring to us. You can see here some pictures of the signing. Just to remind everybody, we signed on the 7th of February and announced on the 9th of February. It will be a landmark transaction, so there is, as you would expect, a number of approval processes that we need to go through. We're quite far along in the approval process. We have submitted all of the necessary filings in each of the markets, and we are now engaging with regulators, competition authorities, and other interested stakeholders to address their questions and work through that process. In the meantime, we have appointed a team on our side to get ready for day one to make sure that there is a smooth and orderly transition. And I think, you know, quite hopeful on that. And as I said earlier, we continue to target the fourth quarter of this year to close the transaction. But that is, of course, subject to the regulatory approvals. And if anything changes, we will, you know, we will share an update. Okay, just if I go to the next page, I think folks may be eager to understand the impact of NGIN and what it will mean for Vivo. And as and when we get through the approval process and we can start to share more information on the company, we will, of course, do that. But I think if you take a step back and you think about the timeline from 2021 to 2023, a number of steps have happened. And the way that we would like to frame this for everybody is to understand our ambition around creating a Vivo Energy 2.0 and to hopefully have a leading or the leading Pan-African energy business across the entire continent. Obviously, In November of 2021, VTOL announced its offer to delist Vivo Energy. That transaction, to remind everybody, completed just over a year ago at the end of July 2022. So since July of last year, VTOL and Vivo, which is the left-hand side of the triangle, have been working diligently to reintegrate Vivo back into VTOL and to reestablish and enhance some of the core working relationships between the two companies. Obviously, VTOL has been a shareholder of Vivo since its founding, but we are very excited about working more closely with VTOL now that we are part of the VTOL group. Then we announced the transaction with Enjin in February of this year, as I described. And we were working through that process of integrating and enhancing plans for day one and for beyond day one between Vivo and Enjin, which is the bottom part of the triangle. And much like Vivo itself, part of the value enhancements that we think can be brought to Enjin will be in partnership with our shareholder VTOL, particularly around integrating the value chain, increasing the security of supply and the resilience of their value chain, particularly in South Africa as that market evolves due to the changing macro landscape in South Africa. So once we are successful in doing that, we will increase our platform from 23 countries to a total of 27 countries. You can see from the map here, there's still some countries missing from this that would form part of our ambition. But as I said, we're very excited about what this will mean and the scope and scale for what the increased vivo energy will look like. We've talked about the financial implications for Vivo a little bit. And we will, of course, discuss that in more detail as we get through the approval process. But I think just from a bond investor perspective, the way that we would frame this is we see this as very accretive to Vivo Energy itself. Vivo is not going to take on any new borrowings at the Vivo level to fund this. There will be some debt inside the engine business that comes with the acquisition, but the equity capital to fund the purchase price will come from VTOL itself, which will be increasing its investment into Vivo. And so this becomes a very creative transaction across a number of metrics, which we will detail in due course. So if I go to the last page on my side before I hand it over to Ishan for the financial update, you know, of course, want to touch on our focus on ESG and on sustainability. So I think first and foremost, every meeting at Vivo Energy starts with safety. Our focus on safety remains critical. I think we're pleased with our performance. We had a strong performance in the first half of the year with zero total recordable case frequencies. We had a safety day every day campaign, which was launched, where each month we will have a new topic that we focus on to really drive home the importance of safety and in particular life-saving rules for our staff and for our stakeholders. I think, and lastly, again, as Vivo has gone through the process to reintegrate into VTOL, our colleagues from VTOL did an ESG audit on Vivo and we got a good, clean bill of health, which we were pleased about. There's more detail on our website and we can, you know, people can see around our community investment activity. But I think the point that I want to kind of highlight here is that having already been doing this for more than a decade, we went out to our staff and we asked them to share with us their views on what we should focus on for the next period of time. And so we got some really exciting feedback to focus around health, renewable energy and education. I think in other slides, we can talk about the three Ps, which we can share, but Nonetheless, I think here there remains a significant focus from our side. We see the importance of being a leading stakeholder in our community and with our stakeholders. And we see this as part of our value proposition. So this is very much something that's core to us and not in any way sort of a tick box exercise. So I'll share some summary remarks at the end. And if you just go to the next slide with the picture, this is the lubricants bay that I was describing. Some of us from the executive team are there in the middle of the picture. This is in Mozambique, where we attended a site opening in May of this year. And we're very excited about the potential for these sort of sites, not only in Mozambique, but in other markets. Okay, Yussam, if you want to take over from here, please.

Thank you, Jay. Good afternoon, everyone. I'll spend the next 10, 15 minutes to talk about the financial performance and leave a bit of time for Q&A at the end of this presentation. So as you all know, the macroeconomic environment was very challenging in the first half of this year. We've experienced a dollar liquidity shortage, especially in the Eastern African region, causing some disruptions to fuel supply chain. In the West and North Africa, where currencies are pegged to euro either fully or partially, a weaker euro dollar exchange rate led to a lower unit margin when translated into dollar. The high inflation exacerbated by the depreciating local currencies against the US dollar impacted consumer purchasing power and slowed down the economic activity. The decline in oil prices versus last year should help ease this inflationary pressure in the coming months, but it had unfortunately impacted negatively the value of our strategic fuel inventory, and that impact flowing through cost of sales led to a lower IFRS gross cash unit margin. In order to neutralize base level inventory impact from the margin, we're transitioning to the replacement cost methodology to manage our commercial performance in line with VTOL's risk management framework. And I will talk in a bit more detail about this new financial performance measurement methodology in a few moments. Next slide, please. So despite the significant headwinds we had to face in the first half of this year, our volume dropped by 3% only versus the same period last year. Gross cash profit dropped by 18% and was mainly impacted by the stock effect I just spoke about. And also the weaker euro dollar and the resulting currency translation impact. Consequently, EBITDA and net income after adjusting for special items dropped to $157 million and $9 million respectively. Next slide, please. On the other hand, the free cash flow just for special items was very strong at plus $182 million, thanks to $242 million of generated operating cash flow. This is a result of the significant improvement in working capital as the government receivable balance that was built last year started to wind itself down over the course of the first six months of this year. $70 million of cash was spent on investments in new assets, an increase of $14 million versus same period last year. And that demonstrates our confidence in the long-term growth potential of our markets. Next slide, please. Business performance by segment shows that retail continues to contribute around 60% of the total gross cash profits. Non-fuel retail gross cash profit grew by 6%, contributing $17 million in the first half of this year. Volume in both retail and commercial dropped by 3%, but unit margin of retail and commercial were $59 and $45 per cube, respectively, mainly impacted by stock effect and currency translation effect, as I explained earlier. Loop's performance was also impacted by the same macro headwinds. with both volume and unit margin dropping by 9% and 14% respectively. Next, please. As you can see on this graph, our gross cash unit margin has dropped below $70 for the first time since H1 2020, when we had to face the COVID challenges. If we adjust for the base level stock effects that I talked about earlier by using the replacement cost methodology, to measure the real underlying business performance, then the gross cash unit margin would actually be in the low 70s. Which leads me to the next slide about introducing the replacement cost methodology to measure and drive business performance. So measuring cost of sales using historical cost as weighted average cost can result in volatility in the operating margin. especially where we hold large quantities of compulsory strategic stock. So neutralizing that base level stock effect by measuring the cost of sales using replacements cost rather than historical cost gives a better and more accurate assessment of the underlying operating performance. And that will allow Vivo to improve its commercial and investment decisions and be more competitive in the future. Replacement cost reporting is currently under review and will be rolled out in the near future. Our financial performance reporting will then be in line with other peers. Next slide, please. Regarding the balance sheet, we remain focused and committed to operate with strong balance sheet. Our recent refinancing allowed us to raise long-term capital and strengthen the company's liquidity profile. As you can see, the net debt decreased by more than $140 million since December last year, in line with our deleveraging objective. And debt cover ratio, excluding these liabilities and the subordinated shareholder loan, stood at 2.1 times EBITDA. Finally, there has been some recent positive rating actions from S&P who raised the outlook from stable to positive and from Fritch, who removed the negative watch. And we're currently enjoying two investment grade ratings and are well positioned to add a third one. So with that, I will now hand over to Jay to conclude. Jay, over to you.

Thanks, Isham. Yeah, no, I think, again, just to summarize the first half of the year and frame our outlook going forward, we continue to see the resilience of our business. We continue to see the resilience and diversification of our portfolio. As Isham said, East Africa faced a number of challenges, and I think the The macroeconomic challenges in those markets is well documented in the public domain, particularly some of the effects, availability and shortages in Kenya, Tanzania and Zambia, which are three of our key markets and have all gone through relatively public challenges around those spaces. Nevertheless, as I said, as we exit the first half and look at our current trading numbers, the run rate is expected to improve in the second half of the year. And we think some of the volatility is starting to be behind us. This should lead to a more stable financial performance in the second half of the year. And as identified, we have... key specific tangible action items in each of the regions that our teams are working to deliver upon, which we think will place us well as we work through this year and through the Unwind cause, you know, with the rise in interest rates last year, and then not only the significant increase in commodity price in 2022, but ultimately the reversal of commodity prices through the first half of this year. So that's it from our side in terms of the update. I think, you know, just to flag and reiterate one point that Issam mentioned, while the net income number is clearly disappointing from our side. The operating cash flow and the free cash flow remains robust. And I think you see that in what we've demonstrated in terms of releasing working capital, both as we return towards more normal levels in terms of our government receivables, And as you think about, you know, the offsetting pressure from the unwind on the historical costs of our margins is the release of working capital as it requires less cash to replace that working capital as we move through the cycle. So we continue to think that we're in a strong financial position. And as I said earlier, excited to invest and support the business going forward. Thanks everybody for your participation in this call. As I said at the outset, this is our first sort of official update call. After being a delisted company, we intend to continue to have these calls going forward on a regular basis. So we look forward to communicating with you. We will be participating in various bond investor conferences this fall. So if you are in London in particular and you'd like to meet with us, we're happy to do so. And you can always reach out to the company directly with any questions offline and we can continue that dialogue. So thanks for taking the time on a Friday in August. And I think we can conclude the call at this point.