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.

Morning, Scott. Morning, Jovan. It's amazing, Scott, how quickly a year goes, eh? A year or so ago... Things are looking pretty grim now today. You deliver a result with a dividend like that and life is fantastic. Javon, probably to you, I don't know, or Scott, whether to you, but I want to open the batting with commercial. I mean, this is a business that, I mean, it's sort of like with the second cousin, if you like, of the group. I mean, it was retail and then refining.

But these commercial results just look outstanding to me. Javon, can you give a bit more detail, or again, Scott, if it's relevant to you.

That slide 13 just looks to be quite an outstanding slide where you've got market recovery, favourable margin mix on new business wins.

Favourable margin mix on new business is wonderful. You're not trading away margin for that. And then can you go into a bit of detail with these one-off trading benefits that you get? Because that's something that I wasn't familiar with given that you buy from Github.

And these on-spot sales, you know, in volatile times, the sustainability of that, given that we're going to go through more volatility, I would imagine, in fuel supply, the opportunities are then being more sustained. So can you give us a bit more colour on what looks to me to be one of the highlights of this result? Thanks, David, and thanks very much for the question. Before I hand over to John to talk about the... specific question around the relationship with retail and the supply benefits there. Let me just say a few things about commercial. I'm sure you'll acknowledge that we've always spoken pretty highly of commercial and tried to point out the strength and the diversity of the commercial business. I think relative to other companies, we have probably a much more diverse business than most. We obviously supply jet fuel and diesel and to involve to large commercial customers but we also have a very broad specialties business as well and that gives us obviously exposure to a broader range of products and services a broader range of customers and a broader range of segments and that has historically always provided quite a bit of internal resilience to sector swings and And I think this has been a period where that diversity has really shone through and probably a period where all the sectors that we have sold into have all performed pretty well and that's evident in the results that you see in commercial. It's kind of linked a bit to our long-term strategy is to continue to build on that strength and find opportunities to add to that business. It's a big part of our long-term strategy for the commercial business and leverage the strength that we have there and and the capacity we have in that part of the business to grow even further into the future. So I guess in short, David, we've always been pretty excited about the commercial business, but I think this has been a period where hopefully it's been, you know, the results really show that and hopefully as we go forward, it'll be much better recognised by the market. Probably touch on the trading benefits for you there as well, David, and thanks again for the question. It really is, I think, a benefit of the relationship that we have with this whole to supply us with imported products. They carry a lot of the global trading exposure for us and it means when we have particularly volatile periods like we've seen in the first half with sharply rising product premia, the arrangements we have with them mean the impact of that is smooth over time and so we have seen a little bit of one-off benefit from that in the context of most of the $16.4 million that we've called out there. So quite helpful in the context of those arrangements, and we will see some of that cost up flow through over time. We've also called out the spot sales that you mentioned as last opportunities in the first half.

It just looks to be a very well-performing business.

And just I'll finish, Scott. We're not going to have too many more unplanned breakages at the refinery, are we? This catalytic cracker, that's not major, is it? Or is it just a couple of weeks? What are we looking at there? Yeah, we obviously don't enjoy these outages, Dave. And to be fair, the refineries had a long period of running extremely well, and that was evident in the first half at a time when there was real opportunities that you had by running well as well, and that's obviously a big part of our results. We're in the process of restarting this week and that will set us up well I think for the rest of the year at a time when refining cracks, particularly diesel, are starting to expand again. So I think we're potentially looking into quite a good period for refining. I guess there's one silver lining David, we had an outage during the one period During the year when margins were pretty low, so if we're going to have one, we timed it pretty well. So it's back up and running now with cracks rising. That's what's happening. Is that right? Oh, that's correct. So it was down when the margin was down.

Well, geez, you can't do much wrong at the moment, Scott, can you? Thanks very much, Scott and Giovanna. Thanks, David.

Thank you. Your next question comes from Michael Samotis from Jefferies. Please go ahead.

Good morning. First question for me is on the cash flow. It's clearly a very strong performance in light of the movement in the oil price. Can you just give us a little bit more colour on how you managed to manage your working capital position so tightly and will you be able to hold on to that cash position heading into the second half or was there some timing benefit in there?

Yeah, I can talk to that one. Thanks for the question, Michael. I think what a credit goes to the wider Treasury and fuel sourcing teams in managing exposure. It's something that is not an easy task and particularly in a volatile period that we've had has been quite challenging. I think we've demonstrated a track record over time of pretty carefully managing our inventory exposure in the context of gains and losses there. against our supply chain and working capital exposures. There's no real one-off that we've called out in the first half and I think we've been able to continue the trend of largely having those two lines offset each other so that we can maintain pretty strong cash conversion as a business, something that I expect we'll continue to focus on pretty heavily going forward and agree it's been very successful through a challenging period and something we're quite proud of.

Yeah, well done on that. The second question I've got is just relating to the commercial business and the product quality premium and then maybe relate that back to the benefit you got from the relationship with Vitol during the first half. How should we think about the impact from quality premium in the second half versus the first half? I mean, others have called out some pressure in the first half, but it looks like your relationship with Vitol offset that to a large degree. So how do we think about that going forward?

Yeah, I can take that one as well, Michael. That's right. I mean, we have called that out in the outlook slide as well. And we're certainly seeing higher quality premium on products. There was a lot of volatility in the first half. and where you see the sort of trade and benefits, supply chain benefits that we've called out, that's really a testament to the quality of relationship we have with Vitol and our ability to smooth those sorts of impacts over time. So I don't expect that we'll be able to avoid those quality premium increases, and that's why we've talked to it on the Outlook slide. The job at the moment is conversations with customers to pass that on where it's genuine underlying quality and that's a continuing piece of work that we're very focused on.

We're going... Sorry, I was just going to say, Scott, it sounds like you're in a good position relative to your competitors, so it should be a relatively easier conversation with the customers. Is that a sensible way to look at it?

I wouldn't say that even this, but passing on costs are easy conversations with customers. They're always obviously difficult, but, you know, we do have... strong relationships with our customers and flexibility in our contracts for resources periods. But I'd also go back to the point I made before, is the commercial business is much more than just diesel and jet, and a significant proportion of our earnings come from other segments and other products, which are less exposed to some of the premiums that they're seeing come through on those main products. So, again, the diversity provides quite a bit of internal resilience to those cost pressures. Thank you.

Thank you. Your next question comes from Mark Wiseman from Macquarie Group. Please go ahead.

G'day, Scott and Siobhan. Thanks for the update today. Just had a couple of questions. Firstly, on the crude premier for the Geelong refinery, could you provide just a little bit more colour on crude sourcing in July and August and just in context for the second half? How big have those crude premiums been for the specific crews that you're running, and how do you think about that? Thanks.

Yeah, we don't provide that level of detail, but naturally, in a period where you've got strong refining tracks, particularly led by diesel tracks, that it tends to drive the premiums up for diesel-rich crews. In terms of your question, in a general sense, that's where we're seeing the particularly elevated crude premiums, where refineries are all incentivised to maximise user production, as we are as well, and that obviously sends the crude premiums up for those particular crudes. But that's only part of the slate, and obviously other crudes have lower premiums, and we obviously always try and optimise around the crudes that are available in market, and obviously this is the kind of views we take on what those forward margins are going to look like. So that's a pretty dynamic process that we run, and we obviously always try and make the best decisions we possibly can with the proofs that are available. But in a general sense, hopefully that helps you address your question.

Yeah, that's great. Thanks, Scott. And just finally, on the Geelong LNG import terminal as part of the energy hub, could you just maybe confirm the expected cost of that project? Is it still unchanged? And once the approval comes through, assuming it does come through positively, what's then required prior to FID?

Yeah, look, I might take the option of bringing Lachlan in to the right question.

Yes, go ahead. And thanks. Just to give you a bit of an update, maybe on the second half first on process, As Scott said earlier, we're now through the panel hearings and awaiting the report from that committee, which will then go to government. And so we're now looking to sort of the end of Q4 or in Q4 for that regulatory approval. We've obviously had the time in that period to get pretty organised with the project. As we've publicly said, we've got great commercial customer partners into the project and project to build the jetty, which is a significant part of the capital associated with the project. So we'll be looking to move to FID as soon as we can. It is dependent on both that government decision and then working with our customers on the timing to deliver that. But we'll be looking to do that as efficiently as possible after that approval stage. As to cost, I think that's something we need to update a bit later as we get closer to FID. As I said, with Dawnport coming in and building the pier infrastructure, they will take some of the capital expense through that arrangement and we will be funding the capital which does effectively the top sides of the pier and some of the onshore facilities and the pipeline to deliver the project.

That's great. Thanks, Lachlan. Cheers.

Thank you. Your next question comes from Dale Condis from Baron Joey. Please go ahead.

Morning, guys. Maybe just while we're talking about LNG, Can you perhaps give a little bit of update of where you are with customers and off-take and the certainty of sort of having the right financial terms to support the project moving forward? Is it really difficult seeing spot LNG prices as $50 US in an MBTU and domestic gas prices of $14 to see how the customers will support this?

Yes, I'm happy to take that question and thanks for the question. As I've noted before, part of our thesis for our project was always that we wanted to see customer support from day one and so we had that through the participation of the On Genome of Food Consortium and the typical BCGI and then Woodside joining the project. at the back end of last year, which I think shows directionally that the demand side and the customer side of the market sees the logic for where the LNG import tunnel is being placed, but also the long-term need for it. In terms of the gaps market, there's obviously a substantial difference between parties that are looking at term LNG as opposed to the spot pricing. Our base case is that we will provide the infrastructure and we're looking for partners who are taking long-term capacity in the facility and we still think that ceases to take hold. and will play out as we get closer to FID. Ultimately the commercials are underpinned by the gas supply position in Victoria and the Gippsland Basin coming off in the mid part of this decade and accelerating through the back end of the decade. So we think that still supports long term capacity off takers of the terminal who will be looking for long term gas positions in Victoria.

Okay, and then maybe just a follow-up question, probably more for Jovan. Just in terms of the balance sheet capacity, it's an amazing, strong balance sheet that you have. What are some of the competing opportunities for capital that you see for use before you'd maybe consider M&A or returning more capital to shareholders? Is it the refinery that's sent you around? what do you think you need to work through before you can make a better decision on how much capacity you have?

Thanks. Yeah, it's a good question. I think there's a range of factors we're working towards. It was only November last year that we put out the strategy presentation, talking to some of the opportunities that we were keen to pursue, and we're still conscious of the earnings target that we set out, the greater than $50 million of earnings over the next two or five years, and we're pretty focused on looking for opportunities to deliver that. Again, I think we've got a pretty good track record of returning money to shareholders through further capital management where it makes sense to do that and we continue to weigh opportunities against that going forward. There's a few things we've done. We've obviously brought forward the refining dividends to deal a little with the net cash position and we've got a pretty ambitious capital program certainly through the back half of this year and over the next couple of years and we'll be focused on delivering that But there's a range of opportunities for us out there. There's a number of which are known, such as the Liberty convenience opportunity, and obviously the LNG import terminal we've talked to. We'll continue to work opportunities to deploy that, and we'll keep you guys updated as we do that.

So is the second half run rate for CapEx then more indicative of the run rate going forward over the next couple of years?

Yeah, it's a little project dependent. It's certainly a higher capital year than it has been in the past this year, based on the guidance, and a lot of that is back-ended and focused on some of those energy hub-related projects, so things like the low sulphur gasoline upgrade at Geelong and the strategic storage tankage, which will straddle obviously next year and the year after as those projects complete. So it will be a bit of a heavier load in that space, and If we're able to get some new opportunities like the LNG import terminal up, then there'll be suspends associated with that too through that period.

Okay. Thank you.

Thank you. Your next question comes from Mark Santa, MSD Marquis. Please go ahead.

Morning, guys. I've got a question for you on the tapestry as well, Javon, and I'm not going to call it amazingly strong. I'm going to call it depressingly strong. Even on a mid-cycle refining margin, you've got, I mean, come the end of the year, you're going to make a lot of cash in the second half of this year as well. You're going to have well over a billion dollars of headroom, probably towards the bottom end of your gearing range. You talk about investing in the M&A and the 50 million, but either go up if you're targeting, but I think the message last time you guys spoke about M&A was that you're targeting kind of old world low multiple businesses to get either you're going to spend a billion bucks on 20 times EVA dialed businesses now or you're not going to be spending all of that headroom on M&A. Has there been any change in the thought process of what you're spending on M&A or should we still think there's going to be plenty of headroom to post M&A?

Yeah, I think we'll continue to consider opportunities. I mean, the $50 million earnings target that we put out there was in excess of $50. So, you know, there's obviously opportunity for us to deliver more than that. I hear what you're saying. I think I'd be personally pretty disappointed if we had to spend a billion dollars to deliver 50 of EBITDA. So I think that does give us some flexibility to consider a range of options, both in delivering that target and also opportunities for further capital management. But a little bit more time to play out as we think about those opportunities into the end of the year.

So, just even being even more direct on it, are you seeing opportunities that are even more accretive than buying your own stock back on subpar times either, though?

Well, I think there's a range of factors that lay against that, right? I mean, that's certainly the obvious opportunity, and we've demonstrated that we're happy to do that in the past. When you think about some opportunities in that space, particularly the Liberty Convenience one, which you know well, and the LNG import terminal, I think there's an ability to start to diversify the earning space a little bit more beyond traditional fuels. And so that's our value too. But again, you know, we've got to weigh the strategic value of that against the opportunity to undertake further capital management. And as you say, with a strong balance sheet and a lot of capacity that we have, it's potential to do a combination of things.

Can I just ask a quick question, if I can, on the retail result? We saw, of course, from our own poll in May, how much weaker second quarter than first quarter, and when we look at AIP margins, they were actually pretty consistent on average through the quarter, but it looks like you both probably underperformed industry margins whilst margins were falling during the second quarter. Is that a fair synopsis in there, or should we also take the second half industry margins today for 23 cents a litre versus 12.7 cents a litre? Should we also assume, if that's the case, that you probably outperformed the industry as margins arisen?

It's a little hard to hear you, Mark, but I'll have a go. I mean, I think the RIP margins that are published are obviously helpful directionally from time to time, but I think it is worth remembering that they're a bit of a simple average across all networks and all sites. And so, while they are helpful directionally, ultimately, the actual volume-weighted average The margin performance, the type of performance in each individual market around each service station is what drives the overall market. And I think you're right, the rising product prices and the volatility in that space in the first half has certainly had an impact. And I think industry has done, I think, a reasonable job of trying to manage that and absorb it. Obviously, as we go forward, there's a range of volatility in private prices and we'll have to continue to manage that while driving a sensible outcome for that part of the business. Perfect. Very good.

Thank you. Your next question comes from Joseph Long from UBS. Please go ahead.

Good morning. Congratulations on a solid result. Maybe if I just kind of... Our first question is just on the LNG import terminal. I guess, firstly, just wanted to understand the status of the HOA with Hogue LNG on the RFSU, and then leading into that is, how do you see the economics of your LNG import, given the ACCC report talking about the progress at Port Kembla and Venice Energy? Yep, good. Thanks for the question. I apologize, I just blanked on the first part of the question. quite closely with her as the market leader in SSRUs with regard to provision of a vessel. That heads of agreement is still on foot and we're working closely with them on delivery of a vessel. It obviously is relatively tight in that market given conditions in Europe at the moment. We are confident that we'll be able to secure a vessel. You should take into account that the envelope for delivery of the vessel that we're looking at is probably different to what is currently driving the European market, so we think there's good opportunity there. Of course, we need to get through the regulatory approval stage and then get into the commercial and SID stage before either we would commit or they to the final vessel to be delivered for the project. In terms of the advocacy report into gas, I think what you can read through that report is that while there's been some tightness in the market, supply has been maintained through this year, but the real drop-off in gas supply As I said before, it comes in the middle of the decade and grow into the back half of the decade. And so the delivery of our terminal matches that quite neatly. And so we think both AMO's current guidance and the updated AHRC report is supportive of the project we're looking to deliver. Okay. Got it. Maybe if I just turn to refining then. Just wanted to understand a bit more on your rolling energy hedging costs given the electricity prices have kind of lifted. How do we think about these costs gradually coming into the business?

Just to get out of the question around energy hedging, we've got a bit of a bad line here at the moment. Yes, yeah. Yeah, so look, in terms of energy costs, we... We have a mix of term contracts and we carry some spot which is evident in the results you can see in the first half because energy costs are slightly up reflecting our exposure to spot markets. But predominantly we do term and we carry a bit of spot because we like obviously to manage production variability and optimise around own gas and gas from the market as well. So that's a strategy that's served us pretty well in the past. will remain part of our hedging strategy into the future as well.

Okay. And then the last one, maybe just on your hydrogen refuelling facility, can you provide a bit of colour on how much earnings uplifts that might provide and how much that might contribute to your $50 million target? Yeah, thanks for the question. Just to recap for everyone, the hydrogen facility is a service station, a fully operational commercial service station that we're looking to deliver on out along the site by the back end of next year. We're looking at the first stage to have fully operational 15-odd vehicles running through that. part of the core thesis of the project is to bring those customers with us and they are part of the project and part of the funding. It's obviously only one station, right, so the earnings from that are not going to be material in the context of the business. This is more about a long-term strategy working closely with customers and government to prove as a viable alternative to diesel in the longer term and a zero-emission alternative. And we think there is long-term growth in that business, but it won't be materialising in the short term. Okay, just to confirm the economics of the standalone project today, that still stacks up on your return statement? I just lost it. We do have a bit of a bad line. I lost the last word there, but did you say, did the economics stand up on our capital framework? Yeah, your capital framework, how you think about allocating capital. Yes, they do, but you should take into account this is half government funded as well, right? So hydrogen at the moment is obviously not cost competitive either with the fuel or the vehicle to diesel. Over the period, over the future period, we expect that cost-competitiveness to get closer, but half the funding for both the building of the site and bringing the electrolyser, but also the delivery of the vehicles is being provided by ARENA. But with that funding involved, yes, we do expect a return from the service station. Okay, thanks.

Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Your next question comes from Scott Riles from WeMore Equity Research. Please go ahead.

Hi, thank you very much and thank you for continuing to set the gold standard for efficient I just have two questions. One is around 520 and some of the opportunities that you talked to around energy transition and I guess particularly co-processing and picking up on the hydrogen question just now. Can I just confirm on co-processing that you're looking to do that at Geelong and then You've acquired the little Leon Del Basil, if I've got that right, business already, but that would appear to me to be more an organic growth opportunity rather than any acquisitions. Would that be a fair comment to make? Yeah, that's probably the right way to think about it. Obviously, with the refining package we've agreed with government and committing to refining out to 2028, it gives us the opportunity to look at Geelong and work out what that's really bring a vision to what it can do in the back half of the decade and post 2030. One of the advantages of a refinery is it does have significant processing capability which is necessary to produce lower carbon fuels and recycled plastics. and that processing capability is variable. So it has the ability now to do some co-processing. We're looking at additional opportunities to develop new kits that would go into Geelong to process other weights and alternative feedstocks. We think that's an important part of an energy transition in the medium term. to be able to provide lower carbon fuels to the market while we've still got traditional engines for quite some time to come. So I guess the summary of that is that we feel like we've got the opportunity to do that work to develop those initiatives and we're pursuing that now. The plastic facility next door has been joined through our refinery assets We think it suits better to be part of the wider Viva Energy business now and that's the thesis for doing the acquisition. It now gives us the opportunity to look at plastic through cycling in greater depth and bringing the two businesses together makes that opportunity much easier to assess. And, obviously, the plastics industry, which is, again, if we consider the diversification and other streams of our specialty businesses, they've got their own challenges with regards to wanting to see increased recycling products come through that system, and there's some industry and government initiatives and mandates to do so over the coming term, so we think that's an attractive opportunity as well. Great. And then I'll just continue on the hydrogen one. You mentioned there's the first step in establishing a network along the East Coast, and I get the fact that it's along one site and all of this, but if that's ultimately the ambition, can you just explain to me the gateway for investment that you'd look at and what are the key milestones, I guess, that you'd be looking at in terms of making further investments and over You know, what sort of timing to place? Yeah, so the... Obviously, the Sydney to Melbourne route is such a heavy freight route that it's the logical first place to develop new fuels and initiatives in that freight market. And starting off with the Geelong gives you the anchor point to then build out that network up to Sydney and then, obviously, the Denwood to extend to Brisbane and then potentially to Adelaide in the other direction. You're probably surprised as to, you know, it's not that many service stations you need to build to connect the two major cities, and we're accessing that now. You should take into account there's also open now Victoria and New South Wales government funding to adapt to this exact express purpose. It was something that the two state governments had done together, so we'll be part of that initiative and looking to participate in that. And so from the stage gate, that's probably the first stage gate to looking to that expansion. The other important thing is to start to see vehicles on the ground, and that's the thesis behind this first go-on service station, what we really want to prove up with vehicles Geelong is the vehicles here in Australia and operating doing genuine commercial freight tasks for genuine commercial counterparties and shows that that can work and then that will then lead in and give the industry, the wider industry confidence to invest into the long haul freight network. Okay, great. And then can I just ask probably a question to Scott? I think the government started talking about potentially further changes in emission standards, obviously to enhance the availability of electric vehicles. But can you just give us a sense of how you're thinking about that in a strategic sense, please?

Yeah, look, I mean, obviously the one that has been announced and one that we're working to is obviously the introduction of low sulphur. petrol by the end of 2024, which is the most important change to support the introduction of low emission Euro 6 vehicles. I think that the government's looking for starting consultation around CO2 emissions, which is probably more about the vehicle myths necessarily. It doesn't necessarily move into bill standards. that will obviously change the model. It will further support the introduction of lower emission vehicles into Australia as well by regulation over time if that comes to pass. So there's always a bit of a nexus between vehicle standards and fuel standards, so we will clearly stay close to those issues. But, you know, so now the known part of the equation is obviously low sulphur, and that's what we're working towards and the project we have government support for. Okay, great. Thank you.

That's all I had.

Thank you. Your next question comes from Daniel Butcher from CLSA. Please go ahead.

Yeah, hi. Just a couple of questions really around... Firstly, just on your product space, just sort of curious whether we should expect diesel to be 41% and gasoline to be decent going forward. Maybe you can give us an idea for 2023 as well, given the second half of 2023 has been impacted by that totally cracker outage you mentioned. And just curious, can you break down the other 17% a bit? Because there's quite different spreads within culture than that within other. I'm just curious if you can give us a rough breakdown of that, please.

Yeah, sure. I can give you a bit of colour on the refining space, Dan. Excellent question. We're constantly assessing opportunities to process the optimal product play at Shillong, and some of that depends on the margin environment at the time, and some of it also depends on availability and the cost for different crews relative to others. And so while diesel production is a little bit off in the first half relative to prior periods, that's a pretty dynamic process where we're constantly assessing available crews relative to the sorts of margins that we expect to see over the coming months in the market. And so we'll move around a little bit from time to time. I mean, generally there's been a trend over the past couple of years of trying to maximise diesel production because that's where the strength in margins has been and certainly the expectation of strength in margins. and probably expect to see that continue, but it will depend a little on that dynamic process that the terms Geelong run.

Right, okay. Would you mind giving a bit of colour on the 17% return? How much is fuel oil, LPG, that sort of stuff?

Yeah, it's generally a pretty small component, fuel oil, and it's not necessarily a refined product. It's generally blended at Geelong to service specific industries. The other specialty products that fit within other are things like bitumen, chemicals, solvents and other products that support some of our specialty businesses in commercial.

Okay. Very good. Just to follow up on the question on energy costs, can you talk about how much gas and how much electricity Geelong uses? Does it mainly gas? or is the last portion of electricity there as well? And where was the contrast struck and when is the rollover on the gas side?

Yeah, so I mean, both gas and electricity are significant, you know, significant inputs into Geelong's operating costs. We've significant injuries on both fronts. And then we run a rolling tip for both electricity and gas, but also, as I said before, to add elements of spot as well, exposure just to optimise around production, spot prices in market and also to optimise, in the case of gas, as I said before, is optimised between whether they burn on gas or purchase off the grid. It's quite a dynamic process and it continues to roll and it obviously continues to affect the forward markets and take the optimal decisions based on what's available.

Okay, thank you. Just quickly on retail, the high margin premium fuels have dropped a bit by a couple of percentage points. Obviously, compared to down a little bit as well. Can you talk about where you think that could normalise that mid-cycle, those premium fuel sales, and could you increase your premium sales percentage with extra marketing expense?

That's a question. Yeah, we certainly are investing, and it's the focus of a lot of our investment program in both marketing and also availability. So we've been... The changes we made to the agreement with Coles back in 2019... where we were able to appreciate big powers exclusive to the Colts Express network. Since then, though, we've been able to roll that out across the whole Shell branded network. So that's been quite effective for us in improving availability and also exposure in market. And then our marketing spend has been to support that as well. So most of our sponsorship marketing is directed towards our sales brand, opinion brand. And we believe that also provides a bit of a halo effect for the broader other grades as well just by having a strong brand recognition and things that support the whole business. So it remains to be focused. It's a pretty important part of our strategy. But obviously at times of high petrol prices, consumers do need to make decisions to trade down. We've seen that in the past and we've certainly seen that through this period as well. where they'll trade down from $98 to $95 and $95 to $91 where they can depending on the vehicles that they're driving. So I think that's quite elastic. It'll come back again. If we come to a period where petrol sub-prices reduce and those parts become more affordable again for consumers,

One quick last one I'd like to just... You mentioned on slide 21 about the Alliance Refreshment Plan for 2020, so if you could just give us a couple of bullet points about what that involves.

The refreshment program you're talking about?

Yes. Yes, thanks, yeah.

Yeah, so we've been through a program with Coles of refreshing the stores over the last... or through the COVID over the last year or so, and we've done about 100... just done 140 of those... And the results have been, you know, we've been quite pleased with them and we've committed with Coles to do another 140 in the year 2023. So we'll continue to roll that out and hopefully continue to progressively refresh the whole network over time. So it's mostly focused on stores, but it's also a bit focused on optimizing forecourts as well and improving, like, diesel pumps that we're in. for example, and then having all grades and all pumps where we can. And how do you share the costs on that and the benefits? We just share them, so it depends on the... Some of it goes to Hawthorne, some of it goes to the store. We benefit from increased store sales in terms of higher royalties, and obviously just... From a consumer perspective, they see it as one business, so it's important that we continue to co-invest in it together.

All right, I'll leave it there. Thank you very much.

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

Thanks everyone for joining us this morning and for your questions. As I mentioned at the beginning of the session, I'm really pleased with the way the business has performed in the first half and the results that we've achieved. I'm also very excited about the projects that lie ahead and what they'll mean for our company. ourselves to both the energy transition and energy security. Thank you very much for your support. We really appreciate it. I hope you have a good day.

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