Vector Limited (VCT) Earnings Call Transcript

Hello, everybody. Can I just offer my apologies for that delay. Very fortunately, we're back, and we can carry on with the meeting, and we will do that. I did say to my team this morning as we all arrive now, "Guys, we really got to be on fire today." So I don't know whether I jinxed it or we are. So we'll commence proceedings, and I'll ask John to come up and get us underway. Thank you.

[Foreign Language] Good evening, everyone. Good afternoon, everyone, and welcome to our 2026 Annual Meeting for Shareholders. My name is John Rodger, and I'm Vector's Chief Legal and Assurance Officer and Company Secretary. I'd like to acknowledge [Foreign Language] for Central Auckland where we're meeting here today. I'm going to run through some housekeeping before we get underway. The toilets, some of you might know a locator just outside the way you came in. The next section in my speech is called if there's an emergency. So I'm going to short-sight one, I think, drill, and we'll move straight into the cell phones. I would ask you if you can to please switch off your cell phones or put them on silent for the duration of the meeting. And at the end of the meeting, there's going to be time for something to eat, which is going to be well earned and a chance to have a chat to the Vector directors and to staff if you've got any questions or any feedback on discussions today. Now I'll turn to the agenda for today's meeting. First, I'm going to go through the instructions for voting and for asking questions. We'll then move on to ordinary business in the meeting. We are -- we're going to hear addresses from our Chair, Doug McKay; and from our Group Chief Executive, Chris Blenkiron. We'll then go to the formal resolution to appoint our new auditors, PwC. after that, we'll move into general business, and there will be time for shareholder questions. There will then be an opportunity to vote and voting will then be closed and we will formally close the meeting. Today's meeting is a hybrid meeting, so that's being held here in person and online. This is a meeting of shareholders. So we'd ask you to keep your questions focused on matters that are relevant to shareholders. Our customer team is at the back as usual and is simple to help you if you've got any queries around operational or customer service measures. You can ask questions at the specified times during the meeting. To help give everyone an opportunity, we'd ask you to limit yourself to 2 questions. If you have more questions than that, then Chris Doug, other means the Vector team and I will be available at the end of the meeting. If you're participating to online, you can submit your question at any time using the online voting platform. We'll then answer those at the appropriate time in the missing. And if you need technical assistance, you can type in your query on the web portal and a member of the Computershare team will assist you. We welcome media today as observers. Can you please hold your questions until after the meeting, make yourself known to a member of our communications team and the management team. The voting today on our resolution will be conducted by way of a poll. If you're in the room, you can mark your paper any time on your voting paper and a member of the Computershare team is going to gather these up at the end of the time for voting at the end of the meeting. If you're online, you can vote any time through the online platform after Doug has declared the meeting open. Doug will indicate the final opportunity for voting before the papers are collected and the online voting closes. Thank you. I'll now hand over to Doug to open the meeting.

Thank you, John, and welcome, everybody. As we have a quorum and it's now well passed 2:00 p.m., it is my pleasure to declare the Vector Limited 2026 Annual Meeting of Shareholders open. With the meeting open, you may now cast your vote at any time. The number of shareholders who have appointed proxies and the shares represented by those proxies are shown on the screen. The screen also shows the proxies held by me in my capacity as Chair and in my own name, including the years held by Entrust, our majority shareholder. It is my intention to vote the discretionary proxies I hold in favor of the resolution. And I would now like to acknowledge my fellow directors, Alastair Bell, Vaughan Busby, Dr. Paul Hutchinson, Dame Paula Rebstock, Bruce Turner; and Anne Urlrwin. Also at the table are our Group Chief Executive, Chris Blenkiron and our Chief Legal and Assurance Officer and Company Secretary, John Roger, who has just taken you through the meeting procedures. In the front row, in front of me here are our Chief Financial Officer, Jason Hollingworth; our external auditor, Matt Dipros from KPMG and other members of the vector executive team. I'll now move on to an overview of Vector's financial performance. I'm pleased to report a strong financial performance for the year ended 30 June 2026. Adjusted EBITDA increased from $401 million in FY '25 to $482 million in FY '26. As the chart shows, the increase was driven principally by the electricity business. Gas distribution was broadly stable while the other category was down $8 million compared to the prior year. The main driver of the increase in electricity adjusted EBITDA was the higher DPP4 revenue allowance for electricity distribution businesses. It applied for the full FY '26 year compared with only 1 quarter in FY '25. Net profit after tax increased from $155 million in FY '25 to $240 million in FY '26. The movement reflects higher adjusted EBITDA, partly offset by lower capital contributions and higher net interest. A key difference year-on-year is that F25 included a $37 million impairment of the gas distribution business. There was no impairment in FY '26. Overall, the increase in NPAT reflects the stronger earnings performance together with the absence of the gas impairment. Gross capital expenditure increased by $74 million or 16% from $470 million in FY '25 to $544 million in FY '26. Electricity CapEx accounted for the majority of the movement, increasing from $432 million to $512 million. This is the largest annual investment ever made in our electricity network. It supports reliability and resilience today while preparing for rising demand across Auckland. Within electricity CapEx, growth expenditure increased by $18 million and replacement expenditure increased by $62 million. Gas distribution CapEx was down $5 million and other was down $1 million. Vector continues to maintain a strong balance sheet. At 30 June 2026, economic net debt was $2.28 billion and gearing was 39%. We continue to manage funding prudently, with a focus on maintaining financial flexibility as we invest in the network and pursue disciplined growth opportunities. The Board declared a final dividend of $0.135 per share, taking the full year FY '26 dividend to $0.26 per share. The dividend reflects the strength of the year's performance and the Board's consideration of Vector's investment program, balance sheet and future funding requirements. I'll now turn to the outlook for FY '27. As with FY '26, we are providing guidance on adjusted EBITDA, gross CapEx and capital contributions. For FY '27, adjusted EBITDA is expected to be between $540 million and $560 million. Gross capital expenditure is expected to be between $605 million and $635 million. Capital contributions are expected to be between $160 million and $190 million. The guidance reflects continued investment in Auckland's electricity network while maintaining our disciplined approach to costs, capital and funding. Customer-driven activity is expected to be broadly in line with FY '26. The guidance range for capital contributions is lower reflecting that contributions can vary substantially depending on the timing of major customer project connections. We'll now move to the next part of our presentation, where I will set out the context for the next chapter of Vector's growth. And Chris will talk about a refreshed strategy to deliver that growth. After that, I will open the floor for shareholder questions. Throughout Vector's history, the business has created value by anticipating major shifts in the energy sector and positioning itself accordingly. We have never stood still. We built our foundations through major acquisitions, then expanded into metering and other energy services. Through our symphony strategy, we were early to recognize the value of a more integrated approach to energy. More recently, we've simplified our portfolio, exited a number of investments and sharpened our focus on the opportunities we believe can create the greatest long-term value. Each phase has built on the one before, while our core business has remained strong and has consistently underpinned the group's performance. Those decisions have reinforced the areas where Vector has a genuine advantage. Together with the disciplined execution reflected in this year's financial result, they leave the company ready for its next phase of growth. Our forecasts show demand for electricity rising. And all the trends point to accelerating electrification as Auckland's population grows. More loans, more large loads are added and more data centers are built. The next major shift for New Zealand is not simply generating more renewable electricity. It is electrifying more of the economy with electricity meeting a greater share of the country's energy needs. This year, more than 90% of New Zealand's electricity has come from renewable sources but electricity currently meets only about 1/3 of our energy needs. As transport heating and industry electrify, that share could rise to around 60%. That would represent one of the most significant transitions the country has undertaken, with benefits for customers, the economy and the environment alike. Vector intends to take a leading role in that transition. And if we get it right, we will create attractive long-term growth opportunities for the business while supporting outcomes that matter for New Zealand. That is why we have refreshed our strategy. It is not a radical change in direction, but an evolution that reflects where the sector is heading and the scale of the opportunity ahead. The Board believes Vector is ready to capture it. I'll now hand over to Chris to explain what that looks like in practice.

Thank you, Doug. Before I talk about where we're going, I want to acknowledge the strength of the business today. I'm incredibly fortunate to have joined a company that's in great shape. It's not something that happens by accident. It's the result of disciplined decisions long-term thinking and a commitment to doing the right thing for customers and shareholders. We have invested for the future without losing sight of affordability. We've continued to strengthen and grow the network with record investment exceeding $0.5 billion in FY '26. Meanwhile, Vector's share of the average monthly household bill has barely changed in real terms over the past decade. For absolute clarity, our pricing on your electricity bill is, on average, $4 more a month in today's money than it was in 2013. That's particularly important when you consider what is ahead. We're in the middle of a 20-year program to invest around $10 billion in the network that will enable Auckland's growth and electrification for decades to come, including $5.4 billion over the next 10 years alone. Our progress to date is no small achievement, and it's a credit to the people who have guided this company over many years. The electricity network is at the center of everything we do. And we also have a set of complementary businesses in our portfolio: gas distribution, fiber, our technology Solutions business and Bluecurrent. Each contributes in a different way to strengthening our core electricity distribution business. Together, they help make us better and the investment and the pricing track shown on the graph gives you confidence that we run a very efficient EDB. So my job isn't to reinvent Vector. It's to build on what's already been created and make sure we're in the best position to succeed. That means being clear-eyed about where the energy sector is heading and where Vector can make the greatest contribution. As Doug said, the future is electrification. This will be one of the largest and longest running infrastructure transitions Auckland has undertaken. We believe Vector has the assets, capabilities and experience to help lead the change towards an electric future over the next 30 years. Delivering that future will require a collective effort One of the strengths of Symphony was recognizing that customers do not experience the energy sector one organization at a time. They experienced it as a single interconnected system with one overall bill. And it's encouraging to see the industry increasingly working together on that basis. Electrification will deliver real benefits for customers. A fully electric home with solar and an EV can be cheaper to run than a typical home today. Preparing for a more electric future requires investment but it must remain affordable. Our success will not be measured by how much we spend but by how effectively we invest and how productively we use the assets we already have. Every dollar we save through better planning, technology and smarter network is a dollar customers do not need to fund. But we will never pursue those savings at the expense of safety reliability or service. Our strategy has a simple objective: connecting Aucklanders to the energy transition and helping lower their overall energy bills. So how will we get there? We will transform our distribution business, so it is ready for a more electric Auckland. We will continue to lift our productivity so we get greater value from the network. We will set up 2 new enterprises, one, called Nexos, to build on our connections experience and deliver the grid exit and injection points that New Zealand will need as electricity demand grows. The other, called Catalyst, will help Auckland's businesses and over time, households, overcome the cost and complexity of electrification. Together, these priorities reinforce one another, a modern, efficient distribution system provides the foundation while our broader capabilities help customers electrify and create new avenues for growth. For me, the most important part of our strategy is what we call transform distribution. Behind the label is a simple idea that builds on what we started with Symphony. The distribution business of the future will need to operate very differently from the one that we have today. Transforming distribution is about preparing Auckland's network for a more electric future. while getting more from our infrastructure. As more customers generate, store and manage their own energy, the network will need to become smarter, more flexible and more responsive. An example of how we will transform our distribution system is with better data that will give us a more detailed view of network performance and available capacity. We now receive smart meter data in 5-minute intervals for around 50% of customers, and we aim to reach 95% by 2031. This will allow us to understand demand in greater detail, so we can use existing capacity more effectively, target expenditure more precisely and avoid building infrastructure before it's needed. AI will play an increasingly important role in helping us make sense of that data. We're already seeing benefits through tools such as grid aware which help us identify issues sooner and target investment more effectively. On Kawau Island, a network survey that previously required 8 people working for 5 days can now be completed in a matter of hours. AI-assisted pole inspections have reduced assessment times by more than 80% from up to 45 minutes per pole to less than 7 minutes using drone imagery. We will deploy AI responsibly with strong governance, appropriate safeguards and careful management of cyber and technology risks. We also need our network to become more fixable. We'll make more use of options like batteries and demand response while aligning more closely with how the wider electricity system operates. We've identified more than 30 locations with batteries or other flexible solutions could help defer or reduce traditional network investment, creating opportunities for new providers to deliver those services. Transforming our distribution business is about making electrification work better for customers. That means affordable, responsive and reliable services. alongside more opportunities for customers to benefit financially through cost-reflective pricing and incentives for using energy more flexibly. We're already seeing this in practice. More than 2,500 homes are participating in flexible pricing arrangements. These reward customers for shifting demand away from peak periods. And we were the first electricity distributor to remove peak pricing from mornings in May and September because increased visibility in our network showed us that it was possible. It also means continuing to challenge our assumptions. Historically, nearly all growth has come from new connections, and our position is that growth should pay for growth. As more demand comes from existing customers, electrifying their homes, vehicles and businesses, will work with regulators and the sector to make sure costs allocated fairly and support an equitable transition for all customers. When growth changes, we need to change too. While we're doing all of that, our focus on safety and resilience remains unchanged. As the network evolves, customers should continue to have confidence in the service they receive supported by clear information and a faster response when disruptions occur. We know households and businesses are under cost pressure. As we've made clear, the answer isn't simply to spend more. It is to lift productivity and avoid unnecessary expenditure. Every project we can avoid through smarter use of the network helps keep costs down for customers. When investment is required, however, we need to make sure that it is the right investment delivered in the right place at the right time and as efficiently as possible. We will still need to invest in physical assets like power poles and wires. And increasingly, that investment may include batteries and other flexible solutions. Getting those decisions right matters because we're operating in an environment of rising costs which ultimately flow through to our customers. Take those power bowls I've just mentioned. We have 126,000 on our network to maintain and replace and the cost of erecting a standard double concrete pole has increased by over 40% above inflation in just 5 years. That includes around $2,000 more per hole just for traffic management. This shows that keeping costs down isn't only about buying materials at the best price. It is about planning and delivering work efficiently, building strong partnerships with councils, with regulators in the wider sector, so the rules are practical and the projects can be delivered effectively. This is what Transform Distribution is ultimately about combining better data and technology with the judgment of our people to make every dollar count for Aucklanders. If we get it right, customers benefit from a more reliable network and lower energy costs over time, while shareholders benefit from a more efficient future-ready business. Alongside transforming our core distribution business and lifting productivity, we've thought carefully about where else we are uniquely placed to make the biggest difference. The opportunities we are pursuing build directly on our existing strengths in Auckland's emerging needs. That's why we're creating 2 new businesses, Nexos and Catalyst. As New Zealand electrifies, demand is growing for large connections that enable major electricity users and generators to connect to the national grid. These projects are becoming increasingly important to the country's growth and traditionally have been delivered largely by Transpower. We're establishing a new business, Nexos to bring additional capability to this market. It will build on the expertise we've developed delivering complex connections on our network and apply it to opportunities across New Zealand. We already have a strong pipeline of our own projects and are in discussions with customers today, planning future high-voltage connections, giving us a solid foundation from which to grow. The level of demand is clear. There were 5 transmission connection inquiries in 2019. This year, that number has risen to 131. Individual projects can range in value from $50 million to $150 million. Not all will proceed, but the pipeline points to a substantial long-term need. By applying expertise built over many years, we can help more customers connect sooner and support the infrastructure New Zealand will need. Electrification makes economic sense for many businesses, but the upfront cost and complexity of making the switch can be significant. That's why we're establishing our second new business called Catalyst. It will help businesses and, over time, households overcome the practical technical and financial barriers that can stand in the way of electrification. This links directly to our strategy. We've talked about preparing Auckland's network for a more electric future. And we also see an opportunity to help turn customers electrification ambitions into projects. We've seen the value of this kind of thinking before. Our early investments in smart metering and our Technology Solutions business helped lay the foundations for the 5-minute data capabilities now being rolled out across New Zealand and Australia. Catalyst applies the same principle, anticipating where the sector is heading and building capability ahead of demand. For customers, the opportunity is also significant. The house on this slide shows a typical Auckland home and the savings that can be achieved by electrifying things like transport, heating and hot water. The same principle applies to many commercial and industrial customers. In simple terms, the more energy users that can be electrified efficiently the greater the ability to reduce the overall energy costs over time. Looking more closely at the potential market for Catalyst, we estimate Auckland's 90 largest gas users could represent around $1 billion of investment as they transition to electricity, acknowledging that some are limited for now by current technology. Industrial heat pump conversions can cost between $1 million and $3 million per megawatt to install, highlighting the size of the emerging market. That's why we'll initially focus on large energy users, helping commercial and industrial customers make the transition to electricity. For some, that may involve replacing gas-fired equipment. For others, it could involve solar generation, battery storage or other technologies. Nationally, around 500 industrial sites have been identified as suitable for process heat conversion representing an estimated $5 billion investment opportunity. While the economics are increasingly attractive, many of these businesses face competing demands on their capital, making it difficult for some to find the upfront investment required to get started. Catalyst will help customers overcome those barriers. Depending on the project, that could include technical design, implementation support, partnerships or solutions that address the upfront capital requirement. The goal is to help viable projects proceed sooner. By doing this, Vector can support business growth. help counter deindustrialization and job losses in Auckland and accelerate the shift to lower cost, lower emissions energy solutions. Nexos and Catalyst will operate independently of our regulated network business and will be subject to the same investment discipline that has served Vector well over many years. We'll also continue to grow the value of our existing interests in fiber, gas, our Technology Solutions business and our investment in Bluecurrent. The energy transition is a once-in-a-generation opportunity. Vector brings technical expertise, a strong balance sheet and a willingness to partner with that creates better outcomes. We expect Nexos and catalyst to make a meaningful contribution to group earnings over the medium term. Our strategy is straightforward: transform our distribution business, lift productivity, help Auckland electrify at the lowest possible cost and pursue growth where we can create value for customers and shareholders. Auckland is changing, and so is Vector. Our role is to connect Aucklanders to the energy transition and make sure they share in its benefits. Doug has more to say about the strategy. But first, we've got a short video that captures some of the exciting opportunities before us. [Presentation]

One of the things that appeals to the Board about this strategy is the balance it strikes between ambition and discipline. We're building on the strengths that have served us well while responding to a rapidly changing energy landscape and evolving customer expectations. That puts Vector in a strong position to benefit from the opportunities ahead and to help power Auckland's transition to a more electric future. Just as importantly, it does so in a way that remains focused on affordability, prudent investment and long-term value creation. Taken together, we believe these are the right priorities for the next phase of Vector's development and for delivering sustainable growth in the years ahead. Vector has served Auckland for more than a century and the decisions we make today must equip it to serve the city for generations to come.

I will now open the floor for shareholder questions on Vector's FY '26 financial performance or the refreshed strategy. Questions may also be put to our external auditor, but please keep those questions relevant to the auditor's role. Are there any questions from shareholders in the room on the address as you have heard from Chris and myself, the annual report, financial statements or the audit report. If you could, please raise your hand and wait for a microphone to come to you. If you could introduce yourself at the beginning.

[ John Clearwater ], shareholder -- thank you, John. I would like to thank our new Chief Executive, Chris line or a most encouraging report. And I was left with the feeling that there was very little room for an LPG is. So I wonder if you could put a light under the government and say you're barking up the wrong tree.

I know where you're going, but we'll leave the LPG arena for the government, the next government as it seems now, to decide. But we're confident that we can meet most of, if not all, of Auckland's electricity energy needs with the strategy we've been talking about today.

Hi. My name is [ Jagadev ]. I'm reading through annual report, and I see that there is a $1 billion intangible assets. which is the cash distribution asset. And I see on the slide that there was a prediction that in the future, gas energy would be replaced by solar. So how would you make sure that the $1 billion assets which is sitting at intangibles would not have a genuine goodwill impairment. Or like if you think that the future is going towards solar and there's not much need of gas distribution and having a $1 billion gas distribution asset, is it not a risk on the asset side?

Well, thank you for that, Jagadev. That's a good question. I'm going to ask Jason who's sitting down in front of me to help respond to the specific balance sheet situation of those gas assets. But we are not in control of the situation we find ourselves in with gas. It is a depleting resource. It's dropping dramatically. Our strategy is to determine particularly with the large customers Chris has talked about, about 90 or so in Auckland. Most of those who do use gas for their electricity -- for their energy needs, we need to help them get off gas and on to electricity as part of their risk management strategy for the state of the gas supply market. Now we've taken an impairment in gas last year, and we have adjusted our investment strategy for those gas assets. to be more operational in focus and not so capital focused for the future because the future of gas definitely is finite. And we need to be very responsible and prudent about how we manage those assets to their end-of-life situation. part of the help we need for that is to get the Commerce Commission on board to understand that we've made investments in guests that we might need to recoup faster than the original anticipated life of those assets. So it's very much in our frame. I can assure you of that. But Jason might want to just comment on the state of the balance sheet, goodwill versus asset value and so on.

Thanks. Just a couple of comments. The carrying value of that gas distribution business is more like $500 million think -- and there is no goodwill attaching to those assets. We've written all that off. So we're carrying those assets at their regulated asset value. And we just had a reset with the regulator, the Commerce Commission, and they've enabled us to depreciate those assets at a more accelerated rate, which will help us get our investment back into the early 2040s. So I guess we're confident that there's gas -- certainly gas for residential distribution into that time period, and our strategy is about getting our large customers off gas and on to electricity, which will help preserve those gas reserves for our residential or retail customers. So it's all part of a linked up strategy, I think.

Any other questions? There's one over here on here, sorry. We'll go here first. We'll catch you in a minute.

My name is [ Neil Anderson ], and I'm New Zealand Shareholders Association representative to the shareholder in my own right. There was a lot of philosophical discussion about how you're going to electrify the industrial customers, but not a lot of information about CapEx and how much it's going to cost and some comment on that would be useful. Second question is, you showed 2 houses up there, but you made no comment really on how or what you're going to do to put cash or money or whatever into electrifying those houses. So that's it.

I get the thrust of your question. All of this sounds pretty capital-intensive, which it is. And we may well find ourselves financing some of it. But also, Chris mentioned, there are a number of infrastructure funding partners out there who are very interested in this type of investment. And if we can structure the equity component with the help of some partners. We have a partner like that in our Bluecurrent business at the moment, Queensland Investment Corporation. We've got inbound inquiries as to how others might join us in how we've set up financing and funding arrangements here. And their expectation is a relatively modest but solid infrastructure return rate. So we're not at this stage into the detail of financing individual projects. We've just started and commenced conversations with prospective customers. And very encouraged by the interest that we're getting. We haven't turned our minds to the 2 house situation we highlighted yet because we think the priority should be the net industrial customers. because their energy use is so significant, and they would be at risk of deindustrializing if they don't get assistance to move to another form of energy, through electricity, which would put employment at risk in Auckland and so on. So that is our priority, and we're confident that we work -- when we work with those customers, there will be a combination of their balance sheets, our funding support and potentially funding partners and debt, which will suffice and give us the capacity to do what we want to do. I hope that's sufficient at this stage. We don't have detailed financial plans by customer yet, but we've understood at a high level, how we will structure a lot of these investments.

Just an additional comment then. Residential customers are going to want to know soon. How are you going to do a 2 house solution. many, many residential customers are looking to the 2-hour solution. So I urge you to get on to that quickly.

Okay. Thank you. There was a question over this side as well.

[ Cory Leigh Van Camp ], shareholder. Some of us in the suburbs, as you're aware, are facing the Gasly prospect of Plan Change 120 and intensification where it really shouldn't be. Some of us are already undergrounded with power. And all you've talked about is power poles and the extra cost and you've shown wires up on top of the ground. So where is the undergrounding program add? And how would the intensification be affected with extra power poles and undergrounding, et cetera? .

Well, your street is in a very privileged position if you are undergrounded. It's a very small percentage of our whole network. So what we showed on the video is more realistic as to what Auckland looks like, which would be different from your Street and different from my street actually as well, currently.

Are you expanding undergrounding? Or has that just stopped?

No, it hasn't stopped. It continues on as it always has done. We allocate a certain amount of investment every year for undergrounding we prioritized the projects. Part of that is what are the existing aboveground assets, what condition are they in? Are they at risk of not performing. And we don't want to underground assets that still have good life on them. So we tend to focus where those opportunities are. We also focus on opportunities where residents of the street are prepared to part fund the investment in underground because undergrounding electricity is a very expensive exercise. And each year, we sign off and agree with our shareholder Entrust, on what those undergrounding priorities would be and what budget we commit to spend on undergrounding every year.

So if we are already undergrounded in the street and a long comes permission for a great big tower to be stuck in the middle of our street, which is inappropriate, and they've never paid for the undergrounding, what's the situation there?