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Edited Transcript of VEA.AX earnings conference call or presentation 26-Aug-19 12:30am GMT

Half Year 2019 Viva Energy Group Ltd Earnings Call

Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Viva Energy Group Ltd earnings conference call or presentation Monday, August 26, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jevan Bouzo

Viva Energy Group Limited - CFO

* Scott A. Wyatt

Viva Energy Group Limited - CEO & Executive Director

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Conference Call Participants

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* Ben Gilbert

UBS Investment Bank, Research Division - Executive Director and 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

* 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 Viva Energy Australia H1 '19 Results Conference Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Scott Wyatt, CEO. Please go ahead.

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [2]

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Good morning, and welcome to the Viva Energy Results Presentation for the 6 months ended 30 June 2019. My name is Scott Wyatt, Chief Executive Officer of Viva Energy. And with me today is Jevan Bouzo, our Chief Financial Officer. Jevan and I will talk through the highlights in today's presentation, and there will be an opportunity to take some questions at the end.

Now let me kick off on Slide 5 by discussing our company's commitment to people, safety, the environment and the community. In terms of safety, I'm particularly pleased with the progress we've made this year. We've delivered advanced safety training program to over 700 workers at the Geelong Refinery, and we have a number of other material programs in place across the rest of our operational activities. These have all delivered improved outcomes, and our injury frequency rate has fallen by 40% and that was the lowest level since 2015.

On the people front, I'm delighted to welcome Amanda Fleming to the executive team in the role of Chief People and Technology Officer. Amanda joins us from Super Retail Group where she was the Chief Transformation Officer and Managing Director of Super Retail Commercial, and prior to this, she held senior human resources roles at Coles, Pizza Hut USA and Mars. She brings a wealth of relevant experience, and we are really looking forward to her joining the team from the 1st of October.

We're also pleased to have been recognized once again this year as an Employer of Choice for Gender Equity (sic) [Equality] by Workplace Gender Equality Agency. Diversity in all its forms is important for the future success of our business.

Across the country, we support a range of community programs. And I would like to take the opportunity today just to share some work that we do to support the federal government's indigenous advancement strategy. Since 2014, Viva Energy has manufactured low aromatic fuels at our Geelong Refinery for supply to regional and remote areas of the country to help combat petrol sniffing. Research conducted by the University of Queensland has shown a 95% reduction in petrol sniffing in the communities where low aromatic fuels is available. And this is just one of the community initiatives that we're involved in, and we're very proud to support a range of other programs around the country.

Turning to Slide 6. Let me briefly touch on the key financial highlights for the first half of 2019 before I share the key achievements across the various other parts of our business. I'll discuss today's financial results in the context of the old leasing standard as this will enable you to compare our results with the guidance that we have previously provided. Jevan will provide further information about the adoption of the new lease accounting standard and the adjustments to how our financial statements are presented, and he'll also discuss our financial results in more detail.

So on a replacement cost basis, group underlying EBITDA for the first half was $171.6 million and underlying NPAT was $78 million, both of which are within the guidance range we've provided to the market late June. As we previously advised, our results in the first half were impacted by continued weakness of refining margins and lower retail market margins. The Board has determined a dividend for the 6 months ended 30 June 2019 of $0.021 per share. The dividend is fully franked and represents a 60% payout ratio of distributable NPAT on a replacement cost basis.

Net debt for the half closed at $168.7 million. This is up from a net cash position of $0.2 million as at the end of December 2018, predominantly due to the payment of $137 million associated with the renegotiation of the retail alliance with Coles.

Now turning to sales performance on Slide 7. I'm pleased to note that our sales volumes for the first half of 2019 were up 2.5% on the first half of 2018 and well ahead of the broader market which declined by just over 2%. Alliance weekly sales volumes have stabilized since Viva Energy took control of retail pump prices, and we continue to see strong growth in Liberty and our other retail channels.

Premium fuels represents 28% of total petrol sold, and we continue to leverage the success of the Shell V-Power Racing Team to support our retail marketing initiatives to build customer brand preference.

Now turning to Slide 8. Let me discuss the retail business in more detail. 2019 has been a significant turning point for our retail business with the renegotiation of the retail alliance with Coles. We have the largest single-branded convenience business in the country, and I believe this new agreement provides the platform to better leverage our relationship and outperform our competitors as we grow fuel volumes and develop our customer and convenience offers in the years ahead.

Retail EBITDA on a replacement cost basis of $283.3 million is down 8.1% on last year due to the impact of lower sales volumes through the alliance and lower retail fuel margins. However, we have seen an encouraging response to our pricing and marketing strategies, and we remain confident that the reinvestment we are making this year is critical to the long-term success of this business and achieving our goal of lifting weekly sales through the Alliance channel to above 70 million liters per week.

Across the rest of our Retail business, we continue to see strong sales growth, and we look forward to gaining regulatory approval for the acquisition of the Liberty Wholesale business, which we announced earlier this year. As part of this transaction, Viva Energy would also hold a 50% interest in a Liberty Retail joint venture, which currently holds more than 50 Liberty- and Shell-branded company controlled fuel and convenience stores, with plans in place to grow this further. Together with the Alliance and dealer-owned network, our Retail business is now well placed for future growth.

Now turning to Slide 9. Let me touch on the commercial business -- businesses, which generated an underlying EBITDA on a replacement cost basis of $155.6 million in the first half of 2019. After a relatively stronger performance in 2018, commercial earnings are down 6.6% on the same period last year, largely as a result of higher shipping costs, competition and margin compression on contract renewals. Despite very competitive trading conditions, sales performance remained strong, and we retained a high-quality customer portfolio, which provides opportunities for growth as our customers succeed in their own expansion strategies. The commercial business has remained a solid contributor to earnings, and this is underpinned by our competitive national supply chain and our important trading relationship with Vitol.

Looking forward, initial trials of very low sulfur fuel oil have been very promising and position us well to continue to make the requirements of our marine customers following the implementation of the new low sulfur marine fuel rules from January 2020.

Our Supply, Corporate and Overheads segment covered on Slide 10 has largely performed in line with expectations, delivering underlying EBITDA on a replacement cost basis of negative $285.7 million. We remain very focused in driving efficiency and productivity improvements across all parts of our business.

Now moving to Slide 11. The Refining segment delivered an underlying EBITDA on a replacement cost basis of $18.4 million. Earnings in the Refining segment have continued to be impacted by weak regional refining margins, primarily due to the softness in regional demand and excess gasoline supply, which saw Geelong Refinery margins declining to an average of USD 5.1 per barrel compared to USD 7.4 per barrel in 2018.

A number of improvement initiatives across the refinery have been implemented in the first half, including a new energy procurement strategy, which has seen us transition from being a retail natural gas buyer to being a wholesale gas market participant. Energy benefits have also been realized through the power purchase agreement we entered into with Acciona's Mt. Gellibrand Wind Farm covering approximately 1/3 of Geelong's electricity requirements.

Turning to Slide 12. I'm very pleased with the operational performance of the refinery this year. Crude intake for the first half was up 12% on the same period last year, and operational availability was 94%, which represents one of the best periods of performance in the last 5 years.

Responding to the difficult refining margin, we lifted diesel production to record levels and reduced our exposure to gasoline production, which was reduced to 33%. This is a particularly strong outcome, which reflects improvements we've made in crude sourcing that has provided Geelong with greater processing flexibility. We're well placed to benefit from any improvement in refining margins in the future.

Let me now hand over to Jevan Bouzo, who will talk more about the financial performance.

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Jevan Bouzo, Viva Energy Group Limited - CFO [3]

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Thanks, Scott. Today, we've presented our financial results under the new lease accounting standard, AASB 16, which took effect from 1 January 2019. We've also provided key financial items under the old standard, AASB 117, to assist with the comparison to historical periods and to prior guidance.

Slide 14 sets out the key financial results under both standards, and I'll take this opportunity to call out a few of the highlights on this slide. Volume performance for the half was really positive. However, our Retail, Fuels and Marketing EBITDA RC was impacted by tighter market margins with the balance of the EBITDA performance driven primarily by lower refining margins.

The balance sheet remains strong with net debt of only $168.7 million and net working capital of $223.4 million (sic) [$223.9 million]. Our investment in associates includes our 36% stake in Viva Energy REIT, which is currently worth $750 million, and our free cash flow for the period was $116.6 million.

You'll note the introduction of our right-of-use asset and lease liability, I'll turn to Slide 15 now and talk to this change. As a December year-end company, we're one of the first required to report under the new standard. The transition to AASB 16 is an accounting change and has no impact on the underlying economics of the business, cash flows, dividends or any of our debt covenants. That said it's a significant change to our financial reporting and results in some changes to our headline financials. The new standard requires us to bring operating leases onto the balance sheet with a lease liability of approximately $2.4 billion and a corresponding right-of-use asset of about $2.3 billion. At inception, these balances largely represent the present value of future lease commitments, including a number of option periods as required by the accounting standards. As a result of adoption, group underlying EBITDA RC for the half increases by $125.8 million due to the lease expense being removed, mostly from the Supply, Corporate and Overheads segment. Over time, the right-of-use asset will amortize on a straight-line basis, while the lease liability will reduce with implied principal and interest components calculated from the actual lease payments.

The amortization and interest, partially offset by removal of the lease expense, will drive a reduction in underlying NPAT RC of $27.1 million for the half. I'm confident that approximately half of the lease liability on balance sheet is offset by the present value of sublease income received from Coles Express under the Alliance arrangements. The present value of this sublease income is estimated at $1.2 billion. However, money received will remain in the income statement as revenue. This is in accordance with the accounting standard requirements.

We'll continue to pay a dividend based on distributable NPAT RC, which removes the impact of noncash accounting items, such as AASB 16. Therefore, there is no impact from the new standard on the cash distributions available to shareholders.

Turning to Slide 16. We've summarized the changes resulting from AASB 16 to bridge our underlying NPAT RC from the old standard to the new standard. The bridge includes the impact on operating costs, depreciation and amortization and interest, which I covered on the previous slide. We've also shown the effect on tax expense as a result of these adjustments. Our cash tax is not expected to change as a result of the new standard adoption.

The following 2 slides, 17 and 18, show our EBITDA and our NPAT results under both the old standard and the new standard. We've made pro forma adjustments to the historical years FY '15 to FY '18 under the new standard to assist with a like-for-like comparison to the first half '19 result.

From here, I'll move to Slide 19. On this slide, we've set out the year-on-year EBITDA bridge for the period presented under the old lease accounting standard in the way you're familiar. As Scott mentioned earlier, weakness in retail fuel margins in the market, higher supply chain costs and margin compression on contract renewals contributed to the decline in retail fuels and marketing EBITDA. The refinery demonstrated strong operational performance. However, this wasn't enough to offset continued weakness in regional refining margins, which impacted earnings during the half.

Supply, Corporate and Overheads was higher than the first half last year due to higher operating costs; growth in lease expenses, remember, this is under the old standard; and some one-off transaction costs, particularly associated with the Liberty transaction and the Alliance reset.

Our cash flow on Slide 20 has been prepared with the new lease accounting standard EBITDA as the starting point. As you'll see, this has no impact on the cash flow of the business, and I'll briefly talk through a few key items on the slide.

Operating cash flow for the period was $316.6 million, and we made the payment of $137 million to Coles. We received $19.4 million in distributions from our investment in Viva Energy REIT, and this line is offset by some money spent to acquire shares in our own company on-market to settle legacy incentive plans rather than issuing new shares. Under the new accounting standard, operating lease expenses have been reclassified from EBITDA to finance costs and repayment of lease liability. And adjusting for the one-off payment to Coles of $137 million, dividends paid of $93.3 million and working capital movements of $39.6 million, the adjusted underlying free cash flow was $101.7 million.

Turning to Slide 21, we've set out the impact of the one significant item recorded during the period. This is a benefit of $15.8 million relating to the finalization of the tax consolidation and is in addition to the $345.5 million recorded in FY '18.

On Slide 22, I'll talk to the balance sheet. We've maintained a strong balance sheet with net debt of $168.7 million at 30 June 2019. In addition to this, we estimate that the company will receive a tax refund of approximately $83 million in September 2019. This is as a result of lodging the FY '18 tax return in July this year, which included the impacts of the tax consolidation for the first time. The new leasing standard results in a lease liability of approximately $2.4 billion being added to the balance sheet, as I mentioned previously, and approximately half of this is offset by sublease income received from Coles Express. And I should note that on current prices, our investment in Viva Energy REIT is worth more than $750 million.

We continue to have significant headroom on our USD 700 million debt facility, which is available to fund fluctuations in working capital. In March 2019, the facility was successfully extended for 3 more years to March 2022.

Working capital increased during the period, primarily as a result of rising oil prices and additional inventory taken on with Alliance fuel pricing. However, this was partially offset by lower stock levels at 30 June 2019.

Turning to Slide 23. Total CapEx for the half was $69.9 million, lower than the expected CapEx of $98.7 million. This excludes the $137 million payment made to Coles for the Alliance reset and $42 million for the Liberty transaction expected in the second half.

Retail CapEx was $19.4 million lower than the same period last year. The prior period included higher CapEx from tank replacements and Shell brand refresh work that is now complete. There were less retail sites added in the first half, primarily due to a focus on resetting the Alliance.

CapEx for the refinery was $7.4 million higher than guidance, mostly due to capital works being completed earlier than expected. The full year also includes a range of initiatives aimed at improving costs and reliability, such as the new gasoline tank and the control system upgrade.

CapEx in Supply, Corporate and Overheads was $7 million lower than forecast, mostly due to fuel oil upgrades at Gore Bay extending into the second half.

Finally, turning to our dividend policy on Slide 24. We announced the dividend for the first half of $0.021 per share, fully franked. This represents a 60% payout ratio of distributable NPAT RC for the period. Distributable NPAT RC excludes noncash items, which fluctuate over time. And you'll see we've made an adjustment for the new accounting standard, AASB 16, which is an example of a noncash impact to earnings. We've also maintained our policy to target a 50% to 70% payout of distributable NPAT RC.

From here, I'll hand back to Scott to conclude.

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [4]

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Thanks, Jevan. I'll finish now with a few comments on the outlook for our business for the second half of the year.

As mentioned earlier, we remain committed to investing in improved competitive retail fuel pricing and marketing initiatives, which are aimed at restoring growth in the Alliance network. We are confident that the volumes have now successfully been stabilized, and we are well on the way towards our goal of lifting sales volumes to about 70 million liters per week. Sales volume performance has been encouraging in recent months as a result of our improved price positioning and a range of marketing initiatives, such as the little -- Coles Little Shop 2 promotion, which has been available at all Coles Express sites, is also assisting.

Lower retail market fuel margins continue to provide some headwinds for the Retail business. And if this was to persist over the balance of the year, then retail earnings are unlikely to improve from the underlying EBITDA result achieved for the Retail segment in the first half of 2019, notwithstanding the potential for return to volume growth.

Commercial markets are expected to remain very competitive with some continued cost pressure on margins from increased supply chain costs. We'll continue to focus on improving margin performance through cost and supply chain efficiencies.

Improvements in regional refining margins in July and August have been supportive of the Geelong Refining Margin. The actual refining margin for July 2019 is USD 7.70 per barrel, with refining intake of 3.6 million barrels. The expected Geelong Refining Margin and intake for quarter ending 30 September 2019, will be impacted by the planned maintenance of the Platformer in August 2019, as previously disclosed.

Going forward, we intend to provide a quarterly trading update on the business, the first trading update expected to be provided in late October 2019. Performance of the Refining segment will now also be updated on a quarterly basis through the release of Geelong Refining Margin and crude intake performance.

This brings me to the end of the presentation. With that, I'd like to hand over the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Mark Samter with MST Marquee.

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Mark Samter, MST Marquee - Energy Analyst [2]

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A couple of questions, if I can. Just first, probably that's surprised me on the retail guidance. Can you just help us contextualize a little bit. So I mean, effectively you're saying you've given away all of the margin you've acquired from Coles and then the payment from industry margins. It is rather -- can you kind of contextualize on how much of those you think, to an extent, been your own doing on the retail margins? How much you've been -- kind of leading the pricing cycles down? And why you would expect margins to stable out in the second half?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [3]

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Yes. Sure. Thanks for the question, Mark. Yes, I think, as we indicated, when we announced the new relation -- arrangements with Coles that this year would be a period of reinvestment. And that with the margin transfer, I guess, from Coles to ourselves and us taking control of retail pricing, we expected to reinvest the majority of that, if not all of it, into both being more competitive in terms of board pricing, but also investing quite heavily in marketing campaigns, which are obviously designed to reactivate customers now. The joint arrangements -- the joint promotion that we're just in the middle of with Coles on the Little Shop 2 campaign is a really good example of that, but there are others that are more direct with customers as well. So that has been a period of investment. And obviously, the return that we expect to -- that we're looking for from that reinvestment is an improvement in volumes. I'm pretty pleased -- or actually, I'm very pleased with the fact that we have stabilized volumes over the course of the first half. That was an important first step in terms of our strategy.

The second step, obviously, is to turn that investment into growth, and as indicated in the announcement, we remain absolutely committed to progressing that strategy and delivering on our goal of lifting sales to over 70 million liters per week. And obviously that volume uplift will be -- is what we need to provide -- start to provide a return on that investment that we're making. So fundamentally, nothing has changed there.

I guess, what we have found since we assumed the role of taking over our pricing is that -- it's obviously introduced a new volatility to our business in the context of retail fuel margins. There's been a few moving parts and that one has been, obviously, the impact of oil price volatility, and that was a key factor in the first half performance, where there was a period of relatively steep increases in oil prices, which compressed retail market margins as we -- due to the lag and passing it on to customers. But I guess also there's been quite a change in the competitive dynamic in the industry as well.

I mean, in essence, both the supermarket players are no longer in control of pricing and we're supposed to step back from that. Euro Garages have entered the market and assumed retail pricing for that part of the network. We've obviously changed the arrangements with Coles, and other competitors are also progressing their own strategies. So I think it's a relatively -- it's a changing, dynamic in the competitive marketplace that's having some impact on market margins. And that's certainly what we have seen, to some extent, in the first half, but certainly, in more recent weeks as well. To the extent that we're contributing to that, I think it's a number of factors, Mark. I think, at the end of the day, we have changed our pricing strategy. We're now pricing that market right around the country and -- but delivering more competitive pricing to our customers. It was a key part of our strategy, continues to be a key part of our strategy and I firmly believe it's the right decision for our business over the long-term, and as -- it will require some investment, and clearly, that investment for now is probably more -- a bit more substantial than we had anticipated, but it's still the right thing to do for our business over the long run. And how the market evolves, I don't particularly know. We'll have to continue to monitor that and adapt our strategies accordingly.

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Mark Samter, MST Marquee - Energy Analyst [4]

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And so you're not saying at this stage -- I mean, I think, last call that you did, I think you guys agreed with that kind of my numbers are the average lease outside, which probably the majority of sites in Australia would have been loss-making in the first half. You've got to assume that's not sustainable for the industry, but you're not seeing any change in competitive behavior yet on that?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [5]

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So what do you mean by changing competitive behavior, Mark? Just can you...

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Mark Samter, MST Marquee - Energy Analyst [6]

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There's some pricing strategies from competitors. I mean, particularly people who just paid an awful lot of money to buy sites. You would have thought the whole industry is not going to want to price where they are if the average lease outside is loss-making?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [7]

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Yes. I mean as we talked about last time, I think the industry, if you think about the cost of running a retail network, are largely similar across all of the competitive risk players in the market. I mean we largely run a leasehold model. The industry largely runs leasehold models. Today, most leases in the industry look the same and have the same sorts of escalations in them. So -- and obviously, wage costs in terms of running a service station are largely consistent as well. So I think the underlying cost base of the business requires a certain margin to, obviously, maintain profitability, but also deliver return on investment. And over time, that should support a certain level of return for all the players in the industry. But where it's different, of course, is that things like quality of network, scale of your business, your overhead costs, your ability to generate a growing share of non-fuels income are really important for the future of this business. And that's why we made the changes that we made with Coles earlier this year to set ourselves up to play successfully into that environment and to be able to continue to leverage the quality of our network, leverage our scale and leverage the quality of the partnerships that we have with Coles. So those things are really fundamental, and they're probably more fundamental than ever through a period of time when margins are compressed.

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Mark Samter, MST Marquee - Energy Analyst [8]

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Going to just -- that was kind of 1.5 question, so I might sneak in my 2.5 question. I don't know to what extent you are going to be able to answer this, but obviously Shell's move into -- potential move into electricity last week. Can we just think about in other countries where they've done this, obviously, the retail fuel brand is quite important then on leveraging those customers. Can you maybe talk about whether you see opportunities to do a thing on the customer front? With Shell though, I mean, you suspect they've not done what they've done? And also, just talk about if there are any constraints they can put on the brand and now they're obviously going to be -- they're potentially a lot more interested in that brand with the retail customers. How you think that could all play out for you?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [9]

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Yes, I'm probably not really in a position to talk about the detail of our relationship with Shell, but clearly, it's an important one. And we're, obviously, the licensee for Shell in Australia in terms of the broader downstream business. So we do have a close relationship. I think beyond that relationship, though, more generally, we clearly are looking at the developments of energies, particularly renewable energies, the impact that, that might have on our business over the long term, how do we commercialize some of those opportunities and obviously, use them to broaden our customer offer and continue to make our sites -- our business in both retail and commercial continue to be relevant for our customers over the long term. So where there's an opportunity to work that with Shell or other partners, we obviously remain open to those sorts of opportunities.

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Operator [10]

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Your next question comes from David Errington with Merrill Lynch.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [11]

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Scott, can I just follow-on from Mark's question on the retail side. I just want to run these numbers by you so we don't go off of it half-baked here. But your guidance you're basically saying that retail is going to be in line with the first half if conditions don't improve. That's pretty straightforward, but I wanted to get an idea on my numbers, the second half of '18, retail did $326 million EBITDA and obviously the first half, this is old standard. Your first half, you did $283 million. So what you're calling out is if things don't improve, there is a fair sizable drop second half-on-second half on an underlying business because of these changed conditions. Is that what you're basically inferring is that with these change of conditions that you elaborated with Mark, that that's the magnitude that you're talking?

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Jevan Bouzo, Viva Energy Group Limited - CFO [12]

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David, I think you might need to check your second half '18 number. I think we were $308 million in the second half last year.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [13]

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That was the first half last year, you did $308 million. You got it here first half '18 under the old standard $308 million.

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Jevan Bouzo, Viva Energy Group Limited - CFO [14]

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Yes. And then I don't think we did $326 million in the second half. I'll come back and check those numbers for you.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [15]

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Can you just -- because I've got you in the full year for retail at $609 million.

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Jevan Bouzo, Viva Energy Group Limited - CFO [16]

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Yes, which would imply $300 million around this month the second half.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [17]

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Yes, $326 million, that's what I was saying. You did $326 million in the second half, and you did $283 million in the first half. And you're guiding...

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Jevan Bouzo, Viva Energy Group Limited - CFO [18]

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Did you say -- sorry to cut you off, David. Did you say $609 million for the full year, last year? $308 million in the first half. I think it implies about $300 million, $301 million in the second half last year.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [19]

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Okay. All right. So what did you do? You did $609 million and you did $308 million in the first half, okay, okay. So you're $301 million and so basically you're saying -- what you're saying is if there's no improvement, you'll be doing $283 million. So the drop would be from $301 million to $283 million second half-on-second half. That's the sort of magnitude that you're talking?

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Jevan Bouzo, Viva Energy Group Limited - CFO [20]

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That's right. And I think perhaps where we're going with that, David, is in the context of the current environment, what we saw in the first half around oil price, our change in strategy, having taken over fuel pricing on the 1st of March and also some increased competitor action, it actually puts us in a pretty good place, we think, and reflects, obviously, the strength of our network and the quality of the offer that Scott talked to earlier.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [21]

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Yes. Given the stuff that's going on, that seems to be a well -- relatively well-managed outcome, I would have thought. The only issue, if I'm -- again, I'm not putting words into your mouth. I just want you to clarify what you were inferring to Mark. The investment -- the question I've got -- I suppose, this is where I was going, you said that the investment is more substantial than you first thought. Is that a timing issue, do you believe? Or is it a permanent issue? And this is going again to what Mark was asking about not sustainability of current market conditions. So in your opinion, is this a timing issue? Or is it a more permanent thing?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [22]

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No. I think the investments that we needed to make to bring our retail board prices in line with market and be genuinely competitive offer out there is exactly what we thought it would be. And if you look at where we're pricing at the -- our positioning in the market across the whole country at the moment, David, I think there's no doubt that we are now a competitive player in the market and that's exactly where we wanted to be and that's compared to where we were this time last year as a substantial investment that we've made. So that's exactly as we expected it to be. We knew that when we took -- made the changes in the relationship with Coles when we took on that responsibility. I guess what's been more challenging is just the headwinds we've seen on overall market margins in retail. As I said before, largely is a result of sharp increases in oil prices in the first half, but more generally -- laterally more related to just a change in competitive dynamic in the market as well. So that's just a picture of the market. We're only one player in the market. There's a lot of other dynamics at play, and we have to see how that evolves over time.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [23]

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And I suppose I was hoping that in the second half after paying the $137 million, taking the full retail margin that you wouldn't have had to invest all of it and some in that second half. I was hoping for a little bit of sugar in that second half, but it looks as though conditions have been such that, that's frustrated your ability to do that.

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [24]

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The sugar will come, David, from improvements in volumes through the network. And that was really why we indicated that we -- in order to get a return on the investment that we're making in terms of competitively pricing that, we would like -- we aim to lift volumes above 70 million liters a week, and that's our goal. And obviously, the first step in that was stabilizing the decline because as you're aware up until that -- until this point, volumes were declining quite significantly, not just year-on-year, but also month-on-month. So we've now got a period of track record behind us, where volumes week-to-week are stable, and we're at a period now where we're expecting to start to grow the business and -- yes, our price positioning and the things that we're doing with Coles on marketing are tangible evidence of our efforts to do that, and we're encouraged by the results that we're seeing in recent months.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [25]

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And just following on the Supply, Corporate and Overheads, that increase of $26 million, Jevan, can you elaborate how much of that was the one-off costs? And this higher pipeline and distribution costs, can you elaborate a little bit on what happened there, please?

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Jevan Bouzo, Viva Energy Group Limited - CFO [26]

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Yes, yes. Sure, David. Bear in mind, we've been talking about our performance in Supply, Corporate and Overheads segment for a while because we've been referring to guidance. In terms of the year-on-year performance, there was always flagged a bit of a step-up and that's really driven -- remember, we're talking about the old leasing standard. So to an extent, by full year impact of new sites in the lease expense that sits inside that segment, but also typical annual lease escalations and the usual employee wage costs. Across the supply chain, we had some small increases in pipeline, coastal shipping activities and those sorts of things. The one-off expenses that I referred to in the first half, you could think about in the context of a few million dollars. But rather than calling out significant items, we've just put them in the segment earnings.

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Operator [27]

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

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [28]

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I'm just interested on the commercial business in terms of the competitive backdrop you're seeing there. Have you seen a step-up in the intensity around contract renewals? Or is this pretty similar to what you're seeing when you last reported at the full year?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [29]

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So I guess similar to what we saw when we reported on the full year, Ben, I think we indicated then that we were actually in the context of what's been a pretty competitive environment, I guess, for a long time, but certainly, over the last couple of years that we're really happy with our results at the end of last year, and that was somewhat better than we anticipated. But we're also cognizant of the fact that we've got a good customer base and obviously, typical contracts are 3-year contracts every year. We've got about 1/3 of those customers that go to market provides an opportunity for our competitors to bid, and we have to defend ourselves based on our track record of supplying those customers and, obviously, demonstrating competitiveness as well and occasionally, we do see margin compression through those processes. And we then have to build on that relationship and obviously, improve earnings over the life of the contract extension that we've achieved. So we're mindful that we had some of that activity last year that was going to flow through into this year and we're certainly seeing, obviously, in our earnings in the first half some of the impacts of that, together with some of the other supply chain cost increases that Jevan touched on before.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [30]

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And the second one, just in terms of the capital structure and now how you look at the group at the moment, you've obviously got a pretty good half end net debt position and some timing and stuff around that. But you look at sort of where cost of funding is at the moment, if you sort of take a view that it's a bit of an abnormal year and refining margins over time do normalize to go through the fine line those sort of things and then hope the retail gets to a point of sort of a more adequate return or industry level of profitability. What's the Board thinking and sort of what's been the discussions around potentially exploring taking on some more debt, slowing down the rate? To look at a buyback at the moment is pretty efficient way to use capital, I would have thought at the moment?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [31]

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Yes. You're right, Ben, about the current interest rate environment. It's certainly a good time to be borrowing. It's something that we're always thinking about and considering. And obviously, I can't comment further on that front today. But certainly, the environment, as you mentioned, is quite attractive for borrowers. And we did go some way to taking advantage of that by extending the facility that we have in place in March this year. And as luck would have it, interest rates have improved further since then, and it's certainly something we're looking at, at the moment in terms of the overall cost of funding.

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Operator [32]

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Your next question comes from Shaun Cousins with JPMorgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [33]

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Just a question in regards to, I guess, the speed of your investment in pricing retail. Have you accelerated your investment in price nationally because of your participation in the Little Shop sort of program, giving, I guess, now consumers have an opportunity to reengage with the brand because of Little Shop and you want to put your best foot forward in regards to pricing? And does that sort of resulted in an acceleration of your price investment? And I mean, more generally, do you think you needed to -- or have you been surprised that you've needed to invest possibly more? And does that reflect that the brand was possibly in a weaker position in terms of the eyes of the consumer, hence, you've had to do more on price investment than you otherwise would have expected?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [34]

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No. I think, Shaun, as we said -- I said just before, I think the investment that we've made is exactly what we anticipated we would do from a strategy point of view and also what the cost of that would be, given the gap to market that we were faced with before we took over control of pricing. So I think on that front, this is entirely anticipated. I think in terms of how we've executed that over the last 6 months, there's a whole range of reasons and that underpin the strategy that we've pursued. There's been aggressive implementation of more competitive pricing across the country over that period of time, which certainly now consolidated that. I think our position in all markets right across the country is strong. We're seeing good feedback from customers in terms of perception surveys that we run. We're obviously seeing encouraging sales results. It was absolutely critical that as we -- that we supported all the marketing programs, not just Coles Little Shop 2, but all the marketing programs that we've got in place to reactivate customers with competitive pricing, so that when we do bring customers to the sites that they have a positive experience and just the whole point of the campaign is to get them back and to keep them coming back. So those have all been key pillars of our strategy and I'm very happy with how the execution is going and the results that we're seeing.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [35]

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Fantastic. And maybe just, I guess, in terms of you said you're in line with the market on price or maybe you should clarify sort of that statement, particularly in regards to which competitor set. Is it the majors, for lack of a better word, your BP, Caltex, Woolworth's petrol? Is that kind of who you're expected to -- pardon me, who you believe you're now in line with?

And looking forward, who are you going to take market share from because you've got a scenario where you've got to effectively try to gain volume share, but you're not necessarily likely to take it back from the people that have gained market share from you, who are the Metros, Speedways, West Sides, even the like there. So I'm just curious, where is your pricing and who do you think you can gain market share from or what style of competitor you believe you'll be able to gain volume share from, please?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [36]

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I mean, look, I'm sure it was a surprise and I'm not going to share all of our pricing strategy with you over the phone. But -- and look, in all seriousness, it clearly does vary from market to market, from site to site. It's a -- as you know, it's a very dynamic market. And a lot of sophistication needs to go into how you price to get the best outcome of both sales volumes and also margin performance and also changing customer perception as well. So we've got a fairly well-thought-out strategy. It will vary from location to location and vary against competitive sets as well, which is a little bit depending on the locations we're competing in. So it's quite dynamic, and there's no standard formula on that one, Shaun. And -- but generally, where I expect to take -- as we grow volumes, I expect it to come from the whole market. I think it all -- there's no one -- we're not targeting any one particular competitor. We're targeting customers that we will -- that have had a relationship with us in the past, that have predisposed to shopping at our network. And obviously, new customers that we believe are best suited to the office and the segments that we're trying to target. So they'll come from right across the marketplace.

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Operator [37]

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

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [38]

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First one is just around the Geelong Refinery. You seem to have got some benefits out of modifying the crude intake mix and simultaneously got quite a good operating cost performance this half. I just wondered whether you could comment on those variables, please.

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [39]

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Yes. Look, I think, obviously, in the world we were playing, the margin environment that we're faced within the first half of this year really forced us to do what we can to minimize the -- could what -- do what we could do to minimize the exposure to gasoline production, which is where, obviously, we're seeing some very poor gasoline cracks and obviously increased our exposure to diesel production, which is, obviously, what was a more healthy part of the barrel. So on that front, we've done -- I think the refinery has done an outstanding job on that front, given that we've got a relatively fixed configuration and there's limits to how much production you can actually shift. So a lot of that was done through crude selection and the new crude tank that we commissioned a couple of years ago has been instrumental in providing that flexibility. And I've been really -- it's been quite a significant shift that we've been able to make. Now the downside -- the flip side of that, of course, is that crude selection and some of the crudes that we needed to buy to be able to achieve those outcomes were probably more expensive than they have been in the past because we're not the only refinery trying to do this within the region. So it doesn't necessarily translate directly into an outstanding refining margin performance because the fundamentals of refining margins from the first half were quite weak. But those are the sorts of things that we need to do when times are difficult. And I think on that front, we've done a really good job.

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Jevan Bouzo, Viva Energy Group Limited - CFO [40]

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And just to your point, Grant, on the operating costs, you're right, we've shown operating costs on a dollar per barrel basis of under $5 for the first time in the last 4 years at $4.70, which is really a combination of good cost management there and showing a small decrease on a run rate basis year-on-year, but also the increased production that we've managed to run through refinery. And I think holding energy costs, particularly in the current environment of rising gas and electricity has been a really good outcome too and a bit of a testament alluded to by Scott in his commentary on the gas and electricity purchasing changes.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [41]

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Okay. Maybe just slightly medium-term question. Could you comment at all on your outlook for regional refining capacity utilization? Just give us -- try to give us some perspective to think about the refining margin environment over, say, the next sort of 2 years, please?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [42]

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Yes. Look, there's a number of factors that will influence the final outcome for refining margins. Obviously, capacity is one thing. We have seen more capacity come on stream in China this year, but probably the bigger overhang is really oil products demand growth, which is subdued, particularly given the global economic environment at the moment. That's the real overhang on the refining industry. But obviously, the other big change coming up, which I think in the short term, is more fundamental is just how the introduction of IMO impacts refining margins. We're certainly seeing in more recent times, a more, I guess, a spread of refining cracks, which are more typical of what we would expect heading into IMO. So deteriorating fuel oil improving, strengthening diesel and some strengthening in gasoline as well. So -- but that's -- we're going to sort of see how that all plays out. And obviously, we'll learn that soon enough given the introduction that will take -- and transition that will take place over the next 6 months or so.

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Operator [43]

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There are no further questions at this time. I'll now hand back to Mr. Wyatt for closing remarks.

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [44]

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Thanks, again, very much for everyone to join this morning. Just to quickly recap the results that we've announced today, we obviously pre-guided back in June a lot -- really all largely consistent with the guidance we made, largely the top end of the ranges that we provided. So very happy with the final outcome in that context. Obviously, refining margins and retail market margins have been somewhat of a headwind in the first half and in case of both continued to be a challenge in the second half of this year, but we have seen some strengthening in the refining margins. We're very pleased with the progress we're making on our retail strategy, stabilization of volumes in Alliance in the first half was absolutely critical for us. And we're seeing some encouraging sales and customer perception changes over the course of the last few months. So very positive about the progress we're making on our retail strategy and remain confident that that's the right one for the longer-term of our business, and that we're on track to deliver the sales lift that we're looking for to achieve more than 70 million liters a week across the Alliance platform.

But more broadly than that, the other retail channels that we participate in are also important. We've seen great sales growth in those over the first 6 months of this year. And we continue to invest in our own dealer network. We look forward to completing the acquisition of the Liberty business and the Wholesale business and being able to continue to grow our presence, and particularly in regional and rural Australia through that platform, and also joining with the current other owners of the Liberty business and developing their own retail channel, of course, across the country over the course of the next few years.

Thanks, again, for joining. As I also mentioned, we will now be providing quarterly updates, so I look forward to talking to you all, again, late October when we can talk a little bit more on our quarter 3 performance. Thank you.