Ampol Limited (ALD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ampol Limited First Half 2020 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Matt Halliday. Please go ahead.

Thank you. Good morning. My name is Matt Halliday. I'm the Managing Director and CEO of Ampol Limited. Welcome to our first half 2020 results announcement call. Today, I'll provide an overview of our performance and will be joined by our interim CFO, Jeff Etherington, who will discuss the financial results in more detail. Following the presentation, we will take questions. In the room with Jeff and I today, we also have Louise Warner, our Chief Commercial Officer; as well as Joanne Taylor, the EGM of Retail, Brand and Culture. The first half of 2020 has provided an incredibly challenging backdrop for both the economy and our business. Initial impacts from bushfires, floods and IMO 2020, followed by the COVID-19 pandemic, have all caused significant disruption to the global hydrocarbon market and have severely impacted customer demand across numerous channels. Despite these impacts, our business has, again, demonstrated its resilience with a solid result in fuels and infrastructure, excluding Lytton, and strong growth in Convenience Retail. This resilient performance has been enabled by decisive actions taken to protect the safety of our people and customers, to maintain business continuity throughout the pandemic and through our continual focus on cost and capital discipline. Pleasingly, despite the challenges presented by the pandemic, our business has continued to deliver value for shareholders through the execution of our strategy with continued growth in international earnings. Today, we have also announced that we have been selected as the preferred proponent to redevelop 4 Tier 1 highway retail sites in New South Wales. These are high-volume sites with long leases in privileged locations on major motorways. And these sites are expected to generate significant value right across our integrated supply chain. We also recently announced the sale of a 49% interest in our high-quality core retail property network, which will release $612 million of capital. The COVID-19 pandemic has created significant market and economic uncertainty, and we believe it is prudent in the current environment to maintain balance sheet strength. As such, the proceeds, once received, will initially be used to set leverage at the bottom end of our target leverage range, as outlined in our capital allocation framework. In accordance with this framework, we also intend to explore potential capital returns and growth opportunities as and when market conditions improve. Moving to our safety performance on Slide 4. The safety of our people and our customers comes first at Ampol, and it is pleasing to show an improvement in our safety performance during the half. Fuels & Infrastructure has benefited from actions to reduce the frequency of injuries such as strains, slips, trips and falls and from a strong focus on hazard reduction as we continue to execute the extended turnaround and inspection at Lytton refinery. Convenience Retail safety has also improved as our larger company-operated retail network continues to embrace our strong safety culture and benefit from the increased training we have put in place, especially around routine activities such as manual handling. The emergence of the COVID-19 pandemic has presented significant challenges to maintaining the personal safety of our employees and customers, and we have sought to mitigate the risks of transmission through actions such as the installation of protective screens and hand sanitizer in our retail sites, increased frequency of cleaning and the enforcement of social distancing practices to ensure compliance with government regulations. Slide 5. Our financial performance in the first half of 2020 demonstrates the resilience of our integrated business despite the severe impacts from COVID-19. Fuels & Infrastructure ex-Lytton EBIT of $171 million was down 11% on first half '19. This is a solid result given the significant disruption to global hydrocarbon markets and the extraordinarily challenging economic conditions, where our Australian volumes were down 14% in the half. Lytton's financial performance has been heavily impacted by the pandemic, with EBIT of negative $59 million, driven by extremely weak refining margin conditions during the half and crude costs incurred as part of the extended T&I. Convenience Retail EBIT of $125 million was up 47% on the prior corresponding period with robust industry retail fuel margins, benefiting from the timing of crude oil price movements and more than offsetting lower volumes during the period. The strength of this result is reinforced by the fact that our controlled retail network reduced in size by approximately 5% during the half as a result of disciplined decisions to divest HBU sites and to close additional marginal sites. In the second quarter, the demand destruction caused by COVID-19 impacted volumes, and whilst industry margins remain solid, the nature of our company-owned operating model means that we continue to incur the underlying fixed cost base associated with more normalized demand. At the same time, it is pleasing to see results from our continued focus on fuel and store labor optimization, while the solid growth in like-for-like shop sales highlights that our Convenience Retail offering continues to gain traction with customers and performance continues to improve in line with our communicated Convenience Retail KPIs. Our RCOP NPAT of $120 million was down 11% on the prior corresponding period, and our HCOP result of negative $626 million reflects a $434 million inventory lost from the large move in crude and product prices between periods, and negative $312 million post-tax of significant items. The significant items recorded during the period include impairment charges of $355 million relating to non-current assets, including the Lytton refinery and retail sites that have been impacted by COVID-19. A $57 million expense relating to our rebrand to Ampol; $36 million of other expenses; and $2 million of other income from JobKeeper. These numbers are all pretax, and a detailed breakdown of them can be found on Slide 25 of the appendix. Before moving on, I would like to point out that the impairment of approximately 200 retail sites relates mainly to our noncore sites. And we continue to assess options for how we can maximize value for shareholders from these sites. Many of these sites are partially impaired because they have been overcapitalized in the past relative to their earnings potential. This reinforces the need for our strong focus on capital, cost and returns discipline going forward. Slide 6. As noted in our previous updates to the market. COVID-19 has materially impacted demand from many of our customers, with these impacts continuing to be felt as various government restrictions continue to remain in place. Our Australian volumes, which includes Convenience Retail, were down 14.1% during first half '20, with Ampol's wholesale market share remaining largely unchanged apart from jet. Jet fuel has experienced the greatest demand destruction given the impact of international and domestic travel restrictions and border closures. And these significant and varied disruptions to customers mean that it is challenging to make meaningful market share comparisons. Our Australian diesel volumes remained flat versus the prior corresponding period with demand resilience evident from key customer segments, including mining. Our international volumes were up 93% as our trading and shipping team saw opportunities to create value amongst the market disruption, supported by our international storage arrangements. This strong volume growth was due to higher third-party sales, and it is important to note that these volumes can vary significantly from period to period, depending on market condition with a focus on overall integrated system value. Convenience Retail volumes were down 17.7% on the prior corresponding period due to extreme weather events early in the half, then Stage 2 and 3 government restrictions in response to COVID 19. Greater demand destruction was observed in base-grade gasoline with our strong card offering, ensuring diesel demand remains relatively robust. Pleasingly, resilience was also observed in demand for premium fuels, which represented 50.3% of total Convenience Retail volumes during the half. Retail fuel market share in first half '20 was largely consistent with second half '19 despite the reduced network size, which is an excellent result and testament to our disciplined focus on value rather than volume. Slide 7. The pandemic continues to present challenges to our business with sustained weakness in global hydrocarbon demand as a result of government restrictions and border closures. Our Australian wholesale business continues to observe demand resilience for diesel. However, jet volumes were down 50% in first half '20 and were down approximately 70% in July '20 compared to July '19. In Convenience Retail, volumes were down 11% in July '20 compared to July '19, and are down approximately 18% for August month-to-date as Victoria has introduced the Stage 4 government restrictions. Prior to the recent reinstatement of restrictions in New Zealand, Gull volumes had recovered to pre-COVID levels and SEAOIL volumes are recovering from their lows. As these COVID impacts continue to be felt, we are taking action to protect our business and ensure that we are well placed to benefit from an economic recovery. Our business continues to focus on optimizing value across the integrated supply chain with strict adherence to our Board-approved risk management framework. We have taken quick strong action by bringing forward and extending the Lytton T&I with these works now well progressed. We are planning for the closure of 20 depots in regional areas as well as 34 marginal retail sites in addition to the 25 HBU sites that have been divested. Following on from the delivery of our temporary cost reduction initiatives, we will be accelerating other cost reduction opportunities that were originally planned for delivery over the medium term. All of these steps are consistent with a disciplined approach to delivering enhanced returns from our assets. Slide 8. Despite the disruptions experienced during the period. We have continued to execute our strategy as demonstrated by the strong performance in F&I International, with EBITDA of $52 million, up 63% on first half '19. Gull and SEAOIL both delivered earnings growth despite experiencing significant volume impacts from the more severe government restrictions in New Zealand and the Philippines with new sites added in both during the half. As previously mentioned, higher third-party volumes were also a meaningful contributor to our strong international growth with additional storage in the Southeast Asia region during the period, providing enhanced capacity for our trading and shipping team as they took advantage of market conditions to maximize value and deliver strong returns on working capital. Slide 9. As I have previously mentioned, performance by convenience retail in the first half was strong, with highlights in both fuel and shop. Retail fuel margin strength was observable during the half from the publicly available AIP data. While our net available margin, or NAM, was up approximately 27% against the prior corresponding period on a per site basis. This continued trend of outperformance compared to industry highlights, the strength of our privileged network and our card offering, strength and focus on premium fuels, operational excellence and the focus on balancing value and volume. Our total network shop sales increased 0.5% during the half, which is impressive given the external disruptions experienced and the reduction in controlled network size of approximately 5%, as previously mentioned. More importantly, our like-for-like network shop sales increased 2.9% during the half, driven by an 8.3% increase in average basket value to just under $12 as more customers took advantage of our convenience offer to meet their daily needs. This like-for-like network shop sales increase is in line with the KPI we provided to the market for 2020 despite the economic weakness we have seen from the bush fires and COVID-19. Shop margin was flat during the half as sales growth was skewed towards lower gross margin items and lower fuel volumes resulted in lower commission agent fees. Our 2 metro pilot stores performed well during the half, achieving average monthly sales of approximately $300,000 per store and average gross margin of 37%. We continue to see strong potential for value creation from the metro format and after being disciplined on format rollouts during the initial from COVID-19, we now expect to introduce up to 4 new stores into the network by the end of this year. Slide 10. I would like to provide a brief update on our rebranding actives. We are excited by the opportunity to progress our rebrand to Ampol, a name which better reflects our status as Australia's leading independent transport fuels company and to bring back an iconic Australian brand with significant customer awareness and support. 2 retail pilot sites have been launched early in the second half with our Concord and Granville stores in Sydney now operating under the Ampol brand. Learnings from these pilot stores will be captured in the rollout of approximately 20 sites to be completed by the end of 2020, while rebranding across our B2B and card businesses will also occur in the second in half. In August, we also launched our new premium fuel brand, Amplify, leveraging off our strong existing capabilities in premium fuels. The expected cost for rebranding the network to Ampol remains at $165 million with a CapEx component of approximately $120 million and an OpEx component of $46 million, which relates to the rebranding of third-party-owned sites, which has been treated as a significant item in the accounts. It is expected that savings of $18 million to $20 million per annum will be made from ceasing to pay trademark licensing fees from 2023, although we will likely experience higher marketing and other expenses associated with our rebrand to Ampol over the period in which this brand transition will take place. We will also record an additional noncash expense of $40 million in total by the end of 2022 associated with the accelerated depreciation of existing signage. There was $7 million of accelerated depreciation recognized in the half as a significant item. Slide 11. We continue to progress our existing cost-out program and have initiatives in place to deliver the remaining $40 million of savings, which is on track to be achieved by the end of 2020. As mentioned on the previous slide, we are deepening our cost-out opportunity pipeline post-COVID as well as accelerating cost reduction initiatives originally targeted for delivery over the medium-term in our 2024 earnings uplift target. This action includes initiatives such as further retail labor optimization and initiative such as the rationalization of our depot footprint and broader distribution footprint. Capital discipline remains a core focus with first half CapEx spend of $88 million and 2020 full year guidance of below $250 million. We have created value for shareholders through the recently announced sale of a 49% interest in our core retail freehold property, which will release $612 million of capital. We have also been selected as the preferred proponent to redevelop 4 high-quality, high-volume Tier 1 retail highway sites in New South Wales. We are continually assessing new ways to unlock value for shareholders from our significant freehold property assets and from our market-leading infrastructure, including through the potential to host strategic reserves being considered the federal government. We also continue to review capital allocation and returns across our integrated supply chain. Slide 12. The acquisition by Charter Hall and GIC of a 49% interest in our core retail freehold property assets announced earlier this month, demonstrates the value of our network with the net proceeds of $612 million, representing a strong outcome for shareholders given the volatility in market conditions during the period. The structure will see Ampol hold 51% of an unlisted property trust, which in turn, holds 203 freehold sites, with the number of sites held in the trust reduced from the original indicative of approximately 250 sites in order to maximize value for shareholders. The execution of this initiative represents a key achievement in the delivery of our strategy outlined to the market at our 2019 Investor Day, and we will continue to actively explore ways to create further value for shareholders from our significant freehold property assets. Thank you, and I will now hand over to our interim CFO, Jeff Etherington to discuss the financial results in more detail.

Thank you, Matt. and good morning, everyone. Matt has highlighted the significant impacts that COVID-19 has had on our business, where our financial results were significantly impacted by demand destruction across many parts of our business. The waterfall chart on Slide 14 highlights the key drivers of the reduction in RCOP EBIT by business unit from first half of 2019 to first half 2020. RCOP EBIT fell by $34 million in the first half 2020, driven by $60 million of lower Lytton earnings and $21 million lower fuels and infrastructure ex-Lytton earnings, partially offset by $40 million higher Convenience Retail earnings and a $7 million improvement in corporate costs. As Matt has previously mentioned, our HCOP NPAT result of negative $626 million reflects a negative $434 million inventory loss from the large move in crude and product prices between periods and negative $312 million post-tax of significant items. And as Matt mentioned, a breakdown of these items and the assumptions used can be found in the appendix. The waterfall chart on Slide 15 provides some further detail the fuels and infrastructure results. F&I delivered total EBIT of $112 million, with F&I ex-Lytton delivering an EBIT of $171 million, down $21 million compared to first half 2019. This is a solid result given hydrocarbon demand impacts from COVID-19, with this volume impact reducing EBIT by $33 million, and with the loss of scale in the supply chain having a further $14 million impact. The resilience of our business is evident considering these significant effects. Comparing the results to the prior year, we have reduced our OpEx by $12 million through our continued focus on cost, and we have delivered $20 million higher international earnings. Finally, the waterfall shows the corrections for 2 offsetting one-off impacts, the $23 million one-off and not repeated benefits realized in trading and shipping in first half 2019 and the $29 million FX gain in first half 2020. Lytton EBIT of negative $59 million was down $60 million from first half 2019, with key impacts being the net negative $57 million from lower refining margins and foreign exchange, the net $63 million negative of lower production, resulting from the decision to extend the T&I and $9 million in crude costs, which I'll touch on in the next slide. Slide 16. As previously mentioned, refiner margins were extremely weak in first half 2020, with the average Lytton refiner margin of USD 4.68 per barrel versus USD 7.50 per barrel in the first half of 2019, both of were below historical averages. Lytton recorded sales from production in the first half of 2 billion liters, below the 2.9 billion liters achieved in first half 2019 due to the decision to bring forward the Lytton T&I, which commenced in late April. These works remain on budget. As previously mentioned, the decision to bring forward and extend the T&I resulted in a $9 million cost to manage committed crude purchases during the half, which was known and factored into the decision made to accelerate and extend the shutdown. These crude costs will continue into the second half with a total cost of approximately $30 million for the full year. As we've recently announced, at the conclusion of the T&I, the refinery will begin a phased restart across the month of September. Moving to Slide 17. Convenience Retail delivered EBIT of $125 million for the half, which was $40 million higher than the first half 2019, driven by a $63 million impact from higher retail fuel margins. Shop margin after site costs was flat versus the prior corresponding period. However, it should be noted that this number includes the impact of a $1 million decline in fuel commission from lower volumes and was achieved despite the impact of higher costs associated with the transition of franchise sites to company operations. During the half, 69 franchise sites transitioned into company-operated network, and we remain on target for substantial completion of transitions by the end of 2020. In parallel, our labor and operational initiatives are gaining traction at a store level, with labor as a percentage of sales improving by almost 2%. Cost of business remained flat, driven by improved store labor efficiencies and a continued focus on cost discipline, while other impacts on Convenience Retail earnings included unfavorable one-offs of $17 million and a negative $6 million impact from remediation provisioning as well as IT, asset and store equipment write-downs. Turning to Slide 18. Net borrowings, excluding the present value of lease liabilities, ended the period at $1.23 billion, above the $868 million debt position at the end of 2019. Adjusted debt, which includes the present value of future lease liabilities, totaled $2.11 billion. As we demonstrate in the net debt waterfall chart, Ampol continues to benefit resilient underlying cash flow from operations, with underlying replacement cost free cash flow of $384 million in the first half. However, as seen from our reported HCOP profit, cash flows in the period were impacted by a significant inventory loss given the large fall in crude and product prices. This fall in prices has been partially offset by improvements in working capital, which would have been approximately $100 million more favorable had we not chosen to hold higher temporary inventory at the end of the period relative to the current demand level requirements. CapEx, as Matt mentioned, has reduced to $88 million in the period, with dividend payments of $127 million and financing costs totaling $84 million. The impacts to operating cash flows from the unprecedented market volatility have been well managed through the action we've taken across the business and enabled us to protect a strong balance sheet position. Slide 19. Our period end net debt position sees our leverage ratio sitting just above its target range of 1.5 to 2x adjusted net debt to EBITDA. However, on a pro forma basis, including the proceeds from our property transaction, our leverage ratio would sit at around 1.5x once this deal completes prior to the impact of our interim dividend. Our decision to maintain balance sheet settings at the low end of our target range is prudent considering the significant market and economic uncertainty arising from COVID-19, with the ability to consider future capital returns in line with our capital allocation framework as and when this uncertainty reduces. The resilience of our underlying businesses and continued execution of our strategic initiatives sees us well placed to participate strongly in an economic recovery. We will deliver the remaining $40 million of existing cost-out program by the end of 2020 and accelerate cost reduction initiatives to accelerate savings that were originally planned to be delivered over the medium term, and we will continue to actively explore options to release further value from our significant freehold property assets. Our liquidity position remains strong with $1.8 billion in undrawn committed facilities, no facilities to refinance in 2020 and the property proceeds -- property transaction proceeds still to come in. We remain committed to our capital allocation work, which prioritizes: firstly, safe and reliable operations, a strong balance sheet position, dividends returns to shareholders with any excess capital then returned to shareholders via a release of -- with the release of franking credits or allocated towards incremental growth when returns are compelling. Today, we've also announced an interim dividend of $0.25 per share, reflecting a 52% payout ratio being within our guidance range of 50% to 70% of RCOP NPAT. The dividend reflects both the underlying resilience of our business and the focus on maintaining prudent balance sheet settings as we never gave a course through COVID. Thank you. And I'll now hand back to Matt for closing remarks.

Thanks, Jeff. Moving to Slide 21. We continue to make sustainability a part of our culture by incorporating it into our strategy in a way that delivers long-term value for our shareholders, customers and the community. Through the devastating bushfires earlier this year and the ongoing COVID-19 pandemic, we have demonstrated our strong community focus. We have maintained a business-wide commitment to the continuity of supply against a backdrop of significant uncertainty and business disruption in order to continue to serve our customers and the local communities in which we operate. Slide 22. As we emerge from the COVID-19 crisis, I would like to summarize why Ampol is well positioned to deliver further value for shareholders. We have delivered a strong outcome through the execution of our retail property transaction and are actively exploring further options to create value from our significant freehold property. We have made good progress in setting the foundations for international growth in F&I and have increased confidence in our ability to deliver growth in nonfuel earnings for Convenience Retail through the continued pursuit of efficiencies, including the ongoing optimization of retail labor. And we will continue to maintain a disciplined approach to capital allocation and returns as we deliver the remaining $40 million of cost out in 2020 and accelerate the delivery of additional cost out into 2021. We look forward to providing an update on these and other initiatives and a further evolution of our strategy at our Investor Day planned for the 23rd of November. Finally, as the business prepares to navigate the challenges and opportunities that COVID has presented, I would like to provide a brief update on changes to the Ampol leadership team, which will strongly position us to execute our strategy and deliver value for shareholders. Louise Warner has been appointed Chief Commercial Officer with a broadened role that will see her responsible for the commercial performance and strategic growth of F&I as well as IT. I am pleased to announce that Andrew Brewer will be returning to the business, reporting to me in the role of EGM Infrastructure. Andrew has a long history with the company and brings significant downstream experience to the business, which will be critical as our business continues to evolve against the backdrop of COVID. Joanne Taylor's role has been broadened as the EGM of Retail, Brand and Culture, taking on additional responsibility for brand, marketing, communications, and human resources. Jeff Etherington will continue in the role of interim CFO, where his efforts have been invaluable in protecting the balance sheet through these challenging times, and we'll be running a recruitment process to fill this role permanently. Alan Stuart-Grant, EGM Strategy and Corporate Development; and Georgina Koch, General Counsel and Company Secretary, will remain in their current role. As a result of these changes, Chief Information Officer, Viv Da Ros and EGM Human Resources, Celina Cross, will be leaving the business in coming months. I'd like to thank Viv and Celina for the outstanding contributions they have both made during their time at Ampol, and wish them the very best for the future. Thank you for your time today, and we will now hand over for questions.

[Operator Instructions] The first question comes from Michael Simotas with Jefferies.

The first question for me is on the $621 million cash drag from inventory loss. I mean, I understand the dynamics there. But when I look at the quantum of that adjusted for your volume, it's materially larger than what your listed number reported last week. So I just want to understand what the drivers of that are. And specifically, whether the trading and shipping business had a large impact on that.

Okay. I might start with the response on that and then hand to Louise to build on it. So in terms of the cash flow, as you can see on Slide 18, our operating cash flow for the period was an outflow of $66 million. That comprised 3 components: one being a favorable movement of $171 million in working capital, and then effectively an outflow of $237 million that we've disaggregated there illustratively to be underlying free cash flow of the business, and then the inventory loss that you called out there. So the combination of those $237 million outflow, plus $171 million of working capital, all up, a resilient operating cash flow performance of a net outflow of $66 million. I might hand over to Louise to build on the inventory loss component.

Yes. So I think it's fair to, on face value, compare us with Viva. But I think there's some material differences between the 2 companies. Firstly, the headline volumes in Australia are higher for our business. Secondly, Viva has a material amount of volume they place domestically in their specialties business, which we don't actually have. All of that's produced in the refinery and our alternate or our volume substitute is transport fuels that come from overseas. So there's some baseline differences there. Then normally, our supply chain is a longer supply chain, and that certainly was the case in the first half as we came into the year, and we're working on our various strategies, both to earn and grow our earnings from trading and shipping, but also the efforts we were making to mitigate the impacts of IMO 2020. So that lengthened our supply chain. And given we control that supply chain end to end, it means that we will take the working capital associated with that across that whole supply chain. As Jeff's outlined, as we came into the middle of the year, we are carrying some incremental crude storage and are managing that decision we made around Lytton, but also taking advantage of the wider supply chain and the opportunities that are prevailing in the market. And you see that in the underlying F&I results as well. Overall, we would say that the uses of the extended working capital that we put into our supply chain to control end to end, we do spend a lot of time looking at the return on the working capital and convinced we're making good returns there. But overall, the difference would be driven by those -- that longer inherent supply chain that we have as a company.

Okay. So I shouldn't think of it as trading losses in Ampol?

No.

No. Sorry, we said no in answer to your question, Michael. No. It's related to the longer supply chain and the move in crude and product prices. That's what it relates to. So if you were to assume that crude and product prices will unwind, you'll see it go back the other way.

Yes. Okay. All right. And then the second question for me, and I guess it's somewhat related to the balance sheet and the decision around the capital structure. How are you thinking about the leases from the property transaction? From Jeff's comments, it sounds like you're capitalizing the leases even though the property vehicle will be consolidated. And I guess my question is if you're thinking about those leases and debt, which I guess is appropriate, why do that property transaction, and especially now given it doesn't sound like you think it's the right time to release capital back to shareholders?

Okay. So there's a couple of things in there. So in terms of the treatment of the property transaction, it is a 51% retained stake that we will own. We have financial and strategic control of that. And therefore, from an accounting perspective, the property trust is fully consolidated. And so in terms of the balance sheet, what you will see is a change in the minority interest in equity to the tune of the proceeds that we'll receive. And the other side of that will be cash. So there is no lease liability at the consolidated level. So it does release over $600 million of capital. And as we've said, that will be initially used to repay debt, given where our settings are as at June 30. That takes our leverage metrics from just above the top end of our target capital structure of 1.5 to 2x towards the bottom of that range, all things being equal. Our capital allocation frameworks, again, in the pack, it's very, very clear. What we will do or where our focus will be if leverage is at the below the bottom end of that 1.5x, we'll be focused on additional capital returns to shareholders in the absence of compelling growth opportunities, similar to where we were a year ago, where we conducted an off-market buyback for around $1 a share.

So Michael, just to supplement Jeff's answer, this does genuinely release capital into the balance sheet. So we go from at the half, sitting just above the top end of our range to sitting at about 1.5x on a property adjust -- transaction adjusted basis. We think it's prudent to sit there at the lower end of our range given where the world sits at the moment in COVID. But as we've called out, we certainly have an intention to explore capital returns as and when market conditions improve.

On that, Matt, from an absolute debt-level perspective, where we're going from $1.233 billion and we show pro forma debt levels would be $621 million. So for this business, that is a very manageable, if not low level of debt and positions us very, very well for an earnings recovery post-COVID.

The next question comes from Shaun Cousins with JPMorgan.

Just a question on cost savings. Just curious given you generated, I think it was $60 million of cost savings in the second half '19, and you're highlighting $40 million to go in calendar '20, what was realized in the first half '20, if anything? And maybe why isn't it there a little more urgency in regards to extracting costs out of this business, please? I thought there may have been an update on cost-saving targets on a more medium-term basis today, please.

Yes. Thanks, Shaun. So we have delivered significant cost out during the period. Of course, we've calibrated in particular, in the retail part of the business, but also across the corporate part of the business, temporary cost savings that have flowed through to match the demand reduction that we've seen through the second quarter and into the second half as a result of COVID. I can assure you that -- so we are very well positioned in terms of matching the demand destruction that we've seen with cost-out activity. We are very well placed, and we'll provide an update on the cost out at the Investor Day in November. I can assure you there's no lack of urgency within the business to be looking at the medium-term improvement targets that we have for earnings and ensuring that we have cost-out activity accelerating the delivery of those targets.

The next question comes from Mark Samter with MST Marquee.

A couple of questions, if I can. First question, can you just help me understand the second quarter in Convenience Retail? So you told us for the first quarter that you did 1.1 billion liters of sales, which means we're left with 0.89 billion liters in the second quarter, which, if my Excel is working properly, is a 19% reduction in volumes. Now ARP industry margins were, I think about $0.18 a liter for the first quarter and $0.209 a liter for the second quarter. You take that volume and that margin, that should give you a gross margin in the second quarter, that is 94% of the gross margin. You said both in the first quarter and of the half year result, the shop sales were flat. And yet even if we give you those one-offs back, EBIT is obviously down once again 55%, 60% second quarter versus first quarter. So can you try -- but help me help me understand the second quarter? And I guess the really important question is then, is the first quarter or second quarter a better proxy for what we should expect to see going through the second half?

Yes. Thanks, Mark. So look, I think in terms of the second quarter, clearly, we did see considerable demand destruction in the business. So volumes were heavily impacted as we went through sort of peak covered, if you like. And so that's obviously an important starting point. Margins were stronger, and we've called out in the pack, our NAM per site performance, which was strong, and it was -- it continued to be strong through the second quarter. Clearly, there is the $23 million of one-offs that we've called out. So that does need to be adjusted for, if you like. I think the other 2 points that I would make that we have reduced our network size by approximately 5% during the half, the average site last year was about 3.5 megaliters in terms of volume, so you can run the numbers through on that, that has an impact. I think the final point that I would make is that compared to Viva, obviously, we have quite a different operating model that we run. We have a cost base, which we have adjusted through the measures that we've taken through the second half to seek to adjust for the volume destruction, but Viva has a cents per liter fuel commission model. So costs essentially are variabilized and drop out of the business alongside volume, obviously, that goes the other way as volumes then recover. So we're quite clear that our performance in terms of NAM per site was strong throughout the half, where obviously, though, our operating model is a little different to that of Viva. And obviously, the $23 million of one-offs is the other component.

The next question comes from David Errington with Bank of America.

This is probably a question for Jo. It was good disclosure on Slide 9. But I'm just a bit concerned with the labor to sales ratio of nearly 26%. When you got a gross margin of 32%, and that's pre-waste and shrink, I know that metro is up around 37%, but I'm really struggling, Jo, as to how you're ever going to make money in this business if your gross margins pre waste and shrink at 32%, and your labor to sales ratio is up around 26%, and that's not even including -- and I noticed that you didn't -- there was no contribution at all from the shop this half. Just wondering how you can actually drive that ratio is better so that you can make a dollar in this? Because I just can't see how you're going to make a dollar in this business with such a high labor to sales ratio.

David, it's Jo. So just a couple of points. Obviously, the labor ratio is across the whole network. When we look at the 2 metro sites, in particular, and both of them have now had the full benefit of performance year-to-date. And what we are seeing month-on-month is improvement in our labor as a percentage of sales. So we're very purposefully, when we opened the sites made sure that we were focused on customer experience on full range and making sure we explored every possible opportunity with the 2 sites. Now that we're in full execution mode, month-on-month, we are seeing continued improvement in labor as a percentage of sales and have a clear pathway to our business case that we need to achieve for those particular sites in order to deliver returns. So with respect to those 2 sites, in particular, we are very clearly focused the 3 variables that will deliver us the returns, which is achieving growth in sales. And you can see in those sites that they're definitely growing beyond and above a Foodary or a typical Star Mart. Secondly, it's improving continuously the labor that we're executing in those stores, which we are doing through a combination of initiatives. So one, it is the labor standards we've rolled out not only in the metros but across the network to ensure that we're increasing transactions per person that we're able to deal with. It's also using self-checkouts, which we have in those particular stores as well, which increase our throughput without needing to add additional labor for those sales. It's also looking at efficiencies in back-office so that we can reduce the administrative time our teams are spending. And the third component is waste. So now that we have the full 6 month of operations of those sites, it's really looking at the range that we haven't been able to pay back some of the higher waste items to ensure more is dropping to the bottom line. So we're confident as we move into the second half and the 4 additional sites that Matt has spoken to, that we can continue to improve those performance and improve profitability and the returns they deliver.

The next question comes from Gordon Ramsay with RBC.

Just looking at the Lytton refinery and the refinery margin for the first half of the year, the landed crude premium was like $9.50 a barrel. Can you just explain why that went up so much compared to the first half 2019?

Yes. So we see Lytton's performance being largely influenced by IMO 2020, given that was the period of time that we were mainly operating for. So we outlined that in previous updates, basically, as we saw the onset of IMO 2020, we saw crude premiums and freight move at that time. And so the cost of crude went up quite materially over that period. What we were observing in the market with some level of normalization heading into that market, but obviously, IMO 2020 has become completely overcome by COVID. So with COVID we see significant demand destruction for products, and then in turn, all grades of crude. And so we've seen crude premiums reverse in the opposite direction, but with still significant variability as the global oil markets find a new balance in the COVID situation. So we would say that result in the Lytton numbers was caused by IMO 2020, we don't think that's a relevant consideration for the upcoming period simply because of the fundamental shift in the market because of COVID.

The next question comes from Daniel Butcher with CLSA.

So I was hoping you could talk through your thoughts around what's happening in Victoria. I noticed that obviously there's AIP margins have now gone the last couple of weeks below the sort of average levels, especially on petrol, whereas volumes are down, so that's going to be offsetting each other where they were in the first half. Can you maybe talk through about the price cycle there, and whether you see that reverting in the future and how it sort of plays out?

It's Joanne. So we definitely are seeing an impact in Victoria across both petrol and diesel that's at or slightly above what we saw in COVID probably in April of this year. So there definitely is an impact to volume that's quite stark compared to the rest of the country. We particularly see in Queensland and WA, quite improved performance with respect to volumes. With respect to the price cycle, we are seeing rational behavior. So there is no doubt that we and our competitors have a fixed cost base, and we are seeing, therefore, the market act quite rationally with respect to restorations. We're still in a relatively early phase since the onset of stage 4 restrictions in Melbourne. And price cycles, so I think we still need to see a little bit more time path to see how industry margins are dealt with appropriately.

And then more generally, in Victoria, Victoria does not have as large an industrial or wholesale base as some of the other states like Queensland or the northwest of Western Australia. And just in terms of our total volumes as a company, we -- our historical strength around our assets means that we have more exposure into the states like New South Wales and Queensland.

The next question comes from Grant Saligari with Crédit Suisse.

Matt, I was just wondering whether you could elaborate a little on the responsibilities for the new role of EGM Infrastructure and sort of how that does or doesn't overlap with Chief Commercial Officer, F&I, just in terms of what the responsibilities are and I guess what that role is designed to achieve, please?

Yes, sure, Grant. So essentially, the Chief Commercial Officer role will focus, as I mentioned, on the full commercial supply chain from trading and shipping, which is obviously an area we continue to develop, including on the international side right through to then the customer side of the business from a wholesale point of view. So that is the full extent of the remit. And it signifies the increased focus on continuing to develop the F&I part of the business in terms of where Louise will be focused. So Andrew's role as the EGM Infrastructure will be focused very much on the operational aspects of our asset base, our refining and our distribution network.

The next question comes from Scott Ryall with Rimor Equity Research.

I was wondering if you could just talk through how we can expect to see the Ampol branding differ to the current Caltex branding, say, over the next couple of years. And maybe a couple of things to think about would be, does this mean we're going to be more likely to see some increased rollout of the Woolworth stores, given the metrics that you've talked to today? And within that, could you talk about the highway leases that you've won as well? What won you that business in your mind? Because I guess it's all related.

Yes, sure. Thank you. So look, in terms of Ampol, we believe it's a very exciting opportunity to bring back an iconic heritage brand into the market, and we will be rolling out the Ampol rebrand across our entire branded network of sites, which is just over 1,900 sites over the next couple of years. So in terms of what it will mean, it will mean ensuring that Ampol delivers for customers, delivers that high-quality customer service, delivers that high-quality convenience offer and delivers against the premium fuels that we've become known for. So that's very much what Ampol will be about. And we think it's a great opportunity to connect much more closely with our customers. In terms of the Woolworths partnership. So that, I think, it's quite complementary. If you like, Woolworths is a very significant grocery retailer, obviously, and they give us scale, the scale and the model to bring in a high-quality metro offer into our network as well as access to the benefits of wholesale distribution to expand our range. We think that, in combination with the Ampol brand, although their separate arrangements will be quite complementary. In terms of the new highway sites, these are ultra-high-quality locations, I would say, very high volumes. And in a post-COVID environment, I think we're quite excited about what those sites will be able to do to us. Clearly, they will be branded Ampol. And I think the result is testament to the work the team has done with the RMS in New South Wales over a long period of time, building a strong relationship and demonstrating our credentials that are only strengthened by the reintroduction of the Ampol brand.

The next question comes from Shaun Cousins with JPMorgan.

Just a question on Convenience Retail, maybe following up some other questions that have been asked. Can you maybe talk a little bit about what waste was incurred in the first half '20? If that was a factor that drove that weak second quarter EBIT result or what your one-off COVID costs were in terms of putting up shields in store, et cetera? Again, I think following Mark's question, trying to get to the bottom of the EBIT in the second quarter, please?

Sean, it's Jo. So as Matt touched on, one of the real driver to the second quarter result and so reiterating that our fuel NAM on a per site basis was improved on the prior period. We did see softer volumes in Easter over that April period and into May compared to the prior year. So there is no doubt that volume destruction as a result of COVID during at its peak was an impact to our business. And obviously, as we've transitioned to a company operating model during that period, we have an underlying fixed cost base. So we did see that impact in our performance as a result. When it comes to shop performance, no waste, it's not what contributed to any decline in expected performance. It was largely, as we've touched on, the underlying cost base in an environment where volumes were significantly impacted, as I said, particularly in a year-over-year period, April and May where we saw that volume decline.

And I think, Shaun, on Slide 17 in the pack, you can see the component parts in the notes of the one-off items, including the inventory write down, the other expenses, and there was a casual -- a leave accrual for casual labor as a result of the court decision. And there's also a nonrepetitive stuff that happened in the first half of '19, but they're the components of the '23.

The last question comes from Mark Samter with MST Marquee.

I've got 2, but I'll start with one. If I don't get cut off, I'll ask the second one as well. I think at this time last year and for a while, you were talking about the 240 noncore sites in retail. I mean I noticed you stopped talking about them, but I guess if you look, you've had 2 bids from fuel retailers, Chevron sports, Puma, Speedway has got sold on 10,000x EBITDA. And the U.S. -- your earnings, whilst the second quarter is confusing me is up pretty materially on last year. And so it'd be hard to argue, let's say, a harder market to do something that those assets in this time last year, are they suddenly corrugate, is the paralysis in decision making? Or are those assets still under consideration for what you might do with them?

We continue to look at the sites, Mark, and what we want to do with them. Clearly, the environment continues to evolve. The focus on efficiency and the pathway that we can see in Jo's business to deliver a lower cost base. We've talked a lot about the focus on labor and costs more broadly is very much a focus, and we will cycle some of them back into the core network. There is no question. There is then the disclosure we've made in the release this morning around 34 marginal sites. So we've closed 16 of them. We have plans in place to close the balance of those. So again, a disciplined response to sites at the tail end of the network where we can, in many cases, either not renew the lease. In other cases, we will release the freehold property value. And then the remaining component of those sites we believe will better belong, most likely with distributors in another network. We'll continue to explore those options. And we do continue to explore those options. And we'll continue to explore on some of those sites in unmanned format. So that's where our thinking is on the 240, and we'll give a more comprehensive update at the Investor Day in November. Thank you.

That is all the time we have today for the question-and-answer session. I will now hand it back to Mr. Halliday for closing remarks.

Thank you very much for joining us this morning and for participating. We believe Ampol is very well positioned. It's been a resilient second quarter -- first half performance against very challenging market conditions, but we see a very clear pathway to continue to evolve and develop the business. So thank you for joining us.