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Edited Transcript of CTX.AX earnings conference call or presentation 24-Feb-20 11:00pm GMT

Full Year 2019 Caltex Australia Ltd Earnings Call

Sydney Mar 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Caltex Australia Ltd earnings conference call or presentation Monday, February 24, 2020 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joanne Taylor

Caltex Australia Limited - Executive General Manager of Convenience Retail

* Julian Segal;Managing Director and CEO

* Louise Warner

Caltex Australia Limited - Interim COO

* Matthew Halliday

Caltex Australia Limited - Interim CEO

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Conference Call Participants

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* Ben Gilbert

UBS Investment Bank, Research Division - Executive Director and Analyst

* Daniel Butcher

CLSA Limited, Research Division - Research Analyst

* Darren Leung

Macquarie Research - Analyst

* Grant Saligari

Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director

* Mark Samter

MST Marquee - Energy Analyst

* Michael Simotas

Jefferies LLC, Research Division - Equity Analyst

* Shaun Robert Cousins

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Caltex Results Announcement Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Julian Segal, Managing Director and CEO. Please go ahead.

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Julian Segal;Managing Director and CEO, [2]

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Good morning. My name is Julian Segal. I'm the Managing Director and CEO of Caltex Australia. Welcome to our 2019 Full Year Results Announcement Call. Today, I'll provide an overview of our performance during the year and will be joined by our CFO, Matt Halliday. Following the presentation, we will take questions. In the room with myself and Matt, we also have Louise Warner, the EGM of Fuels & Infrastructure; as well as Joanne Taylor, the EGM of Convenience Retail.

I will start with a review of our safety performance on Slide 4. The safety of our people and customers come first at Caltex. Our 2 business segments operating environments, which present different hazards in the course of their operations. The Board, the Caltex leadership team and our employees all know the critical importance of keeping safety front and center to ensure that our people and our customers go home safely every day.

In Fuels & Infrastructure, we experienced an increase in low consequence injuries at Lytton, with a steady injury count across the rest of F&I. In 2020, we are redoubling our efforts to improve safety performance.

In Convenience Retail, we have seen an increase in the number of recordable injuries as a result of growth in site numbers, with most of these injuries being of a lower severity, such as slips and strains. We know we must lift our performance and are taking action, including the launch of First Time, Every Time to help people bring the right focus to every task, enhanced safety leadership actions and simplification of processes and store procedures.

Moving on to Slide 5. Our financial performance in 2019 was in line with guidance and was impacted by several factors that we have discussed during the year. Fuels & Infrastructure (ex Lytton) delivered a solid underlying result. While EBIT of $380 million was down 7%, this includes the negative $47 million impact from the EG Group contract, which was repriced and renewed in 2018 and the continued impact of a soft Australian fuel market. Lytton EBIT of $70 million was down, impacted by soft regional refining margins as well as outages at the refinery in the first half caused by external power interruptions.

Convenience Retail EBIT of $201 million was down 35%, mainly due to subdued retail fuel margins, partially offset by an improvement in share performance. The $5 million improvement in shop contributions in the second half represents an increase of 8% on the prior period, with operational improvements executed through the period. It is very pleasing to see Jo Taylor and her team gaining traction in improving share performance.

While our 2019 result is disappointing, we are pleased with the improved performance in the second half of 2019 relative to the first, delivered from all parts of our business. 2019 was a year with challenging market conditions, saw us experience unsustainable lows in both regional refining margins and domestic retail fuel margins. At our first half result, we're committed to take action to deliver improved returns in a tougher economic environment and unlock value in our portfolio for shareholders. We announced a cost-out program to deliver $100 million of sustainable savings to our business. And in 2019, we delivered $60 million of this program with a further $40 million to come in 2020.

We also announced that we will divest around 50 retail sites deemed to have a higher value through alternatives, with the first tranche of 25 sites being sold for $136 million. In November, we also announced our intention to IPO up to 49% interest in approximately 250 of our core freehold retail sites. This has progressed well, and Matt will provide an update on this shortly.

These initiatives demonstrate our strong focus on cost and capital discipline to deliver sustainable uplift in returns and ultimately allow us to release our sizable franking credit balance to our shareholders while not impeding delivery on our strategy.

Moving on to Slide 6. As previously mentioned, the economic weakness experienced in 2019 provided a challenging backdrop for our business. All the charts show the Australian industry experienced a decline in wholesale volume, driven by cyclical weakness in agriculture, construction and retail sectors. The impact of this cyclical weakness is evident in diesel demand, which saw benign demand growth in 2019 versus average annual growth rate of around 5% to 6% per annual over the prior 3 years. As Australia's leading transport fuels company, these conditions have had a significant impact on our business with our diesel falling down 1.9% against the previous corresponding period. The main factors behind this decline were the one-off benefit from the overlap of contracts with a large mining customer in 2018, which benefited prior year by 100 million liters. The prolonged drought, resulting in approximately 50 million liters lower volumes sold into rural areas as well as growth and customer demand from B2B customers linked to economic softness.

Our jet fuel volumes were down 4.7% in 2019 as we remain disciplined in a competitive market undergoing rising input freight costs. Our focus is always on maximizing value rather than chasing volumes. Freight recovery charges are typically fixed in jet contracts, whereas the cost borne by Caltex varies with market conditions. And we have exercised the right discipline to maximize value through this cycle. This also impacted F&I earnings in 2019, as Matt will discuss later.

Caltex has a strong track record in supplying high-quality jet fuel for our customers, and we will continue to adjust our offer for these conditions and to support the expected medium-term growth volume from this sector. In line with this approach, contract wins in the fourth quarter of 2019, then we expect to recover over half of this lost volume in 2020 outside of the impacts from the coronavirus, which we'll address further in our market outlook.

While economic weakness has also impacted our Convenience Retail volumes, particularly due to our large share of the retail diesel market relative to competitors, we are pleased to regain market share through our continued focus on fuel. Further evidence of this success is our ongoing growth in premium fuels volumes by 0.5%, which made up around 49% of our total retail fuel volumes in 2019. Retail fuel margins improved in the second half of 2019 relative to what was experienced in the first half of 2019. This improvement in margins was driven by gasoline, which Matt will discuss later.

Moving now to Slide 7. Despite domestic volume softness, the financial performance of Fuels & Infrastructure has been solid, which has been enabled by our continued focus on efficiency and our ability to optimize across our integrated value chain.

International volumes grew strongly in 2019 as market conditions in the second half were favorable to third-party sales. Additionally, Gull in New Zealand has delivered continued solid performance, with sales volumes growing in 2019 to exceed 400 million liters. And we are pleased by SEAOIL's progress during 2019 on the growth plan. We gave a detailed overview about our international growth ambitions at our Investor Day and continue to remain excited by this area of our strategy.

Moving on to Slide 8 now. 2019 was a pivotal year for Caltex, and I'd like to spend a moment to recap on some of the highlights. In the first half, we delivered our commitment to return capital to shareholders by completing a $260 million off-market buyback. We are cautious of the value of franking credits to our shareholders. And through execution of the various strategic initiatives underway, we remain focused on making further return to shareholders going forward. The buyback was completed while maintaining Caltex' strong balance sheet, with our credit metrics within our target range at year-end.

We conducted an important review of our retail network, which has enabled the tiered format strategy, including rolling out our first 2 Metro stores along with operational practices that will drive enhanced profitability at the site level. We also announced an intention to IPO a 49% interest in the freehold properties within our core retail network. This transaction is expected to deliver significant value for shareholders at a time when there is a strong investor demand for high-quality property assets. In turn, listing significant capital and improving returns for our shareholders.

Our 2019 Investor Day saw us outline plans to further build our international capabilities through the opening of a trading and shipping office in Houston as well as starting our international storage expansion in Singapore. These 2 initiatives offer exciting growth potential for our Fuels & Infrastructure business, in addition to the continued growth of both Gull New Zealand and SEAOIL in the Philippines.

Finally, we announced in December our plans to relaunch our iconic Ampol brand, which presents the opportunity to better reflect our proud Australian history and our position as Australia's leading transport fuels company.

Moving on to Slide 9. Caltex is a resilient business, underpinned by privilege assets, core capabilities in managing complex supply chains and deep customer relationships, which together underpin our competitive advantage. We will strengthen the business and create further value by delivering our announced strategic initiatives.

Our Fuels & Infrastructure business continues to generate reliable cash flows and has strong regional growth prospects that leverage our core strengths across the supply chain with our trading and shipping capability being a key advantage we continue to develop.

In Convenience Retail, as we head into the last year of franchise transitions, the strength of our retail network, combined with our fuel focus and retail partnerships means we are better positioned than ever to grow earnings.

In addition to maintaining a strong dividend, where surplus capital exists, we continue to prioritize further capital returns to maximize shareholder value and return franking credits.

Slide 10. Before moving on to our financial results, I would like to reflect on why Caltex is well positioned to deliver both the potential $195 million earnings uplift and unlock further asset value by 2024. We see a pipeline of international growth opportunities for F&I that have the potential to deliver $70 million of earnings uplift and we will maintain our strong position in retail fuel whilst delivering on the potential nonfuel earnings uplift of $85 million. We will also continue to leverage our history of cost discipline to deliver the remaining $40 million of cost out in 2020.

Finally, value will be unlocked for shareholders through our retail property IPO, the proposed hybrid instrument and the divestment of the second tranche of higher or better use properties. This will be complemented by continued focus on capital efficiency.

Thank you, and I'll now hand over to our CFO, Matt Halliday.

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Matthew Halliday, Caltex Australia Limited - Interim CEO [3]

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Thank you, Julian. Good morning, everyone. Julian has highlighted the difficulties faced in 2019, where our financial result was impacted by weak economic conditions. The waterfall chart on Slide 12 highlights the key drivers of the reduction in RCOP EBIT from 2018 to 2019. RCOP EBIT fell by $219 million in 2019, with this mostly driven by softness in our -- in 2 of our most important margins, refining and retail fuel. Lytton earnings were $91 million lower, and the impact from retail fuel was $115 million lower compared to 2018. Compounding this was the impact of the repriced EG Group fuel supply contract, which had a $47 million impact in 2019. What is not shown in this waterfall is that much of this profit impact occurred in the first half. With RCOP EBIT up almost 40% in the second half of 2019 compared to the first half as market conditions stabilized, most of the contract reprice had flowed through, and with benefits of our cost out program starting to be realized. We said at the first half result that we would take action to drive better performance across all parts of the business, and I'll now detail the progress we have made on Slide 13.

We are very well progressed on our $100 million cost out program, having achieved $60 million in 2019, with these savings being approximately $30 million to Corporate, $15 million to Convenience Retail and $15 million to F&I. These sustainable savings have been important in offsetting the natural cost inflation within the business, and we are confident in our ability to deliver the remaining $40 million of this program in 2020. The baseline for these savings is 2018 and excludes natural group cost inflation and transition of sites, so as to be like-for-like. The cost out is heavily focused on fixed costs in Corporate and in the business units, and on our external spend by improving our procurement practices right across the group. Corporate benefits have been driven by a reduction in labor and consulting spend as well as heightened focus on other overhead costs. In 2021, that will include a substantial reduction in office rent as we move out of the CBD to Alexandria.

Continuous improvement is part of our DNA, which creates a competitive and efficient organization for us to ensure we are delivering strong returns for our shareholders. Our focus on capital discipline saw 2019 capital expenditure of $270 million and we expect 2020 CapEx to be around $300 million.

The waterfall chart on Slide 14 provides some further detail on the F&I result. F&I delivered total EBIT of $450 million, with F&I (ex Lytton) exiting deliver an EBIT of $380 million, down $29 million compared to 2018. This is a solid underlying result when considering the $47 million EG contract impact and an $18 million impact related to jet contracts that Julian noted earlier. Jet contracts are typically structured so that the supply carries the risk for movements in freight rates, which moved against Caltex in 2019, but we would expect to normalize through the cycle. As Julian also noted, weakness in the Australian economy as well as the drought have proved very challenging for wholesale demand. However, the business has taken action to offset these headwinds through the international business, in particular, with EBIT up 6% and through a strong focus on cost discipline right across the supply chain.

Lytton EBIT of $70 million was down significantly from the $161 million in 2018, with a $54 million impact from weak regional refiner margins and a $38 million impact from lower production as we thought to trade-off production volume and mix in lower-margin conditions. There was a $10 million impact relative to 2018 from the outages in the first half of 2019. The Lytton impacts were only partially offset by the receipt of a $7.5 million insurance payment relating to the outages and its continuous improvement benefits realized during the year.

Moving now to Slide 15. As previously mentioned, refiner margins were lower in 2019, with an average of USD 8.08 a barrel versus USD 9.99 a barrel in 2018. As you can see, the external margin conditions experienced at the end of the year and into January are towards the lowest seen in recent years and well below the 10-year average of USD 11.43 a barrel. In second half 2019, refiner margins have been most significantly impacted by both higher crude premiums and freight costs, as shown through the Malaysian OSP Premium differentials shown on the chart. This index represents a typical sweet crude basket in Asia versus Dated Brent and is, therefore, a useful proxy for regional crude premiums.

Lytton recorded sales from production in 2019 of 5.5 billion liters, in line with guidance, but down from the 6 billion liters achieved in 2018. This lower production was due to the outages already noted and the decision to reduce feedstock purchases due to softer margins. This is evidence of us constantly optimizing our supply chain in combination with our refinery, including decisions about make versus buy. This decision-making approach using market insights is an example of how we leverage our integrated supply chain. In 2020, we remain focused on retaining Lytton back to historic production levels, with 2020 production guidance of 6 billion liters, as usual, subject to this production level being economic. This production guidance includes the impact from the third and final phase of the current T&I maintenance cycle, which is planned for August.

Moving now to Slide 16. The year has started with 2 significant market disturbances impacting crude markets, being the transition to new marine fuel oil standards under IMO 2020 and the outbreak of the coronavirus. The initial response to IMO has been greater demand for low sulfur fuel oil, which has in turn driven up light sweet crude premiums. It is still too early to assess the full impact of the coronavirus. However, we have observed Chinese demand erosion, as you would expect as well as run cuts we are seeing across Asian refineries. We have seen some softening in freight rates and crude premiums. However, we note that this will take some time to realize in our results given our long supply chains. It is important to note that the market is yet to settle regarding both disturbances, and Caltex will continue to actively monitor market conditions with a view to leveraging our flexibility across the value chain to maximize value in the prevailing conditions. We will also continue to publish our CRM results monthly while we see these highly variable conditions.

Moving now to Slide 17. Convenience Retail delivered EBIT of $201 million for 2019, which was $106 million lower than 2018, given weakness in industry retail fuel margins. Shop margins after site costs contributed an extra $5 million for the full year, with this number representing a net increase of margin plus site costs as the network transitioned to over 80% company-operated by the end of the year. This represents an increase of 115 sites that are now company-operated. Network shop sales grew by 2% during the year, driven by strong growth in hot beverage and fresh product categories. Caltex' national market share also increased by 0.2% to 20.5% during the year. We expect performance to accelerate through delivery of the initiatives discussed at our Investor Day in December, including our increasing focus on operational efficiencies and merchandise in store.

Cost of doing business increased by $14 million, driven predominantly by increased occupancy costs in the lease portion of our retail network and by one-off site maintenance costs associated with improving the safety standards of transition sites.

As mentioned at the first half result, the reduced earnings from profit on site disposals and asset write-downs largely reflects the $8 million gain on sale of the Burleigh Heads site in 2018. No site sales in 2019 were recorded above the line, with the $53 million profit on divestment of the first tranche of higher and better use sites being recorded as a significant item for 2019.

Moving now to Slide 18. Retail fuel margins in 2019 were lower than 2018, primarily as a result of domestic economic weakness and a heightened competitive dynamic. While retail fuel margins were soft in the first half of 2019, the AIP data, although indicative in nature, shows that gasoline margins recovered in the second half of the year as industry pricing became more rational and better reflected the realities of cost pressures across marginal sites. We continue to benefit from our focus on fuel and our advanced capability in this area, which, when combined with the strength of our network, enabled us to continue to outperform the industry in the second half.

Disciplined pricing and a focus on premium fuels saw Caltex restore its market share during 2019, with a decline of 2.2% better than the industry decline of 2.3%.

Another pleasing aspect of our retail fuel performance has been the further growth in premium fuels. Over the year, we managed to grow our premium volumes by 0.5%, which reflects our site-level investment in promoting the benefits to customers of our high-quality fuels, which now represent just under 50% of total Convenience Retail volumes. In the chart on the right-hand side of this slide, we compare Caltex' retail performance to industry in the second half 2019 on a net available margin, or NAM, per site basis as we did at the half year. Caltex continued to outperform the industry during the second half when comparing the NAM per site to the previous 6 months, with Caltex being up 7% versus industry at 5%. This is before considering increased shop earnings or value captured from the integrated fuel supply chain.

While we have seen some stabilization in industry conditions in the second half of the year, 2019 was clearly a difficult one for the entire industry given the soft economic conditions, cost pressures and changes in the competitive landscape. Caltex is well positioned relative to the industry, given our integrated fuel supply chain, our strong network and our high-quality fuel offering. Given diesel represents approximately 50% of our retail volumes, which is higher than industry average, we are also well placed to benefit should diesel margins continue to recover. We will continue to maintain our focus on fuel to balance our decisions across margin and volume to maximize value. We do this by maintaining a competitive position in base grade, while leveraging our strong premium fuels offer and differentiating across micro markets in which we operate.

Turning to Slide 19 to review the impact of the result on cash flow and balance sheet. Net borrowings, excluding the present value of lease liabilities ended the period at $868 million, lower than the $955 million at the end of 2018, which resulted in Caltex' leverage ratio sitting within its target range of 1.5 to 2x adjusted net debt-to-EBITDA by the end of 2019. This is an exceptional result, considering the very difficult economic conditions experienced during the period and the $500 million in shareholder returns delivered by Caltex when taking account of dividends and the $260 million off-market buyback executed in April. This reinforces the underlying resilience of the business and the high quality of its assets. The drivers of this reduction in net borrowings included solid operating cash flow of $835 million and a $142 million impact from the sale of property, which includes the proceeds from the divestment of the first tranche of higher or better use sites at the end of 2019. The $129 million movement in other financing activities relates mainly to the adoption of AASB 16.

Total capital expenditure for the year was $270 million, consisting of stay in business spend of $161 million, growth CapEx of approximately $95 million, and corporate CapEx of $14 million, which is mostly sustaining in nature. Adjusted debt, which includes the present value of future lease liabilities and other adjustments made by the ratings agencies, totaled $1.78 billion.

Moving to Slide 20. Today, we announced a final dividend of $0.51 per share, reflecting just over a 60% payout ratio being just above the midpoint of our guidance range of 50% to 70% of RCOP NPAT. Through improved financial performance in the second half as well as the progress made on our strategic initiatives, our leverage has improved relative to where it's at in the first half. The resilience of our underlying business and continued execution of our strategic initiatives means that we expect to be able to unlock significant capital and return -- and improve returns to our shareholders.

On Slide 21, I would now like to provide a brief update on the proposed retail property IPO, which we announced last year. Work continues to progress with a portfolio of approximately 250 sites defined for the property trust, of which Caltex will retain a 51% interest. Key features of the trust include a weighted average lease of 18 years and annual rental escalations of CPI. And we continue to target being ready for a listing on the ASX by mid-2020. Delivery of this strategic initiative will provide validation of the value of our retail property assets and is expected to release significant balance sheet capacity to enable shareholder returns and release of franking credits.

I would now like to provide a brief recap of the acquisition proposals the company has received. As announced on 17th of February, Caltex received a proposal from Couche-Tard to acquire all of the shares in Caltex by way of a scheme of arrangement at an indicative cash price of $35.25 per share less any dividends declared and paid by Caltex. The Caltex Board considers that it is in the interest of shareholders to engage further with Couche-Tard and is providing them with the opportunity to conduct due diligence on a nonexclusive basis. On February 19, Caltex announced that it had received a proposal from EG Group to acquire all of the shares in Caltex via a scheme of arrangement for a combination of $3.9 billion in cash and securities in an entity to be listed on the ASX, which would own the Caltex Fuels & Infrastructure business. The Caltex Board continues to consider the proposal.

The Couche-Tard and EG proposals are each subject to various conditions, and there is no certainty that either will result in a change of control transaction.

Now let me hand back to Julian to discuss the 2020 outlook.

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Julian Segal;Managing Director and CEO, [4]

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So turning now to Slide 23. We continue to make sustainability a part of our corporate culture by incorporating it into our strategic and business planning processes and shaping our strategy in a way that delivers long-term value for our shareholders, customers and the community. One recent example of this work is our response to the bushfire crisis.

Caltex continues to support the communities in which we operate in by providing StarCash donations to drought and bushfire affected areas. I'm particularly proud of our operational efforts during the bushfire crisis in keeping regional communities supplied and supporting the efforts of the Australian Defense Force and Rural Fire Services in extremely difficult and hazardous circumstances.

Moving to Slide 24. We expect 2020 will be another pivotal year for Caltex as we continue to progress delivery of our strategic initiatives. An important initiative is the relaunch of our Ampol brand. A significant amount of work has been completed and we'll commence deployment in a capital-efficient way in the second half of 2020, which will scale up in 2021. Our focus, as always, will be on driving value from our core business and exercising cost and capital discipline to enable delivery of shareholders' returns.

Within our Fuels & Infrastructure business, our focus will be on returning Lytton production back to historic levels, aiming for 2020 sales from production of 6 billion liters, subject to market conditions as well as completion of the planned T&I by the end of August.

Debottlenecking projects at Lytton are expected to allow for production between 6 billion to 6.5 billion liters over 2021 to 2023, again, subject to market conditions. We will also continue our regional expansion through Gull in New Zealand and SEAOIL in the Philippines as well as commence trading activities in our Houston trading and shipping office and further progress our international storage capability in Singapore.

In Convenience Retail, we'll be focusing on driving customer-led initiatives across both fuel and shop, with the safety of our people and our customer critical to our success. The transition of franchise sites to company operations will be substantially completed by the end of 2020 with a clear focus on delivering operational efficiencies across the network. We will also continue the disciplined execution of our tiered format strategy that will include the opening of a further 3 to 5 Metro pilot stores throughout the course of the year. Recent AIP data in 2020 indicates ongoing strength in gasoline margins, with these retail margins now also beginning to recover from sustained weakness through 2019. Finally, our focus at the group level will be on capital discipline across the business, delivery of the remaining $40 million of cost out and progress across our key strategic initiatives to enable improved shareholder returns.

As this will be my last result after 11 years within Caltex, I will provide an update on this year's succession process that commenced in August last year when I informed the Board of my intention to retire. I will formally step down as Managing Director and CEO from the 2nd of March 2020. Matthew Halliday, currently Caltex' Chief Financial Officer, has been appointed as Interim CEO of Caltex with effect from the 2nd of March 2020. Current Executive General Manager, Fuels & Infrastructure, Louise Warner, has been appointed as Interim Chief Operating Officer; and current Deputy CFO, Jeff Etherington, has been appointed Interim CFO. Jo Taylor will continue in her current role of Executive General Manager Convenience Retail, reporting to the Interim CEO. The Board decision to pause the search for a CEO and make this interim appointment is prudent given our recent announcements regarding Couche-Tard and EG Group's proposals. Importantly, these appointments will allow us to continue to engage with interested parties while continuing to execute our strategy.

In closing, I want to thank all our investors for an enjoyable and satisfying 11 years. It hasn't always been smooth sailing and at times, we disagreed, but I'm proud of what has been achieved and sincerely believe the business is positioned well for further success. I have no doubt that in whatever form it ultimately takes, the Caltex business has a bright future ahead.

Thank you for your time today, and we'll now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Michael Simotas from Jefferies.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [2]

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The first question from me is on the Fuels & Infrastructure business. Now clearly, the environment's pretty tough, but it was a nice solid result from the core Australian part of the operations. Can you just talk a little bit about the competitive landscape in each of your verticals? And also how you manage the business through the period? It sounds like you're very disciplined when it comes to taking costs on contracts. So you talked a little bit about jet, but just across the other verticals, how much volume you might have given up and what you expect to recover into the next period?

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Louise Warner, Caltex Australia Limited - Interim COO [3]

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Michael, Louise here. Yes, I think we would stick by the message we've sent all along with F&I. Firstly, I think we adjust our operations for the market conditions, and we've provided the jet example there as a clear example of us focusing on value rather than volume. We do know that the market conditions in 2019 put a bunch of our customers under pressure, and so we adjust our supply chain across all products to compensate for that. And as Matt talked about, continuous improvement is also a key part of that. So we're looking for efficiencies and changes to our supply chain each and every year. So as we look forward, I think the big disturbance, as we talked about, is the coronavirus coming into 2020 for our Australian customers. We are seeing impact already on jet fuel demand, so we'll see how that plays out. And then we are seeing some initial positive signs out of some of the key sectors like agriculture, with the rain finally coming in some key areas. So it's a bit of wait to see what our customer demand is and then we will continue to follow the practices that we have demonstrated over the last few years of running our business efficiently into the market conditions.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. And in 2019, obviously, demand was subdued, but there's also a lot of diesel in the region as well, sort of see you called out jet and that's largely freight costs. What about on diesel? Did you have to absorb much margin pressure on diesel? Or was there a fairly disciplined approach in that segment as well?

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Louise Warner, Caltex Australia Limited - Interim COO [5]

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Yes. We haven't called out anything intentionally there. So yes, we look at the integrated supply chain and then adjust both the sales and the cost side to adjust to those conditions. Obviously, we would like to see the market return to the steady growth that we would see, and we do anticipate that coming through in the medium term as we highlighted at the Investor Day.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [6]

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Okay. And while we're on that, the coronavirus impact that you've called out across the market, is Caltex likely to be affected broadly in line with the market, just based on your exposure, whether that be international versus domestic or directly to Chinese carriers? Or are you a little bit protected by your mix?

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Louise Warner, Caltex Australia Limited - Interim COO [7]

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I think we're largely in line with the industry, but we also say that it's an evolving situation. So we're talking directly with our customers and understanding what's impacting their flight numbers and their transport. So we also expect that to be an evolving situation, depending on where we see the impacts of the virus prevail.

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Operator [8]

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The next question comes from Shaun Cousins from JPMorgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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Just a question on Convenience Retail. In terms of your 2% increase in network shop sales, did you get a similar increase in weekly sales per store? Or was that a little lower? And you've also highlighted a 5% uplift in shop contributions. Can you just confirm that? I assume that's 4-wall or store profitability. And what were the major drivers of that? Was it sort of the work on gross margin or labor costs or other drivers there? So maybe a question for Jo, please?

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Joanne Taylor, Caltex Australia Limited - Executive General Manager of Convenience Retail [10]

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Of course. Shaun, it's Jo Taylor here. So just to cover off your 2 questions, we did see the increase across all stores across the network. But of course, as you know, in a retail environment, we did have some stores perform more strongly given their respective situation in the market. So overall, on average, we saw each store improve their performance, but some really strong performances from stores that have had recent refreshes by way of example. In terms of the drivers of the improved performance in shop, it reflects what we spoke about at the Investor Day. So really 2 key drivers, Shaun. We're seeing the improvement in operational performance as a result of simplifying processes in-store, so really removing some of the work that is being done at a store level and automating that has had a benefit in the way in which we utilize labor in-store and allowing our spend in turn to spend more time focusing on servicing customers in stores rather than people being in the back office and doing paperwork. So that's been a clear important driver for labor.

In addition to that, we particularly saw in the second half improvements in our merch performance. So really driving value through coffee, to send a clear message to customers about good offers, good value offers at Caltex, but leveraging that with some margin mix opportunities in-store as well, so that we're ensuring we're dropping more dollars to the bottom line. So those things made a big improvement to shop performance. And as well, what we're seeing, as we've spoken about previously, there has been a lot of change in the network as we transition. And as we get forward into the -- now the final year of transitions, we're seeing the benefit of that flow-through to profitability, and we expect that to continue to improve as we end the year in 2020 with the majority of stores being company-operated.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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Great. And about that question on CapEx guidance. The $300 million -- and this maybe for you -- either you go or Matt. Just how much is incorporated in the $300 million for the Ampol rebrand? And just how do we think about in terms of not only the corporate stores that you have, but who's going to pay to rebrand putting Ampol on the current EG or former Woolworths petrol sites, the reseller sites? How does that actually play out by way of -- do you sort of -- does the individual operator there -- do they pay for it? Or do you -- or does Caltex have to pay for that and then you sort of claim that back by a higher sort of prices over time? I'm just curious around how that Ampol rebrand plays out and whether or not that's part of the $300 million CapEx, please?

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Matthew Halliday, Caltex Australia Limited - Interim CEO [12]

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Yes, Shaun, it's Matt. Let me take that. Look, we manage our CapEx as an envelope. So we've guided to $300 million, and that's what we expect to manage all of our CapEx for 2020 within, including the spend that we have for the year on the rebrand. In terms of the obligations, the obligation to rebrand is across the 2,000-site network. And so that's the -- they're the plans that we have in place to roll out.

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Operator [13]

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The next question comes from Mark Samter from MST.

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Mark Samter, MST Marquee - Energy Analyst [14]

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A couple of questions, if I can. The first is just around the bids, plural. And was wondering if you could give us -- you guess you've now got a bid, the fixed price bid that reduces by the dividends, the one that doesn't reduce by the dividends. Can you give us clarity on how the Board is thinking about the price for the Couche-Tard bid? Do we assume it goes through another dividend and therefore, whatever the right number is, you're down at low $34 a share to compare the year ago you just bid against?

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Matthew Halliday, Caltex Australia Limited - Interim CEO [15]

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Yes. Thanks, Mark. I'll take that. So look, the Board has considered the Couche-Tard proposal, obviously, including the impact of the dividend reduction, and has determined that it's in the best interest of shareholders to move that transaction into the next phase and offer due diligence. So it is considered the value across some different scenarios and it's decided that pushing it into this next phase of offering diligence is the right step forward. In terms of EG, the EG proposal, as I mentioned, it's still being evaluated. Clearly, compared to a cash proposal, it is more complex. And so exploring what the value of the future security might be, exploring the impact of the dividends in a relative sense, that's all part of the equation that's currently under evaluation by the Board.

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Mark Samter, MST Marquee - Energy Analyst [16]

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And then just a second question, I don't know, maybe it's hard to put aside near-term volatility because of the coronavirus. But if we go back and look at what the business thought about the business going forward when you first rejected that Couche-Tard bid. I mean -- I guess I'd look at this result and say it's the first result in a very long time for Caltex that hasn't disappointed, to be honest, there's some pretty strong signs of encouragement and, yes, to see how much of the Convenience Retail result was margin impacted and where we're cycling margins now. Look, as a business, when you look at the future of Caltex as stand-alone business now versus when you first rejected that bid, have you actually seen cause for more optimism rather than less optimism, particularly given what Convenience Retails do?

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Matthew Halliday, Caltex Australia Limited - Interim CEO [17]

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Look, I think as we set out on the 5th of December at our Investor Day, we set out that we have -- we're very confident in the position of the business, our ability to create value, and we talked about the initiatives on both the F&I and the Convenience Retail side to have initiatives to grow earnings. We're very confident in our ability to unlock value from the portfolio as well. So I think we set out pretty clearly that we see a bright future for the business. And we stand by that. And we think the result here evidences that. As you say, close to a 40% increase in EBIT, half 2 and half 1, is reflective of the underlying strength and resilience of the business. So we continue to remain optimistic. Having said that, we believe that the right step on the Couche-Tard proposal is to move it into due diligence to look at what transaction could make sense to maximize value for our shareholders.

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Operator [18]

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The next question comes from Ben Gilbert from UBS.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [19]

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Just interested first just talking about the retail margins on the fuel side, it seems like and as the oil price coming back a bit has helped, but just your view around the competitive backdrop in the space at the moment and your ability to sort of sustain or see that sort of ongoing positive momentum around retail for your margins?

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Joanne Taylor, Caltex Australia Limited - Executive General Manager of Convenience Retail [20]

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So Ben, it's Jo Taylor. As Matt touched on earlier, what we saw in the second half of last year was a clear improvement in retail fuel margins. And we saw the behavior in the market reached a level of stability towards the back end of the year. We're only 2 months into 2020, but we're seeing that continue. Obviously, as you mentioned, some improvement in input costs is assisting in that, but we're also seeing behavior in a way that is reflecting some stability come back into the marketplace, and that is benefiting our result as we're in the first 2 months of this year.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [21]

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That's great. And just second one for me...

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Matthew Halliday, Caltex Australia Limited - Interim CEO [22]

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I think the AIP data indicates that you can see some improvement continuing on into the first part of this year.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [23]

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Yes, okay. That's great. And just second one for me. Just interested in the guidance for Convenience in terms of the back courts for 2020, just around the top line and also the margin. And I was just interested -- I know if you don't want to delve into specific categories too much, but just tobacco versus ex tobacco because, obviously, tobacco is a pretty material part of sales. It sounds like that's been more challenged or more competitive. Just what are you thinking around that category? And I suppose, is that what's leading into your expectations around improved GMV just for a mix effect?

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Joanne Taylor, Caltex Australia Limited - Executive General Manager of Convenience Retail [24]

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Ben, it's Jo again. Look, we see tobacco in our business reflect what is happening in the broader market. But there is still opportunity to continue to play competitively in tobacco and in a similar way across other products. It's about making sure we've got the right mix of value and premium products, and that is a clear part of our tobacco category focus that we will maintain this year and into the future. I think what's really pleasing in the shop performance is that we're seeing our new categories continue to get stronger and stronger. So the rollout of hot beverage through coffee and that platform across our network is continuing to drive increased visitation to our stores, and we're seeing it flow through to sales and a greater attachment rate. At the same time, we're seeing our move into food-on-the-go drive strong results and improve GP in those categories as well by getting the right mix in-store in terms of the actual basket that our consumers are purchasing.

So in summary, yes, a clear focus on us on maintaining our market position with tobacco and then continuing to drive these new categories to drive both sales and GP in store.

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Operator [25]

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The next question comes from Darren Leung from Macquarie Group.

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Darren Leung, Macquarie Research - Analyst [26]

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Just a quick one. Can you give an update on the second tranche of the high and best use assets, please?

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Matthew Halliday, Caltex Australia Limited - Interim CEO [27]

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Thanks, Darren. So look, we're doing the work, the same way we are with the IPO to be ready to launch. So we're preparing ourselves and are ready to launch the second tranche. At the moment, we're obviously quite focused on the transactional activity, but we have the HBU second tranche slightly -- it's ready to go and it's ready to launch that program as and when we need to.

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Darren Leung, Macquarie Research - Analyst [28]

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Understand. And just another -- a second question. Just to clarify, how many parties have reached out to you regarding -- I'm sorry, since the initial Couche-Tard transaction, please?

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Matthew Halliday, Caltex Australia Limited - Interim CEO [29]

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As we've -- as we discussed in our early January release, a number of parties have expressed interest in parts of the business, and we continue to explore with those parties, whether there's something that makes sense.

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Operator [30]

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(Operator Instructions) The next question comes from Grant Saligari from Crédit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [31]

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I want to start by acknowledging the strength of the Fuels & Infrastructure business. And you've obviously shown a lot of discipline in pricing. I guess my question is around the volume implications and for how long are you going to actually withstand declining volume in what is largely a fixed cost business? You've obviously had some difficult market conditions in 2019, with a possible exception of agriculture, it's likely to be more difficult in 2020 in this competitor. At least one competitor that's fairly aggressive at growing volumes. So just interested in your thinking around your ability to sort of sustain this sort of type of discipline on pricing and where the possible volume impacts that you've been incurring across our business.

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Louise Warner, Caltex Australia Limited - Interim COO [32]

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Grant, Louise here. Yes. So I think we have confidence in the position that we're in, in the market. So we are the market leader, and we have all the strengths that we've talked about in the Investor Day. So our relationship with customers, our assets and then the ability to integrate across the supply chain including not being worried about where we actually make money. So what I would say is, we have seen 2 different types of volume impacts. So some market-related and some our choice. So market-related, we would say 2019 had a particular characteristic. We are seeing the impacts of coronavirus around some of the products, but we would say and we would still stand by our medium-term outlook of growth in those 2 key sectors for F&I volumes, which is jet and diesel.

In terms of how we price or how we look for value, all of the costs and the benefits of our supply chain are considered through that, so each decision we make considers that integrated supply chain and the value we can create. So we are very much open to the overall portfolio as well as the individual decision. And you can see that cycle and that discipline playing out on the reverse as we regain contracts through that discipline as well. So overall, I think we know it's a competitive industry. We wouldn't say there's a single competitor that's aggressive in chasing our volume. We know that all of our competitors are doing that. But we're confident in all of our strengths as a company to continue to compete and maintain our position.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [33]

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But your comments would suggest that the contracts that you're choosing not to win have a negative GP or a negative variable profit contribution or you're able to take fixed costs out to mitigate that impact if volumes are likely to decline again this year, just currently how you maintain that profitability in F&I. And just specifically, your comments around jet. Didn't you say that you expected jet to be down or aviation to be down, I think, 5%, 10%? Over what period was that? Was that for the first half or this quarter? Or what period are you indicating that volume decline?

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Louise Warner, Caltex Australia Limited - Interim COO [34]

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So we're not indicating any period because I think as you would be aware, the coronavirus impacts are emerging, and it's very difficult to predict what the overall impact will be. We're judging that based on the discussions we have with customers. And many of those customers are actually in the public arena announcing how long those cancellations are for, but they are short-term periods because they also are having the same difficulty in assessing the impact. So we would say the coronavirus impacts that we know of today, short-term impacts, but our ability to forecast where that heads is obviously very difficult. And so that talks to the coronavirus.

In terms of the overall volume story, we think about it as a portfolio. We think about both the cost and the value side, and we would not see that as a long-term trend. Jet contracts are generally short-dated, so they're not long-term contracts. And so we would see our ability to get back into the market at any given time as something that we have at hand. So we wouldn't say that, that has had an impact as a long-term trend by any means.

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Operator [35]

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The next question comes from Daniel Butcher from CLSA.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [36]

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Just a follow-up on the takeover, if I can, to extent you can answer. Just wondering, if you were to put up under the EG bid, what would the allocation of the corporate cost between the Convenience Retail that goes to EG and the new Ampol spinoff? And secondly, what are the sort of operational synergies that are being integrated that we might think about being potentially lost if Caltex is split up?

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Matthew Halliday, Caltex Australia Limited - Interim CEO [37]

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Yes. Thanks, Dan. Look, I'm not at liberty to disclose how we would think about the split of overhead costs. Clearly, that's part of the consideration that we're working through at the moment. In terms of dis-synergies of separating the business, look, we maintain that there is synergy that we extract by operating right across the value chain. I think as we presented this result, we've highlighted exactly where there are some good examples of how we realize that value. And clearly, it's part of the evaluation as we work through what the ongoing value of the fuels and separated Fuels & Infrastructure business would look like. But yes, that's about all I can say on those topics.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [38]

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Sure. Is there anything you can say maybe about potential positives under that scenario? Or is there anything where you might benefit from having greater focus as a smaller company?

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Matthew Halliday, Caltex Australia Limited - Interim CEO [39]

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Look, I think we -- our view would be, we have the focus in each individual part of the organization as we're structured at the moment. You can see that resilience coming through in the continuous improvement that helps support this result. So I think we like the best of both worlds, which is real focus in the way we operate each of our businesses. At the same time, we get the value of visibility and flexibility right across the value chain. So that's the way we think about it.

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Operator [40]

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At this time, we're showing no further questions. I'll hand the conference back to Mr. Matthew Halliday for closing remarks.

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Matthew Halliday, Caltex Australia Limited - Interim CEO [41]

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Great. Thank you. Look, the -- 2019 was no doubt a very challenging year, very soft refining and retail margins. At the end of the day, though, I believe the resilience of the business and the quality of the asset position is reflected in the result that you see today, a very strong focus within the business on delivering year-on-year performance on the controllables and discipline in all of the markets in which we operate. That's what led us to deliver results at the upper end of our guidance range today. And as mentioned, we continue to focus on how we can unlock capital and stronger returns for our shareholders through the range of strategic initiatives that we have underway.

I'd like to, at this point, acknowledge Julian for his great service to Caltex over 10-plus years. Julian has led the company through huge changes, as you all know, over that period to set the business up with -- for strong success, strong assets, very strong people and a very strong culture. So we'll certainly miss Julian's wise counsel and perspective, but I think he has well and truly earned the right to take his leave and ensure that the foundations are very strong to build a very strong future for this company, its shareholders and its people.

On that note, I'll leave it. Thank you very much for joining.