Viva Energy Group Limited

Thank you for standing by and welcome to the Visa Energy Australia 1H 2020 results announcement. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question via the phone, you will need to press the star key followed by the number 1 on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the Ask a Question box. So now I'd like to hand the conference over to Mr. Scott Wyatt, Chief Executive Officer, please go ahead.

Good morning and welcome to the Aviva Energy results presentation for the period ending 30 June 2020. My name is Scott White, Chief Executive of Aviva Energy and on the call with me today is Yvonne Brugo, our Chief Financial Officer. Quite a bit is covered this morning, including an update on the proposed Capital Management Program that will see us return to shareholders the bulk of the proceeds from the Aviva Energy REIT divestment. We'll discuss this a little more later in the call. As you will be aware, COVID-19 has presented challenging trading conditions across the Australian economy, with impacts felt by all in the community. It has challenged us all, but I'm extremely proud of the way in which the people of Evo Energy and its partners have responded. Despite the extraordinary circumstances we find ourselves in, we've posted resilient results which reflect the strength and diversity of our business, and I look forward to discussing these with you this morning. Let me start with our sustainability performance as set out on slide 5 of the presentation material. This year we have maintained a strong safety and environmental performance with a significant reduction in recordable injuries and loss of containers. We have successfully implemented robust health management protocols in the workplace to maintain physical distancing in our operational facilities and more than half of our 1,200 employees are currently working productively from home. Last year we launched our Reconciliation Action Plan and despite the disruptions to our planned activities, I'm pleased with the progress we have made on delivering on our commitment to this area. I'm particularly pleased that we were re-awarded the contract for the manufacture and supply of low aromatic fuel into northern Australia. Research has shown that petrol sniffing rates have significantly declined in the communities that we support and I'm really proud of the role our company plays in this important program. I'm heading for operational performance on slide 6. As previously reported, sales volume fell as a result of the border closures and stay-at-home restrictions put in place to manage the spread of COVID-19. Sales of JetSeal have fallen 74% in the second quarter and Alliance sales volume declined to under 40 million metres per week at the peak of the restrictions. Over the last few months, retail sales have been showing steady improvements, averaging above 53 million litres per week in June and July, and while retail sales volumes are naturally impacted by Stage 3 and 4 restrictions now in place in Victoria, the rest of the country continues to show steady recovery. Despite these impacts, seasonal sales have held remarkably well due to the continued economic activity and a relatively strong agricultural season. premium fuel sales have also been comparatively strong, representing 29% of total petrol sales for the half. As previously announced, refining production was reduced to address boiling demand for jet and petrol in particular, with crude intake for the half at 18.4 million barrels. Availability of operating units was strong at 98% and our refining team did well to manage early shutdown of the cataract litter cracker and bring forward the planned maintenance. This is progressing well and remains on plan for a start-up in late October. Regional refining margins continue to be heavily impacted by the forward and global oil demand. Although we're taking steps to minimise exposure to weak jet and gasoline refining tracks in particular, the Geelong refining margin for the first half was below our operational break-even at US$2.90 per barrel, and this has continued into July where we recorded a GOM of $2 per barrel. While operating in hydrostreaming mode with lower fuels production and residue disposal costs contributes to this lower margin outcome, we still believe this produces a superior outcome in a full shutdown and retains appropriate flexibility to manage changes in local demand. Turning to slide 7, let me address the financial outcomes. Given the significant sales impact that we're seeing across our retail and aviation businesses, I'm very pleased with the underlying performance of the business. Non-refining avatar of $319 million is up 14% on the first half 2019, reflecting a strong sales performance in the non-aviation commercial sectors and a much improved retail fuel margin compared with the first half 2019. Refining losses of $49.4 million reflects a very weak refining margin environment I mentioned earlier, together with lower production as a result of operating in hydrosteam mode. Our group underlying user card was within the June 2020 guidance range, and we have maintained a dividend payout ratio of 60% of distributable net profit after tax. Given the uncertain environment, we are taking steps to reduce supply chain costs and discretionary and have reduced our full year 2020 CAPEX guidance to $145 million to $190 million, down from the previously guided $250 million to $300 million. We remain on track to deliver these reductions. The combination of these results and the strength of our balance sheet as the business role positions to return all the proceeds of the VEVA energy REITs are destined to shareholders. We intend to return $630 million through a second tranche of capital management initiatives and complete the existing $50 million on market buyback program in due course. Slide 8 checks out the impact from COVID-19 on our half year 2020 earnings compared with the prior period. The direct impact of earnings from COVID-19 is estimated at approximately $41 million with sales, supplies and retail and aviation responsible for $23 million and $29 million respectively. Lower fuels production and refining contributed to a further $27 million, with reductions in corporate and supply chain costs contributing $23 million and $14 million respectively. Prior to the impact of COVID-19, sales volume growth within the Alliance Channel generated an uplift of approximately $5 million, while the full acquisition of Liberty Wholesale last year has contributed a further $7 million. The recovery of retail fuel margins compared with the first half of 2019 contributed an additional $59 million of earnings which were largely offset by weaker refining margins which negatively impacted our earnings by approximately $57 million. Slide 9 maybe provides some further insight into the refining margin environment. Geelong refining margins were initially impacted by higher crude pregnancy as they transitioned to low sulphur fuel oil at the beginning of the year. While this unwound as oil prices fell, the substantial reduction in global demand for oil products has weighed heavily through April and May, with negative jet and gasoline collapse for a period of time. There have been some periods of recovery, but the markets still remain very weak. The forward refining margin environment is very uncertain and likely to remain challenging in our view until global ore demand begins to materially recover. As a consequence, we are beginning to see some new refining projects deferred and permanent refinery closures announced such as the Shell Tabangal facility in the Philippines. While these closures may help to rebalance production over time, new refineries are still expected to be commissioned and the outlook in our region is particularly difficult to determine. Here in Australia the Federal Government has undertaken a review of the refining sector and has initiated a request for information to consider the establishment of strategic ore reserves. Beaver Energy is participating in these reviews and while we believe they have the potential to improve the long-term sustainability of the refining business, we continue to monitor the situation closely to adapt our plans and continue to assess the short and long-term viability in this part of our business. Thanks, Scott.

Slide 11 summarises our financial results for 1H 2020. Rather than talk through these slides, I'll go through each of the areas in a bit more detail, starting with retail on slide 12. Retail underlying EBITDA RC for the half was up 17.5% at $332.9 million and within the guidance provided in June 2020. The largest impact on earnings during the period was retail fuel margins which recovered from the very low levels we saw in 2019. This combined with the consolidation of the Liberty business we acquired last year and some cost savings offset the volume disruption from COVID-19. Prior to COVID-19, the business achieved strong sales growth and alliance volumes from January to mid-March, with several weeks above 70 million litres per week. The COVID-19-related impacts to volume began from mid-March 2020 and were more of a feature during the second quarter, as Scott outlined earlier. Turning to slide 13, commercial underlying EBITDA RC for the half was down 14.3%. at $135.7 million, slightly beating the guidance provided in June 2020. Commercial earnings for the period were primarily impacted by a reduction in aviation sales of approximately 38%. Despite the volume loss in aviation, the remainder of the commercial portfolio performed in line with the prior period. This demonstrates the high-quality customer portfolio we have and the sectors in which we operate. We've worked closely with our customers and have managed our credit exposure extremely well, avoiding any significant bad debt. We'll continue to support our customers through these challenging times and I'm really proud of the work our team have done in this space. Turning to slide 14, the refining segment delivered underlying EBITDA RC of negative $49.4 million. Below the guidance provided in June 2020, reflecting weaker regional refining margins than forecast for the month of June. Refining margins had the largest impact on earnings in the period, with the Geelong refining margin averaging US$2.90 per barrel, compared with US$5.10 per barrel in the prior period. As you know, in April this year we shut down the RCCU and one of the smaller distillation units, transitioning into hydroskimming mode. While we were able to manage the risk of lower demand for both gasoline and jets, intake was reduced to 18.4 million barrels, down from 21.4 million barrels in the prior period. The team were able to achieve some cost savings and are largely operating with the full workforce. Obviously, the financial result in this part of the business is extremely disappointing and we're continuing to assess the short and long-term viability of the refinery. Turning to our Supply, Corporate and Overhead segment on slide 15, we delivered an underlying EBITDA RC of negative $149.9 million, an improvement of $12.7 million on the prior period. As a result of the current environment, we've maintained a strong focus on costs, looking for opportunities to cut discretionary spend and defer non-essential items. Storage and handling costs benefited from reductions in non-essential maintenance and energy costs. Pipeline and supply costs were also lower as a result of the COVID-19 impacts to volume. We managed to deliver some cost savings with reductions in corporate site maintenance and contractor and procurement benefits. And across these three areas, the cost improvements totaled $17 million and were partially offset by some net one-off benefits in the prior period. Slide 16 sets out the 1H 2020 cash flow bridge. The table in the middle of the slide sets out the underlying free cash flow for the business and after adjusting for items in the table which are not part of ongoing business operations and the inventory loss of $301 million, the underlying free cash flow on a replacement cost basis was $97 million. This was a positive result considering the environment and is reflective of the work we've done on cost, both from an operating and capital expenditure perspective. It's important to remember we report our financial performance on a replacement cost basis, which removes impacts of movements in the oil price on inventory. Due to the large decline in oil prices through the first half, we reported a significant inventory loss. Removing this volatility and the working capital benefit is important when establishing the underlying free cash flow for the business. Turning to the balance sheet on slide 17, the chart on the right shows the change in net debt from $137 million at 31 December 2019 to net cash of $481 million at 30 June 2020. Cash generation from the business contributed approximately $97 million during the period, and relief of working capital added a further $140 million. As I mentioned, the volatility of oil prices during the period resulted in a $301 million impact. In addition to this, the divestment of our stake in Beta Energy REIT, now Waypoint REIT, delivered $729 million on a gross basis. Our working capital facility of US $700 million remains in place and provides the company with significant flexibility. Slide 18 sets out our capital expenditure guidance for 2020. As previously announced, our total capex for the year was revised downwards to $145 to $180 million from the previous guidance of $250 million to $300 million, and Scott talked to us earlier. In revising the guidance, we focused on reducing capital projects and deferring non-essential spend, while continuing asset integrity and safety-related activities. On slide 19, we set out the reconciliation of NPAT to underlying NPAT-RC and distributable NPAT-RC. The significant one-off item of $187.4 million relates to our sale of the 35.5% holding in Viva Energy REIT, in our waypoint REIT. We continue to adjust Distributable MPAT RC for revaluation gains or losses on FX and all derivatives and for the impact of AAASB16. We've announced an interim dividend for the first half of 0.8 cents per share, fully franked, and this represents the 60% payout ratio of Distributable MPAT RC. consistent with all dividends paid to date. Our dividend policy to target 50% to 70% payout of distributable MRC remains unchanged. I'll now move to the section on capital management, starting with slide 21. In February 2020, we sold the company's non-core interest in Beaver Energy REIT for $680 million in after-tax proceeds, and announced the intention to return these proceeds to shareholders through a combination of off-market and on-market buyback programs. Shortly after, COVID-19 began to affect Australia, with impacts for several parts of our business, creating uncertainty for the company. As a result, we deferred the proposed capital management program, commencing a smaller $50 million on-market buyback in June 2020. Throughout this period, it remained our intention to return these proceeds to shareholders in line with the original purpose of the transaction and associated announcements. We've continued to assess the most effective method of returning the proceeds to shareholders, with the company's cranking position making it difficult to execute an effective off-market buyback. Today, we announce a cash return equal to $530 million to shareholders, which comprises a capital return of $415.1 million and a special dividend of $114.9 million. The special dividends will be unfranked, reflecting the low level of franking credits available to the company at this time. The remainder of the previously announced $50 million on-market buyback will be completed following the cash return and the additional $100 million of proceeds will be returned in due course. As part of the cash return, an equal and proportionate share consolidation of 0.84 shares for every one share will be undertaken to adjust Beaver Energy's number of shares for the quantum of the cash return. This means every 25 shares will become 21. Relevant shareholder approval will be sought at a special meeting of shareholders on 30 September 2020, and if approved, the payment will be made on 13 October 2020. Our decision to announce the cash return reflects the company, the fact that the company has a sufficient understanding of the COVID-19 impacts and expects to maintain a strong balance sheet after the return. Slide 22. sets out additional details of the cash return and share consolidation. This will comprise a return of capital of 21.46 cents per share and a special dividend of 5.94 cents per share unfranced. The share consolidation will reflect the entire cash return as set out in the table and is expected to be EPS accreted. Slide 23 sets out the key dates including the special meeting of shareholders and the date of payment I mentioned earlier. I'll now hand back to Scott to wrap up before we move to questions.

Thanks, Jovan. Looking forward, Slide 5.5 sets out our key priorities for the second half. As mentioned earlier, we're seeing good recovery of retail sales in most states, and while this is encouraging, we are prepared for further setbacks, as we have seen in Victoria, and we'll continue to manage volume and margin mix appropriately. We expect aviation sales to remain heavily impacted until next year, but have taken steps to manage costs and prepare ourselves to take advantage of any earlier rebounds. As mentioned earlier, we will maintain a strong focus on our refining business to ensure that we minimise risk of operational interruptions from COVID-19 and complete the major maintenance on time and be ready to start in November. We'll maintain a strong discipline on cost and capital management and progress with our plans to return the proceeds. of our divestment from Beaver Energy Reef over the coming months. Finally, we'll continue to drive for the projects we announced as part of the Geelong Energy Hub, with the clear priority to move to seed stage for the LNG Redactification Facility by the end of this year. We're now open for questions.

Thank you. If you wish to ask a question via the phone, you'll need to press the star key followed by the number 1 on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the Ask a Question box. The first question comes from Michael Simotas with Jefferies. Please go ahead.

Good morning, everyone. I've got a couple of questions on the commercial business. So you've given us the drag from the aviation business. If I pull that out, it looks like your commercial earnings were up about 5% relative to the same time last year. And that was after a fairly difficult half in the second half of 19. Can you just talk us through what's improved so much there, please?

Michael, I think, thanks for the question. I think, as I said, the commercial business has been pretty resilient given the impacts in aviation. We were fortunate to get, you know, essentially complete the cruise season at the end of the beginning of this year without major impacts, obviously despite the significant impacts to the cruise sector. So that supported our performance in the first half. Our other key sectors, bitumen, specialty businesses and resources have continued to perform pretty strongly because those are all supporting economic sectors that have largely continued uninterrupted through COVID, diverse restrictions in place around the country. So I think on that sense, the government's done a good job in continuing to get a good balance between maintaining economic activity and obviously protecting health. And that's supported the commercial business results quite a bit. And look, within aviation, Michael, I think there's obviously different sectors within there as well. So the international and big jet domestic has been significantly impacted. But regional... aviation, whilst it has been the case, has still performed pretty strongly through the period and our general aviation business has continued to be a contributor and obviously we've taken some steps to reduce costs as well. So overall, I think it just underscores the power of having a diverse commercial business. And as I said many times before, different sectors perform in different ways. And that's helped insulate us a little bit through that process.

Yeah, it's a very good outcome. And it looks like some of the margin compression that we saw in the second half of 2019 must have unwound in some of the other sectors outside of church.

Look, I mean, I think, yeah, I mean, for phase to phase, some of that's cyclical, Michael, so it's not necessarily competitive, and you do have the cyclical notes, you know, some factors that do reflect that in commercial, and I wouldn't say it's all competitive, but yeah, I think you're right. I mean, I think whilst two commercials well down, it's still a very good result under the circumstances.

Yeah. Okay. And then the second question from me, just trying to think about how we should look at the marine business, firstly heading into the second half, but then more importantly the first half of next year. How much money do you actually make out of? My understanding is most of your marine profitability will come from cruise and the outlook is uncertain, but I think it's pretty fair to say that next year's season is going to be well down on the one that you've just seen. So how do you think about the impact from that?

Yeah, so as we said previously, I think marine's two sectors, right? You've got container shipping and you've got the cruise sector. we've taken the view that, and in consultation with our customers of course, that the accrued season this year is going to be very light and it's going to be probably not recover really until the next year's season. So on the back of that we have taken steps to So we've reduced the number of barges that we would normally retain to support the business through the next season. We can obviously re-fleet ahead of the season after that. So I think we've managed to mitigate a lot of the costs that would normally support that part of the business and it also helps to mitigate the margin decline in that area. And the container shipping side will have continued to perform very strongly. The work we did to transition to low sulphur fuel oil has really supported that business and that product's been in very high demand and obviously there's a benefit there in the sense that it's a product that we blend and make at Geelong and sell into Melbourne and other markets but most of them are in Melbourne and that's really helped support earnings in the marine sector as well. but I feel we're well set up to minimise the impact in the marine business for the next 12 months.

Okay, thank you.

Thank you. The next question comes from Grant Salgari with Credit Suisse. Please go ahead.

Good morning and thanks. First question just concerning the Alliance volumes. I think you called out 53 million litres per week average through June and July. That seems a little softer than some of the traffic figures that are published by Transurban, etc. But maybe you could put a little more colour on performance either by state or just help us understand that 53 million litres, because it's down about 20% off the peak, 70 million litres earlier in the year.

Look, thanks for the question, Brian. It's obviously very significantly from state compared to around the country because obviously restrictions are at different phases and you can see that in the traffic reports as well. We did put out an announcement a couple of weeks ago around July sales and focusing on petrol and in there we indicated that petrol sales across the country outside of Victoria were down about 11% for July year on year. and struck for Victoria down 25%, which of course reflects the Stage 3 restrictions that we were under for that period of time. So I think that the 53 reflects a mix of states and territories that are recovering progressively back towards pre-COVID levels, and obviously Victoria, which is some way behind that, just given the state of restrictions that we're in at the moment. So I think it's a long way from where, you know, the peak of the decline that we saw we're down to 40 millimetres a week and there are some fashion territories that are getting very close to pre-COVID levels so obviously that will continue to evolve over the next few months.

Is it too early for you to have formed any views on the sustainability of some sites Because presumably there's widely varying impacts when you get down to a side-by-side basis. Is it just too early for that, or are you starting to form some conclusions around that?

I think there's some sites more affected than others, depending on whether they're a metro site or a regional site. So I think generally the regional network is held up. more strongly than the metro locations, simply because the restrictions are different. And obviously within that is quite a variability of impacts across, and also different impacts across fuel and non-fuel as well, of course. But I think, look, we would take the view that it's all at this stage all part of COVID and you wouldn't form any long-term views about the performance of sites until we emerge from this and we have an understanding about what more permanent impacts in terms of customer behaviour have evolved through COVID-19 and obviously that's some time down the track from where we are today.

And just finally, what scope is there for you or what ability is there for you to further reduce production of the refinery? Because realistically, that's a fairly bearish outlook obviously for margins. If we do continue in an environment where margins are below break-even for the refinery, what scope is there for you to further reduce costs and production temporarily there?

When we were faced with the need to bring down the cat-cracker unit at the end of April, we took the decision shortly after that to continue to operate in what we call hyper-screening mode, which is essentially operating without the cat-cracker, and also bring forward the maintenance. We took a decision to continue to operate because we felt that that was ultimately can deliver the best financial outcome relative to a full closure. And that's on the basis that we feel that whilst the margins are low, there is still sufficient margin to offset costs that would be unable to be offset if we went into a full shutdown mode. And so that was really the key. of that decision and despite the losses we still believe that to be the case. It does provide us while bringing units the ability to ramp up production if the demand was to improve and all the margin environment was to improve. Now unfortunately in Victoria it hasn't progressed that way for now because we've obviously gone into a series of more severe restrictions. part of the thinking around maintaining production and that still exists for us over the next few months as we complete the turnaround and hopefully come out of stage 4 restrictions. So we felt that optionality and flexibility was quite valuable to us and we still believe that to be the case. From a cost perspective, we continue to operate the site. We're undertaking major maintenance here so our ability to take further costs out of it is quite low. The outcome for the refinery really depends on Obviously, the local demand, we believe, around the refinery in the optimal way and regional refining margins.

Okay. All right. Thank you.

Thank you. The next question comes from Adam Martin with Morgan Stanley. Please go ahead.

Good morning. Just on balance sheet capacity, you've historically talked about sort of that billion-dollar debt capacity level. Does that change at all with this sort of weaker refining margin outlooks?

Thanks for the question. It's a good opportunity for me to hand on over to Javon. Thanks, Scott.

And thanks for your question, Adam. Yeah, I mean, I think the way we've talked about balance sheet capacity in the past has been now on a through-the-cycle EBITDA basis. When you think about our facility that we have in place now, it's the US $700 million facility, so around that Aussie $1 billion mark. In the context of gearing and balance sheet capacity. As I mentioned, we tend to think about through the cycle EBITDA and there's certainly peaks and troughs and I think it's fair to say we're in a fair trough at the moment with refining and so obviously we try to look through that when we think about long-term earnings of the business but also take that into account in the context of decisions we might make in the short-term around gearing.

Okay, thanks. And just a second question. Just on... Geelong Energy Hub, I think you've previously disclosed that Vitol was helping you with some of the gas work, understanding the market. Is there any sort of update here around the business model that you're thinking, you know, sort of interest from other third parties etc. Can you just talk about that please?

Yeah, not at this stage Adam. We're obviously in the expression of interest process at the moment. That's close. We're obviously assessing the responses that we've got. We're not in a position to share more information than what we did previously at the last announcement.

Okay, all good. That's all for me. Thank you.

Thank you. The next question comes from David Arrington with Bank of America. Please go ahead.

Morning, Scott. Morning, Jovan. A bit of a... I don't know what type of question you'd call it, Scott, but what's the end game for resigning? I mean, I think Jovan mentioned There's short-term viability versus long-term viability. Obviously, short-term viability, it's not flash at the minute, but can you talk about what sort of considerations you talk about when you sit around your board table? Obviously, I don't want the intricacies on that, but I'd be very interested to hear what are the considerations that you need to look at in terms of long-term viability, and does this close into the decision today to return $500 million of capital? Because I imagine if the refinery doesn't have long-term viability, that causes a lot of challenges going forward. But if you can answer that first question and then we talk about the second thing, the decision to escalate or speed up the decision to return capital.

Yeah, sure. That's a good question. Thank you, David. I think I'll start by saying just to remind everyone that, you know, The refining business has been a significant contributor in the past and a very important part of our business and remains an important part. It's a largely standalone business. There are a lot of synergies between the refinery and our downstream marketing businesses as well, particularly commercial. It's on the back of that that we've made a significant investment in Geelong over the last It is a cyclical business however and we have been going through a down cycle over the last year or so for different reasons and obviously COVID has put an awful lot of pressure on the refining sector, not just in Australia but globally as well. as it deals with unprecedented decline in global world demand. So we're at a very deep trough in the cycle as a result. It's just going to transform it quite a bit. We've seen a number of refinery closures around the world, as I spoke about before, and it's just an outcome of the environment that we're in at this point in time. So, you know, we took... We obviously took a review... of the decision to continue with the turnaround earlier this year and concluded that it was in the best interest to continue to operate the site for the reasons I mentioned before and complete the turnaround. But obviously regional refining margins continue to be quite challenging and that's reflected in our first half results and as we acknowledge they're not results that we can sustain for a long time or want to sustain for a long time. As a result, we need to continue to review the advisory refinery. I think in terms of your question, David, the things that we do think about and we need to think about as part of the future is how do we think about the regional and global refining margin environment? How long will it take for global demand to begin to recover sufficiently to lift margins to at least a break-even level? And it's a combination of, you know, global world demand recovery, the sorts of changes that are happening around capacity in terms of closures and new refineries. So that's always a key macro factor for us. In the short term at Geelong, it's about our ability to restart the catcracker unit at the end of October when the work has been completed. at the moment is not the best way to run a refinery and that's reflected a bit in the margin results that we've seen. So the sooner we can get to operating all our units and have sufficient local demand in Victoria to sustain that operation will obviously be a help as well in terms of our local refining margin. And then the third area is really just the outcome of of this broader work that the government is doing in terms of reviewing the sector and we're encouraged by that work. I think it's good to see the government taking an active role and thinking about the role that refineries have in providing broader energy security and obviously That's leading to some potential initiatives such as the establishment of strategic oil storage in Australia. So those developments potentially will help improve the long-term sustainability of the refining sector as well, but obviously the outcomes of that are not known at this point in time, but that's also part of the consideration that we would make in terms of the long-term future of the general refinery.

The second part of the question is that it really You must have confidence, though, because the escalation or the... That's probably not the right word. The acceleration, I suppose, of returning the capital to shareholders is, you know, you're returning the vast majority. You must have confidence that it's going to come back because the potential is if you decide to exit refining, I'm assuming that that's going to take a bit of a capital cost.

Yeah, I think we've... We have confidence that we can handle either outcome day, but I think that's the way to think about it. So obviously if the environment continues to evolve, if we get more confident that this is a shorter rather than longer term issue and that there's some recovery in margin either through getting our operations back to full capacity and or an improvement in global margins, then obviously we can sustain that for for a period of time. We wouldn't sustain it forever though and that's obviously the limit to that. But conversely if we are faced with the choice we don't want to have to make but if we do have to close the refinery that we also feel that we can manage that as well within our balance sheet capacity. So we've considered both outcomes and are comfortable that those are both manageable in the context of that we're able to proceed with the return of the I was approaching the rate to investors.

Let me just make one quick one. The $300 million, I mean, it's a very administrative type question, the inventory loss. How is the truth that that's cash out, that's just inventory loss? Is that just expected to bounce back? I don't know if it's a silly question because it's a historical cost, not a replacement cost, but it is cash out the door at the moment, isn't it? Just probably just aren't.

Thanks again Scott and thanks Dave for your question.

The way to think about the inventory loss and in some periods gain that we do record being the difference between replacement cost and historical cost is really the one-off impact of the way oil prices have moved during that particular period. a significant fall in the oil price, which was really sort of March onwards, we have seen that significant inventory loss. And, you know, right, it does affect the cash flow statement. Now, I guess there's been, with that fall, a fairly substantial release in working capital that's partially offset that. And we've seen the oil price move significantly further up post-year end. And so you can assume that, you know, over time that will bounce around both up and down, but doesn't reflect the underlying earnings of the business within a particular period. Yeah. Thanks, Scott.

Thanks, Yvonne. Thanks, Ray.

Thank you. The next question comes from Sean Cousins with JP Morgan. Please go ahead.

Thanks. Good morning, all. Just a question on retail fuel margins. Talk a little bit about your confidence in the sustainability of the higher margins that we've seen so far in calendar 20 and what have been the real changes to see margins remain, while they're not as high as they were earlier this calendar year, they still remain in recent months fairly healthy. So how are you thinking about that in the medium term, please?

Thanks for the question Sean, but I think it's really consistent with what we've had all the way along since we took control of retail pricing I suppose and that is that the retail fuel inconvenience sector across all participants have a certain margin need and so that ultimately, whilst it remains a very competitive segment, that margin need is is relatively consistent and ultimately drives the volume margin outcome that you expect to see from the sector. I think we've just been through... I think we've always talked about what happens if fuel volumes continue to decline over time, how does the sector respond to that? We've just been through the most massive period of fuel decline that you probably could imagine a pretty rational sector as a result because we are all faced with lease costs and wages and the overall just general cost of running a retail business and that has to be recovered from the mix of fuel and convenience of course and I think that's how it's behaved. But within that it's always going to be a competitive segment and that's always going to be the case but I think long term I still remain fairly confident that margin need will be covered.

And maybe just one for Javon, just on capex, you've been able to find a significant amount of capex savings. We've sort of spoken about this before, but I was curious around what impact this has on future growth that won't be able to be achieved. And if it's just being more prudent, maybe why weren't you being as prudent as this before? I'm just curious around how you think about fiscal 21 capex and what kind of is the very good work you've done in 20, how that turns out into future years, both on an earnings availability that's there or not, but then also where the catch-up capex exists.

Thanks, Sean. And, yeah, I mean, I think there's a couple of parts to your question. In the context of the work we've done this year on CapEx, we've certainly deferred certain projects that were non-essential during the period, and we've also taken, I guess, reductions in others as a result of the changing environment. There's certainly, you know, CapEx, to give you an example in the aviation business, which relates to capacity improvements that we obviously put on hold for a period of time while we see how that industry shakes out. And there's other CAPEX that we're proceeding with, but for the bulk of 2020, it relates to asset integrity and safety-related projects. And I think in that context, it's probably fair to say it would be difficult for the business to sustain the low level of CAPEX that we'll record this year on an ongoing basis. And we'll have to continue to look at that as we come into 2021. I don't think you should necessarily assume that everything that's deferred just gets stacked on top of another year, though, because there's obviously a certain amount of capacity that the business has to undertake work and material projects at a particular time. And so something that we'll continue to look at as we move closer into next year, but definitely With the current economic outlook, we'll be pretty focused on minimising the capex and operating expenditure where we can and where it makes sense for the business going forward. Okay, fine.

That's great. And just finally... I'm not sure I haven't seen anything in your presentation that feels there, but has Vitol indicated that they are looking to vote in favour of the capital management program? And sometimes there is shareholder approval. I'm just curious if you've highlighted that Vitol will approve this or not.

We haven't called it out in the presentation, Sean. No, not at this stage. Nothing yet. All right. Thanks so much.

Thank you. The next question comes from Mark Stamter with MST Marquis. Please go ahead.

Yeah, morning. Just a bit of a bigger picture question if I can. There's obviously been a lot of talk and focus on the future of the refinery. I'm just wondering if there's any ongoing thoughts about some of the assets and I guess in particular I think about Gourbet and the fact that Sydney Real Estate seems to be the only asset class in the world that can really never go down and I guess there may be changes in longer-term volume outlooks, potentially around JET, and there's obviously third-party access you could use if you did something with a call base. Is there any other consideration around other assets, or is it very much just a refinery debate internally at the moment?

Thanks for the question, Mark. I might get to Mark to answer that.

Yeah, sure. Yeah, I mean, I think at the moment, in the context of our... We've talked about the flexibility that we have with the balance sheet and the focus that that gives us in the context of our ability to undertake transactions or activity going forward. I think in that regard, we've been pretty focused on obviously the key projects that we've announced already, the energy hub, the opportunity with the Geelong refining site and in association with the refining business that's there. Beyond that and the transaction to realise value from the investment in Beaver Energy REITs, I think we're pretty focused on the next six to 12 months and how the business tracks during this period and the CapEx profile, and we probably won't necessarily... comment any further on realisation of the infrastructure or other assets at this stage.

Cool. Thank you.

Thank you. Once again, if you wish to ask a question, please press star 1. The next question comes from Daniel Butcher with CLFA. Please go ahead.

Hi, guys. Just wanted to clarify actually more from your July announcement where you spoke about the petrol being down 25% in Victoria. But, you know, credit overall, which implies that diesel and commercial was up quite a bit. Can you maybe break out how much of that year-on-year increase in the non-petrol side of Victoria was due to M&A, from you picking up further stakes in the G and so forth, and how much has increased market share or winning contracts and so forth?

No, I don't forget last year. So the Liberty business, whilst we've got 100% of it, of course, the fuel sales to Liberty would have been included last year as well as this year. So on a life-to-life basis, there's no change there. But I think the back end of the first half was a particularly strong agricultural season. And so we benefited from that through our Liberty business, but also through our other regional wholesale relationships that we have, and that continued into July as well. So I think, as I mentioned before, the impact from COVID is a bit different regionally versus metro, and the region has held up somewhat better, and to be on the comparison, I think it's been also benefited heavily from the agricultural season that we had towards the back end of the first half. I don't think it's any more complicated than that.

Right. It doesn't look like a huge amount. Okay. And just on the capital return, I mean, since before you withdrew your rating, you were down by the sudden investment grade. So I guess I'm just wondering, you know, what makes you think it's an appropriate capital structure to return all that cash when you saw COVID hanging around as an issue? I know you've mentioned you've got your $7 million loan. debt facility in place, but presumably the sort of underlying credit rating would be some investment rate. Do you think it's worthwhile taking a bit more cash on the balance sheets for a rainy day?

I guess in the context of the transaction to sell down our investment in Beaver Energy REIT, we released about $680 million in up-to-tax proceeds and We've announced today the cash return of $530 million. The $50 million buyback that we announced previously, we expect to continue. And then there's another $100 million which we've retained at this stage. And while the overall intention is still to return all of the proceeds, we'll have some flexibility with respect to that $100 million. So there is some cash on the balance sheet. I think, Daniel, when you look at the capital structure, we're pretty heavily net cash. at the moment, and even after returning the proceeds, we'll have very little net debt, almost none, and a US$700 million facility in place, so quite a lot of flexibility in the balance sheet, and I think having a fairly good understanding of the current environment and the different scenarios that could play out, feel comfortable at this time to return those proceeds. I think, too, when you talk about the decision that the credit rating agency made there's obviously a number of factors that go into that consideration of our leases, the way you think about the alliance model and also the fact that from an efficiency perspective we've got a very low net debt and so a combination of all those things and the way we think about those in terms of our capital structure gives us confidence to return the proceeds at this time noting particularly that the alternative use, they're not The cash is not earning a lot of money at the moment and it's getting in the bank. The interest rate is obviously pretty low, as you know. Fair point. Okay. Thanks very much. Cheers, guys.

Thank you. There are no further telephone questions at this time. I'll now hand back to Mr Wyatt.

Thanks again for joining us this morning. Obviously, the results will actually be in line with what we pre-guided in June, with the exception of refining. But I think reflecting back on the first part, given the uncertainty and the challenging environment, our overall business has performed really well, particularly, obviously, our non-defining businesses. As we've discussed, some really great resilience within commercial, which I think continue to demonstrate the real value that's in the diversity of that business. And obviously, having now full control over our retail pricing in our retail business has really helped us to manage the overall volume margin through the first half which has really demonstrated the benefit and strength of that strategic decision we took the year before. So very happy with that. We've clearly got some challenges in refining. We're obviously not alone on that front and it's an area that we monitor in very closely and assessing the factors I mentioned before on the call to determine the right way forward. But we've invested heavily in refining. committed to it and we will work hard to get confident about the way forward. At the same time obviously the losses in the first half are significant and we can't support those for a long time so we need to continue the market and take action as appropriate. We'll continue to keep you informed on that as we have done. We'll keep the updates on refining performance happening. each month and keep you abreast of developments in that area because it's obviously quite a changing environment. But otherwise overall, very pleased with the performance and very pleased to be in a position now to have the confidence to be able to return the proceeds from the Sarla Beaver Energy REIT to investors as well and obviously we'll progress that over the next couple of months. So thanks again, that's the volume and I look forward to talking to you all again in the future.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.