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Edited Transcript of VEA.AX earnings conference call or presentation 23-Feb-20 11:30pm GMT

Full Year 2019 Viva Energy Group Ltd Earnings Call

Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Viva Energy Group Ltd earnings conference call or presentation Sunday, February 23, 2020 at 11:30:00pm 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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* Adam Martin

Morgan Stanley, Research Division - Research Analyst

* Ben Gilbert

UBS Investment Bank, Research Division - Executive Director and Analyst

* Darren Leung

Macquarie 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

* Mark Samter

MST Marquee - Energy Analyst

* Michael Simotas

Jefferies LLC, Research Division - Equity Analyst

* Shaun Robert Cousins

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Viva Energy Australia Full Year 2019 Results Announcement. (Operator Instructions) I would now like to hand the conference over to Mr. Scott Wyatt, Chief Executive Officer. 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 full year ending December 31, 2019. My name is Scott Wyatt. I'm the Chief Executive Officer of Viva Energy. And with me today is Jevan Bouzo, our Chief Financial Officer.

Today's results presentation follows our announcement last week that we sold our 35.5% interest in Viva Energy REIT for $734 million. The divestment was an important transaction for Viva Energy and its shareholders, as it allows us to unlock capital and return this to shareholders through a proposed buyback of shares. We'll spend some time discussing this in more detail later in the call, but let me begin with an overview of our 2019 results commencing on Slide 4 of the presentation pack.

During the course of last year, we maintained a strong safety and environmental performance and progressed a number of new programs, which help sustain a strong safety culture. I'm particularly pleased that 95% of our employees surveyed felt that their team is committed to operating safely and empowered to intervene and raise any safety concerns.

Like all Australians, we've been shocked by the devastating bushfires impacting many parts of the country. As you would expect, we were involved in delivering fuel to impacted areas to support firefighting efforts and have also assisted with donations to organizations who are directly supporting recovery. In line with our standard practice, we have provided paid leave to all our employees who have volunteered to help respond to these fires.

Last year, we also formalized our indigenous participation program and launched our inaugural reconciliation action plan that was endorsed by Reconciliation Australia. This plan celebrates indigenous cultures, promotes reconciliation, builds respect and raises cultural awareness. We also continue to support a range of community programs right across the country.

Within the company itself, we continue to foster inclusiveness and diversity. Our support for part-time operator positions at Geelong Refinery is helping to attract more women to our frontline operations, and our involvement with Career Tracker Internship program provides career and leadership development for indigenous students. We are recognized as an employer of choice for gender equality, and our employee engagement scores stand at 68% with many employee groups at top quartile.

Turning to our scorecard on Slide 5. Let me just say a few words about our overall operating and financial performance. Over the last year, we've seen several changes, which have altered the industry landscape. Changes in the ownership of competitor fuel and convenience businesses and the renegotiation of our retail alliance arrangements were material developments in the retail market. While the global transition to lower-sulfur marine fuels and more generally, changes in crude flows as a result of regional conflict and trade barriers, have led to periods of volatility in both oil prices and refining margins.

In the context of these external developments, I'm very pleased with the underlying performance of the business and the progress made on our strategic priorities. Total sales volumes are up nearly 5% on 2018 as a result of substantially improved performance in our retail Alliance business, continued growth in our Liberty channels and solid sales across our commercial and wholesale sectors. Refining was also strong with periods of record production, high levels of unit availability and utilization and a focus on optimization to minimize exposure to lower-margin production.

Our decision to take responsibility for retail fuel pricing across the Alliance network has delivered steady improvements in sales performance and brand perception. We expect to continue this during 2020, as we maintain our price and value positioning in market. Lower retail market margins recovered in quarter 4 2019, and we are now well placed to benefit from any sustained improvement in trading conditions through 2020. Several expiring commercial contracts were successfully renewed during the year, and we also expanded strategic relationships with key partners such as the Australian Defence Force, which provide opportunities for growth in the years ahead.

We have maintained a strong capital discipline with operating capital expenditure reducing by 33% to $162 million and relatively low net debt of $137 million. Group underlying EBITDA was at the top end of our December 2019 guidance, and we have maintained a dividend payout of 60% of distributable net profit after tax. Following the sell-down of our stake in Viva Energy REIT, we also intend to undertake a share buyback using all of the net after-tax proceeds of $680 million.

Slide 6 gives more detail on our sales and earnings performance. As I noted earlier, total sales volumes were up approximately 5% on prior year but also well ahead of the broader market, which marginally declined by 1%. This outperformance was driven by stronger sales in both retail and commercial sectors. Petrol sales stabilized following the restoration and growth of the retail Alliance, while sales of diesel and jet were up 10% and 4%, respectively, as a result of strong performances in our aviation, Liberty and wholesale sectors. Premium fuels remained steady at 28% of total petrol sold, and we see opportunities to improve this over time as we build customer brand preference and grow sales through the Alliance channel.

Notwithstanding this strong sales performance, earnings in our nonrefining segments fell about 19% on prior year, contributing $528 million towards the underlying group EBITDA of $645 million, and with refining contributing $117 million. This decline in earnings was predominantly impacted by several market headwinds, which also had a considerable impact on overall industry profitability last year.

Let me comment on these just by turning to Slide 7. As mentioned earlier, lower retail fuel margins were driven by softer retail market conditions, changes in competitive dynamics and periods of rising oil prices. This was a challenging period for the industry, so it was pleasing to see margins strengthen and stabilize in quarter 4. And this has continued into 2020 supported by falling oil prices.

Regional refining margins were generally weak on the back of continued lower regional demand growth and more recently due to rise in crude premiums, as the industry transitions to lower-sulfur marine fuels. Coupled with weaker-than-expected demand for marine diesel fuel, regional diesel refining cracks have been relatively disappointing. And this continues to put pressure on Geelong refining margins together with regional demand impacts from coronavirus. While cost increases are generally recovered in all our retail and commercial contracts, our lower dollar and higher ocean freight during 2019 had particularly impacted commercial earnings. We expect to see some recovery as we progressively pass through cost increases over time, and we continue to work on initiatives to improve efficiency and reduce energy costs more generally across our business.

Slide 8 sets out the impact of these market-driven factors on our 2019 earnings compared with the prior year. Lower retail and commercial market margins, higher ocean freight, a lower Australian dollar and weaker regional refining margins collectively reduced earnings by approximately $137 million, with lower retail market margins accounting for nearly 2/3 of this impact. As mentioned earlier, retail margins stabilized and strengthened in the fourth quarter and have continued to hold through early 2020. We are less than 2 months into the year, but should this environment prevail, then this should be supportive of improved earnings in our retail business.

Moving to factors, which are more directly within the company's control. You can see that the changes to the Alliance agreement with Coles resulted in a margin uplift of just over $100 million during 2019. Since we took control of retail fuel pricing in March, we have repositioned fuel prices in line with our major competitors, which is estimated to have cost $66 million. Should market margins fully recover, then the net benefit of these changes is, therefore, around $37 million last year. Resulting sales growth in 2019 added $9 million across both retail and commercial earnings, and we expect this to continue as we restore sales in the Alliance channel. Margin from improved refinery production was offset by cost increases and lower margin in our supply chain segment, while higher employee and corporate costs accounted for cost increases of $17 million. Overall, the underlying EBITDA from factors directly within the company's control contributed to improved earnings of around $30 million over 2018 in an underlying basis.

Before I hand over to Jevan to discuss our financial performance in more detail, I would just like to set out the key strategic achievements we delivered in 2019, as set out on Slide 9. The renegotiation of the Alliance agreement and the full acquisition of the Liberty Wholesale business has allowed us to simplify and strengthen our retail operating platforms. We have the largest single-branded fuel and convenience network in the country with over 700 sites operating under the Alliance and our value-led offering under development with Liberty Retail. Our new arrangements will help us better leverage these relationships and further develop our leading fuel and convenience offers in the years ahead.

While our regional refining margins have been disappointing, we have greatly improved our operating performance at Geelong, which has helped to maximize production and make the most of the margin opportunity. I believe that we are very well placed to benefit from any improvements in regional refining margins in the months ahead.

Finally, I'm pleased with the way we've maintained a strong capital discipline in preparation for the major maintenance turnaround of our refinery this year. We reduced capital spend by 33% during 2019, and our debt -- net debt remains low. As announced to the ASX on Friday, we sold our noncore shareholding in Viva Energy REIT for $734 million, which allows us to return capital to shareholders. This is consistent with our objectives to maintain a flexible balance sheet to allow for investment in growth, while maximizing returns to shareholders.

I'll now hand over to Jevan Bouzo, Chief Financial Officer, who will discuss the financial results in more detail.

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

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Thanks, Scott. Slide 11 summarizes our financial results for 2019 in the format you're used to seeing. Rather than talk to this slide, I'll go through each area in a bit more detail, starting with retail on Slide 12.

Retail underlying EBITDA (RC) for the year was 7% below 2018 at $564 million but above the guidance provided in December 2019 as a result of retail market conditions improving beyond our forecast into the end of the year. The chart at the bottom left of the slide sets out the key changes from 2018 to 2019, and there were really 2 major impacts during the year. The first was resetting the Alliance agreement, which on historical margins provided a direct earnings uplift of $103 million. During the year, about $66 million were spent lowering retail fuel prices in line with our competitors and driving marketing programs to reengage customers. This worked well with sales volumes through the Alliance lifting to 65 million liters per week in the second half. The second major impact was retail market margins falling during 2019 due to periods of higher oil prices and then heightened competition. This impacted earnings by approximately $86 million, and I'll touch on this a little bit more on the next slide.

Data from the Australian Institute of Petroleum on Slide 13 is based on national, simple average data and can be used as a directional guide for actual market margins. From the chart, you can see margins in 2019 have declined to their lowest level in 5 years, as prolonged periods of higher oil prices and then later heightened competition impacted the year. From the bars on the right, you can see that retail margins improved in the fourth quarter, more in line with recent historical levels, and we're continuing to see positive results in the early part of 2020. Despite this short-term volatility, we remain confident in the long-term strength of the sector and our opportunity to outperform, given our ability to capture upside in retail margins under the reset Alliance arrangements.

Turning to Slide 14. Commercial earnings of $297 million were down 10% on the prior year. The bridge at the bottom left of the slide sets out the key impacts to the result from 2018 to 2019. You'll recall that 2018 was a particularly strong year for commercial. And while we saw some volume growth in 2019, a number of contract renewals returned lower margins, which have impacted results by about $13 million. In addition, there are some shorter-term contracts where certain price elements are fixed with changes only able to be passed on from renewal to renewal. During the year, we saw a lot of volatility in ocean freight rates leading up to the IMO compliance date, and this impacted 2019 by about $18 million relative to the prior year. Despite some headwinds during 2019, including the lower Australian dollar, we maintained a high-quality customer portfolio and continued to see sales growth and acquisition of new strategic accounts such as the Australian Defence Force that Scott mentioned earlier.

Turning to Slide 15. The Refining segment delivered underlying EBITDA (RC) of $117 million, which is in line with the prior year and reflects continued weakness in regional refining margins offset by strong operating performance for periods of the year. Several operational records were set at Geelong during the year, with white barrel production averaging 105,000 barrels per day, diesel production of 39% and refinery intake of 42 million barrels, delivering about $17 million of earnings compared with 2018. While the falling Australian dollar delivered a $29 million benefit, the GRM of $6.60 per barrel compared with $7.40 in 2018 reduced earnings by $45 million. Cost increases were partially offset by energy benefits realized through the power purchase agreement with the Mt Gellibrand Wind Farm for approximately 1/3 of Geelong's electricity requirements.

As you can see on Slide 16, gasoline cracks were lower than the long-term average during 2019 largely due to lower regional oil demand growth, exports from China and additional production from refineries that upgraded their production of light products ahead of IMO 2020. Diesel cracks remained strong, as expected, but were offset by increasing crude premiums towards the end of the year, as refineries shifted to a sweeter diet in preparation for lower-sulfur marine fuels.

Higher sulfur fuel oil cracks have declined sharply as expected, but these have minimal impact on GRM for Geelong, as we produce fuel oil from imported blend stock. While not shown on the chart, and given short history, low-sulfur fuel oil cracks have started strong, tracking broadly in line with diesel cracks. The IMO 2020 transition continues to be the primary driver of refining margins during early 2020, with the impacts from coronavirus on regional demand a watch point.

Turning to our Supply, Corporate and Overheads segment on Slide 17. We delivered an underlying EBITDA of minus $333 million. The bridge on the bottom left sets out the key drivers of change from the prior year. Supply chain impacts of $8 million were due to increased coastal shipping and property management costs. Salaries and wages and corporate costs combined contributed an extra $16 million and were primarily driven by natural and contracted wage inflation and the full year impact of being a publicly listed company. In 2019, there were some one-off costs of about $8 million. These mostly related to transaction activity, and there are also about $13 million of one-off benefits in 2018 which did not repeat.

Slide 18 outlines our capital expenditure. Total operating CapEx for the year was $161 million, excluding the payments for Coles Express and the Liberty acquisition. This compares with operating CapEx of $241 million in 2018 and is reflective of a focus on tighter capital allocation in what has been a challenging market environment during 2019. Our forecast CapEx for 2020, excluding the planned turnaround activities, is between $140 million to $160 million, reflecting continued discipline in this space.

The Board has approved the major maintenance turnaround of the residual catalytic cracking unit and associated processing units during 2020. The estimated capital cost is between $110 million and $140 million. This activity is scheduled to begin towards the end of the third quarter and was last undertaken in 2016. The turnaround is expected to negatively impact refining intake by approximately 1 million to 1.5 million barrels and will also reduce GRM during the 5- to 8-week period of turnaround activity. The actual impact on GRM will depend on the regional refining margin environment at the time. We estimate that the total CapEx for 2020 will be between $250 million and $300 million.

Slide 19 sets out the 2019 cash flow bridge. Underlying free cash flow is set out in the table at the top right of the slide. After adjusting for changes in working capital of $33 million, the payment to Coles and Liberty totaling $162 million and net loans to associates of $4 million, underlying free cash flow for the year was $189 million, out of which we paid dividends of $134 million. Under the new accounting standard, operating leases are now classified as finance costs and repayment of lease liability rather than a component of EBITDA.

Turning to Slide 20 on the balance sheet. We've set out the change in net debt from 31 December, 2018 to 31 December, 2019. Strong cash generation and the focus on tightening capital expenditure has contributed to the company maintaining a relatively low level of net debt. The primary drivers of movement in net debt to $137 million at 31 December, 2019 was the payment to Coles, the acquisition of Liberty and loans to associates, which combined totaled $158 million. Our lower net debt position, combined with the fact we recently extended our working capital facility of USD 700 million through to 2022, means that the company retains maximum financial flexibility, which is not contingent on maintaining our credit rating. The S&P rating held by the company was secured when we brought Viva Energy REIT to market in 2016. Since this time, Viva Energy REIT have obtained their own rating. And in line with the sell-down of our stake last week, we've issued a notice to S&P to withdraw our rating.

On Slide 21, we set out the reconciliation of NPAT to underlying NPAT (RC) and then distributable NPAT (RC). There are a couple of minor significant items which between them were a noncash benefit of $4 million, alongside the impact of finalization of the one-off tax consolidation benefit of $8.2 million. We've announced the final dividend for the second half of $0.026 per share, bringing our total dividend for 2019 to $0.047 per share fully franked. This represents a 60% payout ratio of distributable NPAT (RC) and is consistent with the ratio applied at the half. We continue to adjust distributable NPAT (RC) 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 ratio of distributable NPAT (RC).

Turning to Slide 22. We announced last week that we sold the company's 35.5% stake in Viva Energy REIT for a total of $734.3 million and an estimated pretax profit on sale of $112.9 million. The company will, however, no longer receive cash distributions from VVR nor record the share of profit from associates, which included noncash investment property revaluations. Divestment was an important transaction for Viva Energy and our shareholders, and it releases a substantial portion of capital for the company to return to shareholders, recognizing that investors who want exposure to VVR have the ability to invest directly on the ASX rather than indirectly through Viva Energy.

In terms of timing, VVR has performed well since listing, and current market conditions provide it an opportunity to exit at an attractive price. Over 400 of our retail sites continue to be leased from VVR, and we retained security of tenure through long-term leases with multiple option periods. We'll continue to have a number of ongoing relationships with Viva Energy REIT, including as manager of the vehicle, which remains unchanged. We'll work constructively with the independent directors in respect of future arrangements, and Lachlan Pfeiffer and I will remain on the Board in the near term.

In respect of the capital management program, our intention is to return all of the $680 million of after-tax proceeds from the divestment to shareholders by way of an off-market buyback, subject, of course, to obtaining regulatory and shareholder approvals. The off-market buyback is expected to be completed during the second quarter of this year, and any shortfall in the off-market program will be returned via an off-market -- an on-market buyback.

I'll now hand back to Scott to wrap up.

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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 the business in the upcoming year, which is set out on Slide 24. As mentioned earlier, we have established a strong foundation last year with much improved retail operating platform, strong operating performance and positive action on capital management. Our focus is -- on the year ahead is to build on this through continued improvement in our brand perception and sales growth in our core retail channels, optimization of volume and margin mix across both retail and commercial and continued focus on cost efficiency, especially within our supply chain.

In our refining business, we aim to maintain production flexibility to optimize margins and to execute our major maintenance turnaround on time and within budget. We will progress our share buyback, as Jevan has set out, and continue to manage a strong focus on capital management.

Given the various M&A activity in the market, we will continue to consider and assess any relevant opportunities. We will, however, take a cautious approach, which carefully considers quality of earnings, overall value and strategy and execution risk. We are focused on opportunities which leverage synergies and are accretive to shareholders. We're also closely watching development of coronavirus. At this point, there has not been any material short-term impact on our business. However, there may be longer-term impacts from lower regional demand and a general slowdown in economic activity. We are monitoring potential impacts to our business operations, procurement functions and customers, and we've taken steps to minimize any risk to our employees and contractors.

Finally, I would like to acknowledge a number of changes to our executive leadership that will take effect from the end of March 2020. Daniel Ridgway, our Chief Operating Officer, has made a decision to leave the company after more than 22 years with the business. Daniel wishes to pursue new interests. And on behalf of the company, I want to thank him for his significant contribution over all those years and especially in our time as Viva Energy. I'm very pleased to announce that Thys Heyns will succeed Daniel as our Chief Operating Officer and welcome Dale Cooper to replace Thys as our Executive General Manager of Refining. Dale joins us from Canada and with more than 30 years' experience in the refining sector. I expect these changes in leadership will be smooth, and that we'll maintain pace in pursuing our goals in 2020.

This brings me to the end of the presentation. I'd like to now 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 from MST.

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Mark Samter, MST Marquee - Energy Analyst [2]

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I don't really know how to ask a question on M&A that I'd get an answer to. But I guess maybe to think about -- at least, there's obviously a lot going on in the sector at the moment, and there's potentially people who end up with assets that are very unnatural owners of those assets but could have strategic benefit to you. I guess I'll couch the question about M&A and with the credit rating going today in the context of all the Viva REIT stakes going to buyback. Can you talk through the capacity you think you have now that all of that money is going to be returned to shareholders?

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

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Thanks, Mark. Thanks for the question. I might turn that over to Jevan to answer that question.

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Jevan Bouzo, Viva Energy Group Limited - CFO [4]

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In the context of your question, I think we've got a relatively low net debt position at $137 million. I mentioned on the balance sheet slide that we've recently extended our USD 700 million facility through to 2022, which in Australian dollar terms gives total facility limit of about $1 billion. So we've got quite a lot of capacity there under the existing facility. And when we talked about long-term debt levels in the past, we've tended to talk about something in the range of 0.5 to 1x EBITDA being fairly sustainable for a business of our nature. And I think if there was a very attractive opportunity, you could perhaps go a little bit above the top end of that range on a temporary basis to take advantage of something that you thought made sense. But we'll still remain disciplined in that space.

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Mark Samter, MST Marquee - Energy Analyst [5]

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And then just a question, when we think about the buyback, I know you can't speak for Vitol or no desire to do otherwise, but is there a desire from Viva to maintain in percentage terms the Vitol stake of 45% or whatever it is? And I guess, how we should then think about the fact that if -- because there's no franking credits, if the other 55% of the register would effectively for our market and therefore are broadly enticed to participate on the on-market. Is there a cap to how much you would do on-market if there is a big residual after the off-market?

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Jevan Bouzo, Viva Energy Group Limited - CFO [6]

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Yes. It's obviously hard for us to speak on behalf of others. And I think what I would say to that question, Mark, is that there's $680 million of after-tax proceeds and gross proceeds were $734 million. So there are some franking credits that will be associated with the transaction. Our intention is to complete an off-market buyback, and I think we would like to see Vitol Investment Partnership participate on a proportionate basis. So for them, creeping over 50% to a control position. So at this stage, I'd be expecting them to participate proportionately and to sit where they are. Beyond that, if there was any shortfall in the off-market buyback, our intention would be to return that by way of an on-market program.

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Mark Samter, MST Marquee - Energy Analyst [7]

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Okay. But I might just sneak in one really quick question on retail margins, if I can. Oil price aside, which obviously has helped through this process, can you get -- I know everyone in this sector blames everyone else if the prices are going down and probably if prices are going back up. Can you give us a flavor for what you think has driven the increase in margins beyond the oil price impact over the last, I guess, 3, 4 months that we're seeing?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [8]

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So I think, Mark, as you've sort of touched on it, there's a lot of different factors that play that impact in retail fuel margins. I think probably -- obviously, last year, we kind of went through a few periods of very difficult times for retail market margins, including as a result of rising oil prices and just general changes in competitive activity. That's -- we saw retail margins strengthen in quarter 4 and stabilize, and that sort of continued through to 2020. Obviously, falling oil prices do provide some margin uplift temporarily as well. But I think generally, it feels like we're in a -- it's much more stable and more consistent with what we've seen in the past. And as I sort of said through my introduction that those conditions continue through the course of 2020, then we should expect to see a better year from our retail business, which will obviously be a good thing.

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Operator [9]

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Your next question comes from David Errington from Merrill Lynch.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [10]

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Scott, I was really disappointed to hear that Dan's left the business. I mean, clearly -- I mean, it's -- I had a very high regard for Dan, but also know he was very highly regarded. He did a lot of good job with that. And I'm wondering whether -- because in your Slide 12, you highlight market margin compression is a big cause for the retail margins having been hit, which is following on from Mark's question just before, which you called out as a noncontrollable compression. But I'm not certain that, that's completely right because I think that you were a contributor to a bit of the compression when you took over the margin, and there was going to be a normal, if you like, competitor response to a large industry event. So given how important getting back that $86 million of market margin compression is to Viva going forward, I mean, that's a big, yes, factor in our investment thesis that you can get back that compression that happened. I'm worried about losing people like Dan and whether you've got the capability in that retail team, that retail management team to now -- because you're now controlling the retail side of the business, whereas, previously, you didn't. You're really controlling the price. Can you give us some assurance that you're going to be on top of that? Because as I said, your 22 years' experience has just walked out the door, and I was disappointed to hear that he's left the business.

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [11]

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Sure. And thanks for the question, David. I mean he hasn't left yet. He leaves at the end of March. But -- and obviously, I've worked with Dan for a very long time, both previously with Shell and then obviously more closely through the journey that we've been on as part of Viva Energy. And obviously, a lot of the achievements that we've delivered in the last 5 years, Dan has been a big part of. But that -- I think this change is a managed transition. Dan has the desire to, as you can expect after a long period of time in the industry, to move on to other things. And he's worked closely with us to ensure that we manage Dan's transition in a seamless way. Megan Foster came into the business to run the consumer business and take over from Dan at the beginning of last year. That's given us more than a year for her and Dan to work closely together, as she gets into -- up to speed with our industry. She has a very strong retail background and obviously can apply that to our industry. But in the time of last year that she's worked with Dan, she's been able to learn from him. And so he leaves the consumer business in a very strong place with her leading that part of the business. And obviously, she joined at a great time because we were obviously embarking on our new journey in terms of controlling -- setting fuel prices and delivering this -- setting up a strategy for the future. So I think that's in a really strong place.

And obviously, we still have good continuity through the rest of the executive team. Jevan, who you know very well, has been with us through the entire journey as well. He's actually our Chief Financial Officer, but he's much more than that and has a very strong understanding of the rest of the business and plays a key role in helping to drive the various different elements of that as well. So I feel like it's been a very, very carefully managed transition. I think it's sad to see Dan go, but I think we are well placed to continue to drive the momentum and the outcomes that you touched on before that you were -- that everyone's looking for.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [12]

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Well, following -- again, Mark was touching on it, and this is where I suppose he was going with. What's the key variable in getting that $86 million? I'll keep on harping that $86 million because that's the price now to get that back. That's $86 million, which is a big chunk of your earnings. You're talking a big, big chunk. What's the key driver that we have to be looking at to say, "Hey, you can get that back?" Is it just lower oil prices? Is it a competitor dropping out of the market? What will be the key driver to you getting that back? Because I must say, Megan, I know Megan. Megan worked at Myer for a long time, and she's an outstanding retail or -- but this is the petrol market now. And I'm just -- 22 years of experience of the petrol market has now walked out. I've just lost a little bit of confidence, if you like, of you being able to get that $86 million back. So what's the key driver in getting it back?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [13]

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Well, I think -- I'd say what you said earlier on that we're not -- we -- the market factors -- we are a part of the market. So we have some influence and impact in the outcome around market margins in terms of how we behave and how we price in market. So that slide wasn't really trying to set it out in a way that disconnects our responsibility from that. And I think we've done a lot to reposition ourselves in market to price sensibly in a sophisticated way on a very local market level across the country. We've learnt a lot as we've taken over that responsibility. I think we're managing that well, and I'm sure that is also a significant part of the improvement in retail market margins that we saw starting to develop in quarter 4 and continue through to 2020. So I think we -- by being an active participant in the market, by being more active in terms of how we price and being more competitive, we also have quite a degree of influence over how -- our market outcomes. And we're starting to see that as well. And like I said before, Megan and Dan have worked very closely together over the last 12 months to understand how we want to pursue our strategies in setting retail fuel prices. And the outcomes that you've seen last year, and particularly in the back end, Megan's been a very big part of driving that. So like I said before, very confident about the future.

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

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Okay. Okay. And just following the spirit of keeping my questions in what is in your control, your turnaround this coming third quarter of the cat cracker, which is obviously a big event for the company. You say it's going to drop about 1 million to 1.5 million barrels, but -- and could impact margins depending upon a few factors of how -- but my also understanding is, is that if you really plan this well, this CapEx should lead to an improvement of your performance at Geelong because post the turnaround, you get an uplift in spreads because of higher-quality product that become available post the turnaround. So how are you going to plan that this won't be a major disruption? Because I'd like to think that you -- given the performance of Geelong in the last 6 months has been a good uplift, you should be able to go into this period by building up a bit of inventory. You've invested in tanks. So that this won't be a major cause of concern for us that there will be a drop-off here. The CapEx is fairly high. There's a big range of what you're going to spend, but I'm hoping that there's not going to be a material impact to your performance from this turnaround. Can you shed a bit of light on whether that's being a bit ambitious? Or whether you think that you're being cautious? And that if you've planned this well, there may not necessarily be an impact?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [15]

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Yes. Look, these turnarounds, this -- we do this major maintenance turnaround every 4 years, David. So it's something we've obviously done before and we're well versed in it. We plan for these turnarounds well in advance. I mean there was quite a bit of -- a lot of effort last year in planning for the turnaround this year. And obviously, that will continue. But we're well placed and well prepared for it, as you would expect. There obviously is an impact during the turnaround because we're taking out a number of key units to undertake the maintenance effort. And those units will not be available to produce production, particularly in the case of the cat cracker, the upgrading that normally comes from that unit. We replaced that lost production with imports. And again, that's all part of the planning that goes into these events. And so I expect we'll -- I think having been out and seen the work that the guys are doing in preparation, feel confident about where we're at, at this point in time. The range on capital just reflects the fact that when you take units down, you wash your well plant for it. You may well find other aspects of the plant that needs to be worked on as well. So there's always a range going into these events because you have discovery in the process. But we're well placed. We will have a disruption to production for the 2 months of the turnaround, but I'm confident we'll complete that work well and restart on plan and get straight back into production at the end of the event.

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

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In '16, was there a big drop-off in -- because that's the last time you did such a big one. What would have been the drop-off back in '16, just to refresh our memories?

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Jevan Bouzo, Viva Energy Group Limited - CFO [17]

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I think the way to think about it, David, is when you look back at 2016, it was a year of relatively low refining margins anyway. When we talked about our performance relative to the Singapore FCC marker in past periods, you see that there had been, I guess, a bit of a decline in our premium over the Singapore margin during the period of the turnaround. And you see that in the 2016 historical results. Now that's largely because the cat cracking unit, which is subject to the turnaround activities, is one of the major upgrading units. And so while there will only be a minimal impact to intake during the period, you do experience some margin impact as a result of not being able to produce as much higher-margin products during the turnaround.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [18]

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Yes. Okay. Well, thanks, Scott. Thanks, Jevan. And well done on the buyback. That's a pretty aggressive buyback. Well done on really focusing on your shareholders. So well done.

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [19]

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Thanks, David.

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

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Thanks, David.

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Operator [21]

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Your next question comes from Adam Martin from Morgan Stanley.

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Adam Martin, Morgan Stanley, Research Division - Research Analyst [22]

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Can we just update on the Alliance volumes? Obviously, you've talked about 65 million liters per week average. Is that sort of growing during the quarter? And also, your thoughts on how close you are to the 70 million in 2020, please?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [23]

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Thanks, Adam. Thanks for the question. We haven't disclosed how sales have progressed since the close of the year. So obviously, the results we've reported here reflect 2019. You may recall that we plan to do quarterly updates on trading performance. So we'll have an update on first quarter trading when we come out probably in April to report on that. So we'll have more to say on retail sales at that point in time, Adam. I think for now, look, I think, we obviously finished second half at an average of just under 65 million liters a week. That was consistent through the half, taking account of the normal variability you get around school holidays and things. So what we do feel confident in saying is that, that was as a sort of sustainable level of sales as we finished entering -- exiting last year, and we hope to build on that through the course of this year and make further steps towards our midterm goal of getting above 70 million liters a week.

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Adam Martin, Morgan Stanley, Research Division - Research Analyst [24]

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Okay. Well, it's delightful. There's been some concern in the market just regarding sort of further exposure or expansion into refining, if that's -- it's to come up for sale, is that -- obviously, refining has been a pretty difficult business since you've listed. What's your sort of appetite to expand in refining versus other assets, i.e., retail or commercial, please?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [25]

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Yes. Adam, I think in terms of portfolio activities, whether it be potential acquisitions or divestments, I don't -- we won't get into the habit of ruling anything in or out or making comments on that. But I think what I would say generally around potential acquisitions is that we've been pretty cautious. We've only made 2 in the time that we've been Viva Energy, which have been largely in the retail space, and Liberty obviously being a significant one for us, which we completed the full acquisition of last year. We are, as I mentioned in the introduction, pretty focused on ensuring that if we were to acquire, that it should -- adds quality earnings to our business, that it takes account of our strategy and consistent with where we're heading and obviously is accretive to shareholders. So -- and that's kind of how we look at things. Yes, there's obviously a fair bit of speculation at play around potential portfolio activities around the country. But our main focus really is on running our current business and leveraging obviously the platforms we've put in place, in the case of our retail business, and continuing to maintain momentum on running our refinery well and completing our turnaround well this year and improving the quality of earnings in our commercial business. That's where we see the greatest opportunity at the moment, and we're very focused on that. But we'll obviously keep an eye in terms of what's happening in -- across the rest of industry.

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Adam Martin, Morgan Stanley, Research Division - Research Analyst [26]

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Okay. That's good to hear. And just a final question, just around refining. Obviously, crude premiums going up during the last part of the year and also the freight costs. Can you sort of -- what are you seeing in January, February for both crude premiums and freight costs, please?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [27]

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I think just generally around crude premiums, I think what we have seen through the transition to IMO, and there's been some commentary on it, is that the level of marine diesel that has been required to help manage the transition to IMO globally has been lower than expected. So there's been a very high demand for low-sulfur fuel oil, as you would expect. But most of that production has been -- has come from fuel oil streams rather than necessarily through the addition of diesel to deliver the low sulfur limits. And so that hasn't really lifted diesel cracks as much as we would expect, but it has lifted the demand for light sweet crudes, which are obviously part of the diet for our refinery and other refineries in the region as well. So we're seeing higher accrued premiums, which were partly expected, but we haven't really benefited from the same level of uplift in middle distillate cracks as we were hoping for as well. So that's what's really weighed on refining margins more recently through the back end of last year and early this year. And I think generally, yes, we're still very much in a period of transition. It's got some time to really bed down and get back to sort of a normal long-term operating level in terms of how the refining industry and the region is performing. So we need to give it some more time and see where it levels out. And as I mentioned in my introduction, our main focus in this environment is just to really try and make the right calls around the crudes that we buy and the production that we -- the yields that we focus on in terms of the products that we produce to try and maximize the margin opportunities that are available to us.

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Operator [28]

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Your next question comes from Shaun Cousins from JP Morgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [29]

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Just a question regarding the Coles volumes. Coles are talking about the first half being 64.4 million liters. You guys are saying 65 million liters or just under. Should we interpret that as the difference between the year-end when you guys end on the 31st of December and they end on the 5th of January? Is that -- effectively, they're picking up 5 days of pretty subdued volumes. Is that the way we should think about that discrepancy?

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Jevan Bouzo, Viva Energy Group Limited - CFO [30]

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Yes. I think that's right, Shaun. There's a bit of seasonality in volumes in the industry. And so over that period, just between Christmas and New Year's in early January, that's pretty quiet on the roads and you tend to see that flow through in the volumes. And I think Coles are on a retail calendar rather than a typical financial year-end like us. So they pick up a little bit more for January than we would.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [31]

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Got you. That helps to clarify. And your -- if we think about your broader retail volumes with petrol as somewhat of a proxy for that, while your Alliance volumes were up, your petrol volumes were broadly stable, only up 0.6%. Can you talk about what you -- particularly the volumes that you haven't done in petrol and what style of customers you're not providing fuel to now? And then what the impact that has on a retail EBITDA basis, please?

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Jevan Bouzo, Viva Energy Group Limited - CFO [32]

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Is your question, Shaun, going a bit more to the margin mix as we recover volume?

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

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Very much so.

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Jevan Bouzo, Viva Energy Group Limited - CFO [34]

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Yes. I mean, I think, we've seen some uplift in petrol. I think it's worth remembering that across the volume that you see in our results release, sort of, talking total company, and that covers both sales through the Alliance channel but also sales through our dealer networks and other sales to independently branded retailers. And at this stage, it's still pretty early days, but we're seeing volume recovery largely across the board. Ideally, for us, we're able to capture more of the premium fuels market, and that will deliver an improvement in margin mix as the volume recovers. And we talked a little bit to the percentage of premium on total petrol in the slide on the volume performance and our real focus around trying to maximize that going forward.

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

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And maybe just a couple of questions on the VVR. Why did you sell down the whole stake? Why didn't you sell down a lesser amount, particularly given the fairly modest that you ended up the year with $45 million in franking credits you'll generate some on the back of the divestment? But why the decision to sell the whole 35.5% rather than a lesser amount, please?

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Jevan Bouzo, Viva Energy Group Limited - CFO [36]

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Yes. I think, Shaun, when you think through our ownership in Viva Energy REIT, for all the reasons why you get comfortable selling down, you do so on the basis that you're comfortable selling out completely. And so it felt like maintaining a lesser shareholding, whether it was 20% or 15% or so, wouldn't really change our position today, given that we've sold the entire stake, and making the capital available to return to shareholders felt like the right thing to do.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [37]

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Finally, why are you being so generous to continue to provide management services on a cost-recovery basis? I recognize there might have been an incentive there given you have a large shareholding, and you as a shareholder were better off. Is there any consideration around providing those on a more than cost recovery basis?

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Jevan Bouzo, Viva Energy Group Limited - CFO [38]

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Yes. The management contracts that we have in place with VVR was put in place when we brought the vehicle to market in 2016. It's got a 10-year term, so there's about 7 years remaining. And what we've said in the release both on Friday and today is that we intend to work constructively with Laurie and the other independent directors on those arrangements going forward.

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Operator [39]

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

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [40]

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Just on the retail margin side of things. Just interested in what you're seeing in terms of industry consolidation or rationality out there, particularly on the independent channel. And there's been a lot of talk around independents, in particular, are having some more challenging economics, given some of the margin compression. But the number of stores continues to pick up. I think they're sort of well over 6,500 now. Are you seeing any signs of consolidation coming through or the independent part of the market, in particular, becoming a bit more rational on pricing?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [41]

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Look, as I said, as I sort of commented before, Ben, it's a -- there's so many different factors at play in retail market margins. And obviously, it varies considerably from market-to-market as well, and that's -- the outcome is ultimately a combination of all the activities that all the competitors play and the competitive dynamic at play. So independence is a part of that, but we're obviously part of it as many of the other majors as well. So I think generally, the outcome of all of that has been the strengthening of margins in quarter 4, and that's been pleasing and helps build confidence about the strategy that we're on to regrow sales through our core networks. And we're obviously very focused on that.

In terms of broader industry consolidation, I mean there -- I think there's been some change in ownerships, which I touched on earlier, but I haven't seen any significant consolidation of retail networks within the industry. Obviously, if bids like the EG bid for Caltex were to proceed, then that would be a significant consolidation. But obviously, all of that has to go through regulatory approval processes as well. And as we've seen in the past with BP's attempted acquisition of Woolworths, that's not always straightforward. So I think -- look, it's an extremely diverse marketplace, lots of different players. I think that adds to the competitive dynamic, but it does provide opportunities if you're clever at how you price and clever at how you play within markets. And that's what our focus is on.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [42]

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All right. And just second on the retail side. You obviously did sort of South Australian parts of Victoria a little bit earlier in terms of the pricing reset. Could you give us a bit of an idea just around how that's tracking for the 6 to 9 months and now? And then if it's -- you're seeing New South Wales and some of the other states follow that similar path in terms of trajectory of upswing around volumes?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [43]

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Yes. Look, I think we're focusing now, Ben, now that we're sort of nearly a year into managing fuel pricing just to focus on the performance of the total network and how that's traveling. And obviously, we'll report on that on a quarterly basis as we have done. And you can see the uplift that we've seen in the Alliance. And it's not going to be helpful for us from a competitive point of view to get into a level of detail down at individual geographies. So apologies for not being able to directly answer your question.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [44]

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That's all right. I presumed that intuitively, the ones you've gone earlier on would be having a stronger performance given that pricing is more embedded in those markets.

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [45]

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Yes. I mean we obviously had a 9% uplift half-on-half. That's come from, in part, some of the markets that we'd already invested in, and obviously it's come also from markets that we have commenced investment in. So I think -- one thing I would remind everyone as well is not all of it -- it's not -- the investment has not entirely been on improving the positioning of our repricing in markets. It's also been on leveraging our loyalty programs and reactivating customers, encouraging customers back. Obviously, we used -- have been using the flybuys program for that, but we also launched 2 other membership-based programs with carsales.com and also Transurban through the second half of the year. And that all helps us reach potential customers or -- that we can entice back with the offers that we now have.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [46]

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And just final one for me, just on your commercial profitability. I know that there's probably a little bit of a disappointment or surprise that there's some of the contraction in the second half, and you provided that guidance a little while ago. Just how you're thinking about the trajectory of commercial profitability looking forward. I think you sort of said as the contracts start maturing, you get more add-ons, et cetera. So it should be more accretive to margin. Are you still feeling comfortable around that commentary?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [47]

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Yes. I think -- I mean, commercial is obviously a collection of different businesses, and it's not all about commercial fuels. It's also about our specialty products as well. And so each sector has performed differently through the last couple of years. I think last year was particularly challenging probably across all sectors. But I think each one -- there's different opportunities as we look forward for improvement in some of those sectors. And I still feel very -- I feel good about the customer base that we have in commercial across-the-board. I feel good about the sectors that we're involved in. And I think, yes, whilst it's been a softer year last year, it does come off the back of what was quite a strong year in 2018. And with some significant headwinds, we will be able to recover some of those costs as contracts renew. And some of those headwinds may decrease over time as well and provide opportunities to recover margins. So it's always a challenging business, but we have a strong position in a lot of sectors that will allow us to benefit from any upswing in trading conditions.

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Operator [48]

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Your next question comes from Michael Simotas from Jefferies.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [49]

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First one for me, maybe I can just pick up on that discussion around the commercial business. So a few moving parts, and I was hoping we could break them apart a little bit. So you've got freight and FX, which obviously weighed on the business in the second half, as well as market margin compression. I think you said 1/3 of your contracts came up for renewal in 2019. So rolling into 2020, could you just try and break apart for us, please, annualization of those factors which we saw in the second half as well as maybe a comment on how many contracts come up for renewal as well as how many of your contracts allow you to recover some of those costs?

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Jevan Bouzo, Viva Energy Group Limited - CFO [50]

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Michael, it's Jevan here. Yes, I mean, just touching on some of the impacts that we set out on the slide, probably the key impact there is the margin compression that we saw, which was primarily on contract renewals. We said that, that impact in 2019 was about $13 million relative to the prior year. And you could assume that those contract renewals weren't all undertaken on the 1st of January at the beginning of the year. So that would suggest a little bit of cycling in 2020.

In the context of the ocean freight and the FX impacts, some of those contracts, and I have mentioned shorter-term contracts when I talked to the slides, you could think of those in the context of 12 to 18 months, and your ability to capture those increases depend on the environment at the time of renewal as well. And so some of the impact we saw on ocean freight was pretty pronounced, particularly into the end of the year. While ocean freight, in the context of IMO 2020, remains fairly volatile, it doesn't look like it's getting a lot worse than it already was.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [51]

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Okay. But so just on annualization of those factors, it sounds like 2020 could be a bit worse than second half of 2019 before some of that stuff rolls off and hopefully you can recover. Is that the right way to think about it?

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Jevan Bouzo, Viva Energy Group Limited - CFO [52]

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Yes. I think that's right. And there's obviously a lot we can do in the context of some of the new strategic accounts that we talk to. We'll have the opportunity through some renewals in 2020 to reset the base on some of those items. And so while base case might look like that, hopefully, there's some opportunity to improve on that through the course of the year.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [53]

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Okay. All right. Second question for me, on retail. Just interested in sort of developing a discussion around fourth quarter versus third quarter volumes. I mean obviously, you've put some pretty material investment into the market, saw a nice uplift. But that investment being in the market doesn't seem to have lifted volumes in the fourth quarter versus the third quarter. So what makes you confident that you can continue to grow volumes towards that 70 million and then 75 million liter per week target without putting more investment in?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [54]

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Yes. I was pretty happy with the fourth quarter result because you've got to remember, it came off of a very strong campaign and the third quarter was a little shot, too. It provided a very initial kick in terms of not just sales but obviously getting customers back across the network. And so to be able to retain that lift that we'd had in quarter 3 and quarter 4 was actually a pretty good outcome given we didn't repeat a similar campaign in quarter 4. It was just more sustained activation of our loyalty program. So I think that finishing the year with having lifted the underlying performance of the retail Alliance to a sort of sustainable 67 million liters a week is a pretty good outcome. And the rest of it will come just from being consistent with pricing, building confidence and trust with customers again and leveraging the other elements of our offer, being our network and our brands and our convenience offer and loyalty programs I mentioned before. That's how we will continue to move forward in terms of restoring the capability of that network.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [55]

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Okay. I guess one surprising thing for me was Coles reported very strong same-store sales growth in your fourth quarter versus your third quarter, which suggests that traffic was pretty healthy through the network. But it just didn't seem to translate to incrementally higher fuel volumes. Was there anything sort of funny in the timing there?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [56]

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I don't think so. I don't know if I'd read too much into that. We've always got customers that come in for fuel and shop. Customers come in just to fuel and customers come for shop. They're very -- just different segments. One of the things that Coles did mention in their report was that they've seen quite a big uplift in tobacco, which I think was a segment that they were underperforming in and then they've improved their positioning in that. And that probably drove some of the uplift in sales that you saw in quarter 4. There's more for them to comment on, obviously.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [57]

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Yes, sure. Last question for me, just on the Liberty wholesale business. I think it lost just under $1 million in the month that you had it on the books for. Based on the accounts that, that business has lodged, I was sort of thinking annualized, it should do about $15 million of EBITDA. Is that a reasonable assumption for 2020? And will that be in the retail business?

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Jevan Bouzo, Viva Energy Group Limited - CFO [58]

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Yes. Obviously, we're not giving guidance forward, Michael. But you're right about the final month of the year. It's worth remembering that we settled that acquisition on the 1st of December. And so there's a whole lot of work associated with the separation of the wholesale and the convenience business as well as some day 1 transition adjustments, which all would have flowed through the December month. So in the context of what that business is -- what that wholesale business is capable of earning, I think, ballpark, you're not far off. You should remember that when we talked about the opportunity to buy that business in the past, we'd talked about doing so at a multiple of EBITDA that was a small improvement on our trading multiple. In fact, it gives you some context.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [59]

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Yes. And it will be in retail, right?

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Jevan Bouzo, Viva Energy Group Limited - CFO [60]

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Yes. That's the current intention, yes.

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Operator [61]

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Your next question comes from Darren Leung from Macquarie Group.

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Darren Leung, Macquarie Research - Analyst [62]

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Just the first one for me, hoping extension on the Viva retail REIT sale, can you give a bit of context in terms of the pricing, particularly relative to where the 10-year bond is sitting today? So you're looking at 10-year bonds that's about 1% dividend yield seeing at the sort of lower 5s. When you're looking at your comparables, a lot of them seems to be trading at a much sharper price. So almost as an extension of the question before, why is this the right time?

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Jevan Bouzo, Viva Energy Group Limited - CFO [63]

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Yes. I think you've pointed out some helpful factors, Darren. Our asset prices, particularly in the real estate sector, in many respects, are at all-time highs. When you think about where Viva Energy REIT has been trading, it's been trading pretty close to its peak at the moment. And while you do look at the 10-year bond rate as a place to store cash, and for us, it's important to look at the alternative opportunity, which is buying back our own stock, and when you think about that in the context of a relatively small proportion that Viva Energy REIT was returning to us in the context of the cash distributions we were receiving versus the ability to buy back approximately 20% of your market cap, it really made sense for us to realize that stake now and hope to return that money to shareholders.

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Darren Leung, Macquarie Research - Analyst [64]

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Second question, just on coronavirus. So it's good that it hasn't impacted your business so far. Obviously, everyone's got a view on whether this thing progresses or not. But in terms of the thought process behind how it impacts your business, if it does, can you give us just the basic framework as to which part of the commercial business it impacts and which parts of the retail business it impacts, please?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [65]

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Yes. Thanks. I mean, obviously, the immediate impact is in our aviation business because, as you know, there's a significant reduction in flights in and out of Australia, and that's relatively material for the aviation companies. So we will expect to see some reduction in jet fuel sales. We're relatively less exposed to Chinese carriers. So it's more as that starts to impact just the broader market that it will start to impact our results in aviation. But yes, a big part of that sector for us is domestic, obviously both in terms of major airports but also the minor airports that we have -- we support around the country as well. So to some extent, we're insulated from the short-term impacts. I think as I sort of touched on in my introduction, the watch point really is just the broader economic impacts if this is to be sustaining and grows as a major issue. And what does that does -- do for the general economy and confidence? And how does that impact our business, as it will do for every other business in Australia as well? So the short-term impact is relatively minor. For now, it's more the watch point around how does this -- the long-term impacts for the country.

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Darren Leung, Macquarie Research - Analyst [66]

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How much of the Chinese carriers that they represent of your jet fuel volumes?

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Scott A. Wyatt, Viva Energy Group Limited - CEO & Executive Director [67]

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Sorry?

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Darren Leung, Macquarie Research - Analyst [68]

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How much of the Chinese carriers as a percentage of jet fuel volumes?

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Jevan Bouzo, Viva Energy Group Limited - CFO [69]

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Yes. Look, we won't disclose that. But we're -- we have a relatively low exposure to Chinese carriers at the moment.

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Operator [70]

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

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [71]

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Just a couple of quick ones. Just one on the off-market buyback. Just given the low franking credit balance that you have, and you've obviously disclosed the tax that you're likely to pay on the sale, I'm just struggling to see how you're going to execute a substantial proportion on the off-market buyback, unless you believe there's going to be a strong capital component. Maybe you could just talk us through your thinking on that?

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Jevan Bouzo, Viva Energy Group Limited - CFO [72]

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Yes. Sure. I guess, the way to think about it, Grant, and you've called it the right way, $734 million of proceeds, after-tax basis, about $680 million. Executing the return by way of an off-market buyback gives all shareholders the opportunity to participate. And while the low franking component might mean you end up with a slightly lower than typical discount to market, it's worth remembering that we do have one large shareholder in the form of Vitol Investment Partnership, who currently sit at 45% of the register. If we were to return all of the money on-market, then it'll obviously be very difficult for them to participate and would risk creeping them up to a control position. So I'd expect to see them participate on a proportionate basis than any shortfall from the broader market then, where we'd be pretty comfortable returning that by way of an on-market program.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [73]

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Okay. All right. That's helpful. And just a quick one. On commercial, I guess the surprising thing to me a little is the extent of the rebase in 2019. Could you give some indication as to how much of your commercial contract volume was actually reset or recontracted in 2019? And was 2019 such a difficult year for recontracting? What were the factors that led to that?

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Jevan Bouzo, Viva Energy Group Limited - CFO [74]

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Yes. I think in terms of total volume, Grant, we called out previously that it was about 1/3 of our volume that was recontracted during the year. And while it was a fairly challenging year, typically, what had happened was that you'd have to give up a little bit of margin to retain those contracts in a pretty competitive environment. And so they were really the factors that led to that margin compression over the course of the year. I think...

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [75]

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Was 2019 though particularly difficult? Because could we expect that again in 2020 when you recontract another 1/3 or another 1/4 or whatever the proportion is?

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Jevan Bouzo, Viva Energy Group Limited - CFO [76]

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Yes. I think the commercial business has always been pretty competitive. We did see some pretty tough periods in terms of some of the recontracts in 2019, and there's probably a little less in 2020 up for recontract. And there'll be some opportunity for us to recover that going forward. So that's obviously something we're quite focused on.

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Operator [77]

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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 [78]

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Well, thanks again for joining us today to discuss the financial results of 2019. We obviously preguided on these last year and pleased to say that we've finished largely in the top half of the guidance range and pretty consistent with what we'd previously announced. I guess the highlights for me, very much the strong performance of the retail business in the back end of last year and obviously just the improvements that we made through the course of the year as well. Commercial also finished at the top end of our guidance. And as we've discussed, within commercial, a lot of different businesses and some strong positions in various sectors that provide opportunities to benefit from improvement in trading conditions going forward. And Refining, a really strong year in our operating performance at Geelong, record levels of production and set us up well to continue to make the most of improvements in refining margins into the future. A lot of planning in place for a turnaround of our major units this year and looking forward to completing those, that turnaround, on time and in budget as well and setting the refinery up for the next 4 years of its -- of operations.

So overall, a lot achieved on our strategic priorities, well placed as we finish the year and looking forward to some improvement in trading conditions this year, which will hopefully flow through to earnings through the course of the year. And of course, looking forward to continue to maintain a strong focus on capital management and delivering on the share buyback through the course of the first half.

Thanks, again, for joining, and we'll obviously look forward to catching up with many of you through the meetings that we'll have through the course of the week. Thanks again.