Ampol Limited (ALD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ampol Limited FY '20 Results Announcement Conference Call. [Operator Instructions] There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Matt Halliday, CEO. Please go ahead.

Good morning. My name is Matt Halliday. I'm the Managing Director and CEO of Ampol Limited. Welcome to our full year 2020 results call. Today, I'll provide an overview of our performance. And I'm 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, we have Joanne Taylor, EGM of Retail, Brand and Culture; Brent Merrick, EGM, Commercial; and Andrew Brewer, EGM, Infrastructure. Starting on Slide 3. 2020 has been an exceptionally challenging year, with severe economic weakness from bushfires, adverse weather and the COVID-19 pandemic, combining to impact customer demand for hydrocarbons and disrupt the markets in which we operate. The lower Fuels & infrastructure (ex Lytton) result was impacted by the loss of scale through the integrated supply system, with weakness in Australian volumes partially offset by strong growth in International volumes. Lytton refinery earnings were heavily impacted by COVID-19, which saw us adjust our approach to executing the turnaround and inspection and announced our strategic review to determine how to maximize the value of this strategic asset. Finally, on a positive note, Convenience Retail has delivered a strong result, with volume weakness relating to COVID more than offset by strength in retail fuel margins and improved execution in shop as we progress our retail strategy. Pleasingly, despite a year of significant volatility and uncertainty, we have made excellent progress on delivering the strategic initiatives outlined at our 2019 Investor Day. And I'm proud of how our organization has responded to the challenges we have faced through the year. We successfully completed the property transaction with the Charter Hall-GIC consortium, acquiring a 49% interest in 203 of our core freehold retail property sites, and also executed a $500 million hybrid bond issuance. F&I International EBIT grew by 18%, which puts us on track to deliver our long-term growth target, while strong momentum in Convenience Retail Shop and our successful tender to redevelop 4 high-volume New South Wales highway sites gives us confidence in our retail strategy. We were also able to deliver on our commitment to release franking credits to shareholders, with a $300 million off-market buyback announced in November and completed in January, further supplemented by a $0.48 per share full year dividend. Moving to our safety performance now on Slide 4. The safety of our people and our customers always comes first at Ampol, and I'm extremely pleased with the strong improvements in our safety performance in 2020. The extended turnaround inspection at Lytton refinery was completed incident free, and we have recorded our best process safety result in the last 5 years, which is an excellent achievement. Fuels & Infrastructure benefited from targeted personal safety improvement plans to reduce the frequency of injuries such as strains, slips, trips and falls. Convenience Retail safety has also improved significantly due to our focus on behavioral safety and the execution of our retail safety road map, driving a reduction in the frequency of low-consequence injuries, especially around manual handling tasks. Slide 5. The financial performance of our integrated business in 2020 was directly impacted by COVID-19-related disruption. F&I (ex Lytton) EBITDA of $299 million was down 21% on 2019. This result reflects the challenging economic conditions arising from the pandemic, where our Australian volumes were down 17% for the year driven heavily by aviation. And earnings from the integrated supply chain were impacted by this loss of scale. Lytton delivered an EBIT loss of $145 million, with the refinery heavily impacted by extremely weak refining margin conditions. Lytton was off-line for a substantial portion of the year, during which we conducted the extended T&I and incurred one-off crude costs to manage committed crude cargoes during the T&I. Convenience Retail EBIT of $287 million was up 43% on 2019 as industry retail fuel margins benefited from the fall in the crude oil price, more rational industry behavior, a recovery in fuel volumes through the second half and growing momentum in the shop. I'd note the Convenience Retail result was impacted by higher depreciation and amortization given the $26 million site remediation and dismantling impact, which was partly offset by a half year benefit from impairments of Convenience Retail sites, the inference being, as per the guidance on Slide 33, that Convenience Retail D&A is about $15 million higher in the 2020 result than it was in 2019 and again will be in 2021. Our RCOP NPAT of $212 million was down 38% on the 2019 result, and our HCOP result loss of $485 million reflects a $360 million inventory loss from the large move in crude and product prices between periods as well as a $337 million post-tax loss, reflecting significant items. A full breakdown of significant items is provided on Slide 24 in the appendix. But with a $312 million post-tax expense booked in the first half of 2020, the additional $25 million net expense is primarily related to a further impairment of $59 million, which Jeff will discuss in more detail shortly. The waterfall chart on Slide 6 highlights RCOP EBIT by business unit from 2019 to 2020. RCOP EBIT fell by $206 million during the year, with significant disruption to the global hydrocarbon market seeing $215 million lower Lytton earnings, $81 million lower F&I (ex Lytton) earnings partially offset by $86 million higher Convenience Retail earnings. Slide 7. COVID-19 materially impacted demand for many of our customers in 2020. And these impacts continued to be felt as various government restrictions remain in place, particularly in relation to international travel. Our Australian wholesale volumes, which includes Convenience Retail, were down 17% during 2020 as the effects of COVID were felt for 9 months of the year. Jet fuel has experienced the greatest demand destruction, with volumes down 56% on prior period given the impact of international and domestic travel restrictions and border closures. The recovery in jet fuel demand remains heavily dependent on international travel and freight, with these flights representing over 75% of Ampol's 2019 jet fuel volumes. Our Australian diesel volumes were down 6% on prior period, with continued demand resilience in key B2B customer segments such as mining, but some impact felt during the year in diesel demand from retail customers. Our International fuel volumes were up 36% in 2020 as our trading and shipping team created value from higher third-party sales in volatile market conditions supported by our expanded international storage arrangements. As always, it is important to note that the third-party volumes can vary significantly from period to period with these cargoes dependent on market conditions and their contribution to overall integrated value across the supply chain. Convenience Retail volumes were down 14% on prior period, with demand improving in the second half of 2020 as government restrictions began to ease, albeit it remains dynamic with the introduction of rapid lockdowns continuing to impact demand year-to-date. Retail gasoline volumes fell 18% and were more impacted than retail diesel volumes, which fell 9%, with our strong card offerings supporting diesel demand on a relative basis. Pleasingly, continued resilience was observed in demand for premium fuels, which represented 51.3% of total Convenience Retail volumes during the year. Slide 8. We remained focused in 2020 on executing our F&I International growth strategy, with strong organic earnings growth delivered in volatile market conditions. RCOP EBIT of $85 million was up 18% on 2019, with Gull growing volumes by 4% and rolling out 10 new sites despite strict government travel restrictions. SEAOIL volumes also showed resilience despite adverse impacts from government restrictions and added 76 new sites to their network in the Philippines. As previously noted, strong growth was observed in third-party fuel volumes, with storage in the Southeast Asian region providing scope for our trading and shipping business to deliver strong returns on working capital in volatile market conditions. Turning now to Slide 9. In 2020, we substantially completed the analysis of our retail network review, specifically around the outstanding cohort of sites identified as noncore in 2019. The network review has been a valuable exercise for shareholders, with the most important element being it has enabled management to focus on high-volume privileged sites that have the capacity to deliver the most value for shareholders. And I believe you can see the EBIT delivery from our core network coming through in this result. As part of the network review process, we divested 25 higher-value sites, as previously disclosed, and closed 33 marginal sites in 2020, as communicated at our Investor Day in November. We have also transferred approximately 20 sites from the company-operated network to resellers in the broader branded Ampol network, reflecting a focus on wholesale fuel rather than retail at these sites. These changes reduced the size of our controlled network by 9% in 2020. We have also flagged today that approximately 20 further noncore sites are planned for closure in 2021. And we will continue to explore alternative avenues to maximize returns from the 80 remaining noncore sites as part of BAU activity, with a large number likely to be either closed or transferred to alternative operators over time. We have now deemed that the majority of these sites do not prove to be critical to the overall integrity of our branded network. It is important to note that this remaining cohort of noncore sites are largely a collection of marginal, smaller-volume regional sites with minimal residual land value after factoring in remediation costs. These sites contribute negligible earnings to the group, and so the management of this tail over several years will have little impact on group earnings. When we step back from the initial identification of 240 noncore sites in our network in 2019, it is pleasing that through operational and cost improvements and adjustments to our fuel and shop offer, we have transferred a significant proportion of the original 240 noncore sites back into the core network. We'll continue to focus on the high-quality core of our company-operated network to deliver value for shareholders from the disciplined execution of our convenience strategy. An active focus on retaining and securing quality sites, as evident by the recent award of 4 New South Wales highway sites in 2020, will ensure that we retain Australia's leading fuel network. Now on to Slide 10. The Convenience Retail result was strong in 2020, with improved performance in both fuel and shop and the business reaching practical completion of the transition of franchise stores to company operations. Retail fuel margin strength was observable throughout the year from the publicly available AIP data, which reflected rational industry behavior in the face of extreme demand destruction. We benefited through the strength of our privileged network and strong card offering as well as a continued focus on premium fuels, which represented 51.3% of retail volumes in 2020, which was up 2 percentage points on 2019. Our total network shop sales increased 4% during the year, which is pleasing given the external disruptions experienced and 9% reduction in controlled network size. The strong momentum and execution of our retail strategy is evidenced through the 7% increase in like-for-like network shop sales in 2020, with strong growth in basket size reflecting ongoing improvement in our customer offer. We are seeing customers spend more time in their local areas, taking advantage of our convenience and range to meet their daily needs, with this trend being accelerated during COVID. Our ongoing focus on efficiency and enhancement of the customer offer is demonstrated by the $25 million increase in shop contribution margin in 2020, again, achieved despite the reduced network size, which has helped sharpen our focus. We finished 2020 with 6 metro pilot stores in the network, with the latest 4 reflecting lower cost and investment profiles and trading well, demonstrating the potential for the format across our core network. Thank you, and I'll now hand over to our Interim CFO, Jeff Etherington, to discuss the financial results in more detail.

Thank you, Matt, and good morning, everyone. As Matt has outlined, COVID-19 demand destruction has had a significant impact on our 2020 financial results. The waterfall chart on Slide 12 details how the pandemic has impacted the Fuels & Infrastructure results. F&I delivered total RCOP EBIT of $154 million, down $296 million compared to 2019. The main driver of this lower result was a $145 million RCOP EBIT loss at Lytton refinery, the part of our business most adversely impacted by the pandemic. Lytton earnings were $215 million lower compared to 2019 as the result of exceptionally weak refiner margins resulting in a negative $172 million impact, lower volumes associated with the extended T&I resulting in an $89 million impact, and the $29 million cost to manage committed crude cargoes during the T&I, as highlighted at our half year results. These headwinds more than offset favorable items, including non-repeat of the 2019 refinery outages and lower feedstock and input costs. F&I (ex Lytton) delivered an RCOP EBIT result of $299 million, down $81 million compared to 2019. This is a resilient result given reduced hydrocarbon demand caused by COVID-19 and the resulting impact that loss of scale has on earnings from our integrated supply chain. Lower volumes from the pandemic reduced earnings by $68 million. In addition, COVID-related supply costs and variable demand pricing reduced earnings by a further $28 million. These pandemic impacts, combined with other factors, including the non-repeat of trading and shipping gasoline earnings, called out as one-off in nature in our 2019 results, more than offset $13 million higher International earnings, ongoing cost discipline, which delivered $12 million of reduced operating expenditure, and foreign exchange gains. While it is disappointing to see the significant step-down in earnings, the business is well positioned for earnings recovery when volumes improve in line with economic conditions and government travel restrictions are eased on a more permanent basis, although this timing is uncertain, especially for aviation. Slide 13. As we've advised throughout the year, Lytton refinery has been the part of our business most impacted by the pandemic, exacerbating what were already soft conditions arising from the impact of IMO 2020. Lytton refiner margin averaged USD 4.70 per barrel in 2020, with this reflecting a volume weighted average of the previous methodology from first to third quarter and amended methodology for fourth quarter 2020. LRM includes approximately USD 1 per barrel of other hydrocarbon costs. The extreme weakness in refining margins and the need to preserve cash flow, as well as the need to protect the personnel on-site and adhere to COVID-19 safety protocols, saw us accelerate and extend the Lytton T&I during this period of low margins before safely bringing the refinery back online at the end of the third quarter. This action resulted in production of 3.5 billion liters in 2020, well below the 5.8 billion liters reported in 2019. We are continuing to progress the comprehensive review of Lytton refinery announced in October 2020. And we remain focused on determining how to maximize value for shareholders from this highly strategic asset, with the review to be concluded by the end of the first half of 2021. We continue to engage proactively with the government on fuel security initiatives. And as we continue to work through our review, we formed the view that it would not be appropriate to accept the interim refinery support payments while we are still working out the best path forward for Lytton. Moving now to Slide 14. Convenience Retail delivered an RCOP EBIT result of $287 million in 2020, $86 million higher than 2019. The primary driver of this strong result was the $100 million benefit from higher retail fuel margins assisted by the timing benefit from crude oil price declines. This more than offset the impact from lower volumes resulting from COVID-19 restrictions in place across Australia at various stages throughout the year. Shop contribution margin after site costs was $25 million higher than the prior corresponding period, with the strong performance in the second half reflecting continued disciplined execution of our Convenience Retail strategy, with strong like-for-like sales growth and continual focus on cost control. 2020 was also supported by a $10 million improvement in cost of doing business driven by a continued focus on cost discipline. Consistent with the first half 2020 results, the Convenience Retail result includes $13 million of other one-off noncash expenses, which is a delta of $17 million compared to the 2019 result, given a $4 million benefit in that year. Our disciplined focus on improving return on capital employed across the retail network has resulted in closures of underperforming sites, divestment of sites for higher and better use and continued investment in new sites with the right returns. This closure and divestment activity has prompted the site remediation and dismantling provision to be reassessed. The accounting impact is noncash, and this decision has resulted in an asset and corresponding liability of $241 million being taken up on the balance sheet, the majority of which relates to Convenience Retail sites. This has also increased depreciation and amortization expense for Convenience Retail in 2020 by $26 million, although the increase is not observable in its entirety in the waterfall as it is partially offset by $17 million of lower depreciation from the impairments of Convenience Retail sites booked at the first half year results. As reflected in the D&A guidance provided in the appendix Slide 33, Convenience Retail D&A is expected to reduce in 2021 as the full year depreciation benefit from the impairments taken in '20 is expected to exceed the increase in depreciation associated with the site remediation and dismantling asset. Turning to Slide 15. Net borrowings, which excludes the present value of lease liabilities, ended the period at $434 million, below the $868 million net borrowings position at the end of 2019. This net borrowings number is, of course, prior to the completion of the $300 million off-market share buyback, which settled in February '21. As shown in the net borrowings waterfall chart, our business delivered resilient operating cash flow of $268 million during a period severely impacted by COVID-19-induced hydrocarbon demand destruction and the steep decline in crude and product prices in the first half of the year. Operating cash flow was supported by working capital benefits of $211 million. In response to the challenging environment, Ampol reduced capital expenditure to $227 million, including the T&I spend, with total CapEx down $43 million on the prior corresponding period. This was consistent with our commitment in the second quarter last year to bring capital expenditure below $250 million. Outside of resilient operating cash flow, the key contributor to the lower period-end net borrowings position was the completion of the Convenience Retail property trust transaction, which saw $655 million of net proceeds received in 2020 after tax, stamp duty and other transaction costs. Payment of ordinary dividends were $190 million during the period, and other investing and financing activities amounted to $72 million. Net debt, which includes the present value of future lease liabilities, totaled $1.35 billion at period end. The impacts stemming from the unprecedented economic and social disruption of the pandemic have been well managed through the actions we've taken across the business, enabling Ampol to maintain a strong balance sheet. Slide 16. Whilst considerable disruption occurred in 2020 and uncertainty remains around the profile of the economic recovery, our approach to capital allocation has remained both disciplined and consistent. Capital allocation is governed by our transparent framework to ensure we retain a strong balance sheet in order to support the execution of our strategy and the return of capital consistent with our focus on releasing franking credits to shareholders over time. On a pro forma basis, factoring in the capital return to shareholders from the recently completed $300 million off-market share buyback, our leverage sits at approximately 1.7x adjusted net debt to EBITDA, which is within our target range of 1.5x to 2x on a last 12 month basis. 2021 will see a higher level of capital expenditure, around $100 million higher than 2020, as we ramp up our Ampol rebranding activity and spend more on value-accretive growth initiatives. These initiatives will include spend on initial planning and approval works for the redevelopment of the 4 high-volume New South Wales highway sites that we successfully tended for in 2020. As Matt mentioned, we're proud of the progress we've made in 2020 on the strategic initiatives we have outlined -- we had outlined at our 2019 Investor Day. In addition to increasing capital returns through the off-market share buyback, we demonstrated the value of our high-quality core freehold Convenience Retail network through the completion of the property transaction with the Charter Hall and GIC consortium. We also successfully completed the $500 million hybrid issuance in the wholesale market, receiving 50% equity credit from Moody's Investors Service, completed our existing $100 million cost-out program and announced a further $40 million in cost-out to be completed by 2022. I am proud of the delivery of a number of key strategic initiatives over the past year, particularly when considering the disruptions from the pandemic and the distractions caused by corporate takeover interest. I would like to thank the Ampol team for their efforts in 2020, which see us well positioned to build into 2021 and accelerate when markets recover. Slide 17. We remain committed to returning surplus capital and franking credits to shareholders in line with our capital allocation framework and business performance. We have a strong track record of capital returns since 2015, with $2.4 billion of surplus capital returned along with $1 billion of franking credits. This includes 3 off-market share buybacks resulting in total shares on issue reducing by around 12%. Our most recent $300 million off-market share buyback involved the repurchase of 4.6% of issued capital and the return of around $119 million of franking credits to shareholders. Today, we also announced a final dividend of $0.23 per share, equivalent to 60% of second half 2020 RCOP NPAT. This brings our full year dividend to $0.48 per share fully franked, reflecting a 55% payout ratio, being within our guidance range of 50% to 70% of RCOP NPAT excluding significant items. Our full year dividend reflects the underlying resilience of the Ampol business and our strong focus on balancing returns to shareholders while maintaining prudent balance sheet settings consistent with the strong investment-grade credit rating and retaining the flexibility to invest in future value-accretive growth opportunities. Thank you, and I'll now hand back to Matt for closing remarks.

Thanks, Jeff. Moving to Slide 19. In 2020, Ampol contributed almost $2.5 million to community organizations through the Ampol Foundation, which includes new partnerships launched with The Smith Family and Surf Life Saving Australia. We also continue to focus on our environmental goals with comprehensive TCFD scenario analysis to be released in the second quarter. Moving to Slide 20, I'd like to provide a brief update on current market conditions. While green shoots are being seen in the economy, travel restrictions continue to impact Australian fuel volumes, especially in aviation, where over 75% of our 2019 volumes related to international flights. Given the continued impact of COVID-19 on demand, Ampol's current Australian volume expectations for 2021 are between 13.5 billion and 14 billion liters, with this forecast assuming a delayed recovery in jet fuel demand and a continued impact from domestic travel restrictions. The reality is that the sudden government lockdowns in response to COVID outbreaks, as experienced recently in the northern beaches of Sydney, Brisbane, Perth and Victoria, have a significant impact on our part of the economy. Although short in duration, they create significant disruption to activity levels and result in a lingering effect on confidence. Industry retail fuel margins in early 2021 are lower than the levels observed in the prior period as we work through a period of adjusting margins for higher crude oil pricing. Lytton production was significantly below normalized levels in 2020 as a result of the extended T&I. While this lower level of production impacted Lytton earnings in 2020, it resulted in increased product imports to meet demand requirements, which enhanced F&I Australia earnings. This make-versus-buy decision is an integral part of how we maximize value for shareholders from the integrated supply chain. And I'd note that increased production from Lytton will reduce the level of product imports in 2021 and the F&I Australia earnings associated with product imports. This highlights the importance of completing the review in a timely manner by the end of the first half of 2020. It is important to note that F&I earns significant income in foreign currency, and it will be negatively impacted if the current strength we're seeing in the Australian dollar relative to the U.S. dollar continues. While the COVID-related headwinds of 2020 are yet to alleviate and the timing of recovery remains uncertain, we continue to focus on the controllables and delivering on our promises. We remain on track to deliver the targeted $195 million EBIT uplift by 2024 from shop, International and further cost-out so that we will emerge through an eventual recovery in volumes in a stronger and fitter position. Slide 21. While considerable uncertainty remains over the outlook for economic recovery, we have a clear set of priorities in 2021 to deliver value for our shareholders. We will successfully execute on our rebrand to Ampol with the national rollout to achieve scale by the end of 2021. Our rollout has begun to gather momentum with 44 sites in the branded network having been transitioned as at mid-February. The review of Lytton refinery to determine the best path forward to maximize value for shareholders is ongoing and will complete by the end of the first half. We are focused on improving returns in F&I Australia through a disciplined focus on capital effectiveness and cost efficiency in the non-refining business while also selectively pursuing strong returning investments. Continued effort will be made to deliver on our targeted $195 million EBIT uplift by 2024 relative to a base of 2019, with earnings growth targeted through improvements across our shop operations and a continued disciplined approach to format upgrades and the continued delivery of our F&I International strategy. This year will see us roll out 9 new Gull sites in New Zealand, while we continue to target growth in International third-party sales, which will be supported by new customer wins secured for 2021. In addition, we will commence delivery of a further $40 million of cost savings on a run rate basis by 2022, as announced at our Investor Day in November. Finally, we remain committed to releasing our substantial franking credit balance to shareholders in accordance with our capital allocation framework, which actively allocates spare balance sheet capacity towards incremental returns or growth. Thank you for your time today, and we will now take questions.

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

Got a couple of questions on the Convenience Retail business. And the first one is on the shop sales. So you saw a big acceleration in like-for-like shop sales, looks like about 10% like-for-like in the second half, and that's continued into 2021. Can you pull that apart for us, please, and just talk about how much of that you think is due to underlying improvements in the operations and then how much of it is due to a better marketplace with food retail generally benefiting from COVID as well as the shift to convenience, et cetera?

Yes, I'll hand that one to Jo, Michael. Thank you.

Thanks, Michael, and good morning, everyone. So Michael, it's a combination of both. There is no doubt that COVID has provided some beneficial tailwinds. As Matt talked to, we are seeing people shop more frequently in their local areas. The convenience of our sites and the accessibility means that we've been able to capture that change in customer behavior. But the reason why I say it's both is that we're now through rolling out the plan in a disciplined way over the past 2 years and have the capability to actually execute on it. So, one, that comes through improved range. We are benefiting from the partnership with Woolworths in that compared to other convenience players, we do have a broad range and, hence, have been able to pick up the general grocery top-up shop across many of our sites. We also have seen improvements through our operations of the stores, as we've now virtually completed the transition from franchise to company operations. And we're seeing the rollout of our labor standards across the stores, meaning we're getting the right balance between operational execution and enhanced range to actually ensure that we deliver to the opportunity that exists. As you said, we've seen that continue into the first part of this year and plan to drive that further as we progress through 2021 and beyond. Thanks, Michael.

Okay. And then second question on Convenience Retail. It sort of looks like all of the drivers were very positive in the fourth quarter. You had better fuel volumes. You had supportive retail fuel margins. You had strong shop sales. You had a gross margin tailwind in the shop. You had strong premium penetration. EBIT was lower in the fourth quarter versus the third quarter. I suspect that D&A may be part of the reason for that. But can you just talk us through what happened in the fourth quarter relative to the third quarter and specifically around the depreciation associated with the impairment?

Yes, Michael, it's Jeff. I'll touch on the depreciation. So as we've outlined, we have taken an ARO review on the remediation provision that relates to tank replacement and remediation of sites. And that's had -- resulted in an asset liability of $241 million going on to the balance sheet. We begin depreciating that asset, and that's had an impact on the Convenience Retail result in the second half of a $26 million increase in depreciation. As we've highlighted a couple of times in the speech and throughout the pack, that is partially offset by a depreciation benefit coming through as a result of the impairments -- the $233 million asset impairments taken by Convenience Retail at the half year, that's $17 million, and then flow through to flipping around the other way, lower depreciation in Convenience Retail in 2021 versus 2020.

So, Michael, we saw a strong performance, I think, in the underlying cash earnings through the shop in the fourth quarter due to the combination of drivers that you mentioned. But you did see $26 million of D&A related to this remediation and dismantling -- asset dismantling provision in -- go through in the fourth quarter. You can see that, that was a higher bump, as Jeff mentioned, that impacts 2020. But in fact, on Slide 33, when you look at the guidance for '21 around D&A for Convenience Retail, you can see that coming back down again.

Okay. So that's all in the fourth quarter. And the way to think about that going forward, I know you've given us guidance for D&A overall, but we should think about that $26 million as being permanent but somewhat offset by the lower depreciation associated with the impairment on the asset.

Yes. And I think, as Jeff mentioned, that, that depreciation number for the remediation position will step down to approximately $15 million in '21 and will be more than offset by the depreciation benefit, if you like, flowing from the impairments.

Your next question comes from Shaun Cousins from JPMorgan.

Just a question regarding Lytton. I'm just curious why Ampol wouldn't keep Lytton open until the end of June '21 to receive the money from the government. It just seems like a little bit of a lost opportunity for you just to delay the outcome of your review a few months and collect that money from the government. Can you just sort of provide the basis for that decision, please?

Yes. So thanks, Shaun. Look, as we communicated, I think at the end of last year, we felt that it wouldn't be appropriate to take the short-term support until we had concluded our review, which will conclude in the second quarter. To the extent that our decision was to continue operating the refinery, we'd absolutely be in discussions with government around short- and longer-term support. But what we have said is that until we've completed the review, we don't think it's appropriate to take that money.

Okay. And maybe just sort of generally around how you're thinking about full year '21 volumes, thanks for the guidance, the 13.5 billion to 14 billion liters. How much are you assuming that jet volumes are in line with fiscal '21 at 1.2 billion liters? Because that seems to be the swing factor where we may be out or some of -- or is there something else sort of that's playing on there? So maybe if you could sort of tell us how you're seeing jet for fiscal '21?

Jet's a very significant part of it. I think there's -- we've put in one of the appendix slides what the Q4 run rate looks like. Q4 run rate for jet was 1.1 billion liters. So if you reflect back on 2019 and the comparison there, you've got a gap of about 1.6 billion liters. So jet's a very big proportion of it. And then there are other impacts, including Convenience Retail haven't recovered back to full run rate in the fourth quarter. We do see that continuing to improve. But it will be on our profile. We still haven't got back there. And as I mentioned in the call, we continue to see impacts from the prompt lockdowns year-to-date. So obviously, they are short and sharp, but they do impact confidence as you look at the recovery profile flowing through. So that obviously gives rise to some uncertainty as well. And clearly, as you understand, there's a significant sort of link to retail -- effective retail volumes in our wholesale supply through our reseller network, and those same factors apply through that business.

And maybe just quickly on retail fuel margins. Given the snap lockdowns, it's a rational industry, but wouldn't you -- I mean for Jo, wouldn't you have expected retail fuel margins to better reflect the weaker volumes that you're getting out of these snap lockdowns? The industry did a very good job, say, in February last year reflecting that. Is it a little disappointing that we haven't seen margins expand to what is an increasingly volatile and uncertain retail volume path, please?

Yes, sure. No, I think there's a couple of things to consider. One is, as you've touched on and Matt did, they are short and sharp. So they're literally a 5-day shutdown we're seeing. And as you know, typically, the metro pricing cycles take longer than that. The other factor, because we are -- when you do look at AIP data, you see the impact on diesel at the moment. So there has been some increasing input costs that are a little bit different to what we saw at this time last year, so obviously having to work through those cost increases is probably also a secondary component beyond the snap lockdowns, particularly in relation to diesel.

Your next question comes from Mark Samter from MST Macquarie -- sorry, pardon me, MST Marquee.

Just a question, if I can, on, I guess, how we think about -- I mean obviously, this Lytton review is in time. But if we look at the share price, that's back down to $25. And obviously, we had suitors coming in around the $35 mark, and they saw value above that with what they could create with the business. Can we think about the Lytton review being a platform for maybe some more structural changes? You could think around the broader portfolio and particularly when the share price is languishing down at the levels that currently is.

Yes. Thanks, Mark. Look, there's no doubt that the Lytton review is quite fundamental to the company. And that's why, as we discussed in November, it's important that we take account of all the factors that we need to take account of in assessing what the right decision looks like. Clearly, we have seen BP and Exxon announce closures, and that gives rise to impacts in terms of the buy-sell or the refinery swap arrangements that are in place, which all sort of feeds into our review process. And so we're taking account of all of those factors, and we'll come up with our answer in the second quarter. So it's a critical piece of work. I think we're clear on our time line, we're on track, and we're clear that we're taking account of a broad range of factors in coming to the decision that will maximize value for our shareholders.

And I mean just around that one, well, look, can you just provide everyone with a little bit more clarity? You allude, I think, in the presentation that there's obviously been the volumes lost which -- I think there was a public announcement, or whatever it was, 5 to 6 years ago about supplying BP. So one assumes that's the BP volumes. Just the financial impact on Lytton from having now lost those volumes?

Yes. Look, I think, as I mentioned, buy-sell does play an important role in our business. The closure of refineries, we've seen 2 announcements already, as I mentioned, do lead to a reset. As Perth is becoming an import market, BP has started importing in Brisbane. Exxon now, we need to see what their next steps, and so you are going to see a resetting of those arrangements right around the country, which has impacts in terms of, one, what our import business or our trading and shipping business looks like across the country; and two, has implications for the refining business, of course.

And I mean in a rational market, those kind of things might lead to consolidation of infrastructure as well. Is that just wishful thinking? Or do we think that is a realistic outcome in how this all plays out?

No, I think it's important that as an industry, supply chains are as efficient as they can be to ensure that customers ultimately get the best possible deal and shareholder value is maximized. And what we can't see is -- or shouldn't see is, I think, infrastructure being built where it doesn't need to. So that should drive a range of discussions around sensible infrastructure cooperation.

Your next question comes from David Errington from Bank of America.

Matt, this question probably is to Jo. One part of the result I was really pleased with was the increase in the shop contribution margin, those $25 million. I know, I think, if -- you correct me if I'm wrong, but that first half, that contribution margin was 0, so you've actually been able to generate a $25 million pickup in the second half. Now I don't know what EBIT sales numbers that would be, but that shows that you're running at well above 10%. Now I understand there are tailwinds, but that, to me, that's -- correct me if I'm getting a little bit too optimistic and too bullish, but your run rate on an annual basis is a shop margin of about $50 million EBIT. And that's the high-margin part of the business or the high-multiple part of the business. So, Jo, is that right, those sorts of numbers? What's driving that? Is it basically gross margin improvements? Are you doing -- are you getting your costs right? What is actually driving that increased $25 million? Because that to me is probably, to me, the highlight of the whole result, because given that it's for half a year, you did nothing in the first half, it shows that you're really getting this right. And compared -- given that you were aiming, I think, for $85 million by '24, well, you're more than halfway there by the end of '20. So, Jo, can you give a bit more color on what really drove that $25 million so as we can get a bit more of an understanding as to the sustainability going forward because that, to me, looks like a terrific part of the result?

Yes, sure. David, so a couple of factors coming together to drive the performance. Only moderate gross margin expansion, so it's actually the improvement is through the growth in the top line, and that's largely in the second half. We saw our traditional customer returns, so growth in beverages tobacco and also our focus on fresh and coffee really helping drive top line sales. So that is driver number one. The second component is much better cost control. So we talked about the 2019 Investor Day again in '20, the work we were doing across improving the range but also improving our execution at the store level. We've worked with the Connors Group to engineer labor standards. And the reality of the demand destruction that COVID caused meant we executed those faster than we probably otherwise would because we were forced to in a situation where trading was quite difficult. That paid dividends in the second half as well. There are some others. So largely labor and top line growth are the 2 big drivers. There's also some things that were a little bit different, which is why I don't -- I still have a level of continuing to execute in a disciplined way and us demonstrating it this year and beyond is important, David, because also with COVID were some other tailwinds, so some reductions in card fees and the like that helped improve that cost as well. Some of those, obviously, can return. So it's a combination of some tailwinds. But in truth, and congratulations to the whole team, who has been executing the strategy across the past 2 years to get our operations at the store level better.

But I'm comparing the same thing, Joanne. That was the number that you target at $85 million, and your run rate at the moment is about 50s. That's right, isn't it? That's the number that -- I'm comparing apples-to-apples there, aren't I?

If I'm understanding you correctly, David, yes, happy to talk directly to you a bit further about it. But yes, that is. And when we've talked to the $85 million back in '19, which we said is comparable, there was a large component of that $85 million that was actually due to running the business better before we also looked to enhancements in EBIT through new formats with metro and the like.

Well done, Jo. As I said, I didn't think you'd get any, so you're doing a great job. I've been proven completely wrong on that, so well done on that. Can I sneak one question on F&I? Matt, I don't know if you -- but the F&I OpEx savings, again, the run rate hasn't improved in the second half. It's still running at $12 million. I'm a bit surprised, given the drop in the volume, that you wouldn't have gone a bit harder on the F&I OpEx savings.

Yes, thanks, David. I might hand over to Andrew Brewer to talk about where we're focused in terms of F&I OpEx.

David, Andrew Brewer speaking. The F&I OpEx is certainly a focus for us in terms of efficient operation and making best use of our assets. So the whole spread of opportunities is there across operating costs, maintenance costs and capital investment. So that is the focus. That's a continuing and a high-profile activity for us during this year.

Okay. It's just that there's no improvement in the second half. I mean it's just flat at $12 million. I was just surprised it wasn't seeing much of a pickup.

Well, during the second half of 2020, remember the refinery resumed operation in the end of the third quarter and with the completion of the extended T&I. And so there were some operating costs that you saw reduced during the T&I period which then effectively resumed in refining operations. And as I said, the focus on ex Lytton operating costs continues and is progressively delivered.