Viva Energy Group Limited

Thank you for standing by and welcome to the Viva Energy Australia half-year 2022 results call. 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. I would now like to hand the conference over to Mr Scott Wyatt, Chief Executive Officer. Please go ahead.

Good morning and thank you all for joining us to discuss VEVA Energy's past year 2022 results which follow the unaudited results that we provided in July. My name is Scott White, Chief Executive Officer of VEVA Energy and on the call with me today is Siobhan Bouzeau, our Chief Operating and Financial Officer and Lachlan Pfeiffer, our Chief Business Development and Sustainability Officer. I'd like to begin this morning by acknowledging the traditional owners of the lands on which we are collectively gathered for this call. and pay my respects to Elders past, present and emerging. As always and before we explore our financial results, I would just like to touch on safety and environmental performance as summarised on slide 5. While our performance is largely in line with last year, we have seen a significant reduction in personal safety incidents in recent months, which has been supported by our group-wide safety day which was held in May. We have had a strong commitment from all leaders to lift their presence in the field and to drive stronger levels of accountability and focus, and this is certainly helping to drive the improvements that we are seeing. Like many other businesses, absenteeism as a result of isolation requirements and general winter flus continues to put pressure on resourcing in many of our operational areas, but we have good support from our workforce and expect these pressures to reduce as we enter the summer months. Overall, I'm pleased with the focus we have on health and safety across the whole organisation. According to slide 6, let me now talk to the highlights in our first half results. It's been an extraordinary period with tight supply and recovering demand in many markets driving high levels of volatility in energy markets. Be Ready has been well positioned to navigate these conditions and has delivered a record first half result, growing sales volumes by 5%, and more than doubling EBITDA to $612 million compared with the prior period. Our refinery at Geelong had a particularly strong first half, operating close to full production through a period of exceptionally high regional refining margins and delivering an EBITDA of $371 million. Our commercial business has enjoyed a strong recovery with sales up 7% and EBITDA up 55% on the prior period. Retail sales grew by 1% in a relatively soft market, which was particularly impacted by Omicron and floods during the early part of the period. The contribution from all divisions demonstrates the strength and resilience that is inherent in Beaver Energy's diversified business model, with the company achieving a net cash position of more than $300 million at the end of June, supporting a fully-ranked interim dividend of $0.137 per share. This strong financial position puts us in good speed to pursue our strategic growth agenda, which we shared at our investor day last year. We have made particularly good progress with the Geelong Energy Hub, securing government funding for refinery and storage upgrades, and commencing the development of the hydrogen service station. Independent panel hearings into the proposed gas terminal have been completed, and we now await for government approval. Turning to our sales performance on slide seven, I'm really pleased with the growth that we have delivered in both our retail and commercial businesses in the first half of 2022. Commercial sales volumes increased by 7%, while retail lifted 1% despite market impacts from pandemic flood and high petrol prices. Sales growth has been driven by continued recovery in the aviation sector, strong demand from wholesale segments, new customer wins and continued growth in the Liberty convenience retail channel. Slide 8 compares Viva Energy sales performance with the rest of the market and with pre-COVID demand. With the exception of aviation, we have outperformed the market across all segments and are holding market share in retail despite continued impacts from capital cities from the pandemic, which are particularly impacting petrol demand. It is unclear when and how retail demand will recover over time, but our metropolitan-focused Tolls Express network is well-placed to benefit from any recovery and continues to perform well despite the currently softened conditions. BrandShare's preference based on a comprehensive survey of motorists shows that the Shell brand maintains a leading position in the market as the preferred fuel for one in every five petrol users. Turning to slide 9, let me talk more about the refining environment which has driven such a strong performance in this part of our business. Regional refining margins increased sharply during the first half due to several factors. Lower exports from China, sanctions on Russian oil, demand recovery and reductions in global refining capacity from permanent closures and maintenance activity. While increases in crude premium for the crude process at Geelong have had a dampening effect, strong production and optimisation delivered a particularly quality Geelong refining margin of $19.90 per barrel for the period, more than three times its average in the first half of 2021. Let me now hand over to Germain to talk in more detail about our financial performance. The first half of this year really demonstrates the potential of this business. At a group level, EBITDA was $612 million, up $355 million on the prior period. Free cash flow was $494 million, up $350 million on the same half last year. With a strong balance sheet going into 2022, we ended up with net cash of $324 million at the half with no debt. Through a particularly volatile period for energy markets, retail, fuels and marketing EBITDA grew 14% to $253 million, with NPAT up a similar proportion. This supported an improvement in the interim dividend from this segment to 4.9 cents per share. Refining performance has been a real standout for the period, and I'll talk more about the drivers of performance and the decision on the dividend here on the following slides. Overall, it's been an exceptional half with $355 million of NPAT, supporting a combined interim dividend of $0.137 per share. Turning to slide 12, we've set out the retail EBITDA average. Sales volumes increased by 1%, a good result in the context of record high pump prices, flooding along the East Coast and motorists continuing to work from home due to COVID impacts. The volume performance highlighted the diversity of our networks, Growth from the dealer-owned and Liberty Convenience Network offset lower volumes from Alliance, where more sites are located in metro areas. As you know, a rising petrol and diesel price tends to compress retail margins temporarily, and this had the greatest impact on earnings, along with some impacts from the excise changes. Non-fuel income was slightly down as shop sales partially normalised after a period of strong growth during the pandemic. and we continue to deliver our marketing and brand sponsorship plans, which have no doubt contributed to the resilient market share and strong brand preference that Scott covered on slide 8, and will set us up well for a recovery in the second half. There's also a couple of small one-offs impacting the result, which we don't expect to repeat. On slide 13, I'm proud of the significant improvement in commercial EBITDA in the first half, rising 55% to $164 million. The improvement here has been a result of lots of hard work across many different areas in which we operate and serve our customers. Volume growth and favourable margin mix on segments where we won new business has contributed to an improvement of $30 million. Short-term trading and supply chain benefits of $16 million are a result of import arrangements we have in place with Vitol, which have supported us and our customers through a period of particularly volatile global energy markets. smoothing the impact of rising private premiums. A focus on being available to serve our customers when they need it most has driven some short-term spot opportunities which won't necessarily repeat, but have provided a win-win for both our business and our customers. Outside of these opportunities, some small improvements in margins have mostly offset our increases in costs through the period. Turning to slide 14, refining. As Scott highlighted, the Geelong refinery operated at near full capacity during an extraordinary period, capturing the benefit of higher regional refining margins, particularly in the second quarter. This is clearly reflected in the bridge, with the GRM more than tripling to almost $20 per barrel over the course of the first half. Higher overall costs from shipping, manufacturing and energy were mostly attributable to producing marginal barrels of oil in a favourable environment, and some disruption in supplying Tasmania from Geelong. Gas and electricity prices also rose sharply in the second quarter, and we continue to manage these through a rolling hedging program to smooth impacts of significant movements in price. Given the strong refining margins, we did not receive any support from the fuel security services payment scheme during the period. On slide 15, we've set out a breakdown of net cash flow for the year, which totalled $223 million, and underlying free cash flow before borrowings, dividends and investments of $494 million. Through a period of sharp rises in oil price, where we saw finished product prices above $200 per barrel in Aussie terms, we managed to cash position exceptionally well. The inventory gain for the period offset the draw on working capital, highlighting the strong cash generation of both refining and our retail fuels and marketing business. Turning to slide 16, we set out our capital expenditure profile. Overall capital expenditure for the first half was $66 million net of contributions. While a lot of capital spend will occur in the second half, particularly around major projects that kicked off late in the first part of the year, we've reduced our full year guidance to $235 million to $275 million net of contributions. The reduction in guidance reflects the fact that we've taken a disciplined approach to new projects and managing costs through a period of COVID impacts on workforce and limited contractor availability, along with some impacts of phasing on large major projects, which will run over multiple years. Slide 17 sets out our strong balance sheet position. In line with our capital management framework, we return $49.5 million to shareholders during the year. and on the back of the strong earnings performance, we moved from a net debt position of $95 million to net cash of $324 million. The dividend announced today will first pay out $213 million in the second half, and we continue to focus on the ambitious capital program we have ahead of us. As we set out in November last year, our long-term target gearing range is still in place, and we remain focused on identifying opportunities to deploy capital in line with our stated objective of adding over $50 million to EBITDA over the next three to five years. As we consider opportunities to deploy funds, we continue to weigh these options against opportunities for further capital management, and we still have the remainder of our on-market buyback of $22 million available. I'll now talk to the decision on the interim dividend in more detail on slide 18. we have announced a $0.137 per share dividend for the first half, which is more than three times the dividend from the first half last year. Talking to each of the segments, the Board has determined a payout ratio of 60% for retail fuels and marketing impact in line with past practice, delivering a dividend of $76 million in the first half, fully franked, for $0.049 per share, about 15% above what it was last year. This is in line with our policy to pay consistent dividends from this segment every six months. The Board has also determined to bring forward the annual component of the company's dividend on refining to reflect its exceptional earnings performance in the first half. This means refining will deliver a fully franked dividend of $137 million, or 8.8 cents per share, equating to 60% of its empath during the first half. It's our intention that the final dividend for refining will apply to its earnings for the second half before resuming to an annual assessment from 2023 consistent with our policy for refining dividends. The total dividend of 13.7 cents per share will be payable to registered shareholders on a record date of 8 September 2022. I'd now like to hand back to Scott to cover our strategic update. Thanks, Javon. Before I go to the outlook for the business, I would like to discuss the progress we've made on our strategic priorities on slide 20. As I've mentioned before, the federal government's fuel security package materially transforms the outlook for our refining business, providing confidence to invest in major upgrades to the refinery and to progress our broader vision to transform the site into a modern energy hub. To that end, we've made significant progress to date as we seek to maintain energy security while also contributing to a lower-carbon future. In supporting the energy transition, we are making inroads into reducing our Scope 1 emissions through modernising our plant, pursuing energy efficiency projects and optimising the use of natural gas and known gas. We are also assessing the potential for solar generation on our surplus land at the refinery. For the much larger Scope 3 emissions, we are developing new energies where we see a business case. We have commenced the development of our first green hydrogen service station with completion expected by late 2023. and in July we ordered a 2.5 megawatt electrolyser which will be the largest in Australia by a considerable margin. We plan for the station to be the first in the network along the east coast. We're also investing in processing capability for ultra-low sulphur petrol which supports the introduction of Eurostex low emission vehicle standards. We have successfully secured government funding for this project and are moving through the project milestones to achieve the upgrades by the end of 2024. Looking further ahead, we are assessing opportunities for co-processing biomass and waste streams to produce lower carbon fuels like biodiesel and sustainable aviation fuel, alongside traditional hydrocarbon refining. Our Lion Bell Brazil Australia acquisition, which was completed during the period, provides an opportunity to divert soft plastic waste streams into Australian recycling for the first time. In regards to energy security, we remain focused on leveraging our position as a significant established energy supplier to play a major role in serving the nation's needs. We have invested approximately $30 million in upgrading the refinery to optimise its monitoring and control settings over the last few years and have strategies in place to maximise production of specialty products like bitumen. A new export line will allow us to increase production and back out imports in other eastern seaboard states such as Sydney and Brisbane. We have also commenced construction of a new 19 million litres diesel storage which will support the government's strategic storage program whilst also improving the flexibility and export capability of our products. Our proposed gas terminal in Victoria is progressing well and in July we reached an agreement with Geelong Port to construct the required pier and berthing infrastructure for the floating storage and regasification units. We await the outcome of the environmental regulatory process. Turning to the outlook on slide 21, we remain optimistic about the year ahead on the back of a strong first half. In retail, we've seen volumes recover up 5.6% sequentially in July and higher again in August as COVID cases appear to have peaked and more workers have returned to the office. Margins have also recovered coinciding with the drop in oil prices. Our strategy is to continue optimising the network with a focus on diesel growth, the expansion of Liberty Convenience and the Coles Express Alliance where we have a further refreshment program planned for 2023. And commercial demand has remained robust in July and August, but this has been tempered by rising quality premiums for jet and diesel in particular. By leveraging our strong competitive position, we aim to grow earnings through our core segments of aviation, marine and resources, and to maximise the integrated value of specialty products. Lastly, the refining segment continues to benefit from historically high regional refining margins. albeit they have fallen from their peak levels in the second quarter. The Geelong refining margin declined to US$15.20 per barrel in July, largely as a result of rising crude premium and falling crack spreads. However, we are seeing signs of further strengthening as the northern winter and expected oil sanctions approach. An unplanned outage of the catalytic cracking unit has impacted production during August, and we estimate it has reduced the Geelong refining margin by about US$5 per barrel for the month. However, the unit has retained service and that should see us well placed to maximise production for the remainder of the year. Overall, I'm very optimistic about the second half. Our retail business is well placed for strong recovery, commercial maintains a robust competitive position and continued growth opportunities. While refining performance has dipped in July and August, fundamentals for the refining market remain tight as we head into the next wave of EU sanctions and as winter looms for the Northern Hemisphere. On that note, let me now open for questions.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. Your first question comes from David Errington from Bank of America. Please go ahead.