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.