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Edited Transcript of CTX.AX earnings conference call or presentation 27-Aug-19 12:30am GMT

Half Year 2019 Caltex Australia Ltd Earnings Call

Sydney Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Caltex Australia Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 12:30:00am 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

Caltex Australia Limited - MD, CEO & Director

* Louise Warner

Caltex Australia Limited - Executive General Manager of Fuels & Infrastructure

* Matthew Halliday

Caltex Australia Limited - CFO

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Conference Call Participants

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* Adam Martin

Morgan Stanley, Research Division - Research Analyst

* Ben Gilbert

UBS Investment Bank, Research Division - Executive Director and Analyst

* Daniel Butcher

CLSA Limited, Research Division - Research Analyst

* David Errington

BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia

* Grant Saligari

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

* James Byrne

Citigroup Inc, Research Division - Research Analyst

* Mark Samter

MST Marquee - Energy 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 Australia Limited 1H '19 Results Announcement.

(Operator Instructions) There'll be a presentation followed by a question-and-answer session where we are joined by Louise Warner, EGM, Fuels & Infrastructure; and Joanne Taylor, EGM, Convenience Retail. (Operator Instructions)

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

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Julian Segal, Caltex Australia Limited - MD, CEO & Director [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 first half 2019 results announcement call. Today, I'll give you an overview of our first half performance and will be joined by Matt Halliday, our new CFO. Following the presentation, we will take questions.

I will start, as I always do, with a reflection on our performance in personal and process safety on Slide 3. Safety is of paramount importance to me, to the Board and to each of us in Caltex. By having everyone in our business keeping safety in front and center, our people and our customers go home safely every day. We set high safety standards, and in Fuels & Infrastructure we have a strong track record in maintaining these standards as the result of process consistency and deeply embedded safety mindset. Our key focus is to embed this safety culture within Convenience Retail, which has seen a deterioration in safety performance in line with the transition of franchise sites to company operations.

Moving on to Slide 4. Our financial performance in the first half has been mixed. Fuels & Infrastructure excluding Lytton, delivered a resilient underlying result within guidance range of $190 million to $210 million. While EBIT of $192 million was down 8%, this includes a negative $40 million impact from the repriced, renewed EG Group contract and the impact of soft Australian market demand. Lytton EBIT of $1 million was down significantly, impacted by soft regional refining margins and outages at the refinery due to a power disruption caused by third-party supply. Convenience Retail EBIT of $85 million was in line with guidance of $75 million to $85 million. This was down 47% to -- dominantly due to weak retail fuel margins.

These results are disappointing, and we are taking strong action to deliver improved shareholder returns in these challenging market conditions. We are focused on cost and capital discipline to deliver a sustainable uplift in returns and to continue to deliver strong results. Today, I'm announcing 2 key initiatives that will see us deliver improved performance for our shareholders: firstly, a cost-out program that will deliver $100 million per year in sustainable savings to our business; and secondly, we are leveraging the learnings from work to-date on our convenience retail strategy and a review of our company-controlled retail sites that will see us focus on a high-quality network and ensure a capital is allocated to deliver maximum value to shareholders.

Moving on to Slide 5. Before I provide more detail on these 2 key initiatives, I'd like to provide some context on the market dynamics which have challenged our business. As the charts indicate, we, like the rest of the industry, are experiencing volume decline being driven by cyclical weakness in the agriculture, construction and retail sectors. This is leading to lower wholesale diesel demand, which had previously delivered annual growth of about 6% per year for the last few years prior to 2019. Pleasingly, the underlying financial performance of Fuel & Infrastructure has been resilient despite the lower volumes due to our efforts in optimizing our integrated supply chain. Similarly, our Convenience Retail volumes have always been impacted by the tough economic conditions, particularly due to our larger share of the retail diesel market relative to competitors. As you are aware, Caltex has the preeminent card offering to businesses with over 70,000 StarCard customers. Caltex has also led the market in ensuring our broad range of customers have premium diesel products available across the network. This is a key reason why about half of our retail fuel sales are diesel compared to industry at approximately 30%. We continue to believe this will see us well positioned to benefit from underlying vehicle trends and the recovery of the economy over time.

The cyclical weakness in retail fuel margins contributed to our first half 2019 result. Despite these conditions and through our refocus on fuel, we have been able to achieve a 1% increase in retail fuel market share in the first half, to recover share loss the second half of 2018 and a 2% increase in retail premium fuel sales volumes.

Moving to Slide 6. We're immensely proud of how we have transformed and grown our Fuel & Infrastructure business. It has historically underpinned over 2/3 of group earnings and generates strong cash flows, demonstrating the competitive strength of our business as a fuel supply company. As you can see in the chart, we're adjusting for the impact of the previously announced repriced EG contract, we have delivered another solid underlying result. This was achieved despite significant pressure on the Australian wholesale market volumes, with domestic softness being offset by the benefits of Ampol optimizing the integrated supply chain. This shows the ability of Ampol to capture value in a broad range of market conditions.

Market conditions in the first half of 2019 are conducive to Ampol capturing more supply chain margin by bringing gasoline cargoes from out of region into Australia, leveraging our advantage Kurnell import terminal. Given Ampol's focus on Australian volume optimization in the first half of 2019, we saw a reduction in international third-party sales, but still grew international EBITDA 11% on the first half of 2018 with solid performance from Gull in New Zealand and SEAOIL in the Philippines. Despite global economic uncertainty, we remain encouraged by the opportunities in our international markets.

I'm moving now to Slide 7. As guided in June, we are focusing our effort on cost and have already begun progress on initiatives that will deliver $100 million per annum of operating cost savings as an exit rate by the end of 2020, with more than 50% expected to be achieved as a run rate by the end of 2019. We have looked hard at our cost base, and the initiatives we have identified are sustainable and have a lower risk of implementation. In developing this program, we see an opportunity to leverage Fuel & Infrastructure's long history of continuous improvement and to expand this approach across the entire business to deliver a more efficient and more competitive Caltex. Example of the initiatives that we'll be pursuing are increased labor efficiency, most cost-effective procurement of fluid catalytic cracking unit catalyst for Lytton and the relocation of our corporate head office out of the CBD to Alexandria.

This $100 million of cost saving is significant. It will result in a simpler, more efficient and more competitive Caltex. We will hold ourselves to account to achieve this target or more, and shareholders will be able to see this benefit delivered to the bottom line over the next 18 months. I would also flag that as further evidence of our focus on cost and capital discipline, we have revised our 2019 CapEx guidance down to around $300 million.

I'm now on Slide 8. Over the past 2 years, our company-operated retail network has grown to more than 500 sites. And this business has more than 5,000 Caltex employees engaged across Australia. We have developed and introduced The Foodary, with the first cohort of 63 stores critically informing how we go forward with our strategy. We have learned a lot in 2 years. We have also reviewed our company-operated sites to ensure capital is allocated where we have the greatest opportunity to deliver shareholder value. This review commenced in April and has so far been completed for 550 sites.

From our work executing our strategy and running a larger company-operated network, we now have a better understanding of the factors at the site level that impact the success of our fuel and convenience offer. These factors highlight the need for us to ensure that we deploy the right amount of capital and the right customer offers for each location to deliver earnings growth with appropriate returns. Our progress on the review of our company-operated network has to date identified about 500 sites that can deliver strong returns from the disciplined deployment of an enhanced convenience offer. There are a further 50 metropolitan freehold sites that have been identified as being able to deliver a higher value through alternative use and will be divested in tranches commencing in the second half of 2019. The completion of this process has ultimately allowed redeployment on underperforming capital towards higher-returning opportunities. For the remaining sites in our company-operated network, there is further work to be done to determine the best way to capture value while ensuring we maintain our 2,000-site-strong StarCard-accepting network and achieving a return that meets our capital return hurdle. This is a clear example of Caltex' focus on capital discipline and ensuring all our assets are delivering acceptable returns for our shareholders. We will give you an update on the progress of our network review at our Investor Day later in the year.

Moving on to Slide 9. We have identified key learnings that are critical in ensuring we meet gaps in the burgeoning convenience sector. Our new brand, The Foodary, has been successful in conveying a message to our customers that the traditional petrol and convenience offer is changing for the better. Segmentation of our network on a site-by-site basis is critical in ensuring that the right format with the right offer and range of products to meet gaps in the convenience market within each local market, and we need to deliver this with the right level of capital. There is no one size fits all approach. Our stores have been designed with the right components for each site, and we need to do this with the right level of capital. By leveraging these learnings, we are on the right pathway to execute our strategy in the most efficient and effective way to capture value for shareholders.

Caltex is confident with the progression of its convenience retail strategy and still anticipates it will deliver meaningful growth. The results of the review to date indicate that the previously guided uplift target of $120 million to $150 million by 2024 will not be met. Caltex will take the necessary time to ensure the disciplined execution of the strategy, including tailoring the right format with the right cost base, the right local market. While the uplift in earnings will be lower, the uplift will be achieved with lower CapEx and, importantly, with a higher return on capital. We will provide further update as the retail strategy is executed.

I'm moving now to Slide 10. Caltex is a resilient business that will be further strengthened by the initiatives I've announced today. Our fuel and infrastructure business continues to generate reliable cash flow, and we are taking action across the business to lower costs and improve our return on capital. Our hard-to-replicate assets and networks combined with our fuel focus means we are well placed to grow earnings in both Fuels & Infrastructure and Convenience Retail. In addition to maintaining a strong dividend, where surplus capital exists, we will continue to consider further capital returns to maximize shareholder value.

I'll hand over now to our CFO, Matt.

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Matthew Halliday, Caltex Australia Limited - CFO [3]

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Thank you, Julian, and good morning, everyone.

Look, Julian has highlighted the challenges we faced in the first half of 2019, which are apparent when we look at the key drivers on Slide 12. But as Julian has explained, we are responding to these market dynamics which will ensure a renewed focus on driving value for our shareholders. From first half 2018 to first half 2019, RCOP EBIT has fallen by $186 million. Much of this has been driven by the reset of the EG Group contract as well as external events including regional refining and retail fuel margin weakness and the $36 million cost of incident at Lytton arising from third-party power supply outages. Setting aside the various drivers, though, and as Julian has clearly indicated, the bottom line here is that the result is not acceptable to us and necessitates us taking action to deliver better performance across all parts of the business.

Moving on to Slide 13. The waterfall chart provides some further detail on the Fuels & Infrastructure result. So F&I ex Lytton delivered an EBIT of $192 million, which is only down $8 million compared with the previous corresponding period. This is another strong underlying result from this business when considering the $40 million impact of the EG contract reprice, achieved through our focus on optimizing earnings across the supply chain within the prevailing market conditions. As Julian mentioned previously, the pressure on Australian wholesale market volumes were offset by the benefits of Ampol optimizing the integrated supply chain. More specifically, product margins for gasoline in the first half of 2019 enabled purchases from out of region to be placed into Caltex' physically backed supply chain in Australia, delivering significant integrated value. This is a really good example of the value of Caltex' privileged asset position in Australia, including Kurnell; aggregated customer demand; and ability to leverage scale across our assets and capability in managing these complex supply chains. While Ampol's trading and shipping activities are expected to continue to create value for shareholders, we would not anticipate a repeat of the extra value captured from the gasoline market conditions in the first half, which was the most significant contributor to the $23 million increase in Other Australian F&I ex Lytton EBITDA that is shown on the chart.

Lower regional refiner margins in the half had a significant impact on the earnings from Lytton, with EBIT of $1 million during the period down from the $105 million in the previous corresponding period. Lytton's operating result was also negatively impacted by the outages previously communicated. The increase in F&I ex Lytton depreciation and amortization is largely associated with the introduction of AASB 16. And I would highlight that we have provided updated D&A guidance on Slide 31 of the appendix slide, which reflects a similar message that while you have seen depreciation and amortization step up with the adoption of AASB 16, the D&A expense of the business on an underlying basis is flat to down.

Moving on now to Slide 14. As previously mentioned, refiner margins were lower in the half with an average of USD 7.50 per barrel versus USD 10.06 per barrel in the first half of '18. This represents external margin conditions at the lower end of the 10-year historical range. In a period of lower margins and despite the impact of unplanned outages caused by third-party power interruptions, a positive EBIT was achieved. A key objective over the last 5 years has been for Lytton to be resilient in both good and bad external market conditions, and this result was achieved through our ongoing focus on efficient operations.

We are continuing to see premiums increase for compatible crude oils and feedstocks as a result of IMO 2020 and due to crude-oil-producing countries in Asia conserving oil for their own use. The impacts of higher crude premiums have been partly mitigated by Lytton working with Ampol to source crudes more cost effectively from out of region. Diesel refiner margins have increased as we have headed into the second half. Although there are some outlooks predicting recovery in refiner margins through the second half of the year ahead of IMO 2020, we are mindful of the global economy slowing and the consequential impact on demand as well as the impact of new refining capacity in China. I would flag that we have reduced the forecast for Lytton sales from production in 2019 to 5.5 billion liters. Caltex has proactively reduced feedstock purchases in recent months because production at the previously guided levels did not make economic sense given current feedstock purchase prices. For Lytton, we always remain focused on maximizing value versus import alternatives.

Moving on now to Slide 15. Convenience Retail delivered EBIT of $85 million for the first half of 2019, down significantly given the weakness in industry retail fuel margins.

Shop margin, including site costs, has been flat relative to first half '18, which is the net result of increased margin and increased site costs as we continue to transition the network to company operations. Across our network, we have seen shop sales grow by 2%, largely driven by an increase in fresh and coffee sales and a 1% increase in customer conversion from fuel only to fuel and shop. This has been offset by gross margin reduction of approximately 1% given a focus on national pricing and promotions and wastage and shrinkage associated with the shift to fresh. The reduced earnings from gain on sale of sites and asset write-downs reflects the $8 million gain on sale of the Burleigh Heads site in the first half of '18, with no site sales occurring in the first half of '19.

While earnings were impacted by the ongoing transition of franchise sites to company operations, the earnings impact in the first half of '19 was broadly similar to first half '18, so it has not been called out on the chart.

Moving now to Slide 16. While convenience fuel margins were soft in the first half of '19, Caltex has remained disciplined, with the refocus on fuel highlighted at the Investor Day last October addressing the previous loss in market share. Headwinds such as rising crude and product prices combined with domestic economic weakness meant that industry conditions were tough in the first half of '19. These conditions have exacerbated the competitive dynamic, which has also been influenced by the entry of new participants and new-to-industry sites, due both to elevated industry profit levels from prior years and lower funding costs.

In -- on the left hand -- in the chart on the left-hand side of Slide 16, we show a historical proxy for industry retail fuel margins in Australia, which is the average of the Australian Institute of Petroleum's published retail fuel margins for petrol and diesel. We call it a proxy given diesel data is for base-grade diesel, and there are also some issues with the data sets due to the exclusion of some operators during 2019. The data shows that retail fuel margins have long been cyclical and an underlying growth in margins from 2009 to 2019. The average industry margin over the last 5 years is around $0.137 per liter. In this context, margins in 2017 and 2018 were towards the top of that cycle, and margins in 2019 towards the bottom of this cycle.

In the chart on the right-hand side, we compare Caltex' retail performance to industry in first half '19. Specifically, we compare changes in fuel margin on a per-site basis. We believe that this comparison on a per-site basis is more aligned with the principle of managing our business with a focus on ROCE. When comparing the change in fuel margin per site to the first half '18, Caltex is down 11% compared to the industry down 13%, highlighting our solid performance. This performance by Caltex is before considering any increase in shop earnings or value captured from the integrated supply chain. In the first half '19, Caltex' fuel margin per site was down 15% relative to first half '18, which compares favorably to industry average fuel margin per site down 25% based on industry data. As a reminder, the second half of '18 numbers included exceptionally strong margins in Q4 supported by industry tailwinds.

In absolute terms, the earnings on fuel for the entire industry were soft, with margins in the first half '19 towards the bottom of the cycle against ongoing cost inflation in the industry. We think Caltex is well positioned relative to the industry given our announced cost-out program, integrated fuel supply chain, network strength and the ownership of a significant proportion of our network to protect from lease cost inflation. Caltex' relative performance has been delivered by our promise to refocus on fuel, balancing value and volume through remaining disciplined on pricing while ensuring base-grade competitiveness and better leveraging our premium offer, with specific tactics differing by location.

Moving on now to Slide 17, I'd turn your attention to the impact of the result on cash flow and balance sheet. I would point out that the net borrowing shown here excludes the $899 million present value of lease liabilities, which is now reported on our balance sheet under AASB 16, to show the underlying changes in cash flow on balance sheet. Through the period, the key change in net borrowings has been the $260 million off-market buyback executed in the first quarter combined with the softer earnings in the period. First half '19 EBITDA totaled just under $450 million, which is around $200 million lower than first half 2018. In terms of CapEx, stay-in-business spend was $65 million, with growth CapEx of $39 million. Net borrowings ended the year at $1.26 billion, while adjusted net debt, which includes the present value of future lease liabilities and other adjustments made by the ratings agencies, totaled $2.16 billion. This equated to 2.3x adjusted EBITDA and therefore lies just above our target range for adjusted net debt and as per our financial framework which we shared last year and have again shown on Slide 18.

Moving now on to Slide 18. Today, we announced an interim dividend of $0.32 per share, reflecting a 59% payout ratio, in the middle of our guidance range of 50% to 70%. While we currently sit above the top end of our target leverage range, this needs to be viewed in the context of low cycle refiner margins, the outages at Lytton in fourth quarter '18 and first quarter '19 and low cycle retail fuel margins. The resilience of the business and the actions we are announcing today provides a pathway to move Caltex back towards the bottom end of this target range.

Today, we have announced a $100 million cost-out program and the network review, including the divestment of approximately 50 sites which will release underperforming capital. We have also reiterated our commitment to focus on capital discipline, which has seen a reduction in CapEx guidance for 2019. We will continue to maintain capital discipline and explore ways to maximize returns for our shareholders.

Caltex' credit rating was recently reaffirmed as BBB+ but with a negative outlook. We strongly believe that the actions announced today will see the strength of the balance sheet retained and provide the capacity to continue to support both growth aspirations and incremental returns to shareholders in the future. We take our capital allocation framework seriously, and we believe this represents a strong suite of response measures that will rapidly reposition the balance sheet back inside our targeted leverage settings. The dividend payout is a lever we will also consider using going forward as needed. However, given the numerous other levers announced, we have remained at the midpoint of our range.

Now let me hand back to Julian to discuss the 2019 outlook.

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Julian Segal, Caltex Australia Limited - MD, CEO & Director [4]

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Thank you, Matt.

On Slide 20 now. We continue to make strong progress on our diversity and inclusion strategy, with senior management female representation sitting at 36%. This progress is reflected in our Employer of Choice for Gender Equality citation. We have also established the Caltex Foundation, which supports communities in which we provide StarCash donations to our customers affected by severe drought through rural aid and supporting indigenous children through the work we do with Clontarf and the Stars Foundation.

Moving to Slide 21 now. Our focus for the remainder of 2019 is on driving value from our core business and exercising cost and capital discipline to both maintain balance sheet strength and deliver ongoing returns to shareholders. We will continue to build on the strength of our Fuel & Infrastructure business and deliver our Fuels & Infrastructure growth aspirations with our focus on safe and efficient operations. Pleasingly, the Lytton units are also on schedule to be back up and running after the planned T&I by the end of August. And we will continue our expansion of Gull in New Zealand and SEAOIL in the Philippines. In Convenience Retail, we will continue to progress the delivery of our Convenience Retail strategy across the 500 sites that we have so far identified through our network review and divest the approximately 50 sites we mentioned. We will complete the review of the remaining sites in our company-operated network to determine the best way to serve customers and capture value while ensuring we maintain the presence of our 2,000-site-strong StarCard-accepting network.

Caltex is focusing on return on capital employed to maximize value for shareholders. This includes resetting capital expenditure in 2019 at a lower level and delivering $100 million per annum of operating cost savings by the end of 2020, creating a more resilient business.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Shaun Cousins, JPMorgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Just a question on the $100 million cost out. Can you maybe talk a little bit about how you see the run -- the cost savings being realized, if any of that $100 million was realized in the first half '19? What's expected to sort of land in the P&L in the second half '19? And a comment around the head office relocation. Is that part of the $100 million, or is that in addition to that cost -- $100 million cost saving, please?

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Matthew Halliday, Caltex Australia Limited - CFO [3]

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Shaun, it's Matt here. Look, we commented in the presentation that we're aiming to hit a run rate of 50% of that target by the end of this year. There was a little bit in first half, but it was quite minor. We are taking the actions now in terms of the examples, where we've done significant work on labor. There's a lot happening in the procurement space. So we're taking the actions. Obviously, that takes some time to flow through into a run rate, and so the run rate and getting to that target by the end of this year will be very much back ended. So it will be a modest contribution in 2019. In terms of the head office relocation, that will start to -- that will contribute to the delivery of the full run rate target in 2021, when the office move is scheduled.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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So the office move and the rent saving you get, that is part of the $100 million or that is in addition to the $100 million?

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Matthew Halliday, Caltex Australia Limited - CFO [5]

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That will be contributing to the $100 million, but from a materiality point of view, it's an important contributor, but it'll be contributing to delivery of the target in 2021.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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Okay. My second question is just quickly around the store closures, the 50 closures. How important are they from a volume EBIT perspective?

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Julian Segal, Caltex Australia Limited - MD, CEO & Director [7]

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So Shaun, this is Julian. The contribution from a profit perspective, it's very marginal, so it's not going to have any impact to speak about on our profitability.

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Matthew Halliday, Caltex Australia Limited - CFO [8]

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Yes. It made a modest contribution in the first half, clearly not delivering anywhere like the returns that we need against the capital that we can release, noting that the appetite for sites like this from developers at the moment is pretty intense. So it's a nice market to be heading into. The volume was in the order of 100 million liters in first half.

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

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Okay. And my final question is just the -- you've obviously made quite a few -- quite a dramatic change to the...

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Matthew Halliday, Caltex Australia Limited - CFO [10]

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And just one thing also to note is that given the strength of our network and card offer, we see ourselves retaining a reasonable chunk of that volume.

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

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Great. That's helpful. And just finally, there's obviously been quite a dramatic change in the Freedom of Convenience strategy with you walking away from the $120 million to $150 million, but I don't think many of us had that in our numbers. But maybe just thinking about how does the company plan to make these significant changes in the business in terms of how you're looking at the convenience strategy, the cost-out plans, with a pending CEO change that's going to come in, and you've got a new CEO that will come in, and do they have to agree with these changes? I don't think necessarily that these changes are horribly unwise, but how do you think about making changes to the nature that you're trying to do with the company with a CEO succession sort of program and -- that's well progressed at the moment?

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Julian Segal, Caltex Australia Limited - MD, CEO & Director [12]

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Thanks, Shaun. Thanks for your question. It's Julian. I think the first important comment I'll make, this strategy is very much supported by the Caltex Board, and so I don't see any significant change in strategy in the forthcoming future. And also I don't think the change is going to happen tomorrow. I'm still the CEO of Caltex and I'll be here for quite a while. And so I can say I think very clearly that we are confident about the progression of our retail strategy, and we are still confident to deliver a meaningful growth. If you recall, we flagged at the October Investor Day that we will have -- we will be embarking, would be embarking on a review of the network. In fact, we've done it earlier than what we said, and the reason is we've got enough learning now to be able to do that. And as you can see, we are taking action. I think from -- and Jo can talk a bit more, if you've got specific questions, but the key for us is to ensure that we tailor the right format with the right local market and the right cost. So this is basically -- these are basically the 3 important principle guiding us on how we roll out the strategy further.

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Operator [13]

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Your next question comes from David Errington, Merrill Lynch.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [14]

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Julian, following up from that. I'm confused as to what the strategy is now in retail. Now I'm not saying that to be a smart aleck. I'm saying that because, as you said at the October Strategy Day, you were gung ho about going down convenience retail and complete transformation of a petrol offer into being convenience retail. You mentioned the word many times, that you didn't want Caltex to have a Kodak moment, and now I'm trying to figure out what has happened here. I mean we've all got our opinions as to whether you'd be successful or not. That's beside the point. The point was you were taking the company down a strategic direction that was going to transform Caltex into a convenience retailer to avoid a Caltex (sic) [Kodak] moment. And then you've done a study which I didn't know you were doing in April, and then you found these learnings, and I'd like to know what those learnings were, that has enabled you guys to walk away from this big bold number, $120 million to $150 million uplift. You're basically saying, "Oh, no. We're not going to deliver that now. It's still going to be meaningful. We don't know how much, but we're walking away from that." I sort of like don't think that that's a good-enough explanation. I think I'd like to know, and my question is, what are these learnings that you've found? What is the strategy going forward now? Is it a transformation strategy? What is it? Because to walk away from a $120 million to $150 million guidance and just say, "Oh, by the way, we're walking away from that," irrespective of whether we've got it in our numbers or not, that's beside the point. You gave that guidance to the market as basis of the conviction of your strategy, and you now found learnings in April that have completely now you've walked away from that. So I think that you need to explain what those learnings were and what actually is the strategy today compared to what it was before April, please.

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Julian Segal, Caltex Australia Limited - MD, CEO & Director [15]

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Thank you for your question, David. I think first of all, I'd like to clarify that the Caltex strategy has always been very clear that we've got 2 businesses, the Fuel & Infrastructure business and the Convenience Retail business. We have never had a vision in which Fuel & Infrastructure was not the key core business for us. And indeed, I'm very proud to say that over the last 5 years, we've built a very good business, which is our Fuel & Infrastructure business. What I always said, and I still believe it's the case, we need to expand the breadth of the business to create an additional growth platform, because I will emphasize again, we have grown in Fuel & Infrastructure as well. So I'm talking about an additional growth platform, and we believed at the time that Fuel -- that Convenience Retail it is. I still believe that. I still believe that we've got an opportunity to grow Fuel -- to grow Convenience Retail, but we have learned a few things over the last 2 years. And therefore, we said we will not meet the $120 million to $150 million uplift target by 2024.

You asked me what learnings I refer to. I think the first learning was that the new brand, The Foodary, has been successful in conveying the message to our consumers, and I think [we feel in consumer as such] that the traditional petrol and convenience offer is changing for the better. And I can see others following in this pathway. And we also found out, as we control more and more of our own sites -- remember, a couple of years ago, we only controlled 85 of our sites. We are controlling over 500 now, so we're much more familiar with what is happening with our sites, site by site. So we've learned that there is a need to be able to vary the offer and range of products on a site-by-site basis so that we can meet the gaps in the convenient market. And I am not talking about the convenient market as a whole but in each mini market. And I believe that our partnership with Woolies will play a key role to enable this flexibility and better range. And the third learning that I referred to is the segmentation of our network which we have performed now on a site-by-site basis. And that's critical to us because we now know what the right format and the offering is for every single site as well as the level of capital investment needed for that particular site. So it's about the identifying the right location for our offering, identifying the right format for our offering and then marrying it with the correct capital so we can deliver superior returns. So basically we are building on these learnings and evolving our formats to deliver better returns.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [16]

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Have you got the retail depth of talent in your management team? And that's not -- Jo is there, but have you got the depth of retail capabilities, Julian, to really go forward? Because it seems to me, in the last 2 to 3 years you've been doing this, you just haven't had the depth. I mean Fuels & Infrastructure, great business, no question, great management team, but retail, it seems to be a strategy that you're just going down the path where you're sort of like making it up as you go along. And I don't mean to be disrespectful with that, but do you need to really boost your retail talent in your team?

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Julian Segal, Caltex Australia Limited - MD, CEO & Director [17]

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Thank you for the question, David. I think the current team is exceptional. And I invited you a while back, when I met you in Melbourne, to come and meet some of these people. The invitation is still there. I'd just like to make a comment in terms of the depth of this team, if you'll allow me for just a couple of minutes, of what the retail team had to deliver over the last 2 years. And over the last 2 years, the team that normally is there to run the business as usual had to roll out a new business that we started basically with pen and paper. And we knew that. And you may recall my analogy, what I said, we are going about it using a LEGO building blocks frame of mind. We knew we'll make some mistakes. We knew we'll have to take some building blocks and replace them with others, and we've done that as well as running the normal network. At the same time, the same team has been involved twice in negotiations on the Woolies business. First time, as you know, and we thought we lost it to BP, and that consumed a lot of time. And second time, we actually got a better deal, in my view. And that also took a lot of time, but that brought us to today where we've got, I think, an excellent agreement and it's an important partnership with Woolies. At the same time, unfortunately, and we didn't shy away, and of course, that was the issue with our wages underpayment by some of our franchisees, which put us in a position that we had to deal with a large number of sites that we had to take over and rebuild them because they were not run properly. And we're not prepared for that. It was the same thing, they had to do that. And then of course, when we make our decision that we need to control our network so we can roll out our strategy, that necessitated significant effort on our part dealing in a very mindful away with each and every one of our franchisees to come to an agreement. So all this, David, has been delivered in the space of 2 years. And we took some steps in the wrong direction from time to time, of course we did, and that's expected. Do I believe -- coming back to your question, so I'm not shying away from it, do we have the depth of talent? I think we do. Jo, you may want to comment on that, but our door is open for you to come and meet these people and make up your own mind.

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Operator [18]

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Your next question comes from Mark Samter, MST Marquee.

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Mark Samter, MST Marquee - Energy Analyst [19]

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Just a couple of questions, if I can. First one for Louise, I think, just on the $23 million that you made from the sourcing gasoline out of the region. Obviously, it's a fantastic outcome and a great advert for the infrastructure. Can you just make -- I'm just trying to get my head around the inference in the wording about it that you're saying it was because of the weaker conditions in Australia and therefore if it's nonrecurring in the second half, it's partially nonrecurring because of an improvement in the underlying business. Because I guess if we take it out, we're talking about a $168 million, not a $191 million of EBIT. Just how we should think about second half earnings against that backdrop.

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Louise Warner, Caltex Australia Limited - Executive General Manager of Fuels & Infrastructure [20]

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Yes, Mark, good question. So the market weakness that we're talking about is actually the global market weakness. So I think you would have seen that very clearly in refiner margins in the first half, particularly the big dip we saw in first quarter. Those same market conditions, extremely weak market conditions, also with the same market conditions that enabled the gasoline sourcing. So our team in Ampol, with their global reach both in a physical sense, but also a market knowledge sense, was able to identify opportunities coming from out of region into those really unusual gasoline market conditions and then deliver on them all the way through the first half. So the same market conditions that we consider to be highly unusual in refiner margin are the same market conditions that delivered that result that we're talking about here. So given that they're unusual market conditions, we're not seeing the same market conditions today, we wouldn't expect those earnings to repeat. However, what we would say is it also shows what -- it's a really good example of what we've been talking about. It's the capability of the Ampol team to look to a broad range of market conditions and find the right opportunities in them.

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Mark Samter, MST Marquee - Energy Analyst [21]

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Perfect. And then just second question, on the 50 sites that, I think, Matt, you might have said in the call about developers looking at them. Do you expect all of these sites to close as operating sites? And I guess following on from that, do you think -- I guess these sites collectively, they're not huge on the basis -- what are they, 70, 80 basis points of the national network of sites? Do you think it's possibly something that your competitors follow and we start to see the rationalization of a market that feels pretty irrational through the first half of this year?

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Matthew Halliday, Caltex Australia Limited - CFO [22]

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Yes. Thanks, Mark. So yes, we firmly expect all of them to close, and they'll be auctioned. And we see them being purchased by developers. As I mentioned on the call, we see really strong interest for these types of development sites at the moment. So that is what will happen. I think as I also mentioned earlier, we see the strength of our network and our card offer meaning that we can hold a reasonable proportion of the volume here. Look, in terms of our competitors, I think you'll have to ask them. I think what we're demonstrating is the disciplined approach that we'll take to looking at whether returns are available and being delivered, and we'll take action accordingly.

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Mark Samter, MST Marquee - Energy Analyst [23]

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Was there anything particularly common amongst them? Because what we're saying is there are 50 sites that, despite the fact they weren't incurring a lease cost, were effectively making no money. I mean again, you wouldn't expect they're unique versus your competitive base. Was there a recurring theme in, be it geography or level of local competition or something? Was there something that you saw consistent across the sites?

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Matthew Halliday, Caltex Australia Limited - CFO [24]

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Well, I don't think it's fair to say they were making no money. They were making a modest amount of money. And I think clearly, when you look at our returns calculation, the alternative use meant that we could release -- that the returns looked at from that viewpoint were very, very low. So and in terms of the location, these are principally metro, all these are metro Melbourne, Sydney sites.

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Operator [25]

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Your next question comes from James Byrne, Citigroup.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [26]

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Look, I just wanted to ask about the 240 sites yet to be reviewed. So you've been pretty -- I assume that this review has only been going on for a short time and that you've already gotten through 2/3 of the sites. I presume then the remaining 240 don't meet your criteria. My question is how do you balance the idea of divesting those stores that aren't meeting those criteria such as ROCE against cannibalizing the benefits of having a larger network?

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Matthew Halliday, Caltex Australia Limited - CFO [27]

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Yes. So look, we had, on Slide 8, we put down the criteria that we applied. We -- the answer was obviously clearer given the high quality of the 500 sites. It was clear for the 50 sites. We need to deepen our analysis on the 240 sites applying exactly the same criteria. Look, so we balance those criteria when we look at it. It's very much a balanced approach where it's not exclusively looking at it through ROCE lens. The integrated network is important. The competitive overlay across each and every mini market is really important. And I think that's a theme you hear coming through these results, which is site-by-site segmentation is critically important. Ultimately, though, what we do really see is we are going to maintain our close to 2,000-site-strong StarCard-accepting network. The strength of that network is really critical to the underlying strength of the business. And so we will deepen our review, but we are very committed to ensuring that we preserve the integrity and strength of that network.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [28]

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Okay. In June, on the conference call, you'd stated in the B2B segment you were only seeing volume pressure and not margin pressure. Is that still the case? And the reason I ask is that your competitor yesterday had flagged some margin pressure on repricing of contact -- contracts.

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Matthew Halliday, Caltex Australia Limited - CFO [29]

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No. That continues to remain the case. Look, we haven't changed our approach that we take in balancing margin and volume, and the comment we made in June absolutely still holds today.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [30]

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So do you foresee margin pressure in business to business as competition increases?

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Matthew Halliday, Caltex Australia Limited - CFO [31]

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I'll hand over to Louise to give you some more detail.

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Louise Warner, Caltex Australia Limited - Executive General Manager of Fuels & Infrastructure [32]

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Yes. So the wholesale market or the B2B market has remained competitive for a number of years. We're confident of our ability to compete into that market. And we do think about it from an integrated margin perspective. So we are able to see all the way from source to customer through our integrated supply chain, and we are exercising the right volume-versus-value tradeoff. We wouldn't see that intensity to be materially different, although we are seeing volume pressure from the downturn in the Australian economy.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [33]

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Okay. But just to be clear, so how much of the volume that you've forgone has been around protecting margin versus a deterioration in broader economic conditions affecting demand?

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Louise Warner, Caltex Australia Limited - Executive General Manager of Fuels & Infrastructure [34]

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So we don't believe we're forgoing customers, if you want to put it that way. We do see customer contracts rolling on and off at all times, and we make the right prudent decisions into each of those customer contracts. But we're not materially seeing any change in customer base, but we are seeing economic pressure on particular segments in the B2B industry. We've called out things like construction and agriculture and then the related industries on overall sector which is road transport.

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Matthew Halliday, Caltex Australia Limited - CFO [35]

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But when we look at underlying share on a same-customer basis, we don't see that we've lost share. Each company obviously has different set of contracts on different industry channels, but we don't at all see ourselves having lost share. In '18, diesel share was supported by an overlap in a large B2B contract, which was beneficial, but that was a factor that applied in 2018.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [36]

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Yes, okay. Look, just very quickly on the outlook for retail, where competition in second half to date has meant that your higher-margin expectations don't appear to have come to fruition. Just wondering how you're thinking about the outlook for retail in the second half, please.

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Julian Segal, Caltex Australia Limited - MD, CEO & Director [37]

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So maybe, Jo, you take this question.

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Joanne Taylor, Caltex Australia Limited - Executive General Manager of Convenience Retail [38]

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Yes, absolutely. So James, we definitely saw improvement in June. In the first period of the second half, we're seeing a softer margin than we saw at the end of June, but that also does reflect the seasonality that we see in our business, which we typically would see improve into the fourth quarter of this year. And that's guiding our view into the remainder of this year.

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Matthew Halliday, Caltex Australia Limited - CFO [39]

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[But it is] -- we have seen crude prices come down and stay down, which we talked about in June. That's offset to an extent by the weakness in FX that we've seen. And as we have discussed, the economic weakness continues and we haven't seen an uptick, although we would argue it's still too early to see an uptick coming through. I think in terms of the question of sustainability, and we have talked about this a bit earlier as well, but around half of our sites are freehold. The industry typically has lease arrangements in place with 3% ratchets, which ultimately provides some degree of structural costs supporting the market.

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Operator [40]

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Your next question comes from Adam Martin, Morgan Stanley.

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Adam Martin, Morgan Stanley, Research Division - Research Analyst [41]

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Well done on responding on costs. Just in terms of I'll just ask that question slightly differently. I mean do you expect an uplift in the second half for retail, putting the cost-out to one side? Because obviously first half is impacted in some ways by oil price, obviously also competition. But do you expect an uplift for that division?

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Matthew Halliday, Caltex Australia Limited - CFO [42]

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Well, look, Adam, we don't provide guidance. I think you can see what's happening in the AIP data. The recovery in June, as Jo has mentioned, was not sustained, but typically it's a seasonally weaker time of the year that we see flowing through at the moment. And seasonally we tend to see a stronger finish to the year. So we're not going to give guidance, but clearly the -- how the economic weakness unfolds will be important and how the seasonality plays through in the current competitive dynamic will be important.

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Adam Martin, Morgan Stanley, Research Division - Research Analyst [43]

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So no real improvement for July/August, is that the message?

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Matthew Halliday, Caltex Australia Limited - CFO [44]

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You can see that it has come off from June, and...

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Adam Martin, Morgan Stanley, Research Division - Research Analyst [45]

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No, sorry, I mean from the first half. From the first half.

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Matthew Halliday, Caltex Australia Limited - CFO [46]

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(inaudible) consistent with what is seasonally a weaker period, when you go back and look through on a month-by-month basis over the past number of years.

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Adam Martin, Morgan Stanley, Research Division - Research Analyst [47]

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Okay. And just around the sites that you're selling, are you going to do any remediation around those? Does that help? Do you get better value? Just what are you going to do around the sites that you're going to sell?

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Matthew Halliday, Caltex Australia Limited - CFO [48]

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Yes, we will. So the detailed assessments are currently being completed as part of our due diligence process in preparation for those divestments.

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Operator [49]

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Your next question comes from Grant Saligari, Crédit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [50]

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Viva seemed to be making a point that now that they've brought their pricing back to market, there'll be a natural drift of volume back to their sites that was being bypassed previously. I guess in some of the more granular data that you see on some of the overlapping sites, do you actually start to see that impact through Q4 -- or through Q2 of your financial year? And to what extent do you think that the volume in your sites could be vulnerable to that sort of market change?

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Julian Segal, Caltex Australia Limited - MD, CEO & Director [51]

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Let me -- thanks for your question. It's Julian. Let me start by saying that what we said in the past still holds [value], and that is you can't look at the total market of Australia or New South Wales, even Sydney. The markets are very much mini markets, sometime 2 sites, sometimes 3 or 4 or 5 sites. And each of these particular sites is impacted by the location, by the other offering that you put on that site. So it's very, I think, incorrect to talk about a blanket trend. Jo, would you like to add a bit of color to that?

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Joanne Taylor, Caltex Australia Limited - Executive General Manager of Convenience Retail [52]

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Yes, Julian, I think that is -- it is critical. What we see is that customers don't gradually change their behavior, but what we are seeing in our actions is making a difference to the volumes that we've been able to retain within our business. And it has resulted in us regaining market share. And that's because, as Julian has mentioned, we're taking decisions on a market-by-market approach, [confident] of our competitors in that area but also looking at the grade of our products, making sure that we're competitive but also looking at opportunities to maximize margin through our quality premium products that we do have across both petrol and diesel. So we are driving those tactics in order to see the improved result that we have had this year on fuel.

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Julian Segal, Caltex Australia Limited - MD, CEO & Director [53]

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If I can add one comment which, again, I made in the past. I think, whilst Caltex -- and we're a public listed company, so of course we get a lot of air space, I'd like to remind you there are quite a few other players in this market. There is 7-Eleven, there is EG, there is BP and there's independents. And if you are going to look at the market as the interaction between Viva and Caltex, you'll be missing what's really happening in the market. It's much more complex. And that's the way we run our business, taking into account all these interactions side by side. And that's why I think we managed to successfully manage our volumes well in the first half.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [54]

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Well, that's helpful. On the potential for additional site closures, you do run an integrated business. So I guess to what extent are you constrained in closing sites before you start to affect your Fuels & Infrastructure business in terms of volume?

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Matthew Halliday, Caltex Australia Limited - CFO [55]

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Yes. So look, I think in terms of the remaining sites under review, I think we talked about the -- or we talked about the 50 sites. The remaining sites under review, we absolutely see them playing a critical role in our network, in our 2,000 sites right across the country. So we're -- beyond the 50 sites, at this point, we're not looking at site closures.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [56]

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Okay. That's helpful. And just one final one, if I could, just on refiner margins. Your competitor is saying they're optimistic on refiner margins, but I think in your commentary on regional margins, you seem a little more cautious, talking about some capacity additions, obviously as we know, in China. What are your thoughts on the regional market environment for refiner margins over sort of the next 12 months, 24 months?

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Matthew Halliday, Caltex Australia Limited - CFO [57]

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Yes. Look, we don't provide an outlook on refiner margins, but Louise, do you want to provide some color?

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Louise Warner, Caltex Australia Limited - Executive General Manager of Fuels & Infrastructure [58]

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Yes. I mean as Matt says, we don't provide an outlook. And that's because we all know that it's extremely difficult to predict refiner margins due to the range of factors. I think the key factors that we would see impacting refiner margins over the period of time you've asked about, for the next 1 to 2 years, IMO 2020 becomes a key consideration in the market, but it will have a range of impacts on the diesel market, fuel oil market, freight market as well as crude premiums. So we continue to watch all of those things because each one impacts us. We also are seeing -- as well as our own domestic softening of conditions, we are seeing a softening of global conditions, which means demand globally for oil products is softer than many people had outlooked for. And then we have some of the capacity additions coming in. Over the top of that, you have the range of the normal factors, geopolitical issues, unplanned outages. And so we would see that, that range of conditions will continue to prevail, so which point on the same things that we flagged going forward, IMO 2020 and capacity additions and then how all of that picture comes together.

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Operator [59]

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Your next question comes from Ben Gilbert, UBS Investment Bank.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [60]

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Just interested in just sort of when you look at your underlying cost base just in the context of the cost -- the $100 million cost out. What are you seeing underlying inflation across the business on that sort of touch over $1 billion cost base at the moment?

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Matthew Halliday, Caltex Australia Limited - CFO [61]

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Yes, so we are seeing inflation hitting the cost base, as I mentioned earlier. The $100 million is the target before the impact of inflation. So that's against the 2018 baseline, but we are seeing a degree of inflation flow through the business at the moment. Clearly, we have the benefit that I mentioned earlier relative to most of the industry in terms of the freehold presence within our network, but that leasehold component of our network is suffering a cost escalation well above inflation at the moment. For the balance of our cost base, we're seeing it escalate pretty much in line with the inflationary environment that we're seeing at the moment, so low but inflation is there.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [62]

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Around 2.5% to 3%, is that fair? Sorry, is 2.5% to 3% inflation sort of fair?

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Matthew Halliday, Caltex Australia Limited - CFO [63]

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So yes, sorry, that's fair.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [64]

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Okay. And just on the retail competitive backdrop. So I know we've had a number of questions on it. I'm just interested in your comments around the competitive backdrop because I know there's been a lot of discussion on Viva, but EG probably looks like they've been a little bit more aggressive than maybe would have thought in the market as well. And space for the last few years has been growing. I think sort of 2017 grew at a couple; last year grew close to 4% in terms of total store numbers. Do you think we're just going through a period of sort of natural rebasing where maybe there's going to be some pressure on independent store numbers? And I'm interested if you're seeing any pressure there in terms of competitive set. And then do you think we in the longer term should see normalization? Because I think [that's sort of sense of the undertone] that you think we're probably going to see a bit of normalization in margins, maybe not necessarily this half but sort of looking forward at the next 12, 24 months. Is that fair?

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Matthew Halliday, Caltex Australia Limited - CFO [65]

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Yes. I think when -- not going to comment on individual competitive behavior. Clearly, there has been a weak environment, as we've talked to, and that's led to a heightened competitive dynamic. And we've also had some changeover in the players in the sector. So there is a bit of normalization to take place, I think, whenever that occurs. Look, I think what we said when we ran through the slides is we pointed to the average over the last 5 years and where the first half sat against that average. I think we see a market that has always had some cyclicality to it. Clearly, the first half was at the very bottom end of that 5-year range. Clearly, '17 and '18 were periods where we were at the top end of that range. So I think if you look at the notes on the Slide 16, the 5-year average has been $0.137 per liter. The first half was around $0.126. So everyone can draw their own conclusions on sort of sustainability, but I come back to the cost inflation point, the fact that lease arrangements in place across the industry have in the order of a 3% cost ratchet. Ultimately, that provides a degree of structural cost support.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [66]

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And just final one from me. Just in terms [just in sort of Lytton, just has the] ability to sort of adjust that product slate in terms of any ability to take advantage of some of the change in the product prices, sort of diesel versus gasoline?

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Louise Warner, Caltex Australia Limited - Executive General Manager of Fuels & Infrastructure [67]

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Yes. So from a Lytton point of view, one of the things we do on an ongoing basis is optimize the product slate and the feedstock slate in combination with our import supply chain. So that's actually routine business for us. So we look at prevailing market values across both refining and import and all the way through from source so we're able to optimize that full picture together. So we're already doing a number of things in that space. And I think the most -- one that we've called out in the results is our choice not to buy feedstocks into the IMO 2020 conditions. That's the most material shift in what we've seen in terms of the overall slate that's on the input side rather than the output side. We would note that we -- Lytton makes a range of grades of gasoline. High-octane gasoline, it's very strong in. So there's the base-grade gasoline and also its ability to make octane, which creates some differential economics around the gasoline pool than just looking at the underlying refiner margin as well.

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Operator [68]

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The next question comes from Daniel Butcher, CLSA.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [69]

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Just a follow-up and a couple of other questions. Maybe, please, just I had heard from other people that the rehab cost per site was very low at about $100,000 a site. Can you confirm it is that low? Or what's your best guess currently? And maybe you could hazard a guess as to the best estimate of per-site or aggregate value for the 50 sites you're going to sell at this point in time.

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Matthew Halliday, Caltex Australia Limited - CFO [70]

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Yes. I think I'm going to disappoint you, but we've done a lot of work. We've got market values on the site, but I'm not going to -- it's subject to an auction process that we'll be proceeding with. And so I'm not going to preempt that process. As I mentioned earlier, we see really good appetite in that market. Look, the number for remediation that you provided, it ranges. The number you've got is a fair bit too low, but we're doing the due diligence at the moment. And we are not going to give any numbers before we complete that process.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [71]

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Sure. I thought it was too low as well. Maybe just following up on the 240 sites under review. You sort of said reasonably categorically you're not going to close those, so I'm just wondering what the review is going to do given that you still are testing out the Woolworths Metro concept, seem to be a little bit of drift on exactly when and how to roll out a better retail concept. What's the review going to end up saying?

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Matthew Halliday, Caltex Australia Limited - CFO [72]

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So look, we will deepen the review, applying the 5 criteria that we laid out on Slide 8. What I'm indicating is that those sites play a really important role in our overall network, and we see them continuing to play an important role in our overall network. How we best deliver value from them for our shareholders will come out of a deeper layer of analysis that we need to do across those mini markets, the particular characteristics of those sites, how exactly they plug into the network from a synergy point of view, a deeper lens on how we can deliver returns in particular, and then we'll come out with a clearer pathway on how we take them forward. What we do see is ongoing fuel supply into those sites is important to our overall network and the strength of that overall network.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [73]

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Sure, okay. You mentioned for the 50 you're divesting that you think that you might be able to retain some of those through StarCard network. Would you hazard a guess as to would it be 1/4, 1/2, what sort of volumes could you retain?

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Matthew Halliday, Caltex Australia Limited - CFO [74]

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We know we have a strong position from a -- both a market share point of view. Card is an important part. It's not exclusively about card, but no, I'm not going to -- sorry, I'm not going to give you a particular number as to what we see retention looking like.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [75]

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Okay. Sure. I think if I recall correctly, last call, you said you might have about 3 Metro stores operating with a bit of history by the end of calendar year '19. I'm just wondering whether you have any updates to the number of stores and the time line for the initial bunch of tests. And for the next tip after that, for the next sort of tranche of test stores and rollout?

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Joanne Taylor, Caltex Australia Limited - Executive General Manager of Convenience Retail [76]

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So let me take that question. So we have our first 2 Metro at Caltex sites opening at the end of November of this year. Those sites will be in New South Wales and will form an important part of giving us additional learnings from what we've understood from the operation of The Foodary. As we said before, we think the Metro concept helps us to expand the range that we will be providing and is well suited to meet the needs within the local environment. The first 2 store formats will be critical in giving us feedback on how successfully we have done that, and then in turn, that will guide the rollout of some additional sites in 2020 to build our further plan across the rest of the network.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [77]

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Sure. So those sites, how long will they take to build in 2020? I mean we'll only start to get data on them at the end of 2020. And do you have a rough idea of how many that will be, 5, 10, more than that?

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Joanne Taylor, Caltex Australia Limited - Executive General Manager of Convenience Retail [78]

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It's a little bit too early to say how many that we plan to roll out in 2020 at this point in time, but we would seek to do it in a very disciplined and measured way. So that sees us see, indicatively, it would be 5 to 10 in 2020 that we are planning. We're in the midst of capital planning at this point in time. So we will effectively use the first quarter and second half to review the performance of the first 2 pilots, the key measures that we've got in place, and determine how we progress from there.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [79]

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Okay. And maybe just one final question just on the $100 million of cost savings. I'm just wondering how much of those savings you're targeting, do you think, competitors could copy and thereby might compete away so that the EBITDA benefit is not necessarily realized?

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Matthew Halliday, Caltex Australia Limited - CFO [80]

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Yes. I -- look, Dan, I think we can see a clear opportunity for us to address cost across the business. I'm not really in a position to comment what others may or may not be able to do.

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Operator [81]

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Thank you. There are no further questions at this time. I will now hand back to Mr. Segal for closing remarks.

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Julian Segal, Caltex Australia Limited - MD, CEO & Director [82]

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Thank you very much, everyone. Really appreciated your participation. I thought it was a good session with good questions, and I'm looking forward to seeing you again for the yearly results.