Ampol Limited (ALD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ampol Limited 1H 2022 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Matt Halliday, Managing Director and CEO. Please go ahead.

Good morning, everyone. My name is Matt Halliday. I'm the Managing Director and CEO of Ampol Limited, and welcome to our half year 2022 results call. I'm joined by our CFO, Greg Barnes, who will discuss the financial results in more detail. And following the presentation, we'll take your questions. Today, we also have Brent Merrick, Andrew Brewer, Kate Thomson and Mike Bennetts joining us on the call. And during the presentation, we're going to refer to documents launched earlier day on the ASX. As always, safety comes first at Ampol, and I'm going to start with our safety performance on Slide 3. Personal Safety remains a key focus for Ampol with F&I, Convenience Retail and Z Energy maintaining a very strong performance as our annual safety improvement plans, including a targeted focus on leadership time in the fields, delivers good results. And when it comes to process safety, we had no Tier 1 process incidents, a track record that we have now maintained since October 2018. And a comprehensive spill prevention program, which involves working closely with our carrier partners has now been embedded into business as usual. Unfortunately, we didn't meet our expectations with the Kurnell terminal waste water separator overflow in April. After several weeks of extreme rainfall, there was a very intense rainfall event during a very short period that led to a discharge of oily water from the site impacting the local community. Importantly, we have now completed the investigation and the cleanup work, and we continue to work with the New South Wales EPA, Kurnell community and the local counsel to address the findings. Turning to the highlights of our performance now on Slide 4. And against the backdrop of increased volatility due to the global energy shock, COVID outbreaks and extreme weather that we've seen Ampol delivered a record half year performance. I think this demonstrates the benefits of Ampol's integrated supply chain and the underlying resilience of our business. Looking at our financial performance first. RCOP EBIT was a record at AUD 734 million with RCOP EBITDA AUD 927 million. And this record was largely due to the unprecedented strength in the Lytton refiner margin after what has been a sustained period of low margins in recent years. But pleasingly, we also saw a substantial lift in trading and shipping profitability, and our shop performance was also strong in the face of headwinds in the retail fuel business as higher prices hit consumers hard and our margins compressed as prices climbed rapidly. Total fuel sales increased to 11.5 billion liters, mainly due to jet fuel sales and of course, the addition of Z. The acquisition of Z elevated debt borrowing levels to just under AUD 3 billion. Leverage was 2.6x due to the timing of the acquisition of Z and the divestment of Gull, which settled in July. So on a pro forma basis, leverage reduces to 2.2x, which is well inside our targeted leverage range, and Greg can step you through that further in a moment. When we look at the strength of our financial performance, the strength of our balance sheet and our view of the outlook, it's allowed the Board to declare an interim dividend of AUD 1.20 per share. This represents a payout ratio of 61% of RCOP NPAT, which is just above the middle of our dividend policy range. The dividend releases a further AUD 123 million of franking credits and we have now returned about 60% of our franking balance since 2019. Turning now to our strategic priorities. We've continued to execute on our strategy to diversify and grow internationally by completing the Z acquisition. The Ampol rebrand is on track for completion before the end of the year with the cohort of EG stores, the bulk of the remaining program. And since launching our future energy and decarbonization strategies in May last year, we have continued to build capability and invest in future energy and decarbonization. And I'm going to talk in more detail about these programs shortly. Amongst the disruption and turmoil of the past few months, we've maintained our focus on creating value for all stakeholders. Our resilient supply chain has ensured fuel security for our customers despite the significant global disruption to crude and product flows. We've continued to invest to decarbonize our own operations, and we launched our second reconciliation action plan. And recognizing the increasing cost of living pressure on consumers, the Ampol Foundation and Z Energy's Good in the Hood program, but provided increased support to the communities where we operate. Turning now to Slide 5. The significant dislocation in global energy markets caused increased volatility and record high fuel prices. Local markets were further impacted by extreme weather and lower mobility due to COVID outbreaks. Ampol has undoubtedly been a net beneficiary of these impacts largely due to the unprecedented refiner margin strength as well as the attractive trading opportunities the volatility presents. Conversely, quality premiums, which reflect the cash price paid over [indiscernible] to secure spot cargoes rose very sharply and compressed margins, reducing earnings from fuel sales to contracted customers. In retail, the high fuel prices, flooding and COVID all operated to reduce fuel volumes and rapidly rising finished group -- finished product prices rather also compressed retail fuel margins. The improved shop margin was unable to fully offset the fuel headwinds resulting in lower overall convenience retail earnings. Looking at the detail on the fuel volumes on Slide 6 now. We observed different performance across our key markets with group sales volumes up 4% after adding 2 months of Z sales of 603 million liters. Australian wholesale volumes grew 6.5% as jet fuel grew with air travel recovering from the COVID lows. Conversely, Convenience Retail fuel sales fell 5.8% on a like-for-like basis as the combined impacts of flooding, Omicron and higher prices took their toll on mobility. Taking both these markets into account, the combined Australian demand grew 2.1%, the first time since the pandemic that we have seen a half where our Australian sales volumes have grown. The supply-constrained market limited the available opportunity for spot trades, reducing international volumes sold. Very pleasingly, though, our enhanced international supply chain capability, which has been built over many years, allowed flexibility to respond to the supply chain disruption and volatility and provided attractive trading opportunities to source, blend and store cargoes. And this helped to improve internationally generated earnings despite the reduced volumes sold. I'm now going to hand over to Greg to take you through the details of the group and segment performance.

Great. Thanks, Matt. Good morning, everyone. Look, as you can see, there's a fair bit going on in the results. So what I thought I'd do first is just step you through some of the major changes. We obviously completed the Z Energy transaction during the period. Our results include their May and June performance only. As you'd expect with any acquisition, we need to make acquisition adjustments or purchase price accounting adjustments. We're obliged to make some of the initial PPA adjustments on acquisition, which we have done and we'll complete that process at year-end. We also modified our RCOP methodology to align with Z Energies, and we communicated this at the time of our Q1 release. For this reporting period, we've classified Gull as held for sale and reported it as a discontinued operation. We've since completed that sale, that is the sale of Gull in July. But there's a reconciliation of these adjustments in the appendix to the ASX release and on Slide 28 of the presentation to give you a hand to update your models. If we go to the results on Slide 8. As Matt commented, this is a record result for Ampol and one that was delivered in very challenging market conditions of which we are undoubtedly a net beneficiary. The performance was driven primarily by Lytton, which benefited from a significant step-up in refining margins, and we also saw a really strong performance from our F&I International business. Despite the headwinds of weather, Omicron and record high fuel prices, Convenience Retail reported an encouraging result, particularly in the shop, where our team continues to deliver. And as I mentioned, we've reported just 2 months of Z. So it hasn't really had a big impact on the results for this period. But I'll talk to it in each of the segments in a moment. Just on RCOP NPAT, we reported AUD 471 million and a statutory result of AUD 696 million. The statutory result includes nearly AUD 290 million of inventory gains after tax, reflecting the rising crude and product prices during the period. It also includes significant items of AUD 65 million after tax, the bulk of which relates to Ampol rebranding, transaction costs associated with the acquisition of Z and the sale of Gull as well as our settlement with EG. If we go to Slide 9, it shows the key contributions to the growth in group EBITDA and EBIT. It Really does highlight just how important Lytton second quarter performance was to the group half result. I'll talk to the other businesses on subsequent slides, but we will note the uplift in corporate costs of $7.6 million. This was largely due to increased accruals for short-term employee incentives consistent with results as well as costs related to self-insurance where we lifted premiums to cover flood damage at affected retail sites during the period. Slide 10 looks into the F&I result in more detail. Obviously, the refineries are standout. The Lytton refiner margin reached USD 32.96 per barrel for the second quarter. That's compared with $10.59 per barrel in the first quarter in U.S. dollars. The significant increase reflected a combination of global factors, including COVID demand recovery and lower inventory levels, especially diesel. This was compounded by the supply shock caused by Russian sanctions and Chinese export quotas trending below historic levels. These factors drove refined product prices higher and increased landed crude premiums and product freight costs. At Lytton, production lifted in the second quarter maximizing the benefit from the elevated refiner margin environment. Total production for the half was nearly 3 billion liters in line with the same time last year. So with this backdrop, Lytton EBIT was AUD 444 million, an increase of AUD 393 million over the same time last year. The performance from F&I International, excluding Gull, was another highlight. I'm going to talk to that in a subsequent slide. F&I Australia ex Lytton was largely in line with the same time last year, which is a great result given the quality premium headwinds that Matt spoke to earlier. As we outlined at the half year, we've increased our investment in future energy. That spend is largely focused on e-mobility in our retail electricity pilot and the team is making great progress on both counts, and Matt is going to come back and talk to that shortly. Slide 11 takes a bit of a deeper look into F&I Australia. We called out earlier the quality premiums for spot cargoes rose to unprecedented levels over mops daily pricing. This creates challenges for our business to pass these costs on to customers contracted at fixed premiums. Pleasingly, trading and shipping label to benefit from the elevated market volatility through sourcing, storing and blending physical products while managing the price risk through derivatives trading. The strong trading and shipping performance offset the impact of quality premiums in the period, with F&I Australia ex Lytton earnings rising by 2.6% in the half. Volumes are also up 2.1% on the back of improved jet volumes in particular. Australian jet volumes grew nearly 59% year-on-year. However, this volume remains about 30% below pre COVID levels. The volume outcome is pretty pleasing, I would say, given more than half of Ampol's wholesale volumes go to Convenience Retail, EG and other resellers. These channels were obviously impacted by the combination of high prices, flooding and reduced mobility due to COVID outbreaks. We are equally well placed to benefit from any recovery in mobility in the future as immigration levels normalize, and fuel prices moderate. I now go to Slide 12, and you can see that our F&I International earnings, excluding Gull almost tripled this half. I think it really underscores the capability that Ampol was built in international sourcing, shipping and price risk management. And while the extent of its contribution to group earnings, will vary from period to period. It plays an important role in securing our supply chain, and we certainly expect it to grow over time. It is also a key foundation for Ampol as we transition to more energy-efficient solutions. During the period, the team were able to secure our supply chain and take advantage of market dislocations by sourcing, storing and blending cargoes to service third-party international customers. So while volume was down as a function of the supply shock, the elevated volatility created opportunities to capture greater margins. Gull also grew earnings in the period by around AUD 5 million. And we've called out the current and prior year numbers here and in the reconciliation in the appendix to make it clearer for you to update your modeling going forward. Earnings from sea oil that is also grew as demand improved post COVID and their planned network growth continued. On Slide 13, you can see the KPIs for the convenience retail business. Total retail fuel volumes were 1.9 billion liters, down 5.8% on a like-for-like basis for the reasons we discussed earlier. The high prices also impacted demand for premium petrol, particularly in the second quarter, where consumers traded down. Despite this, premium fuel sales penetration was quite resilient over the half, down 1.4 percentage points. The good progress in shop performance continued. Network shop sales declined by just 1.6% in that environment on a like-for-like basis, but shop income increased -- as shop gross margin post waste and shrink expanded to 33.3%, that's an increase of 2.3 percentage points from the same time last year. Improved promotional activity labor efficiency, reduced waste and shrink and the ability to pass through price increases all contributed to the improved performance. Our nonfuel EBIT uplift initiatives reached AUD 58.4 million by 30 of June and that's against a 2019 base. And we're now tracking ahead of schedule to deliver against our target of AUD 85 million by 2024. On Slide 14, you can see quite clearly the impact of the key drivers I've just mentioned. As you know, for most of the half, fuel costs continuously increased and rose particularly steeply in the second quarter. This takes time to pass through to retail prices, compressing fuel margins until they settle. As I mentioned, the strong shops performance saw its contribution increase by AUD 6 million. Progress in these areas means we are well positioned to benefit from improved trading conditions as they eventuate. Cost of doing business also reduced. And really, there was just a focus on spend right across the board. If I turn to Slide 15, and you'll -- to talk about Z Energy. As you know, the acquisition completed on the 10 of May. And we've got 2 months of trading included in the group results. And as like we have it, we completed the transaction in the thick of Omicron as it's swept through New Zealand and as it was transitioning to an import model. so they had a tough couple of months. July was much stronger, and we're really encouraged by what we see in this business, and we're very pleased that, that is now part of Ampol. So while it's early days, the integration is progressing well and we're confident of delivering the estimated benefits of NZD 60 million to NZD 80 million per annum. This transition to a full import model is largely complete, and we've successfully executed with Z Energy able to maintain supply to its customers with limited disruption. The result does include some one-off costs of around AUD 6.9 million associated with the transition, which are included in the results that's in New Zealand dollars. We're yet to complete the purchase price accounting adjustments, although we have made some initial adjustments as we are required to do. We've provided the underlying performance of Z that reflects its previous reporting methodology. And you can see the impact of the preliminary PPA adjustments being an increase of AUD 0.5 million for the 2 months. Turning to our balance sheet and cash flow on Slide 16. We obviously completed the acquisition of Z in May, which was fully debt funded, and we didn't complete the sale of Gull until after balance date in July. This largely explains the movement in net debt over the period to just under AUD 3 billion at 30 June. A pro forma net debt position is also provided on the slides, reflecting the receipt of the proceeds relating to Gull in July. At the 30th of June, our leverage was 2.6x on an absolute basis and 2.2x on a pro forma basis. The pro forma calculation adjusts for the Gull proceeds excludes Gull earnings for the last 12 months and includes the last 12 months of Z earnings. The substantial movement in crude and product prices in the second quarter had a significant short-term impact on working capital. This, combined with some additional physical inventories to facilitate the trading and shipping opportunities I just spoke of, led to working capital increasing by over AUD 800 million during the period. We expect these earnings to convert to cash in the second half and working capital to begin unwinding at current price levels. You can see we also received the proceeds from Ampol's Second Property Trust for the sale of a 49% interest in 21 properties to Charter Hall. Capital expenditure for the half was just over AUD 120 million, including rebranding. We expect full year spend to be around AUD 400 million, inclusive of Z. This is about AUD 50 million lower than previously guided with some delays in obtaining development approvals at the Pheasants Nest and M4 projects deferring spend into next year. While we paid AUD 98 million in dividends during the period being the final dividend for FY '21, we are declaring an interim dividend for FY '22 of AUD 1.20 per share that reflects both the strong earnings performance in the half and the underlying strength of our balance sheet. So thanks for that. I'll hand back to Matt and come back for questions.

Great. Thanks very much, Greg. I'd now like to turn to an update on our strategy on Slide 18. In February, we outlined our key strategic priorities for 2022. And halfway through the year, we've made some good progress. The Ampol rebrand has progressed at pace with 1,285 sites rebranded at 30 June, with the remaining works pertaining mainly to EG. And where we sit right now is that we're approximately 90 sites into that part of the network and getting the Ampol brand onto these sites should be a positive catalyst for our wholesale volumes. And while there have been some delays, we continue to advance the redevelopment of the 4 large highway sites in New South Wales. Our Enhance pillar is focused on international growth and nonfuel earnings. We completed the Z acquisition in mid-May, and the Gull divestment was completed in July. This was a tremendous effort by a lot of people right across both Ampol and Z and we welcome Z into the Ampol Group with our early work only reinforcing the confidence we have about the benefits available. The nonfuel EBIT uplift strategy continues to gain traction, and I think you can see that evidenced in the SHOP results that we're presenting today. And we remain very confident in the delivery of the AUD 85 million uplift opportunity which does not rely heavily on format enhancements like Metro Go, which will continue to progress and be refined over time. I'll now move to Slide 19 to explore the Evolve pillar which outlined our response to the range of possible energy transition scenarios. Our transition strategy is evolving as we learn more through our test and learn programs and engagement with customers, governments, OEMs and other key stakeholders. With battery electric vehicles, the likely solution for passenger and light commercial, we have now moved the rollout of the Arena co-funded AmpCharge EV fast chargers to the scale-up phase. Meanwhile, we're investigating the economics of purpose-built EV charging hubs that incorporate multiple charge points in 1 location. That is also commencing the initial phase of its EV charging network rollout of 26 sites. -- in partnership with the Energy Efficiency and Conservation Authority, and 11 sites are expected to be up and running in early 2023. As our customers' needs expand and the future of powering mobility becomes more complex, Ampol is very well placed to make it simpler for our customers. Ampol aims to power their journeys through a combined fuel offer with ongoing liquid fuels, which they will need for some time to come as well as electricity at their home and on the go. So we can serve our customers at the start, during and end of their journey. To support this goal, Ampol applied for and has received a retail energy authorization from the Australian Energy Regulator. -- and we will commence a trial for a small group of employees to now test and Ampol's value proposition. We see hydrogen as a possible solution for long-haul heavy transport although other technologies may emerge. The economics are difficult at present but expected to improve over time with testing and with some further scale. And we're currently researching and undertaking commercial discussions to assess hydrogen production economics and domestic distribution opportunities. We have paused the Lytton hydrogen pilot facility with our partner, Fusion Fuel Green. The geotechnical characteristics for the preferred site were unsuitable for the trial. I think this is evidence that we're going to remain disciplined in allocating capital and deploying our resources as we progress on our test and learn projects. Biofuels and synthetic fuels prove to have an important role to play during the transition, particularly in hard-to-abate areas such as aviation and heavy industrial sectors like mining. These are important market segments for Ampol, and we are increasing our efforts to assess opportunities in renewable diesel and sustainable aviation fuels, including supply chain economics and the opportunity to repurpose our existing infrastructure. I'd now like to make some comments on the outlook for on Slide 21. I -- we've obviously seen a very significant disruption to the fuel supply chain in recent months, leading to volatile pricing for crude and refined products. As you can see, the fundamental physical product markets look quite tight and to some extent, will be influenced by the level of exports that are coming out of China. The graph shows refining crude distillation unit capacity net additions from 2019 through '24. I think the first thing to note is the net closures during 2020 and '21. And as poor refinery economics drove several closures, including in Australia and New Zealand. And while there are net additions forecast in 2022 through to 24 -- these are primarily focused on China's domestic consumption and the export-oriented additions are largely in the Middle East. Other factors that drove the extraordinary refiner margin environment that we saw during the second quarter, including low global inventories as the crisis began and geopolitical factors relating to Russian sanctions, and the reduced exports that we've seen out of China remain largely unchanged. European diesel stocks remain well below 5-year averages, getting into what looms as a very challenging winter. -- and very high gas prices, increased costs in European refineries looking to produce diesel. All of these supply side factors, of course, need to be weighed against the demand impacts as the global economy slows. But according to Fax Global Energy, Asian demand ex China is forecast to rise by 5.6 million barrels per day over the 2022/'23 forecast period. compared with only 1 million barrels of net additions ex China. So I think this combination of factors suggest that the fundamentals of the global refining supply-demand balance are likely to remain tight. -- and the volatility that we've seen is likely to persist for a while yet. Turning now to the position in Australia and New Zealand. -- where demand remains below pre-COVID levels as the recovery in petrol and jet demand lags. Diesel demand has certainly been resilient and is tracking above pre-COVID levels across both markets. And as the leading transport fuels provider in Australia and in New Zealand, Ampol's very well positioned to benefit from the ongoing recovery in fuel demand. I'd like to close today on Slide 23 with a view of the current trading conditions. Ampol is well positioned to address inflationary pressures, as I think is evidenced in this result. The underlying business and our sector has proven to be resilient. Our trading and shipping capability positions us well for ongoing volatility. And as does the government underpin at Lytton, and we continue to focus on delivering underlying productivity benefits right across the business. Since the end of the half, global crude and product markets have continued to experience volatility and the Lytton refiner margin eased through July as product cracks weakened. The LRM in July was USD 16.46 per barrel, so still well above historical averages. In F&I, ex Lytton quality premiums remain a watch point but retail margins improved in July as refined product costs eased. And as a result, Convenience Retail exited July in line with year-to-date last year, effectively making up the shortfall at the half and we see the strong shop performance continuing in the business. Debt Energy will contribute a full second half. And as Greg talked to, July trading saw a very strong improvement. We did well placed to benefit from the ongoing recovery in fuel demand post COVID. And that ends our presentation of the half year results. So now Greg and I we'll take your questions. And just a reminder that we also have Brent, Andrew, Kate and Mike on the line, so I may also direct some questions to them. With that, we'll take our first question, please, operator.

[Operator Instructions] Your first question comes from Dale Koenders from Barrenjoey.

Just firstly, a question on, I guess, the cash flow result. Just trying to understand how much of the working capital build through the period, would you say was from Z energy or other volume recovery in the business? And how much was price specific that we could sort of assume recovers in future periods?

Dale, it's Greg. I'd look through Z Energy. Obviously, we acquired working capital with the business. I would say about 80% of the uplift that we spoke to, the $800 million, about 80% of that is price related. So you see it coming through as essentially debtors, if you like, with inventory and payables, largely netting off 1 another. What we have also seen, so what's the 20%? The 20% is call it, 150 million liters of product that we are carrying in storage to support the international trading business. So that's a portion of it. But the large majority of it is that flow through of pricing to sales to customers held as debtors at the end of the reporting period.

And then I guess if we think forward into the second half, even if there's no unwind, it kind of indicates that the underlying cash flow from the business is about $0.5 billion in the first half. on a pro forma basis, you're already in the middle of your target I think. Is there any reason that we should not assume you're at or below target settings and discussing off-market buybacks in 6 months' time, although [indiscernible]?

So if I think about working capital, I mean, obviously, it depends on your view of product and -- product pricing, crude pricing. And you would naturally think as you build up your working capital and invested in it in a rising price market that your earnings will convert the cash prices have come off recently, and that should be favorable to cash flow and working capital. So look, our approach, to the second part of your question, our approach to capital management, I think, has been quite clear and consistent. Our allocation framework stands. The Board and management team are supportive of that. Of course, when you look at the results we've had in Q2, you need to look through those a little bit to ascertain where you think sort of a sustainable leverage ratio position will be. And that will be - that's the sort of thing that will guide our thinking around what do we do. With our balance sheet going into 2023, and of course, we're weighing that up against investments we need to make in Ampol to support its transition. But I think your point is a valid one, and I just suggest we just want to look through to a more normalized earnings basis, we assess leverage and capital management options.

I guess as the question on those, what are the competing forces or competing options for capital within the business previously that said target of $100 million spend on energy transition, which actually means sort of EV and retail electricity what you've been talking about today. So is there any other big spends we should be anticipating in the near term?

Look, there are the 2 things we're focused on. I guess I would describe e-mobility as sort of moving beyond that test and learn process, certainly by the end of this year, we'll be much more active in our first phase of the network rollout, if you like,. Under the Arena grants as you're aware of. So that's sort of starting to move out of test alone. So -- and then retail electricity, as Matt described, we're just trialing with our employees. We're just about to launch that actually as a trial with our employees, and then we'll go back from there. So I would think at year-end, we'll have more to say on our plans around those 2 aspects of the business. And the other areas, as noted in the slide, bio fuels or sustainable fuels, if you like, aviation and renewable diesel is an area we're certainly investigating in that research phase off. But the 2 main categories, I would say, at the moment, the e-mobility and retail electricity. So I think it would be better placed to talk about what's next in those categories around the time of our full year results.

Okay. And then just a final question. Trying to understand how repeatable the F&I earnings are on a go-forward basis. How much of that AUD 43 million step-up versus pcp was more what you consider sort of one-off good trading opportunities that either in our model shouldn't be forecasting in next period? And on the flip side, how much of the headwind has mopped premiums presented to the Australian earnings that you get some of that back when things normalize?

Yes. So do you want me to have a crack at it first?

Yes, go ahead.

So look, on the trading and shipping piece, I sort of made a point in the results, the results for trading and shipping are going to vary from time to time, but we've got really positive expectations out of that business over time. It does 2 things, right? It serves as a risk management capability and a sourcing capability for our Australian business, but it can also capitalize on markets like what we've just seen where there's volatility and a bit of a dislocation in markets. So Matt commented on the sort of supply-demand situation. I think we will see some volatility for a little while and Matt referenced the same thing. But really, it will just turn on the specific opportunities in front of us. What I would be thinking about in our International business, in particular, is sort of looking through the swings and roundabouts period-to-period and sort of thinking about sort of longer-term growth of that business because we've been quite consistent in delivering growth through that business over time. [ Queue pace ] probably won't get into specifics on it, if you don't mind, just because it gets a bit sensitive as it relates to individual commercial contracts and things like that. But what I would say is they certainly were very -- they've moved with cracks with refined product pricing and in part of a function of sort of markets rebalancing and longer shipping periods and the requirement to recover pricing and freight costs in a market that's in backwardation. So to the extent those conditions stay, I think they'll move in line with crude and product prices is probably the best way to describe it. But with prices down in July, we've naturally seen [ queue pace ] on spot cargoes softening a bit in line with that.

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

Following from that question, on the maps and all the rest of it, this -- I apologize upfront if this sounds a really dumb question, but coming from an ice cream analyst point of view. But Ampol is an integrated fuel provider, which means that you buy from the virgin source, you go through the whole source and then you finish a -- sell the finished product. You call out these gains and then you call out these headwinds, and then we sort of like as Dale basically pointed out, we then question about the -- we question about the sustainability of what is, in inverted comas, a trading profit? But you guys call it a trading profit I mean -- and when we -- in this part of the world here of trading profit, we put a P1 on it. So my question is, should we see this as a trading opportunity or just an automated part of your integrated supply chain, and it's a normal course of your business, so we should put a normal multiple on it because this is what you do? I don't know if that's -- I mean, I'm pretty simplistic, but you guys call them out as special items, but are they really special? It's just part of your integrated and what might be a trading profit at this point, it's actually a burden to the refinery. And if it unwinds, then the refinery makes more money. I'm just trying to get my head around it. Can you do it to us non-technical people. Is this just an ordinary part of your integrated business model? Or is it actually a segmented part that's different?

No, I think it's sort of -- David, what I would say is the result and the market volatility that we've seen highlights the value of the integrated value chain. And I think it specifically highlights the capability that is being developed in the trading and shipping business. So the 100-odd people we've got in Singapore and a handful of people we now have in the U.S. to find opportunities around the fact that we have the refinery, we have the physical short, if you like, or the backing, and we have exceptional storage capability, both in Australia and now New Zealand as well as international storage capability. And it's that tool set that has enabled us to find opportunities around -- to trade around the supply chain and volatility is supportive of that. So I think as Greg said, you'll see it move around a little bit, but I feel very confident that what you are seeing is the demonstration of the value of the capability that we have built over a number of years and continue to build on. And when we look at the trading and shipping business and the International P&L, we continue to see growth of earnings through that business and the ongoing capability that is occurring year in, year out in that business.

Well, this is what you were calling out when you made the acquisition wasn't it Matt? But this is the increased capability that you were hoping to gain is what you are basically calling out of synergies, but improving of the buying opportunity, the storage. Is that a fair call? Because this seems to be an ongoing...

It's a very fair call, David, because I think the Q2 result and the outperform driven by trading and shipping underlined a, the capability that we've built and b, why we think we're the best owner of that short into New Zealand because it gives us even greater scale in region and the sorts of opportunities that we have found in the second quarter are exactly the sorts of opportunities that with even more scale in region, we think we can drive profitability from. And that's kind of what we're talking to with the NZD 60 million to NZD 80 million, but obviously, we're going to look to do better than that.

And a sustainable enhanced capability, yes. Second question, Matt, how is EG going? I mean it's a part of the business, you called it out. It's been a real handbrake. Now obviously, COVID hit, but the business has deteriorated significantly. The relationship's deteriorated. Can you give us a bit of numbers as to how much volume you did drop in that period and that sort of gives us an idea as to what the potential upside could be in regaining it? Because it looks like EG was a significant handbrake over the last 2 years in terms of volume in that wholesale part of the business.

Yes. I think, look, as I mentioned, David, it sort of -- I think it is a positive catalyst for volume within our business because we are overweight in terms of retail links wholesale volumes, and EG is a very big part of that. My view is that getting the Ampol brand, given the successful -- the success of the Ampol rebrand getting that brand on their sites and getting the full network rebranded is a positive catalyst for our wholesale volumes. Clearly, there were some issues we needed to work through in terms of the dispute regarding the rebrand. We found a pathway through that now. We're 90 sites into getting the Ampol brand on their site. So I would -- and we're obviously now have worked our way through COVID disruptions and the other disruptions that we've seen. So I'd like to think we're well placed. I can't give specific numbers on the EG business. But what I can say is that getting the Ampol brand on those sites is a positive catalyst for our wholesale volumes.

Okay. There's a lot of tailwinds coming in the second half, Matt. So I'm looking forward next February, seeing some really good numbers come through. Thanks very much.

Thanks, David.

Your next question comes from Mark Wiseman from Macquarie.

Congrats on the results. First question I had was just on the shop results. In retail, it's pretty impressive the way you've expanded those gross margins. You've obviously been investing pretty heavily in your network. I was just wondering how sustainable that 33% is going to be as the top line improves. Could you maybe just talk through how that result was achieved and how to anticipate those margins going forward?

Yes. Let me start off, then I might pass to Kate, who's on the phone, but I think it is a very strong result. I think when you look back over the last number of periods, there's evidence of the progress that we're making continue to build despite the headwinds around mobility and fuel volumes that we've talked to. But in terms of the write-off for the right customer segment on the right side is very much where we've been focused. Great talk to product mix, promotional activity, our ability to pass through inflation and really getting that, the labor model and the offer for the customer in the right place in each local area has been key to delivering on the result. And we view it to be sustainable, and we're making really good headwind in terms of the progress we're making against the 85 million, and it's all that kind of that improvement that underpins that $85 million. And obviously, we're sort of $58 million through and looking after to comp a pretty soft half of Q3 when we were locked down last year. So, we're confident in the ongoing delivery. But I might pass to Kate to make some more comments on what underlies that improvement.

Okay. And so building on what Matt just said, I will call out consistency of shop offer across our company-operated network. We launched our Ampol way proposition in line with the Ampol rebrand, and we're now seeing the benefits of good consistency in operation across all our company-operated sites. Matt mentioned a focus on the right product in that locations. So that's been a result of tiering our product range across 4 tiers of sites, which has driven margin improvements and enabled us to get our promotional mix right in the promotional campaign period. And on top of that, we have effectively managed our operational costs, the labor, inventory waste to drive improvements, and that's in a period of high volatility. So we see all of those operating cost improvements as maintainable.

Okay. Great. I just had another question on the Z network. I think there had been some mention of another property trust transaction in respect of those New Zealand sites, how big could that opportunity be? And is that something that you're progressing at the moment?

Mark, it's Greg. Yes, so it is something we're progressing and certainly would expect to be saying something on that all going well this year and ideally before the quarter is out. So the ballpark numbers, you're looking at around, let's call it, 130 New Zealand thereabouts. So there's a little bit of tax linked to it, but it's around 130 million net from memory. So definitely something we're well progressed on at the moment.

Okay. Just last question for me, just on the hydrogen strategy. You've talked about Lytton not being suitable at the site for the electrolyzer. I wonder are you considering Kurnell other locations in the portfolio to create green hydrogen? Or are you taking a view that you can sort of wait and just see how the hydrogen production evolves over time?

Mark, we are considering different opportunities, but we're also being quite focused and realistic around the challenges around the economics of green hydrogen, it is going to come. It's going to take some time in our view. So we're going to be quite disciplined in terms of our priorities and how much we take on in the near term. We are obviously a mobility-led -- we've got a mobility-led strategy. So how can you get some sites on the highway? How can you start testing supply chain with customers, but acknowledging it's not going to be -- have material size and scale anytime soon. Sites like Kurnell, sites like Lytton are incredibly well-positioned sites, large freehold land major hazard facilities as their own today and very well connected to water to wharf and to domestic mobility supply chain. So we will, but we'll be quite cautious in the way that we progress.

Your next question comes from Michael Simotas from Jefferies.

First one for me is on the shop, and it was nice to see a good result there. How is the shop handling inflation? Have you seen a lot of inflation on the products you're selling? And to what extent are you being able to recover that? And also, it'd just be great to get some comments on whether tobacco is still a drag for that business?

Yes, Michael. So as we talk to, there's a -- there are a range of areas where we're driving improvement through the shop and our ability to pass through price increases is certainly an element of that. We are seeing prices increase, but it's quite different across the different categories, I would say, is what we're seeing at the moment. But certainly have seen a good ability to pass through where we are seeing inflation, and I think you see that in the result. I might pass through to Kate to talk about tobacco, which does remain a drag in the numbers.

Thanks, Matt. Yes, we're seeing our tobacco volume continued to be impacted. Our tobacco volume impact is in line with industry performance. So no outlays from that point of view, and we expect tobacco to continue to be a challenge moving forward.

Okay. Great. And then secondly, a couple of questions on the F&I business. Can you help us a little bit with the earnings swing factor on the potential for jet fuel to continue to recover. It looks like it's about 1 billion or so liters below where it was prior to COVID but to be fair, the volume that you've got so far, I would think would be lower margin domestic volume and then you've got international volume to come, which should be at a higher margin, particularly as the smaller carriers start to put capacity into the market. But then the other side, we can't see is to what extent costs have already come back into the business and what the variable costs will be. So any sort of help you could give us on the swing factor, but it looks like it could be another $ 20-or-so million over time to be.

Greg, do you want to take that one?

Yes. Look, I think your numbers sound about right, Michael, at the top of my head. I think some of the circuit at volume is about the shortfall. We have seen some recovery in International, but as we quoted, it's still overall 30% down. During the -- over last couple of years, the team have really repositioned the customer base, if you like and the mix of business they have that skews to more international, more out of Sydney and Brisbane unless out of Victoria, which should lend itself to margins, but it goes without saying that jet of all categories is a pretty skinny margin business, but international is slightly more favorable than domestic. But the sort of numbers you're talking about, I don't think a million miles off.

Okay. Great. And then just the last one on the product premium. I understand you don't want to get specific, and that's fair enough. Obviously, the elevated crack spreads, benefit refining and that money is in the bank for shareholders. Is there any ability to recover the product premium from your customers on a lag basis? Or do you need product premium to come back in to recover those earnings?

Yes. It really depends on the nature of the contract Michael. But as those things -- it's a timing, some of it that is more on a stock basis, obviously, flows through. And then as contracts renew it gets factored in, of course. So that's what we're seeing, and that recovers as that profile makes it sort of runs through the business.